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Commercial law: Law Commission calls for fairer insurance law

The Law Commission has spoken out in favour of new legislation which would make it an insurer's primary obligation to pay valid claims after a reasonable time. Insurers who delay payment unreasonably or who fail to pay a valid claim should be made liable to pay damages for foreseeable loss, they say.

At the moment, some small businesses in Britain are waiting as long as six months to receive a valid insurance payout, with no recourse for compensation for the delay. The Law Commission is looking to make changes designed to help small businesses who are hit by unexpected events.

Under the present law in England and Wales, a policyholder can sue their insurer if they are taking a long time to settle a valid claim, or are refusing to pay at all. However, they can only sue for payment of the claim, not for any losses which they have suffered as a result of the delay.

Individuals and very small businesses can make a complaint to the Financial Ombudsman, who can award compensation but larger businesses have no remedy at all.

Under regular contract law, if one party fails to undertake a contractual obligation the other party may sue for damages as long as their losses were foreseeable.

Judges in England and Wales have previously decided that the law for insurance contracts is different. Now the Law Commission is recommending that insurance contract law be brought in line with the principles of regular contract law.

"Insurance contract law is unfair, unprincipled and out of step with today's commercial realities," said David Hertzell, the Law Commissioner.

"Small businesses are particularly vulnerable to late payment of insurance claims. We are seeking a solution which balances the insurers' need to investigate claims against the policyholder's expectations that valid claims will be paid in reasonable time."

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