Key changes spell harmony
27 February 2006
Although not traditionally heralded as one of the sexiest areas of law, insurance has generated remarkable sparks in recent weeks.
First insurance giant Axa hit the headlines by launching a search for its first-ever formal global legal panel. Fewer than 10 lucky firms are expected to win a place on the panel and benefit from a share of Axa's multimillion-pound legal budget.
Next we saw a flurry of lateral insurance hires, most notably the defection of US firm Swidler Berlin's entire insurance group to rival Heller Ehrman's Washington DC office, apparently to avoid client conflicts generated by the merger of Swidler and Bingham McCutchen.
This Insurance Special Report examines the technical developments within the sector, including the regulatory and market impact of the rise of corporate partnerships.
It also examines the Law Commission's recommendations on insurance regulatory reform and their implications for the future, as well as the increasing use of international arbitration within the insurance sector.
The MIA has survived essentially unchanged, with very little supplementary legislation (with the possible exception of the Third Party Rights Against Insurers Act, 1930). In lieu of a new or updated act, we have simply seen further regulation. But can this really be the most effective way of achieving transparency, certainty and clarity of the rights and obligations arising in relationships between insurers, insureds, reinsurers, brokers and other intermediaries?
Previous criticisms of the existing law have focused on the heavy consequences of non-disclosure and breach of warranty, and yet have still come to nothing. The Law Commission is now looking, once again, at the need for insurance law reform, and on 18 January 2006 published a scoping document inviting feedback, with a consultation document to follow later in the year. Consequently, the industry now has a tremendous opportunity to exert influence and effect fundamental changes.
Is reform needed?
The MIA is 100 years old, drafted long before the advent of commercial air travel, computers, the global finance markets, the internet or global warming.
There is no programme for convergence with Europe on insurance law. The UK insurance industry needs legal reform to help it remain competitive with its European, US and Bermuda counterparts.
The London market is an expensive base from which to operate, in part due to regulation, and the London market has a reputation for being slow to meet claims. Reform of underlying law, rather than a tidal wave of regulation, will provide an opportunity to quicken the pace.
London is a historic centre of insurance. If the London market does not provide an influential lead on insurance law reform, the EU may pre-empt it with measures less to the market's taste.
The current act does not have a consistent approach to dealing with fraud and is anomalous in its treatment of agency relationships. Remuneration models require an overhaul. Reform could help smooth the peaks and troughs of the much- maligned insurance cycle.
The Law Commission's paper is expected to open a debate across the UK insurance industry as to how the market can engineer reform that assists it to become more competitive. Key issues the industry ought to examine for relegislation include: transparency, remuneration, agency relationships, contract certainty, time to speed up the claims process, a consistent approach to dealing with fraud and subrogation.
The question of broker remuneration spills over into the oft-cited need for transparency within insurance relationships. The broker is usually considered to be the agent of the insured party and as such is required to look out for their best interests. The broker also has a role in advising on and obtaining the right terms and in dealing with claims when they arise. New York Attorney-General Eliot Spitzer has questioned how a broker can be free of conflicts of interest if they are receiving remuneration from the other party in a transaction where the broker is supposed to be advising the insured.
The legal anomaly is that, by convention, the insurer pays the broker's commission, notwithstanding that the broker is the agent of the insured, to whom they owe most of their duties. If the broker is being paid by the underwriter anyway, does it matter if the underwriter pays them a little extra without the insured knowing about it? While the answer of course is yes, it nevertheless reflects the tangle of current legal relationships under the existing insurance law and re-emphasises the need for a clearer restatement of the duties owed, and to whom.
The MIA permits the execution of a policy "at some point" after inception (under Section 22) while failing to specify exactly how long after this refers to. With the various forms of instant electronic communication available today, it is difficult to justify, even with such a complex document as an insurance contract, why a full policy wording should not be in place at the time the risk incepts. And yet such instances are not unknown - indeed there are plenty of examples of the problems caused by incomplete or insufficiently clear contracts based upon short form slip definitions.
Under pressure from the Financial Services Authority, the London market has committed to achieving contract certainty, at inception, by the end of 2006. With some flexibility and competitive edge endangered in the process, new legislation is preferable to piecemeal regulation.
The London insurance market is often criticised for (as it appears to policyholders) the inordinate time insurers sometimes take to decide whether or not to pay a claim.
Under the existing legislation, there is no sanction against them doing this (as there is in other countries such as Spain). However, the reality is that insurers have to conduct investigations into non-disclosure or misrepresentation with great care, which can delay a final decision significantly. If their investigation can be said to have been inconsistent with avoiding the entire policy, a policyholder's lawyers can (and will) argue that insurers have waived their right to avoid for non-disclosure or misrepresentation by their conduct. This is the case even if there may have otherwise been a valid reason to avoid the policy.
The remedies for fraudulent conduct by a policyholder, both when obtaining the policy and subsequently (notably during the currency of a claim) are uncertain. There is no consistency of approach to this problem. Some insurers insert clear and unequivocal contractual provisions within their policies, setting out the consequences of fraud. Yet few, if any, actually define what constitutes fraudulent conduct. Those that do not have any contractual provisions stating the consequences of fraud have to rely upon common law rules to govern the outcome.
Owing to the inherent complexities of modern commercial transactions and insurance programmes, many insurance disputes often involve more than two parties. This is particularly evident in the construction sector, where for example disputes involving landlords and tenants often lead to an uncertain environment for all concerned.
If a third party can establish a clear contractual obligation, whereby they have contributed to the insurance premium, why should they not have absolute certainty that they will not be sued for negligence by those insurers for a recovery of the claim outlay?
The London market has long been regarded as a global leader of insurance. To maintain this position, and to have an influential say in the inevitable eventual push from the European Parliament towards greater harmonisation of insurance law, we must encourage a thorough review of insurance law in this country and identify the legislation necessary to make it fit for the needs of the 21st century insurance market.
Kenneth McKenzie is head of insurance at Davies Arnold Cooper