UK: Insurance/Reinsurance Bulletin, June 2009

Last Updated: 9 June 2009

Reinsurance Fraud Allegations Are Justiciable
Korea National Insurance Corporation v Allianz Global

By Andrew Bandurka

In this unusual case, the Court of Appeal ruled that reinsurer (Allianz) allegations of fraud against the North Korean state-owned insurer, KNIC, are "justiciable" (i.e. capable of being tried in England), and therefore capable of forming a defence to KNIC's reinsurance claim, despite the potential of those allegations to cause diplomatic embarrassment between the UK and North Korea.

Overcoming Allianz' allegation of fraud, KNIC had obtained judgment in the North Korean court against Allianz, in accordance with the jurisdiction clause in the reinsurance contract, and sought to enforce the judgment in the UK. Allianz alleged the judgment had been procured by a fraud, instigated or approved by the North Korean Government with KNIC's knowledge or participation, and that the judgment was unenforceable on public policy grounds since the North Korean judiciary, which gave the judgment, was controlled by the Government, which instigated or approved of the fraud.

The fraud allegations directly concerned the claim itself (which involved a helicopter crash and resulting damage to a warehouse and its contents), but also relied on fraud inferred from a breathtaking litany of past alleged criminality on the part of the North Korean state, including the involvement of North Korean diplomats in drugs trafficking, and state involvement in counterfeiting currency, cigarettes and pharmaceuticals.

These fraud issues will not now be decided by the court, because the case has been settled, nevertheless the Court of Appeal did rule that the fraud allegations were justiciable and should not be struck out. This rested partly on the fact that the British Government, despite having been give the opportunity, had not indicated that a decision would embarrass diplomatic relations with North Korea, and partly on the fact that the relevant legal authorities did not support any proposition that, in a commercial context, when allegations are made against a state, not in relation to a sovereign act carried out in its own jurisdiction but in relation to acts which affect the rights of a party under a commercial contract, the court should exercise restraint. Waller LJ said "If a foreign state were an insured under an insurance contract the insurers cannot be precluded from alleging a fraudulent claim simply because that might embarrass the foreign state. It cannot be any different if a state entity makes the claim and it is asserted that both the entity and the state owner were involved in the fraud."

The case is quite unusual and may be confined to its facts. Nevertheless it may provide some comfort to re/insurers of state-controlled entities in certain regimes which are starved of hard currency and where the independence of the judiciary and the state is, at best, questionable.



Drop Down Clauses in Umbrella Policies

By Andrew Dunn

Multi-national assureds often supplement local insurance cover (within a given single jurisdiction) with a worldwide master or umbrella insurance policy which responds excess of the local policy limit. Sometimes, the umbrella policy will contain "drop down clauses" – which operate so as to reinstate cover under a local policy which may otherwise have been exhausted. This can give rise to the question: on what terms is the local cover reinstated?

In Flexsys America L.P. v XL Insurance Company Ltd, Tomlinson J. had to consider a claim by Flexsys under its global umbrella liability policy (US$25 million x/s US$1 million) after a local US liability policy up for $1 million had been exhausted in defending "advertising liability" claims. Aside from the different policy limits, the local policy provided cover against advertising liability on terms which were materially broader than those of the master policy. Flexsys tried to argue that the drop down clause in the umbrella policy not only reinstated the broader terms of the local cover, but sought to apply those broader terms up to the full policy limit of the master umbrella cover ($25 million) rather than just the $1 million limit of the local policy.

Tomlinson J. decided that Flexsys could not do so. His starting point, not surprisingly, was that the operation of a drop down clause would be dependent upon its wording, which in the present case was: "In the event of total exhaustion of a local policy this [master/umbrella] policy will continue in force as the underlying insurance, subject to the terms .... of the particular local policy". Whilst the facts giving rise to Flexsys' exposure, which could trigger the local policy but not the master policy, may have been the exception rather than the usual or paradigm case, there was no reason not to give effect to the terms of the umbrella policy in respect of the loss above the limit of the local policy. The court therefore applied the terms of the umbrella policy and refused Flexsys' claim for cover up to the limits of the master policy, as if it had been written on the terms of the broader local policy.

The case highlights the importance of policyholders and their insurers co-ordinating the terms on which local and umbrella cover are purchased.



Credit Where Credit Is Due

By Kapil Dhir and Andrew Carpenter

On 1 May 2009 the Department for Business, Enterprise and Regulatory Reform ("BERR") announced the launch of the government trade credit insurance top-up scheme. See the following for full details: http://www.businesslink.gov.uk/bdotg/action/detail?r.lc=en&type=ONEOFFPAGE&itemId=1082435828&r.s=sl

The scheme will run until 31 December 2009. It is hoped that the scheme will be of use to businesses who are at the limits of their trade credit insurance availability. The suppliers will be able to purchase government-backed trade credit insurance. The value is determined by the level of cover provided by the existing underlying trade credit insurance policy. The minimum amount of cover is £20k and a maximum £5bn is available under the scheme.

ABI Statement

Just prior to the BERR announcement, ABI published a statement of principles for trade credit insurance. The statement may be found at: http://www.abi.org.uk/Document_Vault/Trade_Credit_Statement_of_Principles.pdf

The principles set out how trade credit insurers operate and what their clients can expect from them. The ABI notes that many credit insurers already follow those minimum standards, and indeed some go beyond them. The ABI has also published advice to businesses on trade credit insurance to assist clients of credit insurers in understanding the information expected from them. The link to that advice is: http://www.abi.org.uk/Members/circulars/viewAttachment.asp?EID=22610&DID=17616



Credit Insurance In The Economic Downturn

By Graham Denny

Credit insurance plays a vital role in companies' trading activities and financial stability. The sectors heavily reliant upon credit insurance include the construction, electronics and retail sectors and these are areas which have been badly hit in the current economic downturn.

Since the end of last year a number of countries have taken steps to shore up the availability of credit insurance to safeguard trading activity. At the end of last year France introduced CAP, an initiative intended to supplement the credit insurance already provided to companies. In the last month France has announced a further initiative, CAP+, intended to provide credit insurance cover for risks that are considered uninsurable. In Canada the government have offered up to C$1 billion in funding to the country's six private credit insurers. Portugal has expressed an interest in purchasing a local credit insurer to secure additional support for the country's exporters. In the UK too, Alistair Darling has announced a credit insurance initiative.

HFW has recently advised a number of parties on their obligations under credit insurance policies. The prevalent issues focus on the pre-qualifying requirements for a covered loss and policyholders' adherence to their ongoing claims obligations under the policy.

There can be many pre-qualifying requirements. These include ensuring that the transaction from which the loss has flowed is in accordance with the requirements of the policy. Examples include requirements for retention of title clauses to be included in trade agreements; the transaction too must fall within the credit limit provided for that particular buyer; a policy may exclude trade with particular countries and so where a buyer's business is registered may be significant. In addition to these, there are normally ongoing reporting requirements for potential losses and disclosure of adverse information in relation to buyers.

Once the policyholder has suffered a loss, which is a covered loss as defined under the policy, there are ongoing claims conditions which must be adhered to. These can include ongoing reporting obligations and obligations to take reasonable steps to minimise losses. In relation to the latter, consideration should be given to whether such steps have been undertaken soon enough or whether the mechanics of any deals done to minimise losses breach any policy conditions such as maintaining rights against buyers and third parties for insurers. If trading on a global basis, what is reasonable may depend upon the debt recovery options available in a buyer's country.

Whilst adhering to policy terms sounds straightforward, difficulties in securing cover can come where companies, now notifying losses, in boom years have not needed to rely upon their credit insurance and so have not abided by the pre-qualifying policy obligations in their transactions. Companies trading on a global basis from business units worldwide face the logistical difficulty of ensuring their business units comply with policy conditions. In those cases it is important that trading and reporting protocols are in place for those business units that reflect the company's credit insurance obligations.



D&O Update

By Graham Denny and Costas Frangeskides

There have been a number of noteworthy events recently:

  1. In recent weeks the Financial Services Authority (FSA) has signalled that it intends to take a far more aggressive approach to regulatory breaches. Their focus is not just on the companies themselves but also on the individuals at the helm of the companies. Any increase in enforcement action is likely to have a knock-on effect on D&O notifications/claims.
  2. Banco Santander has agreed a $235m settlement with Irving Picard, trustee for the liquidation of Bernard Madoff Investment Securities over its Madoff losses. A legal claim was brought against two funds run by Santander's investment management arm. It is anticipated that the bank's D&O insurers will face a potential payout following the settlement.
  3. In our last bulletin we wrote about the intended introduction of a new responsibility for "senior accounting officers" of large companies as explained in Budget Note 62. The provisions are expected to be incorporated in the new Finance Bill 2009. This will require senior accounting officers of the relevant companies and large groups of companies to take reasonable steps to establish and monitor accounting systems within their companies to ensure such systems are adequate for the purpose of accurate tax reporting. Annual certification that the accounting systems in operation are adequate for the purposes of accurate tax reporting is required or, if they are unable to do so, they are required to specify the nature of any inadequacies and confirm that those inadequacies have been notified to the company auditors. Penalties will be levied against them personally as well as the company where the obligations have not been met through careless or deliberate failure and for giving, whether carelessly or deliberately, an incorrect certificate or notification. The level of such penalties is unclear. It is likely that this will have an impact on financial directors' duties. It is anticipated that the Finance Bill will receive formal assent at some stage this summer.
  4. Lord Justice Jackson's preliminary report on civil litigation costs was published on 8 May 2009. Whether this review on costs will accelerate discussion for changes in legal processes permitting contingency fees and greater access to collective redress is something which needs to be followed closely given the potential effect it could have on claims across the board.
  5. Finally, the prosecution of Cotswold Geotechnical Holdings, on which proceedings commence on 17 June 2009, is the UK's first prosecution for corporate manslaughter under the Corporate Manslaughter and Corporate Homicide Act 2007, which came into force on 6 April 2008. The fact that a director of the firm has been charged with gross negligence manslaughter is a stark reminder for all directors to check their D&O insurance policies to ensure they have adequate cover.


Block Exemption: European Commission to focus more on Insurance & Reinsurance

By Anthony Woolich

On 24 March the European Commission ("Commission") published its preliminary views on renewal of the Insurance Block Exemption Regulation (BER). The BER, which will expire on 31 March 2010, exempts certain agreements between insurance companies from the EC competition rules which ban restrictive business practices. The Commission thinks that two of the four categories of agreements currently exempted by the BER could be renewed: exchange of statistical information for the calculation of risks and the creation of co-insurance and reinsurance pools. But the Commission thinks that it is unnecessary to renew the exemption for non-binding standard policy conditions (SPC) for direct insurance, non-binding models on profits, or technical specifications for security devices and their installation and maintenance.

Without a BER, relevant agreements are not illegal automatically, but insurers would have to self-assess whether their agreements fall within the scope of competition law and, if so, whether they could be considered "exempt".

On the formation of pools, contrary to the position with SPCs, the Commission accepts that there is a special need for co-operation, because without pools certain types of risk might not be insured adequately or at all. The Commission plans to tighten BER rules for pools, for example on market share, and by emphasising the need for a careful legal assessment.

The Commission believes that the insurance/reinsurance sector has not been examined as closely as other financial services and that this "is likely gradually to change". In particular, the Commission quotes many cases where businesses mistakenly believe that their practices comply with competition law. The Commission also remains concerned that the subscription market is not compatible with competition law, as it "almost always results in an alignment of premiums and other conditions of coverage."

The Commission would welcome feedback on its proposals, and the industry should focus more on compliance with competition law.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.