The Financial Services Bill
By Graham Denny
On 19 November 2009 the Government introduced the Financial Services Bill (the "Bill") to Parliament, to provide greater rights and information for consumers and stronger financial regulation to make banks more robust in the future. It follows the "Reforming Financial Markets" White Paper of July 2009, which considered the causes of the financial crisis, action to be taken to restore financial stability and possible regulatory reforms.
The Bill will not become law unless and until it undergoes the necessary Parliamentary process, but of particular note in the Bill are the extensions of the disciplinary, enforcement and information gathering powers of the FSA and the implementation of a new collective redress system for financial services claims. These are potentially significant issues for the financial services industry and insurers.
Disciplinary, enforcement and information gathering
The extensions to the FSA's disciplinary and enforcement powers for those who have breached the rules include penalties for those who perform controlled functions without having the required FSA approval, but lack of knowledge that the function was a controlled one could be a defence.
The FSA will have extensive powers to obtain and require information or documents it considers relevant to the stability of one or more aspects of the UK financial system. This power extends to managers of investment funds and persons connected to them, as well as service providers who provide services to an authorised person. A service provider is likely to include professional advisers. The Bill does provide for safeguards in relation to the exercise of these powers by the FSA.
Collective redress
The potential impact of the collective redress proposals in the Bill cannot be overstated and follows a considerable amount of debate over the last few years concerning the existing collective redress mechanisms in England and Wales, the primary fear being a move towards the US class action system. The Bill proposes significant changes in this area for "financial services claims", which are defined broadly in the Bill.
Amongst the proposals are: that claims need not be brought by those individuals in whom the cause of action rests but can be brought by representatives who have no interest in the proceedings; the courts are to decide as to whether collective actions can be brought on an opt-in or opt-out basis; and, the courts are permitted to make an award of damages without undertaking an assessment of the amount recoverable in each individual claim. The collective redress proposals will require a new set of procedural rules to be created by the court or at the very least an update to the current rules.
Comment
The threat of the introduction of a US class action system was hitherto considered unlikely primarily because the current system in England and Wales does not provide for class actions on an opt-out basis and there is also a different attitude in the US to litigation funding and costs. The Bill proposes changes potentially paving the way for collective redress actions for financial services claims on an opt-out basis, subject to the court's consent, and so the immediate focus of the debate is likely to turn to Lord Justice Jackson's review on costs and his final report expected out this month.
Whilst the Bill's proposals may have a considerable impact upon the regulation of the financial services sector and the increased threat of collective redress actions against it, the Bill may well undergo further amendment and in any event it may still not become law if it is not brought in before the general election.
The Third Parties (Rights Against Insurers)
Bill
By Saman Salimi-Pou
The Third Parties (Rights Against Insurers) Bill (the "Bill") had its second reading in the House of Lords on 7 December 2009. The Bill, with some changes, follows the 2001 Law Commission report on third parties' rights against insurers.
Why reform?
The Bill aims to enhance the current rights of third parties where an insured purchases insurance in respect of its liability to such third parties. Normally, the insured claims under the policy and the insurer pays the claim subject to the loss being covered. A problem arises when, before the third party is paid in respect of the liability by the insured, the latter becomes insolvent with the proceeds of the claim becoming part of the insured's insolvent estate to be paid out to all unsecured creditors after payment of secured and ringfenced creditors, according to the insolvency rules. Although the Third Parties (Rights against Insurers) Act 1930 aimed to resolve the problem by passing the insured's rights under the policy to the third party, it has proved to be expensive and time consuming to use and it is ill-equipped to deal with the modern laws of insolvency, since it requires that the claimant third parties must establish the defendant's liability prior to commencing a separate claim against the insurers.
The Proposed Bill
In summary, the proposed Bill:
- Permits third parties to pursue claims directly against the insurers in the court, which would deal with all the issues arising in respect of the claim. Third parties will no longer be required to prove the defendant's liability first (although such a liability must still be proved),
- Permits third parties to know about the rights under the insurances passed on to them from the outset. It is hoped that this additional information will enable the third parties to consider the option to litigate and pursue claims more carefully with a resulting reduction in the volume of the claims without merit,
- Gives third parties exceptions to the defences available to the insurers. The aim of this is to prevent the third parties' claim being defeated by the insurers based on technical defences in the insurance,
- Allows insurers to set off the money/premiums owed to them under the insurance contract against the sums payable to the third parties.
The Bill also provides that it is irrelevant whether or not the liability of the insured was incurred voluntarily without the express consent of insurers. The Bill does not apply to reinsurance contracts. Therefore, the current problems and uncertainties in relation to the reinsurance cut-through clauses will remain unresolved. It is anticipated that the Bill, if passed, will result in an increase in the claims made by third parties and a reduction in legal expenses due to streamlining of legal proceedings into one rather than two causes of action.
Credit insurance, no more credit
By Saman Salimi-Pour
In our June 2009 bulletin, we reported on the government backed top-up scheme in place for businesses, who found it difficult to obtain credit insurance due to the economic climate. The scheme was designed to run until 31 December 2009.
According to the recent pre-budget report, the government has decided not to extend the scheme beyond the above date. Approximately £18.5m worth of credit insurance was approved for businesses under this scheme. Not extending the scheme is likely to have an adverse effect on the companies especially in the export sector, who find it hard to obtain credit insurance cover elsewhere. This can be particularly problematic in hard market conditions, where the credit insurance offered is restricted due to the stringent criteria that businesses generally need to satisfy before cover is approved.
Forum-shopping
By Edward Rushton
Deutsche Bank AG v Sebastian Holdings Inc
The ability of English Courts to refuse jurisdiction on the grounds of forum non conveniens (inappropriate forum) has been hotly debated since the 2005 ruling of the European Court of Justice (ECJ) in Owusu v Jackson (Case C-281/02). Following the Owusu decision, English Courts cannot apply the doctrine of forum non conveniens in cases where jurisdiction is vested in them by virtue of the domicile of the defendant pursuant to Article 2 of the Brussels Regulation. However, the Owusu decision left doubt as to whether forum non conveniens could be applied in cases where jurisdiction was vested in English Courts on different grounds.
Article 23 of the Brussels Regulation vests jurisdiction in the courts of a Member State where the parties have agreed to a jurisdiction clause in its favour. In Deutsche Bank AG v Sebastian Holdings Inc., [2009] EWHC 3069, SHI applied to the Court to decline jurisdiction (or stay proceedings) relating to a dispute arising from multiple contracts which contained competing choice of jurisdiction clauses. SHI relied on the doctrine of forum non conveniens arguing that it would be more convenient for all complaints to be heard in a single forum, and that New York was to be the preferred forum because of the location of witnesses and because it had already commenced proceedings there. Deutsche Bank resisted SHI's application, and argued that even if SHI was correct the English Court was bound to follow the Owusu decision. It therefore could not refuse jurisdiction.
Burton J. held that it was not obvious that New York was the most appropriate forum. He therefore refused SHI's application. This meant that he did not have to decide whether the Owusu decision would have precluded him from applying the doctrine of forum non conveniens where a particular contract contained an English jurisdiction clause. Nevertheless, the judge did provide a helpful comparison of the types of the jurisdiction clauses. Exclusive jurisdiction clauses, which were present in two of the five contracts, were the strongest. At the lower end of the hierarchy were nonexclusive jurisdiction clauses. These did not provide that the parties would not raise forum non conveniens arguments. However, even non-exclusive jurisdiction clauses would require an applicant to show that an alternate jurisdiction was clearly and distinctly the more appropriate forum in order for English Courts to decline jurisdiction.
Australia – "Other Insurance"
clauses – Section 45 of Insurance Contracts
Act
By Richard Jowett and Celina Fang
A recent High Court case sheds light on the scope of section 45 of the Insurance Contracts Act 1984 and illustrates that the use of "other insurance" clauses by some insurers to avoid double insurance is still effective.
It is common for insurance policies to contain a clause whereby the insurer limits or excludes its liability in respect of a loss for which the insured is covered under some other insurance. However, the effectiveness of these provisions has been curbed by section 45 of the Insurance Contracts Act 1984 which renders such clauses in general insurances void except in cases where the clause is required to be effected by law or appears in a genuine excess policy. The rationale for this is that an insured who has paid two sets of premiums is entitled to recover his/her loss from any one of the insurers, who is then entitled to seek contribution from the other insurers. The section's operation is limited to cases where the insured has "entered into" the contract of insurance that contains the "other insurance" clause.
In a recent work-related injury case, Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pte Ltd [2009] HCA 50, the High Court elaborated on the meaning of the words "entered into". The case involved injuries sustained by employees of Speno Rail Maintenance Australia Pty Ltd (Speno) while performing work under a contract between Speno and miner Hamersley Iron (Hamersley). In accordance with the contract, Speno arranged public liability insurance on behalf of Hamersley with Zurich Australian Insurance Ltd (Zurich). The contract also contained a provision requiring Speno to indemnify Hamersley against all claims occurring as a result of anything done in the performance of the contract causing death or injury to any person.
Following a District Court trial in which Speno and Zurich were both ordered to indemnify Hamersley against its liability to the injured workers, Speno failed to make any payments while Zurich paid Hamersley $1.2 million. Precluded from pursuing Speno due to contractual waivers of subrogation in its policy, Zurich sued Hamersley's own insurer, Metals and Minerals Insurance, for contribution under the principles of double insurance. The High Court ruled that Zurich was not entitled to claim for contribution because the insured was not a party to another contract of insurance – rather, it had been added as an insured. Section 45 should be construed on the basis that it is the objective of the legislature only to avoid provisions which are covered by reference to a contract into which the insured had entered, and not upon the basis of some wider objective. Therefore, where the party has not entered into another policy of insurance but had been added as an insured person, section 45 does not apply in respect of the "other insurance" provision.
Key implications arising from this case include:
- Insurers who rely upon "other insurance" provisions referring to parties who have "entered into" a contract of insurance need to be aware that a party who is added as an insured in a policy that has been contracted by another, did not "enter into" the contract within the meaning of section 45, and thus the section is not engaged and the "other insurance" provision would not be void by virtue of section 45.
- When one party is taking out insurance on behalf of another (and the latter already has insurance), caution needs to be exercised in order to avoid claims of double insurance made by the latter's insurer.
- A carefully drafted "other insurance" clause need not be void under section 45 and may be used by insurers to avoid double insurance claims.
Conferences and Events
Equitas v R&Q Re: Practical Justice?
Andrew Bandurka will discuss this case at a meeting of
the London Reinsurance Group, at 2.30pm on 26 January, in the Swiss
Re building. By invitation only: enquiries to
andrew.bandurka@hfw.com
Contractual Liabilities and Indemnities
Marsh's National Oil Companies Conference, Dubai
(22-24 February 2010) Paul Wordley
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.