Construction analysis: Sarah Schütte of Schutte Consulting Limited looks at changes to commercial insurance law and practice which are likely to be introduced via the Enterprise Bill.
What do the Enterprise Bill provisions say?
The Bill requires insurers to pay all claims within a 'reasonable' time or be liable for damages. It thus permits businesses to claim damages from their insurers for the unreasonably late payment of claims by way of action for breach of contract.
This means that any insurance policy incepting on or after 12 August 2016 will contain an implied term requiring the insurer to pay out a claim to its insured within a reasonable time. A 'reasonable' time is assessed by a non-exhaustive list of relevant matters--for example, the time to investigate the incident, assess the claim etc. It thus depends on all the facts and circumstances, in line with the usual test of 'reasonableness'. A defence is available in the form of 'reasonable grounds' to dispute either validity (ie a coverage issue) or value (ie cover agreed, but quantum disputed).
Why is this a potentially significant development?
Insurers have long been criticised for their slowness in paying out claims, and the current law (Marine Insurance Act 1906) does not impose any timeframe. The new provisions were considered unsuitable for the special parliamentary procedure for Law Commission Bills (the means by which the Insurance Act 2015 (IA 2015) came about) and so were excluded from IA 2015. However, they were resurrected in the Enterprise Bill with cross-party support, and come into force with the rest of the IA 2015 on 12 August 2016.
Isn't this unusually quick?
Yes. It reflects the general shift towards a more 'fair' insurance industry since the Consumer Insurance (Disclosure and Representations) Act 2012 (CIDRA 2012) changes came into force in 2013.
Will the new provisions be welcomed by the construction and engineering industry?
Undoubtedly, yes. Construction and engineering stakeholders have been lobbying for change for many years. The fact that the changes will come into force in around nine months has surprised many--in a good way!
How will the changes affect insureds?
The time between submission of a claim, and pay out, should reduce. It is difficult for insureds to bear upfront the cost of damage or loss, but they have a duty to 'act as a prudent uninsured' (ie to mitigate the loss or damage). Thus they have to spend money hoping that claims will be paid out in full (in effect, reimbursement). This risky, but unavoidable, situation should improve.
Why is the construction and industry affected acutely?
In our industry, the sums spent on stemming damage or loss can be huge--for example:
In addition, safety and regulatory requirements must be adhered to, which can be costly.
It is difficult for any insured whose claim is subject to the machinations of the claims adjustment/handling process. However, this is particularly difficult in the construction and engineering industry because of the tight margins on which firms at every tier of contracting operate.
Will insureds be able to request an interim pay out?
Yes, just as now, this will be possible. An interim payment is always welcome relief to insureds, as it softens the blow of the ongoing mitigation duty, and makes the CFO happy.
What exactly will an insured have to do in order to claim damages?
In short, an insured would have to bring legal proceedings against its insurer.
So more spend?
Yes, at least upfront. The mechanism does not seem very user-friendly--for example:
spending more money upfront puts the insured at further risk (even though, in the event of success, I would expect the court to award costs in favour of the insured), and
falling out with the insurer could harm the insured's market reputation
Do you expect insureds to start making claims for damages as of August 2016?
I expect the mechanism will be rarely used in practice. Court should always be the last option--it rarely does any good, even if you win, and is certainly not a relationship-maker. This new legal right gives a level of support and comfort not previously available. I think it will help to rebalance what is perceived as an unfair playing field.
On a practical level, I see the provisions more as a tool in the insured's armoury. I hope they will allow difficult conversations to take place more readily and more openly, and promote improved collaboration--the insurer will have to communicate more proactively on expected timing for payment of claims, and why, and the insured will feel empowered to ask probing questions about when it can expect payment, and what is the cause of the 'delay'.
What should construction and engineering insureds be doing to prepare?
I recommend the following:
'Up' the risk management game
Review current processes and procedures to monitor claims, because they may need adjusting. For example, a reminder to chase up status/progress, and to log/allocate day-to-day spend.
Invest in training
Solid knowledge-based training such as basic insurance law and procedure, and skills training such as how to handle difficult conversations, will equip individuals suitably and help them to feel confident.
Be prepared to bring proceedings
Keep detailed records of dealings with insurers, because launching an action is expensive and time- and energy- consuming.
Take care with cashflow
This is particularly important for SMEs. Don't hesitate to ask for interim payments, because the onus will be on insurers to pay within a reasonable time.
Any hints on what insurers should be doing to prepare?
Actions to take in order to implement the new provisions include:
Review claims handling procedures and processes
To allow claims handlers to properly capture the steps taken to analyse, assess and decide on coverage and payout (and therefore satisfy the 'reasonable time' duty).
Invest in training
To ensure that claims handlers are well-versed in the new law and can apply it in practice, as their judgement-making skills may be tested.
Develop a defence strategy
Claims are inevitable but the key is containment. Strong compliance activities will assist.
Be aware that failure to comply could do serious damage
Falling foul will hurt both the bottom line and the market reputation, including any reinsurance programme.
Until the new provisions come into force, what practical tips can you share for compliance with current legislation?
Given that insurers are bracing themselves for changes which are likely to hit their bottom line immediately (c. £250,000 to £500,000 in systems' updates, training etc), I recommend that construction and engineering insureds take extra care over the next nine months when submitting and following up claims, because insurers are going to be looking for ways to minimise the impact of the costs hit--to me this may mean a short-term spike in claims coverage rejection.
My top five tips for insureds for this period are:
Comply with all policy requirements
In disclosure (because information is currently a 'warranty' breach of which allows insurers to avoid the policy entirely) and on notification (because timing of making a claim is usually a condition precedent to liability). Minimise the insurer's ability to avoid paying by complying with prescribed procedures to the letter. If you are unsure, ask the broker for guidance.
Act as a prudent uninsured
Spend what you have to spend in order to minimise loss or damage. Do it in a timely manner. A good understanding of the incident by finance teams will help operational teams dealing with the practical aftermath and the need to spend.
Be vigilant at record keeping
Record carefully the reasons for spend and link it specifically to the damage/loss which you are trying to minimise. Support the records with photos or videos.
Maintain communications with broker and insurer
The better the relationship, where they understand your business objectives and values, the more likely you are to have a sympathetic ear when it comes to claims.
Lobby for interim payouts
Manage the risk associated with spend, and present coherent reports in a timely fashion to the broker/insurer together with a clear and reasoned request for reimbursement. Follow up periodically.
Managing cashflow is the topic of next month's 'Industry Insight'. It will focus on payment issues in the industry and what can be done to improve the situation.
This article was first published on Lexis®PSL Construction on 10 November 2015