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Date: January 2012
The Law Commission is proposing that insurers should be liable for damages when they “unreasonably” delay paying a claim.
The Law Commission is proposing that insurers should be liable for damages when they “unreasonably” delay paying a claim. At the moment, English law says an insurer is not liable for any loss caused by its delay or failure to pay a valid claim. This rule is based upon the concept that an insurer’s primary obligation is not to pay valid claims but to prevent the loss from occurring. However, the Law Commission points out, that this concept should also mean that property insurers are “in breach of contract hundreds or thousands of times every day, whenever a fire, a flood, a road accident or other such event occurs.”
A new law should be introduced that makes insurers liable for damages when they “unreasonably” delay paying a claim, according to proposals from the Law Commission.
Under English law an insurer is not currently liable for any loss caused by its delay or failure to pay a valid claim. “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,” the Law Commission said in its Consultation Paper.
“This is a surprising view. As one judge put it, property insurers may be surprised to discover that, on this argument: they are, collectively, in breach of contract hundreds or thousands of times every day, whenever a fire, a flood, a road accident or other such event occurs.”
The Law Commission has called for comments on its proposals by March 20, when it will then make its final recommendations to the Ministry of Justice. Response forms for comments on its proposals can be found at this link The Law Commission.
The Law Commission said it had accepted the argument that insurers need enough time to investigate claims fully. It is therefore proposing that insurers should be allowed a “reasonable time” to investigate claims and assess the loss.
“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,” said the Law Commission.
“Once the investigation is complete, however, the insurer should assess the claim and communicate its decision promptly. This is similar in principle to the current FSA rules.”
The Law Commission has a statutory obligation to simplify the law. It therefore reviews areas of the law that have become unduly complicated, outdated or unfair and following a process of research and consultation, the Commission makes recommendations for reform of the law to Government.
This consultation relates to its Insurance Contract Law Project. You can find out more at this link The Law Commission.
As part of that Project the Law Commission also looked at insurers’ remedies for fraudulent claims and reports that “the law on this issue is convoluted and confused”
The Commission has proposed that the law should be changed so that any fraudster would forfeit the whole claim and all subsequent claims, and not just the part of the claim related to the fraud.
“We also propose that in some circumstances the insurer should be entitled to claim damages from a fraudulent insured for investigating the claim,” said the Law Commission.
The Commission’s also looked at the principle of insurable interest for all types of insurance and found strong support for the principle. For life insurance, it proposes widening the categories of those who may insure the life of another and for indemnity insurance it proposes replacing “the mix of archaic statutes and common law with a clear restatement of the principles”.
Finally, in the fourth part of its consultation process, the Law Commission proposes to abolish the requirement of a formal marine policy, set out in section 22 of the Marine Insurance Act 1906, as the requirement is “out-dated and no longer used”.
“We also propose reforms to section 53(1) of the Marine Insurance Act 1906, which makes a broker liable to pay premiums to the insurer,” said the Law Commission. “This is a complex provision which could have surprising consequences for an insurer if the broker were to become insolvent.”
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