Insurance Market Conditions Report 2013/2014

Transcription

1 Insurance Market Conditions Report 2013/2014

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3 CONTENTS 01 WELCOME LEGISLATION REGULATIONS, DIRECTIVES AND OTHER GUIDANCE CONSULTATIONS, REPORTS, REVIEWS AND MISC PROCEDURE CASES 53 03

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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 [email protected] 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

21 Right to be forgotten Under the proposed Regulation, a right to be forgotten will be introduced. This right applies unless you have a legitimate reason to keep the data. Insurers would then need explicit data retention policies. Extra administrative burdens Data controllers would have extra administrative burdens regarding accountability, documentation, security risk evaluations, privacy impact assessments, data protection by design, self audits and data protection officers. Security breach notification Notification of all security breaches would have to be made to the data protection authority without undue delay and within 24 hours unless there is a reasoned justification for an extension. Increase in maximum levels of monetary penalties Fines for breach of the legislation are proposed to increase dramatically with fines for serious breaches to be set at 2% of annual worldwide turnover. FCA regulation on referral fees The Legal Aid Sentencing and Punishment of Offenders Act 2012 ( LASPO ), covered in more detail under Procedure, introduced legislation to ban referral fees for personal injury cases. The ban came into effect on 1 April The Financial Conduct Authority ( FCA ) will supervise and enforce the ban in relation to its regulated firms. The FCA has advised that it defines a banned referral as any payment made for the referral or introduction of any client or potential client. Its monitoring and enforcement of the ban will mirror its approach to other legislative changes. It will be risk-based and proportionate, and the FCA confirms that it will prioritise event-driven risks in line with its regular supervisory work. The FCA does not need any additional powers, other than those defined under the Financial Services and Markets Act 2000 and the Financial Services Act The Treasury has now made the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Referral Fee) Regulations 2013 which came into force on 9 July 2013 and enable the FCA to enforce the rules against referral fees contained in sections of LASPO. Breaching the ban after 1 April 2013 is not a criminal offence but it will be a regulatory offence for which the FCA can use its existing enforcement powers. The FCA has established a formal framework for working with its regulatory partners, the Claims Management Regulator ( CMR ) and the Solicitors Regulation Authority ( SRA ). This means that where it jointly regulates a firm with the SRA or CMR, it will coordinate its supervisory activity where appropriate and share market intelligence. FOS policy statement on publishing ombudsman decisions On 21 March 2013, the Financial Ombudsman Service ( FOS ) published a statement on providing final ombudsman decisions (but not informal conclusions reached by adjudicators) in full from 1 April 2013, subject only to removing all reference to the identity of the consumer and other clearly sensitive information. This requirement was included in the Financial Services Act The first 110 insurance decisions were published on its website on 12 July 2013 and more will be added at regular intervals. Insurers details are available so it is possible to search both by business and insurance topic. This facility will make future FOS decisions more accessible and transparent. 21

22 HSE costs recovery scheme Fees for intervention ( FFI ) is one of the most significant and controversial changes in the health and safety arena in recent years. From 1 October 2012, if the Health and Safety Executive ( HSE ) decides to notify an organisation in writing that a material breach has been found, that organisation will be charged 124 per hour for the HSE s time spent identifying, investigating and resolving the breach. These charges are imposed on organisations without prior warning, with little opportunity to control the time incurred and will be payable within 30 days. Invoices could range from 750 for a letter of advice to thousands of pounds for an investigation leading to a prosecution. Unlike in previous years when the HSE had to recover its fees by way of prosecution costs at a sentencing hearing, no prosecution is necessary under this new regime. The HSE simply has to show that a material breach has occurred in order to recover its costs. A recent Freedom of Information Act request showed that the FFI scheme generated around 857,000 from 1 December 2012 to 31 January 2013 with 60% of HSE inspections resulting in a charge. As would be expected, the manufacturing and construction sectors featured heavily. To minimise the risks of FFI, organisations should no longer see HSE inspections as opportunities to seek advice but instead focus on ensuring compliance with health and safety legislation beforehand. A process should be implemented to ensure material breaches found by an inspector are dealt with quickly and remedial action communicated efficiently to the HSE, in order to minimise costs. Finally, those in receipt of an invoice should be aware of the right to appeal it, either by challenging the materiality of the breach or the costs incurred, and they must understand that the risk of paying the invoice is that this could be used as evidence of acceptance of breach in any subsequent criminal or civil proceedings. IBA guidelines on party representation in international arbitration 2013 The International Bar Association ( IBA ) published these guidelines in the spring. The guidelines can be adopted in effect as rules and aim to ensure that the party representatives conduct arbitrations to the same standards of behaviour and with similar expectations. In relation to contact with party-nominated arbitrators, in many jurisdictions (such as those in the UK) the normal expectation is that a party will stand back from its appointed arbitrator and have no contact with them that is not known to both parties. In other jurisdictions, it is common for there to be ex parte communication so that the arbitrator in effect becomes the voice of the party who has appointed them. The guidelines tackle this by limiting such contact to the appointment stages, so that it is legitimate to contact a prospective arbitrator to determine suitability, availability and conflict of interest. It will also be legitimate to contact the appointee as regards similar matters relating to a chair of the tribunal. It will not be acceptable to discuss the substance of the dispute with either a prospective or actual appointee at any stage. Other rules deal with such matters as changing party representatives; the conduct of counsel where he/she knows witness or expert evidence to be false; disclosure; and preparation of witness statements and expert reports. The guidelines are not without their teeth and are backed up by a series of actions the arbitrators may take in respect of breach. These include drawing adverse inferences and reflecting the misbehaviour in the eventual award of costs. Whilst the guidelines are not compulsory, the IBA is a respected body within the arbitration community and it can be expected that use of them will gradually become common. At this stage the guidelines can 22

23 be adopted by the parties in their arbitration clause forming part of their contract so that they are then imposed on any subsequent arbitration or adopted at the time any arbitration occurs by agreement. They may also be introduced (although this has the feeling that it will not be commonly done) by the arbitrators where those arbitrators consider by virtue of local laws or existing rules under which the arbitration is being conducted that they have authority to impose them. IMD2 The text of the revised Insurance Mediation Directive was published in July Known generally as IMD2, it will amend and replace the current Insurance Mediation Directive. As a reminder, changes based on the July 2012 draft include: A widening of scope to include all sellers of insurance products (including insurance companies that sell directly to customers the UK already operates on broadly this basis). Extending the scope to include firms providing claims and loss adjusting services on behalf of insurers. Removing the activity of introducing from scope the mere provision of information will not be included. Sellers of low risk ancillary insurance products will be subject to a simplified declaration procedure rather than full registration. Mandatory disclosure of how, and how much, an intermediary is paid, or the basis on which payment is calculated, modelled on the regime that currently applies to investment business under MiFID. More detailed requirements applying to life insurance products with an investment element. A simpler passporting regime, with a single EU registry for insurance intermediaries providing crossborder services. A ban on tying sales of insurance products. The introduction of a class of professional customer, in relation to which the information, conflicts of interest and advice obligations would not apply. Following the July 2012 draft the following commentary has been published: The European Data Protection Supervisor stated it was concerned about the investigatory powers of the competent authorities; their powers to access existing telephone records and traffic data; the mandatory publication of sanctions; and whistleblowing schemes. The European Parliament s Committee on Economic and Monetary Affairs suggested changes to scope; registration and simplified declaration procedure; professional and organisational requirements; conflicts of interest and transparency; cross-selling; insurance investment products; and delegated acts and levels of harmonisation. The Committee on Legal Affairs has argued that the scope should be narrowed; certain exceptions should remain; the definition of contingent commission should be widened; the hurdle of demonstrating appropriate professional experience be removed; and the requirements for detailed remuneration disclosures be deleted. The Internal Market and Consumer Protection Committee s opinion focuses on tying and bundling; remuneration rules; geographical scope; and scope. It is unclear to what extent the various opinions and reports will be taken into account in agreeing the final text of IMD2. The Directive could contain some significant changes, or be little more than a damp squib, depending on whose arguments hold sway. The European Parliament is due to debate IMD2 on 18 to 21 November Subsequently, it is intended that the text of IMD2 should be finalised in late 2013, meaning it will probably be required to be implemented in member states on or after

24 Late Payments Directive and Late Payment of Commercial Debts Regulations In February 2011 an EU Directive was published on combating late payment in commercial transactions. It repeals and modernises the existing legislation on late payment. In the UK, the Government brought the changes into force on 16 March 2013 in the form of the Late Payment of Commercial Debts Regulations The new rules apply to commercial contracts made on or after 16 March 2013 for the supply of goods or services. The rules establish default payment requirements for the payment of invoices and the right to compensation in cases of late payment in all commercial transactions irrespective of whether they are carried out between private or public undertakings or between undertakings and public authorities. Where no time for payment is stated in the contract, statutory interest will be incurred on outstanding payments from 30 days after the later of receiving the supplier s invoice; receiving the goods or services; or verification or acceptance of the goods or services (where there is a procedure for verification or acceptance of the goods provided for by statute or in the contract). In a business to business contract, the parties can agree a due date for payment of up to 60 days after the latest of the events listed above. In such a contract the parties can agree a due date for payment which exceeds the 60 day limit but only if the period is not grossly unfair to the supplier. Interest is to be paid at a rate of 8% over the Bank of England base rate or such other rate agreed between the parties, so long as it provides a substantial contractual remedy. The supplier is also entitled to compensation for the cost of recovering the debt. Legal Ombudsman After 18 months in operation, the Legal Ombudsman re-examined its scheme rules with the benefit of operational experience. A public consultation took place in One of the principles guiding the review was harmonisation with other ombudsman schemes. During the review, it was announced that complaints about Claims Management Companies would be considered by the Legal Ombudsman, giving it an expanded jurisdiction. Following the consultation, the following changes came into force on 1 February 2013: Extended access to the scheme to include prospective customers who have been unreasonably offered or refused a legal service. This brings the service in line with other Ombudsman schemes such as the Financial Ombudsman Service. It was decided not to extend the service to other third parties for the time being. An increase in the amount of financial compensation that can be awarded from 30,000 to 50,000. Although in the majority of cases where compensation is ordered the financial value of the redress is less than 1,000, this change allows compensation to be ordered for higher value claims. This was a compromise figure. Due to the number of cases affected, the Legal Ombudsman did not expect this increase to result in a rise in insurance premiums. It was thought that it would be cheaper for the profession (and their indemnity insurers) if cases up to a limit of 50,000 were dealt with through the Legal Ombudsman. An increase in the time limit to six years from the date of the act/omission or three years since the complainant should reasonably have known there was cause for complaint. Again, this brings the service in line with other ombudsman schemes and the courts. A change in the case fee structure from 1 April 2013 to remove free cases for firms. The changes are intended to make the service a more practical alternative to court action. Although not anticipated to add substantially to the 75,000 80,000 24

25 contacts the Legal Ombudsman receives each year, the changes are expected to result in a 10% increase in the proportion of contacts which will fall within its eligibility criteria and therefore increase the number of full investigations that the organisation carries out. A report commissioned by the Legal Ombudsman has revealed a huge alternative legal market in which services are being supplied by unregulated providers. To simplify the complaints process, the Legal Ombudsman has suggested bringing complaints against professional services under one scheme. Other measures currently being considered include a voluntary scheme, which would allow unregulated service providers to opt into Legal Ombudsman jurisdiction, and a common portal for ombudsman schemes. From September 2012, the Legal Ombudsman has started publishing an online list of its decisions. Product safety reform In February 2013 the European Commission published its proposals for two new Regulations aimed at improving the safety of consumer products and strengthening the market surveillance of products in the EU. A new Regulation on Consumer Product Safety, to replace the existing General Product Safety Directive ( GPSD ), has been proposed to apply to all non-food consumer products with some specified exceptions. It will not apply to products subject to corresponding sector-specific EU harmonisation legislation, and medicinal products are specifically excluded from its scope on the basis they are subject to a pre-market assessment that includes a specific risk benefit analysis. Unlike the GPSD, the Regulation does not refer to a producer. Instead it refers to economic operators and identifies the specific obligations of manufacturers, distributors and importers. Some of its main features include: An extension to include products that are made available to consumers via a service provider. Greater traceability of products through the supply chain for example, distributors and manufacturers need to label the country of origin on products. Obligations on manufacturers to draw up and retain technical documentation including a risk assessment for ten years after the product has been placed on the market. New obligations to label products with a type, batch, serial number and enhanced obligations to provide contact details of the manufacturer and importer. A proposed Regulation on Market Surveillance of Products will consolidate and update the existing market surveillance rules into a single instrument. It will dispense with the distinction between consumer and professional products for market surveillance purposes. It will also avoid making a distinction between harmonised and non-harmonised products except where this is unavoidable in applying certain specific provisions. Some areas will be excluded from the scope of the Regulation, including food products, medicines and medical devices. The new Regulations are due to come into force in Unlike Directives, the Regulations will apply directly in EU jurisdictions, with the advantage of this not giving room for divergent transposition by member states. The European Commission has also proposed a multiannual plan of non-legislative measures on market surveillance, which aims to outline the non-legislative action that it will take to reduce the number of unsafe or non-compliant products and ensure the efficiency and effectiveness of the surveillance of products. These new measures, whilst having practical implications for businesses, should enable unsafe or otherwise harmful products to be more readily identified and taken off the market and help reduce unfair competition. 25

26 RICS guidance on risk, liability and insurance in valuation work Concerned that valuation for secured lending could become an uninsurable activity, the Royal Institution of Chartered Surveyors ( RICS ) issued a consultation in December 2011 on professional indemnity insurance for valuations. This was followed by the consultation response, Recommendations for Action, in June The recommendations were aimed at increasing competencies within the profession and limiting exposures when things go wrong (limitation of liability clauses and minimum terms revisions). The RICS then published a new guidance note, Risk, Liability and Insurance in Valuation Work, in January The guidance strongly recommends the use of liability caps to manage risk in valuation work and not to permit third party reliance on valuations. It urges members to take a fresh look at the terms and conditions on which they engage with their clients and to be clear about the nature and extent of their responsibilities. Problems in this sector remain. The large number of negligence claims has resulted in insurers increasing premiums or withdrawing from the market completely. Coupled with this there has been a downward pressure on fees making valuation work uneconomical. The RICS denies claims that sales are falling through because of mortgage valuation delays caused by lack of surveyors. The RICS considers that there are enough valuers to meet current levels of demand but that the market conditions are such that there is a general reluctance to take on the work at all. The RICS is carrying out discussions with all those involved, including banks and insurers, to address how to fix the broken market and is now calling for evidence to feed into a new independent commission. With property valuation underpinning many types of economic activity and fundamental to risk management in property lending, it is in the public interest for valuation services to be broadly available. RIDDOR Regulations changes Another move to simplify health and safety legislation for businesses is likely to take effect on 1 October 2013 when the requirements under the Reporting of Injuries, Diseases and Dangerous Occurrences Regulations ( RIDDOR ) are amended. The changes will focus on the less serious workplace accidents (incapacitation of a worker for less than 7 days) with obligations relating to more serious accidents and those involving members of the public remaining the same. Changes will largely simplify the form filling exercise that employers are required to carry out and submit to the Health and Safety Executive in the event someone is injured or there is a dangerous occurrence involving their business. The list of possible injuries has been shortened and industrial diseases have also been reduced to eight categories of work related illness. There will also be a reduction in the number of dangerous occurrences which will need reporting. Solvency II and Omnibus II Directive The exact timing for the implementation of Solvency II still remains unclear. Due to the ongoing delay to the adoption of Omnibus II (which makes a number of changes to the Solvency II Directive) and, therefore, to the transposition and implementation of Solvency II, there is currently no clear official EU timeline. The Solvency II Directive was amended to provide for revised implementation dates: for member states of 30 June 2013 and for insurers of 1 January Speculation remains as to when these dates will be further revised. On 23 May 2013 the Prudential Regulation Authority ( PRA ) wrote to firms stating that although it could not yet provide a clear timetable, it was acting in two ways to help the UK industry, both in the European negotiation and in its approach to implementation for UK firms. 26

27 On 14 June 2013, following a six-month industry study, the European Insurance and Occupational Pensions Authority ( EIOPA ) published its findings from the Long Term Guarantee ( LTG ) assessment and recommendations for the way long-term products should be valued under Solvency II. A few days later, EIOPA also closed its consultation on proposals for preparatory guidelines. The EIOPA report strongly recommends the inclusion of an LTG package of measures. For annuity business, this will permit insurers to take some credit within the discount rate for investment returns earned above the risk-free rate from backing assets (via a matching adjustment ). However concerns remain that the matching adjustment is likely to fall short of industry needs. With the LTG assessment now complete and consultations on preparatory guidelines closed, there appears to be strong political will to get Solvency II ready for implementation in The aim is to reach agreement on Omnibus II, which will introduce the final LTG requirements to the Solvency II regime, in autumn In the meantime, the PRA is allowing firms to put to use the significant investment in Solvency II internal models to meet current regulatory requirements under the Individual Capital Adequacy Standards ( ICAS ) referred to as ICAS plus. The PRA believes that the UK s current prudential framework for insurers is a good basis for a smooth transition to the new regime under Solvency II. The PRA has stated that Solvency II Own Risk and Solvency Assessment ( ORSA ) will help give a better understanding of an insurer s business. The PRA intends to make early adjustments to the existing regime to incorporate the ORSA under ICAS plus meaning that all UK insurers are better prepared for the introduction of Solvency II when the time finally comes. Standard contractual terms for barristers The Bar Standards Board has made changes to the Bar s Code of Conduct in an attempt to modernise the process of referral of work to barristers. From 31 January 2013, barristers are only obliged to undertake work under new standard contractual terms (annexed to the revised Bar Code of Conduct) or their own published standard terms of work. The previous Bar Council non contractual terms have now been abolished. Although a change in 2001 had allowed a barrister to enter into a contract with instructing solicitors, few barristers opted to do so. The recent change has therefore resulted in a major change in the relationship between barristers, their instructing solicitors and the lay client. Under the new standard terms, a barrister can now sue for unpaid fees. The new standard terms were not agreed by the Law Society and some of the terms have been identified as being unacceptable to solicitors, particularly for commercial instructions. The approach taken by chambers has been mixed. Many initially ignored the changes and, relying on the argument that there was never a problem before, have continued to accept instructions on the old terms. Others have embraced the move to formalised contractual terms. The changes have made it necessary to consider carefully the terms on which counsel is instructed and the respective liability of the parties to the arrangement. This has resulted in some difficult discussions. The very fact that these difficult negotiations are taking place perhaps confirms the need for express terms to be agreed. The Law Society and the Bar Council have agreed to work together to ensure the contractual terms of business between barristers and solicitors are acceptable to both parties. In the meantime, solicitors and their clients need to review the terms on which they are prepared to instruct counsel. Proposing anything other than the new standard terms does now mean that counsel is entitled to refuse the instructions. 27

28 Test-Achats ECJ case on use of gender in insurance The UK implemented the Test-Achats ruling on 21 December 2012 by simply removing the carve-out previously contained in paragraph 22 of Schedule 3 to the Equality Act The European Commission published a fact sheet on 20 December 2012 confirming that, from 21 December 2012, insurance companies in the European Union will have to charge the same price to men and women for the same insurance products, without distinction on the grounds of sex. The factsheet confirmed that the change is to apply to all new contracts for insurance products. The factsheet gave some simple pricing examples, but did not consider the concept of a new contract which continues to create some uncertainty for the industry. Insurers should now be pricing personal lines insurance products on a gender-neutral basis and customers should also be aware of the change. However, policies issued through arrangements with employers or on a group basis are not affected by this change. Insurers can also continue to take into account gender for internal purposes, such as when reserving, and insurance can be marketed explicitly at one gender provided both men and women can buy it on equal terms. 28

29 04. CONSULTATIONS, REPORTS, REVIEWS AND MISC. Alternative business structures for lawyers Brought in by the Legal Services Act 2007, alternative business structures ( ABSs ) are beginning to have an impact on the market. The Act has allowed nonlawyers to own and invest in law firms and allows lawyers to join other professionals in multi-disciplinary practices. The number of approved ABSs continues to grow. The nature and size of these organisations varies significantly from small high street firms at one end of the spectrum to the Co-operative Legal Services (the first approved ABS) at the other. ABSs have been established by chartered surveyors, accountants, construction professionals and financial advisers wishing to set up a legal arm. A significant development has been the recent growth of insurer ABSs. These tie-ups between insurance companies and law firms are, in part, a response to the major changes introduced by the Jackson reforms of civil litigation. The introduction of ABSs has introduced new challenges for professional indemnity insurers. As ABSs vary enormously in terms of ownership, investment strategy and governance, each has to be individually risk-assessed by underwriters. Where ABSs are run on a traditional law firm model, but with external capital, underwriters must ensure that effective procedures are in place to manage any conflicts of interest which might arise and that compliance with the regulatory framework is met. There may be a conflict in an ABS between its obligations to the stakeholders and its duty to clients. Multi-disciplinary practices raise different challenges. It is important to ensure that all legal activities are covered by insurance which meets the minimum terms. It may be necessary to have insurance from two different insurers in order to provide the necessary cover. Further changes in the regulation of legal services can be expected. Due to the complexities of the current regulatory landscape, the Ministry of Justice has decided to undertake a review of the legal services statutory framework. The purpose of this review is to consider what could be done to simplify the regulatory framework and reduce unnecessary burdens on the legal sector whilst retaining appropriate regulatory oversight. As a first step, views are being sought from a range of stakeholders across the legal services sector. Building information modelling Building information modelling or BIM has been a hot topic in the construction industry since the Government announced in 2011 that BIM would be compulsory on all public sector projects from Using BIM, the parties involved in a construction project work together to create a digital model of the building. This is then used by the design team, the construction team and finally the building owner to manage the facility throughout its life. It should help to control costs and reduce waste. The Government will require BIM Level 2 to be used. Level 2 BIM will require the architect, structural engineer and other design consultants to develop their own separate models, which are then shared with the project model. Although intended to reduce the risk of potential problems arising during construction, BIM raises a number of legal issues including the role and responsibilities of the information manager and BIM coordinator, accountability for design, entitlement to intellectual property rights, confidentiality issues, IT risks and risks of data error. Insurers are having to adapt to these new arrangements but Level 2 BIM does not appear to have had significant implications in respect of premium or coverage restrictions. Following a lengthy consultation with insurers, the Construction Industry Council has published a Best Practice Guide for PI Insurance when using BIM which provides practical guidance for design consultants. They are advised to consult with their brokers and to disclose fully their 29

30 involvement e.g. if they are acting as BIM co-ordinator or information manager or whether they are hosting any BIM environment. The use of Level 3 BIM (a fully integrated and collaborative process with a centrally hosted model) will raise different liability issues and insurers will need to consider the implications carefully. It has been suggested that the answer to this more collaborative way of working will be the increased use of single project insurance. Business interruption policy wordings In October 2012, the Chartered Institute of Loss Adjusters ( CILA ), in conjunction with the Insurance Institute of London, published a report: Business Interruption Policy Wordings Challenges Highlighted by Claims Experience, aimed at achieving clarity and contract certainty. The report does not provide prescriptive new wordings but sets out the current position, the problems, the consequences and potential solutions in relation to a number of issues. The question now is whether the wordings will be reviewed and changed in the light of this work. CILA reports that it is encouraged by conversations with a number of insurers who have made, or are proposing to make, alterations to wordings as a consequence of the review. Caldicott review This review considered difficulties experienced in sharing personal confidential data (i.e. identifiable patient data) amongst health service bodies and others. It has made a number of recommendations aimed at ensuring sensible access to such data and an end to the culture of anxiety around data sharing, while still protecting such data from inappropriate use. These include recommendations around information governance within organisations and criteria for allowing access to data by health and social care professionals. The Government is currently considering the review and its response to the recommendations. Competition Commission investigation of private motor insurance The Office of Fair Trading referred the private motor insurance market to the Competition Commission in September The Commission has produced a statement of issues confirming that it is considering five theories of harm: Harm arising from the separation of cost liability and cost control (moral hazard). Harm arising from the beneficiary of post-accident services being different from and possibly less well informed than the procurer of those services. Harm due to horizontal effects (market concentration). Harm arising from providers strategies to soften competition. Harm arising from vertical relationships (vertical integration). The Commission has to date issued an updated statement of issues and some of its working papers and had round table meetings with some of the parties in July. It is expecting to publish its provisional findings and remedies notice (if required) in October/November The statutory deadline for the investigation is 27 September

31 Corporate manslaughter prosecutions Figures obtained from the Crown Prosecution Service ( CPS ) indicate a 40% increase in corporate manslaughter cases opened in 2012.To date only three companies have been convicted under the Corporate Manslaughter and Corporate Homicide Act 2007 ( the Act ), namely Cotswold Geotechnical Holdings, JMW Farms and Lion Steel. However, in late 2012 and early 2013 a further four companies have been charged with the offence. Currently, the only companies to be prosecuted have been relatively small. One explanation is that it is harder to identify a gross failing at management level in large companies. Members of an organisation s senior management ought to be aware that whilst the offence of corporate manslaughter is only relevant to corporate bodies, with the increase in prosecutions comes the likelihood that the number of senior managers prosecuted for general health and safety offences, and the offence of gross negligence manslaughter, will also rise. For the purpose of the Act, senior management is defined as those persons who play a significant role in the management of the whole, or a substantial part, of the organisation s activities and is therefore not limited only to company directors. In a number of ongoing corporate manslaughter cases, members of senior management have been charged as individuals at common law, or with offences under the Health and Safety at Work Act 1974, both of which carry the risk of custodial sentences. In light of the CPS increased focus on the offence, it would be wise for companies to review their health and safety policies and arrangements in order to demonstrate a responsible culture at management level. Companies, and their brokers, should also give consideration to the provisions of their employers and public liability insurance policies to ensure that there is adequate cover, both to defend a prosecution and to cover the prosecution s costs. D&O policies should also be revisited to ensure that there is sufficient cover in place in the event of a corporate manslaughter prosecution, and to take into account the potential increased risk that individual directors and other members of senior management may be prosecuted at common law or under health and safety legislation. Cyber risk insurance 2013 has seen continued growth in interest and publicity around cyber risk insurance, particularly data breach or privacy liability insurance. It is estimated that only 5 12% of European businesses carry cyber insurance, which indicates that although take up has been slow, the potential for insurers remains enormous. The feedback that we have received from insureds is that cyber products are priced too high to become a mainstream insurance purchase. In our experience, the principal reason for this is a lack of awareness of the magnitude of these new emerging risks and of the scope of cover provided by available products. Insurers pricing is entirely understandable given the lack of historic claims to assist insurers in rating the risks and insureds are reluctant to complete exhaustive proposal forms as to their risk exposure (and might not even be able to provide the information sought). We expect premiums will reduce in 2014 following the launch of cyber products by many insurers in 2013 leading to greater competition. Some insurers are also approaching data breach and privacy liability insurance as a more commoditised product for SMEs rather than specialist insurance for high turnover insureds. This strategy follows a US Secret Services study finding that 72% of all data breaches occurred in small or medium sized businesses. Other feedback we have received is that insureds do not appreciate their level of risk in respect of data breach and privacy liability and are unable to quantify that risk financially. Claims are the ultimate justification for the purchase of an insurance policy and there are relatively few publicised cyber insurance claims outside the US. We have advised on a growing number of data breach and privacy claims indicating that this is set to change. 31

32 The draft European Data Protection Regulation (see Regulations above) is also creating significant awareness around privacy risks. It will introduce mandatory breach notification and significantly higher fines which drove the growth of the US cyber risk market when introduced. The provision of cyber insurance is (rightly, in our view) seen by many insurers as a growth area for investment in product development. The business sectors of greatest interest are hospitality, financial institutions, and, to some extent, retail, although businesses of all sizes are affected by cyber risks. Disaster insurance Green Paper A Green Paper was published by the European Commission in April 2013 posing a number of questions concerning the adequacy and availability of appropriate disaster insurance. Its objective is to raise awareness and to assess whether or not action at EU level could be appropriate or warranted to improve the market for disaster insurance in the European Union. Moreover, the process was hoped to expand the general knowledge base, help to promote insurance as a tool of disaster management and so contribute to a shift towards a general culture of disaster risk prevention. The report asked various questions and sought responses by 15 July A summary of responses will be published and the European Commission will then decide on the best course of action, including legislative changes. EIOPA consultation paper on good practices on comparison websites The European Insurance and Occupational Pensions Authority ( EIOPA ) published a consultation paper on Good Practices on Comparison Websites on 27 June The paper highlights differences in the regulatory treatment of aggregator websites between member states. It also identifies suggested good practices which, although not legally binding, could encourage regulators in member states to enshrine some or all of the proposals into their respective rulebooks. Examples of suggested good practice include clarity about ownership of the website; disclosing how many products the website compares per type of policy; clear and uniform presentation of information; consistent ranking criteria; and dealing with potential conflicts of interest. The paper invites comments by no later than 23 September EIOPA consultation paper on requirements for insurance distributors The European Insurance and Occupational Pensions Authority ( EIOPA ) published a consultation paper on Good Supervisory Practices regarding knowledge and ability requirements for distributors of insurance products on 27 June The paper identifies suggested good supervisory practices in the area of the knowledge and ability requirements imposed by EU regulators on those selling insurance products. It identifies the scope of knowledge required, including legal, market and ethical expectations, including the knowledge required to provide suitable and/or personalised recommendations where required. The consultation paper also suggests good supervisory practices around continuous professional development, both in terms of CPD requirements and how to monitor and ensure compliance with those requirements. The paper invites comments by no later than 23 September

33 Environmental Liability Directive ( ELD ) review The EU Commission is to submit a report to the EU Parliament and Council before 30 April 2014 which will include a review of the ELD, which has direct effect and has been adopted into the national laws of all EU member states (including the UK from March 2009). The ELD creates significant liabilities for cost, damages and losses for operators and companies that cause damage or significant risk of damage to water, land or protected species and natural habitats. Annex 3 lists activities that attract strict liability and includes all activities that require licences or permits, transportation of dangerous substances, discharge to and abstraction from waters, genetic modification of crops, mining and resource extraction and carbon capture and storage. Fault based liability applies to other activities not in Annex 3 but which risk or cause damage to the areas protected by the ELD. The ELD places duties on operators and companies to report any environmental damage or risk of damage to the regulator, prevent damage and take action where there is an imminent threat. Article 14 encourages member states to develop a system of compulsory financial security. Those states that have committed to such systems such as compulsory environmental insurance include Portugal, Spain, Hungary, Greece, Romania, Bulgaria, Slovakia and the Czech Republic. The UK is not currently considering compulsory insurance. Cover is currently through optional environmental liability insurance or bank guarantees. At a stakeholder conference in June 2013 the UK reported that there had been 19 cases under the ELD in the UK since March involved actual damage and seven involved an imminent threat. Environmental insurance is a growth area and it is clear that a very high proportion of businesses that undertake activities that could lead to ELD events are not aware of their duties, let alone the availability of specific insurance cover or the limitations of their existing policies. European health insurance card ( EHIC ) Earlier this year, the European Commission launched an infringement action against Spain relating to the refusal of certain Spanish hospitals to accept the EHIC. Under Article 19 of EU Regulation 883/2004, all EU citizens are entitled to healthcare that becomes necessary in any member state they are visiting, to be provided by the social security provider of the member state they are in on behalf of the social security provider of their home member state. Under Article 35, the benefits given by the social security system of the member state visited must be reimbursed by the patient s home social security system. The European Commission has been investigating reports that certain Spanish hospitals have been asking patients whether they hold travel insurance and either seeking payment of medical expenses from travel insurers or requiring patients to hand over credit card details. Some patients even allege that they have been told that if they hold travel insurance, their EHIC is not valid. Being able to use the EHIC rather than their travel insurance is particularly significant for patients with pre-existing conditions which flare up when they are on holiday, or whose condition is otherwise excluded from the scope of their travel insurance, and where treatment will not wait until they return home. At the end of May 2013, the European Commission made a formal request for information to Spain, being the first step in formal EU infringement proceedings. 33

34 The next step is for a response to be produced by Spain which will then be the subject of further discussion between Spain and the European Commission. Ultimately, if they are not satisfied with Spain s response, formal action will be taken before the European Court. DAC Beachcroft s London and Madrid offices are heavily involved in advising clients on this issue and are in regular contact with the European Commission. Expert group on European insurance contract law Insurance was carved out of the initial initiative on European contract law reform as the European Commission recognised that insurance required specific in-depth analysis. In January 2013, the European Commission established an expert group on European insurance contract law to examine whether differences in contract laws pose an obstacle to crossborder trade in insurance products and, if so, to identify the insurance areas which are likely to be particularly affected by such obstacles. An EU wide insurance contract law would allow purchasers greater choice and insurers a wider customer base but difficulties are likely to be encountered in relation to knowledge of the local market and different legal jurisdictions. The group is required to report its findings to the Commission before the end of this year. FCA thematic review into the sale of add-on insurance In December 2012, the Financial Services Authority ( FSA ) announced that it was going to carry out a study into sales of general insurance add-on products. The successor Financial Conduct Authority ( FCA ) announced in June 2013 that it was gathering evidence for analysis and expects to publish its findings by early The FSA expressed concerns that consumers were experiencing poor outcomes when purchasing insurance as an add-on, specifically around the extent of risk transfer, value for money and their understanding of what risks add-on products do and do not cover. The FCA has now chosen five insurance products for its initial data collection from firms and consumers: guaranteed asset protection insurance (GAP insurance), home emergency, gadget, travel and personal accident. This list includes add-on products where the FCA thinks most consumers will be aware of standalone alternatives (travel) and products where they may not. The FCA will look at whether the prices of these addon products are excessive for the cover provided, having regard to whether equivalent products are available at significantly lower prices elsewhere and whether margins significantly exceed normal commercial rates. It will also test whether the level of cover matches what consumers reasonably expect, and look at information on claims rates, payouts, claims rejections and complaints. The FCA is not directly testing for misselling or any other form of misconduct, but focusing on whether competition is ineffective and, if so, why. In the meantime, the FCA has already fined a number of firms for shortcomings in this area. FCA thematic review of broker conflicts of interest In a speech on 2 July 2013, the Head of General Insurance and Protection at the Financial Conduct Authority ( FCA ) announced that a thematic review into how UK insurance brokers manage conflicts of interest would be launched. Working with trade associations, the review will focus particularly on small and medium-sized enterprises and microbusiness customers and will test whether essential everyday insurance products that those businesses need are designed and delivered fairly. The findings are likely to be published before the end of the year. The starting point for the review is not that a problem currently exists but that as the insurance broker business model has changed and radically evolved over the last 20 years, the FCA wants to test how conflicts of interest are currently identified and managed. This reflects the FCA s new forward-looking approach to regulation. 34

35 There will be two strands to the review. The first will be payment flows between insurers and brokers with an emphasis on ensuring that brokers are really acting in the interest of the client. The FCA is particularly interested in how insurance brokers identify and manage potential conflicts where they receive revenue from both their customers and insurers. The concern in respect of revenue from insurers is not the payment of broking commission in a normal range but profit share, volume arrangements and other payments received from insurance companies. The FCA will also look at several aspects of the value chain such as claims handling and management. The FCA noted that an increasing number of brokers now take on many of the value chain functions historically performed by insurers. Some brokers have shifted from being vanilla product distributors to product designers, underwriters and claims handlers through delegated underwriting and claims authorities. As a consequence, there was a concern that conflicts of interest may have mutated into a very different risk. The FCA expressed its ultimate aim as being to restore trust and confidence in the insurance sector and to make the market work well for both participants and customers. The FCA noted that insurance brokers have a particularly important part to play in delivering innovation and choice for customers. FCA thematic review of motor legal expenses insurance In June 2013 the FCA published the results of its thematic review into motor legal expenses insurance ( MLEI ), asking motor insurance providers to reflect on our findings. Particular concerns raised were in relation to: The basis on which MLEI is provided (within the core motor policy, as a pre-selected add-on requiring the customer to opt out, or as an add-on which the customer is required to select). The quality of explanation of MLEI at all stages of the customer journey, including the claims process, with an emphasis on providing clear, appropriate information. The extent of cover provided the FCA found evidence of widespread misunderstanding about the scope of cover provided by MLEI. The FCA has asked firms to pay particular attention to what customers are saying about their understanding of MLEI and motor insurance in general. It will revisit this issue in 2014 to assess how the market has responded. FCA thematic review of the claims process in the insurance market travel and household Speaking at the annual conference of the British Insurance Brokers Association ( BIBA ) on 15 May 2013, Martin Wheatley, Chief Executive of the Financial Conduct Authority ( FCA ), announced an FCA thematic review into insurance claims. The announcement follows the results of a survey published by BIBA earlier in 2013 reporting widespread views hotly contested by the Association of British Insurers that insurers are taking longer to pay valid claims. 35

36 The review will cover claims across the general insurance market, but focus particularly on household and travel claims. Among the points the FCA says it will look at are: Whether a customer s experience varies according to if they bought insurance directly, through a bank or through an affinity scheme. How good insurers are in explaining up front what will happen when a customer makes a claim. Whether payments are made in a fair and consistent manner when they are due. If an insurer s claims department is as well resourced as the sales team. The FCA expects the findings and final recommendations from the review to be published by the last quarter of Fracking Fracking (hydraulic fracturing) involves drilling vertically and then horizontally and injecting millions of litres of water, sand and chemicals to break open the rock strata to release trapped gas reserves. The rapid development of fracking in the USA, to the extent that as a nation it expects to achieve energy self-sufficiency and so energy security in the near future, together with the economics of cheap fuel for manufacturing and other industries has led EU energy ministers to meet to discuss ways of boosting the EU energy industry to try to control and reduce EU dependence on imported energy which seriously affects economic competitiveness in world markets. Recoverable amounts in Europe are thought only likely to compensate for the reductions in other internal gas production so maintaining Europe s dependency on imported gas at around 60% of consumption. In the UK, however, there is increasing scientific data that there are vast reserves of shale gas under significant parts of the UK. Estimates for the shale gas reserves are such that, even if only 10% of those reserves in the north west alone are extracted, this would equal 40 years worth of the UK annual gas consumption. The UK Government is increasingly encouraging the development of the industry through tax breaks and other favourable financial benefits, such as a proposal that local communities could receive up to 100,000 for local projects. Public fears include the risk of earth tremors being triggered by the drilling process and the contamination of ground water and aquifers. Many of the potential reserves are situated under the most densely populated areas. The drilling activity involves major use of heavy and noisy equipment and infrastructure is required to carry supplies to the national gas grid. The insurance challenges associated with large scale gas development and extraction and potential claims in the event that structural or environmental damage results in densely populated, environmentally sensitive or economically important areas is significant. The drafting of policies and the calculation of premiums will provide both major opportunities and major risks. Government strategy to promote UK as leading centre for insurance The Government has announced its intention to launch a strategic plan aimed at promoting the UK s position as a leading centre for the insurance sector. The proposal will be similar to plans the Government unveiled in its budget earlier this year, when it published a strategy focusing on strengthening the competitiveness and growth prospects of the assetmanagement sector. The Government has already been speaking to a wide range of firms across the sector in recent months to seek their views and contributions and it has been indicated that the insurance sector will hear more about the plans in the weeks and months ahead. 36

37 The Government recognises that the discussions it had around asset management were absolutely essential in setting out an approach for regulation and taxation, while also focusing on trade promotion that can enhance the prospects of the industry. It has recognised that the insurance industry has a very distinctive role in the UK and ought to be respected for the ways in which it is different from other sectors of the economy and not be shoehorned into policies and approaches that are generic when the industry is very specialised, both as an industry but also across the different parts of the industry. In a speech launching the initiative in May 2013, Greg Clark MP, Financial Secretary to the Treasury, stated The common denominators of the industry social purpose, the best reflection of the country s internationalism, always striving for innovation and helping to promote responsibility these are the characteristics that have been apparent throughout the history of the insurance industry in the UK and they couldn t be more needed today. Further details of the initiative, including timescales, are awaited. Guideline hourly rates review Guideline hourly rates ( GHR ) for use in the summary assessment of solicitors costs have historically been set by the courts and more recently by an advisory committee reporting to the Master of the Rolls. In October 2012 the Ministry of Justice disbanded the previous advisory committee and directed the Civil Justice Council to set up a specialist committee to conduct a comprehensive review of the GHR and make recommendations to the Master of the Rolls by March The committee will then review the GHR annually. The rates currently in force are still those set in HSE prosecutions of healthcare providers likely to increase following Mid-Staffs In the aftermath of the Mid-Staffordshire inquiry which exposed failings in clinical judgement and care leading to hundreds of patient deaths between 2005 and 2009, the Government has confirmed that the Health and Safety Executive ( HSE ) should be able to prosecute hospitals and other care providers such as care homes in all cases of criminal negligence, including for failings in clinical judgement and quality of care, and that it will be adequately resourced from now on to carry out this role fully. Whilst the HSE has always been under a duty to investigate breaches of the Health and Safety at Work Act 1974 (where organisations have failed to ensure the safety of their employees or non-employees), the guidance has to date restricted their responsibilities in a clinical setting to major non-clinical risks such as trips and falls, scalding and electrical safety. In contrast, the Care Quality Commission has been responsible for investigating concerns about clinical judgement and quality of care, but has had no power to prosecute under the Health and Safety at Work Act 1974 and could only prosecute under other legislation if it firstly issued a warning notice which was then ignored. This regulatory gap has meant that hospitals, care homes and other care providers have largely escaped prosecution up until now where a death or injury has been caused by a failure of clinical judgement or lack of quality of care. This position has now changed and the first criminal investigation arising from the Mid-Staffordshire inquiry has commenced with the HSE considering whether there is sufficient evidence to prosecute following the death of Gillian Astbury who died after a failure to administer insulin led to her slipping into a diabetic coma at the hospital in Particularly given the introduction of Fee for Intervention last 37

38 October (see Regulations above), this change in the scope of the HSE s role is likely to be costly both from a financial and reputational perspective for healthcare organisations who do not meet the required standard of care. Insurers should be aware that their insureds in the care sector will likely be the subject of greater scrutiny following accidents and complaints resulting from clinical issues and that cover for the defence and prosecution costs of these investigations may therefore be drawn upon more frequently. Law Commission review of insurance contract law Since our last report, the Law Commission has published summaries of responses to its proposals both in relation to damages for late payment and insurers remedies for fraud (December 2012) and warranties and the business insured s duty of disclosure (March 2013). The responses were largely supportive of the proposals but highlighted concerns over the detail of how they would work in practice. In brief the proposals are as follows: Damages for late payment The proposals would see insurance law brought into line with general contract law, with legislation re-characterising insurers primary obligation from a duty to prevent loss to a duty to pay valid claims after a reasonable time. Unreasonable delay or wrongful repudiation of a claim would then entitle insureds to claim damages for proven and foreseeable losses. Fraud The fraud proposals clarify the existing law that a policyholder who commits fraud forfeits the whole claim to which the fraud relates, together with any claim where the loss arises after the date of the fraud, but they would not forfeit any previous valid claim. Insurers would also have a new right to claim back costs incurred in investigating such claims. Business non-disclosure Unlike for consumers, it is proposed that the duty of disclosure should be retained for businesses. The remedy of avoidance would still be allowed where there has been dishonesty and, by these proposals, insurers would also be allowed to retain the premium. In the absence of dishonesty, there would be a default proportional system, akin to the consumer model. Business basis of the contract clauses would, however, be abolished, which would shut the door on decisions such as Genesis Housing Association Ltd v Liberty Syndicate Management Ltd (2013), which allowed insurers to rely on innocent misstatements in the proposal form. In advance of any Bill, Airmic published a guide and model wording on 11 June 2013 with the aim of encouraging insurers to remove basis clauses from their policies. Warranties Breach of warranty would only have suspensive effect so that if the breach is remedied, liability would be restored. Further, where a term (not only a warranty) is designed to reduce the risk of a particular type of loss, liability would be suspended only in relation to that risk. It is proposed that the warranty provisions would be mandatory for consumers but a default regime only for businesses. We now await the detailed revised proposals which are expected to be published in a final report and draft Bill this December/January If these changes are also enacted, they will introduce new concepts with fundamental implications for insurers, brokers and insureds. Lloyd s three year plan Lloyd s published its three year plan for on 11 December This is the first such plan since the Lloyd s Market unveiled its Vision 2025 goals in May In the plan, the Corporation of Lloyd s sets out its priorities, including: 38

39 Ensuring an appropriate balance of regulation for effective market oversight the threepronged approach favoured by Lloyd s should balance syndicate performance, prudential capital requirements and risk management with the entrepreneurial approach for which Lloyd s underwriters and brokers are renowned. International growth and diversification, with an emphasis on encouraging new business and capital from developing economies. Making sure that Lloyd s is a capital-efficient market, attracting new capital and retaining existing investors. This will back the growth in insurance premium expected from the first objective and is particularly aimed at attracting new individual Name investors by offering more flexible means of participating at Lloyd s. Streamlining and enhancing distribution in other words making it easier to insure risks with Lloyd s syndicates through the intermediation of brokers and coverholders. Attracting and promoting talented people to work in the market and in the Corporation. According to Vision 2025, Lloyd s is seeking to be the global centre for specialist insurance and reinsurance. Some may say that it already has that status, but the continued commitment of the Corporation and the market s refusal to rest on its laurels is to be welcomed. MiFID 2/PRIPs/UCITS 5/RDR The European Commission is proposing a series of measures relating to investment business, including (directly or indirectly) long-term insurance products with an investment element. These include amendments to the Markets in Financial Instruments Directive (commonly referred to as MiFID 2), further changes to the regime relating to undertakings for collective investment in transferable securities ( UCITS 5 ) and proposals for a regulation on packaged retail investment products ( PRIPs ). These measures are also linked to the proposed amendments to the Insurance Mediation Directive (see above). The proposed text of the MiFID 2 Directive and Regulation were published by the Commission in October 2011 following a public consultation. Since then, a number of compromise proposals have been published. The European Parliament is currently due to debate the proposals in October 2013, with implementation not expected until mid 2014 or While many of the proposals in MiFID 2 are aimed at the infrastructure of the financial markets, other key themes include permitted forms of remuneration for financial advice and the extent to which executiononly investment business should be permitted for retail clients. Client classification is also under review. UCITS 5 proposes tighter regulation of depositaries, including a provision that only credit institutions or investment firms can act as UCITS depositaries, and imposing requirements on UCITS managers in relation to remuneration policies. The European Commission originally suggested that the UCITS 5 Directive might apply from the end of However, based on the current status of negotiations, the end of 2015 now looks more likely. The PRIPs Regulation proposes a standardised key information document ( KID ) for a wide range of retail investment products, including certain insurance products. Under the proposed Regulation, the product manufacturer will be responsible for drafting the KID. If it does not comply with the requirements of the Regulation, investors may claim damages from the manufacturer for any loss caused through the use of the KID. Mid 2015 is the date by which the Regulation on KIDs for PRIPs could apply, depending on the date the Regulation enters into force. 39

40 Meanwhile, in the UK the main provisions of the Retail Distribution Review ( RDR ) came into force on 31 December The Financial Conduct Authority is expected to monitor compliance with both the letter and the spirit of its RDR measures closely and is likely to act quickly if it identifies any gaps or ambiguities in the new regime. MoJ consultation: Damages Act 1996: The discount rate How should it be set? and review of the legal framework The discount rate is an important factor in the calculation of future losses in the highest value claims for personal injury damages, where the future loss claim forms the largest component of any award. Currently set at 2.5% (in 2001), it has recently been under attack from lawyers advising claimants following a Privy Council case in which the discount rate in Guernsey was reduced to a negative rate for personal care and earnings related losses, increasing the value of that claim by several million pounds sterling (Helmot v Simon (2012)). In England and Wales and in Scotland and Northern Ireland, the rate is set not by the courts but by each Government under statutory powers in the Damages Act The Minstry of Justice ( MoJ ) s second consultation on the discount rate closed on 7 May The first consultation paper ( How should it be set? ) related to the methodology to be used by the Lord Chancellor and his counterparts in Scotland and Northern Ireland in independently setting the discount rate for personal injury damages in their respective jurisdictions. This consultation paper closed in October 2012 and no Government has yet published any response. The second consultation paper sought views on two subjects relating to the setting of the rate under section 1 of the Damages Act 1996, namely whether the legal parameters defining how the rate is set should be changed and whether there is a case for encouraging the use of periodical payment orders instead of lump sum payments. No indication has so far been given as to when the MoJ is likely to respond to these consultation papers. MoJ s consultation on reforming mesothelioma claims The Ministry of Justice ( MoJ ) launched a consultation on reforming mesothelioma claims on 24 July The consultation is open until 2 October. The paper outlines the Government s proposals to improve the speed and efficiency of the claims process for mesothelioma so that early payment of compensation is made. The proposals are to introduce a new dedicated Mesothelioma Pre-Action Protocol to establish a quicker standard process to set timescales for more straightforward mesothelioma claims. It aims to encourage early settlement without recourse to litigation. To support the new Pre-Action Protocol there will be an industry funded Secure Mesothelioma Claims Gateway, providing a secure method for claimants to register necessary information such as medical records. The Gateway will also handle untraced mesothelioma claims and will be linked to the mesothelioma support website which aims to provide guidance to all sufferers on the courses of action available to them. The MoJ is also proposing a new fixed recoverable costs regime to reflect the greater speed and efficiency of the more straightforward claims which go through the Pre-Action Protocol under the new system. The MoJ is seeking views on both the principle and the structure of the proposed fixed costs regime. The paper also seeks views about section 48 of Legal Aid, Sentencing and Punishment of Offenders Act 2012, which excludes mesothelioma claims from the changes to success fee and ATE premium recovery introduced for other claims on 1 April Section 48 requires the Government to carry out a review before imposing the changes to funding in mesothelioma claims. It will consider the likely effects and determine the outcome of the review in the light of this consultation. 40

41 MoJ consultation: reducing the number and cost of whiplash claims Building on Jackson LJ s review of costs in civil litigation, on 11 December 2012 the Ministry of Justice ( MoJ ) launched a consultation on the Government s proposals to tackle the whiplash epidemic in England and Wales. The consultation was twofold, considering: The creation of independent medical panels, to support better diagnosis of soft tissue neck injury claims; and The merits of increasing the small claims track limit for personal injury claims arising from road traffic accidents to 5,000 (or beyond), to dissuade fraudulent and exaggerated claims being pursued with the primary function of generating legal costs. It was the MoJ s intention to publish a written response to the consultation during spring However, just a week after the consultation closed on 8 March, the Transport Select Committee ( TSC ) launched its own independent inquiry on whiplash, calling for evidence from key stakeholders within the industry. The MoJ has, therefore, delayed publishing its own response pending sight of the Select Committee s report. The TSC published its report: Cost of motor insurance: whiplash on 31 July 2013 and concluded as follows: It was not able to support the MoJ s proposed increase in the small track limit, for fear that it would impact access to justice where potential claimants did not feel comfortable in representing themselves. It supported the Government s proposals to overhaul the way in which medico-legal reports are obtained in whiplash injury cases and proposed a requirement for claimants to prove they saw a medical practitioner within a defined period after the accident. It was critical of insurers practice of making offers to settle before the production of medical evidence (commonly known as pre-med offers ) as it was counter-productive and encouraged fraudulent or exaggerated claims. The MoJ is now expected to publish its response to the original consultation in the autumn. Private healthcare market investigation On 4 April 2012 the Office of Fair Trading ( OFT ) referred the privately funded healthcare market in the UK to the Competition Commission ( CC ) for a market investigation. This followed a year long market study, which resulted in the OFT report dated 8 December 2011 which detailed findings of a number of features of the private healthcare market that prevent, restrict or distort competition. The CC Investigation The CC are now conducting a detailed investigation of the market and issues raised in the OFT report. The statutory deadline for the CC s final decision is 3 April If the CC find uncompetitive practices then they have the power to impose structural and behavioural remedies in the form of undertakings or by statutory order. Whilst the investigation is not complete, on 28 August 2013 the CC published its Notice of Provisional Findings ( NoPF ) and Notice of Possible Remedies ( NoPR ). In summary, the NoPF stated that there are features of the supply and acquisition of privately funded healthcare services that, either alone or in combination, prevent, restrict or distort competition such that there are adverse effects on competition. The following features were identified as having an adverse effect on competition: high barriers to entry for full service hospitals; weak competitive constraints in many local markets including central London; the operation of incentive schemes to encourage patient referrals for treatment at private healthcare facilities; and a lack of sufficient publicly available performance information on both private hospitals and on consultants. 41

42 The NoPR set out a number of potential remedies including: divestiture of one or more hospitals and/or other assets in areas where competitive constraints are insufficient; preventing tying or bundling; restrictions on expansion; preventing hospitals from offering incentives which are intended or have the effect of encouraging consultants to refer or treat patients at that hospital; a recommendation to national health departments that they publish consultant performance indicators on their website; and an information remedy. Perhaps disappointingly for insurers, the CC have considered but are not minded to pursue a price control remedy. It has however stated that it will consider this remedy further if interested parties provide evidence or reasoning as to why it should be taken into account. The CC has invited interested parties to submit reasons in writing as to why the provisional findings and possible remedies should not become final by 20 September Private investigators On 30 July 2013, the Government announced that from 2014 the private investigators industry will be regulated and private investigators will need a licence from the Security Industry Authority to operate. Since last year s revelations about widespread phone hacking and use of private investigators at the News of the World and subsequent convictions, much concern has been voiced regarding the potential for poor practice in the industry. The Financial Services Authority and the Serious Organised Crime Agency have both conducted investigations which have revealed the use of private investigators by organisations across many sectors, with law firms, financial services groups and insurance companies among a list of clients potentially connected to private investigators convicted of illegally obtaining information. The Home Secretary said: It is vital we have proper regulation of private investigators to ensure rigorous standards in this sector and the respect of individuals rights to privacy That is why I am announcing today the Government s intention to regulate this industry, making it a criminal offence to operate as a private investigator without a licence. Initial reports suggest that investigators will be required to pass a training course on legal requirements and face detailed identity and criminal record checks, with criminal convictions for data protection offences precluding a licence. Those found guilty of not having a licence or passing information to an unlicensed person will be liable for a fine of up to 5,000 and/or six months in prison. We suggest our clients should review company practices of engaging private investigators and ensure that before instructing a private investigator, or including or maintaining one on an approved panel, detailed identity checks are obtained and best practice guidance issued by the Information Commissioner s Office and Association of British Insurers consulted. Sentencing guidelines consultation The Sentencing Council has been consulting on new sentencing guidelines for the criminal courts in environmental crime cases. Current guidance and experience is limited and the aim is therefore to increase consistency. The draft guidelines will apply to most waste offences including the unlawful deposit, treatment and disposal of waste, fly tipping, pollution offences and breaches of environmental permits and exemptions plus breaches of noise abatement notices. The guidelines are likely to result in significantly higher fines for SMEs and larger businesses. Courts will arrive at a sentencing starting point and range based on the degree of harm caused and the culpability of the offender. The courts will then consider aggravating and mitigating features. Aggravating features include previous convictions, a bad history of compliance, location of the incident such as highly populated areas, repeated incidents or actions over an extended period of time, concealment and obstruction of investigators and 42

43 financial motivation or gain. Mitigating features include remorse, steps taken to remedy the consequences, cooperation, a good record and a guilty plea. The suggested starting point fine for a business with a turnover in excess of 25 million with the highest level of harm and culpability is 750,000. It is increasingly common for directors and officers to be prosecuted alongside their companies. If convicted they can face community or even custodial penalties and the prospects of confiscation orders under the Proceeds of Crime Act Companies and their directors will then need to be aware of their environmental responsibilities and they will want comfort that they are adequately protected by insurance. Whilst criminal fines arising out of the prosecutions will not generally be insurable, the legal costs of defending criminal prosecutions will almost certainly attract cover under the company s D&O policy. Although insurers liability for claims arising out of pollution have historically been excluded (because environmental liability is moving away from negligence towards strict liability and remediation costs can be substantial) cover is usually carved back in for the defence costs incurred in defending such claims. We may, of course, see this exclusion being re-visited in light of increasing global pressure on businesses to implement more environmentally friendly strategies in due course. For now, D&O insurers should ensure that they factor in the increased defence costs exposure they may face as a result of these changes. In order to ring-fence their exposure, insurers may consider offering a sub-limit of indemnity for these costs or a separate excess. SRA review of solicitors professional indemnity insurance ( PII ) An increase in both the value of claims and the number of firms facing difficulties in obtaining PII through the open market prompted the Solicitors Regulation Authority ( SRA ) to carry out a review of solicitors PII arrangements in 2010/11. The final stages of the reforms are now about to be implemented. The main changes proposed in 2011 were in relation to the Assigned Risks Pool ( ARP ) which provides cover for solicitors who fail or are unable to obtain professional indemnity insurance on the open market. The ARP had become increasingly unpopular with insurers who were responsible for the cost of it and had to contribute to the underwriting losses in proportion to their market share of the primary compulsory layer of insurance. Funding arrangements for the ARP were first amended and then a decision made to abolish it. Cover for uninsured firms was transferred to the Compensation Fund in October From 1 October 2013, instead of entering the ARP, firms that cannot obtain qualifying insurance will be given a 90 day policy extension from their previous insurer. There will be an extended indemnity period for a period of 30 days in which a firm can continue to practise and try to obtain qualifying insurance. After this time, firms will enter a cessation period of 60 days in which firms will be unable to accept new instructions and can only perform work in connection with existing instructions. If a firm is unable to obtain a policy of qualifying insurance within that 90 day period, then they will have to cease practice and their insurer will be required to provide them with the mandatory six years run-off cover. There will also no longer be a single renewal date from 1 October This should allow underwriters to consider each proposal more carefully and may assist those firms which, on first blush, do not appear to have a good risk profile. The new provisions represent a change from pooled to individual liability and are broadly supported by insurers. It is hoped that the changes will encourage new insurers to enter the market and increase existing insurers appetite to insure the profession. Improved competition and lower premiums are needed, particularly in the light of recent problems with unrated insurers which together currently write 12.3% of the market share. The winding up of Latvian insurer Balva, following the insolvency of Lemma (and previously Quinn Insurance Ltd), has caused widespread concern and prompted a review by the SRA of the risk to clients when a firm s professional indemnity insurer gets into financial difficulties. However, no decisions will be made in time for this year s renewals. 43

44 The Law Society has expressed concerns about the instability of the solicitors PII market and, in an interesting recent development, has launched Chancery Pii, a direct joint venture with broker Miller Insurance Services LLP, which will provide professional indemnity cover for firms with between one and four partners. Telematics The level of interest in telematics has continued to gather pace with many insurers now entering the market with telematics supported products. Reports suggest that such products are increasing in popularity with consumers. Sales to female drivers in particular have increased, possibly as a consequence of the Test Achats case and related amendments to the Equality Act. The popularity of such products has led the Association of British Insurers ( ABI ), in association with the British Insurance Brokers Association and the Information Commissioner s Office, to publish a Consumer Guide and a Best Practice. Whilst voluntary, the Best Practice does emphasise the need for insurers to use telematics products responsibly and in line with established Treating Customers Fairly requirements. It also provides comprehensive guidance on how insurers should comply with the fair processing (provision of appropriate privacy notices and information about the processing) requirements of the Data Protection Act Interest has also started to shift focus with many insurers now recognising the benefit of telematics as a fraud prevention tool. This shift has, however, sparked significant debate amongst insurers in respect to the use of data, the sharing of data amongst the industry and the effect this may have on consumer trust. In its guidance the ABI expressly excludes data used for fraud prevention and detection in its data sharing requirements, recognising that such data should be shared if it is for a legitimate fraud prevention purpose. However, this does not detract from the general obligation under data protection law to inform data subjects of the purposes for which you will be using and disclosing their data and such notice should include references to fraud prevention and detection. Companies should also ensure that they satisfy the requirements of s.29 of the Data Protection Act (allowing disclosures for the prevention and detection of crime) before sharing such data. With the increased interest in such products and the wider benefit to the industry as a whole, it is likely that the use of telematics data for fraud prevention will be placed under further scrutiny. Careful consideration of s29 of the Data Protection Act is, therefore, essential. Terrorism insurance review In June 2013 Airmic produced a terrorism insurance review in conjunction with Willis, looking at terrorism insurance arrangements in selected territories. It provides a useful guide to state terrorism schemes across selected countries. Young driver safety: Department for Transport green paper As Britain s roads become safer year on year, the number of young people (aged 15 24) who are killed or seriously injured in road traffic collisions remains an alarming statistic. Whilst only one in eight drivers is under 25, they account for one in three of all deaths on Britain s roads. Inextricably linked to tackling the rising cost of insurance for young drivers and championed by the ABI, it comes as no surprise that the issue of improving young driver safety has progressed quickly up the parliamentary agenda. Possible ideas for tackling the problem include imposing night time curfews through the use of telematics devices, a one-year minimum learning period, a limit to the number of young passengers and a zero blood alcohol driving limit for an initial period. The Department for Transport has recently confirmed it is delaying the publication of its green paper on young drivers until autumn 2013 (expected to be October), to enable the Government to decide on the precise content of the issues to be debated. 44

45 05. PROCEDURE Legal Aid, Sentencing and Punishment of Offenders Act 2012 ( LASPO ) LASPO implemented a number of recommendations from Lord Justice Jackson s Review of Civil Litigation Costs Final Report which was published in January The following is a summary of the most relevant changes. Referral fee ban LASPO introduced a ban on the payment or receipt of referral fees in claims for personal injury. The ban has two sections. Firstly, a regulated person is in breach of LASPO if they either refer or have referred to them prescribed legal business and are paid or pay for the referral. Secondly, they are also in breach if, in providing legal services in the course of prescribed legal business, they arrange for another person to provide services and are paid for making that arrangement. Prescribed legal business is defined as meaning business that involves the provision of legal services to a client where the legal services relate to a claim or potential claim for damages for personal injury or death, or to any other claim or potential claim arising out of circumstances involving personal injury or death. This definition is very wide and could for example encompass a situation where legal services are being provided to an uninjured claimant but there is an injury to another person involved in the accident, even the defendant, whether or not the injured person has made a claim. The reference to prescribed legal business limits the ban to arrangements which ultimately involve a legal representative authorised and regulated under the Legal Services Act 2007 (essentially solicitor practices, barristers and alternative business structures). Importantly, it extends to any legal work done by such entities and is not restricted to cases ending in litigation. The ban is, however, broader in scope and covers entities regulated by the Financial Conduct Authority or by the Claims Management Regulator, where those entities are involved in the supply of work to those carrying on prescribed legal business. It should be noted that LASPO states that payment includes any form of consideration whether any benefit is received by the regulated person or by a third party. This means that it is not possible to make a referral where any form of benefit is received by any party. Some commentators who have expressed contrary views may not have fully appreciated the outcomes focused basis of regulation which will be applied in dealing with the conduct of legal services providers. Non-recoverability of success fees and after the event ( ATE ) insurance premiums Success fees in conditional fee agreements ( CFAs ) and ATE insurance premiums are no longer recoverable from the losing party. This applies to CFAs signed on or after 1 April 2013, ATE policies taken out on or after 1 April 2013 or new cases taken on after 1 April 2013 under a Collective CFA ( CCFA ) with a success fee (even if the underlying CCFA was entered into before 1 April). The need to provide information about funding arrangements to the court and other parties is also removed for those cases. The new rules will not until further notice apply to diffuse mesothelioma claims and publication and privacy proceedings and will not apply to insolvency proceedings until April The current ability for claimants to bring cost free claims (using a CFA and ATE insurance for adverse costs) may therefore be lost. Defendants will no longer be subject to potentially increased costs liability where the claim is funded using a CFA or ATE insurance and this should have a significant impact on the amounts paid out by insurers. The savings will, however, to some extent be offset by two other reforms: qualified one way costs shifting and a 10% uplift in general damages. 45

46 Damages-based agreements ( DBAs ) DBAs (also referred to as contingency fee agreements) are now permitted in all civil litigation cases and are governed by the Damages-Based Agreements Regulations They provide for payment of the lawyer s fee only in the event of success and then by reference to a percentage of the damages recovered (known as the contingency fee). DBAs are only suitable for claimants at present. In the event of success, the claimant s lawyer will keep the base costs recovered and set them off against the DBA fee and the claimant will then be responsible for any shortfall, which will be paid out of the damages recovered. The maximum payment that the lawyer can recover from the client s damages will be capped at 50% of damages in non-personal injury claims and 25% of general damages (pain, suffering and loss of amenity) and past special damages (after deduction of recoverable benefits) in personal injury claims. The cap does not apply to appeal proceedings. VAT and counsel s fees are included in the cap but other disbursements (including reports and court fees) and ATE premiums are excluded. Recoverable costs will be assessed by conventional means so defendants costs liability will not be increased. The claimant is not required to notify the defendant of the DBA (as no additional liability is claimed from the defendant) but the indemnity principle means that the claimant cannot recover more than the agreed contingency fee from the defendant. This means that the costs payable may be less than the amount of costs as assessed. Care will therefore be needed, when defending claims presented with the assistance of DBAs, to ensure that any costs paid to the claimant do not exceed the agreed contingency fee. The Ministry of Justice ( MoJ ) is reviewing the position following concerns voiced in the legal press about the drafting of the regulations, which it is said leave a number of uncertainties. It is not currently known whether this will result in their amendment or whether the MoJ will simply continue to monitor their application in practice. Increase in general damages by 10% Following the Court of Appeal s amended decision in Simmons v Castle (2012), see also under Cases below, there will be a 10% increase in the level of general damages in all civil claims for pain and suffering, loss of amenity, physical inconvenience and discomfort, social discredit or mental distress. The intention is to compensate claimants to a certain extent for being unable to recover CFA success fees from losing defendants. The increase takes effect through any judgment or court award on or after 1 April 2013, unless the claimant s claim is funded by a CFA with a success fee that was entered into before 1 April The exclusion for cases with a pre April CFA will not apply in mesothelioma or publication and privacy cases. Offers to settle/part 36 Part 36 is amended to provide an additional sanction (on top of those already in Part 36 in relation to indemnity costs and interest) for a defendant who does not accept a claimant s offer (made on or after 1 April 2013) and then fails to beat it. The claimant will be entitled to an additional amount unless the court considers it unjust to do so. The additional amount will be calculated as a percentage of all damages where the claim is, or includes, a money claim and a percentage of costs for a non-monetary claim as follows: 10% for amounts up to 500,000; and 5% on amounts above 500,000 and up to 1 million The maximum uplift is therefore 75,000. The availability of the additional uplift is intended to lead to more claimant Part 36 offers. Defendants and their representatives will need to ensure that all Part 36 offers are considered with care, particularly where there is a prospect of the claimant beating its offer. The rules do not provide a tapering penalty, or prevent the uplift from applying to last minute offers. 46

47 Causing serious injury by dangerous driving Section 143 of the Act came into force on 3 December 2012, creating a new offence of causing serious injury by dangerous driving. The new offence is triable at both the Magistrates and Crown Court. The offence carries a maximum of five years imprisonment. Disqualification from driving for a minimum period of 12 months is obligatory and the court must order the defendant to remain disqualified until a driving test is passed. This offence was created following pressure from lobby groups campaigning for longer sentences for offences of dangerous driving where serious harm or injury has occurred. There was a perceived gap in sentences between the two year maximum for the offence of dangerous driving and the 14 year maximum for the offence of causing death by dangerous driving. Whereas previously both dangerous driving and inflicting grievous bodily harm could be charged in relation to the same incident, the relatively low conviction rate for defendants charged with both of those offences has also led to the introduction of this new offence, as the requisite level of intent/recklessness for inflicting grievous bodily harm is not required. The definition of dangerous driving remains the same, i.e. that the defendant s driving fell far below what would be expected of a competent and careful driver and that it would be obvious to a competent and careful driver that driving in that way would be dangerous. However serious injury has not been specifically defined. The Act simply states that serious injury means physical harm which amounts to grievous bodily harm for the purposes of the Offences Against the Person Act It is not necessary that any harm should be either permanent or dangerous and neither is it a precondition that the victim should require treatment. Furthermore, in assessing whether particular harm was grievous, account must be taken of the effect on, and the circumstances of, the particular victim. The cost to insurers in providing representation to their policyholders who have been charged with this offence is therefore likely to increase, as the defence may well need to obtain expert evidence in relation to any medical evidence that the prosecution seek to rely on. Furthermore, it is anticipated that the uncertainty as to the definition of serious injury will result in an inevitable influx of cases proceeding to appeal. Defence costs orders The provisions of Schedule 7 came into force on 1 October They make significant changes to the system through which successful defendants and appellants in criminal proceedings (including health and safety, environmental and motor prosecutions) may be awarded amounts from central funds in respect of costs they have incurred defending their position. Under previous legislation, following a successful trial or discontinuance of proceedings, any defendant (whether an individual or a company) in a criminal case was entitled to reclaim their legal defence costs. It was also possible for insurers who provide defence costs cover to recoup the majority of any expenditure. Under the new provisions, the effect of the new section 16A(2) (5) of the Prosecution of Offences Act 1985 for companies and other legal persons is that legal costs cannot be included in a defence costs order, except where the legal costs were incurred in proceedings in the Supreme Court. For individuals, legal costs can be recovered in respect of proceedings in the Magistrates Court and in the Crown Court, on rare occasions (i.e. in respect of appeal proceedings against a conviction or sentence of the Magistrates Court.) The amount of costs awarded however will be limited and more similar to a legal aid rate. What this means in practice, post 1 October 2012, is that companies (or insurers providing defence costs) will no longer be able to claim those costs back if criminal proceedings are discontinued or if a company wins at trial. 47

48 Other Jackson reforms Qualified one way costs shifting ( QOCS ) QOCS applies to claims for personal injury (including clinical negligence) and claims under the Fatal Accidents Acts. The introduction of QOCS is designed to offset the non-recoverability of ATE premiums. QOCS provides claimants with protection against liability to pay defendants costs unless a claim falls into one of the categories of exemption. There is no financial eligibility test. Claimants will still need to cover the cost of their own disbursements (possibly by taking out ATE insurance). If the claimant wins and is awarded damages, they will still become liable for any costs orders made in favour of the defendant, but ordinarily only up to the limit of damages and interest awarded. This includes interim costs orders and costs entitlements against claimants who fail to beat a defendant s Part 36 offer or accept such an offer out of time. Where the claim is found to have been fundamentally dishonest or is struck out because it discloses no reasonable cause of action, is an abuse of the court s process or because of the claimant s conduct, then there will be no QOCS protection at all and the defendant will be entitled to enforce any order for costs without limit (in the case of a finding of fundamental dishonesty, only with the permission of the court). QOCS is only available to claimants who did not have a CFA or ATE insurance in place before 1 April Costs budgeting All parties (except litigants in person) in multi-track cases, and other cases where the court so orders, will be required to file and exchange costs budgets which set out the estimated costs of the case to trial. This will not automatically apply to claims in the Admiralty and Commercial Courts (of any value) or claims in excess of 2 million (excluding interest and costs) in the Chancery Division, Technology and Construction Court and the Mercantile Courts, but the court can still order costs budgeting in these cases. This exemption is currently under review by the Ministry of Justice. The new rules apply to cases commenced on or after 1 April Budgets must be in a prescribed format and will be submitted to the court for approval. Parties can agree budgets and the court will be able to approve these, but not revise them. The court can approve or revise non-agreed budgets and may make a costs management order ( CMO ) indicating the court s approval of the budget (following revision if appropriate). The court cannot approve costs that have already been incurred, but will take them into account when considering the appropriate level of budget. If a CMO is made the court will thereafter control the parties budgets. Parties are required to revise their budgets if there are significant developments in the litigation. Applications for revision should be made as soon as it becomes apparent that the original budget has been exceeded by a more than minimal amount (Elvanite Full Circle Ltd v AMEC Earth & Environment (UK) Ltd (2013)). Following the conclusion of the matter, when recoverable costs are assessed, the court will not depart from approved or agreed budgets unless there is good reason to do so. The Court of Appeal in Henry v News Group Newspapers Ltd (2013) sought to emphasise that they will rarely consider it appropriate to depart from an agreed or approved budget, particularly if the paying party would be disadvantaged by that. In the later case of Troy Foods Ltd v Manton (2013), the Court of Appeal 48

49 however appeared to leave the door open to arguments about good reason to depart from costs budgets, in stating that judges will not treat the court s approval of a budget as demonstrating, without further consideration, that the costs incurred are reasonable or proportionate simply because they fall within the approved budget. However, parties need to be aware that, once a budget is agreed or approved, unless it is revised, there may not be an opportunity to challenge it on detailed assessment. In Safetynet Security Ltd v Coppage & another (2012) and Slick Seating Systems & others v Adams & others (2013), HHJ Brown QC dispensed with a detailed assessment at the conclusion of the matter since both cases had been subject to costs management and the budgets of the receiving party had not been exceeded. Defendants should therefore take the opportunity to challenge the other side s budget at the initial costs management hearing so as not to lose the opportunity of doing so at a later stage. Costs proportionality A new test of proportionality will apply to the assessment of recoverable costs on the standard basis. The new rule applies to cases commenced on or after 1 April 2013 but does not apply to costs incurred in respect of work done before 1 April. Costs will only be considered to be proportionate if they bear a reasonable relationship to the value of the claim, the complexity of the litigation, any additional work generated by the conduct of the paying party and other factors, including reputation or public importance of the claim. Disproportionate costs, even if necessarily or reasonably incurred, may not be recoverable from the paying party where the costs are assessed on the standard basis. The new rule will not apply to the indemnity basis of assessment. When deciding the amount of costs to award, the court will now also have regard to the receiving party s last approved or agreed budget. There has been a particular emphasis in the reported cases on costs not being wasted on excessively long skeleton arguments and strict compliance with the rules regarding skeleton arguments (in both form and content). This new rule should assist defendants in reducing costs payable to a level which is more proportionate to the sums at stake and issues in dispute. Case management and relief from sanctions After 1 April 2013 the courts will be less tolerant of delay and breaches of the Civil Procedure Rules and court orders than has been the case to date and it will be more difficult to obtain relief from court sanctions. There have been a number of reported cases which reflect the new stricter approach to non-compliance with rules and directions. However it should be noted that the court in Re Atrium Training Services Ltd and Conor Williams Ltd (2013), which involved an application for an extension of time, also took a balanced approach and emphasised that it was important not to go to the other extreme and encourage unreasonable opposition to extensions which are applied for in time and involve no significant fresh prejudice to the other parties. Defendants will need to be advised that delay in responding to requests from their insurers and solicitors may result in their being unable to present the defendant s case in full at trial, and may cause unnecessary costs to be incurred. The whole ethos of cost and case management is for judges to be more involved in actively managing the conduct of cases and the recoverable costs. If this leads to a sustained position of delays not being tolerated and legal costs being more tightly controlled, then this should have a positive impact for insurers. Disclosure There is a new procedure for all non personal injury multi-track claims, which gives the court a much greater scope for tailoring disclosure to the particular case. Judges will look carefully at proportionality of costs and the possibility of scaling down disclosure. The new rules require parties to have a good grasp of the disclosure implications at an early stage (possibly even before proceedings are commenced) and will involve significant co-operation with the other parties. 49

50 Expert evidence Parties seeking permission to instruct an expert will, in addition to the existing requirements, need to provide an estimate of the costs of the proposed expert and set out the issues which the expert will address. In connection with the new costs budgeting rules, the courts may also be encouraged to make more use of their powers to limit the recoverable costs of expert evidence in advance. The court will now have the power at any stage in the proceedings to direct experts to give evidence concurrently (known as hot tubbing ). Witness evidence The rules have been amended to emphasise the court s powers to manage witness evidence actively, with the court specifically being given the power to limit the issues on which factual evidence is given, identify the witnesses who may be called and limit the length or format of witness statements. Change to the small claims track limit As from 1 April 2013, the small claims track limit increased for non-personal injury claims from 5,000 to 10,000; the 1,000 limit for personal injury claims is to remain unchanged for the time being, although there is an outstanding MoJ consultation on raising it in road traffic claims at least. The change in the small claims track limit may mean that a greater proportion of litigants pursue their own actions, rather than pay for professional representation. Whilst the courts are not expected to extend the level of latitude offered at present to litigants in person, responding to claims from them often involves dealing with unmerited requests for disclosure, the pursuit of unmeritorious claims and an increase in the work required of defendants and their representatives. If the small claims track limit for personal injury claims is increased, DBAs might become more common in these claims. Pre-Action Protocol for Low Value Personal Injury (Employers Liability and Public Liability) Claims and the extension of fixed recoverable costs Following the introduction of the Pre-Action Protocol for Low Value Personal Injury Claims in Road Traffic Accidents in 2010 for claims of up to 10,000 in value, vertical extension of the protocol to cover claims up to 25,000 and horizontal extension to bring in alongside it the Pre-Action Protocol for Low Value Personal Injury (Employers Liability and Public Liability) Claims has seen the low value protocols extended significantly in Vertical extension 5 July 2013 saw the Civil Procedure Rules Committee sign off the new Pre-Action Protocol for Low Value Personal Injury Claims in Road Traffic Accidents ( RTA protocol ), facilitating the vertical extension of the scheme from 31 July up to 25,000 and capturing all fast track cases. The new RTA protocol applies to all personal injury claims submitted through the portal on or after 31 July 2013 within fast track value bands. However claims valued at over 10,000 (excluding any vehicle related damages) are excluded unless the accident occurs on or after 31 July Claims that have already been submitted through the portal prior to this date will continue to be governed by the original protocol. Secure electronic transfer It was always the intention of the original protocol that secure electronic transfer of information would be delivered by means of the purpose built electronic portal. However, the original protocol did not preclude the use of alternative means, such as facsimile transmission. The new protocol prescribes that the electronic portal must be used. 50

51 The 400 club The new protocol incorporates important changes to ensure claimant representatives are properly instructed, prescribing that they may only sign the electronic claims notification form on their client s behalf if they have written instructions to do so. In addition, for cases where the new protocol applies, the stage 1 fixed costs will only become payable once the claimant s representative has delivered the settlement pack at stage 2. If the much maligned 400 club did ever exist (and this is a matter of debate) then the problem will soon be eradicated. Complex cases The new protocol takes into consideration the likelihood that claims falling within the new value band of 10,001 25,000 will be more complex and harder to quantify. This is to be reflected in the corresponding amendments to the fixed recoverable costs regime, which will see the introduction of a two tier system, with the fixed costs payable at stage 2 of the process doubled from 300 to 600 for claims valued at more than 10,000. Whilst there is a presumption that they will not be required in claims up to 10,000 in value, the new protocol allows for access to medical records and the provision of photographs and witness evidence in more complex cases, where they will assist in the quantification of damages. There is no facility for compensators to challenge the veracity and content of a witness statement should the matter proceed to a stage 3 hearing and insurers will need to decide whether to exit a claim from the process. There is also provision within the new protocol for an additional fee where specialist legal advice is required in complex cases, as well as the facility for claimants to obtain multiple interim payments. However, what constitutes a complex claim to trigger the additional fee (currently 150 plus VAT) is not defined. Late settlements The new protocol also provides clarity as to the fixed costs payable where a claim settles after the court proceedings pack has been delivered at the end of stage 2, but before the commencement of the proceedings at stage 3. This has been a source of confusion for motor insurers, with the Behaviour Committee advising that stage 3 fixed costs should be payable in these circumstances, and some County Court decisions suggesting otherwise. The new protocol resolves this issue by providing for payment of fixed late settlement costs of 250 in these circumstances effectively mirroring the fixed costs payable for preparation at stage 3. Horizontal extension The extension of the protocol into employers liability ( EL ) and public liability ( PL ) claims is expected to cover over 80% of casualty claims, although there are specific types of claim which are excluded from its remit, including multi-defendant EL disease claims, abuse claims, PL disease claims and PL claims against individuals not sued in their business capacity. It applies to claims relating to accidents occurring on or after 31 July 2013 and disease claims which were not presented before 31 July Where defendants follow the strict timescales provided by the protocol, admit liability (without contributory negligence) within 30 business days (EL, 40 business days PL), and keep the claim within the protocol, the fixed costs allowed for claimants solicitors ( 900 on claims of up to 10,000, 1,600 thereafter) present a significant saving for insurers and their insureds. However, the defendant and its insurer must bear in mind the fact that, having admitted liability, there is limited ability to retract that admission, should the true value of the claim be much greater than the 25,000 ceiling, and the fact that the admission includes admission that some form of injury was caused by the alleged incident. 51

52 Reduction of RTA costs The Lord Chancellor decided in February 2013 to reduce the fixed costs paid for pre-issue stages in RTA protocol cases up to 10,000 in value, from a total of 1,200 to 500. This reduction applies to all claim notification forms sent via the portal on or after 30 April 2013 and so has some retrospective effect. The decision sparked considerable protest from the Law Society and from claimant lawyer bodies, two of which applied unsuccessfully for judicial review of the Lord Chancellor (see R (on the application of APIL and MASS) v the Lord Chancellor in Cases below). Fixed recoverable costs Alongside the extension of the low value protocols, 31 July 2013 saw the extension of fixed recoverable costs to cover litigated RTA claims and EL / PL claims which fall out of the low value protocols. The fixed costs apply only to claims where the claim notification form is sent after 31 July 2013 and for the horizontal and vertical extensions, this only applies to accidents on or after 31 July There will be no fixed costs for disease cases falling out of the protocols. Calculated based on a combination of the stage at which the claim settles and the damages recovered, the fixed costs, when combined with the non-recoverability of success fees, should present insurers with a reduction in indemnity spend and greater certainty over their potential exposure. The introduction of fixed recoverable costs in most fast track personal injury claims, first advocated by Lord Woolf as long ago as 1996, may prove to be the boldest step of all and the most likely to deliver sustained savings over time. Review of police bail In May 2013 the Law Society called for a change to police bail practices. At present the Police and Criminal Evidence Act 1984 provides no time limit for police investigating an offence to make a decision on what action to take against a suspect. The Law Society proposed a statutory time limit of 28 days on police bail, with provision to apply to a Magistrates Court for an extension of time where their investigation has not been completed. Delays in police investigations are common and it is a particular problem with fatal or serious injury road traffic collisions where it can often take six months or more for the police/crown Prosecution Service to make a decision on what action to take. The Law Society s proposal is likely to face opposition from the police and CPS as a time limit of 28 days is perhaps unrealistic. In any event, the introduction of a time limit would require primary legislation. The hearings could however be a useful fact finding exercise at an early stage of a case, particularly in relation to a civil claim where currently the police are not obliged to reveal information unless and until a suspect is charged or summonsed for a criminal offence. Traffic Courts In May 2013, the Ministry of Justice announced plans to establish a dedicated Traffic Court in each police area in England and Wales in an attempt to streamline the criminal justice system and ensure that Magistrates Courts time can be allocated to more serious offences. Traffic Courts will however only deal with cases where a defendant does not contest the offence and more serious offences, including causing death or serious injury by careless or dangerous driving, will continue to be dealt with in the Magistrates and Crown Court. Insurers will need to ensure that policyholders do not feel unduly pressured into entering a guilty plea to get things over and done with quickly and that they consider all their options, including taking legal advice where necessary, particularly where there may be a significant civil claim. 52

53 06. CASES Abuse The judgment of the Supreme Court in Various v The Catholic Child Welfare Society in Nov 2012 considered the courts approach to vicarious liability in abuse cases. It contains a detailed review of the path the courts have followed to reach their current position. In this case the issue looked at was vicarious liability where there were two potential organisations who had control over the abusers. The court concluded that there could be dual vicarious liability and it upheld the akin to employment scenario. An employer would not in any circumstance have condoned abusive behaviour and not have expected its employee to engage in such acts. There has been much judicial comment and grappling with terminology regarding this issue. The courts now accept that an employer can be found to be vicariously liable for the acts of abuse by one of its employees (which can include volunteers or those in a position akin to employment) if it is accepted that some form of assault/ abuse occurred; and there is a closeness of connection between the employment of the abuser and the act of abuse. Establishing whether or not there was sufficient closeness remains an area of some debate. In the first significant case on this issue (Lister v Hesley Hall (2001)) the court drew a distinction between the abuse by the teacher/master whose job involved the specific care of the children he abused; and abuse by a gardener/ caretaker who was not employed to have any contact with the children. It is now 12 years since that judgment and in the intervening period the Soham murders by Ian Huntley, a school caretaker, have occurred. It would be interesting to see whether a court would draw the same distinction now or, as seems more likely, conclude that the employment of the gardener/caretaker to be on the same premises as the children with the opportunity to meet them would be sufficient for a finding of vicarious liability. This seems particularly the case given the media frenzy surrounding the abusive behaviour of Jimmy Savile, Stuart Hall and others. Following the publicity surrounding these men and the associated investigations and enquiries (Operation Yewtree, the BBC related Dame Janet Smith review, the three NHS reviews etc), the number of reports to the police of sexual offences has risen by 9%. If the courts accept that there has been abuse (and if there has already been a criminal trial with successful convictions it will be impossible to deny that such acts occurred), and also that there is a closeness of connection between the employment of the abuser and the individual abused, then liability is in effect strict, even though there has been no actual fault on the part of the employer. The liability of the employer derives from their voluntary assumption of a relationship with the claimant and the duties that arise from that relationship and their choosing to entrust the performance of those duties to their servant. There will therefore be no consideration of what steps the employer did or did not take to prevent the abuse occurring. Hence the preference of claimants to frame their case in vicarious liability as it is arguably easier to prove, or at least more difficult for a defendant to defend, and because this is also a significant factor in limitation. It deprives a defendant of the opportunity to argue that it has been prejudiced by the claim proceeding so many years after the abuse occurred. The other case in the last 12 months involves that of Patrick Raggett, the former city solicitor who alleged that he had been abused when attending a Jesuit school. He courted the media long before Savile, Hall, Chethams Music school, the Church of England (Diocese of Chichester in particular) etc became repeated newsworthy topics. Having overcome the limitation and vicarious liability thresholds he proceeded to a quantum only trial to recover he said 5 million in damages. In an 80+ page judgment which contains a detailed assessment of his character and pre-existing narcissistic personality disorder he was awarded general damages of 40,000 even though the court accepted the abuse was at the mild end of the spectrum and had had limited impact on Mr Raggett through the course of his adult life. His special damages 53

54 and interest were just under 15,000 so fell somewhat short of the sum he had hoped for. The main consequences of this judgment have been twofold. Firstly, this is now for many claimants solicitors the starting level for general damages in all cases, with much higher figures being claimed for more severe abusive behaviour causing significant psychiatric injury. Secondly, claimants solicitors have sought to increase their ATE insurance realising that they were at risk on costs where, as happened here, a sensible offer had been made but rejected. From our experience of defending claims of this nature we predict there is likely to be a continuing increase in new claims for the next months. At some stage the issue of limitation will need to be reopened as the claims now being made include those where there was a criminal conviction many years ago or where claimants previously sought to pursue a claim but decided not to due to uncertainty of success. For defendants there has to be a time when there can be some certainty the claims will end. For insurers there is a need to maintain significant current reserves for these claims for at least the next few years but thereafter, given the greater openness and support now for victims to come forward, it can only be hoped that they will choose to do so now and gradually the claims will become few and far between. Aggregation aviation liabilities Aioi Nissay Dowa Insurance Company Ltd v Heraldglen Limited and another This is the first time that an English court has addressed whether losses arising out of the 9/11 attack on the Twin Towers of the World Trade Center were caused by one or more occurrences or series of occurrences arising out of one event for the purposes of the limits and deductibles in the reinsurance contracts. The case was an appeal by the claimant reinsurer under section 69 of the Arbitration Act 1996 from an arbitration award dated 26 January In their award, an experienced and distinguished tribunal concluded that the reinsured losses caused by the attacks arose out of two events (as contended by defendant reinsureds) and not one. The appeal was dismissed by Mr Justice Field and the arbitration award upheld. It had been open to the tribunal to find that there was no basis for concluding that there was any factor amounting to an event of sufficient causative relevance to override the conclusion that two separate hijackings caused separate loss and damage. The tribunal was also entitled to find that there was no sufficient unity of time or location for the losses to have arisen out of one event, notwithstanding that the Twin Towers were part of an overall complex and the closeness in time between the commencement of each flight and the subsequent crashes. The outcome, which does not come as a surprise, will provide greater certainty for both reinsurers and reinsureds. Arbitration/ADR Turville Heath Inc v Chartis Insurance UK Limited Turville s claim against insurers arose out of losses caused in a fire at Turville s property. In particular the parties were in dispute as to whether the building substructure should have been salvaged and re-used. An arbitration clause in the policy (which was a printed clause in a standard form) provided: If you and we fail to agree on the amount of loss, either party may make a written demand that each selects an independent appraiser. The independent appraiser will select an arbitrator within fifteen (15) days.. The independent appraisers will then appraise the loss and submit any differences to the arbitrator. A decision in writing agreed by the two appraisers or either appraiser and the arbitrator will be binding.. On an application by insurers (under s 9 of the Arbitration Act 1996) to stay legal proceedings that had been commenced by Turville so that this procedure might be followed on the basis the clause was an arbitration clause, the court held it was not such a clause. The appraisers essentially acted as experts, 54

55 and even if it could be said that at the second stage of the process (when the matter was referred to the arbitrator) that there was something in the nature of an arbitration, the arbitrator could not reach a decision without the agreement of one of the appraisers. As the judge said: A sole arbitrator must be able and competent to make his own independent decision on all matters put before him. On this occasion insurers application nonetheless succeeded on different grounds, namely that the court could stay the proceedings under the inherent jurisdiction under s 49 of the Senior Courts Act It did so because the parties had initially started down the path contemplated by the clause, and the court thought that route should not now be abandoned. But it might well be said this was a lucky outcome for insurers. The remedy under s 49 is discretionary and is not one to rely on, whereas the court has no room for manoeuvre if the case clearly falls within s 9 of the Arbitration Act. The moral is to ensure either a clear expert or clear arbitration process is written into the policy and to avoid the type of hybrid seen here. Wah (aka Alan Tang) & Anr v Grant Thornton International Ltd & Ors A jurisdictional challenge was made to an arbitral award under s 67 of the Arbitration Act This required the court to decide whether the contractual ADR processes were a condition precedent to commencement of arbitration proceedings. A dispute arose following the expulsion of a partnership from Grant Thornton s network of accountancy and audit firms. The membership agreement contained a multi-tiered dispute resolution clause which required certain procedures to be followed before the dispute was referred to arbitration. As the requisite steps were not followed, the claimants argued that the arbitral tribunal did not have jurisdiction to make the subsequent award. The judge held that the dispute escalation provisions were not sufficiently clear and certain to be given legal effect. The judge observed the tensions between the desire to give effect to what the parties agreed and the difficulty in giving what they had agreed objective and legally controllable substance. He re-iterated that agreements to agree and agreements to negotiate in good faith, without more, must be taken to be unenforceable. Good faith was too open-ended a concept or criterion to provide a sufficient definition of what such an agreement must as a minimum involve and when it can objectively be determined to be properly concluded. However, when the relevant provision is but one part of a concluded and otherwise legally enforceable contract, the court will strain to find a construction which gives it effect. The test was whether the obligations and/or negative injunctions imposed were sufficiently clear and certain to be given legal effect. On the facts of this case, the judge concluded that, although there were detailed provisions in the agreement, the provisions were too equivocal in terms of the process required and too nebulous in terms of the content of the parties respective obligations to be given legal effect as an enforceable condition precedent to arbitration. The challenge on jurisdiction therefore failed. Dispute escalation clauses are often used in long term, high value contracts. If disputes can be resolved by consent without resorting to arbitration or litigation, time and costs will be saved and, it is hoped, damage to the on-going relationship between the parties avoided. The challenge in drafting a multi-tiered dispute resolution clause is to make it flexible enough to deal with unknown circumstances but sufficiently certain for it to be legally enforceable. 55

56 Causation Ace European Group Ltd v Chartis Insurance UK Ltd The insured was engaged in the construction of an energy from waste facility and took delivery of 16 economiser blocks, sent from Romania, for use in two boilers. The blocks consisted of banks of vertical tubes which, after delivery, were found to be cracked. The insured had a marine policy which covered damage in transit excluding inherent vice and an erection all risks policy which covered damage on site. It was agreed that the cracking had been caused by vibration but an issue arose as to whether it had been caused by vibration on the voyage or wind on site. At first instance it was held that the marine insurers were liable. They appealed. The Court of Appeal held that vibration on the journey was the only cause for which there was any evidence and had been shown to be the proximate cause on the balance of probabilities. There was no inherent vice. In any event, once it had been established that the loss was caused by the insured peril and was fortuitous, there was no room for inherent vice to operate and it could not be treated as another proximate cause. The marine insurers appeal was therefore dismissed. DAC Beachcroft LLP acted on behalf of the respondents. Nulty v Milton Keynes Borough Council A series of fires broke out in April 2005 at a recycling plant owned by Milton Keynes Borough Council (the Council ), causing damage estimated at 4.5 million. The possible causes of the fires were electronic arcing, arson or a cigarette carelessly discarded by Mr Nulty, a self-employed engineer. The Council brought a claim against Mr Nulty. Mr Nulty s contractor s liability insurers, NIG, ran the defence without prejudice to also seeking a declaration that it had no liability under the policy due to late notification. The notification provision was not expressed to be a condition precedent and there was therefore liability under the policy. However, the court at first instance held that NIG s position had been prejudiced by the late notification (insurers losing the chance of proving that the cause of the fires was an uninsured peril) and reduced the extent of its liability to Mr Nulty by 15%. (There was no subsequent appeal from that decision.) As regards Mr Nulty s liability to the Council, Edwards- Stuart J at first instance concluded on the facts that although none of the possible causes were inherently likely if taken on their own, the carelessly discarded cigarette was the most probable. He then went on to consider whether such a finding was sufficient to hold that the Council had discharged the burden of proof. At paragraph 219, he stated that it was a rule of law that, where one possible cause of a fire is unlikely but other causes are very much less likely, the first cause becomes the probable cause. NIG appealed against the finding on causation, arguing that the judge had failed to satisfy himself that any single cause was proved on the balance of possibilities and that he had misapplied the law, the above statement being contrary to Rhesa Shipping Co SA v Edmunds (The Popi M) (1985). In The Popi M, Lord Brandon argued that it was inappropriate to apply the reasoning of Sherlock Holmes who said that when you have eliminated the impossible, whatever remains, however improbable, must be the truth. In that case, the House of Lords concluded that in some cases, the result may be that no cause is proven on the facts. Giving the leading judgment in the appeal, Toulson LJ found that the trial judge had erred in law at paragraph 219. However, the trial judge had considered the factual evidence put before him in great detail and had satisfied himself that the Council had proved the cause of the fire. The appeal was therefore dismissed. 56

57 Toulson LJ also provided some useful guidance on the balance of probability test, commenting that the case for believing that the suggested means of causation must be stronger than the case for not so believing. He added that it is unhelpful to summarise the test as requiring a probability of 50% or more, as that carries a danger of pseudo-mathematics. This case is an interesting example of the approach to analysing competing causes of a loss. In complex cases heavily reliant on expert evidence a claimant must be cautious not to assume that, just because their expert s view seems more plausible than that of their opponent, a court will necessarily accept that the claimant has proved their case. Valiant Insurance Co v Sealion Shipping Ltd This case concerned a specialist drilling support vessel equipped with thrusters. In February 2009 the port thruster motor broke down and the vessel was placed off hire. The vessel owners subsequently made a claim under their loss of hire policy. Repairs of a previous failure in 2004 resulted in the replacement of the starboard motor, with the original motor being repaired and kept in storage. In 2009, the vessel owner proposed to move the newer starboard motor to the port side and reinstall the original starboard motor. At the same time, the owner undertook maintenance work, access for which was made easier by the replacement of the motors. During this maintenance work, hydraulics in the starboard motor system failed, resulting in a failure of the starboard thruster, and the vessel was put into dry dock. Shortly after leaving dry dock, the starboard motor failed again and the vessel was put into port. Insurers argued that the events constituted three separate breakdowns, each subject to a 21-day excess and, since none of the breakdowns was responsible for more than 21 days loss of hire, the owner s claim was not payable. In the Commercial Court, the judge found in favour of the assured. The judge held that, although there was no technical causal link between the three failures and they were therefore three separate occurrences, the owner was entitled to treat the entire 82-day period in which the vessel was off hire as being consequent on the original February breakdown. The Court of Appeal rejected insurers appeal. The failure of the starboard hydraulics did not break the chain of causation, as the work which led to the failure was closely and reasonably linked to the owner s efforts to mitigate. It was reasonable for the owner to take advantage of the improved access to undertake further work and the starboard hydraulics failure was incidental to the owner s attempt to mitigate by swapping the motors. Construction Trustees of Ampleforth Abbey Trust v Turner & Townsend Project Management Limited In an unusual case where the entire construction was completed under a series of letters of intent, the judge found the project manager had failed to take the steps reasonably required of a competent project manager for the purpose of finalising the contract between the client and the contractor and was therefore negligent and in breach of contract. The project manager sought to rely on a limitation of liability clause. Although the judge accepted that the contract was freely made, the central factor that led him to conclude that the limitation clause was unreasonable (under the Unfair Contract Terms Act 1977) was a contractual obligation on the project manager to take out professional indemnity insurance to a limit of 10 million. The judge stated that the cost of the insurance would, as a matter of commercial reality, be passed on to Ampleforth within the fees payable. By limiting liability to the amount of fees paid (approx 110,000), the greater part of the insurance contracted for was rendered illusory. The 57

58 second ground relied on by the judge was that it was unreasonable to introduce such a draconian term without specific notice where a relationship of trust had been built up. The argument that the client has implicitly paid for the insurance is debatable as policies are usually purchased on an annual basis. Nevertheless, this decision may make it more difficult in the future to rely on a cap on liability and highlights the need to ensure that insurance clauses and liability caps are drafted in a consistent way. The case also provided some useful guidance on the extent of a project manager s role. In broad terms the project manager will act as the representative of the employer for the purpose of co-ordinating different aspects of a construction or engineering project. Here, the judge referred to the project manager as the coordinator and guardian of the client s interests. The extent of the duties owed by a project manager are still evolving. However, the over-arching nature of the role means that project managers may be exposed to criticism (and claims) whenever something goes wrong. West v Ian Finlay & Associates The validity of a net contribution clause was tested in this construction case. The Wests wished to carry out extensive refurbishment to their family home but were on a limited budget. After protracted discussions with the architect, a specification of works was agreed. This was on the basis that the Wests would arrange the procurement of certain discrete parts of the work themselves so that they would not attract either the architect s percentage fee or the contractor s overheads or profit on these items. The project was a disaster and substantial remedial works were required. The Wests sought to recover damages of over 800,000 from the architect alleging negligent and inadequate advice and failure to notice defects. The architect attempted to rely on a net contribution clause to limit its liability to the Wests. The judge concluded that the clause satisfied the fairness test in the Unfair Terms in Consumer Contracts Regulations However, the judge interpreted the clause, which limited the architect s liability to an amount that was reasonable for them to pay in relation to the contractual responsibilities of other consultants, contractors and specialists appointed, in the Wests favour. He held that other contractors did not include the main contractor. The clause only applied to direct suppliers and not work or services for which the architect received a fee. As the evidence indicated that the main contractor (which was by then insolvent) was jointly to blame for many of the issues, this interpretation substantially increased the amount of damages that the architect was liable to pay. Construction professionals will want to manage their risk in advance by including a net contribution clause in their terms and conditions of engagement to limit the extent of their liability. Equally, such a clause is likely to be resisted by contractors and employers. This decision emphasises the importance of careful drafting of a net contribution clause to ensure it provides the protection intended. Zennstrom & Anor v Fagot & Ors The Zennstroms purchased a property in 2009 for 1.1 million. The property had been completely rebuilt prior to the purchase. Unfortunately, shortly after the purchase, the property was found to be structurally unsafe and had to be demolished. The Zennstroms issued proceedings against the vendors as well as the builder and others involved on the project. As a preliminary issue, the court had to decide whether the vendors owed a duty to the Zennstroms under the Defective Premises Act The Act requires those involved in building and designing a new dwelling to ensure that it is fit for habitation when completed. The duty also applies to anyone providing or arranging such works in the course of a business. 58

59 In order to succeed the Zennstroms needed show that the vendors were acting in the course of a business. They had to prove that the vendors intended to sell the property from the time when they engaged the contractor and also that they did not intend to occupy the property as their home for more than a minimal period. The court held that there was no evidence that the vendors were acting as property developers and therefore the claim failed. They had built the property as their dream home and only decided to sell the property after the work had been completed. The decision makes it clear that it is the intention of the party at the time the works are commenced that is relevant. However, the judge also made it clear that the fact that the vendors had not been involved in property development in the past was not a decisive factor. Contract AJ Building and Plastering v Turner The defendants claimed under their household policy following damage. Insurers accepted liability and instructed remedial works to be carried out by rok, who in turn engaged the claimant building contractors. Whilst insurers paid rok, they went into administration and the claimant was not paid. The claimant therefore claimed directly from the defendants, relying on a mandate signed by them as evidence of a direct contractual relationship. It was held that the claimant had no right to recover under the mandates. There was no direct contractual obligation on the defendants to pay for the work carried out by the claimants. The correct interpretation of the wording of the mandates was that they only obliged the policyholders to pay for works beyond those covered by the insurance policy. Significant features included that insurers had approved the works and agreed to pay for them; the defendants had no part in selecting rok or the claimants; the defendants had not agreed the price; and a reasonable person would not have understood the mandates as meaning that the defendants were accepting personal liability. DAC Beachcroft LLP acted on behalf of the defendants. VTB Capital Plc v Nutritek International Corp and Others and Prest v Petrodel Resources Ltd & Others In VTB Capital the Supreme Court refused to pierce the corporate veil of a company (the Company ) to enable VTB Capital ( VTB ) to pursue a contractual claim against the alleged beneficial owners of the Company (the Owners ) rather than the Company itself. VTB alleged that it had been induced to enter into a loan facility with the Company as a result of fraudulent misrepresentations made by the Owners and sought to pierce the corporate veil so that it could rely on an English jurisdiction clause contained in the loan agreement between it and the Company. The Supreme Court refused to extend the principles of contract law in the novel way put forward by VTB so as to treat a third party as a co-contracting party, since this was not justified in this particular case and was contrary to authority and principle. It was therefore not necessary for the Supreme Court to opine on the existence of the doctrine of corporate separateness or give guidance on the circumstances when the corporate veil may be pierced. However further clarification on this issue came in the later Supreme Court decision of Prest v Petrodel Resources Limited & Others (2013). Whilst Prest was a matrimonial dispute concerning the power to transfer properties owned by the husband s companies to his wife following their divorce, the comments will have ramifications outside the matrimonial sphere. The comments were obiter, the court having decided that there was no need to pierce the corporate veil in this particular case since the properties could be transferred to the wife under matrimonial legislation. The Supreme Court confirmed that the corporate veil can be pierced but only in limited circumstances. There were differences of opinion but the leading judgment given by Lord Sumption is the one that is likely to be relied on in future. He stated that the corporate veil 59

60 may be pierced where a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control. In these circumstances the corporate veil could be pierced, but only for the purpose of depriving the company or its controller of the advantage that they would otherwise have obtained by the company s separate legal personality. Credit hire Singh v Yaqubi The claimant hired a Bentley for five days and then a Rolls Royce at a daily rate of 2,000. The total amount claimed for hire charges was 92,953. The claimant gave evidence that the car was one of a fleet of seven vehicles owned by his business partnership and was needed to maintain the partnership s image of success. The judge found that there was an absence of detailed evidence that the car was needed by the partnership, particularly when there were six other company cars, and dismissed the hire claim in its entirety. On appeal it was held that the burden was on the claimant to show a reasonable need for a replacement Rolls Royce during the period of repair. The required need was the need of the partnership, as the claimant had put his case, and such need was not self-proving. The first question was whether the claimant needed to hire a car at all. The judge was entitled to find that the need for a replacement Rolls Royce had not been established. Very large car hire claims should be scrutinised carefully by the court particularly when the partnership, which was required to establish the need, had a fleet of seven prestigious cars on the same insurance. For such a business claim to succeed, the judge had been entitled to require specific evidence of need, such as evidence of the actual use of the vehicle for business purposes before the accident and the use to which the hired vehicle was put during the period of hire. D&O Shareholder Claims against RBS and Lloyds TSB Shareholders have brought a claim against RBS and a group of former directors (former chief executive Fred Goodwin, former chairman Sir Tom McKillop, former head of investment banking John Cameron and former finance director, Guy Whittaker) alleging that the directors made a series of misleading statements in the lead up to the 12 billion rights issue which was completed only months before RBS was bailed out by the Government. The claimants also allege a breach of the Financial Services and Markets Act 2000 in that critical information was omitted from the prospectus which therefore concealed the fragility of the bank s situation. The claim is for significant damages for the decline in the value of the investment plus interest. It is thought that another shareholder claim is likely to be brought against 15 current and former directors of Lloyds TSB, including former chairman Sir Victor Blank and former chief executive Eric Daniels, alleging that they were misled over the merger with HBOS. The Lloyds TSB claim includes an allegation of breach of fiduciary duty by the directors for failing to inform the shareholders about the dire financial position of HBOS prior to recommending that they vote for the merger. They also claim that they were not informed of a 25.4 billion emergency Bank of England loan given to HBOS prior to the merger and that the Libor scandal is more proof that they were misled into voting to take over HBOS. The claim is likely to include an allegation that the directors knew that HBOS s real interest rates were not being quoted at the time that they recommended the merger. The D&O policy for the RBS and Lloyds directors will be in line to pay hefty defence costs and damages if the claims are successful. 60

61 Steigrad v BFSL The New Zealand Court of Appeal recently overturned the controversial decision of the High Court which saw three former directors of the collapsed Bridgecorp group denied their defence costs under the company s D&O policy. The policy provided a single limit of indemnity in the sum of $20 million for both defence costs and third party liability. In an attempt to recover investors losses, to the tune of approximately $450 million, the liquidators mounted civil claims against the directors. Concerned that their potential recovery under the policy would be reduced by defence costs, they used section 9 of the Law Reform Act 1936 to assert a charge over the entire insurance proceeds, on the basis that their claim exceeded the limit. Whilst the High Court initially held that a third party claimant could have a statutory charge, with priority, over the entire policy proceeds where there was a single limit, the Court of Appeal quashed this decision. Whilst this might seem unfair to third parties, the court acknowledged that it was obliged to consider the structure of the policy. It reached its decision on two grounds. Firstly, insurers owed two distinct and independent liabilities to the insureds: one was to cover their legal liabilities to third parties and the other was to advance defence costs. In this instance, the charge could not attach to insurance monies lawfully paid to reimburse defence costs, even where there was a single limit. The charge could only attach to the balance that was available to meet third party claims after any defence costs liability had been met. Secondly, s 9 could not be used to interfere with the contractual rights of the parties. The decision of the High Court effectively operated to exclude cover for defence costs, which contradicted the fundamental purpose of the D&O policy. As insurers liability to meet third party claims had not yet crystallised, the court ordered insurers to pay defence costs in accordance with the policy terms. Although the need for separate defence costs policies and/or costs in addition policies may have subsided as a result of this latest decision, it is too early for insurers to revert back to their original wordings. This case is subject to appeal to the Supreme Court in New Zealand. For now, the questions surrounding policy limits must continue to be given the highest priority by insurers and insureds. Extended warranties Digital Satellite Warranty Cover Limited and another v Financial Services Authority In February 2013, the Supreme Court issued its judgment in this case, which considered whether an extended warranty agreement to provide repair services could amount to a contract of insurance. The Supreme Court upheld the rulings of the lower courts and found that it could. This is consistent with previous statements issued by the UK regulators about the scope of insurance regulation. In particular, an extended warranty issued by someone other than the original supplier or manufacturer is likely to be a contract of insurance. By contrast, a manufacturer s or retailer s warranty is unlikely to be regarded as a contract of insurance if it merely crystallises or recognises obligations that are of the same nature as the seller s or supplier s usual obligations as regards the quality of the goods or services. The case is of interest because these issues are rarely debated in the courts, but when they are, can help to clarify the scope of regulation. At a more technical level, however, the case raises questions about the extent to which the European passporting regime for insurance business can cover insurance activities which go beyond the scope of the Insurance Directives. For the sake of ensuring a (relatively) straightforward single market in insurance, it is to be hoped that this particular aspect of the ruling is left as a point of purely academic interest. 61

62 Financial Ombudsman Clark v In Focus Asset Management The High Court has thrown into doubt the question of whether an award made by the Financial Ombudsman Service ( FOS ) is final and binding in relation to the matter in dispute. Previously, the case of Andrews v SBJ Benefit Consultants (2010) had established that if a complainant accepted an FOS award, they were prevented from seeking further redress through the courts in relation to the same complaint. Because the ability of FOS to impose a binding award is limited to 150,000 ( 100,000 prior to 1 January 2012), complainants used to face the dilemma of either taking the bird in the hand of an FOS settlement, or refusing the offer and fighting in court for the full value of what they believed their claim was worth. This latest ruling raises the possibility of complainants bringing a successful claim through the FOS in order to build a fighting fund to finance an action in the High Court. The decision is being appealed and is currently listed to be heard in late October. Fraud Fari v Homes for Haringey This is one of the first cases to follow last year s Summers v Fairclough Homes Ltd, where it was found that a grossly exaggerated case can be struck out as an abuse of process in exceptional circumstances. This case provides guidance on the meaning of exceptional. Mrs Fari made a claim for personal injury and losses following a very minor tripping incident in which she allegedly sustained a knee injury. Her husband also gave evidence that he was unable to work due to the care that he had to provide to his wife following the accident. However, video footage showed that Mrs Fari had in fact grossly exaggerated the extent of her injuries. Whilst the claim was presented at around 800,000, HHJ Mitchell found that a true assessment of the claim was in the region of 1,500. The claim was struck out as an abuse of process under CPR 3.4 and the claimant was ordered to pay the defendant s costs. Applying Summers, he said This is a case of striking out because there has been a complete gross exaggeration of symptoms by Mrs Fari, aided and abetted by her husband. This case is an important step forward in recognising that a grossly exaggerated claim can amount to an exceptional circumstance and therefore be struck out as an abuse of process. Furthermore, the court has now given the defendant permission to launch committal proceedings for contempt of court against both the claimant and her husband and we eagerly await the outcome to see whether they are indeed given custodial sentences, which would send out a clear deterrent message. Hussain v Amin and Charters Whilst the appeal was primarily in relation to an earlier costs decision, the court went beyond this to comment on the defence that had been relied upon by the defendant in the claim itself. It stated that in cases where a claim is defended on the belief that the accident was fraudulent, the defendant should plead fraud in their defence and the burden of proof is then on them to establish that the parties staged the accident between them. The court s comments have been subject to various debates as to whether they are consistent with earlier case law/cpr but the case itself has highlighted at the very least that defences should properly set out the facts upon which a defendant is relying. Mere inferences of fraud falling short of pleading fraud are likely to be challenged by claimants and the courts of their own volition. It also highlights the importance of re-assessing the basis of any defence to a claim throughout the course of the case and following further investigations. 62

63 Versloot Dredging v HDI Gerling & 6 Ors This case concerned a claim under a hull and machinery policy in respect of a partial loss due to engine room water ingress. The vessel was insured under the terms of the Institute Time Clauses Hulls , covering the standard named perils including perils of the seas. Under the terms of the Inchmaree clause, the vessel was also insured against loss or damage caused by the negligence of masters, officers, crew or pilots, provided the same did not result from want of due diligence by the assured, owners or managers. The defendant underwriters raised three alternative defences, contending that: the loss was not caused by a peril of the seas but rather by crew negligence, the latter being uninsured under the Inchmaree cover because the failure resulted from want of due diligence on the part of the owners or managers; the loss was caused by the unseaworthiness of the vessel to which the assured was privy, meaning that no liability attached pursuant to s.39(5) Marine Insurance Act 1906; the claim was forfeit because the claim had been supported in its presentation by a fraudulent device, namely a letter from the assured to the underwriters solicitors falsely stating that the bilge alarm had sounded before the onset of the flooding. Insurers failed on the first two grounds. However, applying the Court of Appeal decision in Agapitos v Agnew (2002), the judge reluctantly held that the assured, in making the fraudulent statement about the bilge alarm, had forfeited the entirety of its claim. The judge noted the existing legal authorities, to the effect that an assured will see his claim defeated where he seeks to deploy a fraudulent device to improve or embellish the claim, even though the claim was otherwise a valid one and would likely have succeeded without it. It is enough that the device relates directly to the claim, and would tend to yield a not insignificant improvement in the claim s prospects. The judge was however critical of the low threshold of materiality associated with the fraudulent device defence, noting that the statement in this case had been a reckless untruth, not a carefully planned deceit. He would prefer, he said, that the court were permitted to look at what was just and proportionate, taking into account all the circumstances of the case. The judge noted, however, that this was not the position under the law as it stands. Permission to appeal has been granted. (See also the Law Commission s review of insurance contract law under Consultations, above, which looks at proposals for fraud.) Health and safety sentencing Whilst sentencing companies and individuals for health and safety offences continues to throw up inconsistencies from the court, there has been more uniformity over the last six months due to greater use of the sentencing guidelines. The three cases of corporate manslaughter which have been before the courts show no evidence of the guideline figure, a minimum of 500,000, being followed. In the New Year one of the defendants in a case for trial is a substantial limited company and it is hoped that the court will offer guidance on when the guideline figure should be followed. The guidelines are increasingly used in sentencing of health and safety offences in fatal cases, where the starting figure should be 100,000. There have been a number of cases over the last 6 12 months where the guidelines have been referred to by the court and the fines have substantially exceeded the guideline figure. In one case, the Court of Appeal indicated a sum of 350,000 was within the appropriate range, but at the top of it. The courts have previously been reluctant to fine a company such a figure as to put it out of business but the Court of Appeal recently upheld a decision where the fine would most likely do just that. Further, they have been more proactive in questioning whether, where the company has gone into administration since the accident, this was genuine or simply a financial gambit to avoid paying the fine. The court can order a forensic examination of the accounts and is increasingly doing so. 63

64 Costs are becoming an ever increasing factor and linked to it is the issue of delay. In the Lion Steel case the judge was critical of the prosecuting authorities for failing to act promptly and as a result only a percentage of their costs was allowed. If we link this greater proactivity of the court with the introduction of Fees for Intervention, there can be no doubt that costs and delay are going to become far more important and relevant in the months to come. Jurisdiction and applicable law Ust-Kamenogorsk Hydropower Plant Jsc v Aes Ust- Kamenogorsk Hydropower Plant LLP In this case the Supreme Court confirmed that it had jurisdiction to grant an anti-suit injunction to halt foreign proceedings brought in breach of an arbitration agreement even where there was no actual or intended arbitration. However, following the ECJ decision of Allianz SpA v West Tankers Inc (2009), this power will only be available where the foreign proceedings were commenced in jurisdictions which fall outside the EU (i.e. outside countries governed by the Brussels Regulation and Lugano Convention). Wall v Mutuelle De Poitiers Assurances The claimant sustained a catastrophic injury as a result of a road traffic accident in France. Liability was not in issue and it was common ground that Rome II applied so that French law applied to the assessment of damages. The claimant contended for the instruction of a panel of experts such as would usually be instructed in a catastrophic case before the English courts. The defendant, the French insurer, argued that any expert evidence should be restricted to that which would usually be placed before the French court given that it was accepted that French law governed the assessment of damages. The English court was asked to determine, as a preliminary issue, whether the issue of expert evidence fell to be determined: a. by reference to the law of the forum (ie. English law) on the basis that it was an issue of evidence and procedure within Article 1.3 of Rome II; or b. by reference to the applicable law (ie. French law) on the basis that it was an issue falling within Article 15 of Rome II. The court held that the question of which expert evidence a court should hear was a question of evidence and procedure and therefore properly fell to be determined in accordance with the law of the forum which was, in this case, English law. The defendant has applied for permission to appeal the decision. Motor repairs subrogation Coles v Hetherton The Commercial Court has given two judgments on three preliminary issues relating to subrogated claims for repairs completed by RSA Insurance. The decision has been appealed and the Court of Appeal will hear argument on 16 October The issues as decided were: Measure of loss: where a vehicle is negligently damaged and is reasonably repaired (rather than written off), is the measure of the claimant s loss taken as the reasonable cost of repair? The judge held that the loss suffered is the diminution in value of the vehicle at the time of the incident, which should ordinarily be measured by the cost of remedying the damage. However, the cost of repairs is merely a way of measuring the loss and the loss can be established in other ways, such as by reference to estimates or expert opinion. He also found that, whilst issues of mitigation may arise where the loss is a consequential loss, such as hire, it cannot apply to the assessment of direct loss such as diminution in value unless there is a causative link between the wrong in respect of which damages are claimed and the action or inaction of the claimant. The compensation for damage done is for loss of value and so is not dependent on repairs being done, or the cost of those repairs being paid by the claimant. 64

65 Test of reasonable repair charge : if a claimant s insurer has arranged repairs, is the reasonableness of the repair charge to be judged by reference to (a) what a person in the position of the claimant could obtain on the open market; or (b) what his or her insurer could obtain on the open market? The judge found that the correct answer was (a). The claimants dealings with their insurers and their insurers actions in relation to the indemnity granted are res inter alios acta, in the context of assessment of diminution in market value or costs of repair and behind the curtain for any tortfeasor who seeks to argue about mitigation of loss in payment of repair costs. Recoverable amount: where a vehicle is not a writeoff and an insurer indemnifies the insured by having repairs performed and paying charges for those repairs, and where the amount claimed is no more that the reasonable cost of repair, is that amount recoverable? This issue was not argued before the judge and he was asked by both parties to refrain from answering the question. However, the judge commented that an overall figure for the reasonable cost of repair of damage to a vehicle may be justified, even if the individual items in the repair costs paid are not reasonable. The cost of repairing damage must be treated in the round, because it is to be taken as the measure of the loss suffered which is diminution in the value of the vehicle. If a package deal for repair was agreed, then it would be the reasonableness of the package as a whole which was relevant, if any issue of mitigation could arise. Personal injury Barker v Lancashire The Court of Appeal reinforced in this case the importance of ascertaining the nature of a highways defect. The claimant suffered injuries when he tripped over a raised cobblestone in a cobbled area surrounding cherry trees in a semi-pedestrianised street. Whilst the protruding cobblestone presented a foreseeable risk of injury and arose from the local authority s failure to maintain the pavement, the area had been the subject of annual inspection only two and a half months before the accident. It was accepted that if the cobblestone protruded by more than 20mm at that time it would have been reported and repaired and therefore the defendant s statutory defence defeated the claim. However, the tree pit as a whole was in a state of untidiness and poor repair; if the court had been required to consider the condition of the entire tree pit it would have found the local authority in breach of its statutory duties at the date of the inspection. In this case, the focus of the pleaded case on the defective stone as compared with the area around the tree meant that the claim was successfully defeated. defendants and their insurers should take care to ensure that they check the pleaded claim, and, where appropriate, seek clarification of the case, as, just as in this case, focus on the defect involved in the accident may assist in defeating the claim. 65

66 Blair-Ford v CRS Following the claimant s injury in a welly-wanging game, the technique used for this activity and the extent to which it needed to be the subject of formal risk assessment and instruction came under scrutiny. Whilst the defendant had performed a dynamic assessment of the risks, it did not consider the potential methods which may be used to throw wellies and the risk assessment performed on the spot did not take into account the risk presented by the unusual technique used by the claimant. However, given the variables presented by the variety of techniques, and the unforeseeable manner in which the claimant threw the welly, the lack of formal risk assessment was not fatal to the defence of the claim; the risk of injury suffered by the claimant was not something against which the defendant should have provided protection. The decision shows that the lack of formal risk assessment is not always fatal to the defence of a claim, and, if appropriate, a more informal risk assessment may be sufficient. Joseph Johnson v Ministry Of Defence and Hobourn Eaton Limited Mr Johnson brought a claim for noise induced hearing loss ( NIHL ). He pleaded a date of knowledge of 2007 when he was approached by a representative of a claims management company at his local supermarket. The claimant conceded that he was first aware of a hearing problem in 2001, which he regarded as insignificant. The court at first instance held the claimant s claim to be statute barred and fixed the claimant with actual knowledge of his condition by 2001 or in any event by 2006 at the very latest. The court held it would be inequitable to exercise its discretion pursuant to s33 Limitation Act The claimant appealed on the basis of both actual and constructive knowledge. The court reaffirmed that the correct approach to S14(3) lies within Adams v Bracknell Forest Borough Council (2005) and specifically within Lord Hoffman s speech at paragraph 33, where it is stressed that the test for knowledge is an objective one. Dame Janet Smith held that a reasonable man in the 21st century would be curious about the onset of deafness at the relatively early age of 61 and would wish to find out what was causing it. Accordingly the court would expect the reasonable man in this case to have sought specific medical advice in relation to symptoms of deafness. The GP, in 2006, was simply asked about the presence of wax in the claimant s ears had the claimant complained of deafness in 2001 or 2006, in view of the GP s close proximity to the Chatham Dockyard, the GP may well have considered noise exposure as a cause of the claimant s hearing difficulty. It was held that the reasonable man in this case would have consulted his GP by about the end of Dame Janet felt that had the claimant presented himself to his GP in 2001 enquiring as to the cause of his symptoms, the diagnosis of NIHL would have been made. The appeal was accordingly dismissed. Smith (No. 2) v MOD This is a follow-up to the Smith (No. 1) case decided three years ago, although with a different set of claimants. The case was brought by the families of soldiers killed in Iraq. Some of the soldiers died when the Land Rovers in which they were travelling passed over improvised explosive devices, and others in a friendly fire incident. The families argued that the deaths were caused or contributed to by inadequate provision of equipment and, in the friendly fire incident, also inadequate training. Claims were brought against the Ministry of Defence both in negligence and for breaching the soldiers right to life under article 2 of the European Convention on Human Rights ( ECHR ) by failing to take adequate steps to protect them against known risks to their life. 66

67 The key issue was whether and how the ECHR applies extraterritorially to protect British troops abroad, specifically when British troops operate in areas not under UK control. The Supreme Court held that the three soldiers who had died were still subject to article 2 ECHR at the time of their deaths. The applications to strike out the claims on a variety of bases, including the extent of combat immunity, failed and the cases will now proceed to full determination of all of the issues. However, even though their claims were not struck out, the claimants were warned that, as the claims stood, they were unlikely to be successful and it was implied by the court that to have a chance of success they would need to make a narrow, specific, and not overly ambitious or interventionist case. Taylor v A Novo (UK) Limited The Court of Appeal was required to consider the control tests set out in McLoughlin v O Brien (1983) and the subsequent cases, including those relating to the Hillsborough disaster. Here the claimant was present at her mother s death in hospital, but did not witness the accident causing her injuries three weeks earlier. Whilst the claim was pursued for nervous shock as a secondary victim, the claimant did not succeed. The claimant was not a witness of the immediate aftermath of the accident in which the injuries were suffered, and the death resulted from deterioration in her mother s condition rather than her condition immediately after the accident. Uren v MOD Senior Aircraftman Uren suffered injuries in a team tournament at work, which involved a relay race where competitors collected plastic pieces of fruit from a shallow pool. The claimant dived into the pool (as did many others), as a result of which he suffered a spinal fracture and was rendered tetraplegic. The level of instruction given prior to the event, and the risk assessment performed on the activity, failed to consider the manner in which the game was played, the risk of competitors diving, or the clear risk of injury. Whilst it would have been sufficient to discharge the duties owed had a warning of the risk been given to the competitors, as the risk of injury was more than minimal, the failure to take steps to minimise the risk resulted in the defendants being found to have been in breach of duty. Wallace v Follett This case deals with the terms that govern the annual written confirmation of life and medical examinations in periodical payments orders ( PPOs ). PPOs compensate severely injured claimants in high value personal injury claims in the form of continuing regular payments (usually paid annually or quarterly) for some heads of future loss (predominantly care and case management costs) generally for the rest of their lives. These orders incorporate quite detailed terms covering the administration, payment and indexation of those payments. The underlying terms are now largely agreed and therefore, in the more straightforward cases, the orders are capable of agreement with the minimum of fuss. However, disputes occasionally arise regarding the terms and such a dispute arose in this case. The Court of Appeal held that a compensator should: have the right to suspend payment in the absence of the annual written confirmation of life without first having to obtain a court order; and as the compensator is a general insurer, have an appropriately restricted right to arrange medical examinations for the purposes of setting aside its reserves to enable it to comply with its regulatory duties. During submissions, reference was made to Mr Justice Mackay s description in Long v Norwich Union (2009) of the balance of benefits and burdens for both sides in this type of order. An appropriate balance needs to be struck which facilitates the continuing relationship that exists between claimants and compensators under such orders and both need to bear this in mind when agreeing terms. This case is also notable because the 67

68 Court of Appeal accepted that it does have jurisdiction to determine disputes involving the discrete terms of PPOs if the parties cannot reach agreement. Williams v Williams (deceased) The appellant was the mother of the infant claimant, who sustained serious brain and spinal injuries when the defendant, who was high on drink and drugs, lost control of his vehicle and swerved into the path of the mother s car. The defendant did not survive the accident. His insurers accepted primary liability but sought to bring a third party claim for a contribution against the mother, arguing that the infant s injuries were caused by her inappropriate selection of car seat. At the material time, the mother s car was fitted both with a booster seat and a forward facing child seat with a 5-point harness. The manufacturer s instructions stated that a failure to use the booster seat in a manner appropriate to a child s size could increase the risk of serious injury or death. It was not disputed that the mother had read those instructions. On this occasion she had elected to place her daughter on the booster seat, having satisfied herself that it was safe for her to do so, by virtue of her weight, and on taking advice from other parents. The judge at first instance found that whilst the mother had not acted illegally by selecting the booster seat instead of the seat with a 5-point harness that was readily available to her, she had acted negligently in doing so. Applying the principles in Froom v Butcher (1976), the judge found that the infant s injuries were causally linked to the inappropriate use of the booster seat and, had the harness seat been used instead, were likely to have been prevented. In the circumstances, the mother should contribute 25% of any damages and costs which fell to be paid by the defendant. The mother appealed the decision, arguing that: the judge gave too much weight to the manufacturer s instructions having regard to the fact that the infant satisfied three out of five of the minimum requirements for safe use of the booster seat, and the fact that such devices were commonly used for infants of a similar age and weight to the infant; it was not reasonably foreseeable that the decision to use the booster seat would result in materially greater injuries if an accident occurred; and the judge was wrong to place weight on the fact that there was a safer option available, particularly in the absence of any evidence to suggest that a child who did meet the manufacturer s minimum criteria would have been safe on the booster seat. Dismissing the appeal, the Court of Appeal held that the judge at first instance had approached the issue of contributory negligence in entirely the correct manner. Insurers should be mindful of the possibility of claims for contribution against parents/guardians in road traffic cases involving injury to young child passengers, particularly those involving high velocity impacts and serious injuries. In such cases, early investigations regarding the mechanics of the accident, together with medical opinion as to causation of the injuries suffered are critical. Policy coverage Ace European Group and others v Standard Life Assurance Ltd In December 2012, the Court of Appeal upheld the High Court s decision in this case and allowed Standard Life to recover in full a 100 million cash injection it had made into its suffering Life Pension Fund (the Fund ) under a mitigation clause. 68

69 Following the Lehman Brothers crash and the collapse of the asset-backed securities market, the Fund saw a one-day fall in value of 4.8%, following which Standard Life received a raft of customer complaints. It calculated that it was vulnerable to 124 million worth of misselling claims based on the fund s literature, which had marketed it as a secure, non-volatile fund, and so it made a 100 million payment to reverse the sudden price drop, without first seeking the consent of its liability insurers. It then sought to recover the payment from insurers. Standard Life s policy was for 100 million and provided cover for Mitigation Costs, which were defined as any payment of loss, costs or expenses reasonably and necessarily incurred by the Assured in taking action to avoid a third party claim or to reduce a third party claim. Standard Life claimed that the 100 million payment was Mitigation Costs, in that it was a loss reasonably incurred to avoid or reduce third party claims and that it was recommended by the FSA. The High Court held that Standard Life could recover the entire payment from insurers and the insurers appealed. The central issue in the appeal related to the mixed motive behind the payment, which insurers alleged was made not simply to reduce or avoid third party claims, but to protect the company s reputation, and whether any monies that were recoverable under the policy should be apportioned by reference to the insured and uninsured interests. The Court of Appeal upheld the lower court s ruling and held that the whole payment was incurred for the insured purpose of Standard Life mitigating its loss. Just because a secondary, albeit intentional, objective was also achieved did not mean that part of the payment was irrecoverable. The court also rejected insurers proposition that the default position was akin to that in marine property insurance i.e. that apportionment applied where both the insured and the insurer benefitted from the payment in question. This principle did not extend to liability insurance. Following this case it will be vital to review policy terms to ensure that mitigation costs cover is not wider than intended. Consideration should for example be given to making obtaining insurers consent to a payment made under the clause a condition precedent in order to control exposure. Amlin Corporate Member v Oriental Assurance In 2008, a passenger cargo ship sank off the coast of the Philippines after sailing into the midst of typhoon Frank. The cargo owners sued the shipowner and also brought a direct claim against the cargo liability insurer, Oriental. Oriental was reinsured by various Lloyd s syndicates, led by Amlin, on an excess of loss basis. The reinsurance contract incorporated the conditions of the underlying insurance policy and contained a follow the settlements provision: To follow all terms, conditions and settlements of the original policy issued by the Reinsured to the Insured, for the period specified herein, in respect of sums and interests hereby reinsured. Both the reinsurance and the underlying insurance also contained a typhoon warranty. The reinsurance contract was subject to English law and jurisdiction, whereas the underlying insurance was subject to Philippines law. Reinsurers brought a claim in the High Court for a declaration that they were not liable to indemnify Oriental under the terms of the reinsurance contract on the basis that the typhoon warranty had been breached thereby discharging them from liability under the reinsurance contract. Oriental applied for a stay of proceedings pending the judgment of the Philippine courts in the claims against Oriental, where the same argument over breach of the typhoon warranty was in dispute. 69

70 The judge dismissed Oriental s application, against which decision Oriental appealed to the Court of Appeal. The Court of Appeal rejected Oriental s appeal, finding that the judge had applied the correct test when assessing Oriental s application for a stay. The general rule is that a stay should only be granted in rare and compelling cases and reinsurance is no exception to this rule. Furthermore the follow the settlements clause contained in the reinsurance policy did not overturn that rule. The judge had discretion to grant a stay, and the inclusion in the reinsurance policy of an English law and exclusive English jurisdiction clause was just one factor to be considered when exercising that discretion. The Court of Appeal also held that the judge was correct to consider the likely length of the Philippines proceedings estimated at 10 years when deciding whether to grant the stay. Following the Court of Appeal s decision, the trial of the reinsurers claim for a declaration of non-liability due to breach of the typhoon warranty was heard in June 2013, with judgment handed down on 31 July The judge found in favour of the reinsurers, holding that both limbs of the typhoon warranty had been breached: limb 1, in that the vessel sailed from a port where there was a typhoon warning in place and limb 2, on the basis that the intended route was within the possible path of the typhoon. It remains to be seen whether the Philippines court reaches a decision at odds with that of the English court on the same issue of breach of warranty. In that event, Oriental would find itself liable to the claimants but without a reinsurance recovery. AstraZeneca Insurance Company Ltd v XL Insurance (Bermuda) and ACE Bermuda Insurance Ltd In a judgment with major ramifications, the AstraZeneca Insurance Company ( AZICO ) insured the AZ Group under a policy that was based on a Bermuda Form but with an English choice of law clause. AZ manufactured an anti-psychotic drug, Seroquel, which was the subject of litigation in the United States. Over 30,000 plaintiffs alleged that Seroquel caused diabetes or diabetes-related disease. AZ defended these claims and ultimately disposed of or settled them without any admission of liability. AZICO indemnified AZ, subject to certain policy exclusions, in respect of both the defence costs incurred and the settlement sums that had been paid. AZICO s reinsurers, ACE and XL, denied that they were liable to reimburse AZICO for either costs or settlements. Reinsurers main argument was that the policy would only provide indemnity if AZ was actually liable to the plaintiffs who had brought the claims and could therefore prove that there would be a judgment against them, based on a proper analysis of the law. AZICO said this was a wrong construction of the policy, an incorrect reading of English law and commercially untenable. In the court s first consideration of Bermuda Form construction issues, Mr Justice Flaux found that the claim against reinsurers for both the settlement sums and the associated defence costs failed in the absence of proof of liability for the underlying claims. He rejected AZICO s argument that the policy provided an indemnity if the insured settled an alleged liability, dismissing AZICO s arguments as regards the numerous references to actual or alleged liability in the policy. Instead, he focused on the use of the word liability in the insuring clause and did not find any wording that would extend the scope of coverage. There was no stand alone costs cover but the policy s definition of Damages included defence costs. AZICO argued that although AZ s own costs could never be Damages, namely something it was obligated to pay by reason of judgment or settlement, nor could liability to pay such costs be imposed by law, nevertheless the costs were covered by inclusion in the definition. The judge rejected this, finding no basis for implying that defence costs cover was a free-standing provision. Costs were only recoverable when AZ was liable. The case is due to be heard before the Court of Appeal in the autumn. DAC Beachcroft is acting on behalf of AstraZeneca Insurance Company Ltd. 70

71 Bate v Aviva Following a fire, the claimant sought an indemnity against the defendant who provided cover for a dwelling named Long House on his estate. Insurers avoided the policy for non disclosure and breach of condition precedent. The Commercial Court held that there had been material non disclosure and breach of condition precedent and insurers were not in breach of ICOB standards. In particular, the c laimant, who was an insurance professional, knew that he should have disclosed substantial building work, in relation to which there was a condition precedent requiring prior notification, and that he was conducting business there. He had also been actively dishonest in misrepresenting that an earlier fire on the premises had occurred at a previous address. Whilst Mr Bate may have plausibly argued that each of the many alleged grounds were not material in isolation, it was the overall flavour of the claim that was his downfall. Beazley Underwriting Ltd and others v Al Ahleia Insurance Company ( AIC ) The claimant reinsurers disputed whether they were liable under their reinsurance contract with the defendant insurers following a claim by the Kuwait Oil Company in relation to a crude oil storage tank, which was one of 15 new storage tanks being constructed. The reinsurance contract contained a claims control clause ( CCC ), compliance with which was a condition precedent to reinsurers liability. The CCC contained obligations under subparagraph (b) to furnish information to the reinsurers who would have the right to appoint adjusters and control negotiations and settlements, as well as the right under subparagraph (c) to approve any admission of liability and settlement. Reinsurers alleged that the insurers, and in particular AIC which handled the underlying claim on behalf of the other insurers, committed various breaches of the CCC and that reinsurers were therefore under no liability for the storage tank loss. It seems AIC appointed its own loss adjuster without prior approval who adjusted the claim from an initial US$6m to US$19m, without regard to a LEG2 Exclusion Clause in the underlying policy. Discussions then took place with one of the other reinsurers who subsequently settled its share and split from the main reinsurance market. That led to further discussions with KOC and an alleged admission of liability and settlement of the claim by AIC. Mr Justice Eder found that the CCC operated as an exemption clause and that reinsurers could only rely upon it if the words are clear on a fair construction of the clause. On the facts, there were no negotiations and the prohibition on settlement had no application to any settlement, compromise or admission of liability in respect of an insurer s own retention or the other reinsurer s share (not least because the reinsurers knew that the other reinsurer was seeking to settle). It was therefore held that insurers had not breached their obligations and were not barred from pursuing their claim against reinsurers. The substantive dispute may now proceed to its hearing in November This will consider, for the first time, the scope and effect of the LEG2/96 Exclusion Clause, frequently used as a model Consequences defects wording. EUI Limited v Bristol Alliance Partnership Limited The Court of Appeal overturned the first instance decision in this case, which concerned motor indemnity. In an attempted suicide bid, Mr Williams deliberately crashed his car into the House of Fraser store in Bristol, owned by Bristol Alliance, causing property damage in excess of 200,000. Bristol Alliance s property insurers paid the claim and brought this subrogated action against Mr Williams and obtained judgment against him. The property insurers sought to enforce the judgment against Mr Williams motor insurers, EUI Ltd, under s.151 of the Road Traffic Act 1988 (the Act ), which places a statutory duty on motor insurers to satisfy a judgment against their insured. EUI Ltd argued that deliberate acts 71

72 of the insured were excluded under the policy. Insurers for Bristol Alliance submitted that s.145 of the Act requires motor insurance policies to cover all liability for damage to property up to 1 million, howsoever caused, so s151 had to be read in that light. Therefore, on the proper construction of the policy with s.145 and s.151 of the Act and the European Directives on motor insurance, it was said EUI had to cover damage to property including that deliberately caused. The judge at first instance decided as a preliminary issue that the claimant insurer was entitled to recover from EUI and that any exclusion was of no effect so far as it related to third parties. The exclusion in the policy was limited to prevent Mr Williams bringing an action against EUI Ltd for damage suffered by him as a result of his own deliberate act. However, the Court of Appeal held that not all damage to property must be covered by the motor insurer. Various forms of liability could be excluded by agreement between insurer and insured, and the terms of the policy expressly excluded damage caused by the deliberate acts of the driver. As such, liability for the damage caused to the House of Fraser store was not covered under the policy. It could not be right that the only requirement of s.151 was that the liability was of a kind which ought to have been covered by a policy complying with s.145. This judgment makes clear that where an insurer excludes cover for deliberate acts, it will not be required to provide an indemnity nor meet a third party claim under the Act. It is therefore important to consider carefully the exclusions in the relevant motor insurance policy as this will have a bearing on prospects of successfully recovering from motor insurers under the Act. (1) McManus (2) Leadbetter (3) Seddon (t/a McManus Seddon Runhams (A Firm)) v European Risk Insurance Co ( ERIC ) The High Court s decision on 17 January 2013 addressed a blanket notification of alleged circumstances under a solicitors professional indemnity policy. The claimants were partners of a high street firm, McManus Seddon Runhams ( MSR ). In June 2011 MSR took over another local firm which itself had taken over Sekhon Firth, a firm that undertook residential conveyancing work. MSR was the accepted successor practice. The claims made policy required MSR to notify ERIC of any Circumstances which may in future have given rise to a claim. Between November 2011 and May 2012, MSR, as successor practice to Sekhon Firth, received 17 claims related to conveyancing matters. MSR investigated the transactions conducted by Sekhon Firth and found a consistent pattern of breaches in reporting to lenders. With renewal approaching, MSR notified ERIC by letter headed Blanket Notification of Circumstances which may give rise to claims. The letter concluded that every file conducted by Sekhon & Firth and its other predecessor firm contains or is more likely than not to contain examples of malpractice. The letter sought to notify as Circumstances anticipated shortcomings in circa 5,000 plus files. ERIC rejected the bulk of these files as valid Circumstances, claiming that MSR had not [identified] the specific incident, occurrence, fact, matter, act of omission which would give rise to a claim on each individual file. The court held that ERIC s rejection was clearly wrong but declined to grant the wide declaration sought by MSR. 72

73 The judge referred to earlier cases where blanket notifications were held to be valid in relation to later claims even though the notifications had not set out the individual client, specific transaction or nature of the circumstance. ERIC had therefore been wrong to reject circumstances without an identified specific incident, occurrence, fact, matter act or omission. Instead the issue depended on the nature of any future claim and whether it arose from a validly notified circumstance. The judge however refused to grant the declaration sought and determined that a number of areas of uncertainty relating to the underlying files, such as fee earner identification, confidentiality prior to claims being made and relevance of the use of non fee earners, meant the scope of the notification was better left until such time as a claim(s) was/might be made. M J Gleeson Group plc v Axa Corporate Solutions Assurance SA In determining preliminary issues in a claim by the claimant building contractor against its insurer, the court was required to consider the scope of the indemnity cover for defective workmanship of subcontractors under a public liability insurance policy. It was held that for the purposes of the additional indemnity in respect of defective workmanship of subcontractors in Memorandum 23, Damage to Property as set out in the general insuring clause and exceptions was an essential pre-condition of cover. Memorandum 23 was not a self contained insuring clause. Privilege R (on the application of Prudential) v. Special Commissioner of Income Tax (January 2013) Legal advice privilege ( LAP ) entitles a party to refuse to divulge legal advice to third parties such as the police, Prudential Regulatory Authority/Financial Conduct Authority, HM Revenue and Customs and other regulatory bodies as well as in court proceedings. The privilege has traditionally only been available where the legal adviser is a lawyer a solicitor, barrister or suitably qualified foreign lawyer. In recent times, however, accountants in particular have agitated for revision of the law, with focus for change gravitating around tax advisers who have increasingly found their clients asking for legal advice on taxation matters, not just accountancy advice. At its simplest the argument is that in circumstances where a lawyer and an accountant are asked to provide legal advice on the same tax issue, why should the advice of the lawyer attract LAP when that given by the accountant does not? Both are well-qualified, closely-regulated professionals equally equipped and used to providing the skilled advice required by their client. Since LAP is owned by the client and not the giver of advice, why should it matter whether the adviser is a lawyer, accountant or indeed any other professional? In this case, Prudential s claim that legal advice it received from its tax advisers, PricewaterhouseCoopers, was subject to LAP was dismissed by the Supreme Court. By a 5 2 majority the Supreme Court accepted that applying a principled approach would result in the extension of LAP to legal advice provided by nonlawyers such as accountants. However, the majority emphasised that allowing Prudential s appeal would extend LAP beyond what are universally understood to be its limits. Moreover, the proposed extension would create uncertainty as to which non-lawyer advisers legal advice qualified for protection of LAP in circumstances where the long-term implications were unclear. Accordingly it was for Parliament to legislate 73

74 for a wider application of LAP should it consider public policy required it. The pragmatic public policy of restricting LAP to a certain and well-defined category of advice has therefore been preferred to the accountancy profession s principled, anti-competitiveness argument. Only Parliament will now be able to come to the aid of the non-lawyer professions on this issue. Procedure R (on the application of APIL and MASS) v the Lord Chancellor The Association of Personal Injury Lawyers ( APIL ) and the Motor Accident Solicitors Society ( MASS ) are the two main bodies representing the interests of claimant personal injury lawyers. In January 2013, they launched an application for Judicial Review, in which they sought to challenge the Lord Chancellor s decision to reduce the fixed recoverable costs payable in claims covered by the RTA protocol (the Pre Action Protocol for Low Value Personal Injury Claims in Road Traffic Accidents). They argued that this decision was taken on 14 February 2012 following a meeting where the Government discussed the proposal with just one interest group, namely insurers and those who pay insurance premiums. They did not claim there was any general obligation to consult before making this decision, but argued that the Government had embarked on consultation and, having done so, could not do it in a partial and unfair way. On 1 March 2013, following an expedited procedure triggered by the Association of British Insurers, the High Court roundly rejected APIL and MASS s arguments. The court held that there had been extensive consultation on the fee reduction and that APIL and MASS could not simply sit back, involve themselves in the consultation over the proposed reduction in fees, and keep up their sleeve the challenge against the Secretary of State s decision in principle. The court also found that the application should have been made significantly earlier (by May 2012 at the latest) and unusually, that even had the application succeeded, it would not have been appropriate to grant any remedy. In finding against APIL and MASS the court stated The legal mind conceives of rational argument, reasoned discussion and evidence based decision making. Politics in democracies is and ever will be a mix of argument, persuasion and bargaining, and an attempt to bring on side interest groups and public opinion. There has long been a criticism that some interest groups have privileged access to Government. The solution lies not in the judicial but in the political sphere. For constitutional and pragmatic reasons, there must be boundaries to the judicialisation of decision making on watershed policy matters. This claim is well outside the field. The wider implication is that it was abundantly clear that APIL and MASS had used the threat of judicial review and then the application itself as ways to delay reforms seen as very much against their members interests. The High Court s rejection of this approach not only prevented delay on this occasion, but also sent a clear message that such tactics would not work. (See also Procedure section above.) Simmons v Castle The court of Appeal gave an unexpected judgment in this case on 26 July 2012, apparently implementing a 10% increase in general damages in accordance with the package of reforms introduced following the Jackson report. That decision would have had retroactive effect, contrary to the intention of the reforms, which were all prospective only. The Association of British Insurers ( ABI ) applied to the Court of Appeal seeking to reopen the appeal. On 10 October 2012 the Court of Appeal handed down a judgment amending its original decision by reversing the retroactive effect, but for CFA claimants only. The outcome means that CFA funded claimants (up to 90% of all personal injury claimants) will not receive the 10% increase in general damages, unless they have entered into the CFA after section 44(6) of the Legal Aid, Sentencing and Punishment of Offenders 74

75 Act 2012 came into force. The judgment remains unchanged for the minority of conventional claimants who will receive the uplift on all judgments after 1 April In addition, the court widened the scope of the judgment from torts to all civil claims and clarified those damages to which the increase will apply. The Lord Chief Justice, giving the judgment of the court, accepted that the ABI had made a proper application to reopen the appeal, although the circumstances were highly unusual. In effect, the Court of Appeal conceded that it should have sought submissions from the ABI and others before making its original announcement. (See also Procedure section above.) Product liability Aspen Insurance UK Ltd v Adana Construction Limited The insured was commissioned to supply and prepare crane bases, to be placed on top of concrete piles and support tower cranes. The process involved sinking steel rebars vertically at four positions into each concrete base, through drill holes bonded with resin, to be used as dowels with which to support the crane. One of the cranes collapsed. The crane base had come away from the piles altogether, taking the intact dowels with it. The insured was sued, based on allegations that the dowels had not been inserted to the required depth/diameter and/or in the wrong position and/ or that insufficient resin was used. However, expert evidence indicated that the fault lay with the underlying design so that the insured was unlikely to be liable. The policy was a combined contractor s liability policy, including public and product liability. The latter section contained an exclusion with respect to any liability arising in connection with the failure of any Product to fulfil its intended function. There was also a general exclusion (the Foundation Clause ) in respect of loss of or damage to any superstructure arising from the failure of the Assured s foundation works to perform their intended function. under the policy as the crane base and its constituent parts amounted to a Product (taking it outside the public liability section) and that no cover was available under the product liability section of the policy because any liability would have been caused by its failure to perform the intended function. Alternatively, the insurer relied on the Foundation Clause. The court found for the insured on all bases. The work carried out by the insured was for work and materials, rather than the supply of a product. The base was created by pouring concrete in situ, after which it came into existence as a lump of concrete. This was not a Product for the purposes of the policy. While the dowels and resin may have been products in their own right, they were not the insured s products. Even if this was wrong, the purpose of the base was to transfer the loads on the crane down into the piles. On the evidence, it achieved that purpose. Similarly, there was no evidence that the dowels failed to do what dowels do. As for the Foundation Clause, a superstructure in this sense referred to a building above the ground, not to a temporary crane. There was therefore no loss or damage to any superstructure. PIP breast implant litigation The matter relates to allegedly defective silicone breast implants manufactured by French manufacturer PIP. Between 40,000-50,000 women received PIP implants in the UK. Around 3,000 women are expected to bring claims against a number of different private hospitals/ clinics. The subject matter has generated significant UK press interest since December It is subject to a Group Litigation Order ( GLO ), with the unusual feature of there also being a large number of defendants. It is also complicated by the fact that the manufacturer is now insolvent (and has limited insurance arrangements). The insurer sought a declaration that it was not liable 75

76 The application for a GLO was made in March It is now being dealt with at the RCJ before The Hon. Mrs Justice Thirlwall. The GLO was advertised in the legal and national press and a cut-off date to join of 8 April 2013 was set down. The date was however extended to October 2013 for claims being brought against insolvent clinics/hospitals in order to allow claimants the opportunity to consider pursuing such claims directly against the UK supplier of PIP implants, Cloverleaf. The matter has been listed to proceed to a preliminary issue hearing in April 2014, by way of assessment of sample cases which have been pleaded against one of the defendants, Transform. The following issues shall be determined at the preliminary issue trial: For the purposes of section 4(2A) of the Supply of Goods and Services Act 1982 ( SOGSA ) is the court entitled to have regard to any or all of the circumstances pleaded by the claimant (but which are not unique to her case), such as that implants were manufactured as approved, had valid CE marks and/or were filled with approved silicone gel, in determining whether or not the implants in a given case were or were not of satisfactory quality? Were the implants supplied in the sample cases of satisfactory quality pursuant to section 4(2) of SOGSA? What is the proper legal interpretation of the remedies afforded by section 11M-P of SOGSA insofar as such issues are raised in the sample cases? DAC Beachcroft LLP is advising Spire Healthcare Limited and BMI Healthcare. Professional negligence Arrowhead Capital Finance Ltd (In Liquidation) v KPMG LLP Dragon instructed KPMG to carry out due diligence on its supply chain to ensure that it would be able to recover VAT which was crucial to the viability of Dragon s business. Arrowhead made investments in Dragon of over $30 million, allegedly on the strength of KPMG s work and two documents created by Dragon which referred to KPMG s involvement. The business subsequently failed due to fraud in the supply chain which meant it could not recover VAT. Arrowhead lost its investment and brought a claim against KPMG for $50 million. KPMG s engagement letter included specific limitations on the extent of its responsibility and a cap on its financial liability. Although KPMG knew that Dragon had produced two documents to attract potential investors and which referred to KPMG s involvement, there was little evidence of any direct communication between Arrowhead and KPMG. The court found that KPMG owed no duty of care to Arrowhead and struck out the claim. The judge followed the established assumption of responsibility test and the threefold test (foreseeability, proximity and whether it is just, fair and reasonable) to determine whether KPMG owed Arrowhead a duty of care. The judge accepted that Arrowhead s loss was a reasonably foreseeable consequence of KPMG s alleged failings and, with some hesitation, agreed that the relationship between the parties was one of sufficient proximity to establish a duty of care. However, he found that it would not be fair, just and reasonable to impose a duty of care on KPMG. On the facts, it was inconceivable that KPMG would have voluntarily assumed an unlimited responsibility towards potential investors in Dragon. 76

77 The case provides a further illustration that UK courts have little sympathy towards sophisticated investors who seek redress against professionals against whom they have no obvious contractual remedy. Arrowhead made a high risk investment for which it was going to be richly rewarded if it was successful and had chosen not to instruct its own professional advisers. It would have been obvious to all concerned that KPMG s engagement would be on specific terms likely to include a limitation on the extent of liability and very possibly an exclusion of liability to third parties. The decision is also a reminder (if one is needed) to accountants of the dangers of contact with prospective investors and the benefit of ensuring that their engagement letters exclude any assumption of responsibility to third parties with whom they have little or no direct contact. Capita Alternative Funding Services (Guernsey) Ltd v Drivers Jonas This Court of Appeal decision provided an interesting insight into current judicial thinking. The appeal resulted from the first instance judge s rejection of all expert valuation evidence and, doing the best he could, reaching his own conclusions as to a property s true value at the material time, which was central not only to establishing liability but also to quantifying loss. The Court of Appeal rejected the defendant s appeal. Their Lordships patently felt that there had been numerous failings in the original valuation methodology, such that it was inevitable that loss had been sustained. Hence justice obliged the judge to decide himself the property s true value so that this loss could be definitively quantified. It was not all good news for the claimant. As a result of paying more for the property than it had been worth, tax allowances referable to the price actually paid had been enjoyed. The Court of Appeal ordered the claimant to give credit for those allowances attributable to the over payment. More crucially, this credit was applied against the recoverable loss, in this case the extent to which the property had been overvalued (SAAMCO (1997)), and not the claimant s overall loss resulting from entering into the transaction. This part of the decision underlines the importance, wherever professional advice to sophisticated commercial clients on investment opportunities is under attack, of examining what benefits may ultimately have been enjoyed by all those participating in the investment, to limit potential exposure. It seems that the judiciary is ever more keen to ensure that justice is done for all parties. The problem is, however, that courts now appear to be looking at how a surveyor carried out the valuation before deciding what the asset being valued was worth. Obviously if critical of how the valuation was conducted, it is easy to see a judge, when subsequently determining true value, arriving at a figure which fixes negligence on the professional. In order to rebalance this potentially unjust swing in favour of claimants in cases of this type, a less prescribed and technical approach to contributory negligence, particularly on the part of lenders, would not go amiss; better still if coupled with judicial acceptance that damage for the purposes of the Law Reform (Contributory Negligence) Act 1945 can be limited to SAAMCO losses (as opposed to overall transaction losses). John Grimes Partnership Ltd v Gubbins At first instance, the judge found that a 15 month delay in a residential development had been caused by the engineer s breach of contract and held that the engineer was liable for the resulting loss to Gubbins which arose due to a fall in the value of the development during this period. The engineer appealed on the basis that the losses were too remote. It relied on the principles set out in the House of Lords decisions in The Achilleas (2008) and SAAMCO (1997) to argue that it was wrong to hold it liable under its contract for losses flowing from a decline in the housing market over which it had no control. 77

78 Dismissing the appeal, the Court of Appeal held that the judge s approach could not be faulted. The standard approach based on reasonable foreseeability applied. If the loss was, at the time of the contract, reasonably foreseeable by the defendant as not unlikely to result from his breach, such loss was not too remote. The decision in The Achilleas had not effected a major change in approach. It was merely an example of the type of case where the standard approach should be departed from. That is where the nature of the contract and the commercial background indicates that the defendant could not be taken to have assumed responsibility for such a type of loss. Losses arising from a movement in the property market were reasonably foreseeable at the time of contract as a consequence of delay by the engineer. Further, the engineer knew that delay brought with it the risk that the property market might move to the disadvantage of the developer. There was no evidence submitted that a party in this engineer s position would not be taken to have assumed responsibility for losses arising from a movement in the property market where there had been delay in breach of contract. This was not one of the unusual Achilleas type cases. It is difficult to rationalise the decision with the SAAMCO approach where valuers are not liable for those losses flowing from a downturn in the market. The Court of Appeal commented that the discussion in SAAMCO about the extent of the valuer s duty provided little guidance. The relevant distinguishing feature of Grimes is that it was a delay case. From a practical point of view, the decision illustrates the importance for professionals to recognise that a small fee does not necessarily limit exposure for negligence and the need clearly to agree the extent of their liability in the contract. Lenders claims against solicitors for breach of trust Actions for breach of trust have been attractive to lenders bringing claims against solicitors as they avoid claims of contributory negligence and remove the need to prove negligence or breach of contract. A claim in breach of trust can allow the lender to recover their full advance from the solicitors, who may often be ignorant of a mortgage fraud in the background. The last 12 months has seen two further Court of Appeal decisions in this area which have shifted the balance somewhat. Nationwide Building Society v Davisons Solicitors (2012) was a case involving a fraudulent transaction where the lender successfully brought a breach of contract and breach of trust claim against the solicitors who were not dishonest but who released the mortgage advance monies to fake solicitors without receiving a clear undertaking to discharge the existing first legal charge. On appeal, the Court of Appeal confirmed that completion had not taken place and that release of the advance was therefore a breach of trust. However, relief was granted to the solicitors under s 61 Trustee Act 1925 as the solicitors had acted reasonably. A standard of perfection was not required. Whilst arguably a victory for lenders, in that the decision makes it more difficult for defending solicitors to avoid a finding of breach of trust, the bar for obtaining relief under s 61 has been lowered. A second Court of Appeal decision in AIB Group (UK) Limited v Mark Redler & Co (A Firm) (2013) may also prove to be helpful in defending a breach of trust claim. In this case, as a consequence of the solicitors actions, AIB obtained only a second charge over the property and lost security worth 300,000. Although the court again confirmed that completion had not occurred and there was a breach of trust, the equitable principles of compensation applied and only the loss actually suffered from the breach of trust ( 300,000) could be recovered. It was not open to the lender to contend that but for the breach of trust it would have asked for its money back and the lender should not be indemnified for the consequences of its commercial lending decision. However, leave to appeal to the Supreme Court has now been granted so this will remain an area to watch. The line of authorities, starting with Lloyds TSB Bank plc v Markandan & Uddin (2012), now makes it clear that if completion does not occur then a claim for breach of trust will be difficult to avoid. However, a finding of breach of trust will not necessarily be enough 78

79 for the lender to recover their losses in full. In cases of fraudulent mortgages, provided that the solicitor has conducted the transaction properly, s61 of the Trustee Act 1925 will step in to relieve the solicitor of liability. In cases such as AIB v Redler, the equitable principle of compensation should limit damages to those caused by the breach. Lenders claims against valuers Claims arising from valuations for secured lending continue to dominate this area. The Jackson reforms this spring, and concerns over limitation, are believed to have resulted in an increase in notifications this year. Despite high claim levels, there have only been a few reported decisions. The first instance decision in Platform Funding Limited v Anderson & Associates Limited (2012) illustrates the need for the claimant to prove causation. The court held that the operative cause of the lender s loss was a fraud perpetrated by the vendor, with the collusion of solicitors, and not any negligent valuation provided by the surveyor. It certainly helped that the judge also considered that the valuation provided by the surveyor would have been no different had an appropriate level of care been exercised, but the case appears to have turned on pure causation. The obiter comments in response to the surveyor s arguments on imprudent lending in that case will be less helpful to insurers. Imprudent lending was considered in two further reported TCC decisions. Webb Resolutions Ltd v E.Surv Ltd (2012) is an important case not least because it involved GMAC, the UK s largest centralised mortgage lender, and E.Surv, the largest residential surveyor in the country. The case was brought as a test case and involved two valuations. The judge confirmed his previous ruling on the appropriate margin of error to apply when assessing whether the valuation was negligent. In considering the commercial decision to lend, the judge made the comment that at times the impression was given that the lender would have been prepared to lend anything to anybody on any terms. Despite this the judge dismissed the contributory negligence plea completely in respect of one of claims. A 50% reduction was awarded in the second claim. In a second case also involving E.Surv, Blemain Finance v E.Surv Ltd (2012), the allegation of contributory negligence failed both on the grounds of causation and substance. Allegations of contributory negligence also apparently failed in two unreported decisions (Redstone Mortgages Ltd v Countrywide Surveyors Ltd (2013) and Mortgage Title Resolutions Ltd v J & E Shepherd Chartered Surveyors (2013)). The courts appear to be reluctant to find that the practice of the whole lending market before the property crash was negligent. Arguments based on the individual characteristics of the loan application are however more likely to be successful and to provide more fertile ground for reducing damages awards. Solid expert evidence will be required to support any allegation of contributory negligence. Mehjoo v Harben Barker The recent HMRC clampdown on tax savings schemes has resulted in a rise in claims against professionals who have advised their clients to enter into such schemes. A tax saving scheme was at the heart of this case which prompted many headlines suggesting that the decision imposed a duty on accountants to advise wealthy clients on how to avoid tax. Those reports are misleading but the case is nevertheless important. The judge held that a duty of care was owed by Mr Mehjoo s long standing accountant to advise Mr Mehjoo on the tax consequences of the sale of his business even though he was not asked to do so. The judge confirmed that there was no such thing as a general retainer of a professional adviser to provide advice as and when needed. However, a duty arose in this case as a result of a course of conduct. This illustrates the importance of detailed and up to date retainer letters. It is often just as important for a professional to set out in that letter what he is not going to do, as well as the professional advice he is agreeing to provide. The generalist accountant in this case was held to be negligent for failing to advise Mr Mehjoo that he was likely to have non-domiciled status, that this carried 79

80 significant tax advantages and that he should seek specialist advice. Had he been so advised, the judge held that Mr Mehjoo would have been advised to enter into a different tax saving scheme, that he would have acted on that advice and that the alternative scheme would not have been challenged, saving him over 800,000 in capital gains tax ( CGT ). Although, it was made very clear that the accountant was not negligent for not knowing of the applicability of a particular tax saving scheme to Mr Mehjoo s position, the end result was the same, with damages being awarded in respect of the CGT payable and interest. There is concern that the decision may encourage future actions based on the notion that generalists are liable for all foreseeable losses where they fail to refer the client to a specialist. There were numerous causation hurdles to overcome in this exceptionally heavily contested case. Before a different judge, a very different result may have been obtained. With the claimant s costs approaching 5 million, the case highlights how expensive a claim based on negligent tax advice is to pursue. This is an area where it may well be that post-jackson costs management will have a part to play. Scullion v Bank of Scotland Plc (t/a Colleys) The last minute withdrawal of the appeal to the Supreme Court has been very welcome news to valuers and their insurers. The Court of Appeal decision in June 2011 stopped a potential flood of claims from investors in the buy-to-let market. The Court of Appeal, overturning the decision at first instance, held that the valuers who had been instructed by a prospective mortgage lender to carry out a mortgage valuation did not owe a duty of care to Mr Scullion who bought the property as a buy-to-let purchaser. In order to reach this conclusion, the Court of Appeal distinguished the case of Smith v Bush (1990) in which the House of Lords found that purchasers of modest residential properties for owner occupation could rely on a lender s valuation, on the public policy grounds that they would not have the means to obtain their own valuation advice. In contrast, the Court of Appeal held that Mr Scullion was not an ordinary domestic householder purchasing his home and the purchase was a purely commercial arrangement. The withdrawal of the appeal by Mr Scullion means that the Court of Appeal decision now stands as the final say on this issue. A number of cases are reported to have been stayed pending the outcome of this appeal and the fear of a further wave of negligent valuation claims by buy to let purchasers has been removed. Any buy to let purchaser that wishes to bring a claim based on a valuation prepared for a prospective mortgage lender, will now have to be prepared to take the matter all the way to the Supreme Court. Riots On 8 August 2011, a Sony Distribution Centre in Enfield was attacked by a group of youths who smashed their way into the premises, looted and set fire to it, resulting in the total destruction of the warehouse and the plant, equipment and stock within it. The fire was one of Europe s largest arson attacks and burned for around ten days. DAC Beachcroft LLP was instructed on behalf of the two insurers of Sony who submitted a claim for material damage and consequential loss under section 2 of the Riot (Damages) Act 1886 (the Act ). Following a total rejection of the claim by police, proceedings were issued in the Commercial Court and a preliminary issues trial took place in July 2013 to determine whether: The loss falls within section 2(1) of the Act (i.e. was it caused by a riot ). Consequential losses (including loss of profit and loss of rent) are in principle recoverable pursuant to section 2(1) and/or 2(2) of the Act and, if so, on what basis. Future anticipated losses (being those which had not been paid under the policies by the time of the original claim under the Act) are in principle recoverable pursuant to section 2(1) and/or 2(2) of the Act. The police withdrew their case on the third issue during the trial. 80

81 The court s determination of the second issue will have far reaching implications for the insurance industry, the police and the public. If the principle is even partially accepted then a large number of claims under the Act may have scope for recovery significantly widened. The overall cost to the police will soar (particularly in the case of properties or businesses facing total destruction at the hands of rioters) as the quantum for this element of any claim may far exceed any material damage losses. Insurers may find that more claims are disputed and that the police become even more stringent in their adjusting of quantum, utilising arguments such as proportionality and contributory negligence (given the language of the Act in terms of just compensation). These arguments are foreshadowed for the second phase of the litigation if insurers are successful on issues 1 and 2. Although addressing claims for loss of rent should be relatively straightforward, the police may struggle with more complex business interruption type losses. This will in turn impact on police resources and insurers may have to wait even longer to receive albeit potentially much higher payouts under the Act. It is also conceivable that a determination favourable to insurers will be the final nail in the coffin for the Act in its current form indeed, there is much current debate about how the principles of the current Act may need to be changed to reflect the 21st century reality. The preliminary issues judgment is expected in October. Strict liability (Rylands v Fletcher) Stannard v Gore Strict liability under Rylands v Fletcher (1868) has been considerably restricted, in cases of non-negligent fire damage to neighbouring properties, in this Court of Appeal decision. An electrical fire, fuelled by burning tyres, spread from a tyre storage unit on an industrial estate in Hereford to damage neighbouring properties, including the property of Mr Gore, who was uninsured. The Court of Appeal found unanimously in favour of the owners of the tyre storage unit. The Court of Appeal took the opportunity to reexamine Rylands v Fletcher and associated cases. Ward LJ concluded that: The defendant must be the owner or occupier of land. He must bring/keep/collect an exceptionally dangerous or mischievous thing on his land. He must have recognised or ought reasonably to have recognised that there was an exceptionally high risk of danger or mischief if that thing should escape. His use of the land must be extraordinary and unusual. The thing must escape from his property onto the property of another. Damage must be caused to the land or the claimant s rights and enjoyment of that land. Applying these tests to this case, Ward LJ concluded that the thing brought on to Mr Stannard s premises was a large stock of tyres, which were not exceptionally dangerous or mischievous. There was no evidence that Mr Stannard recognised or ought to have recognised that there was an exceptionally high risk of danger/ mischief if the tyres should escape. Here, it was not the tyres that escaped but the fire. The judge at first instance was therefore wrong to conclude it was the escape of fire that brought the case within Rylands v Fletcher principles. Keeping a stock of tyres on the premises of a tyre fitting business was not an extraordinary or unusual use of the land. Rylands v Fletcher liability was therefore not established and, no negligence having been proved, the claim failed. The moral of the story is for property owners to make sure there is insurance cover for losses occasioned by fire on their premises. DAC Beachcroft LLP represented the owners of the tyre storage unit. 81

82 DAC Beachcroft is the market-leading specialist international insurance law firm. Our unique offering includes: an international cross-class capability, covering the full range of claims from the systemised to bespoke; advisory work for insurers covering corporate, regulatory and commercial; international coverage. We work with almost all of the world s leading insurance companies. We have expertise and experience across the entire sector. Our long history of commitment to, and investment in, the insurance sector means that we have an unrivalled depth of experience and breadth of insight. Our international reach includes a presence in key insurance markets across the UK, Europe, Asia-Pacific and Latin America, as well as formal relationships with law firms in India, North America and elsewhere. We have more than 900 professionals including 145 Partners who specialise in insurance and reinsurance one of the largest insurance groups of any law firm. Many of our lawyers have, themselves, worked in the insurance industry. Within this team, over 100 lawyers focus on international insurance, based in London and Madrid and including offices in Chile, Ireland, Mexico, Singapore and New Zealand. The DAC Beachcroft LLP Insurance Market Conditions Report is provided for information only and no liability is accepted for errors of fact or opinion it may contain. Professional advice should always be obtained before applying the information to particular circumstances. The copyright in this Report is retained by DAC Beachcroft LLP. We like to keep our clients and contacts informed of services we think may interest them and, in order to do so, we keep a database of contact details; these details are never passed on to any other organisation without permission. If you would prefer not to hear from us again with regard to any of our legal updates, seminars and other services, please [email protected] DAC Beachcroft LLP August

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