An audience of market professionals met at Berwin Leighton Paisner LLP’s bi-annual insurance seminar in London on 20 May 2014 to discuss topical issues.
The seminar was introduced and chaired by Senior Reinsurance Partner, Jonathan Sacher. The themes explored in the event were Ombudsman Awards, Leader/Follower obligations, recoverability of defence costs in liability policies and the first year of the PRA/FCA’s dual regulation of the insurance industry.
Head of Insurance, Anthony Lennox, discussed the recent Court of Appeal decision in Clark v In Focus Asset Management. This case considered whether a Complainant to the Financial Ombudsman Service (“FOS”), with a FOS Award, could subsequently pursue the same claim by civil proceedings. Anthony noted that the Court of Appeal had decided Mr & Mrs Clark were barred from continuing their civil proceedings on grounds of “res judicata” arising from the FOS Award. Anthony’s view was that Complainants with a claim exceeding £150,000 would now be ill-advised to pursue their claim through FOS, unless the insurer agreed to be bound by the FOS Award. Anthony predicted this decision would run contrary to the use of FOS as a cost-efficient way of determining disputes.
Partner Neil Owen then discussed the impact of the recent judgment of the Court of Appeal in San Evans Maritime v Aigaion Insurance. The case considered whether a lead underwriter could release a following market (company) underwriter from its obligations to follow the lead’s settlement. Neil noted that the court once again avoided having to decide whether there was an agency relationship between lead and follower, deciding instead that the follower had bound itself in contract with the insured to follow the leader. Consequently, only the insured, not the lead, could release the follower from its follow obligation. Neil observed that this decision shouldn’t affect the obligations which exist between lead/second and follower under the Lloyd’s Claims Scheme as insureds were not counter-parties to that scheme. Nor does the decision increase the risk of a lead/second being exposed to suit by a follower. Neil said that for a lead to avoid a risk of suit in circumstances where it wanted to negotiate its own settlement, the lead could either make each following market a party to the settlement agreement or, if that was not desirable, enter into a collateral agreement with the insured and each follower which expressed the lead’s settlement not to be binding on the followers.
Defence Costs in Liability Policies
The Court of Appeal decision in AstraZeneca v XL Insurance was discussed by partner Andrew Rose. Andrew recommended that the right to payment of defence costs should always be included as a standalone provision in liability insurance policies. It was also necessary, in Andrew’s view, to now specify this provision was to be triggered only by the making of a claim (not the establishment of actual liability).
PRA/FCA Dual Regulation
Finally, partner Nathan Willmott gave an overview of the first year of the PRA/FCA dual regulation of the insurance sector. Recent months have shown a real surge in regulator interest in the commercial insurance market, demonstrated through a large number of skilled person reviews, thematic reviews on issues such as coverholders, reserving and claims-handling, and the governance and risk management systems in place at UK insurers. Among a range of emerging themes, Nathan identified the significant overlap between the areas of interest of the PRA and FCA, with the FCA taking an active interest in core prudential issues such as Board level governance; while the PRA appears to be interpreting its “policyholder protection” objective broadly and therefore duplicating the FCA’s remit in the area of conduct risk.
Nathan identified that the PRA’s recent consultation on its proposed “Fundamental Rules” for banks and insurers indicates a desire to introduce strict liability for firms where they experience failings in system and control/risk management frameworks – even where they had taken all reasonable steps to manage risk. Furthermore, rumours from the regulators indicated that fundamental reform of the approved persons regime would include insurers and not be limited to banks. In summary, it was clear that the spotlight would remain on the insurance sector for the foreseeable future.
In addition to the debate generated on these issues, discussions after the presentations also centred upon whether claims handling within the insurance industry would become a renewed focus for both the PRA and the FCA and whether the AstraZeneca decision represented a positive development for the London insurance market. We are sure the year ahead will throw up many more cases and developments for the insurance industry which will provide much food for thought for the next seminar.