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Insurance Law Reform

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In December 2011 the Law Commission introduced the consultation paper 201 as well as the Consumer Insurance Bill which is set to make up the bipartite reform of insurance law in the UK.

The paper addresses a number of issues however the two most significant amendments that will be examined in this article involve damages for a late payment of a claim and insurers remedies for fraudulent claims.

Damages for late payment of a claim

According to established contract law principles, a party that has breached a contract is responsible for any loss that is foreseeable by the parties at the time the contract was formed. However, this principle is complicated when applied to indemnity insurance contracts.

An indemnity insurance contract is a contract between a policyholder and an insurance company for the insurers to provide security against loss of an asset. Hence, if there is a failure to pay by an insurance company to a policy holder there is a breach

An insurance company may question the pay out to the policyholder resulting in a possible lengthy battle that could be financially crippling to many business's before the insurers finally agree to fulfil their contractual obligations. If one were to apply a simple contract law analysis it is arguable that the insurers would be liable to pay any costs incurred as a result of the insurance companies unwillingness to promptly pay the insurance holder.  However complications arise due to the fact that insurance companies are not required to pay policy holders for such a loss. An example of such a case can be seen in Sprung v Royal Assurance in which the delays of Royal Assurance to pay Mr Sprung resulted in his business suffering further loss of £75,000. The courts found that the insurance company was under no duty to reimburse Mr Sprung.

The reasoning behind such a decision is that the court ,in previous cases, have found that an insurance company is under a duty to prevent loss as opposed to indemnifying the policyholder. By this logic insurers are in breach of contract as soon as loss to the policy holder occurs, thus insurers are breaching contracts thousands of times a day. The pay out  undertaken by insurers is therefore regarded as a damages payment as opposed to a fulfilment of a contractual obligation and due to the long established principle that damages for late payment cannot be made against an award for damages, policyholders in the position of Mr Sprung are in an unfortunate position.

The Law Commission proposals involve implementing a statutory measure so as insurers are held liable for late payments on claims. Such legislation has obviously been met with much criticism from insurance companies who state that they will have less time to question claims on indemnity insurance due to the threat of having to pay these expenses which could lead to an increase in the already estimated annual  £1.9 billion lost due to insurance fraud.

Tackling insurance fraud

As previously stated £1.9 billion is estimated to be lost annually due to insurance fraud. The Law Commission has introduced legislation that attempts to tackle this major issue. The law on insurance fraud is not entirely clear due to the cautious and confusing approach that the courts have taken in interpreting the relevant statute (Marine Insurance Act). The relevant piece of this act has been held to apply to all types of insurance contracts and allows for the courts to entirely set aside an agreement between insurers and policyholders. What has not been made clear is to what extent insurers can recoup the fraudulent claims.

In an attempt to dissuade potential insurance fraud claims the Law Commission intend to legislate so as to entirely set aside a pay-out even if only part of the claim was entered into fraudulently as well as any subsequent pay outs. The Law Commission also wish to legislate so as as to hold the policy holder accountable for the insurers expenses incurred in investigating the fraudulent claim.

Although such legislation is obviously meant to dissuade fraudulent claims many are sceptical about the effectiveness of such a law. Many leading insurance law firms point out that the vast majority of fraud is committed by people with very little legal knowledge as to the repercussions of such an action, therefore, although the Law Commission can be seen to recognise the important issue of insurance fraud it is unlikely that their proposed legislation will have much effect on reducing the £1.9 billion lost by insurance companies every year.

In conclusion the Law Commission have proposed some key changes to insurance law in the UK. However, it remains to be seen whether such legislation will be implemented and whether it will have the desired effect envisaged by the Government.

For additional information please contact Justin Emerson of Gepp & Sons on 01245 228113 or emersonj@gepp.co.uk

The above is not legal advice; it is intended to provide information of general interest about current legal issues.

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