Law Commission proposals to hold insurers liable for damages after delays or refusing to pay a valid claim have been welcomed.
The industry has suggested the law should be re-characterised to reflect the insurer's duty as the ‘duty to pay a valid claim within a reasonable time.'
Responses to the Commission's consultation on 'Damages for Late Payment and the Insurer's Duty of Good Faith' reveal the majority of the insurance industry believes the law is ripe for reform.
At present under law in England and Wales, if payment of a claim is delayed, a policyholder who suffers loss as a result has no remedy other than a claim for interest.
This was exemplified by the Sprung v Royal Insurance (UK) Ltd case where the insurer failed to pay a valid claim within a reasonable amount of time and Mr Sprung suffered a significant uninsured loss.
The Court of Appeal found, with "undisguised reluctance", that there could be no award of damages for late payment of a valid insurance claim.
Of the 32 consultees, all but one agreed that the law in this area should be reformed.
As the Commission explained: ‘It is noteworthy that all 12 of the insurers and insurance associations who responded thought there should be some change to the current law.'
The ABI response said: "The ABI accepts that there is a need for reform in this area... If the insurer has declined a valid claim and has acted unreasonably, we accept that the law should be brought into line with general commercial contractual principles."
This was echoed the British Insurance Brokers' Association (BIBA), which said: "There is no justification for treating an insurance contract as different to any other contract in this respect.
"Consumers buy insurance to protect their possessions and businesses buy to protect their assets and liabilities. Any delay in payment can negate that protection."
Two options for reform were present in the consultation paper:
• to provide damages for the insurer's breach of duty of good faith (by amending section 17 of the Marine Insurance Act);
• and to reverse the decision in Sprung and recharacterise the insurer's duty as the duty to pay a valid claim within a reasonable time ("the strict liability" approach).
Most consultees (20 of 25 who responded to the question) were in favour of reversing Sprung, and again, most argued that change should not be left to the courts as this would be time-consuming and require a case to be taken to the Supreme Court.
Therefore, most consultees supported legislation to recharacterise the insurer's obligation as a duty to pay a valid claim within a reasonable time.
It was also noted that all but one consultee agreed the present approach by the Financial Ombudsman Service (FOS) to provide damages for distress, inconvenience, and discomfort where an insurer fails to respond promptly to a claim or at all was correct.
However BIBA added that the approach should be enshrined in statute so that "it is a right rather than a whim."
The Commission said it intends to publish further proposals on the subject in a joint consultation paper in the Spring.
