UK: Insurance And Reinsurance Weekly Update - 4 February 2014

Last Updated: 11 March 2014
Article by Nigel Brook

Welcome to the fourth edition of Clyde & Co's (Re)insurance and litigation caselaw weekly updates for 2014.

A summary of recent developments in insurance, reinsurance and litigation law.

Insurance contract law reform

The Law Commissions have produced some draft clauses which they intend to include in a bill later this year.

This week's caselaw

Unite v Liverpool Victoria

Judge decides whether a claimant is entitled to commission where insurance products were sold to its members.

"Aeroflot - Russian Airlines" v Berezovskaya

A case on whether a court should impose restrictions on the disclosure of confidential documents.

Insurance contract law reform

The Law Commissions have produced some draft clauses which they intend to include in a bill later this year (and they hope that the bill will follow the special Parliamentary procedure for uncontroversial Law Commission bills). It is envisaged that business insurers will be able to contract out of all of the changes (business insurance covers insurance taken out by all businesses and individuals who buy insurance related to their trade, business or profession, as well as reinsurance and marine insurance). Some of the key proposals (and accompanying commentary provided by the Law Commissions) are set out below:

(1) Utmost good faith/non-disclosure: These proposed changes will apply only to business insurance. It is proposed that the duty to volunteer information will be retained. An insured will have to make a fair presentation, which will include putting a prudent insurer "on notice" and giving sufficient "signposts". An example given is where an insured says he makes valves and then lists his 3 principal clients (all in the petrochemical industry). This would be sufficient to inform the insurer of the possible increased risks should the valves fail because they are being used in a combustible industry.

The Law Commissions also intend to target the practice of convoluted presentations and data dumping: "a lack of structuring, indexing and signposting may mean that a presentation is not "fair"". Hence, a proposed clause requires disclosure "in a manner which would be reasonably clear and accessible to a prudent underwriter".

When deciding what an insured knows, it is the knowledge of senior management or those responsible for arranging the insurance which matters. An insured must carry out a reasonable search for information, and what is reasonable will depend on the size, nature and complexity of the business.

An insurer "ought reasonably to know" something if it is known to an employee/agent who ought reasonably to have passed it on, or relevant information which is readily available. An insurer will also be presumed to know things which are common knowledge, or which an insurer offering insurance of the class in question to insureds in the field of activity in question would be expected to know in the ordinary course of business.

It will be possible to avoid a policy (and keep the premium) where the insured was deliberate and reckless. In other cases, a scheme of proportionate remedies will apply (including avoidance with a return of premium and a proportionate reduction in the policy proceeds).

(2) Fraudulent claims: The Law Commissions propose retaining the rule that an insurer is not liable to pay a fraudulent claim and can recover any sums already paid in respect of it. It is proposed that the insurer will also have the option of terminating the contract from the date of the fraudulent act (not discovery), without any return of premium. The insurer can then refuse to pay any claims from that point onwards (but will remain liable for legitimate losses before the fraud).

(3) Damages for late payment: The Law Commissions propose that it will be an implied term of an insurance contract that insurers will pay sums due within a reasonable time. Late payment will attract damages from the insurer. Insurers will be allowed a reasonable time for investigating the claim and reasonableness will depend on, amongst other things, the type of insurance and the size and complexity of the claim. Where an insurer can show reasonable grounds for disputing a claim, failure to pay the claim while the dispute continues will not be a breach of the implied term. An insured will also be entitled to recover interest pursuant to the contract and/or statute (e.g. section 35A of the Senior Courts Act 1981).

(4) Good faith: In addition to the duty of good faith in relation to non-disclosure and misrepresentation, the Law Commissions have also dealt with the overarching principle of good faith, which applies to both the insured and the insurer. In particular, the Law Commissions have noted that where an insurer breaches this duty, the remedy of avoidance is unsatisfactory because the insured generally wants its claim paid. Accordingly, the Law Commissions propose abolishing the remedy of avoidance for a breach of the duty of utmost good faith. The Law Commissions do not suggest a remedy of damages instead (despite contemplating introducing that remedy in their sixth issues paper). Rather, they suggest that the courts will allow good faith to be used as "a shield rather than a sword" i.e. insurers may be prevented from exercising an apparent right if they have not exercised it in good faith.

(5) Warranties: The Law Commissions are still working on clauses dealing with reforms to warranties.

Click here for a link to the draft clauses and the Law Commissions' accompanying notes:

Unite v Liverpool Victoria

Whether claimant entitled to commission where insurance products were sold to its members

The claimant trade union entered into an agreement with the defendant, which sells insurance products. In return for access to the claimant's members for marketing purposes, the defendant agreed to pay a commission to the claimant. However, some members of the claimant purchased the defendant's insurance products directly and without using a dedicated telephone line and website identified in the marketing materials sent to them. As a result, the parties disputed whether the claimant was entitled to its commission for all products sold to the claimant's members or only for those products sold via the telephone line/website. This depended on the interpretation of the term in the agreement between the parties which obliged the defendant to pay commission "in respect of the Services". In turn, the judge was required to decide the scope of "the Services".

Teare J rejected an argument by the claimant that it covered any selling of the insurance products to its members. The selling in question had to follow advice and marketing to the members. However, he also rejected the defendant's argument that only those sales to members via the designated channels fell within the scope of "Services". Although he accepted that that construction would have been consistent with the aim of the agreement, there was no specific reference in the agreement to sales through a designated channel. Certain members might read the marketing literature sent to them directly and then purchase a product in the same way as any member of the general public.

Accordingly, the judge concluded, on the facts of the case, that commission was payable when there was a causal connection between the Services (i.e. marketing) and the earning of premium. He rejected an argument that his conclusion was unworkable in practice. He held that practical problems arose here only because of the general success of the defendant in marketing to the general public after the agreement was concluded and "the parties, with the assistance of the marketing expertise available to them, are probably able to assess the likely percentage of the sales to union members who did not use the designated channels which resulted, in part, from the marketing envisaged by [the agreement]".

"Aeroflot - Russian Airlines" v Berezovskaya

Whether court should impose restrictions on disclosure of confidential documents

The issue in this case was whether information which was confidential to a non-party should be disclosed to the claimant. It is well-established that the fact that documents are confidential does not confer any privilege against an order for disclosure. However, the court does have a discretion whether to order disclosure. The relevant test is: (i) whether disclosure is necessary to dispose fairly of the proceedings; (ii) whether the information can be provided in a way which does not breach confidentiality; (iii) can the court place restrictions on the use of the information; and (iv) if so, should those restrictions be imposed.

Morgan J concluded, following earlier caselaw decisions, that it was not open to him to order disclosure to the claimant's lawyers but not the claimant itself. However, he also concluded that he did have power to allow a party to rely on the confidential information subject to certain restrictions. The judge ordered that disclosure of confidential information be restricted to certain named persons within the claimant and be made by way of a single hard copy which must not leave the specified office for each named person. Express written undertakings must be provided by each named person to maintain confidentiality and to not use the confidential information otherwise than for the purpose of the proceedings. Both the parties and the third party have permission to apply as to how the documents would be dealt with at the hearing and as to the terms which should be imposed for the eventual destruction or return of the documents.

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.

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Nigel Brook
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