International focus

Publication October 2015


United Kingdom

Proposal to amend Insurance Act 2015 to introduce damages for late payment of claims

The Enterprise Bill which had its first reading in the House of Lords on September 16 proposes an amendment to the Insurance Act 2015 to enable insureds to claim damages for late payment of insurance claims. The introduction of the Law Commissions’ proposal in this Bill has come as a surprise to the market which opposed the introduction of such consequential damages. As English law currently stands, damages for late payment of an insurance claim are not recoverable from insurers (see Sprung v Royal Assurance (UK) Ltd [1999] I Lloyd’s Rep IR 111). The insured’s remedy is limited to interest. Proposals to require insurers to pay claims under policies within a ‘reasonable time’ were included in the Law Commissions’ review into Insurance Contract Law, however, this proposal was not included in the final Insurance Bill which went through Parliament to become the Insurance Act earlier this year. The industry was against the inclusion of such a requirement on the basis that it would impair insurers’ ability thoroughly to investigate claims before taking a decision on liability and make it almost impossible to calculate future liabilities. The Government believes that this change in the law will incentivise insurers to pay claims promptly and allow for damages to be paid to policyholders who have suffered loss as a result of late payment.

What is proposed?

Part 5 of the Enterprise Bill amends the Insurance Act 2015 to introduce new section 13A requiring that insurers pay claims within a reasonable time. This will be a term implied into both consumer and non-consumer contracts of insurance, breach of which will give rise to the usual remedies for breach of contract, including damages. Reasonable time should always enable the insurer sufficient time to investigate and assess the claim. What is ‘reasonable’ will depend on all the circumstances and a non-exhaustive list of factors can be taken into account. Included in the list of factors are the type of insurance, size and complexity of the claim, compliance with any relevant statutory rules (including for example requirements in the Financial Conduct Authority Handbook) or guidance and 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.

Defences available to insurers

The Bill provides insurers with a defence to a claim for damages for late payment where it had reasonable grounds for disputing the validity or quantum of a claim. This would enable an insurer to defend a claim for late payment where they suspect that the claim is fraudulent. However, even where an insurer has grounds for conducting further investigations they may still be found to have breached the Insurance Act where it conducts an investigation unreasonably slowly.

Contracting out

It will not be possible to contract out of this implied term in consumer insurance contracts. It will be possible to contract out of these requirements in non-consumer contracts but, like other aspects of the Insurance Act, where this is done the insurer must comply with the transparency requirements in the Act so that the effect is clear and unambiguous. It will not be possible to contract out of the implied term where breach has been either deliberate or reckless.

Timing

If this amendment to the Insurance Act is successful, it will come into force a year later – that will be some time after August 2016 (when the Insurance Act as originally enacted comes into force).

European Union

Distribution comes into focus

Agreement has been reached on the text of the revised Insurance Mediation Directive (or Insurance Distribution Directive – as it will be known). A compromise text which has been agreed between the trialogue bodies of the European Union (EU) was published on July 16. The text remains largely the same as the text published by the European presidency back in October last year. However, the compromise text now includes the requirement to have a short, stand-alone ‘product information document’ that resembles the ‘key information document’ required by the Packaged Retail and Insurance-based Investment Products Regulation (1286/2014), or ‘PRIIPs’.

The product information document should be presented and laid out in a manner that is clear and easy to read and should contain the following: the means for payment of premium; the main exclusions in the policy; obligations relevant to the commencement and duration of the contract; obligations on making a claim; the term of the contract; and the means of termination.

The new Insurance Distribution Directive requires that all insurance distributors should ‘always act honestly, fairly and professionally in accordance with the best interests of its customers’. This requirement imposes a high standard upon all distributors (including direct sellers and those distributing to professional customers) to consider the interests of customers in their business. This could have potentially far reaching consequences as was seen in the application of ‘Treating Customers Fairly’ by regulators in the UK. Furthermore, distributors are required to ensure that they do not remunerate or assess the performance of their employees in a way that conflicts with the duty to act in the best interests of customers. In a move similar to the recent tack taken by the FCA, the Directive also requires firms to operate and review a process for the approval of each insurance product they offer and to review any significant adaptations of existing products before they are marketed or distributed to customers. This process requires firms to identify target markets and ensure that risks to the target market are assessed and managed.

It is anticipated that the European Parliament will vote on the Insurance Distribution Directive in the next few months. The Directive would come into force two years after the agreed text is published in the Official Journal of the EU.

The Directive will change the manner in which insurance is distributed in the EU. The Directive requires that insurers and intermediaries allocate responsibility for aspects of the product chain (including mis-selling) in their agreements. With the fallout from the mis-selling of payment protection insurance still ongoing in the UK, the long-term costs and risks of poor allocation of responsibility in the distribution chain will become increasingly important.

The Netherlands

Life insurers required to actively assist clients with unit-linked insurance policies

The Decree implementing rules in relation to actively assisting clients with unit-linked insurance policies to make an informed choice has been published. The Decree introduces an obligation for life insurers to demonstrate that they have actively assisted clients with unit-linked insurance policies to make an informed decision as to whether they want to continue, amend or terminate their unit-linked insurance policy. For these purposes, life insurers are required to provide their clients with adequate information on, amongst other things, the current and expected future financial consequences of the unit-linked insurance in relation to the purpose the client had at the time of concluding the policy, the possibilities to amend or terminate the insurance policy and the consequences thereof.

This obligation is introduced as a result of various problems that have been associated with unit-linked insurance, such as high and unclear costs, lack of information, the effects of leverage and capital erosion and disappointing returns on investments.

The Decree only applies in relation to unit-linked insurance policies that were entered into before January 1, 2013.

Australia

‘User pays’ funding model for ASIC: the first step towards a bigger, bolder regulator gets Government backing

The Government has given its support to a ‘user pays’ industry funding model for the Australian Securities and Investments Commission (ASIC) in line with the recommendations of the Financial System Inquiry (FSI). A consultation paper was issued on August 28 by Assistant Treasurer, Josh Frydenberg, detailing how the funding model will work.

The new funding model will require the biggest users of ASIC’s resources to pay up to A$220 million of the A$260 million the Government spends on the regulator each year. This will be raised by an annual levy calculated based on market capitalisation and an assessment of each sector’s risk to investors. The fees are likely to comprise A$53 million for banks and listed companies, and A$91 million for investment banks, stockbrokers, insurers, and the superannuation and financial planning industry. If introduced, the levy will be phased in over the next three financial years.

ASIC has been championing the self-funding model for the duration of current chairman, Greg Medcraft’s, tenure. Mr Medcraft has said that the costs of regulation should be borne by the market players who create the need for it, and that a self-funding model will provide sustainability of funding for the regulator through fiscal independence from Government. The Government is saying that it will increase economic efficiencies and improve ASIC’s transparency and accountability.

This is the first step the Government has taken to address the recommendations of the FSI, and one we have been anticipating because it removes the funding pressure that would act as the major impediment to the implementation of other recommendations. Further announcements are expected over the coming months. Freed from the financial burden that would arise, we expect the Government will now throw its support behind the proposals to increase ASIC’s enforcement ‘toolkit’ through the adoption of product governance obligations and intervention powers. This is the first step, but perhaps the biggest, towards a more proactive and interventionist conduct regulator in Australia.

China

CIRC strengthens corporate governance requirements on new insurance entities

In July, the China Insurance Regulatory Commission (CIRC) published a Notice on Several Issues regarding Strengthening the Governance Mechanism of Insurance Companies during Establishment Preparation Stage (the Notice), which took immediate effect. The Notice applies to all insurance companies, insurance group companies and insurance asset management companies.

The Notice sets out the following major corporate governance requirements on new insurance entities:

  • During the establishment preparation stage, any change to the shareholders, proposed chairman of the board or general manager of the new insurance entity is prohibited without prior approval from CIRC.
  • Board members of the new insurance entity must comprise personnel specialising in finance, investment, actuarial and legal matters.
  • Proposed chairman of the board and general manager of the new insurance entity must not concurrently take up other positions.
  • Unless assuming management positions in insurance group companies, senior management personnel of the new insurance entity must not concurrently take positions other than directors or supervisors in other entities.
  • The establishment preparation team of the new insurance entity must submit a monthly written progress report to CIRC during the preparation stage.


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