Insurance focus
June 2011

Deneys Reitz – a tale from war to peace

On 1 June 2011, leading South African law firm Deneys Reitz joined Norton Rose Group – a combination that recalls a peace treaty between the British and the Boers more than 100 years ago in which Deneys Reitz played a significant role. Amelia Costa, Patrick Bracher and John Neaves consider how history has shaped the sources of insurance law and practice in South Africa, as well as Deneys Reitz as a law firm.

In October 1899, the Anglo Boer War commenced when Deneys Reitz’s father, Francis Reitz, then State Secretary for the Transvaal, delivered the Boer Ultimatum to the British. Deneys Reitz, who at the time was 17 years old, volunteered his services to take on the British. At the end of the Boer War in 1902, Deneys Reitz and his family went into exile in Madagascar where he wrote the first of three books, Commando, in which he gives his account of the war. He returned to South Africa at the behest of General Jan Smuts, where he took part in the reconstruction following the war. After his return, he realised that the only solution for South Africa was cooperation between the English and Dutch sections of the community. He fought with the British forces in the First World War and ended the war as commander of a famous Scottish Battalion fighting in Africa and Germany.

After the First World War, Deneys Reitz entered politics and started practising law. In 1924 he formed a partnership with two others. The firm, Deneys Reitz, Jacobson and Effune later merged with Frank Benjamin and Ridsdale and became a major firm with a substantial presence in the insurance industry, representing 90 per cent of insurance companies in South Africa. This firm laid the foundations for Deneys Reitz as it is today, the leading financial services firm in South Africa.

As with the history of Deneys Reitz, there has been tension between Dutch and English law when it comes to insurance law and practice.

South African common law has its origins in Roman-Dutch law, which was introduced in 1652 when settlement at the Cape of Good Hope took place under Dutch rule. However, after the Cape was taken over by the British at the end of the 18th century, the South African courts came to rely on English law and precedent. In 1879, the Cape legislature formally introduced English law for the Cape Province and in 1902, at the end of the Anglo Boer war, the Orange Free State followed suit. In 1977, this legislation was repealed and Roman-Dutch law was restored as the common law in both provinces. In Natal and Transvaal, Roman-Dutch insurance law was never displaced but the law in both provinces was heavily influenced by English law.

In areas where Roman-Dutch law is of little assistance such as the law on companies, insolvency, negotiable instruments and intellectual property, English legislative patterns were followed. In shipping law and marine insurance together with fire and life assurance, English law was influential in the development of jurisprudence.

Against this background, Roman-Dutch law remained influential. It is based on time-honoured principles but is readily capable of development to meet modern circumstances.

In relation to insurance, English law was followed not only because certain principles were specifically adopted but because the wealth of English judicial precedent was a ready source of good example. In addition, English forms of insurance policies were used by South African insurers; many of them with British head offices. The wordings survive to this day and judicial interpretation in the English courts of these wordings is highly persuasive in the South African courts.

Slowly the worth of English precedent in South Africa gave way to the pursuit of insurance principles based on the Roman-Dutch law of contract. This has enabled South African courts to reason through insurance problems to an equitable result by applying principle rather than precedent. A good comparison is the long line of English cases that culminated in Pan-Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd (1994) where the House of Lords laid down certain principles relating to avoidance of an insurance contract on the basis of material non-disclosure. These principles were, with respect, more easily dealt with by the South African courts which applied the Roman-Dutch law principles of misrepresentation inducing a contract. Those principles are well known in South African common law and easily led to a workable solution regarding materiality and inducement in Mutual & Federal Insurance Co Ltd v OudtshoornMunicipality(1985) where the Appellate Division used the reasonable man test as developed in Roman-Dutch Law.

Other recently reported cases illustrate the point as well. In Axa General Insurance Limited v Gottlieb (2005), the Court of Appeal debated to what extent fraudulent conduct by the insured vitiated the right to claim for losses before and after submission of a fraudulent claim. The South African Appeal Court took a mere six pages to conclude that a false claim only affects rights accruing under the policy after termination as a result of fraud. According to ordinary Roman-Dutch principles of contract, rights accrued remain in force and there is no penal principle in South African contract law. In doing so, the court refused to adopt certain contrary principles of English law suggested to it in argument.

Similarly, there is little to debate in South African contract law regarding a continuing duty of good faith and disclosure in relation to a contract. This issue was dealt with by the English courts in Marc Rich Agriculture Training SA v Fortis Corporate Insurance NV (2004), where the court referred to the duty of utmost good faith. South African courts have remarked that there is either good faith or not and the concept of “utmost” good faith adds no additional meaning. The Court of Appeal in Blackburn Rovers Football & Athletics Club v Avon Insurance (2005) referred to evidence to question whether a footballer’s degenerative back condition was normal disc degeneration or the result of some traumatic cause. Similar issues relating to pre-existing conditions have been debated in South Africa and in Concord Insurance v Oelofsen (1992), the court recognised that most people suffer from some medical defect or other and that not every such cause is a pre-existing condition. In the context of a contractual time bar, the failure of an underwriter to expressly rely on time limits has been debated as an implied term or estoppel both in England in Fortisbank SA v Trenwick International (2005) and in South Africa in Union National South British Insurance v Padayachee (1985).

The South African Short-term Insurance Act specifically authorises Lloyd’s to conduct insurance business in South Africa. In addition, there are a number of major international insurers who conduct business through subsidiaries in the country. For that reason a great deal of insurance business is underwritten in terms of policies which are as familiar in London, Toronto and Sydney as they are in Johannesburg. A number of South African decisions have dealt with the interpretation of the wording of various Lloyd’s policies. For instance, in Van Zyl NO v Kiln Non-Marine Syndicate (2002), the court found that a driver who had driven his vehicle after consuming large amounts of alcohol was not entitled to an indemnity because there was wilful exposure to danger. In Napier NO v Van Schalkwyk (2003) the court found that a requirement to report damage to a vehicle within 24 hours of the accident was clear and unequivocal in its meaning and effect and the breach absolved the Lloyd’s insurer from liability. In Certain Underwriters of Lloyd’s of London v Harrison(2003) the Appeal Court rejected a claim because of material non-disclosure of the fact that the vehicle had been imported into the country unlawfully thus prejudicing the insurer’s interest in salvage of the goods insured. Lloyd’s of London v Skilya Property Investments (2003) is a judgment in favour of the Lloyd’s insurers on an aviation insurance policy containing an exclusion for damage sustained whilst the aircraft was being used for an illegal purpose (in this case smuggling cigarettes). The South African law reports are replete with similar decisions.

English judgments often refer to Canadian, Australian and New Zealand cases. It seems clear that in the apartheid years the English courts lost the habit of looking to South African decisions for comparative reasoning. Our theme is that we can repay some of the debt owed to English law and that English lawyers and for that matter lawyers all over the world, will find useful decisions among the body of South African case law.

We propose to highlight significant cases emanating from our courts in future editions of Insurance focus.

For further information contact:

• Amelia Costa
• Patrick Bracher
• John Neaves

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Opening the door to uncertainty – Kouri v Gougeon

In the recent decision of M.B. Kouri Insurance Brokers Ltd. v R.L. Gougeon Ltd., the Ontario Court of Appeal ruled that a broker could issue a binding renewal of an insurance policy despite an agreement stating that it did not have this authority. Unusually, the insurer argued that the renewal was binding because it wanted to recover premiums collected by the broker for the unauthorised renewal. Sally Gomery in our Ottawa office considers the Court’s reasoning, which may open the door to other circumstances in which a court might require an insurer to cover risk that it did not willingly assume.

The facts

Kouri was an insurance broker whose clientele consisted solely of around 175 campground operators. Kouri obtained insurance for its clients from Ecclesiastical Insurance through Gougeon, a wholesale broker with a book of business for Ecclesiastical. The sub-broker agreement between Gougeon and Kouri provided that Kouri had no authority to bind Ecclesiastical to an insurance contract.

All the insurance policies for the campground owners had a common expiry date of 30 May 2004. In early 2004, Kouri asked Gougeon about a possible renewal of the Ecclesiastical policies. Having received no response, on 10 May Kouri unilaterally issued new certificates of insurance to its clients for a further year-long term of coverage from Ecclesiastical. A few days later, Ecclesiastical advised Gougeon that it was extending the term of the existing policies for 30 days whilst it decided whether it would renew the program. In the meantime, Kouri invoiced its clients for premiums at an increased rate for renewed annual coverage. Kouri did not advise Ecclesiastical or Gougeon that it had sent its clients new certificates for another year’s coverage or that it had collected premiums for the first month of such coverage.

In early July 2004, Kouri advised Gougeon that it had obtained coverage from another insurer effective from 1 July. After deducting a commission, Kouri used the money it had received as premiums for Ecclesiastical’s coverage in June to pay the premiums charged by the new insurer. Some time later, Gougeon and Ecclesiastical learnt about the certificates that Kouri had issued for the renewal of the Ecclesiastical policies and the premiums that Kouri had collected for it. They demanded that Kouri remit premium payments to Ecclesiastical for its June coverage. Kouri refused and sued Ecclesiastical and Gougeon for a declaration that it owed Ecclesiastical nothing and in fact was entitled to damages for Ecclesiastical’s failure to decide on the potential renewal of its policies in a timely way. Ecclesiastical counter-sued for the payment of premiums collected by Kouri for its coverage in June 2004.

The trial judge found that Ecclesiastical was not entitled to premiums for coverage in June because it did not tell Kouri that there would be a cost for the 30-day extension. Even if it had, the trial judge found that Ecclesiastical had been negligent in not determining the issue of renewal in a timely way, and that Kouri had as a result suffered damages equivalent to the premiums paid on account of the purported renewal. Ecclesiastical and Gougeon appealed.

The Ontario Court of Appeal’s decision

The Ontario Court of Appeal allowed the appeal and ordered Kouri to pay Ecclesiastical the amounts received from its clients as premiums for the renewal of coverage. The Court relied on section 402 of the Insurance Act, which provides that an agent or broker who receives money as a premium for an insurance contract is deemed to hold such premium in trust for the insurer. In the Court’s view, Kouri’s unilateral act of sending out certificates of insurance created valid contracts. The issue was not whether Kouri could in fact bind the insurer. On the face of the sub-broker agreement, Kouri had no such authority. However, an insured who received a certificate had no knowledge of the terms of the sub-broker agreement, and had no reason to question its validity. As a result, in the Court’s view Kouri’s “ostensible authority was sufficient to create binding contracts of insurance on behalf of Ecclesiastical”.

The Court also found that Ecclesiastical’s failure to advise Kouri in a timely way about a possible renewal was “arguably irresponsible” but not illegal or wrongful conduct. All parties were corporate entities entitled to pursue their own commercial interests.

Implications of the Court of Appeal’s decision

Canadian insurers generally assume that they cannot be bound by unilateral acts of brokers in the absence of a special agreement to the contrary. In some cases an insurer has been ordered to honour a claim made by an insured to whom a policy was not issued due to the failure of an agent or broker to forward the insurance application to the insurer. In such cases, however, the insured has paid the required premium and the insurer would have issued a policy had it received the application.

The outcome in Kouri v Gougeon was obviously influenced by the position taken by Ecclesiastical that the renewals issued by Kouri were binding despite Kouri’s lack of authority to act as it did. However, the Court’s reasoning with respect to Kouri’s ostensible authority could apply in situations where an insurer was contesting coverage. On the Court’s analysis, the central issue was not Kouri’s actual authority but the insureds’ perception of it. As a result, if the issue were not the insurer’s right to collect premiums but rather its obligation to cover a large claim, the Court might well conclude that an insured was entitled to coverage even though a renewal had been issued by a broker without the insurer’s consent. In such a case the insurer might have a claim for indemnity against the broker, but its right of recovery could be limited by the broker’s inability to pay a large judgment.

To protect themselves from such a situation, insurers should ensure that policies clearly set out the limit of the authority of a broker to issue renewals. They should also remind brokers of the limits of their authority under their agreements in situations where the coverage will expire shortly and no decision on a renewal has been made. Unfortunately neither of these measures provide complete protection because insureds may not be able to distinguish between certificates actually issued by the insurer and those devised by a broker who has acted with authority in past dealings.

For further information contact:

• Sally A Gomery

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Storms, floods and coverage under Australian insurance policies – Treasury Consultation Paper

The storms and consequential wide-spread flooding affecting the eastern part of Australia rightly attracted world wide media attention. Despite some of the more sensational headlines, issues relating to insurance are but one aspect of what clearly requires broad contribution from industry generally, insurance stakeholders, consumer and like groups and a tripartite, preferably bi-partisan government approach to the key issues. In recognition of the importance of the role of insurance, an independent review into disaster insurance in Australia has been established. The Natural Disaster Insurance Review will focus on insurance arrangements for individuals and businesses for damage and loss associated with flood and other natural disasters. The Review is to report to the Assistant Treasurer by 30 September 2011. Barry Richardson discusses the issues raised in a recent Consultation Paper on flood insurance.

In April 2011, the Treasury released a Consultation Paper entitled Reforming flood insurance: Clearing the waters. The paper presents the Federal Government’s proposed reforms to household insurance policies, including two related proposals said to deliver greater clarity, these being:

• a standard definition of flood for use in insurance policies
• a short key facts statement that summarises the contents of insurance policies to be made available to consumers.

This apparently follows the experience of policyholders reporting that they were not aware that losses arising from particular types of water inundation were not covered by their policies.

The paper includes possible options for both of these initiatives and seeks comments and feedback on these proposals and a number of related issues, including options for rules surrounding their implementation.

The first proposal – a standard definition of flood

The Insurance Council of Australia (ICA) has suggested that the risks of inundation can be divided into three broad categories:

• Stormwater/rainfall run-off (category A): These terms refer to high intensity, short duration storms producing localised flooding. Most insurance policies (but not all) cover this risk. Some insurers also use the term “flash flooding” with similar intent.
• Riverine/inland flooding/flooding (category B): Inundation caused by watercourses or catchments overflowing their banks due to long duration rainfall over large areas. Some insurers provide cover for this risk, but many exclude it. Whether included or excluded, the definitions of this risk can vary greatly.
• Actions of the sea/sea level rise/storm surge (category C): Inundation caused by movement of seawater. Few insurance policies cover this risk.

Aside from various definitions of category B, some policies use terms such as “flash flooding”, “accidental flooding” and “tidal flooding”, to describe other types of inundation risk.

The paper notes that in the wake of the recent floods in Queensland and Victoria, a number of policyholders reported that they were surprised that their policies did not cover the type of inundation that occurred. The majority of these cases relate to policies that cover for category A but exclude cover for category B (riverine flooding).

The variations in usage of the term “flood” and “flooding” in policies are a potential source of confusion for many consumers. For example, a policy which is stated to cover “accidental flood” or “flash flooding” could give the initial impression that the policy covers risks arising from rivers breaching their banks. However, the policy might contain an exclusion for riverine flooding cover that would be evident on a careful examination.

The different approaches taken in policies to the term “flood” and related terms and potential confusion for many consumers makes product comparison difficult and may lead to underinsurance for flood risk.

The paper notes that the accessibility and affordability of category B (riverine flooding) cover in Australia is a complex issue that involves a range of factors, including availability of flood mapping data, mitigation strategies, availability of reinsurance cover, and others. These matters are being considered in the Natural Disaster Insurance Review and the paper’s objective is not to have all relevant policies cover category B (riverine flooding) risk.

The paper proposes that consumer confusion over the meaning and extent of “flood” coverage may be best addressed by standardising the definition of “flood” and restricting the use of the terms “flood” and “flooding” to the standardised definition.

Standardising the definition of “flood” in policies has been called for by industry and consumer representatives.

The primary objective is said to provide greater clarity on whether or not policies provide cover for category B (riverine flooding).

The standard definition proposal has two elements:

• introducing a standard form of words to describe category B (riverine flooding) risk, which is suitable to use by way of both an inclusion or an exclusion, and which would be required to be used by insurers in all relevant policy language
• reserving the term “flood” and “flooding” for that specific purpose, so that potential confusion with other types of inundation risk is minimised.

The proposed definition is:

Flood means the covering of normally dry land by water that has escaped or been released from the normal confines of:

1. any lake, or any river, creek or other natural watercourse, whether or not altered or modified
2. any reservoir, canal, or dam.

The definition would be accompanied by rules that insurance policies of the relevant class must not include the term “flood” or “flooding”, except in association with the proposed standard definition. That restriction would also prevent those contracts from including compound phrases based on “flood” (for example, “flash flood” and “accidental flooding”).

The paper then canvasses a number of issues that those making submissions may wish to address or consider.

It is suggested that the proposed standard definition and the restriction on usage could be implemented through including appropriate provisions in the Insurance Contracts Act 1984 (the Act). Alternatively, although the existing standard cover regime in section 35 of the Act might be used as a platform, there are likely to be advantages in making the proposal independent of that framework.

Whilst the proposal could be restricted to home buildings and home contents insurance policies, already legally defined through the operation of the standard cover regime in the Act and the Corporations Regulations, to extend the reach of the proposal beyond that class (for example, to retail premises/contents) would require the creation of a new category of policy. Within such a class would be many policies that are not subject to either the standard cover regime under the Act, or even the consumer protection rules in the Corporations Act 2001 applicable to retail customers of financial services.

The second proposal – the key facts statement

As one would expect, a number of policyholders reported that they were not aware, until after the event, of important aspects of their insurance policies.

Information about the terms and conditions of general insurance policies is required to be provided by a combination of the Act and the Corporations Act 2001. The combination of these requirements means that insurers produce, in respect of each relevant type of policy, a Product Disclosure Statement (PDS). The PDS must be issued by the insurer to persons when they first enter the policy. The PDS is required by the law to contain a prescriptive range of information.

The information must be presented in a “clear, concise and effective” manner. If the PDS relates to a certain class of household/domestic contract as prescribed under the Act, it must also “clearly inform” the consumer of any terms of the contract that differ from the standard cover for that type of contract.

The objective of the proposal is said to allow consumers to quickly and easily check the basic terms of the insurance policy, including the nature of cover and any key exclusions. This would help consumers select appropriate products and compare the features of various offerings.

It is not the intention to create a substitute for the PDS. However, the paper does recognise that a proportion of consumers do not read the PDS, either before or after purchase.

The proposal being considered by the Government involves requiring issuers of home buildings/contents insurance policies, in addition to their PDS, to offer to consumers a short statement (one A4 page in length), which contains a set of key facts about the policy.

It is proposed that the contents and format of the key facts statement would be prescribed to some extent, and that each insurer would need to create a key facts statement for its policies that accorded with the requirements. A number of options for the nature of the requirements are set out in the paper, which includes a draft sample of such a statement, for consultation purposes.

Whilst the proposal is directed at home buildings and home contents policies, it is suggested that when the proposal is refined in relation to those policies, an assessment will be made about whether the initiative could be extended to other classes of policy.

Other initiatives

Aside from the Natural Disaster Insurance Review and the proposals referred to above, the paper highlights other initiatives such as the Government liaising with stakeholders on other improvements to the framework for insurance including:

• reliable flood risk mapping
• timeframes for claims handling
• facilitating payments of insurance premiums via Centrepay, a voluntary, free, direct bill-paying service offered to customers receiving Centrelink payments.

Submissions closed on 13 May 2011.

For further information contact:

• Barry Richardson

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Better late than never – insurance contract law reform in the UK

To the surprise of many the Consumer Insurance (Disclosure and Representations) Bill had its first reading in the House of Lords on 16 May. This first stage is a formality whilst the second reading opens the general debate on all aspects of the Bill, which will begin its passage through Parliament in the Lords before reaching the House of Commons. Many had thought it unlikely that the Bill would get parliamentary time and the second opportunity to reform insurance law for consumers would be lost. Michael Mendelowitz and Laura Hodgson consider the main provisions of the Bill.

The Law Commissions of England and Wales and of Scotland began their review of insurance contract law in 2006. Calls for reform of the law on misrepresentation and non-disclosure in insurance contracts are not new. A law reform committee first recommended reform in 1957, followed by further calls in a 1980 report. Indeed, the 1980 English Law Commission report described reform to the law of insurance contracts as “too long delayed”.

There has been widespread support for reform in the area of consumer contracts as the existing law can have harsh consequences on a public largely oblivious to their legal obligations. For many years industry practice guidelines and the Financial Ombudsman Service’s (FOS) approach to resolving complaints have been out of sync with the strict letter of the law.

The current law, set out in the Marine Insurance Act 1906 (MIA) requires prospective insureds to volunteer information about the risk they are seeking insurance for. Section 18 of MIA requires insureds to disclose those “material circumstances which would influence the judgement of a prudent insurer in fixing the premium, or determining whether he will take the risk”. Failure to do so can allow the insurer to avoid the contract. At present there is no obligation in law for the insurer to ask questions and a consumer should consider what information a professional underwriter would wish to know. Very few consumers are even aware of this duty; and, if they are, do not have the means to know what information they are required to volunteer to the insurer. The current law does not take into account what a reasonable consumer might think relevant to disclose.

The 1906 law was drafted in an age when insurance contracts were invariably conducted through brokers who had capacity to advise their customer of their obligations towards the insurer. This is no longer the case. Consumers currently buy a significant proportion of insurance policies through aggregator websites or directly though the insurer – a fundamental shift in the nature of pre-contractual negotiations.

Section 20 of MIA further imposes a duty upon insureds not to misrepresent the information which they do tell the insurer. Any misrepresentation will allow the insurer to avoid the contract. The law will recognise a distinction between a misrepresentation of a fact and an honestly held expectation or belief which then proves to be untrue. Nevertheless, the resulting consequences of an inadvertent misrepresentation (as with a non-disclosure) can be severe where an apparently minor mistake invalidates an insured’s claim.

The proposed new regime: the insured’s duty to take reasonable care

The Bill proposes to change the nature of the parties’ pre-contractual negotiations so that insurers are obliged to ask those questions about the risk they want to know. In response, consumers will be under a new duty to take reasonable care to answer the questions asked by the insurer fully and accurately.

Where a consumer has made a mistake in answering the insurer’s questions, the Bill makes a distinction between “careless” and “deliberate or reckless” misrepresentations. The remedy which an insurer will have in the event of a misrepresentation will depend upon the category of mistake. This new classification of misrepresentations will give legislative effect to the approach currently taken by the FOS. The remedies for the various types of misrepresentations are as follows:

• Where the misrepresentation was deliberate or reckless, the insurer may refuse the claim. A statement will be deliberate or reckless if the consumer knew that it was untrue or misleading or did not care that it was so and knew that the matter was relevant to the insurer. Following a deliberate or reckless misrepresentation the policy will be treated as if it had never existed and all claims by the insured can be refused. This approach is similar to that taken under the current law, although the insurer will now be able to retain any premium unless there are compelling reasons for this to be returned (for example in certain life policies containing an investment element). The retention of premium and avoidance of the policy retains the penal element currently included to dissuade consumers from deliberately or recklessly misleading insurers.
• Where the misrepresentation is merely careless, the Bill provides for a proportionate remedy which will reflect the position that the insurer would have been in had the true facts been known. It is for the insurer to show that a misrepresentation was deliberate or reckless, otherwise it will be deemed merely careless. Under the current law, insurers are able to avoid the entire policy for an innocent misrepresentation with potentially severe consequences for the insured. The Bill provides the insurer with a compensatory remedy. Therefore, where the insurer would have excluded a particular type of claim, the insurer should not have to pay claims falling within this exclusion. Where a warranty or excess would have been imposed, the resulting claim should reflect the policy had such a warranty been included. Where the insurer, on knowing the true facts, would have charged a higher premium, a proportionate settlement should be given to the insured. Finally, where the insurer would have declined the risk altogether, the policy may be avoided and the premium returned.

The proposed new law retains the requirement that the insurer must have been induced by the misrepresentation (as set out in Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1995] 1 AC 501). Consequently, under the proposed Bill, the insurer will still have to demonstrate that, without the misrepresentation, it would not have entered into the contract at all – or at least on the same terms. However, the new law no longer requires the insurer to prove that the misrepresentation would have influenced the judgement of other underwriters in the market. It will be enough for the insurer to show that they were so induced and that a reasonable consumer would not have made such a mistake.

The Bill requires that insureds take reasonable care not to make a misrepresentation. The standard of care will be that of “a reasonable consumer” but an additional element is added which demands that the insurer should take into account the actual circumstances of the individual consumer where they are aware of them. It further includes an additional specification to clarify that a dishonest misrepresentation (even if reasonable to the average consumer) will always be unreasonable. This prevents the more knowledgeable person relying upon the excuse that a less well informed consumer would not have known the significance of a particular fact.

As mentioned above, consumers are required to take reasonable care not to make any misrepresentations. However, the Bill will take into account certain circumstances which will affect the degree of care that should be taken. The following must be taken into account:

• the type of consumer policy and its target market
• any relevant explanatory material or publicity produced or authorised by the insurer
• how clear and specific the insurer’s questions were
• whether or not an agent was acting on the insured’s behalf.

The Bill has largely followed the approach taken by the Financial Services Authority (FSA) and various EU directives in their definition of a consumer insurance contract which covers contracts taken out for purposes “wholly or mainly unrelated to the individual’s trade, business or profession”. However, one key distinction is that the definition will extend the application of consumer law to certain mixed contracts.

Determining the principal of an intermediary

The Bill introduces a statutory determination of when the intermediary will be considered to be acting for the insurer rather than the insured. This matters in those circumstances where it is the intermediary who has acted carelessly or recklessly in transmitting the insured’s information to the insurer.

If the intermediary acts for the consumer, any mistake in the information presented via the intermediary to the insurer will be the responsibility of the consumer. However, where a mistake is made by an intermediary acting for the insurer, any claim must be paid in full.

In its 2007 Consultation Paper on reforming consumer insurance law, the Commissions proposed a single bright line test to determine whether an intermediary acted for the consumer or the insurer. The Commissions’ initial view was that, unless an intermediary clearly acted for the consumer, they should be taken to act for the insurer. In response to considerable criticism of this approach, Schedule 2 of the Bill now states that an intermediary will be acting for the insurer in the following circumstances:

• where the intermediary is the appointed representative of the insurer
• the insurer has given the intermediary express authority to collect the information as its agent
• the insurer has given the intermediary express authority to enter into the contract on the insurer’s behalf.

In other cases the intermediary is presumed to act for the consumer unless, in light of relevant circumstances, it appears that they act for the insurer. The Schedule sets out factors which will tend to show whether the agent is acting for either the insurer or the insured.

Basis of the contract clauses outlawed

The Bill abolishes “basis of the contract” clauses by stating that any representation made by a consumer is not capable of being converted into a warranty by means of a provision of the contract. Basis clauses have been criticised for many years and their use was prevented under the Association of British Insurer’s 1986 Statement of General Insurance Practice (withdrawn in 2005). The FSA rules do not directly outlaw basis clauses, even though their application to consumers would fall foul of the FSA’s Principle 6 (which requires firms pay due regard to the interests of its customers and treat them fairly). In their research, the Law Commissions found numerous examples of the continued use of basis clauses in consumer contracts; the Bill would unequivocally remove these onerous terms from consumer policies.

Proposals for group and life policies

Special provisions are included in the Bill for group insurance schemes. Under section 7 of the Bill, where a misrepresentation is made by a group member of a scheme there will only be consequences for that individual, rather than for the group as a whole. Group policies such as those made by businesses on behalf of their employees do not usually fall within the consumer regime. The proposals ensure that any dispute about a misrepresentation made by a person entitled under the group policy will be treated in accordance with the consumer rules.

In addition to the proposals for group policies, the Bill establishes that where a consumer takes out insurance on the life of another person, and information is provided by the person insured (but not the policyholder) to the insurer, any misrepresentations will be treated as though they were supplied by a party to the contract. Under the current law, should the person insured make a misrepresentation (for example about their state of health) the insurer is not entitled to any remedy as only the policyholder is under a duty not to misrepresent information. In the absence of basis of the contract clauses, the insurer is offered no protection in such circumstances. The Bill addresses this potential problem by placing both the policyholder and the insured under the duty to take reasonable care not to misrepresent information.

Conclusion

It is believed that pressure from Europe to harmonise consumer insurance contracts has prompted the Bill’s introduction into the Parliamentary timetable. We will continue to inform you about the Bill’s progress through Parliament – implementation is anticipated by 2013.

For further information contact:

• Michael Mendelowitz
• Laura Hodgson

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Case notes

R (on the application of the British Bankers Association) v The Financial Services Authority [2011] EWCH 999 (Admin)¹

The British Bankers Association (BBA) has lost its legal challenge to new regulatory provisions and guidance concerning the handling of complaints related to payment protection insurance (PPI). The package of measures was contained in the Financial Services Authority’s (FSA) Policy Statement 10/12: The assessment and redress of Payment Protection Insurance Complaints published on 10 August 2010, which included amendments to Handbook rules, guidance about how complaints should be handled and the basis on which they should be decided, and an Open Letter identifying what the FSA considers to be “common failings” in sales of PPI. The measures include guidance on “root cause analysis”, a mechanism whereby firms may be required to pay redress for losses suffered by those who have not complained.

Amongst other things, the BBA stated that it was concerned that the provisions and guidance effectively apply new standards to past sales (from January 2005). It has been estimated by the FSA that the costs relating to compensation for PPI complaints handling could be between £0.8 billion and £1.3 billion over five years, with wider costs of the package ranging between £1.1 billion and £3.2 billion. Between 3.8 million and 11.3 million non-complainant customers might be contacted and 15 million might be assessed for initial mailing by firms which, according to the BBA’s submission, could lead to at least 35 insurance firms folding at a £35 million cost to the FSA’s compensation scheme.

The judge rejected the BBA’s arguments and held that the provisions and guidance were lawful.

1. The FSA and Financial Ombudsman Service (FOS) were entitled to rely upon Principles which were not themselves actionable by way of damages under section 150 of the Financial Services and Markets Act 2000 (FSMA) in determining compensation claims.
2. The specific rules made by the FSA in the Handbook did not mean that the Principles could not be applied. The Principles provided the overarching framework for regulation, and the specific rules were applications of the Principles. Specific rules could not, therefore, oust the Principles.
3. Section 404 of FSMA authorised the Treasury to authorise the FSA to conduct an industry-wide review of past business and to introduce remedial measures. That procedure had not been followed, but that did not preclude the use of other powers in FSMA.

On 9 May 2011, the BBA published a statement confirming that, in the interest of providing certainty to their customers, the banks and the BBA have decided not to appeal the decision. The BBA states that it continues to believe that there are matters of important principle which it plans to take forward in other ways with the authorities.

¹ This case summary contains elements of a Financial Services Briefing published by Norton Rose LLP in April 2011. 

Sienkiewicz v Greif (UK) Ltd; Wilmore v Knowsley Metropolitan Borough Council [2011] UKSC 10

In March 2011, the Supreme Court unanimously dismissed two appeals against findings of liability for exposure to asbestos.

In Sienkiewicz, Mrs Costello died of mesothelioma on 21 January 2006. She worked for the defendants from 1966 until 1984, during this period she was exposed to asbestos dust, although the exposure was very light. The evidence showed that even if Mrs Costello had not been employed by the defendants, she would have been subject to environmental exposure, and that her employment had increased the risk of disease from 24 cases per million to 28.39 cases per million.

In Willmore, Mrs Willmore died of mesothelioma on 15 October 2009. Before her death Mrs Willmore asserted that she had been exposed to asbestos at the secondary school at which she had been a pupil, by reason of work involving ceiling tiles containing asbestos and the storing of those tiles in a girl’s lavatory at the school.

The Supreme Court, upholding the decisions of the Court of Appeal, held that both defendants were liable in tort.

1. In mesothelioma cases the law recognised that, where there were consecutive exposures by different defendants it was impossible to prove which exposure was the cause of the disease and accordingly a defendant was liable if his exposure constituted a material increase in the risk of the disease being contracted. That meant that, in a multiple exposure case, every defendant faced liability (Fairchild v Glenhaven Funeral Services Ltd [2002] UKHL 22).
2. Under section 3 of the Compensation Act 2006, reversing Barker v Corus UK Ltd [2006] UKHL 20, every defendant was 100 per cent liable to the claimant for the loss.
3. Section 3 did not lay down any principle of causation, but merely provided that if a defendant had exposed the claimant to asbestos and the claimant had contracted mesothelioma, that defendant was 100 per cent liable. The question of causation remained a matter for the common law, the test being whether there was a material contribution to the risk of injury.
4. There was no distinction to be drawn between multiple exposure cases, such as Fairchild, and single exposure cases such as the present, where there was only one defendant and the competing causes were either exposure by the defendant or environmental exposure due to asbestos dust in the general atmosphere. The question was whether the defendant had materially contributed to the risk of injury.
5. The “double the risk” test – whereby if statistical evidence showed that the defendant had doubled the risk of injury, it followed that it was more likely than not that the defendant had caused the injury – had no part to play in mesothelioma cases, and (the majority view) had no part to play in other cases. Epidemiological evidence had to be used with great caution in the context of establishing liability.

For further information contact:

• Rob Merkin

War risks – “ordinary judicial process” exclusion – The Silva [2011] EWHC 181 (Comm)

War and strikes risks insurance against capture, seizure, arrest and detainment usually excludes from cover any detention resulting from the commercial operation of the insured ship, such as action taken to enforce civil debts or obtain security for a cargo claim. The English High Court has recently provided guidance as to the scope of this “ordinary judicial process” exclusion.

On 24 December 2008, the SILVA was arrested in Port Suez to enforce a claim for a share of an unpaid 1996 judgment in respect of a pollution incident in 1989 involving the vessel SAFIR. The share represented a five per cent contribution on damages awarded which was ordered to be paid to “the Judges’ Fund”, for health and welfare benefits to judicial officials and their families.

The arrest was maintained on the basis of evidence that the SILVA was in common ownership with the SAFIR. This evidence was fabricated by a convicted forger who was remunerated by the Egyptian Ministry of Justice for assistance in the collection of debts. Despite this, the Egyptian authorities refused to release the SILVA from arrest. After more than 12 months had elapsed, the insured claimed that the vessel was a constructive total loss. War risks insurers disagreed, relying on the “ordinary judicial process” exclusion.

On the facts, the High Court decided that by no stretch of the imagination could this judicial process be described as “ordinary”. On the contrary, it amounted effectively to extortion. The shipowners were therefore entitled to recover in full.

Exclusion clauses will be interpreted strictly. Where there is ambiguity, an exclusion clause will be interpreted against the party seeking to rely upon it. As a result, it may be necessary for insurers to consider redrafting the “ordinary judicial process” exclusion if they wish to exclude similar claims in future.

For further information contact:

• David McKie

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International focus

China

CIRC drafts rules on the transfer of insurance business in China

On 22 March 2011, the China Insurance Regulatory Commission (CIRC) issued its draft Interim Administrative Measures on Transfer of Insurance Business by Insurance Companies (the Measures) for public consultation. The Measures indicate that a legal framework will soon be in place to facilitate and regulate entire or part transfers of insurance business between insurance companies in China. The consultation closed on 11 April 2011.

Under current Chinese law, an insurance business portfolio transfer can only be completed where a reinsurance arrangement is made or a life insurance company becomes insolvent. The lack of a legal framework for transfers of insurance business has become an obstacle for the restructuring and acquisition of insurers over recent years. The Measures are a response to the recent increased demand for mergers and acquisitions of insurance businesses amongst both domestic and foreign insurers in the Chinese market.

The Measures have 21 articles in total. They purport to protect the interests of both policyholders and assureds. They also set out clear regulatory procedures for insurance companies to comply with when undertaking portfolio transfers.

The Measures state that any proposed transfer of insurance business should be approved by the CIRC. Upon obtaining approval, the transferor should notify policyholders and assureds, requesting their consent. The notification should provide basic information about the transfer proposal and the transferee. Where an assured under a life insurance policy has died, the transferor should notify and obtain consent to the transfer from the beneficiary of the policy concerned. It is unclear what would happen if assureds do not give their consent to the transfer of the policies.

The Measures also require the insurance companies involved in the transfer to make a joint public announcement in the media and on their own respective websites.

The Measures state that the insurance companies involved in the transfer should appoint both professional accountancy firms and law firms to advise on the value of the business to be transferred and on whether the transaction is compliant with applicable laws.

The Measures explain that after the transfer, the transferee assumes all obligations which were owed to the policyholder, the assured and the beneficiary by the transferor as if it were a party to the original insurance policy.

In the event of a transfer of the whole business of an insurance company, within fifteen working days of completion of the transfer agreement, the transferor must apply to the CIRC for cancellation of its insurance permit and to the relevant office of the State Administration for Industry and Commerce for deregistration of its business licence.

The Measures have a number of weaknesses which will need further consideration. Nonetheless, once formally adopted, they will provide a basic legal framework for insurance companies to structure the transfer of insurance business, and achieve their plans for the restructuring and acquisition of insurance business in the Chinese market.

For further information contact:

• Lynn Yang

Germany

Court rules on the imposition of surcharges for deferred payment of insurance premiums

On 29 July 2009, the Federal Court of Justice confirmed that surcharges for deferred payment by way of instalments are invalid if the annual percentage rate is not explicitly stated in the insurance policy. There has recently been a second decision considering this topic in the Regional Court of Hamburg, which came to the same result. These decisions affect a great many insurance companies who apply a surcharge to policyholders for choosing to make biannual, quarterly and monthly insurance premium payments, as opposed to yearly payments.

If an insurance company, which falls within the scope of the decision, fails to use a valid provision regarding surcharges, policyholders may reclaim interest rate payments in excess of four per cent. These decisions may be of interest to insurers in other European countries, as the relevant German provisions were implemented in line with the European Consumer Credit Directives.

A decision in the Regional Court of Bamberg affirmed by the Federal Court of Justice in 2009, stated that deferred payment in instalments constituted the granting of credit by the insurance company. Pursuant to statutory law, the premium for pension insurance falls due annually. The insurance company used its policy to make an offer to the policyholder to defer the payment and, as consideration, demanded a surcharge. This is similar to the standard situation in which a processing fee is paid as consideration for a deferred payment. As with the classification of credit, the annual percentage rate has to be included in the insurance policy.

The scope of the latest Regional Court decision is limited as follows:

• The decision applies to private insurance companies only. It does not apply to contracts with investment funds.
• A consumer needs to be party to the contract.
• The decision only applies if the yearly insurance premium exceeds €200.
• It is unlikely that the decision will apply to private health insurance contracts, which usually provide for monthly payments as standard. The decision only applies when there is a surcharge for payment in instalments instead of annual payments.

The impact of the decision was limited as the litigation was between an association and an insurance company. The court held that the insurance company must refrain from using the invalid provision. However, the case has additional consequences due to statutory law. The failure to include the annual percentage rate means that the statutory interest rate of four per cent applies. Consequently, policyholders are able to reclaim interest rate payments in excess of four per cent, and should only have to pay the statutory interest rate in the future.

It should be noted that the decision needs to be treated with some caution as the Federal Court of Justice did not have an opportunity to decide the case on its facts due to the consent decree, ie, the defendant recognised the plaintiff’s claim irrespective of the merits of the case.

For further information contact:

• Andreas Börner

Hong Kong

Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Bill of Hong Kong

The Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Bill was published in Hong Kong on 29 October 2010. The proposed legislation aims to improve the current anti-money laundering regime by bringing it in line with the prevailing standards adopted by the Financial Action Task Force (FATF). One of the key proposals is the codification of customer due diligence and record keeping requirements, which are largely similar to those set out in the guidelines provided by the Hong Kong Monetary Authority (HKMA), Securities and Futures Commission (SFC) and Insurance Authority (IA).

In relation to beneficiaries of an insurance policy, the proposed legislation suggests that, where a beneficiary is identified, the financial institution must record its name. If a beneficiary is designated by description or other means, the financial institution must obtain sufficient information about that beneficiary to satisfy itself that it will be able to establish its identity at the time the beneficiary exercises a right under the insurance policy or at the time of payout.

The proposed legislation allows financial institutions to conduct simplified customer due diligence in certain transactions involving the following products:

• a provident, pension, retirement or superannuation scheme that provides retirement benefits to employees, where contributions to the scheme are made by way of deduction from income from employment and the scheme rules do not permit the assignment of a member’s interest under the scheme
• an insurance policy for the purposes of a pension scheme that does not contain a surrender clause and cannot be used as a collateral
• a life insurance policy in respect of which an annual premium of no more than HK$8,000 or a single premium of no more than HK$20,000 is payable.

In the event of breach, the relevant authorities (HKMA, SFC, IA, Customs and Excise Department) are empowered under the proposed legislation to take disciplinary action against a financial institution that has contravened the specified customer due diligence or record-keeping requirements. A relevant authority can publicly reprimand the financial institution, and order it to take remedial action and to pay a pecuniary penalty not exceeding HK$10 million or three times the amount of profit gained or costs avoided as a result of the contravention.

The Bill was handed to the Legislative Council on 10 November 2010 and is currently tabled for discussion. Subject to the passage of the Bill, the Government aims to implement the new regime on 1 April 2012.

For further information contact:

• Camille Jojo

Italy

Compulsory mediation procedure subject to legal challenge

On 12 April 2011, the Italian Administrative Court upheld a petition lodged by the National Bar Association. The petition claimed that Legislative Decree no. 28/2010 (which introduced a compulsory mediation procedure prior to the commencement of any lawsuit involving insurance disputes) was not compliant with several of the principles established in the Italian Constitution.

The petitioner reported seven separate examples of constitutional principles allegedly infringed by the Legislative Decree. For example, the petitioner stated that:

• having implemented the mediation procedure as a compulsory condition in order that parties to a dispute might have access to the courts, the Italian Government had exceeded the delegation issued by Parliament, under which the mediation procedure was intended as a voluntary measure to prevent litigation as opposed to a condition for accessing it
• having made mediation compulsory for some of the matters indicated in the Legislative Decree, and not for all, the Italian Government had breached the basic principle of equally regulating similar/comparable matters
• having removed from the requirements any reference to the professionalism and independence of the public/private bodies that will conduct the mediation procedure, the Italian Government had breached the delegation issued by Parliament, under which the mediation procedure should have been carried out by bodies selected under a criterion of professionalism and independence.

The Constitutional Court will make the final decision on this matter. If Legislative Decree no. 28/2010 is considered to be in breach of the constitutional principles, the recently introduced mediation procedure will prematurely expire.

For further information contact:

• Cecilia Buresti

United Kingdom

The House of Commons Treasury Committee publishes details of the Government’s response to its report on the proposals for financial regulation reform

In May 2011, the House of Commons Treasury Committee published the Government’s response to its report on the proposed reform of financial services regulation, which the Committee published in February this year.

The Committee’s report expressed concern that the Government’s current proposals say relatively little about some of the key segments of the financial sector, such as insurance. The Government responds that as the lessons of the financial crisis have predominantly focused on the micro and macro-prudential regulation of the banking sector, it is inevitable that the presentation of proposals for improving regulation should focus on banking. However, the Government states that it recognises the importance of effective regulation in all sectors of the financial services industry. To this end, the Government will ensure that external members of the Financial Policy Committee (FPC) are able to offer insights from direct experience as financial market practitioners, not only in banking but also other sectors such as insurance and investment banking.

In its report, the Committee also discussed the suggestion that the Prudential Regulation Authority (PRA) will focus on what it considers to be medium and high-impact firms and its concern about an implicit acceptance that any failure of a high-impact firm should be avoided. The Government states that although the PRA will focus with great intensity on firms whose failure could cause the greatest risk to the financial sector it accepts that the failure of smaller firms can cause disruption and cost to regulated firms, customers and taxpayers. The Government also indicates its agreement that no firm should be too important to fail and states that it is committed to embedding this approach in the legislation. For example, the PRA will be under a duty to ensure that the cost and disruption arising from a potential firm failure is minimal. This objective makes clear that, to strengthen market discipline and avoid moral hazard, the regulatory system should allow firms to fail.

The Government notes the Committee’s concerns about the description of the Financial Conduct Authority (FCA) as a “consumer champion”. The Government stresses, however, that the term “consumer champion” should be viewed in the context of the FCA’s role as a focused and proactive conduct regulator that is entirely independent and impartial. The distinct objectives of the PRA and FCA should reduce the risk of overlap and the Government discusses the need to coordinate so that both regulators can focus on their core remit.

The Committee discussed the need for the UK to secure appropriate representation on the EU regulatory bodies. The Government is in agreement and explains that the three European Supervisory Authorities (ESAs) will each have a voting member from the UK. The PRA will represent the UK in the ESAs for banking and insurance, whilst the FCA will be a member of the securities authority. The PRA and FCA will work together to ensure that the other regulator and any other relevant authorities are kept fully informed of any matters due to be discussed that fall within their sphere of responsibility. When another body has an interest, the relevant UK member may bring along a non-voting representative of that national body. The Government is proposing legislation which will put the regulators under a duty to coordinate and they will be required to agree a memorandum of understanding which will state how they will manage their engagement with foreign regulatory bodies.

For further information contact:

• David Whear

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