The following article is an opinion piece written by James Morsch and Teresa Snider of Butler Rubin Saltarelli & Boyd LLP.
Many claims people in the London market are concerned about the Enterprise Act of 2016’s new requirement that insurers investigate and process claims in a reasonable time or be subject to paying policyholders’ resulting consequential damages. From our perspective as American lawyers, the Enterprise Act represents a better approach to encouraging timely payment of insurance claims than the “bad faith” model prevalent in the United States and, if properly interpreted by courts, should not lead to the widespread abuses we see in the US.
Most US jurisdictions impose a duty on insurers to process claims expeditiously and deem failure to do so “bad faith”. Some states specify time frames in which claims must be paid or denied; others prohibit insurers from “vexatiously” denying claims. The problem, of course, is not these rules but the penalties imposed on insurers for violating them. Failure to process an insurance claim in a timely manner can expose insurers not only to damages above policy limits but to compensatory and punitive damages that have no direct relation to an injury to the insured caused by the insurer’s conduct. In many US jurisdictions, the legal standard for these “bad faith” claims is essentially negligence, which means that US lawyers who specialize in representing policyholders sometimes try to force errors to lay the groundwork for bad faith claims. An adept lawyer can leverage innocent delays and mistakes by adjusters into large recoveries. In addition, studies indicate that the mere threat of bad faith damages has had an adverse effect on insurers’ claims costs in the US. Insurers threatened with bad faith claims often pay policy limits, even where there are reasonable differences of opinion about whether the insured’s claim is worth limits, simply to avoid extra-contractual exposure.
The recently-enacted Enterprise Act should not subject insurers on policies subject to English, Irish and Scottish law to these same problems. While the Act exposes insurers who delay claim payments to damages in addition to what is owed under the applicable policy plus interest, it does not impose statutory penalties or punitive damages for violations. More importantly, damages under the Act are only recoverable if an insured can meet the strict standards for proving consequential damages. Those standards require proof of cause-and-effect, namely that the insurer’s conduct in delaying payment on a claim actually caused the damages sought by the policyholder. Lest you think that it would be a walk in the park for a policyholder to prove such a claim, the law will require a showing that the damages were foreseeable by the insurer at the time of policy issuance.
How UK courts interpret the Enterprise Act’s “reasonability” requirement will play an important role in determining the ultimate impact of the legislation on insurance and reinsurance claims handling. The Act is more favourable to insurers than the law applicable in many US states in that the Act specifies factors to be considered in assessing the reasonableness of the insurer’s conduct: (1) the type of insurance, (2) the size and complexity of the claim, (3) relevant regulatory rules and guidance, and (4) factors outside of the insurer’s control. An insurer that shows it had reasonable grounds for disputing coverage for or the amount of a claim can escape liability for consequential damages. But, even if the courts interpret these provisions in pro-insured manner, it seems unlikely that the Enterprise Act will usher in a large number of successful claims with large monetary awards against insurers.
Even under the US bad faith model, awards of consequential damages to policyholders for delays in claim payment are quite rare. Where a carrier owes coverage to its insured but refuses to defend the insured against a third-party claim or refuses to accept a settlement within limits on such a claim, courts have awarded consequential damages for attorney’s fees, emotional distress (in consumer claims), and impairment of credit. Courts have also awarded business interruption damages where those damages occurred as a result of the insurer’s failure to pay a claim or its delay in doing so.
While the Enterprise Act does not preclude recovery of these types of consequential damages, it makes it harder for policyholders to establish them. The Act does this by making an insurer’s duty to timely process claims an implied term of every contract of insurance and reinsurance subject to English, Northern Irish or Scottish law (going forward after the Act’s effective date). This means that a policyholder will need to show that it attempted to mitigate its consequential damages. In the third-party claim context, we expect that courts will require an insured to hire and pay its own defence counsel if the carrier delays doing so. In the case of business interruption, we would expect a court to require proof from a commercial policyholder that it lacked the means to obtain financing or use its own funds to mitigate that interruption. In our estimation, these requirements will lessen both the frequency and size of successful claims by UK policyholders against carriers for delays in claims processing.
The Enterprise Act may not be good news to claims personnel in the London market but things could have been much worse. Adoption of an American-style bad faith framework for claims handling would have led to some of the same abuses and increased claims costs we see regularly in the US. By contrast, the Enterprise Act is a relatively even-handed approach that should not lead to the gamesmanship commonly on display in American insurance litigation.
The preceding article was written by James Morsch and Teresa Snider of Butler Rubin Saltarelli & Boyd LLP. It’s content does not necessarily reflect the views of Insurance Business UK.
James Morsch is a Partner and commercial litigator at Butler Rubin Saltarelli & Boyd LLP focusing on complex and high-stakes litigation. Jim represents insurance companies against other insurers and policyholders in class actions, insurance bad faith, restrictive covenants, and unfair competition. email@example.com
Teresa Snider is a Partner at Butler Rubin Saltarelli & Boyd LLP and she concentrates her practice in insurance and reinsurance arbitration, litigation, and related insolvency issues. firstname.lastname@example.org
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