LONDON—Insurance companies should pay damages to clients when they are slow to pay claims, according to the London-based Assn. of Insurance & Risk Managers.

In its submission to the U.K. Law Commission’s consultation paper on late claims payment, AIRMIC said the law discourages “reasonable behavior” by insurers because there is no financial penalty for late payment.

Under current law in England and Wales, a policyholder can sue an insurer over late claims payment but cannot claim for any loss they may suffer because of the delay in receiving the claims payment.

In Scotland, and in some other jurisdictions, policyholders are able to claim for losses suffered because of late payment.

The Law Commission in March asked interested parties to submit their views on whether a change is needed. The Law Commission also asked whether the law should more explicitly outline an insurer’s duty of good faith to, for example, investigate claims fairly.

The consultation period ended June 24.

AIRMIC, in its response, said the timing of claims payment could be critical to businesses’ recovery from losses and said the issue “has become even more acute in view of the increased difficulty and expense of obtaining bridging finance from banks.”

AIRMIC added that its members with overseas operations are at a disadvantage in jurisdictions where local insurance buyers benefit from a more favorable legal environment.

AIRMIC also sent the Law Commission a copy of the voluntary “speed of settlement” agreement it signed with a group of insurers last September.

The agreement, which applies to property and business insurance claims of more than £2.5 million ($37.7 million) on U.K.-issued policies, sets out a framework for the prompt settlement of large claims.

Under those principles, in the event of a major claim, a loss adjuster would produce a cash flow model which would show how much the insurance buyer had lost in terms of production and sales because of an event. The insurer then would agree to try to maintain the buyer’s cash flow position at a level as close as possible to where it would have been in the absence of a loss.

The voluntary agreement was signed by the U.K. units of ACE Ltd., American International Group Inc., Allianz S.E., AXA Corporate Solutions, RSA Insurance Group P.L.C., XL Insurance and Zurich Financial Services Ltd.

The Law Commission is a nonpolitical body set up to keep the law of England and Wales under review and recommend reform where needed. A similar body exists in Scotland.