How often have we seen insurers raise spurious defences, ask further questions and delay payment of good claims for years? For obvious reasons, the insured’s priority when making a claim under any type of insurance policy is that the claim is successfully and promptly resolved. However, it was not until 2016 that any statutory guidance was developed in England on the subject of what is a reasonable time to investigate, evaluate and settle a claim.
Introduced by the Enterprise Act 2016 which came into force on 4 May 2017, Section 13A of the Insurance Act 2015 implies a term into every contract of insurance (concluded after 4 May 2017) that “the insurer must pay any sums due in respect of the claim within a reasonable time”, which is allowed to include “a reasonable time to investigate and assess the claim”.
Section 13A requires insurers to justify the time they take to reach a determination on claims. However, prior to this year, the meaning of “reasonable time” remained undefined in either the legislation or case law.
Earlier this year, Quadra Commodities S.A. v XL Insurance Company SE and Others  EWHC 431 (Comm) became the first reported decision to consider the application of section 13A to insurers’ conduct, that is, whether or not insurers had failed to process and deal with the claim within a reasonable time. The claimant, Quadra, claimed damages on the basis that insurers had taken an excessively long time to investigate and assess the claim and pay sums due, in breach of section 13A. The defendant insurers argued that to the contrary they were entitled to “a considerable time” to investigate the claim, which extended beyond the time after the proceedings were commenced. In any event, they claimed there were reasonable grounds entitling them to dispute the claim. The court concluded that, although the process may have been too slow, because the insurer had a reasonable (even if mistaken) reason to dispute coverage, it could not be held in breach of section 13A.
What is a reasonable time for an insurer to investigate, evaluate and settle a claim?
Section 13A(3) sets out a non-exhaustive list of four factors, to be taken into account, some of which were relevant in Quadra. The insured has the burden to prove what would have been a reasonable time.
1. The type of insurance
The Explanatory Notes to the Enterprise Act 2016 give as examples that claims under business interruption policies, as a general rule, take longer to value than claims for property damage and if an insured peril occurred abroad, the investigation might be more difficult.
2. The size and complexity of the claim
If a case is exceptionally large or complex, then insurers may be justified in taking longer to pay. One particular factor identified in Quadra, which complicated the matter, was that the claim was in respect of losses caused by a fraudulent third party.
3. Compliance with relevant statutory or regulatory rules or guidance
4. Factors outside the insurer’s control
The Explanatory Notes to the Enterprise Act 2016 gave as an example, the fact that a policyholder or third party might fail to provide relevant information in a timely matter. An instance where more than one policy can respond, such as business interruption and property cover, or a dispute between a lead insurer and following market or excess layers, could also lead to a delay.
Factors considered to fall outside the insurers’ control in the Quadra case included:
- the destruction and unavailability of evidence; and
- the commencement of legal proceedings in another jurisdiction and the time required for a decision in those proceedings.
In the Quadra case the judge concluded, on the basis of the evidence available, that, assuming there were no grounds for contesting the claim, a reasonable time to investigate, evaluate and settle the claim would have been “not more than about a year from the Notice of Loss”.
It is important to note that the judge in the Quadra case commented specifically that neither party put forward any expert evidence on the issue of what would be a reasonable time. This may inspire parties in future disputes where section 13A is in issue to adduce expert evidence on this point. However, there will clearly be divergence of opinion between the experts appointed by the insured and insurers, with an associated increase in costs, when ultimately the decision will be made by the judge.
Were there reasonable grounds for insurers to dispute the claim?
Section 13(A)(4) provides that if insurers prove reasonable grounds for disputing the claim, they do not breach section 13A by failing to pay the claim. The Explanatory Notes to the Enterprise Act 2016 confirmed that a “reasonable time” would always include time to investigate and assess the claim.
Moreover, some delay in investigating the claim did not necessarily amount to a breach of section 13A. The judge in the Quadra case specifically noted “the fact that, in some respects, the Defendants’ actual conduct of the claims handling can be said to have been too slow or lethargic, does not itself answer the question of what was a reasonable time.”
Most notably, these grounds do not have to be correct, they can be mistaken. The judge concluded that there were reasonable (albeit insurers were found to be wrong) grounds for disputing the claim on the part of insurers. Although there had been delay by insurers in some aspects of the investigations, there was no breach of section 13A. This confirmation that mistaken grounds are not necessarily unreasonable grounds, is favourable to insurers, who will often delay a payment on a claim due to coverage investigations. However, we would always recommend including a claim for interest under section 13A to encourage payment where insurers themselves know their grounds for disputing the claim are spurious.