UK: Avoiding Internal Market Disputes

How can the insurance market help itself to minimise and avoid costly disputes? In this article, several examples illustrate clearly how you can improve your chances of not ending up in dispute.

Traditionally, the insurance market has relied upon lawyers after the event rather than using them proactively to advise upon or draft wordings. Although this is gradually changing, even where lawyers are used the relative importance of drafting to the insurance market is demonstrated by a reluctance to budget properly for drafting work. The wording is a legal document which may, if disputes arise, end up being interpreted by the courts, therefore ensuring that your wording is legally certain at the outset can avoid problems later on.

Contract certainty may help to reduce disputes but there are other causes of dispute within the market itself which could be avoided. Potentially unnecessary disputes continue to arise between insurance layers, with costly implications for the market. These disputes are entirely predictable, arising out of the uncertainty of litigation and a reluctance on the part of the primary insurers to exhaust its layer in settling a particular claim.

A typical example would be as follows.

1. the claim is worth £6 million;
2. the primary layer is £3 million;
3. the claimant offers to settle for £3 million; and
4. lawyers of the primary layer advise that insurers have no better than a 50 per cent chance of defending the claim.

The primary insurers take the position that unless the excess insurers contribute, there is no point in exhausting their limits and therefore they may as well fight the litigation. On the other hand, excess insurers say in response that they should not need to contribute to a loss within the primary layer when the primary layer has been paid premium to cover liability up to £3 million. Usually, the excess layer will also allege that the primary layer owes a duty to the whole market to settle the claim in good faith.

This type of problem can result in legal proceedings being brought by excess insurers against primary insurers. Another example is when lawyers for the claimants have seen settlement offers refused because primary insurers will not settle within their layer. This has resulted in liability insurers losing in the court at first instance and the Court of Appeal before finally being required to pay the full amount of the claim as well as all of the costs.

If these disputes are predictable it should be possible for the market and its legal advisers to provide a solution. The problem is quite clearly caused by a lack of contractual interaction between the various insurance layers; this includes a failure to focus on duties, provide a formula for resolution or even contractually to provide for a speedy market dispute resolution procedure for these problems.

The same sort of dispute may also arise out of the relationship between lead insurers and the following market. Various market initiatives have taken place recently but frequently there is still an inadequate contractual framework clarifying the obligations, expectation of service, remuneration for service and extent of indemnity between the lead insurer and the following market. Lead underwriter agreements are rarely satisfactory.

However, perhaps the most obvious opportunity of a cost saving arises in respect of subrogation.

First party property insurance cover provides an insured with the comfort of being able to recover its loss without litigating against potentially culpable third parties. However, insurers will wish to utilise the insured's rights to subrogate against those culpable third parties to make a full or partial recovery. The third party will most probably be indemnified by liability insurers (for example, product liability, public liability, professional indemnity or otherwise). Indeed, many insurers will cover, to a greater or lesser extent, all of these classes of business.

Matters may sometimes be complicated by the existence of uninsured losses or substantial deductibles but, usually, subrogation litigation is a recirculation of money within the insurance market.

However, rarely are claims handlers prepared to make early contact with their counterparts to negotiate or mediate an early settlement. When mediation does occur, it is usually in the later part of the litigation, frequently close to trial after substantial legal fees have been incurred. There is clearly an opportunity for the market to set up its own pre-litigation mediation service or at least for both property and liability insurers to sign up to a litigation protocol which encourages early communication between the respective parties.

This lack of communication and generation of unnecessary legal costs is of course exaggerated where an incident such as the explosion at Buncefield generates multiple claims. There was expectation shortly after the loss that the respective defendants would be taking a proactive and sensible response to commercial subrogation claims. It was anticipated that there may have been a similar response to the Buncefield explosion as there had been to the Toulouse incident. However, despite there being a good deal of talk about structured settlements and possible mediation resolution, the respective sides of the market appear to be embedded in litigation. Very few, if any, of the commercial property disputes have been settled or even agreement reached as to quantum. There are complicating factors with such a high profile incident, such as the involvement of the HSE, possible criminal proceedings, the involvement of the large retentions and the involvement of Oil Mutual, but it should have been possible to put in place at a very early date a consultative process to avoid the current situation where substantial parasitic costs are being incurred, not only by the lawyers but also loss adjusters and others.

It should also be remembered that the court system is ill suited to dealing with multiple claims and is a very cumbersome method of arriving at a solution.

There is a good deal that the insurance market could do to facilitate the early resolution of disputes using the skills of legal advisers to create early dispute resolution processes/protocols, in addition to those commercial mediation services which are already available to the market but are frequently only used as a last resort.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.