The first half of 2016 has been a significant period for the Bermuda insurance sector.
The enhanced regulatory status of Solvency II has proven beneficial. Major insurance groups have started seeking approval for the Bermuda Monetary Authority to serve as the group supervisor under the Solvency II regime. In particular, XL Group plc announced that it will be redomiciling its parent company from Ireland to Bermuda. This is on the heels of last year's new commercial insurer formations and Qatar Reinsurance's redomicile to Bermuda. Looking ahead to the next six months of the year, we anticipate a continued increase in activity in the formation and licensing of new commercial insurers, as well as a rise in ILS activity with the formation of new cat bond issuers.
Inside this edition of our Bermuda Insurance Update, we feature commentary on legislative changes and market updates affecting the industry, as well as news and event highlights.
Conyers' Insurance Practice By the Numbers
Head Office and Proportionality
On 1 January 2016 the new Section 8C of the Insurance Act, 1978 relating to maintenance of a Head Office in Bermuda became effective. Under the Section, commercial insurers incorporated and licensed in Bermuda are required to maintain a head office on the Island and the insurance business must be directed and managed from Bermuda. The Section sets out various factors that will be considered by the Bermuda Monetary Authority (the "BMA") in determining whether a commercial insurer complies with this requirement. These factors include: (i) where the underwriting, risk management and operational decision-making of the commercial insurer occurs; (ii) whether the presence of the senior executives who are responsible for and involved in the decision-making related to the insurance business are located in Bermuda; (iii) whether the board meetings occur in Bermuda; (iv) the location where management meets to effect policy decisions; (v) the residence of officers, insurance managers or employees of the insurer; and (vi) the residence of the directors of the insurers. Most, if not all, of the larger commercial insurers in Bermuda already met the requirement. However, initially there was concern as to whether some of the smaller or "limited purpose" reinsurers, such as affiliated reinsurers and "sidecars", would meet the criteria without incurring substantial expense.
Since 1 January 2016 the BMA has given indications to various stakeholder meetings that when determining whether a commercial insurer complies with the head office requirements they will apply the principal of proportionality. The principal of proportionality forms part of the BMA's risk-based approach to insurance regulation and the BMA recognises that insurers have different risk profiles arising from the nature, scale and complexity of their business. As such, the BMA recognises that a commercial insurer writing multiple lines of business with numerous cedants must have a more substantive presence in Bermuda than a commercial insurer which only reinsures its affiliates.
As a result we believe that limited purpose commercial insurers are more likely to satisfy the head office requirements without establishing a full standalone office in Bermuda, provided that the level of activity and decision-making made in Bermuda is proportionate to the nature, scale and complexity of the business.
Insurance Managers Code of Conduct
The BMA has issued a consultation paper setting out its proposal to amend the Insurance Act, 1978 (the "Act") to enhance its oversight of insurance managers, including the introduction of the Insurance Manager's Code of Conduct.
Under the draft Code, insurance managers will be required, among other things, to establish and document an appropriate corporate governance framework and also establish document controls, policies and procedures to ensure their business is conducted in a prudent manner and controls, policies and procedures for the businesses they manage. As with the Insurers Code of Conduct, the Insurance Manager's Code of Conduct expressly provides that when the BMA assesses an insurance manager's compliance with the Code the BMA will take into account the nature, scale and complexity of the insurance manager's business.
In addition, the BMA is proposing to make prudential rules to require insurance managers to file specific details via an Insurance Manager's Return. The BMA is also proposing to extend the Anti-Money Laundering/Anti-Terrorist Financing regime to include all insurance managers. The proposed amendments to the Act will: (i) extend the BMA's ability to make prudential rules to cover reporting requirements for insurance managers and to charge a fee for any modifications or exemptions thereof; (ii) extend the minimum criteria for registration to require insurance managers to have sufficient professional indemnity insurance cover; (iii) require notification of the BMA regarding changes to the controllers or officers of insurance managers; and (iv) provide the power for the BMA to investigate the affairs of insurance managers.
The draft Code of Conduct and Consultation Papers may be found on the BMA's website www.bma.bm under Insurance/Consultation Papers. The BMA has indicated they wish to make the relevant amendments to the Act as soon as possible and require insurance managers to be in compliance by 1 December 2016.
European Parliament and Council Approve Bermuda as Solvency II Equivalent
As we have previously reported, in November 2015 the European Commission published a Delegated Act which recognised Bermuda's commercial insurance regulatory framework as being equivalent to the regulatory standards applied to European insurance and reinsurance companies. Following a review by the European Parliament and Council, the Delegated Act was published in the Official Journal of the European Union on 4 March 2016 and the grant of full equivalence came into force on 24 March 2016 and applies from 1 January 2016.
The Contracts (Rights of Third Parties) Act 2016 (the "3rd Party Act")
The Act was recently passed by the Bermuda Legislature and is now fully operative. The 3rd Party Act is significant in that it permits parties to vary the common law doctrine of "privity of contract", which provides that only parties to a contract may enjoy the benefits and enforce the provisions of that contract.
Under the 3rd Party Act, persons not specifically party to a contract may now be entitled to benefit from and enforce the terms of the contract, subject to certain restrictions. The Act is similar to third party rights legislation enacted in the UK and several other common law jurisdictions.
Application and Exceptions
While the doctrine of privity of contract may now be varied in Bermuda, it has not been abolished as contracting parties are required to "opt in" to the 3rd Party Act's provisions. In order for the 3rd Party Act to apply, the contracting parties must expressly identify the third party (either by name, as a member of a class or as answering a particular description) and agree that the third party may enforce the applicable terms of the agreement. The third party does not necessarily have to be in existence as of the date of the contract; all that is required is that they be clearly identified.
The 3rd Party Act, generally, applies to all contractual provisions, including indemnities and exculpations and other limits of liability. There are also certain contracts, which are specifically excluded, including bills of exchange, employment agreements, promissory notes and other negotiable instruments, rights conferred by a company's memorandum of association or bye-laws, contracts for the carriage of goods by sea or roads or for the carriage of cargo by air and letters of credit.
The Act is also important in Bermuda's insurance space as, amongst other things, it removes uncertainty about the legal enforceability of so-called "cut-through" clauses or endorsements in insurance and reinsurance contracts, which parties have wanted to use in Bermuda over the years. Under this new legislation, as noted, there must be express contracting into the legislation (i.e. parties must opt in) whereas the legislation in other jurisdictions works the other way and applies unless there is a contracting out. Thus, parties will need to take particular care in drafting the wording of such clauses.
Such clauses will, like any contractual terms, be subject to the normal fraudulent preference and transactions at an undervalue rules applying at the time the cut through clause is entered into. However, provided the transaction is a bona fide commercial transaction for proper consideration, between solvent parties, there is now little danger of the common law rules of privity applying to upset the operation and enforceability of cut through clauses.
The 3rd Party Act does not have retroactive effect; however, where a contract is entered into prior to the 3rd Party Act and provides for third party rights in accordance with the 3rd Party Act, those rights will automatically become enforceable by the third party on the commencement date of the 3rd Party Act without further action by the parties. After commencement, parties may also, of course, amend the terms of a prior agreement to include third party rights.
Enforcement by Third Parties
Where the 3rd Party Act's requirements have been met, a third party can enforce the terms of the contract and can avail itself of any remedy that would be available to the contracting parties, including those related to breach of contract, damages, injunctions and specific performance. However, a third party will not have any better rights or remedies than those available to the contracting parties. Thus, if a contract limits recovery or otherwise limits a right of a contracting party, the third party will similarly be limited in terms of what actions or recoveries are available to it. There is protection against double liability, so that, where complete or partial recovery has been made by a contracting party, the Court may reduce any award to a third party by the amount recovered by the contracting party.
Variation of Contract and Assignments
Once rights have been extended to a third party, the contracting parties are restricted in their ability to vary such rights as between themselves and the third party where: (i) the third party communicated its assent to the term to the party against whom the term is enforceable (a "promisor"); (ii) the promisor is aware that the third party has relied on the term; or (iii) the promisor can reasonably be expected to have foreseen that the third party would rely on the term and the third party has in fact relied on it. In these situations the third party must consent to any variation or rescission of the contract unless it has contractually agreed otherwise.
Finally, the 3rd Party Act permits a third party to assign its third party rights under a contract to another person in the same way as a contracting party may assign its rights, unless the contract specifically provides otherwise or on a proper construction of the contract, the rights are personal to the third party.
In summary, under this new Bermuda law, contracting parties may now extend rights to third parties, where desired, thus reducing the burden of entering into multiple agreements to affect the same contractual intent. The Act further enhances Bermuda's commercial laws and, again, demonstrates the Island's responsive legislative framework for business.
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.