UK: HFW Insurance & Reinsurance Bulletin - November 2009

Last Updated: 10 November 2009

FROM AVIVA, WITH PROFITS

By kapil Dhir and Andrew Carpenter

On 18 September 2009 the Court sanctioned a transfer of insurance business concerning the affairs of the Commercial Union Life Assurance Company Limited ("CULAC"), CGNU Life Assurance Limited ("CGNU"), Norwich Union Life (RBS) Limited ("NUL") and Aviva Life & Pensions UK Limited ("Aviva"). This has been a controversial case involving a long running dispute between Aviva and its "with-profits" policyholders regarding the payout from Aviva's "inherited estate" as it completed its reattribution process.

With-profits are savings schemes often sold as part of a pension or mortgage scheme. The funds invest in a broad range of assets and seek to provide a steady annual return, holding back some money in good years so that they can continue to pay out bonuses in the bad years.

Following the merger in 2000 between Commercial General Union plc and Norwich Union plc, the merged group, Aviva, engaged in a programme of rationalisation of its corporate structure. It proposed that the whole of the long-term insurance business carried on by CGNU, CULAC and NUL should be transferred under the provisions of Part VII of the Financial Services and Markets Act 2000 ("FSMA") to Aviva.

Policyholders contended that they ought to have had a much bigger slice of the inherited estate - the money which had built up in the CGNU and CULAC with profits funds - but instead, the Financial Services Authority ("FSA") had, they said, allowed Aviva to plunder the estate for the benefit of its shareholders. As a part of the transfer process FSMA requires that the Court must be satisfied that "in all the circumstances of the case it is appropriate to sanction the scheme". Norris J noted: "This does not require me to be satisfied that no better scheme could be devised; nor does it require me to assess whether the present schemes might be improved by further negotiation." He was satisfied with the conclusions of the independent expert that the security and benefit expectations of policyholders would not be materially adversely affected by the transfer. In addition, the FSA (which was represented at the hearing) was satisfied that the scheme was "within the range of reasonable and fair schemes available to Aviva to achieve its objectives, and that the transfers comprised in it are unlikely materially adversely to affect the interests of policyholders and other affected persons".

In the judgment, the FSA's Treating Customers Fairly regime ("TCF") was given plenty of airtime. Principle 6 of its principles for businesses states that "a firm must pay due regard to the interests of its customers and treat them fairly". Indeed, TCF is recognised by the FSA as being "central to the delivery of our retail regulatory agenda" and "a key part of our move to more principles-based regulation". S.20 of the FSA's Conduct of Business Sourcebook requires a firm to give careful consideration to its operating practices to ensure that they do not lead to an unfair benefit to shareholders and lays down rules addressing situations where the risk of unfair treatment of policyholders is particularly acute, such as the cumulative effect of the annual decisions concerning the ascertainment of profit and the level of distributable profit to be attributed to policies.

Norris J concluded that the inherited estate is part of the working capital of and belongs to the company, not the policyholders. Policyholders have the right to participate in any annual profits that are declared and made available for distribution: they otherwise have only the hope that during the remaining term of their policy there may be an excess surplus that might be distributed.

Comment

The approval of the scheme is seen by many commentators as shareholders taking money that should properly go to policyholders. It is seen by some as a failing of the regulatory system – a weakness that has benefited shareholders to the detriment of policyholders and has therefore failed to treat the customer at all fairly.



A JURISDICTIONAL SLIP UP?

By Geoffrey Conlin

Gard Marine & Energy v (i) Lloyds Tunnicliffe (ii) Glacier Re and (iii) AHP

Gard, a Bermudan company, made claims against its XOL reinsurers under two slips. The first was subscribed to by London market underwriters and the second by Swiss reinsurer, Glacier Re. The first slip contained an express English law and jurisdiction clause, the second slip had no such clause. A dispute arose about the governing law and jurisdiction of the Glacier Re slip.

The Judge held that Gard had established a good arguable case that English as opposed to Swiss law was the applicable law. The circumstances of the placement pointed towards a choice of English law: the underlying and expiring reinsurance policies were London market policies; the brokers were Lloyd's brokers; and the Lloyd's slip incorporated a number of English market wordings and provisions (e.g. "as original" and "follow" language). In reality therefore, this was a case of a Swiss reinsurer being asked to participate in a London market placement.

Could Gard found jurisdiction in England pursuant to Article 5(1) and/or 6(1) of the Lugano Convention, being the applicable regime between the UK and Switzerland?

  1. According to Article 5(1), a person may be sued in matters relating to a contract in the Courts for the place of performance of the obligation in question i.e. where the creditor resides. Notwithstanding Gard's residence in Bermuda, Gard contended that it was London market practice for brokers to pay premiums and accept claims and it was an implied term of the contract that claims would be paid to the broker in London. The Judge disagreed, holding that it was necessary to establish an obligation to pay claims to brokers in London as opposed to a practice and there was insufficient evidence of the practice to found the required implication.
  2. According to Article 6(1), where a person is one of a number of defendants, he may be sued in the courts for the place where any of them is domiciled, but the claims must be so closely connected that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments. The Judge held that Gard's claims against its XOL reinsurers turned on the proper construction of the same clause, in the same terms, placed as part of a common reinsurance programme. This was enough to establish jurisdiction under Article 6(1), as the legal issues were identical and there was a real risk of divergence of outcome; the contingent claims against the broker provided a further connection.

Comment

The case is another reminder that an express choice of law and jurisdiction will minimise the risk of protracted and costly disputes on this issue.



RIGHT TO REPRESENTATION: LEGAL EXPENSES INSURANCE

By Edward Rushton

Erhard Eschig v UNIQA

This case concerned the interpretation of the 1987 European Legal Expenses Insurance Directive (87/344/EEC). The result in this case is likely to have significant consequences for legal expenses insurers who wish to rely on policy provisions to allow them to choose their assured's legal representatives.

The issue arose in the context of a class action against an insolvent investment company. Mr Eschig (and other policyholders) challenged the right of their legal expenses insurer, UNIQA, to rely on a clause in the policy which purported to allow UNIQA to appoint its choice of legal representative on behalf of an assured where it was one of a number of claimants bringing actions against the same defendant. Policyholders argued that UNIQA's reliance on the so called 'mass torts' clause contravened the Legal Expenses Insurance Directive, which protects the right of legal expenses insurance policyholders to appoint their own choice of legal representative. On the other hand, UNIQA claimed that the Directive should be interpreted more widely where the assured was one of a number of policyholders involved in a single class action.

The European Court of Justice considered the wording of the directive (in several languages) together with the directive's purpose, which was to protect the interests of Legal Expenses Insurance policyholders. It was therefore decided that the Legal Expenses Insurance Directive prevented UNIQA from appointing its choice of legal representative on behalf of Mr Eschig and other policyholders. Instead, UNIQA will probably have to indemnify its policyholders for the fees of their chosen lawyers.

The commercial impact of Eschig v UNIQA on the Legal Expenses Insurance sector is being hotly debated. In Britain, the sector has managed to bring down the cost of its products by developing ties with panels of specialised lawyers and negotiating discounted rates. This ruling could jeopardise this approach and, rather than being a victory for policyholders, could restrict insurers' ability to deliver affordable access to justice through legal expenses insurance.



POLICIES AND PROPOSALS - CAVEAT SCRIPTOR

By Saman Salimi-Pour

R and R Developments Limited v Axa Insurance UK plc

The claimant was insured with the defendant under a policy against theft and damage to contract works. In case of non-disclosure or misrepresentation of any material fact, the policy was voidable. There was a negative reply to the question in the proposal asking whether the assured company or any of its partners/directors had been declared bankrupt or were the subject of bankruptcy proceedings or voluntary/mandatory insolvency either personally or in connection with any business they had been involved in. One of the claimant's directors had been a director of a company placed into administrative receivership, which was still in receivership at the time the policy was acquired. This had not been disclosed to the insurers, who sought to avoid the policy on the grounds that this was a misrepresentation. The claimant's application for summary judgment for the grant of a declaration to the contrary was refused. The claimant appealed.

The principal point of the appeal was whether the question in the proposal solely concerned the insolvency of the assured/its partners/directors, or whether it included the insolvency of any other businesses that they had been involved in. The claimant argued that the court needed to consider if its reply was correct based on the reasonable meaning that could be given to it by the assured. The insurer submitted that the court had to construe the meaning of the question objectively and evaluate the assured's response accordingly.

The claimant's appeal was allowed. The court stated that insurance contracts were to be construed objectively and the assured's subjective interpretation of the question was not relevant in the absence of a problem with the actual language of the policy. In this case, the court's construction of the question was that it aimed to confirm the assured company/its directors/partners had not been declared bankrupt and were not at the time of the proposal subject to any bankruptcy or insolvency proceedings. The court held that the assured had replied to the question correctly. It was understandable that the insurers asked the assured about the directors personal position arising from personal affairs or businesses which they had been involved in without going further and asking about the position of any companies as well. This literal interpretation was reasonable and commercially sound. The court also considered that as insolvency was not an insured risk under the policy, it was understandable that the defendant had not asked questions about other companies that the assured's directors had been involved in.

Comment

The case indicates that as the insurers draft proposal forms and policies and have control over their content, the onus is on them to make their intention about all the information they require clear. It also shows a growing trend by the courts in considering the "materiality" of the information requested by insurers when construing ambiguities.



LITIGATION PRIVILEGE

By Saman Salimi-Pour

Westminster International BV v Dornoch Ltd

The claimant owners of a vessel involved in a collision claimed for the losses under a marine policy as they considered the vessel to be a constructive total loss based on the repair costs estimate received from the surveyors they instructed. The defendant insurers instructed solicitors, who requested another surveyor to comment on the surveyor's report obtained by the claimant. The defendant's surveyors estimated the repair costs to be considerably lower.

In February 2008 the claimants commenced proceedings to recover all the sums due under the policy. The claimant sought specific disclosure of the surveyor's report obtained by the defendant as well as the relevant correspondence with the surveyors in respect of which the defendant had claimed litigation privilege.

Tomlinson J dismissed the application for specific disclosure. In applying the test to assess whether the defendant was entitled to claim litigation privilege, the judge confirmed that the prospect of litigation in each case did not have to be greater than 50%, however it needed to be more than a mere possibility. The claimants appealed.

The Court of Appeal upheld Tomlinson J's decision on the basis that the communications between a solicitor or the client and a third party were covered by litigation privilege if such communications were for the principal purpose of getting legal advice in light of a reasonable prospect of litigation. A statement from the defendant as to its state of mind regarding the dispute and instructing solicitors to act on the matter would not be sufficient per se to satisfy the requirements of litigation privilege. The onus of establishing privilege was on the party claiming it. This was a matter, which the court assessed based on the available evidence. The judge had been correct in application of the test as the difference in the estimates for the costs of repairing the vessel provided by the two surveyors was a contentious issue, which might have resulted in litigation. Therefore, litigation privilege applied.



NEWS: SYDNEY OFFICE OPENING

We are pleased to announce the opening of our Sydney office on 1 December 2009. Since opening our Melbourne office in 2006, we have viewed Australia as integral to our international strategy. The growth of our Australian practice emphasises the desire of our clients to have legal advisers they can trust in the markets in which they operate.

CONFERENCES AND EVENTS

US/UK Reinsurance Arbitration Seminar
(1 December 2009)

When arbitration is commenced, US companies usually operate under the Federal Arbitration Act (FAA). However, they can sometimes be called to arbitrate in England under the rules of the English Arbitration Act, where FAA-based strategies and tactics may be ineffective or counterproductive. Likewise, UK-based companies administering London Market business sometimes find themselves embroiled in US arbitration proceedings, where a different approach to the usual strategies and tactics is also required.

Jointly presented by Costas Frangeskides, Partner, Holman Fenwick Willan and Philip J. Loree Jr., Partner, Loree & Loree, this seminar will take a comparative approach and use case study examples to focus on the issues that a US or UK insurer may encounter in reinsurance arbitration on either side of the Atlantic, including:

  • Parties' expectations of neutrality in the arbitrator selection process
  • The arbitrators' power to consolidate proceedings
  • Choice of law clauses, including Bermuda Form
  • Challenging arbitral awards
  • Court support and interference

10th Singapore International Reinsurance Conference
Raffles City Convention Centre
(8-11 November 2009)
Andrew Dunn, Simon Sloane, Paul Wordley

13th Asia Insurance Industry Awards
In conjunction with 10th Singapore International Reinsurance ConferencePan Pacific, Singapore
(9 November 2009)
Andrew Dunn, Simon Sloane, Paul Wordley

RMIA 6th Annual Conference
Cairns Convention Centre, Australia
(22-24 November 2009)
Andrew Dunn, Richard Jowett, Gavin Vallely

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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