My Lords, I thank the noble Earl, Lord Kinnoull, for his amendments and for taking the trouble to meet me and representatives from the London insurance market, and welcome my noble friend Lord Flight, who is an expert in this area. I am also very glad that my noble friend Lady Noakes is with us and thank her for her support for the late payment of insurance provisions; that nicely complements the discussions we have had on other days on late payment for small firms by big firms and retentions. The provisions are, as she says, intended to address a legal anomaly in the current law; that is, that insurers currently have no legal obligation to pay sums due within a reasonable time.
Where late payment does occur, however frequent or infrequent that may be in different parts of the market, it is appropriate that the policyholder should be able to recover any losses suffered as a result. That is why the Bill builds into every contract of insurance an obligation on insurers to pay sums due within a reasonable time. Breach of that obligation may give rise to damages for breach of contract on normal contractual principles.
With his Amendments 52A and 52C, the noble Earl seeks to restrict the types of contracts to which this obligation would apply, excluding reinsurance and certain “large risks”. The clauses in the Bill are the product of a long Law Commission project involving years of engagement with the insurance industry. Stakeholders argued strongly in favour of a single regime for all non-consumer insurance contracts, avoiding boundaries which, by their nature, are complex and arbitrary, and add to legal expense. If different rules applied to different types or sizes of business, insurers would have to identify which side of the boundary each prospective policyholder fell before entering into the policy. This would severely slow down and add expense to the placement process.
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The particular definition that the noble Earl tabled for “large risks”, based on the Solvency II definition, demonstrates the difficulty of defining boundaries.
The definition is complex and has several different elements, but it would exclude all insurance contracts involving a policyholder with a net turnover of €12.8 million and more than 250 employees. This would exclude many medium-sized businesses, which, frankly, are precisely the target of the Bill.
As the late payment provisions currently appear in the Bill, they rectify a gap in the legal regime and encourage responsible payment, for the benefit of policyholders and the perception of the market. These arguments apply for all insurance contracts, including reinsurance, which are treated by the law in the same way as all other non-consumer insurance contracts.
As noble Lords would expect, I am very alert to any argument that there is a threat to the competitiveness of the UK and of London as a world-leading insurance hub. However, the provisions in the Bill are specifically designed to work for the London market, including reinsurance contracts, as well as for SME insurance contracts. We are not planning anything further.
The provisions are flexible so that parties can agree, under Clause 21, on an exclusion or limitation of liability for consequential losses. Such contractual limitations are common in many forms of commercial contract. Whether contracting out is appropriate in individual cases will be a matter for commercial negotiation between insurers and their customers and/or brokers. However, it is in the UK’s interest that the London market is seen to be a good place to contract and a place where customers are paid on time. The time has come to make these much-delayed provisions, as the noble Baroness, Lady Hayter, said.
I hope that noble Lords will recognise, on reflection, that the proposed carve-outs are neither necessary nor appropriate. The provisions have been carefully prepared. On this basis, I ask that the amendments be withdrawn.