Law Commission recommends insurance payout reforms

Reforms over tightening the payout rules for business insurance, which were recommended jointly by the Law Commissions of England and Wales and of Scotland, have been introduced in the Enterprise Bill.

The Law Commissions say that businesses can suffer serious loss if insurance companies delay paying claims. But under the Law Commission reforms introduced into Parliament, insurers would be obliged to make prompt payment or face a claim for damages.

At the moment, insurers are under no legal obligation to pay valid claims within a reasonable time. If they pay unreasonably late or fail to pay at all, policyholders can sue for the money they are owed under the policy, plus interest, but they cannot claim compensation for any additional loss they have suffered due to the delay.
The reforms, which were recommended jointly by the Law Commissions of England and Wales and of Scotland, are being introduced in the Enterprise Bill. If implemented, they will:
oblige insurers to pay valid claims within a reasonable time, unless they have
reasonable grounds for disputing the claim, and:

• allow policyholders to claim damages for any additional loss they suffer because of
• the insurer’s late or non-payment.

The reforms aim to bring insurance law into line with general contract law principles and other jurisdictions including Scotland, the USA, Canada and Australia. In Scotland, the provisions will put the existing law on a statutory footing. 

Welcoming the Bill’s introduction, Stephen Lewis, Law Commissioner for commercial and
common law in England and Wales, said: “We are pleased to see these reforms included in the Government’s Enterprise Bill.

“Insurance enables businesses and individuals to protect themselves against risk but late payment of valid claims undermines that principle. Fire, flood and other such events can be devastating for a business. If a valid claim is then not paid, the loss suffered can be catastrophic, preventing the business from getting back on its feet. This can have serious consequences not just for business owners but also for employees, suppliers and the wider economy. 

“These reforms build on Law Commission recommendations enacted in the Insurance Act 2015. They would help to balance fairly the interests of insurers and policyholders, and ensure an effective, competitive and trusted business insurance market.”

Professor Hector MacQueen, Scottish Law Commissioner, said: “We are delighted that the law in Scotland on this subject will be made more visible by appearing in statutory form.”