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Insurers may face damages for slow claims payments

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A proposal has been made for a law to require insurers to pay legitimate claims promptly or face damages. Under the proposed law, insurers who unreasonably delay paying valid claims would be liable to pay damages to policyholders.

The proposal, submitted by the Law Commission and the Scottish Law Commission, aims to “re-characterise the insurer’s primary obligation as a duty not to prevent loss but to pay valid claims after a reasonable time”.

In their summary of the report the commission states that insurers today are exempt from the normal rule of paying damages if a party breaches a contract. They said that the rule is based on the fiction that an insurers primary obligation is to prevent loss from occurring and not to pay valid claims, and that this needs to be changed.

In the report they cited the ABI as sharing their view, quoting them as saying, “if the insurer has declined a valid claim and has acted unreasonably, we accept that the law should be brought into line with general commercial contractual principles.”

Consumers should also be able to claim damages for distress, inconvenience or discomfort in insurance cases, the advisers said.

According to the commissions, English contract law for insurers is “unprincipled”, “unfair” and “reduces the perceived fairness and competitiveness of English Law.”

Respondents have until 20 March 2012 to reply to the Commissions’ reform proposals.