Insurance Market Conditions Report 2013/2014

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1 Insurance Market Conditions Report 2013/2014

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5 01. WELCOME Welcome to DAC Beachcroft s Insurance Market Conditions Report 2013/2014. Now in its 7th edition, we have set out, as in previous issues, to provide wide-ranging summaries of the major pieces of legislation and regulations introduced in the UK over the last year, with insightful and reflective commentary on their implications for the UK insurance industry. This year, we have placed more emphasis on looking forward, with updates on draft bills, consultations and reviews. We consider, for example, the Financial Conduct Authority s various thematic reviews and the consultations underway by the Ministry of Justice into whiplash, mesothelioma claims and the discount rate. And we have drawn together a selection of legal cases whose ramifications are, we feel, of particular significance for insurers. While some topics will be familiar to you, such as the Jackson reforms, telematics, flooding and the 2011 riots, we have included emerging areas of interest, such as fracking, health insurance abroad and the draft Consumer Rights Bill. Many of the developments covered in this year s Market Conditions Report present both challenges and opportunities to the insurance industry. We hope you will find those we have selected, and our commentary on them, informative, stimulating and useful. If you would like to discuss any aspect of the report in more detail, please contact David Pollitt, Head of Insurance at 05

6 02. LEGISLATION Banking Reform Bill The Financial Services (Banking Reform) Bill has begun its passage through the UK Parliament, with the intention of implementing the recommendations of the Independent Commission on Banking. While the Bill is aimed at imposing structural changes on UK banks to make it easier and less costly to resolve banks which get into financial difficulties, it appears that some changes may be made that have a wider impact on UK authorised firms, including insurers and brokers. An example of this is the new senior persons regime introduced by the Bill, which will replace the significant influence function element of the current approved persons regime under the Financial Services and Markets Act Key aspects of the senior persons regime will include: Reversing the burden of proof in a defined set of circumstances, so that senior persons can be held to account for breaches in their areas of responsibility, unless they can demonstrate that they took all reasonable steps to prevent the contravention occurring or continuing in the part of the business for which they have responsibility. Extending the current three year time limit for commencing disciplinary action against senior persons. Giving the regulators the power to approve senior persons subject to conditions or time limits, for example, on condition that they acquire certain additional skills. The UK Government has stated that, while this regime will apply to banking initially, it will discuss with the Financial Conduct Authority and the Prudential Regulation Authority whether it should be extended to all financial services firms. Care Bill The purpose of the Bill is to reform the law relating to care and support for adults and support for carers. A key aspect of the Bill is how it addresses the cost of social care and an individual s contribution to that cost. In particular, the Bill: Sets a cap on care cost contributions which is subject to annual adjustment. The system of funding care and support, based on a cap on care costs and an extended means test, means that individuals will still have responsibility for their initial care costs but their contribution to these costs will be capped. Board and lodging costs will be outside the scheme. Provides for a local authority to enter into agreements with individuals to defer payments due to it for chargeable services. The Bill imposes on local authorities a duty to offer a deferred payment agreement to those going into residential care so that they do not need to sell their homes to pay for their care. The Bill is of interest as the cap on costs provides certainty regarding the maximum financial liability an individual will incur. This will enable insurers to enter the market to offer products to individuals to insure against their limited exposure to care costs. Consumer Insurance (Disclosure and Representations) Act 2012 This Act came into effect on 6 April 2013, arising out of the Law Commission s review of insurance contract law. At its heart is the abolition of the duty on consumers to volunteer material facts when applying for or renewing an insurance policy. Instead, the burden is now on insurers to ask clear and specific questions and on the insured to answer fully and accurately. The Act only applies however to a contract of insurance entered into by an individual wholly or mainly for purposes unrelated to the individual s trade, business or profession. 06

7 Remedies are shaken up to be in line with the Financial Ombudsman Service, the touchstones now being proportionality and the intention of the consumer. Insurers can therefore still avoid the contract and refuse all claims but only if the policyholder made deliberate or reckless misrepresentations when providing answers. Careless misrepresentations warrant compensatory remedies. Other changes under the Act include the abolition of basis of the contract clauses in consumer policies and a structure to decide, only for the purposes of this Act, whether an agent is acting for the consumer or the insurer. It is vital that insurers have reviewed their compliance with this Act and ensured that: The questions in their proposal forms elicit exactly the information required. Internal underwriting guidelines are clear when trying to ascertain what would have happened if the correct information had been provided. All critical warranties are clearly identified in the body of the policy. The renewal process ensures that consumers can reassess information previously provided. There is nothing to be afraid of in this Act, however, as it largely consolidates current best practice and aligns us with the rest of Europe. More significant changes may lie ahead with the second draft Bill expected this December/January 2014 covering, amongst other things, business non disclosure and the introduction of damages for late payment. These are considered separately below, under Consultations. Consumer Rights Bill The draft Consumer Rights Bill was published on 12 June 2013 following extensive consultation. It streamlines various pieces of consumer legislation into one and introduces new rights for consumers and businesses. The Bill will replace the Unfair Terms in Consumer Contracts Regulations 1999 (the Regulations ) and extend the scope of consumer protection in this area. It will also replace the Unfair Contract Terms Act 1977 in relation to business-to-consumer contracts, although the exclusion for insurance contracts will remain. The draft Bill will allow challenges on the grounds of fairness in a wider set of circumstances than under the Regulations (and similarly allow the Financial Conduct Authority to obtain undertakings from insurers and brokers for breaches). Under the draft Bill the fairness test is extended to a consumer notice as well as a contract. A notice includes an announcement, whether or not in writing, and any other communication or purported communication, to the extent that the notice relates to rights or obligations as between a trader and a consumer or purports to exclude or restrict a trader s liability to a consumer. This would mean that, for example, a statement made in the claims process which might seek to limit or restrict the insurer s liability to meet a claim, such as we will not pay for any insured item unless you can provide an original receipt for that item, would now be subject to the fairness test. The draft Bill also extends the scope of the fairness test to cover individually negotiated terms, although these will be the exception in the context of retail insurance business. The draft Bill makes clearer the circumstances when the price or subject matter of the contract cannot be considered for fairness and in particular requires that, to avoid being considered for fairness, those terms must be transparent and prominent. However, following the case of Office of Fair Trading v Abbey National plc on the fairness of bank overdraft charges, the text of the draft Bill makes it clearer that while the appropriateness of the price itself cannot be challenged as long as it satisfies the transparent and prominent test that does not prevent other challenges relating to the price on the grounds of fairness. For example, while the courts or the FCA would not be able to challenge a transparent and prominently stated premium, the draft Bill clarifies that they could challenge the fairness of a term relating to the return of premium on cancellation. 07

8 The draft Bill also revises the role of and extends the indicative list of terms which may be regarded as unfair (the grey list ) to include three new terms: Disproportionately high charges where the consumer decides not to conclude or perform the contract or for services which have not been supplied. This includes the situation where a consumer cancels a contract. Terms which allow the trader to determine the characteristics of the subject matter after the consumer is bound. Terms which allow the trader to determine the price after the consumer is bound. Clause 71(2) of the draft Bill adds an express requirement that if a term of a consumer contract is especially onerous or unusual, the trader must ensure that the term is drawn particularly to the consumer s attention. This reflects the existing approach of the FCA in the context of financial promotions and treating customers fairly, but by including this requirement within the definition of transparent under the draft Bill, an especially onerous or unusual term would be unenforceable if not sufficiently highlighted to the consumer. Competition law reform The Government has also included in the draft Bill proposals so that any private parties that have suffered damage as a result of breaches of competition law will be able to file a claim for damages, for example, where consumer goods have been purchased at higher prices as a result of a price fixing cartel between competing producers. In order to effect this, the draft Bill includes the following significant changes: The Competition Appeal Tribunal ( CAT ) will have the power to hear not only follow-on damages claims (where the Office of Fair Trading ( OFT )/the new Competition and Markets Authority ( CMA ) or a court have already made a finding of a breach of competition law) but also stand-alone damages actions, where the competition authorities have not yet made a finding of a breach of competition law. There will be two types of collective proceedings available in the CAT: opt-in proceedings (which already exist under the current regime) and opt-out proceedings (which are new and likely to lead to lively debates as to whether mass claims similar to those in the US can be expected here as well). A new opt-out collective settlement regime for competition cases, whereby parties can ask the CAT to approve an agreed settlement on an opt-out basis without the need for a claim to be brought. Further proposed changes under the draft Bill include: The amendment of the Competition Act 1998, to ensure that any injunctions granted by the CAT will have the same status and effect as an injunction granted by the High Court. The introduction of a new fast-track claims procedure in the CAT, for competition claims that are more straightforward. The granting of the discretion to the CMA to certify voluntary redress schemes submitted to it by companies. The Government is currently seeking comments on the draft Bill. 08

9 Crime and Courts Act 2013 The Crime and Courts Act 2013, which received Royal Assent on 25 April 2013, is intended to implement major reforms to the civil and criminal justice systems and is divided into three parts: Part 1: This provides for the establishment of the National Crime Agency (whose role will be to tackle the most serious and organised crime, including economic crime) and the abolition of the Serious Organised Crime Agency and the National Policing Improvement Agency. The Act also introduces the use of deferred prosecution agreements ( DPAs ) in economic crime cases, under which a prosecution for corporate crime is suspended in return for a promise of good behaviour and a possible fine. The latter are likely to be introduced in DPAs only apply to corporate organisations and not individuals. There may be a conflict between a corporate entity, which wishes to report wrongdoing in the hope of securing a DPA, and the individuals in the organisation who are involved in the wrongdoing and will seek vigorously to defend themselves. The introduction of DPAs could, therefore, result in increased exposure for directors. The Director of Public Prosecutions and the Director of the Serious Fraud Office issued a draft Code of Practice in July 2013 setting out how they intend to use DPAs. Part 2: This introduces such measures as creating a single county court for England and Wales, reforming the process for judicial appointments and allowing for the filming and broadcasting of proceedings in the Court of Appeal. Part 3: Miscellaneous and general, including a new offence of drug driving. The majority of the Act is not yet in force but more sections are expected to be brought into force later in 2013 and Defamation Act 2013 This Act received Royal Assent on 25 April However, many provisions are not yet in force and await implementation by Statutory Instrument. Key changes include: Serious harm threshold Only cases involving serious harm to the claimant s reputation can now be brought. This requirement will lead to more early strike out applications by defendants and it will be interesting to see whether, in practice, judges will strike out on the basis of this test. Harm to the reputation of a body that trades for profit is not serious harm unless it causes serious financial loss. This will make it more difficult for companies to sue for defamation which may lead to more actions by individuals associated with the company. Codification of common law defences The common law defences of justification, fair comment and the Reynolds defence are abolished and replaced with statutory defences of truth, honest opinion and publication on a matter of public interest. The new defences aim to simplify the law. Internet defamation The Act creates a new defence where the operator of a website can show that it did not post the defamatory statement on its website and it has complied with the statutory procedure to enable the complainant to resolve disputes directly with the author of the material concerned. Detailed regulations are to be passed to bring this section into effect. The Act also prevents an action being brought in relation to publication of the same material by the same publisher after a one year limitation period from the date of the first publication of that material to the public. This single publication rule replaces the longstanding principle that each publication of defamatory material gives rise to a separate cause of 09

10 action subject to its own limitation period and should prevent, amongst other things, indefinite liability for online publications. Control of libel tourism Where an action is brought against a foreign-domiciled defendant, a court does not have jurisdiction to hear and determine that action unless it is satisfied that, of all the places in which the statement complained of has been published, England and Wales is clearly the most appropriate place in which to bring an action in respect of the statement. It is intended that this will overcome the problem of courts accepting jurisdiction simply because a claimant frames their claim to focus on damage which has occurred in this jurisdiction only. Employment legislation To reduce the burden on employers the Government has proposed to repeal the provisions in the Equality Act 2010 ( Equality Act ) which provide that an employer may be liable for acts of harassment against employees and job applicants perpetrated by third parties. It also intends to repeal section 138 of the Equality Act which sets out the discrimination questionnaire procedure. It now seems likely that these changes will come into effect in October 2013 or April Little use has been made of the third party harassment provisions. However, the repeal of section 138 may have unforeseen consequences and, in particular, could lead employees and job applicants to make greater use of subject access requests under the data protection legislation. Managing such requests can embroil employers in time consuming, costly and difficult exercises. For some at least, discrimination questionnaires are the lesser of the two evils. During 2014 we can expect to see the trend for change continue, as the Government publishes its response on a number of consultations conducted in 2013 and introduces legislation to amend legislation, for example in relation to working time and flexible working. Energy Act 2011 One of the key requirements of the Act is that all residential and commercial properties must meet certain energy efficiency standards by 1 April 2018, if their owners want to let them. Properties which fall below the relevant standard cannot be let until the landlord has made the necessary improvements. This requirement has considerable implications for underwriters, brokers, pension fund managers and policyholders who have bought to let. Whilst the deadline may sound a long way off, insurers need to start understanding the current energy performance of the properties they insure now. If a property falls short of the relevant energy performance certificate ( EPC ) rating, they need to check what plans the landlord has in the pipeline to improve the building s energy efficiency. Buildings must now be assessed for their energy efficiency and given a rating. The most energy efficient properties with the lowest fuel bills have a rating of A. The Department of Energy and Climate Change has indicated that commercial and residential properties for renting must achieve an E rating or above. Those which fall below cannot be let after April 2018, until they are more energy efficient. According to data from environmental risk group Landmark, almost 25% of the 19,700 EPC registrations in the past four years fall into categories F and G and will therefore need an energy refit in order to comply with the Act. The Act may impact insurers in relation to: Reinstatement. Currently, if a fire destroys a property, it does not need to be energy efficient when rebuilt. The policyholder, however, may want to ensure the property is rebuilt so that it complies with energy efficiency requirements for The insurer and adjuster will need to make clear which work will be covered under the policy and which is betterment, so not covered. Reduced rental stock on the market, if landlords do not get their properties up to scratch. 10

11 An increase in unoccupied buildings, either while improvements are made or if buildings cannot be brought up to the necessary standard. More incidents of arson, as it may be cheaper to burn down a property than make it energy efficient. A building which is energy-inefficient could feature as a very strong fraud indicator. Enterprise and Regulatory Reform Act 2013 This Act received Royal Assent in April 2013 (although many provisions are yet to come into force) and affects a number of areas: Health and safety s.69 (which has not yet come into force) amends s.47(2) of the Health and Safety at Work Act 1974, and falls within the remit of reducing the legislative burdens on business, following the reports of Lord Young and Professor Löfstedt. Under s.69, employees will lose their current automatic right to recover compensation if their employer s breach of duty causes them injury. Unless the statutory instrument breached expressly provides a right to found a personal injury claim on its breach, the injured employee will be required to prove negligence by his employer. The extent to which the judiciary will accept evidence of breach of statutory duty as indicative of negligence by the employer, and the contrast between the Enterprise and Regulatory Reform Act and the Employer s Liability (Defective Equipment) Act 1969, will leave claimants and their solicitors with harsh questions as to whether claims should be pursued, and employers and their insurers with difficult decisions on which cases to defend in the future. Employment Section 13 amends section 108 of the Employment Rights Act 1996 ( ERA 1996 ) to remove the two year unfair dismissal qualifying period, where the reason or principal reason for the dismissal is or relates to, the employee s political opinions or affiliation. Sections make a number of changes to the whistleblowing provisions in the ERA 1996 which provide protection against detriment or dismissal as a result of making a qualifying disclosure. With respect to disclosures made on and after 25 June 2013, a worker need no longer to have acted in good faith but the disclosure made must be in the public interest. Section 15 gives the Secretary of State wider powers to vary the statutory cap on the compensatory award in unfair dismissal claims. With effect from 29 July 2013, the limit on compensation is the lower of the current cap of 74,200 or one year s gross pay. This may be revised further on 6 April Section 14 (in force in the near future) prevents pre-termination negotiations with an employee from being referred to in evidence in an unfair dismissal case provided that there has been no improper behaviour. Section 7 of the Act (to come into force in April 2014) introduces a requirement that claimants contact ACAS, with a view to their attempting to promote a settlement, before a claim can be submitted to the Employment Tribunal. The time limit for bringing a claim will be put on hold while a mandatory four step procedure is pursued. It is hoped that this will result in the early resolution of claims. Another disincentive, at least for claimants whose claims are not obviously meritorious, is the introduction of a range of fees for lodging and pursuing a claim, with effect from 29 July

12 Respondents who are found liable may end up picking up an order as to costs along the way. These new fee arrangements highlight the value of household legal expenses insurance for claimants and the need for commercial policyholders to get to grips with the changes as well. D&O The Government is introducing new regulations alongside the Act to bring about significant changes to the way in which quoted companies deal with directors remuneration. The intention is to create a better link between executive pay and performance and to improve the information provided to shareholders and give them more power to control directors pay. The changes will come into force on 1 October 2013 and include provisions that: Shareholders will get a binding vote on a company s pay policy, including their approach to exit payments. A company will only be able to make payments to directors within the limits that have been approved by a majority of shareholders. There will be greater disclosure obligations on companies in relation to directors pay. Payments made to a director which fall outside the most recently approved remuneration policy will be held on trust by the director and an action can be brought to recover the payment. Directors who authorise non-compliant payments will be liable for any consequential loss, unless they are found to have acted honestly and reasonably. Companies will need to review their remuneration policies to ensure compliance with the new rules. Insurers should consider whether they will amend their directors and officers policies to provide cover for directors authorising non-compliant payments and on what basis the risk will be underwritten. Financial Services Act 2012 The key parts of the Financial Services Act 2012 came into force on 1 April The Act amends the Financial Services and Markets Act 2000 ( FSMA ) to bring about a new regulatory structure, abolishing the Financial Services Authority ( FSA ) and creating the Financial Policy Committee, the Prudential Regulation Authority ( PRA ) and the Financial Conduct Authority ( FCA ). In simple terms: The PRA is responsible for the prudential regulation and supervision of UK-based insurers, banks, building societies, credit unions and major investment firms. The FCA is responsible for the prudential regulation and supervision of all other UK-based firms, and the conduct of business regulation of all authorised firms. This means that UK insurers are now subject to two regulators and will need to adapt to dealing with two separate regulators with distinct but overlapping areas of interest. Although the Act does contain some standalone provisions, these generally relate to powers given to the regulators rather than directly affecting regulated firms. In particular, the Act grants the FCA a number of additional powers, including the ability to: Make temporary product intervention rules, allowing it to block an imminent product launch/stop an existing product. Require firms to withdraw/amend misleading financial promotions. Publish details of the start of enforcement proceedings against a firm for rule breaches/ compliance failings. Impose requirements on unregulated parent undertakings that exert influence over authorised persons. 12

13 The Act also introduces mechanisms whereby the FCA can be alerted to competition issues, or matters adversely affecting the interests of consumers. Designated consumer bodies can now use a supercomplaints regime to refer to the FCA when a feature of a market appears to be significantly harming the interests of consumers. In addition, a mass detriment references regime also allows the Financial Ombudsman Service (and individual firms in respect of their own failings) to refer to the FCA with regard to failings by specific firms that result in detriment to consumers. From 1 April 2014, the FCA will take over responsibility for the regulation of consumer credit activities from the Office of Fair Trading, meaning a change in what has been a key principle under FSMA, namely that an appointed representative (AR) cannot also be FSA authorised. Therefore, from this date it will be possible, for example, for an intermediary to carry out insurance mediation activities as an AR while at the same time being directly FCA authorised under the limited permission regime as a credit broker. The most interesting changes brought about by the Act are those related to the FCA and its new powers enabling it to step in earlier and act more quickly when problems are identified. Its creation is seen as an opportunity to reset conduct standards of the financial services industry. Insurers need to be aware that there is a focus on firms to make sure customer protection is paramount to how they run their businesses and to promote behaviour, attitudes and motivations consistent with good conduct. Health and Social Care Act 2012 The majority of the provisions of the Health and Social Care Act 2012 came into force on 1 April The Act establishes a new economic regulatory system for all healthcare providers, public and private. Primary Care Trusts and Strategic Health Authorities have now been abolished with their assets and liabilities transferred to a variety of receiver organisations. Under the Act the new NHS Commissioning Board (now known as NHS England ) has been formed. NHS England is responsible for overseeing Clinical Commissioning Groups ( CCGs ) as well as directly commissioning specialised services, national immunisation and screening programmes and health services for the armed forces and prisons. Although NHS England is a national body it has dedicated Area Teams for each area of England. CCGs are responsible for the commissioning of the majority of NHS services in England including acute, mental health and community care. There are currently 211 CCGs covering the whole of England. The Act places an emphasis on patient choice and creating a more level playing field on which providers from any sector (public, private or voluntary) may offer NHS services and care pathways commissioned by CCGs and selected by patients. As part of this objective, Parliament passed the controversial National Health Service (Procurement, Patient Choice and Competition) Regulations (No. 2) 2013 which require NHS England and CCGs to tender competitively for services in certain circumstances, treating providers equally and not discriminating on the basis of ownership. In addition, changes to the NHS Litigation Authority s clinical negligence scheme for trusts mean that more providers will have access to the risk pooling arrangements previously only available to NHS organisations. The majority of public health services will now be commissioned by local authorities. Although existing public health liabilities of Primary Care Trusts have been taken on by the Secretary of State, from 1 April 2013 local authorities will potentially be liable for claims relating to the public health services that they commission. Monitor has become the new economic regulator of NHS service-providers, operating an economic licensing framework in tandem with the quality regulation framework of the Care Quality 13

14 Commission. Monitor will set a national price tariff for NHS services and will also act as the competition regulator for the health sector in tandem with the Office of Fair Trading. This is a very significant piece of legislation which seems likely to affect the insurance market through its impact on public expectations of health services and the shaping of care pathways. However, those effects will be felt over the long term as well as the short term. The shape of the new economic licensing regime continues to develop through consultations by Monitor. Legal Aid, Sentencing and Punishment Of Offenders Act 2012 ( LASPO ) Please see the Procedure section below. Mesothelioma Bill This Bill, announced in the Queen s Speech on 8 May 2013, will create a compulsory payment scheme for victims of mesothelioma who are unable to trace a liable employer from whom to claim damages. Those who are diagnosed after 25 July 2012, when the Department for Work and Pensions first announced details of their scheme, will be eligible for compensation. The scheme is only open to people who have not brought an action against a relevant employer or the employer s EL insurer because they are unable to do so. of success fees and ATE insurance premium recovery, introduced for all other claims (bar defamation and insolvency) from 1 April 2013, can then be extended to these claims as well. (See also under Consultations below.) The Bill completed its passage through the House of Lords in July 2013 and will be debated in the House of Commons in the autumn, with the aim that it becomes law by summer 2014 at the latest. Despite a number of votes in the Lords on Opposition amendments which sought to extend the scope of the proposed scheme, the Bill has survived largely as originally drafted. Motor Insurance Regulation Bill Whilst Jack Straw s 10 minute Bill of 2010 did not ultimately proceed through Parliament to become statute in its own right, it was undoubtedly instrumental in acting as a catalyst for change. In fact, the majority of its component parts have either been introduced through LASPO (see Procedure below), such as the prohibition of referral fees in personal injury claims and the reduction of MoJ portal costs, or remain firmly on the political agenda, as with tackling the whiplash epidemic and motor insurance risk pricing. The Bill goes hand in hand with other significant planned reforms which include: introducing a dedicated Mesothelioma Pre-Action Protocol (PAP), supported by an electronic information gateway, to complement the successful specialist mesothelioma litigation practice and establish a standard process within set timescales; and developing a fixed costs regime for mesothelioma claims to accompany the PAP. The Ministry of Justice will be consulting on both the principle and structure of such a regime and carrying out a review of the mesothelioma provisions as required in section 48 of the Legal Aid, Sentencing and Punishment of Offenders Act This last step is needed so that the abolition 14

15 Riot Damages Act 1886 (Amendment) Bill This draft Bill was not mentioned in the Queen s Speech but was trailed in a subsequent written statement on 9 May 2013 which announced that the Government had set up an independent review into the Riot Damages Act The review is expected to conclude by the end of September 2013 and will be followed by a public consultation. It will examine the existing criteria which determine when compensation is payable under the Act, including looking at key issues involving the definition of a riot, who should be liable and what level of entitlement should be afforded. Under the existing Act, insured homeowners and businesses claim from their insurers for damage and the insurers can then make claims to the local police. Uninsured losses are claimed directly by any person. Insurers have expressed concern at how many of their follow on claims stemming from the London riots in 2011 were rejected by police authorities and the ABI has been lobbying for reform of the operation of the Act, including an extension of the time window for claims and the standardisation of claims procedures. The police authorities argue that the principle underpinning the Act is no longer appropriate to modern conditions. On 6 August 2013, the ABI published guidance outlining what to do if your property or business is damaged during a riot. DAC Beachcroft LLP is involved in the Sony warehouse litigation arising out of the London riots (see Cases below). Third Parties (Rights Against Insurers) Act 2010 Whilst this Act received Royal Assent in 2010, it has still not been implemented. On 25 April 2013 it was announced that the Government intends to amend the 2010 Act to include (a) a number of specific insolvency situations and (b) a power for the Secretary of State to add further insolvency situations to the 2010 Act by order should the need arise. The intention is to bring the 2010 Act into force as soon as reasonably possible after these amendments have been made and legislation to effect the necessary amendments will be introduced when parliamentary time permits but this is unlikely to be until When implemented, the Act will replace the Third Parties (Rights against Insurers) Act 1930 (the 1930 Act). Under the 1930 Act, a third party cannot issue proceedings against an insurer without first establishing the existence and amount of the insured s liability. The new Act removes the need for multiple sets of proceedings by allowing the third party to issue proceedings directly against the insurer and resolves all issues (including the insured s liability) within those proceedings. Under the 1930 Act, where a corporate insured had been struck off the register of companies, the third party had to take proceedings to restore it to the register before litigation. By removing the need for the third party to sue the insured, the new Act also removes the need for such restoration. The new Act also improves the third party s access to information about the insurance policy, allowing the third party to obtain information about the rights transferred at an early stage in order to enable an informed decision to be taken about whether or not to commence or continue litigation. 15

16 Water Bill About 2% of households are considered to be at high risk of flooding. Whilst insurance for such homes has been provided in line with the ABI Statement of Principles agreed with the Government in June 2008, this was due to expire at the end of June After months of negotiations, a memorandum of understanding was announced on 27 June 2013, with insurers continuing to meet their commitments under the Statement of Principles until such time as a new model Flood Re can begin operating, currently anticipated to be in the summer of This, however, is also intended to be a transitional scheme, being phased out after years. Flood Re will be a not-for-profit fund run by insurers that collects an annual levy of 180 million from member firms. The cost will be passed onto all households through increased insurance premiums, at an expected cost of per household. Excess levels will also be controlled. Households with flood risk will then pay a premium based on council tax banding, up to a maximum limit. The aim is for Flood Re to cover the vast majority of flood claims but should the fund be overwhelmed by extreme flood conditions, the Government would step in as insurer of last resort. The proposal does not, however, cover small businesses, band H properties and those built after These proposals will be given legal backing through the Water Bill, published on 27 June On the same date, DEFRA also published an open consultation, which closed on 8 August 2013, seeking views on the Government s preferred approach to address the future availability and affordability of flood insurance. In a connected move, the Law Society has issued a practice note advising all solicitors to raise flood risk with clients in property transactions and undertake further investigations if appropriate. 16

17 03. REGULATIONS, DIRECTIVES AND OTHER GUIDANCE Airmic reservation of rights guidance In November 2012, Airmic issued updated guidance stated to be aimed at reducing the incidence of reservation of rights letters and the potential for uncertainty they create for insureds. Now included is a sample clause for inclusion in policies (together with explanatory notes) providing a 90 day or otherwise agreed period in which insurers will not issue a reservation of rights. In order to preserve insurers rights, the wording includes an agreement by insureds not to rely on the actions or words of insurers during that period as a waiver of insurers rights. The initial stage allows for without prejudice communication during which insurers can request documents and other information from the insured. At the end of the period, insurers can confirm cover or provide a written reservation of rights identifying why the claim might not be covered and specify the information/action to be taken by the insured which may allow insurers to lift the reservation. It also proposes a meeting at the end of the period to discuss any outstanding issues. This is a step further for Airmic, who have previously issued a voluntary code on the topic, as the proposed clause would be incorporated into policies and therefore be contractually binding. Airmic s aim is that reservation of rights letters become less routine and, where used, will make clear the basis on which such action has been taken. Building Regulations Building Regulations, supplemented by detailed technical guidance contained in the Approved Documents, apply to the construction or alteration of all types of building and seek to ensure that buildings meet certain standards for minimum health, safety, welfare and sustainability. Local authorities are under a duty to ensure that the Building Regulations are complied with. The Department for Communities and Local Government published a number of consultations in 2012, including proposed amendments to the Approved Documents and a consultation on changes to the building control system. Although the proposals for strengthening local authority enforcement powers were widely supported, no changes in this area have yet been proposed. Amendments have been made to the Approved Documents following the consultation and as part of the Government s campaign to reduce red-tape in the housing and construction sector. Although there are only three new additions in the Approved Documents, all the documents include substantial revisions and corrections. Most of the amendments came into force on 6 April Approved Document 7 (materials and workmanship), which came into force in July 2013, implements the EU Construction Products Regulation The documents all now have a new look with an improved layout and changed writing style with a view to making them easier to understand by developers and house-builders. During the Approved Documents consultation, it was considered whether consequential improvements to the energy efficiency of a dwelling should be required when other building work was undertaken. Dubbed as the conservatory tax, this was subsequently abandoned amid fears that it would deter home owners from carrying out building work and lead to an increase in non-compliance. The Budget in March 2013 confirmed the Government s intention to achieve zero carbon new homes in England by This will be achieved, in part, by amendments to Part L (conservation of fuel and power). The long-awaited changes to Part L for England have just been announced. These will come into force in April 2014 (rather than October 2013 as initially scheduled). Since 2011, the Welsh Government has had the power to make building regulations relating to Wales. Although most of the changes made in Wales mirror the changes made in England, some divergence is now starting to emerge. 17

18 Brussels Regulation The Brussels Regulation (Council Regulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters) applies to all European Union members. It dictates which courts should have jurisdiction in respect of disputes involving civil and commercial matters and how judgments in such matters should be recognised and enforced. In December 2012, amendments to the Regulation were adopted following criticism of some of its key provisions. The majority of the recast Regulation (Council Regulation (EC) No 1215/2012) will come into force in January The key changes are: The arbitration exception has been reinforced with an additional recital. This confirms that the process of arbitration is outside the scope of the Regulation. Under the recast Regulation, exclusive jurisdiction clauses are bolstered and will be easier to enforce. At present, jurisdiction clauses are sometimes frustrated by parties bringing proceedings in a jurisdiction other than that chosen by the parties in the agreement, whereupon the court first seised would need to determine jurisdiction before the matter could be transferred to the court nominated by the parties. This can lead to significant delays. In the recast Regulation, irrespective of when seised, the court named in the exclusive jurisdiction clause will have priority and all other courts seised should stay their proceedings. The recast Regulation also applies to agreements entered into by parties who are not domiciled in the EU but who nominate an EU court to have exclusive jurisdiction. However an exclusive jurisdiction clause in a contract of insurance still has to comply with the special insurance provisions of the Brussels Regulation, which remain unchanged. Insurers and individuals and small commercial policyholders do not have an unfettered choice to enter into exclusive jurisdiction clauses and this remains unchanged by the recast Regulation. In some limited circumstances, where the same or related proceedings are already before a non-eu court, member state courts will be able to stay proceedings in favour of the non-member state court, even where the EU court has jurisdiction. Jurisdiction agreements will be considered as independent from the other terms of the contract. As such, they will be unaffected if the contract itself is found to be invalid. The process for enforcing judgments has been simplified, as the need for a declaration of enforceability has been removed. The rules on jurisdiction in matters relating to insurance have not changed. Claims Management Regulation on the referral fee ban and Claims Management Regulation MoJ consultation The Ministry of Justice ( MoJ ) consulted on proposed changes to the conduct rules for Claims Management Companies ( CMCs ). Following that consultation the implementation of the proposed changes took place on 8 July The changes affect three main areas: references to regulatory status; pre-contractual information and the contractual agreement process; and client updates and client notification of enforcement action. The rules provide that CMCs can no longer mention in advertising that they are regulated by the MoJ. Instead CMCs that wish to make mention of regulation in their advertising material may only use the following specific wording in full: Regulated by the Claims Management Regulator in respect of regulated claims management activities. Where a CMC represents their client in making a claim, they must keep the client informed of the progress of the claim, including any significant changes to costs that the client may have to meet, and must inform the client of any suspension or variation of the business s authorisation within 14 days of any imposition of 18

19 such action. It must forward any relevant information received from the client without delay. A contract between a CMC and a client must be signed by the client, and the CMC may not take any payment from the client until the contract is signed. It is now a regulatory offence for a CMC to pay or receive referral fees in personal injury cases following implementation of the referral fee ban on 1 April In addition to this, a ban on the offering of money or similar benefits as an inducement to make a claim has also been introduced currently the Solicitors Regulation Authority and the Financial Conduct Authority do not impose such a ban. Collective Redress Businesses and insurers, fearful that the European Commission ( EC ) was about to propose an EU-wide class action system akin to the USA, should now be breathing more easily. In its recently published communication, Towards a European Horizontal Framework for Collective Redress, the EC gives no hint of such a radical change. Instead, it has made a series of measured recommendations to support the development of collective redress. The EC wants individuals and businesses to be able to obtain effective redress, particularly in cross-border cases, and regards collective redress as a mechanism to achieve this. However, it recognises that any measures must be balanced with the need to support European growth and not attract abusive litigation intentionally targeted against law-abiding businesses in order to damage their reputation or inflict undue financial burden on them. The EC specifically ruled out punitive damages or any deterrent function to collective redress. It firmly concluded that the framework should require the opt-in method of forming claimant groups, save in exceptional cases, so preserving the autonomy of parties to choose to litigate. The EC also maintained the principle that the losing party should bear the costs in collective actions and not be supported from public funds. Any third party funding should be transparent. Representative actions, most likely in the field of competition law or environmental infringement, would need to be brought by a representative body which is a non-profit organisation on behalf of a defined group. The recommendations should be seen as having addressed all the concerns of business and the insurance market during consultation, when they expressed fear of an increase in the frequency of claims, particularly small claims. While this is possible, there is no encouragement for speculative litigation in the proposals. Member states are implored to introduce the principles of the recommendations within two years, but the EC will not assess whether further legislation to strengthen the national approach is needed for four years. In the meantime, the developments will need close monitoring, but it is very much business as usual. There was common ground among all consultees that any system should: be capable of effectively resolving a large number of individual claims for compensation, thereby promoting procedural economy; deliver legally certain and fair outcomes within a reasonable timeframe, with robust safeguards against abusive litigation; and avoid any economic incentives to bring speculative litigation. 19

20 CPS guidance on charging offences arising from driving incidents In May 2013 the Crown Prosecution Service ( CPS ) issued revised guidance on charging offences arising from driving incidents. The two most significant changes concern drivers in emergencies and deaths where the victim is a close friend or relative of the driver. The guidance recognises the fact that drivers of emergency vehicles may need to drive a vehicle in response to an emergency in a manner which would otherwise be considered unacceptable. Accordingly the CPS starting point is that it is very unlikely to be appropriate to proceed with a prosecution on public interest grounds if a police officer, member of the ambulance staff or fire-fighter commits a driving offence while responding to an emergency call. In determining whether or not it is appropriate to proceed with a prosecution, consideration will be given to the nature of the emergency known to or reasonably perceived by the driver; the level of culpability of the driver; and whether there is evidence the driver may be a continuing danger to others. There may be cases when a person who is not a member of the emergency services will have to drive in response to an emergency and the same public considerations will apply. In respect of cases involving the death of a loved one, while it is recognised that a prosecution will usually be in the public interest, prosecutors must acknowledge the greater emotional impact likely to be felt by a driver where the death he or she has caused is that of a relative or someone with whom they share a close personal relationship. Prosecutors are obliged to consider the significant personal loss sustained by the driver, the culpability of a driver and whether or not they present an ongoing risk to other road users. Data Protection Regulation The text of the legislation for a new EU data protection regime is no closer to being finalised than when we reported on this development last year. In January 2012, the European Commission published its proposed Regulation for reform of EU data protection law which would replace the Data Protection Directive (95/46/EC). The Regulation would introduce a new single data protection law across all 27 EU member states and aimed to decrease administrative burdens on companies. The original timescale was for the text to be finalised by June 2013 and implemented by However, over the last year the draft Regulation has faced criticism throughout the EU for being over prescriptive: it contains detailed and onerous obligations and seemingly increases the administrative burden on companies. During 2013, more than 3,000 proposed amendments were tabled by the European Parliament and a planned vote by the Civil Liberties, Justice and Home Affairs Committee, originally scheduled for April, has been delayed until October. Whilst the draft Regulations will almost certainly evolve further, the following are the proposed key changes: Consent There will be stricter conditions imposed when relying on consent for processing personal data. To be valid, consent must be an affirmative action based on a genuine and free choice and the data subject must be able to refuse or withdraw their consent without detriment. Currently, consent is the only option for compliance with the 1st data protection principle for insurers collecting sensitive personal data (such as health data). It is difficult to see how insurers will be able to obtain consent which meets these requirements. 20

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