There can be no doubt how hard the sub-prime crisis and the ensuing credit crunch have hit the financial markets. Similarly, insurers and reinsurers have been damaged (some critically so) by their investment strategies. Commentators believe that further damage will follow when the full impact of claims arising from the economic meltdown is felt.
Human nature will lead investors to look for someone, anyone, to blame for negative investment returns. Invariably, investors' fingers will point at those with whom they have a direct connection and more particularly those with deep pockets, for example intermediaries and financial advisers.
Already this year, the Financial Services Authority has acted against advisers regarding the mis-selling of self-certified mortgages and various lenders regarding PPI mis-selling. These actions may yet lead to legal proceedings, in the form of either common law/statutory misrepresentation claims or claims based on regulatory obligations. The sheer size of the penalties imposed highlights the exposures potentially faced by professional indemnity insurers of intermediaries and financial advisers (and, in turn, reinsurers picking up such exposures). It has been a busy decade for the PI market as it has faced the fall-out from the pensions and mortgage endowment mis-selling sagas.
Confronted by the spectre of mis-selling claims, many insurers and reinsurers are considering their positions, although few proceedings have yet been issued. Consequently, it is impossible to say with certainty what legal issues will arise. If the pattern of past mis-selling crises is repeated, aggregation and notification, in particular, may present difficulties.
Aggregation is likely to be an issue since there will be thousands of individual claims. Recent English decisions reveal an unreceptive approach to insureds/reinsureds arguing for the aggregation of several small claims where the policy is subject to a large deductible. The leading authority remains Lloyds TSB v Lloyds Bank Group Insurance (2003) which arose from the mis-selling of personal pensions. The policy provided that various third party claims resulting from any single act/omission (or related series of acts/omissions) could be considered a single claim for the purposes of the deductible. The court held that underlying acts/omissions could form a related series only if their combined operation resulted in each claim (a most unlikely scenario). More recently, Standard Life v Oak Dedicated (2008) considered the mis-selling of mortgage endowment policies. The policy carried an excess of "£25m each and every claim and/or claimant", which was held to mean the excess applied to each individual claim. Faced with aggregation issues, the courts examine the aggregating words in minute detail and apply the particular facts to that wording. Anticipating how a particular aggregation clause will apply to a particular set of facts remains difficult.
Notification provisions, commonplace in reinsurance contracts, are often expressed as conditions precedent. It can be crucial to determine whether a notification clause has been complied with as breach will allow reinsurers to reject the claim. Standard clauses require notification to reinsurers upon knowledge of any losses which may give rise to a claim. In AIG v Faraday (2007), the Court of Appeal held that 'loss' meant not the reinsured's settlement but the underlying loss which might lead to legal proceedings. In this situation, reinsureds face some difficulty deciding when to notify. Certainly, they should consider notifying early, although no claim/loss may develop.
Insurers and reinsurers are well advised to review their wordings, focusing on the above as well as claims control and follow the settlements provisions.
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