Category: Insurance Act 2015 — claims provisions · Reviewed by Jake Leat, Associate Director · Last reviewed 2026-06-11
Late payment damages are sums recoverable by an insured from its insurer where the insurer has breached the implied term in section 13A of the Insurance Act 2015 to pay valid claims within a reasonable time, assessed on ordinary contractual principles of remoteness, causation and mitigation.
Category: Insurance Act 2015 — claims provisions Also known as: late payment claim, section 13A damages, damages for delayed indemnity, Sprung damages Related concepts: Section 13A Insurance Act 2015, Reasonable time to pay claim, Consequential loss, Business interruption insurance
Late payment damages in insurance are a head of contractual damages introduced into English law by the Enterprise Act 2016, which inserted section 13A into the Insurance Act 2015 with effect from 4 May 2017. Before that reform, the law treated the insurer’s obligation under an indemnity policy as a duty to hold the insured harmless from the date of loss; the loss itself was conceived as the insurer’s breach, and damages for late payment of the indemnity were therefore unrecoverable as “damages for breach of a duty to pay damages”. That position, confirmed in Sprung v Royal Insurance (UK) Ltd [1999] Lloyd’s Rep IR 111 and earlier marine authorities, produced acknowledged injustice where slow or obstructive claims handling caused the insured serious consequential loss, particularly insolvency or loss of contracts. The Law Commission’s 2014 final report recommended statutory reform, which Parliament implemented through the Enterprise Act 2016. The result is that a policyholder under an English-law insurance contract (or one governed by Welsh or Northern Irish law) entered into on or after 4 May 2017 may now claim damages from its insurer for breach of the implied term to pay within a reasonable time, in addition to the policy proceeds themselves. The damages are recoverable on ordinary contractual principles, meaning the insured must prove breach, causation, recoverable loss within the Hadley v Baxendale test, and reasonable mitigation. The reform aligns English law with the long-established position in Scottish, Australian and certain other Commonwealth jurisdictions.
The statutory authority is section 13A of the Insurance Act 2015, read with sections 16A and 17. Section 13A(1) implies the term as to payment within a reasonable time. Breach of that term sounds in damages on standard contractual principles. The Limitation Act 1980, as amended by paragraph 2 of Schedule 1 to the Enterprise Act 2016, provides that an action for breach of the section 13A implied term cannot be brought after one year from the date on which the insurer has paid the sums referable to the claim. This is a significantly shorter limitation period than the standard six-year period for breach of contract and means policyholders must be alert to bringing late payment claims promptly after the underlying policy proceeds are paid.
Damages are recoverable to the extent that the loss was caused by the breach, was not too remote (applying the two-limb test in Hadley v Baxendale (1854) 9 Exch 341 as refined in The Achilleas [2008] UKHL 48) and could not reasonably have been mitigated. The first limb of Hadley v Baxendale recovers losses arising naturally from the breach, in the usual course of things; the second limb recovers losses that were within the parties’ reasonable contemplation at the time of contracting as a probable result of the breach. For the second limb, the insured must in practice show that the insurer had actual or constructive knowledge of the relevant special circumstances (for example, fragile cashflow, time-critical contracts, dependence on swift indemnity to fund reinstatement). Damages may include interest at a commercial rate, bridging finance costs, business interruption losses beyond the policy indemnity, loss of profitable contracts, increased operating costs, and in extreme cases the diminution in enterprise value attributable to the delay.
Contracting out of section 13A is permitted in non-consumer contracts but barred for consumer contracts (section 16A(1)). Even in non-consumer contracts, contracting out is ineffective in respect of deliberate or reckless breaches (section 16A(4)). The transparency conditions in section 17 must be satisfied: the insurer must bring the disadvantageous term to the policyholder’s attention before contracting and the term must be clear and unambiguous as to its effect. The interaction with regulatory rules is important: a breach of ICOBS or the Consumer Duty may evidence unreasonable claims handling for section 13A purposes, while a finding of unreasonableness under section 13A may itself prompt regulatory scrutiny.
To bring a late payment claim, the insured will typically need to evidence the timeline of the claim, demonstrate the points at which the insurer’s conduct fell below the reasonable standard, and quantify the loss caused by the delay. The first reported decision under section 13A is Quadra Commodities SA v XL Insurance Company SE [2022] EWHC 431 (Comm), in which the Commercial Court found that the insurer had reasonable grounds to dispute the claim and had not breached the implied term. The decision establishes that late payment damages are not awarded simply because a claim takes a long time to resolve; the insured must show that the time taken was unreasonable in all the circumstances.
Practical steps for an insured seeking late payment damages include: maintaining a chronology of correspondence; recording all instances of delay, repeated information requests and silence; obtaining the insurer’s claims file (often by pre-action disclosure or in proceedings); securing expert evidence on industry-standard claims-handling timelines; and quantifying consequential loss with contemporaneous financial evidence. The insured should also be alive to the duty to mitigate: failing to seek bridging finance, refusing reasonable interim offers, or failing to communicate the urgency of the position may reduce or extinguish recovery.
For insurers, defending a section 13A claim turns on demonstrating reasonable conduct. Useful evidence includes contemporaneous reasoned file notes, the recommendations of independent loss adjusters and experts, evidence of the policyholder’s own conduct (delay in providing information, refusal of access), the existence of a bona fide coverage dispute, and compliance with internal service-level commitments and regulatory guidance. Insurers should consider making interim payments as soon as partial liability is admitted and should communicate timeline expectations openly. Many insurers have responded to section 13A by establishing dedicated claims governance frameworks, with senior oversight of files that exceed defined investigation timetables.
Variations arise primarily in the scope of recoverable damages. In simple consumer cases, late payment damages may comprise statutory interest plus modest consequential losses such as additional accommodation, vehicle hire or replacement costs caused by the delay. In commercial cases, damages can be substantial: bridging finance costs, business interruption losses for the period beyond the indemnity period, loss of contracts, diminution in business value and reputational damage are all potentially recoverable subject to remoteness and proof. Where the insured has gone into insolvency partly because of late indemnification, the question is whether the insolvency was a reasonably foreseeable consequence of late payment given what the insurer knew or ought to have known.
Multi-party scenarios introduce additional complexity. Where multiple insurers participate on a layered programme, each is potentially liable for the proportion of damages referable to its own conduct. Where reinsurance is involved, the reinsured cedant remains primarily responsible for the section 13A obligation, though it may seek to pass through some part of the loss under the reinsurance contract. Where the policy is co-extensive with another contract (for example, a sale and purchase agreement with insurance-backed warranties), the late payment damages claim may be pursued in parallel with contractual remedies under the other agreement.
Contracting-out clauses, while permitted in non-consumer contracts subject to sections 16A and 17, vary widely in the market. Some clauses purport to cap late payment damages at the policy limit; some exclude consequential loss generally; some impose notification timelines before damages accrue. The validity of each clause turns on the transparency requirements and the prohibition on excluding liability for deliberate or reckless breach.
A SME logistics business holds a goods-in-transit policy incepted in 2023 governed by English law. A cargo of high-value electronics is stolen in transit. The insurer is notified promptly and provided with full evidence of the theft. Six months later, no payment has been made; the insurer is still investigating, despite the loss adjuster’s recommendation in month two that the claim be paid. The SME, deprived of cashflow, loses two major customer contracts when it cannot fund replacement deliveries, incurs ÂŁ40,000 of bridging finance costs, and suffers reputational damage. The policyholder issues proceedings under section 13A. The court finds the insurer’s conduct from month three onwards unreasonable, applying the Quadra Commodities test. Damages are awarded comprising the policy proceeds, the bridging finance costs (first limb of Hadley v Baxendale), the lost contract profits (second limb, on evidence that the broker disclosed the SME’s dependence on prompt indemnity at placement), and interest at a commercial rate. The example demonstrates the practical importance of disclosure at placement of any special vulnerability to delay, since such disclosure can bring losses into the second limb of remoteness.
This entry is part of the Apex Insurance Wiki. Last reviewed by Matt Bartlett on 2026-06-11. Next review: 2026-12-11.
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