Late payment damages (Enterprise Act 2016)

Late payment damages are damages recoverable by an insured for breach of the implied term in section 13A of the Insurance Act 2015 — inserted by section 28 of the Enterprise Act 2016 — that insurers must pay sums due under a contract of insurance within a reasonable time.

Definition §

Late payment damages are a remedy created by statute to compensate insureds for consequential loss caused by an insurer's failure to pay a claim within a reasonable time. They are recoverable for breach of the implied term in section 13A of the Insurance Act 2015, which was inserted into the Act by section 28 of the Enterprise Act 2016 and came into force on 4 May 2017.^[1]

Prior to the reform, English law treated the insurer's obligation under a contract of insurance as itself an obligation to pay damages. The consequence was that an insurer's late payment did not give rise to a separate cause of action — the insured could recover only the underlying claim amount and statutory interest. This meant that consequential losses caused by delay — additional financing costs, lost commercial opportunities, knock-on business failure — were not recoverable. The Law Commission considered this position to be out of step with international comparators and commercial expectation, and recommended reform.^[2]

Section 13A now operates alongside the underlying contractual claim. An insured may recover (a) the sums due under the policy, (b) statutory or contractual interest on those sums, and (c) damages for any consequential loss flowing from breach of the implied term to pay within a reasonable time, subject to the ordinary common-law rules on remoteness, causation and mitigation.^[3]

Legal / Regulatory basis §

The statutory framework comprises section 13A of the Insurance Act 2015 (the implied term), section 16A (limits on contracting out), and section 17 (transparency requirements). Section 13A(5) makes clear that the remedy for breach is in addition to, and not in substitution for, the right to enforce payment of the underlying sums and any right to interest.^[4]

Section 13A(3) sets out the factors relevant to whether the insurer has paid within a reasonable time: the type of insurance, the size and complexity of the claim, compliance with relevant statutory or regulatory rules or guidance, and factors outside the insurer's control. Section 13A(4) provides that if the insurer shows there were reasonable grounds for disputing the claim, the insurer is not in breach merely by failing to pay during the dispute — but the insurer's conduct in handling the claim is a relevant factor.

Section 16A provides that, in non-consumer insurance, the parties may exclude or limit liability for breach of section 13A only in respect of non-deliberate, non-reckless breaches, and only subject to the transparency requirements of section 17. Liability for deliberate or reckless breaches of section 13A cannot be excluded or limited. For consumer insurance, contracting-out is more tightly restricted: no derogation from section 13A is permitted that would put the consumer in a worse position than under the implied term.^[5]

The Law Commission's 2014 report includes detailed analysis of the policy considerations and consultation feedback. The recommendation was rejected by Parliament in the original 2015 Act but was carried into law via the Enterprise Act 2016, reflecting cross-party support for the reform and continued lobbying by consumer organisations.^[6]

The pre-2017 case law remains relevant for contracts entered into before 4 May 2017 and as historical context. The leading pre-Act authority on the rule against damages for late payment was Sprung v Royal Insurance (UK) Ltd, although in the early section 13A jurisprudence the Court of Appeal's analysis in Ted Baker plc v AXA Insurance UK plc has been particularly influential.^[7]

How it works in practice §

In practice, late payment claims are now a regular feature of complex insurance disputes. The structure of a typical claim is to plead breach of section 13A in the alternative to (or in addition to) the substantive coverage dispute, seeking damages for losses caused by the period during which payment should reasonably have been made but was not.

To recover damages for late payment, the insured must establish:

1. The contract of insurance contained the implied term under section 13A (this is automatic for contracts dated 4 May 2017 onwards).
2. Sums became due under the policy at a particular point in time.
3. The insurer failed to pay those sums within a reasonable time.
4. The insurer did not have reasonable grounds (or ceased to have reasonable grounds) for disputing the claim.
5. The insured suffered loss as a result of the delay.

Loss is assessed on ordinary contractual principles. Heads of loss can include additional borrowing costs, lost business opportunities, foregone investment returns, and (in serious cases) consequential business failure. The remoteness test under Hadley v Baxendale applies: the insurer must have known, or be deemed to have known, that the type of loss claimed could result from late payment in the particular circumstances of the insured.

Mitigation is important. An insured who failed to take reasonable steps to mitigate consequential losses — for example, by seeking interim financing or negotiating with suppliers — may find recovery reduced. Insurers also rely on the section 13A(4) defence of reasonable grounds for dispute, particularly where the dispute relates to genuine and complex coverage questions.

Brokers play an important role in supporting late payment claims by documenting the timeline of the claim, the insurer's responses and the consequential losses suffered by the insured. The "reasonable time" assessment is fact-sensitive and benefits from a clear contemporaneous record.^[8]

Common variations §

The practical operation of late payment damages varies significantly by class of business and claim size. For small consumer claims, the practical remedy is typically pursued through the Financial Ombudsman Service, which may award compensation for distress and inconvenience as well as financial loss. For commercial claims, section 13A damages are pursued in court alongside the underlying claim.

In business interruption insurance — a class that generated significant section 13A litigation following the COVID-19 pandemic — the consequential losses caused by delayed payment can be substantial, especially where the insured business is unable to continue trading without timely indemnity. The reasonable time analysis must take into account the complexity of business interruption claims and the genuine difficulty of quantification in novel scenarios.

In specialty lines (such as professional indemnity and directors' and officers' liability), the relevant losses may include the additional cost of legal representation, settlement leverage lost as a result of delay, and damage to commercial relationships. The reasonable time analysis must take into account the iterative nature of liability claims handling.

In consumer insurance, section 13A damages are recoverable in principle but are typically pursued through the FOS. Court action is rare given the cost-benefit balance, but the right exists and provides additional leverage for consumer dispute resolution.

Example §

A manufacturing company suffers a major fire in January 2026, triggering both material damage and business interruption cover. The insurer accepts coverage in March 2026 but disputes quantum of business interruption losses. Interim payments of £500,000 are made in May 2026 but no further payments are made until December 2026, after the insured commences proceedings. The insured argues that a reasonable interim payment of an additional £1.5m should have been made by August 2026, when sufficient quantification information was available.

The court finds for the insured on the section 13A claim. It awards (a) the underlying business interruption indemnity, (b) statutory interest from the date the sums became due, and (c) damages for breach of section 13A reflecting the additional bank borrowing costs incurred during the four-month period of unreasonable delay between August and December 2026, totalling approximately £180,000. The court rejects a head of claim for lost contract opportunities on remoteness grounds, but accepts the financing cost claim as being within the reasonable contemplation of the parties.

See also §

• /wiki/section-13a-claims-handling-duty/ — the underlying implied term
• /wiki/enterprise-act-2016-amendments/ — the inserting statute
• /wiki/insurance-act-2015/ — parent statute
• /wiki/business-interruption-insurance/ — class often engaging late payment damages
• /wiki/contract-certainty/ — related claims-handling theme
• /wiki/fair-presentation-of-the-risk/ — placement duty
• /wiki/consumer-insurance-disclosure-and-representations-act-2012/ — consumer regime

References §

1. ↑ Insurance Act 2015, section 13A (as inserted by Enterprise Act 2016, section 28), https://www.legislation.gov.uk/ukpga/2015/4/section/13A
2. ↑ Law Commission and Scottish Law Commission, "Insurance Contract Law: Business Disclosure; Warranties; Insurers' Remedies for Fraudulent Claims; and Late Payment" (Law Com No 353 / Scot Law Com No 238, July 2014), https://lawcom.gov.uk/
3. ↑ Insurance Act 2015, section 13A(5)
4. ↑ Insurance Act 2015, section 13A
5. ↑ Insurance Act 2015, sections 16A and 17
6. ↑ Enterprise Act 2016, section 28, https://www.legislation.gov.uk/ukpga/2016/12
7. ↑ Ted Baker plc v AXA Insurance UK plc [2017] EWCA Civ 4097
8. ↑ Insurance Act 2015, section 13A(3)