Insurance Bulletin, April 2018 Edition 1
In this issue: Regulation and legislation; Court cases and arbitration; Market developments; HFW Publications and events
1. Regulation and legislation
New Zealand: Government review of insurance contract law
On 6 March 2018, the New Zealand Minister of Commerce and Consumer Affairs released the terms of reference for a review of New Zealand insurance contract law.
The Minister referred to insurance contract law reform in comparable markets, including Australia and the UK, and said that this work is long overdue. He stated that: “there are significant problems with New Zealand’s insurance contract law which are undermining the effectiveness of our insurance markets and impacting those who do not receive the support they anticipated from their insurance policies.”
The terms of reference for the review state that New Zealand’s insurance contract law is antiquated and fragmented (since there are six Acts governing insurance contracts in New Zealand, two of which date back to 1908) and outline an intention to modernise New Zealand’s insurance contract law and consolidate it into one Act.
The terms of reference outline the scope, process and an indicative timeline for the review. The review will examine a range of issues with insurance contract law, including those relating to:
- disclosure obligations for policyholders;
- technical issues that have been identified by the Law Commission and insurance industry;
- regulation and supervision of insurers’ conduct (the International Monetary Fund has identified that New Zealand has room for improvement in this area);
- the scope of terms defined to be not “unfair contract terms” under the Fair Trading Act 1986; and
- consumers’ ability to find and compare prices and policies.
The following areas are outside of the scope for the review:
- competition issues related to the structure of insurance markets;
- prudential regulation of insurers;
- earthquake insurance;
- accident compensation insurance as governed by the Accident Compensation Act 2001; and
- regulation of financial advisers, and the dispute resolution regime in relation to insurance.
The Ministry of Business, Innovation and Employment is preparing an issues paper which is planned for release and public consultation in mid-2018. The issues paper will be an opportunity for interested parties to share their views and insights about the issues that have been identified for the review.
Following this, the proposed timeline and process is:
- Late 2018: release of an options paper for consultation
- Mid 2019: policy decisions to be made and, if warranted, followed by a legislative process.
UK: PRA finalises statements on approach to branch authorisation and supervision
The PRA has published a Supervisory Statement setting out its approach to branch authorisation and supervision, and a Policy Statement in response to its December 2017 consultation on the same topic.
The Supervisory Statement is a little late for insurers that sought to ensure that they were prepared for a hard Brexit at the end of March 2019 – it will probably be of most interest to European insurers which have passported into the UK and are yet to determine whether to establish a UK subsidiary or to apply for authorisation as a third country branch (following Brexit, EU member states will be third country branches).
The Supervisory Statement states that, when considering applications for authorisation as a third country branch, the PRA will assess regulatory equivalence between the UK and the branch’s home jurisdiction, and will consider its ability to supervise the insurer. The Statement also sets a threshold for liabilities of a third country branch which are covered by the FSCS. The PRA’s view is that a branch should consider authorisation as a subsidiary where it has liabilities covered by the FSCS in excess of £500 million.
The Supervisory Statement was published in draft as part of the December 2017 consultation, and the final version contains only minimal changes from the draft. The most significant is that the FSCS liabilities threshold was increased from £200 million to £500 million.
2. Court cases and arbitration
England & Wales: Construction Claims – Subrogation against Sub-Contractors
In Haberdashers’ Aske’s Federation Trust Limited v Lakehouse Contracts Limited1, the TCC considered whether project insurers were entitled to bring a subrogated claim against sub-contractors on the insured project or, to put it another way, whether the sub-contractors were entitled to the benefit of the project insurance.
Haberdashers and the other claimants (the Claimants) had contracted with Lakehouse to perform major construction works to a school in Lewisham. In turn, Lakehouse contracted with a number of sub-contractors, including Cambridge Polymer Roofing Ltd (CPR) for the roofing works. Lakehouse, as it was required to do by its agreement with the claimants, obtained project insurance with the third party defendants (the Project Insurers). Separately, CPR had agreed to take out its own liability cover, which it did for a limit of £5m.
While CPR was carrying out “hot works”, a fire occurred and caused severe damage to the buildings. The Claimants sued Lakehouse, who issued a claim against CPR. CPR then issued its own claim against the Project Insurers on the grounds that it should have the benefit of the project insurance. The Claimant’s claim was settled by Lakehouse for £8.75m, leaving the claims brought by Lakehouse against CPR and CPR against the Project Insurers. In reality, the settlement had been paid by the Project Insurers so the Lakehouse claim against CPR was a subrogated claim brought by the Project Insurers. The claim against CPR was limited to the extent of CPR’s liability insurance, i.e. £5m.
CPR argued that it was a co-insured under the Project Insurance and that as a result, the Project Insurers had waived their right of subrogation against CPR. Although CPR was not named as a co-insured, it was common ground that it fell within the class of sub-contractors who would ordinarily be a co-insured, but the Project Insurers argued that there was an exception where the sub-contractor was required to maintain its own liability insurance.
The case was argued and analysed in a number of ways, but ultimately the Court held that the effect of the express term in the sub-contract between CPR and Lakehouse which required CPR to take out its own liability insurance was that CPR did not have the benefit of the Project Insurance. The Judge’s preferred analysis was that of “standing offer”. The standing offer made by the Project Insurers was to insure all sub-contractors joining a defined grouping upon execution of the relevant sub-contract, and the acceptance of the offer would be to imply a term into the contract between Lakehouse and CPR. However, the contract between CPR and Lakehouse contained a term that CPR would obtain its own insurance so a conflicting term that it was part of the defined grouping of insureds under the Project Insurance could never be implied. CPR was not, therefore, a co-insured under the Project Insurance.
The judge cited the recent case of Gard Marine and Energy Ltd v China National Chartering Co Ltd, in which the Supreme Court considered whether or not co-insureds were precluded from claiming damages from one another by virtue of their co-insurance. However, having decided that CPR was not a co-insured under the Project Insurance, he did not develop this analysis.
The analysis in the case is complicated, but the underlying message is that sub-contractors should not assume they have the benefit of project insurance policies. Having agreed to obtain its own insurance, CPR could not imply a term into its contract with Lakehouse that it was entitled to the benefit of the Project Insurance.
-  EWHC 558 (TCC)
UK: Insurance firms failing to meet FCA general insurance renewal rules
Insurance firms have been warned by the Financial Conduct Authority (FCA) that it will take action against those who fail to fully implement rules recently introduced to increase transparency and to encourage customers to shop around at renewal time.
The FCA’s new rules and guidance to increase transparency and to prompt customers to shop around came into effect on 1 April 2017. The rules require firms to disclose the previous year’s premium, as well as their proposed renewal premium at each time of renewal. Firms must prominently display a message encouraging consumers to check their insurance cover and to shop around for the best deal. Firms are also required to show an additional prescribed message to encourage shopping around to consumers who have renewed their cover with the firm four consecutive times.
England & Wales: Broker liability in underinsurance case
In Pakeezah Meat Supplies Ltd v Total Insurance Solutions Ltd (2018) the court was required to assess damages in an insurance claim by considering what the claimant would have recovered from the insurer if the insurance broker had provided the correct information to the insurer and proper advice to the claimant insured.
Following a fire at its premises, a supermarket, the claimant made a claim under its insurance which was purchased through the defendant broker. The policy covered material damage and 12 months of business interruption. The insurer argued that the claimant had misrepresented certain information, in particular, the number of fryers at the premises. The insurer also argued that the claimant failed to disclose previous financial difficulties of its directors. The claimant asserted that the broker was responsible for the misrepresentation and failure to disclose. The claimant also considered that the broker had failed to identify that the amount of cover should have been higher and had not provided proper advice in relation to this.
The court held that the broker was liable to pay damages in the amount which the claimant would have recovered under the ‘correct’ insurance policy had it obtained the correct level of cover initially. In particular, the court held that the two individuals controlling the claimant had very little experience in insurance matters before and were not aware of the disclosure obligations or the matters relevant to the level of cover required. Further, the court held that if the broker had asked the correct questions, the claimant would have provided the insurer with the correct information and the appropriate level of cover would have been obtained.
In the assessment of damages the court had to consider (i) whether the claimant’s directors ought to have known about its disclosure obligations, (ii) whether the claimant would have disclosed such matters if the broker had properly advised the claimant and (iii) whether this would have affected the available indemnity following the fire. In assessing damages, Butcher J considered the following: i) the claimant’s knowledge of disclosure obligations; ii) the effect of the broker’s advice; iii) the policy that would have been obtained had the claimant been properly advised and accurate disclosure been provided; iv) indemnity for contents; v) indemnity for business interruption; vi) additional premium that the insurer would have charged for additional levels of cover sought; and vii) the possibility that the insurer may not have insured the claimant if it had disclosed the information regarding the number of fryers and financial difficulties of the directors.
3. Market developments
UK: Pool Re cover extended
On 22 March 2018, the Economic Secretary to the Treasury, announced that the British Government intends to amend the Reinsurance (Acts of Terrorism) Act 1993 to extend the cover available to insureds through the government backed reinsurer Pool Re, to include business interruption losses that are not contingent on damage to commercial property.
Pool Re is a government-backed reinsurance scheme which was established in 1993 in response to the Provisional IRA’s bombing campaign on UK territory. It is intended to underwrite commercial property against terrorism risk, and has been adapted at various times in response to changing circumstances in the insurance market. A notable change has been the extension of cover to include damage resulting from acts of terrorism using a cyber trigger, as we have previously reported , which will take effect from April 2018.
The proposed extension of the scheme will allow Pool Re to pay out in cases where a business has suffered financial loss, but no actual damage to physical property, for example, where commercial premises becomes inaccessible due to emergency service operations. This step recognises the changing nature of terrorism threats in recent years. Attacks such as those in Westminster and London Bridge caused minimal property damage, but caused substantial disruption to business in the surrounding areas. The availability of such extended business interruption cover should increase the resilience of businesses in the wake of such attacks. We shall continue to update readers on developments as they arise.
Research undertaken by Daniel Rainer, Trainee Solicitor
4. HFW publications and events
HFW announces new partners in the Insurance / Reinsurance Group
We are delighted to announce two partner promotions in the Insurance Reinsurance Group: Brendan McCashin and Sara Sheffield. Congratulations to them both!
Brendan is based in the Melbourne office and specialises in insurance-related litigation as well as non-contentious insurance and reinsurance matters. Brendan has acted on a wide range of insurance and reinsurance matters for Australian-based and international clients, including flooding, storm, earthquake, fire and explosion events, electricity supply issues and machinery break-downs, as well as high-value class action litigation, public and product liability, and subrogation claims.
Sara is based in Dubai where she acts in a wide range of commercial litigation and international arbitration matters, with a focus on international financial crime and fraud, asset-tracing and recovery, and cross-border disputes. Sara also advises insurers, reinsurers and policyholders on insurance and reinsurance claims, subrogated recoveries, defence work and coverage issues.
HFW Briefing: A decisive change to the UAE’s legal landscape
Sara Sheffield and Derek Bayley examine a groundbreaking and long awaited agreement that allows for the direct enforcement of Abu Dhabi Global Market Courts judgments and arbitral awards into onshore Abu Dhabi.
Click here to read the full briefing.