A new U.K. law will allow insurance buyers of all sizes to receive damages if their claims are not paid within a reasonable amount of time, but the law does not define what is considered “reasonable.”

The U.K. Enterprise Act, which goes into effect May 2017, will make insurers liable to pay compensation if their delay in settling a claim causes financial damage for the buyer, and if the buyer can prove that the handling of their claim was unreasonable and that the damages suffered were foreseeable by the insurer.

As a result of lobbying by insurers, buyers must bring their claim for damages within one year after the original insurance claim is paid in full.

While an implied obligation for insurers to assess claims quickly and with diligence already exists under Scottish law, the Enterprise Act marks the first time that policyholders can seek damages for late payment of insurance claims under English law, sources said.

The Enterprise Act, which updates one element of the Insurance Act 1886 that was left out of the Insurance Act 2015, which comes into force later this year, “remedies a long-standing injustice for insurance policyholders,” said Richard Mattick, of counsel in the insurance practice at law firm Covington & Burling L.L.P. in London.

The legislation brings U.K. law “into line with most of the rest of the world,” said John Hurrell, CEO of Airmic Ltd., the London-based U.K. risk management association.

The Enterprise Act also brings this aspect of insurance law in line with rules that allow damages under other types of commercial contracts, the London-based British Insurance Brokers Association said in a statement.

“It is absolutely correct that there should be an implied commitment in all insurance contracts that the insurer should behave reasonably on claims and that there can now be legal consequences for failing to do so,” Mr. Hurrell said.

Most Airmic members, who typically are large insurance buyers, already tend to be treated “reasonably” and “fairly and efficiently” by insurers, even if the outcome is not always what the buyer had hoped, he said.

And most large insurance buyers can withstand claims delays by borrowing, and any interest payments already are recoverable under current law, Mr. Hurrell said.

Still, he said it will be fairly difficult to meet the legal hurdles of proving the claim was handled unreasonably, that it resulted in damages and that the damages could have been foreseen by the insurer.

Legal experts say uncertainties remain about how the courts will interpret the law.

For example, the Enterprise Act does not define what constitutes a “reasonable” amount of time to pay a claim. The issue is “certainly going to be a flashpoint between parties,” said Nick Young, a partner at DAC Beachcroft L.L.P. in London.

“The question of what is a reasonable time to investigate a claim, and how insurers can demonstrate that they have not unreasonably delayed payment, is likely to be a contentious area,” said Stephen Netherway, partner and head of the insurance team at CMS Cameron McKenna L.L.P. in London.

Insurers should start updating their procedures and policy wordings now, Mr. Young said. They also should ensure that everyone involved in claims is trained to respond to the changes.

“Insurers and brokers must take steps to prepare for the changes,” Mr. Netherway said.

Insurers and brokers also may need to change policy language to limit their potential liability for late-payment damages, he said.

One potential area of concern for insurers will be the subscription market, where they might not have control over the claims process.

“Insurers should consider the risk of liability where they do not have control of claims and may therefore be exposed to mishandling by a third party,” London-based Sidley Austin L.L.P. said in a briefing note.

“This may be relevant, for example, in the case of a following insurer on the subscription market, an insurer taking an excess layer or an insurer which has relinquished control to its reinsurer,” the law firm said. “Parties to these arrangements may wish to agree how such risk will be allocated.”

Insurers also should review their reinsurance arrangements to check for any exclusions or positive statements of coverage in relation to a cedent's liability arising from late payment to a primary buyer, Mr. Young said.

“Reinsurance wordings should be reviewed; outwards reinsurers may or may not be prepared to provide cover for liability for late payment,” the Sidley Austin note said.