Planning guidelines and targets for renewable energy in Australian markets
Victoria and South Australia are tightening their guidelines and planning policies for renewable energy facilities.
Welcome to our first Insurance focus of 2015. This edition highlights an emerging trend that has seen a number of common law jurisdictions revise the principles of insurance contract law to ensure local markets remain competitive in an ever more global marketplace.
The Insurance Act 2015 will come into force in August 2016, marking the most significant reform of UK insurance law in over a century. In a hypothetical case study, we consider how the new provisions of the Act could apply in practice and how the key issues might be decided by a UK court. Principles of insurance law are considered from a South African perspective by Nadia Gamieldien who considers the interaction between the common law and recent decisions on the materiality test in the context of misrepresentation and non-disclosure.
From our Melbourne office, Matthew Ellis and Erica Leaman reflect on the long-awaited final report of the Financial Systems Inquiry. The outcome of this inquiry appears likely to be enhanced conduct regulation, with product governance obligations and greater intervention powers for the Australian Securities and Investments Commission now being considered by Federal Government.
Our regular case review takes a look at some recent decisions of note from the UK, Germany and the United States. Highlights include the much-anticipated In re Deepwater Horizon decision which redefines the scope of additional insured coverage under Texas law. From the UK, we consider some fundamental questions that arose in the ‘B Atlantic’ case regarding proximate cause and the meaning of ‘acting maliciously’ and ‘from a political motive’ in the context of a war risks policy.
Finally, our international focus section provides a brief round-up of some global regulatory developments in Singapore, South Africa and the UK.
The final report of the Financial System Inquiry (FSI) was released on December 7, 2014 (the Report), and its recommendations are now being considered by Federal Government. A number of recommendations are of significance to insurers and intermediaries operating in Australia. We look briefly at four areas covered by the Report, each of which, if implemented, will represent a significant shift away from the current approach to financial services regulation in Australia.
The FSI considers product issuers and distributors, rather than consumers, are best placed to understand the features of a product and its appropriate target market. The FSI therefore recommends introducing a principles-based regulatory obligation that would require product issuers and distributors to consider a range of factors when designing and distributing products and conducting post-sale reviews.
The obligation would require the product issuer and distributor to take into account: the product’s intended risk/return profile; how consumers are affected by the product in different circumstances, implementing controls to ensure the issuer’s expectations for distribution are met; and periodically reviewing whether the product still meets the needs of the target market. For insurers and intermediaries, the implementation of such an obligation will mean monitoring and overseeing a product throughout its life-cycle and having systems in place to ensure such product governance occurs.
Similar to powers conferred on regulators in the UK, the FSI has recommended that the Australian Securities and Investments Commission (ASIC) be granted a product intervention power to enable it to take a more proactive approach in reducing the risk of significant detriment to consumers. Specifically, this new power would allow the regulator to intervene in the business of financial service providers to require or impose such things as:
The proposed powers would be limited to temporary intervention for 12 months, but with the period capable of being extended. The FSI stressed that the recommended powers are intended to address significant consumer detriment and would not alleviate consumers from bearing responsibility for their financial decisions.
The FSI has encouraged the regulatory regime to embrace the disruptive effects of innovation and technology, and encourages market participants to use technology to achieve better consumer outcomes and greater competition. The FSI believes that government, regulators and industry can work together to identify innovative opportunities, remove impediments to innovation and provide better access to data to support data-driven business models.
To this end, the FSI has recommended the establishment of a permanent public-private sector collaborative committee, the ‘Innovation Collaboration’, to facilitate financial system innovation. This echoes the ‘Innovation Hub’ initiative by the UK’s Financial Conduct Authority established in early 2014.
The FSI considers that supporting innovative developments and new technology in financial services should result in significant cost savings for financial service providers, as well as improving the customer experience and reducing the risk of mis-selling. By way of example, the FSI wishes to encourage the general insurance industry to enhance existing tools and calculators used for online sales of insurance products, most notably for home insurance, where recent ASIC investigations have found a high degree of under insurance and poor consumer understanding of products.
Following on from considerable negative publicity in respect of the quality of financial advice in Australia, the FSI has recommended that the competency of financial advice providers be raised and an enhanced register of advisers be introduced. The FSI has recommended that the minimum standards for those advising on Tier 1 products should include a relevant tertiary degree, competence in specialised areas (where relevant) and ongoing professional development. Increased educational requirements would bring Australia into line with standards in place in other peer jurisdictions such as Singapore and the UK.
The FSI has also recommended the introduction of an enhanced register to facilitate consumer access to information about financial advisers’ experience and qualifications and improve transparency. The register should include licence status, work history, education qualifications and credentials, areas of advice, employer, business structure and years of experience.
We wait to see whether and to what extent the above recommendations are introduced. Recent comments from Government, however, suggest that changes may be implemented sooner rather than later; in recent interviews, Assistant Treasurer Josh Frydenberg indicated that product governance and product intervention powers are on the Government’s immediate agenda.
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The drafting of reservation of rights letters on behalf of insurance companies has been the subject of a number of decisions in the US courts. Typically such letters include broad reservation of rights language and, often, coverage analysis is specifically avoided for fear the insurer might be limited to that analysis in the future. Recent opinions suggest, however, that more care may need to be taken in trying to reserve ‘all’ a carrier’s unspecified rights ‘under the policy and at law’.
Specifically, these opinions suggest that in drafting reservation of rights letters, policy exclusions should be promptly asserted as they might apply to the facts. Furthermore, the insured should be clearly informed of the insurer’s coverage position within a reasonable time.
A reservation of rights letter should consider or include all facts that an insurer knows or should know through a diligent investigation. Reservation of rights letters have been found to be ineffective when an insurer fails to include a policy exclusion that it knew, or should have known, was triggered. This scenario was considered in two 2014 opinions applying Georgia law.
In Builders Insurance v Tenenbaum 757 S.E.2d 669 (Ga. Ct. App. 2014), the court considered whether an insurer who identified specific exclusions and ‘globally’ reserved its policy rights disclaiming liability was entitled to later assert additional reasons for non-coverage. The underlying lawsuit concerned whether the insured was liable for damages for faulty home construction. The plaintiff home owner sent the insured notices of alleged defective construction in July 2006 and December 2008 before filing suit in December 2009. In February 2010, the insurer agreed to defend the insured subject to a ‘global reservation of its right to disclaim liability’. The insurer specifically stated that the reservations specified in the letter were not meant to be exclusive but were the ones of which it was presently aware. Further, it reserved the right to amend the letter after further investigation.
Eighteen months later, the insurer issued a supplemental reservation of rights letter stating the policy would not cover any loss because the insured’s duty to notify the insurer of an occurrence was triggered in 2006 and/or 2008, not when the suit was actually filed in 2010. The court stated that ordinarily the insured’s late notice would provide a defence to coverage, but that here, because the insurer was aware of the 2006 and 2008 letters when it issued its first reservation of rights letter, it could not assert those two letters as grounds for non-coverage in its later 2012 letter. Specifically, the court held that ‘although an insurer is not required to list each and every basis for contesting coverage in its initial reservation of rights letter in order to preserve its right to later assert a ground for non-coverage, it must act reasonably promptly upon learning of a policy defence’. The court concluded that, although the insured failed to give the insurer timely notice of its loss, the insurer failed to give the insured timely notice of its intention to assert late notice as a coverage defence. The insurer’s failure to do so waived the defence.
A similar factual scenario was considered in Wellons Inc. v Lexington Ins. Co. 566 Fed. Appx. 813 (11th Cir. May 16, 2014), however, the Eleventh Circuit reached a different conclusion. The insured argued that a recent Georgia Supreme Court (in World Harvest Church Inc. v Guide One Mut. Ins. Co. 695 S.E.2d 6, 9 (2010)) decision required the insurer to inform the insured of each specific basis for its reservation of rights. The insurer contended that the case did not require such specificity but required only that the insurer ‘fairly inform the insured that notwithstanding the insurer’s defence of the action, it disclaims liability and does not waive its coverage defences.’
Ultimately, the court agreed with the insurer and concluded that it is not necessary to specify each and every potential basis for contesting coverage as long as the reservation of rights letter fairly informs the insured that the insurer does not waive its coverage defences. The court relied on the possibility that an insurer might not know of certain coverage defences until completion of discovery or its investigation. Having examined the insurer’s letters, the court determined that they provided detailed analysis as to why specific provisions and exclusions might apply and concluded that the letters were ‘a far cry from an insurer cutting and pasting an insurance policy, with no explanation or analysis’.
Equally important, both the March and April 2007 letters contained non-waiver clauses specifically reserving the insurer’s right to assert additional coverage defences. Thus, by permitting the insurer to go forward with the defence without objection, the insured implicitly consented not only to defence under the reservation of rights but also to the terms of that reservation – including the non-waiver clause. Under Georgia law, the non-waiver clauses were sufficient to protect the insurer’s rights and preclude estoppel. Finally, the court found it was ‘immaterial’ whether the two early letters adequately explained or reserved specific coverage defences because they unambiguously reserved the insurer’s right to assert additional defences. The court seems to have relied on the fact that, at the time of the reservation of rights, the insurer did not know the facts that would show there was no ‘property damage’ or ‘occurrence’ as defined by the policy.
The difference between these two opinions seems to be that the insurer in Tenenbaum knew the basis for its ultimate denial 18 months before it was asserted, while the insurer in Wellons did not know the specific reasons for non-coverage until after discovery concluded.
Reservation of rights letters should, in clear and timely manner, explain the relationship between the policy and the reservation of rights. The Missouri Court of Appeals examined this issue in Advantage Buildings & Exterior Inc. v Midcontinent Casualty Co. (Mo. Ct. App. Sept. 2, 2014) and found that the reservation of rights letter was insufficient. Citing Appleman on Insurance, the court identified three elements of a valid and enforceable reservation of rights letter. The insurer must:
Regarding the drafting, the court held that the reservation of rights letter should be ‘specific and unambiguous, should fully explain the insurer’s position…with respect to the coverage issues, and must avoid any confusion’. Neither party disputed these principles. Nevertheless, the court found that the insurer had failed to appropriately reserve its rights.
Shortly after receiving notice of the suit against its insured, the insurer agreed to defend based on a reservation of rights letter purporting to reserve all its policy defences and stating that it would promptly advise the insured of its coverage analysis. A month later, the insurer sent a second, almost-identical letter quoting a few new policy provisions. The court found that, although the letters generally discussed the nature of the underlying lawsuit and quoted various policy provisions, ‘neither letter clearly and unambiguously explained how these provisions were relevant to the insurer’s position or how they potentially created coverage issues’.
The court also held that the insurer did not ‘promptly advise’ the insured of its coverage position once that analysis was concluded. Instead, immediately after sending the second letter, the insurer determined that although the insured was facing damages of more than $1 million, the policy would cover only about $50,000. A year later, the insurer knew the insured was ‘certainly at risk of obtaining a large judgment against them’ if the plaintiff proved its claims, which would exceed the policy limits and expose the insured to a ‘very significant multi-million dollar exposure with little or no insurance coverage’. But despite having promised in its purported reservation of rights letter to share it coverage analysis ‘promptly’, the insurer did not inform its insured about that analysis until two years later and just four days before trial. The court therefore concluded that the purported reservation of rights letter was neither timely nor clear and did not fully and unambiguously inform the insured of the insurer’s position. As a result, although the policy did not cover the insured’s loss, the insurer was ‘estopped to deny coverage to the extent of its policy limits’.
The Connecticut Court of Appeals, in Sonson v United Services Auto. Association, 100 A.3d 1 (Conn. App. Ct. 2014) allowed an insurer to rely on a coverage exclusion that had not been referenced in a letter rescinding the policy. The insurer had discussed the exclusion in an earlier reservation of rights letter but failed to include it in a subsequent rescission letter. Even so, the court found the insurer could rely on the exclusion in later coverage litigation.
The District Court of Montana considered a similar issue in a first-party property case titled Barnard Pipeline Inc. v Travelers Property Casualty Co. 3 F. Supp. 3d 865 (D. Mont. 2014). Applying Montana law, the court concluded that the insurer was not obligated to detail all potential defences in its reservation of rights letter but that it had not waived and was not estopped from asserting other policy defences. The court noted that the insurer’s reservation of rights letter expressly reserved the insurer’s right to assert additional applicable policy defences. The court also noted that, while Montana law requires an insurer to promptly provide a reasonable explanation for denial of a claim, the insurer does not waive all policy defences that are not included in a reservation of rights letter.
Barnard Pipeline and Sonson highlight the difference between first-party property coverage and third-party coverage involving the insurer’s duty to defend. In Barnard Pipeline, the court specifically distinguished cases where the insurer was estopped from denying coverage after initially assuming the defence of the claim without reservation. It held, ‘here, by contrast Barnard has always been on notice of Travelers’ intention to assert all applicable policy defences. Accordingly, Barnard fails to demonstrate that Travelers has waived or should be estopped from asserting defences beyond those detailed in Travelers’ reservation of rights letter’.
To conclude, recent opinions suggest that attorneys should consider all the facts and potentially applicable exclusions at the time the letter is drafted and clearly inform the insured of the insurer’s position regarding coverage within a reasonable time – i.e. as quickly as reasonably possible.
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In the not too distant future, the Insurance Act 2015 (the Act) will be in force and the much anticipated reforms to business insurance law in the UK will be upon us. By virtue of the extensive coverage given to the reforms, most who work in the insurance industry will be familiar with the changes that are about to come in, at least in the abstract. However, despite the array of briefings that have been produced on this subject, the brave new world of fairly presented risks, proportionate remedies and suspensory warranties may still come as a shock to the system.
So if the theory is familiar, how will the Act apply in practice? Consider the following scenario:
In late 2016, a bank discovers that a number of its employees have been defrauding it on a grand scale over five years, involving the production of counterfeit promissory notes. Fortunately, the bank has a comprehensive crime programme providing cover for such fidelity losses.
It has emerged that a number of general concerns raised by an investigation into compliance standards at the bank were not disclosed prior to the October 2016 renewal. The individual who arranges the bank’s crime insurance was not aware of these issues, which were therefore not passed on to the crime insurance team at the bank’s broker. However, the investigation and its findings were brought to the attention of the broker’s Directors and Officers liability (D&O) team by a senior executive (D&O cover is arranged elsewhere in the bank). This information was passed on to the bank’s D&O insurers as part of a ‘data dump’ amounting to hundreds of pages of documents.
Due to a historic issue, the crime policy contains a warranty that, since 2010, twice-yearly compliance audits of a number of departments have been undertaken, one of which is the department in which the fraud was carried out. However, over the five year period of the fraud, twice-yearly audits have been undertaken on only three occasions.
It is now late 2017 and the bank's insurance claim remains unpaid. However the very significant losses have contributed to the undermining of the bank's capital base, necessitating the sale of its highly profitable but ‘non-core’ commodities arm. If the insurance had paid out promptly, this outcome might have been avoided.
None of the bank’s insurance policies contract out of the Insurance Act 2015.
While this case study may read like the most unlikely of law school problems, it is an interesting exercise to consider how the new Act might apply if the issues which it raises were to come before a judge.
The first question arising from the case study is whether the risk was fairly presented to the bank’s crime insurers – the general issue being whether the concerns raised by the investigation into compliance standards should have been disclosed.
In order to answer this question, the starting point is that, from August 2016 when the Act is implemented, insureds must make a fair presentation of the risk before entering into a contract of insurance. This duty of fair presentation requires the insured to disclose all material circumstances which the insured knows or ought to know, unless any of the exceptions listed in section 3(5) of the Act applies (i.e. the circumstance diminishes the risk, the insurer knows, ought to know or is presumed to know it, or its disclosure has been waived). While the new duty is broadly similar to the duty of disclosure as currently understood, the Act seeks to clarify and confirm a number of features of the current law which have been uncertain to date.
In this instance, the dispute is likely to turn on two points. The first point is whether the compliance concerns are ‘material circumstances’ within the meaning of the Act, in the sense that they would influence the judgement of a prudent insurer in determining whether to accept the risk and, if so, on what terms (section 7 of the Act). While it would ultimately be a matter for expert evidence, and the substance of the concerns would be important, it is not much of a stretch to imagine that compliance issues could be relevant to the judgement of a prudent crime insurer. The second and perhaps more contentious point is whether the compliance issues were known or ought to have been known to the insured. On this point, sections 4 and 6 of the Act contain detailed provisions as to when an insured is treated as knowing circumstances which are material to the risk. Applying these provisions:
Finally, although not relevant to the claim in this particular case study, the bank and its broker may wish to reconsider the current practice of ‘data dumping’ used in connection with the bank’s D&O cover, which is one of the issues that the duty of fair presentation seeks to address. Although the Act recognises that a fair presentation need not be contained in only one document or oral presentation (section 7), by the same token, the disclosure of material circumstances must be made in a manner which would be reasonably clear and accessible to a prudent insurer (section 3).
If the duty of fair presentation has been breached, the next question is whether the insurer has a remedy (and, if so, what it is).
Whereas currently the only remedy for a breach of the duty of disclosure is avoidance of the policy, the Act aims to put the insurer in the position that it would have been in if the risk had been fairly disclosed. Therefore, if the risk would have been underwritten on precisely the same terms and for the same premium, the insurer has no remedy. However, if the risk would have been underwritten on slightly different terms or for a higher premium, or even declined altogether, then the remedy will reflect this.
In order to escape liability altogether in this scenario, the bank’s crime insurers would need to argue that they would have walked away from the risk, or that they would have pared back the cover that is available for fidelity losses (by inserting a wide exclusion, for example). If this point is put in issue, it will be a mixed question of factual and expert evidence as to what exactly the bank’s crime insurers would have done if the risk had been fairly presented.
Section 10 of the Act abolishes the existing law on breach of warranties. The current rule is that a breach of warranty immediately discharges the insurer from all further liability under the policy whether or not the breach is subsequently remedied, whereas the new rule is that warranties are suspensory – in the sense that an insurer is only discharged from liability while the warranty is breached.
In a further change, section 11 of the Act provides that the breach of warranty must relate to the loss. This is framed as a requirement that if a loss occurs, an insurer may only rely on a breach of warranty if it could have increased the risk of loss which occurred.
On this occasion, the warranty has been breached and cannot be remedied, so the suspensory effect of the warranty does not arise. The position might be different if, for example, there was a warranty as to the specification of the bank’s vault which was only met two months into the policy period (although in that case the breach would not relate to losses involving promissory notes). The difficulty faced by the insured, however, is that the compliance audit warranty may tend to reduce the risk of fidelity losses occurring in the relevant department in the period of the fraud. As a result, the insurer would have a legitimate defence to some or all of the bank’s claim if the non-compliance with the warranty increased the risk of this type of fraud loss – a factual question which would probably turn on the detail of the fraud and the likely scope of the additional audits.
And what of the bank’s losses resulting from non-payment of the insurance proceeds? Leaving aside questions of causation and remoteness, which may be significant, the Act does not alter the existing position that damages are not available for late payment of a claim by the insurer. This is despite the Law Commissions’ proposals to the contrary and the inclusion of a provision in the draft Insurance Bill, which was subsequently removed having been deemed too controversial for this legislation. For the time being, the only remedy available for insureds such as the bank will continue to be interest from the date of loss.
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Section 59 of the Long-term Insurance Act and section 53 of the Short-term Insurance Act deal with misrepresentation and non-disclosure under South African law. The Insurance Acts state that a policy cannot be invalidated and an insurer cannot exclude or limit its obligations under a policy or increase the policyholder’s obligations under the policy due to a misrepresentation or non-disclosure unless it is material.
Prior to the enactment of sections 59 and 53, the test for materiality for non-disclosure was dictated by the common law. Formulated in the case of Mutual & Federal Insurance Co Ltd v Oudtshoorn Municipality 1985 (1) SA 419 (A), the test for determining whether undisclosed facts were material or not was whether the ‘reasonable insured’ (i.e. a reasonable person in the same situation and with the knowledge of the same facts and circumstances) would have regarded the facts as material.
The test for materiality for positive misrepresentations, however, was complicated by the poor wording of section 63(3) of the repealed Insurance Act of 1943.
In Qilingele v South African Mutual Assurance Society 1993 (1) SA 69 (A), a confusing distinction was made between the test for materiality in cases where an insurance policy was repudiated on the basis of non-disclosure and in cases where the ground for repudiation was a misrepresentation. The court held that section 63(3) only applied to cases of misrepresentation, and the test laid down in Mutual and Federal Insurance Co Ltd v Oudtshoorn Municipality was held to apply to cases of non-disclosure.
This distinction was criticised by both the Supreme Court of Appeal and academics. In 2003, section 59 of the Long-term Insurance Act and section 53 of the Short-term Insurance Act were introduced. These sections are identical and set out the test for materiality: whether a reasonable, prudent person would consider that the particular information constituting the representation or non-disclosure should have been correctly disclosed to the insurer so that the insurer could form its own view as to the effect of such information on the assessment of the relevant risk.
The same objective reasonable person test for materiality applies to both misrepresentation and non-disclosure. The urge to look to the common law when dealing with misrepresentation and non-disclosure in insurance contracts should be avoided. The case law is helpful in assisting the court to gain an overall perspective of the issues that are relevant such as materiality. It was the impetus for the legislative intervention in issues of misrepresentation and non-disclosure, and the fact that legislation was enacted to deal with those issues is decisive. Given the confusion surrounding materiality for misrepresentation, legislative intervention in the form of section 59 and section 53 was necessary and welcomed. There is no talk of reform in the industry or parliament yet, though the insurance laws are being re-written and future changes are possible.
That being said, materiality alone is not sufficient to avoid liability under an insurance contract. An insurer or underwriter relying on misrepresentation must prove that the material misrepresentation induced the contract. In other words causation must be proved. The insurer must show that, but for the misrepresentation or non-disclosure, the insurer would not have concluded the contract, or it would have contracted on different terms. The test for inducement is subjective based on the view of the particular insurer.
Regarding materiality and causation, the court in Clifford v Commercial Union Insurance Co of SA Ltd 1998 (4) SA 150 (SCA) stated that ‘the two concepts are distinct and must not be confused. Thus it is possible that an insured guilty of material non-disclosure or misrepresentation may be able to show that it had no effect on the underwriter: Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd  1 AC 501 (HL) ( 3 ALL ER 581) at 551 (AC). (Nonetheless, as Lord Mustill points out in the passage immediately following, once materiality has been established the insured is likely to face an uphill struggle in trying to demonstrate that his non-disclosure or misrepresentation bearing this stamp had no effect). The materiality or otherwise of a circumstance should be a constant: something apart from the subjective characteristics, actions and knowledge of the individual underwriter which may be relevant to inducement as a particular case: at 533H-534A.’
In a more recent judgment, Visser v 1 Life Direct Insurance (1005/13)  ZASCA 193 (November 28, 2014), the court reiterated that the onus is on the insurer to prove a material misrepresentation, and that it was induced by the misrepresentation to issue the policy or offer its terms. The onus arises from the general principle that the party who alleges something must prove it. The Supreme Court of Appeal’s judgment in Visser correctly founded the entitlement of an insurer to reject a claim on statute. In Visser the insurer failed to prove that the deceased had a material pre-existing medical condition that should have been disclosed and, therefore, had to pay the claim.
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In the recent case of Atlasnavios - Navegação, LDA v Navigators Insurance Co Ltd and others  EWHC 4133 (COMM), Flaux J was required to determine whether the owners of the vessel ‘B Atlantic’ (the Vessel) could claim against the defendant war risks insurers (the Insurers) for the constructive total loss (CTL) of the Vessel by reason of her detention in Venezuela for more than six months, following the discovery by the authorities of bags of cocaine attached to her hull.
The Court was required to consider and rule on some fundamental questions about proximate cause, the meaning of ‘acting maliciously’ and ‘from a political motive’ in the context of a war risks policy, and whether the ‘infringement of customs regulations’ exclusion was subject to any implied restrictions.
Flaux J held that the CTL claim succeeded on the basis that there was cover under the policy for malicious acts and that, as a matter of construction, the infringement of customs regulation exclusion relied on by insurers was subject to an implied limitation in respect of infringements brought about by malicious acts of third parties, and therefore did not apply to the claim in question.
The Vessel, which at the time of the incident was chartered to Bulk Trading SA, was one of a number of bulk carriers managed by Bulker Chartering and Management SA (BCM) in Lugano, Switzerland.
On August 13, 2007, upon completion of loading a cargo of coal at Lake Maracaibo, Venezuela, for carriage to Italy, the Vessel was subject to an underwater inspection by divers who discovered three bags of cocaine strapped to her hull below the waterline.
The identity of the individuals who attached the drugs (in an attempt to smuggle them to Europe) has never been discovered, but it was common ground that the Vessel’s owner did not know anything about the drugs and had no involvement in any attempted drug trafficking.
The Vessel was detained and the crew arrested for drug trafficking offences. The Vessel remained in detention until, following a jury trial, the Vessel’s Master and Second Officer were convicted in August 2010, and the court ordered the final confiscation of the Vessel.
The claimants’ primary argument was that the proximate cause of the detention of the Vessel was the malicious act of the drug smugglers who attached the cocaine to the hull, with reckless disregard as to whether the vessel would be detained as a consequence and that, either:
The Insurers denied that the Vessel’s loss was caused by a peril insured against, relying principally on the ‘infringement of customs regulations’ exclusion contained in clause 4.1.5 of the Institute War and Strikes Clauses. In the alternative, they argued that the proximate cause of the loss was the owner’s failure to put up security for the Vessel’s release.
In response to the Insurers' reliance on the exclusion for loss arising from failure to provide security, owners argued that they could only be required to provide reasonable security and that they made efforts to provide security, but through no fault of their own, either it was not possible to do so or such security as might have been acceptable to the Venezuelan authorities was simply not reasonable.
There was also a question about the point at which the owners cease to be entitled to claim sue and labour expenses, in circumstances where notice of abandonment had been served and declined but ‘writ clause’ agreed (the effect of which was to put the owners in the same position as if proceedings had been issued on that date).
Definition of ‘malice’ or ‘malicious’
The policy provided express cover for loss of or damage to the Vessel caused by ‘capture seizure arrest restraint or detainment…’, by ‘…any person acting maliciously or from a political motive’ and by ‘confiscation or expropriation’. However, there was also an express exclusion for ‘loss damage liability or expense arising from…arrest restraint detainment confiscation or expropriation under quarantine regulations or by reason of infringement of any customs or trading regulations’.
In ruling on the owners’ claim for a CTL by reason of loss of the Vessel as a result of malicious acts of third parties, Flaux J determined that the correct test for what constitutes ‘malice’ is the criminal law definition, as confirmed by Colman J in Strive Shipping Corporation v Hellenic Mutual War Risks Association (Bermuda) Ltd (‘The Grecia Express’)  EWHC 203 (Comm):
‘There is no reason why the meaning of ‘person acting maliciously’ should be more narrowly confined than the meaning which would be given to the word ‘maliciously’ under the Malicious Damage Act 1861. Provided that the evidence establishes that the vessel was lost or damaged due to the conduct of someone who was intending to cause it to be lost or damaged or was reckless as to whether such loss or damage would be caused, that is enough to engage the liability of war risks underwriters. The words therefore cover casual or random vandalism and do not require proof that the person concerned had the purpose of injuring the assured or even knew the identity of the assured.’
In The Grecia Express, Colman J also held that the scope of the phrase ‘persons acting maliciously’ had to be construed as excluding the conduct of the master and the crew amounting to barratry, since barratry was not a peril insured under the war risks policy in that case.
In the course of proceedings the Insurers accepted that the exclusion for infringement of customs regulations would not apply to so-called ‘put-up job’ scenarios where the authorities deliberately plant the drugs (or presumably engage a third party to plant the drugs) so as to detain the Vessel.
Flaux J considered that acceptance amounted to a recognition that there is an implied limitation on the scope of what constitutes an ‘infringement of custom regulations’ within the meaning of the exclusion. He saw no distinction between the hypothetical ‘put-up job’ and the present case of the drug smugglers whose deliberate and malicious act in planting the drugs leads to the vessel being detained.
Flaux J held that the owner’s claim for a CTL succeeded on the basis that the ‘infringement’ was no more than the manifestation of the malicious acts of third parties in attaching drugs to the hull, and that the exclusion for infringement of customs regulations does not, as a matter of construction, apply to exclude cover in these circumstances. It was necessary to read the malicious acts cover and the customs exclusion together to determine the true ambit.
In considering his judgment, Flaux J cited Toulson J in Handelsbanken v Dandridge (‘The Aliza Glacial’) and, in some detail, Lord Denning MR in Panamanian Oriental Steamship v Wright (‘The Anita’)  2 Lloyd's Rep 365 (Mocatta J). Both citations supported his reasoning that a limitation on an exclusion wording should be implied where necessary to ensure the spirit of the policy is adhered to.
More than half of what is an extremely long judgment by Flaux J is taken up with a detailed examination and analysis of the events leading up to - and contents of - the various hearings and judgments in Venezuela. However, given Flaux J’s ultimate conclusion that the claim was covered under the malicious acts provisions, his conclusions on the political interference aspect of the claim, while interesting in terms of discussions of proximate cause, are obiter.
Flaux J held that, if he had not already found that there was cover under the malicious acts of third parties provision, and that the exclusion for infringement of customs regulations did not, as a matter of construction, operate to exclude cover in those circumstances, then he would have found on the facts that the exclusion for infringement of customs regulations would have applied, because there was no break in the chain of causation between the infringement and the detainment of the Vessel. The decisions of the Venezuelan courts ordering such detainment were not perverse or wrong and were not procured by unwarranted political interference.
He applied the test established by Lord Denning MR in The Anita, namely that the critical question in any given case was not whether or not there had been political interference (including negative or indirect interference), but rather, whether the decision of the judge was justified or not as a matter of law, despite the alleged interference. If it was justified, then any political interference would not break the chain of causation.
Flaux J held that the exclusion for failure to put up security did not apply. This was not a case where the owner was unwilling or unable to provide security, and indeed had taken reasonable steps towards the provision of security. Flaux J considered that it was an unrealistic assumption that reasonable security could and would have been agreed with the Venezuelan authorities.
The Judge held that the owners were entitled to recover sue and labour expenses, including after the notice of abandonment and agreement of the writ clause on June 18, 2008. The Judge rejected the Insurers’ submissions that sue and labour expenditure was not recoverable beyond the date of notice of abandonment. Although he accepted that sue and labour costs could not be recovered after proceedings had been issued, he did not accept submissions by the Insurers that the agreement of the writ clause, for these purposes, meant that the duty to sue and labour or the right to recover sue and labour costs came to an end at that point.
The matter is listed for appeal before the Court of Appeal in the second half of this year. Those interested should watch this space.
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This case, arising out of a fire insurance claim, provides a rare example of judicial consideration of the defence of lack of insurable interest. Judge Mackie QC was asked also to determine questions of misrepresentation/material non-disclosure, breach of warranty and reinstatement.
The Court held that the claimant’s claim should succeed and granted a declaration that it was entitled to an indemnity in the terms sought.
The claim relates to two neighbouring buildings (the Property), destroyed by a fire in July 2012. The Property was owned by a property investor, Mr Singh, and the claimant existed to hold and manage Mr Singh’s property portfolio. The claimant company was owned largely by Mr Singh.
Between 2010 and 2013, the claimant’s broker arranged insurance for the Property via an underwriting agency which had a binder with a Lloyd’s syndicate in 2010/11 and with the defendant in 2011/12 and 2012/13. The claimant submitted a proposal form in respect of the 2010/11 year only, though it confirmed at renewal in 2011 and 2012 that there had been no change in occupancy since the 2010/11 proposal form.
The fire insurance claim was notified to the 2012/13 policy, and was resisted by the defendant on the grounds of lack of insurable interest, material non-disclosure/misrepresentation and/or breach of warranty. The claimant issued proceedings, seeking a declaration from the Court that it was entitled to an indemnity for the costs of reinstatement of the Property.
The defendant argued that:
The Court found that the claimant did have an insurable interest. Notwithstanding that the Property was owned by Mr Singh, the Court accepted that the claimant paid rent to Mr Singh, granted leases over the Property to third parties, took responsibility for any rates liability in relation to the Property, and obtained insurance cover and paid premium over a number of years. The Court found that, on the facts, the claimant was under an obligation to reinstate the Property. The Court also considered that, if the claimant had not had an insurable interest, some other entity within the family business would have assumed the role of insured.
In reaching this decision, and mindful of the Court’s usual inclination to find in favour of an insured on the question of insurable interest (Stock v Inglis  1 QBD 564 cited), the Court was persuaded by the fact that the defendant had neither taken an interest in the question of insurable interest nor alerted the claimant to the importance of the issue until a claim was notified to the insurance policy.
The defence of misrepresentation/material non-disclosure failed on the basis that, to the limited extent to which anything material was misrepresented to the defendant, it was not relied upon by the defendant in writing the risk. The Court found that the only information relied upon by the defendant had been a survey of the Property carried out in 2011. Based on the survey, the defendant had agreed to insure the Property in 2011/12 and 2012/13 on the proviso that certain ‘risk improvements’ were made. There was no evidence that anything else induced the defendant into the insurance contract and it formed no part of the defendant’s case that any of the ‘risk improvements’ were not carried out.
Breach of warranty
The Court dealt with this point only briefly, finding that (although the 2010/11 proposal form had stated incorrectly that there were three tenants at the Property) this proposal form did not form the basis of the 2012/13 policy to which the claim was notified, and therefore there had been no breach of warranty.
The Court was unpersuaded by the defendant’s case that the right to reinstatement costs under the insurance policy was subject to prompt reinstatement of the Property by the claimant. Citing with approval an extract from MacGillivray (at 20-022), the Court found that the requirement to reinstate cannot arise until an insurer has confirmed that it will indemnify.
The Court confirmed that this principle should apply not just to impecunious insureds who cannot pay for the reinstatement without insurance funds, but also to successful businesses.
The Court rejected also the defendant’s argument that the correct remedy was damages, not a declaration, remarking that it is common for the Court to be asked to make a declaration in insurance cases (and, indeed, that insurers often issue proceedings to obtain declarations of non-liability). The Court observed that a declaration (unlike an award for damages) would negate the defendant’s liability should the claimant decide not to reinstate the Property.
The judgment provides an interesting overview of the circumstances in which insurers might raise the defence of lack of insurable interest (although, interestingly, the Court does not appear to have considered Macuara v Northern Assurance  AC 619, the leading case on insurable interest for property risks). The rarity with which this defence is raised reflects a reluctance on the part of insurers to rely on such a technical objection, and the Court’s propensity to lean in favour of insureds on this issue.
The judgment clarifies also the principle that insurers cannot rely upon a breach of policy condition to reinstate promptly in circumstances where they have sought to decline cover, and reaffirms the importance of reliance/inducement in relation to a defence of misrepresentation/material non-disclosure. The Court highlighted the importance of testing this subjective evidence thoroughly before seeking to rely upon such a defence at trial.
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The UK has published a business brief confirming its views as to the implications of the decision of the Court of Justice of the European Union (CJEU) in Skandia (Case C-7/13) (which held that services provided by a head office in the United States to a branch in Sweden which had been brought within a VAT group should be subject to VAT). This decision sent shockwaves through international groups, particularly those in the financial and insurance sectors for whom irrecoverable VAT can be a significant cost.
Where services are supplied between a head office and a branch, FCE Bank (Case C-210/04) confirms that there is no supply for VAT purposes because the branch and the head office are the same person. The CJEU distinguished this in Skandia by holding that where services are supplied by a head office to its Swedish branch which is a member of a VAT group, there was a supply on which VAT should be charged. This decision relied on two fundamental propositions – first, only the Swedish branch was a member of the VAT group (the head office was not) and second, the head office and the Swedish branch were given separate identities for VAT purposes (on the basis that a VAT group has a separate identity to its members).
Her Majesty’s Revenue and Customs (HMRC) has recognised this distinction by seeking to limit the application of the Skandia judgment to those branches which are VAT grouped in a Member State, which allows only the branch (and not the company in its entirety) to join the VAT group (so-called ‘establishment only’ groupings). The UK does not have ‘establishment only’ grouping – an entire company, including head office and any branches, join a VAT group together. HMRC has indicated that they will publish a list of the jurisdictions which they consider have ‘establishment only’ grouping.
The effect of this approach is that supplies made between a head office and a branch or between two branches can have VAT implications in the UK where:
In this situation, the UK VAT rules provide that the supply is made in the UK and will require the company to account for VAT under the reverse charge mechanism. Where the company can recover UK VAT in full, this should have little practical impact. However where the company is unable to recover the VAT in full, this will result in a real cost to the company.
In this scenario, it will be necessary to look at the nature of what is being supplied to the overseas branch, and to take that supply into account in determining how much VAT the company can recover.
These changes to the way VAT is imposed will apply in the UK to services performed on or after January 1, 2016. Businesses have the opportunity to opt to implement this treatment at an earlier date. It is expected that other tax authorities will publish their views shortly. The German revenue is due to confirm its position in March 2015. Given that the CJEU’s decision is consistent with the views of the European Commission, which were published in 2009, it is likely that some changes could be adopted across Europe. Affected organisations will need to consider how to structure internal supply arrangements. One possible approach might be to use cost sharing arrangements. Such arrangements need careful consideration as the requirements for VAT exemption are strict and direct tax issues can also arise.
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In a highly anticipated decision the German Federal Court of Justice, on February 11, confirmed the method of calculation of surplus and policyholder participation in such surplus in life insurance by a German insurer for endowment life insurance. Consumer protection agencies had called the calculation methods ‘intransparent’ and ‘trickery’. The decision confirms the application of the statutory rules by the life insurance industry which otherwise could have faced substantial claims.
A policyholder of Allianz had brought a claim to obtain detailed information on the calculation basis for the surplus of his endowment life policy entered into in 1987 at the end of the term and an amended (higher) payment. He had claimed that the hidden reserve in assets and the surplus participation had been set-off against each other instead of added and that such a calculation was wrong. The Federal Court of Justice rejected the entire claim.
In Germany, the policyholder of an endowment life policy has the right to participate in the surplus generated. The calculation of the surplus is subject to statutory rules. In summary, the policyholder shall participate in such surplus (during the term and at the end of the term) in proportion to the contributions made to the surplus by way of premium payments.
Until reform of insurance contract law in 2007 the participation was a flat amount. Since then, following a decision by the Federal Constitutional Court, the surplus in hidden reserves of assets (i.e. the difference in purchase value and market value of assets) will be considered with 50 per cent into the complex calculation of the surplus. The resulting amount is paid at the end of the term of the life insurance. This calculation has been modified by the Life Insurance Reform Act 2014 which introduced numerous changes to statutory assessment and calculation rules in light of the low interest rate environment. Life insurers can only pay the surplus from, for example, the market gain as long as the guaranteed interest and surplus of all other policyholders is not jeopardised. The focus it would appear is on safe guarding the interest of all insureds as a collective in a stressed interest situation rather than awarding an individual policyholder.
As an alternative approach, a base participation will stabilise the participation in surplus during the entire term of the life insurance product to avoid the policyholder facing an ‘incidental’ low market value which may be cyclic or driven by external factors at the end of the term.
The decision to choose either of the above options is on the life insurer and is made at the end of each year and will vary greatly in the market. Unsurprisingly the consumer protection agencies maintain that the calculation is a ‘black box’ and argue that a new decision the Federal Constitutional Court is needed. In early April the policyholder, backed by the Association of Insureds (Bund der Versicherten), raised a constitutional complaint against the ruling of the German Federal Court of Justice.
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On February 13, 2015, the Texas Supreme Court handed down its decision in the closely-watched In re Deepwater Horizon, No. 13-0670 (Tex. 2014) case. The case arose out of the massive damages caused by the 2010 offshore well blowout in the Gulf of Mexico involving British Petroleum (BP) and its drilling contractor, Transocean. The issue was whether British Petroleum (BP) was entitled to $750 million in insurance proceeds as an additional insured under Transocean’s liability policy. The answer was ‘no’.
The additional insured provision in Transocean’s policies extended coverage to “[a]ny person or entity to whom the ‘Insured’ is obliged by oral or written ‘Insured Contract’...to provide insurance such as afforded by [the] Policy.” The policies further defined ‘Insured Contract’ as “any written or oral contract or agreement entered into by the ‘Insured’...and pertaining to business under which the ‘Insured’ assumes the tort liability of another party to pay for ‘Bodily Injury’ [or] ‘Property Damage’...to a ‘Third Party’ or organisation’. The drilling contract at issue also contained an insurance provision under which Transocean agreed to name BP “as additional insureds in each of [Transocean’s] policies, except Worker’s Compensation for liabilities assumed by [Transocean] under the terms of [the drilling contract]”.
The parties did not dispute that BP agreed in the drilling contract to be responsible for all subsurface pollution while Transocean agreed to assume liability for all above-surface pollution. The blowout and ensuing oil spill occurred below the surface of the water.
BP sought coverage, arguing that the scope of its coverage under Transocean’s policies as additional insured could be determined only by the four corners of Transocean’s policies. More specifically, BP argued that: (1) the drilling contract was an ‘Insured Contract’; (2) the drilling contract obligated Transocean to provide additional-insured coverage; (3) BP was therefore an additional insured under the additional insured provision in Transocean’s policies; (4) there were no limitations on the scope of coverage in Transocean’s policies; and (5) BP therefore was covered for all liabilities (including subsurface pollution liabilities) in connection with the well at issue under Transocean’s policies.
In response, Transocean and its insurers argued that Transocean’s policies incorporated the drilling contract by reference and thereby limited the scope of BP’s coverage to only those liabilities Transocean agreed to assume in the drilling contract, i.e. above-surface pollution liabilities.
The Supreme Court of Texas held for Transocean and its insurers. The Court first noted that Texas cases, including Evanston Insurance Co. v. ATOFINA Petrochemicals, Inc., 256 S.W.3d 660 (Tex. 2008), require courts to consider the terms of an underlying ‘Insured Contract’ to the extent the policy language directs courts to do so. The Court then opined that, because BP’s status as an additional insured was predicated on the drilling contract, the scope of BP’s coverage under Transocean’s policies required reference to the drilling contract’s insurance provisions. Relying on the drilling contract’s requirement that Transocean only add BP as an additional insured ‘for liabilities assumed by [Transocean] under the terms of [the drilling contract]’, the Court then held that the additional insured provision only extended coverage to BP for the above-surface liabilities assumed by Transocean in the drilling contract. Because the liability here was related to subsurface pollution and Transocean only agreed to assume liabilities for above-surface pollution, the Court held that BP was not an additional insured for the Deepwater Horizon claim.
This holding is intriguing, because while the Court quite logically notes that courts must consider the terms of an underlying ‘Insured Contract’ to the extent the policy language directs courts to do so, the Court did not explain at length how Transocean’s policies directed the Court to consider the terms of the drilling contract in relation to limitations on the scope of coverage.
While it is clear that Transocean’s policies directed the Court to consider the drilling contract to determine whether BP was an additional insured by virtue of being an “entity to whom [Transocean was] obliged by oral or written ‘Insured Contract’...to provide insurance such as afforded by Transocean’s Policy,” Transocean’s policies did not explicitly state that the coverage afforded under the additional insured provision was limited in scope such that it matched the scope of Transocean’s obligation to procure insurance for BP as stated in the drilling contract. Instead of relying on an explicit textual ‘hook’, the Court relied on the interrelated nature of Transocean’s policies and the drilling contract to find that a limitation on the scope of coverage Transocean agreed to provide to BP in the drilling contract necessarily limited coverage under Transocean’s policies.
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South African civil law is not punitive, therefore, a fraudulent device used in an insurance claim will not deny the insured recovery for that portion of the claim which is untainted by the fraud unless there is an appropriate fraud clause in the insurance policy.
The position is different in English law. The Queen’s Bench Division of the Commercial Court recently determined in the matter of Versloot Dredging v HDI Gerling Industrie Versicherunag  EWCA Civ 1349 that an insured who has made a fraudulent claim forfeits any lesser claim that they could properly have made. That fraudulent claims rule is also extended to cases in which the insured deployed, in support of a wholly valid claim, some fraudulent means or device to advance the claim.
The claim is fraudulent if the insured believes that it suffered the loss claimed but seeks to improve or embellish the facts surrounding the claim by some lie. Reckless untruth is sufficient to amount to fraud for the purposes of the English fraudulent claims rule.
Under English law insurers are entitled to treat an entire claim as lost, including any genuine part of the claim, if the insured is found to have been fraudulent. This reflects legislative policy which aims to discourage insureds from seeking to make a profit from their loss by exaggerating a valid claim on the basis that, if unsuccessful, the genuine part of the claim will still be covered.
The English courts have also said that the rule is deliberately designed to operate in a draconian and deterrent fashion: ‘The policy of the rule is to discourage any feeling that the genuine part of the claim can be regarded as safe and that any fraud will lead, at best, to an unjustified bonus, and worse, in probability, to no more than a refusal to pay a sum which was never insured in the first place’.
It is regrettable that the South African courts have discounted that rationale on the basis that the penalty for an insured for the use of fraudulent devices is only: the disallowance of that portion of the claim; an adverse cost order and possible claim for damages by the insurer for the costs of investigating and dealing with the fraudulent elements or part of the claim; and exposure to a criminal sanction for fraud.
The reality is that the civil sanction imposes on the insurer an obligation to take steps to seek a remedy and incur the associated costs against an insured that, at the end of the trial, may be without financial assets to meet adverse cost orders or damages awards. As regards the criminal sanction, the insurer has to rely on a criminal justice system which is under enormous resource and capacity pressures.
In the UK, insurers have pursued private prosecutions where the Crown has declined to do so. AXA recently secured a conviction against an insured for a fraudulent personal injury claim. Furthermore, the Criminal Justice and Courts Act 2015 was recently approved by Parliament. The Act grants the courts power to dismiss personal injury claims where the claimant has been ‘fundamentally dishonest’, even if the claimant would still have been entitled to damages. The courts will make an exception only if the claimant would suffer ‘substantial injustice’, in which case the court can order the claimant to pay costs incurred by the defendant. In discussing the Act, Justice Minister Lord Faulks commented that ‘the government simply do not believe that people who behave in a fundamentally dishonest way by grossly exaggerating their own claim or colluding should be allowed to benefit by getting compensation in spite of their deceit’.
The introduction of this provision, together with the successful use of private prosecutions, and the English ‘fraud unravels all’ approach to fraudulent insurance claims gives a general sense of the mood of the industry and the public to fraudulent claims. It is, after all, the honest insureds who indirectly pay for fraudulent insurance claims, even if those claims are unsuccessful.
The Insurance Act 2015, which marks the most significant change in insurance law in the UK for over a century, introduces insurers’ remedies for fraudulent claims. Where fraud is committed by the insured, the insurer will not be liable to pay the claim to which the fraud relates. Any money already paid out for that claim may be recovered by the insurer. The insurer will remain liable for claims made in relation to events that take place prior to the specific fraudulent act. Once the insurer has elected to treat the contract as terminated it can refuse to pay claims relating to ‘relevant events’ (i.e. notice of claim or potential claim) that take place after the fraud.
The Insurance Act will come into force in August 2016. In the meantime, insurers can make successful use of the fraud clauses that operate in practice. Exclusions could also be tightened up in light of the Versloot Dredging judgment.
Insurers may also consider, on the appropriate facts, pursuing civil claims for damages when fraudulent means are used and private prosecutions where the State declines to act.
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At least three sets of consultations were issued towards the last quarter of 2014 that will have an impact on the insurance landscape of Singapore when they are implemented.
A set of consultation papers issued by the Monetary Authority of Singapore (MAS) covers the topic of Outsourcing and will impact all financial institutions licensed by MAS. MAS has indicated its expectation that an institution will manage all outsourcing arrangements as if the services continue to be conducted by the institution. The proposed notice and revised guidelines will cover all business processes which are outsourced or contracted out to any party (whether third parties or related parties) for which a set of minimum standards will need to be addressed for management of such outsourcing.
The main focus of MAS continues to be on material outsourcing arrangements. Part of the proposal provided that material outsourcing arrangements will also include any arrangement that involves customer information which in the event of unauthorised access or disclosure, loss or theft may materially impact its customers. This is in addition to existing material outsourcing considerations covering the potential impact of such outsourcing on business operations, reputation or profitability or adverse impact on an institution’s ability to comply with applicable laws and regulations when there is any service failure or security breach.
Financial institutions are gearing up for the changes which are expected to be implemented in 2015.
In October 2014, a consultation paper proposed legislative amendments to bring into effect proposals under the Financial Advisory Industry Review (FAIR), covering five core concerns:
The proposed amendments will have the greatest impact on life insurers and general insurance brokers (who are exempt from holding a separate FA licence under the Financial Advisors Act but subject to its provisions) as well as life insurance brokers (licensed under the Financial Advisors Act). Industry members are expected to implement a whole suite of FAIR initiatives in 2015.
In keeping with the ongoing regulatory focus on data protection, the Life Insurance Association Singapore (LIA Singapore) has issued a set of consultation papers which are aimed at providing consumers and policyholders with greater clarity on what they can expect from life insurers and their agents when applying the rules of the Singapore Personal Data Protection Act (PDPA) 2012 using two proposed industry codes:
On the topic of data protection, several Advisory Guidelines were issued by the Singapore Personal Data Protection Commissioner in September 2014 ranging from selected topics (such as analytics and research, anonymisation, closed-circuit television cameras, employment, national identification number, online activities, data activities relating to minors) to sector specific guidelines covering education and healthcare.
Although advisory guidelines and industry codes are not considered mandatory, these should form part of an insurer’s determination of best practices or recommended approaches in addressing this topic. It is anticipated that there will be continued focus on data protection for insurers in 2015.
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Over the past couple of years the Competition and Markets Authority (CMA) has been investigating the sale of private motor insurance (PMI). The CMA has concluded that elements of the PMI market are uncompetitive and have detrimental effects on consumers. As a result, the CMA has produced the Private Motor Insurance Market Investigation Order 2015; its key effects are outlined below.
This applies if you are (1) an insurance intermediary who supplies, arranges or administers PMI or (2) an insurer who is authorised to write and/or supply PMI (these are referred to in the Order as PMI Providers).
When you make an offer or invitation (spoken or written) to sell no claims bonus protection alongside PMI, then you must ensure that the NCB Protection Statement and the NCB Protection Information are provided clearly and prominently.
This applies if you are a 'PCW' (which is anyone who runs a price comparison website).
When a PCW provides access to no claims bonus protection then the NCB Protection Statement must be provided clearly and prominently.
To provide the NCB Protection Statement the PCW will need information from the underlying product provider. This will probably result in the PCW being provided with more information by the product provider than it currently receives and therefore an amendment to the existing agreements between PCWs and product providers may be required.
A PCW and PMI Provider must not enter into a new agreement, or perform an old or existing agreement, containing a restriction on a PMI Provider from offering or inviting the purchase of PMI through any other sales channel at a lower price than the price made available for the PMI through the PCW (commonly known as a 'most favoured nation' clause).
The prohibition above does not apply to an agreement containing a restriction on a PMI Provider from offering or inviting the purchase of a PMI on the PMI Provider’s own website at a lower price than the price made available through the PCW for that PMI.
This applies to 'Designated PCWs' – these are single PCWs, or groups of interconnected bodies comprising multiple PCWs, that in the previous calendar year have provided PMI Providers in aggregate with 300,000 PMI sales or more.
Designated PCWs must calculate by February 1 each year the number of PMI sales provided by them to PMI Providers in aggregate in the previous calendar year and notify CMA when they reach, exceed or no longer exceed 300,000 PMI sales.
Designated PCWs must submit a Quarterly and an Annual PCW Compliance Statement to the CMA. The first Quarterly PCW Compliance Statement must be submitted on July 15, 2015 covering the period April 19 to June 30, 2015.
The statements must state that the Designated PCW has not engaged in 'Equivalent Behaviour' during the report period. They must also list every delisting of a PMI Provider from the PCW in the report period (including details on the period of delisting, reasons and nature of delisting every PMI Provider).
Equivalent Behaviour means any behaviour which has the object of replicating any of the anti-competitive effects of the most favoured nation clause. This could include delisting (or threatening to delist), offering less favourable commission terms, offering less favourable contractual terms or compulsory unreasonable burdens through IT changes. These acts are not banned and can be carried out provided the PCW has a legitimate reason to do so. That reason must be unconnected from trying to replicate the legal or economic effect of the banned most favoured nation clause. Details of each delisting much be included in the compliance statements.
All PMI Providers must submit an annual PMI Compliance Statement to the CMA, containing a statement that the PMI Provider has complied with the terms of the order and also copies of the average no claims bonus discounts.
The first Annual PMI Compliance Statement must be provided to the CMA by August 1, 2016 and subsequently on February 1 in each year.
CMA can give directions as to compliance. Any person who suffers loss or damage due to a breach of the duty to comply with the Order (Section 167) may bring an action.
The CMA can also seek to enforce the Order by civil proceedings for an injunction or for other appropriate relief or remedy.
It is not clear how the NCB Protection Statements and NCB Protection Information will affect consumer behaviour, however, these disclosures will inevitably increase the regulatory burden on PWCs and PMI Providers.
We see the tightening of the control over commercial terms between PCWs and insurers as part of a wider trend towards more intrusive supervision of the distribution chain for consumer products. These latest measures reflect the regulatory desire to shift focus towards earlier stages of the product cycle to ensure that commercial parties take responsibility for any resulting consumer detriment.
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Victoria and South Australia are tightening their guidelines and planning policies for renewable energy facilities.
Hacking, corporate espionage and data breaches are on the rise around the globe.