Application of Late Payment of Commercial Debts (Interest) Act 1998 to (Re)insurance contracts

From 7 August 2002, most businesses could claim interest at 8% above base rate on overdue debts from other businesses.

There is continuing debate over whether the Late Payment of Commercial Debts (Interest) Act 1998 applies to insurance (and reinsurance) contracts. These are not specifically mentioned by the Act. In fact, the Act seems impliedly to exclude insurance contracts from its scope.

The Act applies to, amongst other things:

(i) contracts for the sale of goods; or
(ii) contracts under which a service is to be carried out.

It is widely accepted that a contract for insurance is a chose in action, as opposed to a chose in possession like a table or a car, for example. Whilst the Act does not cater specifically for choses in action the definition of “goods” in the Act is taken from the Sale of Goods Act 1979. The 1979 Act excludes choses in action from its definition of goods. Therefore, it would seem that an insurance policy cannot be a contract for the sale of goods (as defined) under the terms of the 1998 Act. It is thought unlikely that a contract for insurance could be construed as one in which the insurer agrees to carry out a service. It is therefore likely that contracts of insurance are excluded from the ambit of the 1998 Act altogether.

The DTI has not produced any guidance as to the application of the 1998 Act to insurance contracts. It is also unclear as to whether the insurance industry was considered when the 1998 Act came before parliament. What is clear, however, is that the 1998 Act will apply to contracts entered into by insurance companies for the purpose of carrying out their business. It will therefore apply to contracts entered into with actuaries and loss adjusters, for example.

If you require any further advice, please contact Raymond Koh at raymond.koh@cms-cmck.com or on +44 (0) 20 7367 2632.