“I'm fed up with coming up the lifts in this building and seeing people carrying around paper files. It’s ridiculous." Lord Peter Levene - chairman, Lloyd’s

Paul Howick, partner in the insurance and reinsurance group at Davies Arnold Cooper, discusses the potential Law Reform cover and how is it likely to affect the industry.

For those who are involved in the world's insurance industry, whether as practitioners or service providers, 2006 is turning into something of a watershed. A debate is on, prompted by unprecedented change and pressures, the way in which the insurance industry operates and the laws which govern those operations, is under the spotlight with an intensity and focus which we have not seen before.

In June, Lloyd's published its 360 Risk Project Climate Change - Adapt or Bust. A report which not so much makes you sit up and take notice, but more like grab what you can and head for the hills (and make sure that it is a high one).

Among its conclusions the Report says:-

"…. the industry can no longer treat climate change as some peripheral work stream, simply to tick the regulatory and compliance box, or to support its public relations strategy. Instead, understanding and responding to it must become ‘business as usual’ for insurers and those they work with. Failure to take climate change into account will put companies at risk from future legal actions from their own shareholders, their investors and clients …"

But to what extent is the legal machinery the framework of the UK insurance industry, to use that current buzz phrase "fit for [its] purpose?"

2006 is of course the centenary of the Marine Insurance Act 1906 "an Act to codify the law relating to marine insurance" and which brought together the English law of Marine Insurance developed through the Courts and market practice over some 200 years. The Act has provided the foundations of the development of all UK insurance law and its principles have been held by the Courts to apply to both marine and non-marine insurance and reinsurance. It provides the foundations for many of the world's insurance legal systems. The Act therefore has stood the test of time but is increasingly showing its age particularly in a world of global markets where challenges to the dominance of London are supported by systems of law more tuned with the demands and pressures of today's world.

On any analysis therefore, the time for change is now. In January 2006, the Law Commission for England and Wales and the Scottish Law Commission (the bodies set up by Parliament for the purpose of promoting law reform) published a joint scoping paper on insurance contract law the purpose of which is to identify, as broadly as possible, a range of insurance topics which will be examined and how, the law in particular areas of insurance should be changed.

The Law Commission made it its business to go out and to seek input not only from lawyers but those actively engaged at the sharp end of the insurance and reinsurance markets whether as producers, consumers or intermediaries. The Law Commission also made it clear that what it expected during the early stages of the consultation process was "impressionistic" answers from respondents, leaving the detailed examination of issues until the publication of a series of consultation papers, the first of which is expected to be produced later this Summer.

So what will the (potential) Law Reform cover and how is it likely the industry? We know that those ever-volatile issues of non-disclosure, misrepresentation and breach of warranty are already candidates for reform and further topics ranging from "worthless policies" to "unjustifiable delay in settling claims" will also come under the spotlight. Further details must await the publication of the consultation papers.

Of more general concern however are three areas which seem to underline the whole process of reform and may well determine the "quality" of the detailed reform which emerges. These may be summarised as follows:-

At the moment there appear to be two camps: one which recognises the need for basic reform of insurance contract law in the form of a new Insurance Contracts Act and the second which suggests that codification is stifling and obstructs the flexibility of the insurance market.

The Law Commission appears to adopt the view that codification is desirable and points to the fact that the criticisms of the 1906 Marine Insurance Act have focused on the last ten years or so of its operation and fail to acknowledge the benefits the Act brought to a largely inchoate system of common law and convention. It also makes the point what would the litigation landscape have been like without the Marine Insurance Act? The Law Commission does however recognise the pressures that exist on parliamentary time and public resources should re-codification of the law be recommended and cites the Government's response to the, ultimately, stillborn 1980 Commission recommendations that:

"there was nothing wrong with the law of insurance contracts that would not be taken care of by the forthcoming FSA rules on conduct of business."

It is not for me to say in the context of this article whether, some years down the line, that particular Judgment would receive the wholehearted support of the insurance industry. The comment does however highlight what appears to many common factors to be a real danger: that whatever recommendations are made ultimately by the Law Commission, they will be introduced by a series of piecemeal regulatory reform and statutory instruments driven by the considerations of expediency and cost without tackling the fundamental question of Insurance Contract Law Reform.

The scoping paper and related commentaries acknowledge the parallel development of "consumer insurance contracts" to the general law of insurance and recognises that the regulation and wider application of consumer legislation has improved the lot of insurance consumers. The Law Commission also recognises the political pressure (both domestic and European) to secure, still further, the position of the consumer in the insurance market and the majority of examples cited in the scoping paper supporting the need for reform are taken from a consumer context.

In its approach to this issue, the Law Commission acknowledges the difficulties of reviewing the law in a field where there is a wide range of contracts, an issue in one area may be a substantial problem, but not in another. The Law Commission draws a distinction between consumers and small businesses (CSBs) and medium to large businesses (MLBs) and in its request for responses it has indicated that it would be useful to know whether a particular problem is thought to affect one or both groups and envisages that " any proposals we may make are likely to make a distinction between the two groups for some purposes at least".

At this early stage responses to this issue again appear to be mixed. On the one hand there is a view which seems to accept that those who travel the road of sophisticated insurance and reinsurance products, will wish the route to be governed by different controls to those dealing in what are essentially consumer products. The other view is that any change which looks at the fundamentals of Insurance Contract Law must do just and deal with issues in a way which are as valid for insurance contracts dealing with consumers as they are for multi-million pound enterprises. Separate consumer legislation and regulation has done and will continue to do its job insofar as safeguarding the particular needs of the domestic consumer.

Since 2001, the European Commission has been examining the potential for reform of contract law principles, including Insurance Contract Law, with a view to adopting new comprehensive legislation at EU levels.

The background is complicated but matters have now reached the "workshop" stage; the first workshop on insurance taking place on 16 December 2005 which was described as "difficult". The progress is such that at the moment the European Commission is holding "discussions with researchers on how the workshops could be organised in order to prioritise the work relevant to the consumer acquis, and what materials should be presented to the stakeholder …" Enough said for the moment perhaps.

The concern is that whatever pace the European Commission moves at, the harmonisation of European Insurance Contract Law is on the agenda and the concern of many in the worlds leading insurance and reinsurance markets is that the agenda should be set by the United Kingdom, a market which is equipped with the sophistication, and the battle scars, to lead the way. The point is made by the Commission that in its current form the United Kingdom Contract Law does not provide a proper footing to establish the foundations for the future of European Contract Law and that is a position which needs to be remedied.

The Law Commission acknowledges the fact that there is "no point in disguising" the fact that the problems have been identified from the perspective of the insured. That said, it is also keen to recognise those issues which are of importance to insurers and identifies, for example, both insurable interest and the need to clarify the definition of fraud and its effect as areas of specific concern to insurers.

In many senses therefore the insurance industry will be the master of its own destiny and this summer promises the opportunity for the industry to engage in a consultation process which, who knows, may rewrite insurance law for the next 100 years.

This Special item appeared in issue 107 of JTW News - July - August 2006

Author: Paul Howick - Davies Arnold Cooper