UK: The HFW Bulletin: Insurance & Reinsurance - October, 2009

Last Updated: 20 October 2009

Pre-Budget Report
By Kapil Dhir or Andrew Carpenter

Amidst the wider discussions surrounding the cuts to public spending, there is talk of a possible tax overhaul for insurance companies in the forthcoming Pre-Budget Report.

A number of insurers have left the UK in recent years and set up headquarters in jurisdictions such as Bermuda, Dublin and Switzerland. The ABI have flagged the chief concern as being the taxation of foreign profits, specifically in relation to controlled foreign companies and overseas branches of multinational UK firms. At present, such firms that hold large amounts of capital in overseas branches with a skeleton staff are caught by the UK tax regime rather than the local tax regime. However, in the face of insurers continuing to exit the country, HMRC seems to be re-examining the regime in order to preserve London's position as a hub for the industry.

If correct, such an overhaul would of course be welcome news for the market in the current climate. In addition, it would sit more comfortably with the proposed Solvency II capital regime, under which branches fall under the group capital regime as opposed to requiring their own capital.

Block Exemption: European Commission To Be Tougher
By Anthony Woolich

On 5 October the European Commission ("Commission") invited comments by 30 November on its revised draft Block Exemption ("Draft Regulation") for the insurance sector, to replace the current Block Exemption expiring on 31 March 2010. The Draft Regulation reflects the Commission's view that there is no longer any justification for the Block Exemption covering model wordings (standard policy conditions) for direct insurance or standard profit models for life insurance, or security devices. The Draft Regulation only provides a block exemption for agreements on joint compilations, tables and studies, and common coverage of certain types of risks (co-re/insurance pools). The Commission has said that it intends to be tougher on monitoring and enforcement to ensure compliance with the rules.

The exemption for pools, other than for new risks for three years, will only apply where the aggregate market share of the participants both inside and outside the pool does not exceed 20% for insurance pools and, for reinsurance pools, 25%. Currently, only the pool market share is relevant. Also, the Draft Regulation does not cover ad hoc co-insurance or co-reinsurance on a subscription market between a leader and two or more followers. New risks will exceptionally include, in addition to risks which did not exist previously, risks whose nature has changed so materially that it is not possible to know in advance what subscription capacity is necessary. Each participant will have the right to withdraw from the pool, subject to "having given a reasonable period of notice". At present the notice given must not exceed one year.

On joint compilations, tables and studies the Draft Regulation only covers the exchange of information that is "necessary". Interested third parties such as consumer organisations must have access to data shared, with a public security exception.

Every contract underwritten by subscription should be analysed under competition law. Also, pool members should review their pooling arrangements.

Systems & Controls
By Kapil Dhir or Andrew Carpenter

In our March 2009 issue we looked at the FSA's changes to the systems and controls regime for insurance intermediaries. The FSA has now published an interim report on their review of anti-bribery and corruption systems and controls ahead of the delayed publication of their final report.

The interim report identifies significant weaknesses in the anti-bribery and corruption systems and controls mechanisms of commercial insurance broker firms. Due diligence and monitoring of third-party relationships and payments are generally seen as very weak with too much reliance placed on informal market views of the integrity of third parties. Lack of specific training on anti-bribery and corruption, even for staff responsible for training others on financial crime is also highlighted.

The FSA's hope is that the interim report's findings will help shape firms' approaches. The interim report can be found at http://www.fsa.gov.uk/pages/About/What/financial_crime/library/interim.shtml.

Sanity Returns: The Insurance Act 1902 (NSW)
By Richard Jowett

In our September 2009 bulletin we included an article on Reinsurance Forum Shopping Australia. We referred to the NSW judgment of HIH Casualty & General Insurance Ltd (in liq.) v R J Wallace [2006] NSWSC 1150 where Einstein J of the NSW Supreme Court held that the Insurance Act 1902 (NSW) applied not only to insurance contracts, but also to reinsurance contracts. This provided reinsureds who sue or are sued in NSW under Australian law governed reinsurance contracts with the consumer friendly protection afforded by that Act. This includes, for example, forgiving an insured for a failure to comply with a term or condition of the reinsurance if the reinsurer has not been prejudiced by the failure (s.18); limitations on the scope of non-disclosure defences (s.18A); exclusion clauses (s.18B); and references to arbitration embodied in the reinsurance contract (s.19).

Under s.21 of the Act, the NSW Governor in Council passed Insurance Regulation 2009 (No. 429 of 2009) which under regulations 2 and 4(b) exempts contracts of reinsurance entered into, on or after 1 September 2009 from the application of s.18, s.18A, s.18B and s.19 of the Act.

Contracts of reinsurance entered into before 1 September 2009 are still arguably subject to the Act, although the conclusions of Einstein J in Wallace may be tested in the NSW Court of Appeal proceedings due to be heard later in the year. Whether or not similar consumer friendly provisions of equivalent state legislation elsewhere (for example, s.27 of the Instruments Act 1958 (Vic)) will be held to apply to reinsurance contracts remains to be seen.

The disapplication of these sections of the NSW Insurance Act to reinsurance contracts returns NSW to what had arguably been the position pre-Wallace. Reinsureds, in particular, need to ensure that they have measures in place to comply with all claims terms and conditions, and in particular notice provisions since for post 1 September 2009 reinsurance contracts they can no longer claim the protections afforded by the NSW Act.

D&O cover for Senior Accounting Officers?
By Graham Denny

In our May 2009 bulletin we highlighted the new duties and personal liabilities imposed upon Senior Accounting Officers (SAOs) of large companies and large groups of companies proposed by Budget Note 62 and the Finance Bill 2009. These are now incorporated into the Finance Act 2009 which received Royal Assent on 21 July 2009. The HMRC guidance on the duties was published on 14 August 2009, which is summarised below:

Reasonable steps

The Act requires SAOs of qualifying companies to take "reasonable steps" to ensure that the company establishes and maintains appropriate tax accounting arrangements and to identify any respects in which those arrangements are not appropriate tax accounting arrangements.

Monitoring & certification

This requires SAOs to monitor the training and performance of those to whom they delegate the control and monitoring activities including assessing whether a third party is suitably competent, qualified and controlled where they have outsourced the role. The Act covers the entire process, from initial data input into the company's accounting systems, to arriving at the numbers which form the basis for completion of the tax returns.

The Act requires SAOs to provide HMRC with a certificate stating whether the company has appropriate tax accounting arrangements or, where it does not, provide an explanation.

The SAO and qualifying companies

The guidance envisages that the SAO will be the director or officer with overall responsibility for the company's financial arrangements. This is likely to be the Finance Director. Qualifying companies are UK incorporated companies whose results in the preceding year, either alone or aggregated with other UK companies in the same group, exceed turnover of £200m or gross balance sheet assets of £2bn. The obligations imposed apply only in relation to financial years beginning on or after 21 July 2009, although the calculation of certain tax liabilities are excluded under the Act.

Penalties

Penalties will be imposed on the SAO personally of £5,000 for any of the below:

  1. Failure to maintain appropriate accounting arrangements
  2. Failure to report if the company does not have the appropriate accounting arrangements
  3. For late certification or deliberately/carelessly inaccurate certification

D&O cover

Whilst HMRC's focus is on the significant risks and not minor errors, companies and SAOs should check their D&O policies as to whether cover is afforded for SAOs and whether there are any exclusions of cover for breaches of these duties.

Conspiracy & Underwriting Authorities
By Saman Salimi Pour

Markel International Insurance Company Ltd v Higgins and QBE Insurance (Europe) Ltd and Amalfi Underwriting Limited v Higgins

At first instance Teare J had held that an underwriting agency and some of its employees, acting under a binding authority to write surety bonds, had conspired to defraud the insurers by overwriting the bonds substantially in excess of the authorised limits, which resulted in keeping the excess of premium for themselves. There was also evidence of involvement in creating false loss bordereaux, masking the excess premium and breach of underwriting authority.

The Court of Appeal dismissed the argument raised by the defendant that at the relevant time he was suffering from the onset of Alzheimer's and therefore would not have been able to form the prerequisite dishonest intent in this respect. Rix LJ confirmed that: "where a claimant seeks to prove a case of dishonesty, its inherent improbability means that, even on the civil burden of proof, the evidence needed to prove it must be all the stronger". His Lordship approved Teare J's application of the test based on the facts and evidence before him that "The burden of proving this fraud lies upon the Claimants who must do so on the balance of probabilities. But cogent evidence, commensurate with the gravity of the allegations made against the defendants, is required to prove the allegation on the balance of probabilities."

The Court did acknowledge that Alzheimer's may have caused incidents of forgetfulness by the defendant, however it failed to account for the substantial overwriting of the business. The defendant must have known what he was doing and the importance of following the limits of his underwriting authority. There had been no evidence that he had forgotten the limits.

Comment

The case highlights the importance of following the conditions of the binding authorities and the fiduciary nature of the duty owed by the agent underwriters to their principal insurers "by reason of the trust and confidence placed upon them".

Wording Of Warranties: Summary Judgment
By Luke Hacker

A C Ward & Sons Ltd v Catlin (Five ) Ltd

In A C Ward v Catlin (Five) the insurer, Catlin, argued that terms of the policy (which it said its insured had breached) were not warranties, but suspensive conditions, and so its case that the claims were not covered could be decided summarily.

A C Ward owned a warehouse from which burglars stole about £450,000 worth of cigarettes and alcohol. A C Ward made a claim under its insurance policy with Catlin, which provided cover for theft of stock. The policy, which also covered other companies contained two warranties: Burglar Alarm Maintenance and Protection Maintenance. Catlin investigated the claim and refused to pay because of unexplained failures of security protection and alarm measures.

A C Ward commenced proceedings. Catlin attempted to deliver a 'knock-out blow' to end the litigation by applying for summary judgment on the basis that the 'warranties' were actually suspensive conditions that limited the risk, so that it was off cover during any period of non-compliance and that there had been non-compliance. The judge – agreeing with the insured – held that the 'warranties' were warranties in the technical sense and not suspensive conditions. The breach of a warranty produces an automatic cancellation of cover of the policy, which in this case, covered other companies and premises. The draconian effect of the breach was held to be relevant in construing the warranty and the summary judgment application failed: the insured had an arguable case and was entitled to determination on more material than was at hand.

Catlin appealed on the basis that breach of the warranties had occurred and that A C Ward had no prospect of succeeding in its claim. The Court of Appeal (dismissing the appeal) held that Catlin's interpretation was draconian and that the more unreasonable or draconian the effects of insurance terms were, the more clear and specific they had to be. Accordingly, the warranties and their effects can only be determined at trial having regard to the facts.

News: Secondment

Andrew Carpenter, Solicitor in our London corporate and regulatory insurance team will be seconded to HFW Hong Kong from 19 October 2009. Andrew's primary focus while in Hong Kong will be on all non-litigation matters which concern our financial services industry clients, ranging from start -ups, to M&A and business transfers, to legacy capital solutions.

Conferences and Events

JLT Indonesia Mining Forum 2009
Jakarta (14 October 2009)
Simon Sloane

Presentations on Reinsurance Recoveries

HFW are pleased to announce that presentations are being offered to clients in relation to reinsurance recoveries, if you are interested in scheduling a presentation or would like further information please contact andrew.bandurka@hfw.com

GAFTA Conference

Nigel Wick, Partner, attended the recent GAFTA Conference which was held at the Chicago Board of Trade Building, Chicago (28-30 September 2009). With a Managing Risk theme, Nigel presented to delegates about insurance as a risk management tool.

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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