Anthony Hilton: The insurance industry needs to heed this sound advice

In a debate in the House of Lords last week, Howard, now Lord, Flight issued a dire warning about the fate that would befall the London insurance market if a clause in the Enterprise Bill that was before the Lords were to be passed.

Insurance costs would rise; premiums would soar; customers would desert in droves; capital providers would look for another home for their money; reserving would become even more difficult than it already is; the whole process of settling insurance claims would degenerate into a legal nightmare; the industry would be forced to decamp to sunnier climes.

Lord Flight seemed almost to imply that it would be preferable if a plague of locusts were to descend on Fenchurch Street.

According to the good Lord, all these things could happen because of a clause promoted by the Treasury in the Bill — a bit of legislation that is designed to make life better for businesses.

The section to which he objects says that if insurers behave so casually, so badly or so incompetently that they fail to pay valid claims within a reasonable period of time, the customer should have some means of seeking redress.

If the clause becomes law, insurers will have an obligation to pay valid claims within a reasonable time. If they don’t, the clients will be able to sue for damages.

This is hardly plague-of-locusts stuff. If the clause were passed, it would bring English law into line with almost every other jurisdiction in the world — even including Scotland.

It ought not be a big deal. It would simply address a peculiarity of English law that classes insurance settlements as damages rather than contractual entitlements. This has to be got round because you cannot sue to get damages on damages.

It sounds arcane but the principle matters a lot because late payment of valid claims is a huge problem for small and mid-sized businesses.

There are cases every year where individuals and small firms go to the wall unnecessarily after some setback for which they were insured because they cannot hold on long enough for the insurance money to arrive.

Not all these delays are the insurers’ fault but some are. Those are the ones this seeks to address.

Lord Flight did not get where he is today by making things up. Rather, he gets briefed. While he did not name his source, what he says bears an uncanny resemblance to the contents of a four-page letter to Economic Secretary to the Treasury Harriet Baldwin that was penned on October 7 by the Lloyd’s Market Association’s David Gittings, Inga Beale of Lloyd’s and Dave Matcham of the International Underwriting Association.

The letter has not been publicly released but the copy I have alleges that the proposal is “fundamentally flawed from a policy and drafting perspective”, says it “will damage the international competitiveness and the interests of the London insurance and reinsurance markets” and has been introduced “without adequate consultation with interested parties and without robust and reliable impact assessment”. For good measure, it adds that it will create legal uncertainty.

But the letter’s authors also propose a solution. They do not object to this clause being available for simple people with simple policies but they do not think it should apply to the clever, difficult stuff they do in the London market.

So they actually propose it should not apply to their customers — or more specifically to large businesses as defined by the Solvency II insurance directive.

Now, as they ought to know full well, large businesses by this definition are everyone else’s idea of pretty small businesses. Their amendment would exclude a large proportion of the clients the Bill is designed to help and in effect render the whole measure pointless.

Interestingly, the London market’s objections are pointedly not supported by the Association of British Insurers, which “backs the concept” and says the clause “should simply reinforce good industry practice”.

That position is echoed by the British Insurance Brokers’ Association as well as Airmic, which represents business insurance buyers in the UK. The rest of the world has also long since lived with this kind of clause. It seems everyone is out of step except the London market.