UK: 2005: insurance law roundup

From the market perspective 2005 will be remembered for the extraordinary number of natural disasters, the consequences of which will most probably result in a market loss for the first time since 2001 and increased capacity next year. From the legal perspective there have been no similar cataclysmic events, although a number of interesting and important developments have occurred.

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From the market perspective 2005 will be remembered for the extraordinary number of natural disasters, the consequences of which will most probably result in a market loss for the first time since 2001 and increased capacity next year. From the legal perspective there have been no similar cataclysmic events, although a number of interesting and important developments have occurred.

Responsibility for the insurance industry passed to the Financial Services Authority at the beginning of 2005. Since then it has begun to implement its statutory objectives to ensure "market confidence" and "the protection of consumers". It is hardly surprising that the FSA identified inadequacies in insurance contracts and documentation as a significant risk to achieving these objectives, as these problems have bedevilled the market for many years.

This year FSA has worked with the insurance industry towards meeting its ambitious target of achieving "contract certainty" by December 2006. A contract certainty Code of Practice is now in place, which aims to standardise the way business in the London Market is conducted, so that complete and final agreement of all terms is agreed before inception. FSA has also been encouraging individual firms to establish contract certainty projects or initiatives to prepare for the inevitable changes. Firms should be prepared to meet the December 2006 deadline or face sanctions, such as restriction to business activity or additional capital weightings.

The British Aviation Insurance Company Limited ("BAIC") decision in July 2005 cast doubt on the practice of insurers using solvent schemes of arrangement to terminate direct books of business (instead of waiting years for the run-off of business to be completed), but the recent decision in the Dutch Aviation Pool ("DAP") case proves that such schemes are still possible.

In BAIC the court refused to sanction a solvent scheme. The two most important points to emerge from the decision were: first that in a solvent scheme, where the alternative is a continuation of the solvent run-off, IBNR creditors must be in a separate class from creditors with accrued claims, and second, that it could be unfair for direct policyholders to have to estimate their future claims and be paid a figure based on an estimate, rather than receiving a full indemnity if and when the claims materialised, thus enabling the court to refuse a scheme, even if approved by creditors.

In DAP the scheme was revised to address these points, although since the scheme was insolvent IBNR creditors did not have to form a separate class as the rights of all creditors were viewed in the context of the company wind-up rather than in the context of run-off continuation. Direct policyholders were also excluded from the scheme.

The DAP decision confirmed that the insurance industry can use schemes of arrangement; although it would appear that certain restrictions remain, namely not to include direct policyholders in any scheme, and to have a separate class of IBNR creditors in solvent schemes.

On 8 December 2005 the keenly awaited Court of Appeal decision in Bonner v Cox & Others (Aon 77) was handed down. Reinsurers agreed to reinsure the Cover underwriters in respect of risks attaching to business known as the '77 Cover. Reinsurers asked the Court of Appeal to reconsider whether Cover underwriters were in breach of duty of care when writing a particular loss making risk, referred to as the Oceaneering risk.

At first instance the trial judge found that there were implied terms in the reinsurance that:

• A policy would only be declared to the Cover if it had been the subject of an underwriting judgment made by the lead underwriter;

• The policies to be accepted to the Cover would be those which in the ordinary course of business the lead underwriter would write, taking account of its reinsurance.

The Court of Appeal concluded that the reinsurance was not subject to any of the implied terms contended for "and would reach the same conclusion in respect of any non-proportional reinsurance". The decision reiterates the widely held view that the Courts are unwilling to rescue careless reinsurers who have effectively been taken advantage of by astute reinsureds.

Whether, and to what extent, brokers were obliged to produce placing and claims/accounting documents to underwriters was considered in the case of Goshawk Dedicated Ltd & Ors v Tyser & Co Ltd & Ors [2005]. The issue for the court was whether underwriters were entitled to placing, claims and premium/accounting documents from brokers' files in circumstances client consent could not be obtained.

The Court found that an underwriter in the Lloyd's market had no "right" to see placing/claims documents already made available to him at the time of placement. When considering a request to provide such documents brokers had to place the interests of their clients above other considerations and should not necessarily disclose material other than for use in the normal course of business, unless consent is obtained or production ordered by a court. Whilst Christopher Clark J did not rule what precisely the brokers had to produce he made it clear that he would not fetter the Court from exercising its discretion independently to refuse to compel production of any documents held in broker's files if they were of limited relevance, or whether such production would involve effort and expense disproportionate to any value that the documents might have.

The decision has been appealed and the Court of Appeal's judgment is expected shortly.

The important Court of Appeal decision in Friends Provident Life & Pensions v Sirius International Insurance sounded the death knell for the "innominate term", a concept seemingly introduced into insurance contracts by Waller LJ in Alfred McAlpine v BAI (Run-Off) Ltd [2000]. In that case Waller LJ raised the possibility that a claims notification clause not expressed to be a condition precedent to liability might be an "innominate" term, the breach of which if sufficiently serious would entitle insurers to repudiate liability for the claim.

In the instant case, FP sought indemnity from excess layer cover under a PI policy. The appeal concerned a clause in the policy requiring notification of claims "as soon as possible". At first instance this clause was held to be an innominate term which FP had breached seriously enough to allow excess layer insurers to avoid. However the decision was reversed on appeal.

Mance LJ for the majority stated in forceful terms "[there is] no justification for the introduction, whether as an implied term or as a rule of law by a previously unknown extension of the doctrine of repudiatory breach or on any other basis, of a novel form of protection for insurers. HHJ Seymour QC has since confirmed that the innominate term is no more in Ronson International Ltd v Patrick.

The cases of Axa General Insurance Ltd -v- Gottlieb and DanePoint Ltd -v- Allied Underwriting Insurance Ltd have reinforced the obiter dicta of Mance LJ in Agapitos -v- Agnew [2002] that the remedy available to insurers for a fraudulent claim is for forfeiture of the relevant claim, rather than avoidance of the whole contract "ab initio". However the Court in these cases did not have to decide (and thus left unanswered) whether a fraudulent claim brought the policy to an end. Thus, it is still not clear whether insurers can refuse to pay a legitimate claim that is made after a claim tainted by fraud.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 12/01/2006.