Law should require insurers to pay valid damages claims in reasonable time, advisors say

The Law Commission and Scottish Law Commission have launched a joint consultation (246-page / 653KB PDF) proposing new legislation to change insurance contract law. Under existing contract law parties that fail to meet contractual obligations can generally be sued for damages by contractual partners. However courts in England have consistently ruled that insurers are "not liable for any loss caused by its delay or failure to pay a valid claim," the Commissions said.

The Commissions want to change the law so that insurer's "primary obligation" is not a "duty to prevent loss" from happening, but to "pay valid claims after a reasonable time," they said.

This rule is based on a fiction that an insurer’s primary obligation is not to pay valid claims but to prevent the loss from occurring. Payment under the policy represents damages, and further damages cannot be awarded for the non-payment of damages," the joint consultation summary (21-page / 283KB PDF) said.

"An insurer who unreasonably delays or wrongfully repudiates a claim should be liable to pay damages according to normal contract law principles – that is for proven and foreseeable losses. We think legislation is needed. Most consultees told us that the prospect of judicial reform was too slow and uncertain," the Commissions said in their consultation paper.

What constitutes a "reasonable time" for insurers to pay valid damages claims should be determined differently according to individual case circumstances, the Commissions said.

"We propose that the definition of a reasonable time should be flexible, taking into account market practice, the type of the insurance, and the size, location and complexity of the claim," the Commissions said.

"We accept that insurers need enough time to investigate claims fully. Thus we propose that a 'reasonable time' should include sufficient time for full investigation and assessment of the loss. Provided that an insurer has acted reasonably in notifying the insured of the information it needs, the insurer’s time to investigate should only begin on receipt of a “clean claim” (that is, once the insured has provided all material information). The insurer should have sufficient time to carry out a full investigation, including time to seek information from third parties where necessary. Once the investigation is complete, however, the insurer should assess the claim and communicate its decision promptly," they said.

The Commissions said it will be legitimate for insurers to agree contract terms with businesses in order to limit their liability for damages, but that not for cases "for losses brought about by their own bad faith". In consumer contracts insurers should be prohibited from excluding their liability "for failing to pay valid claims within a reasonable time," the Commissions proposed.

The Commissions also want to change the calculation of the time limit insurance policyholders would have to bring legal proceedings against insurers for failing to pay a claim under English law.

"At present, the breach is said to occur at the time of the loss and the victim has six years to make a claim. Under our proposals, the breach will not occur until the claim has been made and the insurer has had a reasonable time to investigate it ... Our preference would be for the limitation period to begin from the breach of contract, but we welcome views on this," the Commissions said.

Consumers should also be able to claim damages for distress, inconvenience or discomfort in insurance cases, the advisers said.

"In general consumer law, where a service has been sold to provide peace of mind, damages for distress and inconvenience would be available in appropriate cases. There appears to be a rule in English law, however, that such damages are not available in consumer insurance. Yet consumer insurance is usually sold to provide peace of mind. Distress damages may be particularly relevant, for example, where a consumer’s home has been left in serious disrepair for a prolonged period or where there has been a delay in approving medical treatment. We note that it may already be possible for Scottish courts to award damages in such cases. We propose that damages for distress, inconvenience or discomfort should be made available to the consumer. We ask whether statutory reform is the best way of achieving this throughout the UK," the Commissions said.

English contract law for insurance cases work at present is "unprincipled", "unfair" and "reduces the perceived fairness and competitiveness of English Law." the Commissions said. Although the same problems have not been apparent under Scots law the Commissions said its proposals should be applied across Scotland as well as England and Wales "in the interests of legal certainty and consistency across the UK".

Respondents have until 20 March 2012 to reply to the Commissions' reform proposals.