Insurance Helpline | Insurers required to pay interest on delayed claims
QUESTION: My car was damaged in an accident along Old Hope Road. The other vehicle ran into its back. The third party agreed to fund the repairs, but when she found out the cost, she changed her mind and reported the accident to her insurers. They have admitted liability according to my insurance brokers. It was suggested that I file a claim under my comprehensive policy and allow them to recoup the costs from the other company. I have done so but will have to find $100,000 to pay the excess (or deductible). Because one item is not available locally, I will be forced to drive a partially repaired car for the next three and a half months until the missing part is sourced overseas and shipped here. Can I include the loss of interest on the $100,000 for three months that I would have earned if I did not have to partially fund the repairs in my claim against the third-party insurers?
W.B., Kingston 8
INSURANCE HELPLINE: Two words jumped into my head immediately after I read your email. They had absolutely nothing to do with insurance. They were about economics. Every first-year accounting, banking, business, or finance student is familiar with the phrase 'opportunity cost'.
For those who are less sophisticated than you and who are unfamiliar with the phrase, Investopedia investopedia
cost.asp offers a definition that explains the phrase. It says: "Opportunity cost refers to a benefit that a person could have received, but gave up, to take another course of action. Stated differently, an opportunity cost represents an alternative given up when a decision is made. This cost is, therefore, most relevant for two mutually exclusive events. In investing, it is the difference in return between a chosen investment and one that is necessarily passed up."
My quick and short answer to your question is that it would be unwise not to include the interest that you would have earned if you did not have to fork out the $100,000 to pay the excess.
A February 27, release from the Bank of Jamaica stated, among other things, that effective March 2, interest rate payable on overnight deposits made by commercial banks to Bank of Jamaica would increase from 3 per cent to 4 per cent; and the rate for 30-day certificates of deposit remains at 5 per cent per annum.
If banks are earning interest 24/7, 365 days per year, is it unfair for you to do the same?
Some claimants, in addition to being ignorant about a concept like opportunity cost, are also not familiar with some of the basic rules, or regulations, by which the insurance business should be conducted as is required by law. Rule 135 deals specifically with the payment of claims. It says:
(1) "Payment of claims shall be made with unavoidable (sic) delay if (a) the insured event has been proved; b) liability under the policy has been agreed; c) the amount payable by the insurer agreed; and) the entitlement of the claimant to receive payment has been established.
(2) "All monies payable under the contract ... shall be paid by the insurer within 30 days after it has received proof of claim;
(3) When the payment of the claim is delayed more than two months, the insurer shall pay interest on the cash sum due;
(4) The two-month period runs from the date of the happening of the insured event and interest shall be calculated at the relevant market rate from the end of the two-month period until the actual date of the payment."
THE NEW LAW
State governments in the United States have enacted prompt payment laws. These laws impose interest penalties when insurers fail to make prompt payments. Illinois is one example of a state that has done this.
Sidley, a 100-year old legal firm with operations around the world, wrote on May 11, 2016, about the passing in the United Kingdom of an Enterprise Bill during that month. The new law, according to the firm, "contains a provision that will require insurers to pay claims within a reasonable time".
This, they say, "opens the way for a policyholder to claim compensation for losses resulting from an insurer's delay, in addition to any interest owed on the claim amount. Policyholders do not currently have this right due to a controversial rule of English insurance law that classifies insurance payments themselves as damages (which are not subject to further damages for late payment) rather than contractual obligations. The new provision will bring insurance law into line with general contract law on this issue".
In late 2015, I attended a lecture on medical ethics in one of the new lecture rooms in the ultra-modern Law Faculty of the University of the West Indies. This was the closest that I came to attending law school!
In spite of this, as a non-lawyer, I am very confident that the reasons that I have shared provide evidence that there are good reasons your claim against the third party's insurer should include a provision for the interest that you would have earned if you did not have to dip into your savings to fund the policy excess of $100,000.
Giving up $1,250 calculated at a nominal interest rate of five per cent per annum to the third-party insurers does not make sense when one bank is reportedly charging $385 to change a $5,000 bill into smaller units of currency.
- Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel, write to: firstname.lastname@example.org