What is a ‘reasonable time’?
This was one of the key areas of concern for stakeholders during the consultation process, given the difficulty of specifying a single standard for a ‘reasonable time’ within which to pay a claim. Clause 13A simply provides that it includes ‘reasonable time to investigate and assess a claim’, and states that what is ‘reasonable’ will depend on all the relevant circumstances, including the following:
- the type of insurance involved
- the size and complexity of the claim
- compliance with any relevant statutory or regulatory rules or guidance
- factors outside the insurer’s control.
The explanatory notes to the Bill explain that some types of insurance, such as business interruption, are likely to take longer to assess than simple claims for property damage. Factors beyond the insurer’s control might include delays to an investigation due to the failure of a third party to supply relevant information or where a market follower in a subscription market is dependent upon a decision or action of the lead insurer.
It is inevitable that the scope of this wording, if incorporated into the Act in its current form, will be the subject of dispute. Its interpretation will also be of fundamental importance for determining when the breach of contract occurs, for the purposes of limitation of actions. The courts, aided by expert evidence, are likely to expand on the above factors and add additional ones, and for a market as diverse as the insurance industry, a range of standards is likely to emerge.
The insurer’s defence
Establishing coverage under an insurance policy often turns on subtle arguments relating to the interpretation of policy wordings and/or the results of a careful investigation into the circumstances of a loss. It therefore seems reasonable that an insurer should be afforded an appropriate amount of time to be able properly to investigate the claim (including its quantum) and that it should not be penalised for withholding payment until the claim is determined or agreed to be valid and its amount established.
Again, the courts will have to determine what should constitute reasonable grounds for disputing a claim, as well as the types of conduct by the insurer and any other factors which could negate the defence.
Has an insurer successfully contracted out?
Another area of uncertainty, and therefore one which is likely to end up being the subject of dispute, is whether the parties to an insurance contract have effectively contracted out of the remedies available under clause 13A. Pursuant to clause 16A (also introduced by the Bill) and clause 17 of the Act, an insurer attempting to include a term in a policy which puts an insured in a worse position than the default position set out in clause 13A must comply with the following transparency requirements:
- it must take sufficient steps to draw the disadvantageous term to the insured’s attention before the contract is entered into
- the term must be clear and unambiguous as to its effect.
A court must take into account the characteristics of the type of insured involved, and the circumstances of the transaction in determining whether these requirements have been met. For example, in the case of a small business purchasing insurance, the insurer might be expected to be more proactive and take more steps to bring the term in question to the insured’s attention than it would have to if the insured is a large business and a sophisticated buyer of insurance.
The drafting of any term in an insurance policy purporting to contract out of the remedies in clause 13A will no doubt be carefully scrutinised in the event of a dispute. Further, while a policy may contain a term which purports to allow the insurer to contract out, if that insurer deliberately or recklessly breaches clause 13A then its attempt to contract out will be ineffective.