1 TECHNICAL & LEGAL RISK PRACTICE NEWSLETTER NOVEMBER 2014 WHEN ARE FINAL DAMAGES REALLY FINAL? Settlements for asbestosrelated illnesses EFFICACY OF INSURANCE POLICIES How buying insurance can be an effective way of transferring downside risks RE-READING THE RIOT ACT What are the implications for risk managers? ALSO IN THIS ISSUE Foreword 2 EL premiums 5 Kelly v Riverclyde 7 FCA claims review 8 Page 4 Page 6 Page 7 Insurance contract law reform has (nearly) arrived The avoidance of claims due to intricate contractual terms, non-disclosure, misrepresentation and fraud are of fundamental importance to the efficacy of an insurance policy. The Insurance Bill 2014 will modernise the law in these areas and further increase the competitiveness of the UK insurance industry. The Insurance Bill is currently passing through the stages in the UK Parliaments, and as it is currently drafted will provide more flexible remedies in the event that the insured fails to disclose a fact that is relevant to the insurance being provided. BACKGROUND UK policies sometimes contain clauses known as warranties which must be exactly complied with, whether it be material to the risk or not. 1 If these warranties are not complied with, insurers are able to reject all claims following breach of a warranty even if the breach of warranty had no relevance to the loss or even if the breach is remedied before the loss. Insurers have been able to easily avoid claims by drafting their non-disclosure, misrepresentation and fraud clauses as warranties. To compound the effect of this, many insurance policies until recently included a basis of the contract clause (basis clause). A basis clause is a statement in the proposal form or policy wording 1 Marine Insurance Act 1906 section 33(3) Continued on page 2
2 FOREWORD 2 RISK PRACTICE Technical & Legal November 2014 Welcome to the first issue of our Risk Practice Technical & Legal newsletter which we have launched to keep clients up-to-date with technical and legal developments that may impact you. In this issue, we look at the hot topic of insurance contract law reform. The Insurance Bill 2014 looks set to have a large impact on the industry and benefit insureds as it addresses practices that have often been used to avoid paying claims. We also look at the Kendall v Dowdall case where the claimant was able to sue for compensation from new defendants, having previously accepted a full and final settlement as this has taken away certainty around final settlements in asbestos-related cases. In addition, we round up a range of recent legal developments that highlight the importance of ensuring that all insurance coverage is aligned with policyholders expectations. We also look at the proposed reform of The Riot (Damages) Act 1886; the Financial Conduct Authority s review of how insurers handle commercial claims; possible changes in employer s liability premiums; and Kelly v Riverclyde. Finally, if you have not seen our recent announcement, this is an exciting time for JLT. In August, we announced the merger of JLT Specialty and Lloyd & Partners, which creates a real powerhouse in our chosen areas, as well as the significant expansion of our US specialty capabilities to drive a new phase of growth. We d love to hear what you think of the issue, so please get in touch with any feedback. Continued from page 1 which declares that the information supplied by the prospective policyholder forms the basis of the contract. This has the effect of converting all answers on a proposal form or information otherwise disclosed, into warranties. The Law Commission, AIRMIC (The UK s association for risk and insurance management professionals) and leading brokers such as JLT Specialty have championed the UK government to remove the harsh effects of both basis clauses and warranties. The Insurance Bill 2014 will modernise the law in these areas and further increase the competitiveness of the UK insurance industry. For consumer insurance polices: The Consumer Insurance (Disclosure and Representation) Act 2012 abolished the draconian effects of basis clauses on 6 April For small and medium-sized enterprises (SMEs): The Financial Ombudsman Service (FOS) has customarily disapplied basis of contract clauses when adjudicating micro-business disputes. The proposals contained in the Insurance Bill will bring the corporate business insurance legal and regulatory landscape into closer alignment with that of consumers and SMEs. LAW REFORM For large commercial business the Insurance Bill encapsulates most 2 of the Law Commission s proposals in this area and will make the UK a more attractive place for international policyholders to obtain insurance. The reforms contained in the Insurance Bill benefit the insured in these important ways: It abolishes basis clauses A breach of warranty will only suspend an insurer s liability, and will not terminate it. Therefore in the event that the policyholder remedies a breach of warranty before a loss follows, the insurer will be liable because they are deemed to be back on risk It replaces the century old requirement of the policyholder to disclose every material circumstance that a prudent insurer may wish to know with a duty to make a fair presentation of the risk. A fair presentation of the risk is one which makes clear and accessible information which would put a prudent insurer on notice that it needs to make further enquiries It creates proportionate remedies in the event that a breach of the duty to make a fair presentation of the risk was not deliberate or reckless on the part of the policyholder (i.e. innocent). Paul Knowles Managing Director, Risk Practice, JLT Specialty Limited 2 Two areas of the Law Commission s proposals were omitted from the Bill to allow it to run swiftly through Parliament using the special Parliamentary procedure used for uncontroversial Law Commission proposals. 1) The effect of a breach of warranty where the loss is unrelated to the breach and 2) additional damages for the insured following the late payment of a claim by the insurer.
3 Technical & Legal 3 Fair presentation of the risk insurer remedies The remedies seek to put the insurer in the position that they would have been in had a fair presentation of the risk been made. Therefore if the insurer can prove that they would not have underwritten the risk at all if a fair presentation had been made, then they would still be entitled to avoid the policy. However: If it appears that the insurers would have still underwritten the risk but on different terms then the policy will be treated as if those terms were applied from inception. If the insurer would have charged a higher premium then the claim payment will be proportionately reduced in keeping with the premium. COMMENTARY Though the proposals in the Insurance Bill are welcomed by most brokers and risk managers, this does not alter the default legal position when a breach of warranty has no connection with the cause of loss. In such circumstance the insured would not be indemnified unless the policy contains a clause to modify the legal position. JLT Specialty has not only championed changes to the legal landscape in this area but has also routinely negotiated the inclusion of more favourable nondisclosure, misrepresentation and fraud clauses into bespoke and standard policy wordings. The effect of the duty to make a fair presentation of the risk puts the onus on the insurer to ask questions when underwriting a risk. It also requires the policyholder s senior management, or those responsible for placing the insurance, to take an active and considered approach to what information is provided to the insurers. In order to avoid disputes and to provide clarity as to what was a fair presentation it would be sensible for risk managers to undertake and to evidence that they have done due diligence on the risks for which they are responsible for finding cover. For more information please contact Felix Ukaegbu:
4 4 RISK PRACTICE Technical & Legal November 2014 When are final damages really final? The recent decision in Kendall v Dowdall has removed the certainty afforded by the practice of awarding final damages in asbestos related cases. Until this decision, final damages were intended to fully compensate the claimant both in respect of the condition itself and the increased possibility of developing a more serious asbestosrelated illness in the future. THE FIRST ACTION In June 1998, the claimant was diagnosed with asbestosis and pleural plaques. In March 2001, he brought proceedings against eight former employers whom he alleged had exposed him to asbestos. As well as disability resulting from asbestosis, the medical experts agreed that the claimant had a risk of developing other asbestos-related conditions including mesothelioma. In April 2003, the claimant obtained a judgment against seven of the defendants (the eighth was wrongly joined). The Judge awarded 26,000 as a full and final settlement of the claim with an element of the award intended to compensate the claimant for the risk of developing mesothelioma in future. THE SECOND ACTION The claimant unfortunately went on to develop mesothelioma. He brought proceedings (the second action) against three new defendants. These defendants had not been sued in the first action. The questions for the Court (tried as preliminary issues) were: 1. Was the second action an abuse of process? 2. Should the action be allowed to proceed as it related to the same issues of the original action? 3. Was the second action barred by the Limitation Act 1980? (which creates a time limit for bringing a claim). FINDINGS 1. Abuse of process The judge found that the second action was not an abuse of process. This was because: The three defendants in the second action were not parties to the first action. The claimant s decision not to sue the defendants in the first action was honestly made and was because the claimant s solicitors had been unable to trace the three defendant s insurers.
5 Technical & Legal 5 It threatens the finality of litigation by allowing a claimant who has accepted a final settlement in respect of mesothelioma to re-litigate his claim against new defendants if his condition develops. 2. Permissable action? Though the first action related to the same issues as the second; the fact that the defendants were different meant that the claimant was not prevented (estopped) from bringing the claim. The judge also considered that the action for damages for mesothelioma was conceptually different from the action for the risk of mesothelioma. The judge considered that the claimant was not fully compensated in the first action for the damage for which he then claimed in the second action. COMMENTARY This case raises a number of significant issues in asbestos related claims. In particular, it threatens what had often been thought to be the finality of litigation by allowing a claimant who has accepted a full and final settlement in respect of the risk of mesothelioma to re-litigate his claim against new defendants if his condition develops. We are of the view that it is likely that permission to appeal will be sought by the defendants and will monitor developments in this area. POSSIBLE CHANGES IN EMPLOYER S LIABILITY PREMIUMS The Mesothelioma Act 2014 will allow some mesothelioma victims to claim compensation from a newly created government scheme. If an individual is diagnosed with mesothelioma after July 2012 and is unable to trace the employer or its employer s liability (EL) insurer for the relevant time which they were exposed to asbestos, then they will be able to apply to the scheme. The payments will be funded by a 2.74% levy on insurers. 3. Limitation The Limitation Act allows the Judge to exercise his or her discretion whether the strict time limits for bringing a claim should apply. The claimant was clearly out of time (three years from the awareness of the injury) to bring an action under the terms of the Limitation Act, however the judge concluded that due to the amount of compensation, the severity of injury and the merits of the case, the claimant s case was allowed to proceed. For more information please contact Graham Terrell: INCREASE IN PREMIUMS? MOST EL INSURERS HAVE INTIMATED THAT THEY WILL INCREASE EL PREMIUMS BY 3% - 5% PARTLY TO CATER FOR THIS LEVY.
6 6 RISK PRACTICE Technical & Legal November 2014 Efficacy of insurance policies For those responsible for controlling their company s exposure to downside risks, buying insurance can be a very effective way of transferring risk. the sum for business interruption should be calculated to ensure adequate cover. Ensuring that the most up-to-date and correct values and figures are known to a company s broker and setting the appropriate level of business interruption cover (selecting sum insureds and maximum indemnity periods) is a difficult task and the consequences of failure to do so can result in significant underinsurance or no indemnity being provided at all. This case serves as an important reminder of the necessity of a close relationship between the insured and their broker especially in determining the amount of cover required. Fundamentally important to the execution of risk transfer through insurance is the efficacy of the insurance policy itself. Recent legal developments including the present Insurance Bill on insurance contract law reform and cases outlined below highlight the importance of ensuring coverage certainty is aligned with policyholder s expectations. RECENT CASES Milton Furniture v Brit Insurance The recent case of Milton Furniture v Brit Insurance 1 concerned a catastrophic fire which occurred at the insured s premises and destroyed the vast majority of its stock. The facts surrounding the fire itself were undisputed between the parties at trial. However the policyholder s property insurers resisted the claim for indemnity under the policy on the ground that the policyholder was in breach of two conditions precedent. The case was decided in favour of the insurer due to its specific circumstances. However this case is of interest to those concerned with the efficacy of insurance policies as it turned on the legal interpretation of condition precedents contained in policy wordings. Eurokey v Giles Insurance Brokers 2 The facts which led to this newly decided case involved the adequacy or otherwise of a company s business interruption insurance. The insured had provided information containing the value of stock and machinery together with figures detailing its turnover to its insurance broker, in order for the latter to arrange its insurance. Following a large loss at Eurokey s main premises, it became apparent that Eurokey was significantly underinsured. Eurokey s insurers refused to pay the full amount of the loss due to the underinsurance and consequently, Eurokey brought a negligence claim against Giles for failing to explain how COMMENTARY Insurance buyers must be mindful of the fact that many standard policy wordings contain detrimental contractual terms, the effect of which, if relied on by insurers, would lead to a claim being denied in its entirety or with significant limitations on the amount which the policyholder is able to recover. Guidance issued by AIRMIC 3 recommends that policy wordings due to their intricacies and legal effect should be reviewed by a legal department or third party specialists. We work with our clients to conduct policy wording health checks and try to secure substantial enhancements of cover into both standard and bespoke wordings. For more information please contact Felix Ukaegbu: Milton Furniture Limited v Brit Insurance Limited  EWHC Eurokey Recycling Limited v Giles Insurance Brokers  EWHC AIRMIC Efficacy of Business Insurance 17 June 2014 (http://www.airmic.com/technical)
7 Technical & Legal 7 Re-reading the Riot Act The ongoing Government consultation on proposed reform of the Riot (Damages) Act 1886 is a direct response to the exposure to recovery actions, following up a recent Court of Appeal ruling. What are the implications for risk managers? The initial fallout from the looting and arson of the Sony distribution warehouse in Enfield during the 2011 riots was well documented in the media. In a nutshell the Mayor s Office for Policing and Crime declined compensation under the Riot (Damages) Act 1886 for the largest ever arson in Europe. This led to an action to recover almost 60 million of indemnified losses by insurers as well as 4 million of uninsured losses suffered by the owners of stock held in the degrees. The commercial court ruled that the attack fell within the scope of the Act and insurers could, in principle, recover for physical damage but not for consequential loss. But it was the Court of Appeal s ruling in May this year that raised the political temperature by several degrees. The judges looked at the 1886 Act and earlier legislation and ruled that there was nothing to indicate that claimants were deprived of the right to compensation for losses resulting from physical damage. They argued that the wording did not support the proposition that losses sustained could not include consequential losses. Having satisfied itself that the attack constituted a riot, the Court of Appeal also went on to confirm that the attackers were riotously and tumultuously assembled within the meaning of the Act. This landmark decision means that, for the first time since 1886 the question of payment of compensation has been clarified. Insurers will now expect to recover business interruption losses suffered in the 2011 riots. And there are likely to be other claims from insurers that have been previously rejected. However, the size of settlements remains to be seen since, under the wording of the Act, the police have the right to fix an amount of compensation that appears to be just. The bigger question, however, given the potential costs involved for the taxpayer, is how long will this situation prevail? It seems likely that current Government consultation will seek to limit the types of losses that are recoverable under the 1886 Act or even introduce a new Act of Parliament. But whatever happens we can anticipatel changes in the provision and pricing of riot insurance. KELLY V. RIVERCLYDE (PROPERTY HOLDINGS) LIMITED The case was heard at the beginning of September Kelly had left the office at lunchtime to get a sandwich. Her offices were located on the Greenock river front. She had walked down three steps and was suddenly struck by a seagull causing her to lose her footing. This caused her some modest injuries. The lawyers in this case had claimed the building owners were responsible and not the employers. It was argued that the Occupier s Liability Act, the workplace (health, safety and welfare) Regulations 1992 and related common duties of care had been breached. Initially the claimant argued that the gull s nest had not been removed from the building, causing the incident. However, there was no factual evidence to support this. Nothing suggested that the seagull was nesting on the defendants building. The judge also argued this would be a matter of control rather than maintenance; with regards to the clearing of a nest therefore the regulations would not be applicable. BUSINESS INTERRUPTION LOSSES FIND OUT HOW YOU CAN MINIMISE YOUR LOSS AND MAXIMISE YOUR CLAIMS SETTLEMENT
8 JLT Specialty Limited provides insurance broking, risk management and claims consulting services to large and international companies. Our success comes from focusing on sectors where we know we can make the greatest difference using insight, intelligence and imagination to provide expert advice and robust often unique solutions. We build partner teams to work side-by-side with you, our network and the market to deliver responses which are carefully considered from all angles. 8 RISK PRACTICE Technical & Legal November 2014 FCA review commercial claims Insurers handling of commercial claims is being reviewed by the Financial Conduct Authority (FCA). Our Risk Practice division provides risk and insurance services to corporate clients. We also have a specialist broking team dedicated to placing business and supporting our industry specialisms. As a division, we focus on providing excellent service delivery, innovation and market shaping solutions for our clients. Our aim is to provide a leading, independent specialist alternative for mid-sized UK companies through to multi-national corporations. In addition, as a global service risk practice we offer specialist insurance and risk consulting solutions to our clients, wherever they operate. CONTACTS If you wold require any further information or have any feedback on this edition, please contact: Felix Ukaegbu Technical Specialist, Risk Practice Graham Terrell Partner, Risk Practice This publication is for the benefit of clients and prospective clients of JLT Specialty Limited. It is not legal advice and is intended only to highlight general issues relating to its subject matter but does not necessarily deal with every aspect of the topic. If you intend to take any action or make any decision on the basis of the content of this newsletter, you should first seek specific professional advice. JLT Specialty Limited The St Botolph Building 138 Houndsditch London EC3A 7AW Lloyd s Broker. Authorised and regulated by the Financial Conduct Authority. A member of the Jardine Lloyd Thompson Group. Registered Office: The St Botolph Building, 138 Houndsditch, London EC3A 7AW. Registered in England No VAT No November The review will consider whether commercial customers expectations are met in the claims process, and where poor behaviour could affect trust in the market and lead to poor customer outcomes. The findings are expected to be reported in Q The review recognises that insurers claims service has received no regulatory attention since It follows a similar review earlier this year into household and travel claims, which found that there were many areas where insurers could enhance their claims service to increase policyholder satisfaction. The importance of claims planning for commercial clients cannot be underestimated. Large claims are subject to detailed forensic process by insurers to prove the cover and evidence the value. Most claims problems arise from: Inadequate policy limits, sums insured, indemnity periods Unclear or ambiguous policy wordings Communication failures and poor management of expectations Insufficient evidence and documentation to support the claim. To improve claims experiences, there should be more focus on potential claims outcomes at the time of placement to ensure insurance policies match underlying risks and to manage all stakeholders expectations, says Candy Holland, Managing Director of Echelon Claims Consultants. More up-front consideration of loss scenarios to test out the coverage in a claim situation would be a good step forward, particularly for business interruption policies. If policyholders have greater awareness of policy response before losses arise, then they can talk through a lot of these things, plan for the unknown and create clarity where needed, says Holland. Whether the market makes changes for itself or the FCA introduces new regulations, Holland believes things could be improved in the following areas: 1. Loss scenario planning to stress test policy wordings 2. Interim payments where a more consistent approach from insurers would help policyholders cope with the cash flow problems created by a loss. 3. Transparency around the use of lawyers so that policyholders know when legal council is being sought. 4. More consistency around the burden of proof that policyholders have to meet before insurers accept liability. Insurers want to differentiate themselves, but this cannot come at the expense of clarity and certainty for policyholders at the point of claim, concludes Holland.
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