The Enterprise Act: Tackling late payments

Cash flow is the lifeblood of a business. When a business cannot trade for any reason the cash flow effect is magnified to the extent it could close a business.

A major insurance claim not settled promptly could cause this result. Through no fault of its own a potentially healthy venture may be forced into administration, or worse liquidation, because of settlement delays within their current claims process. If such a time delay causes the client to suffer cash flow issues, by the time the claim is resolved it may be too late.

On 4th May 2016 the Enterprise Bill received Royal Assent and became the Enterprise Act 2016. The payment of insurance monies due, within a reasonable time, is a key element of Part 5 of the Act.

Until now, insurers under their contracts of indemnity were under no legal obligation to pay valid claims within a reasonable time. The government has said it is committed to combating unreasonably late payment of sums due to businesses in particular, and that the new law should incentivise insurers to pay as promptly as is reasonable, and give policyholders a legal right to enforce this.

According to the Department for Business Innovation & Skills, the Enterprise Act 2016 will:

  • Ensure that the law incentivises insurers to pay insurance claims within a reasonable time, and to promote payments within a reasonable time.
  • Give policyholders a contractual right to the payment of insurance claims within a reasonable time.
  • Provide for general damages to be payable by an insurer where a policyholder suffers additional loss because of the insurer’s unreasonable delay in payment.

There is debate around what constitutes “reasonable time” in which to pay a claim, as this will be an objective judgement in each individual case. It will also include time to investigate and assess the claim. Relevant issues are likely to include:

  • The type of insurance (for example business interruption losses may take longer to investigate than a simple property loss)
  • The size and complexity of the claim (the more complex, the more time is likely to be allowed).
  • Compliance with any relevant statutory or regulatory rules or guidance.
  • Factors outside of the insurers control for example, the need for a Health & Safety inspection if something such as asbestos is suspected, or there is difficulty in just accessing the site to assess the damage.

Insurers may contract out of this Act for
businesses (non-consumer contracts), as
long as this disadvantageous term is brought
to the policyholder’s attention before the
contract is entered into, and the term is clear
and unambiguous in its purpose. If these
requirements are not met, or if an insurer
“deliberately or recklessly” fails to pay out
in a reasonable time, the term will be void
and the policyholder will be entitled to
enforce payment and claim for damages.

The provisions will come into force on 4th
May 2017 and will apply to all insurance
contracts entered into on or after that date
unless the insurer contracts out.

If you would like to discuss how the implications of the Enterprise Act could affect you please contact us.

INCE&Co, HM Treasury