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Insurance Law and Regulation Update

  • United Kingdom
  • Insurance and reinsurance

22-09-2016

We set out below recent and forthcoming developments in Insurance law and regulation.

Case law

Regulatory

Insurance Distribution Directive

The Directive on Insurance Distribution (Directive 2016/97/EC) (the “IDD”) came into force on 22 February 2016. The IDD repeals and replaces the Insurance Mediation Directive (2002/92/EC) (the “IMD”) and must be brought into effect in EU member states by 23 February 2018.

Changes brought about by the IDD include the following:

  1. Extending the scope of the regime to all sellers of insurance products.
  2. New rules regarding the professional development of employees of insurance intermediaries.
  3. More effective management and mitigation of conflicts of interest.
  4. Special disclosure requirements where insurance products are bundled together.
  5. Additional conduct of business standards for firms selling insurance-based investment products.

A link to the IDD can be found here.

Law Commission consultation on Insurable Interest

The Law Commission is currently undertaking a consultation in relation to the proposed Insurable Interest Bill. In March 2015, the Law Commission published an issues paper seeking views on proposed reforms to the law governing insurable interest. The current consultation exercise, which closed on Friday 20 May 2016, aims at seeking industry views on the proposed wording for the bill. According to the Law Commission website, the Commission expects to report on feedback from the consultation later this year.

Life Insurance

In respect of life insurance, the bill introduces the concept of “life-related” insurance. The relevant provision in the bill sets out three broad categories of interest for these purposes:

  • certain specific relationships: if the relationship exists, there is no need for the insured to demonstrate financial dependency or expectation of financial loss. These relationships are described as being those of “natural affection”, and have been extended, such that an insured can be said to have an insurable interest in the lives of cohabitants, as well as children and grandchildren.
  • prospect of economic loss: a policyholder may insure the life of another person on the grounds that they would suffer a loss on the other person’s death (or the occurrence of another insured event such as injury or incapacity of the life insured).
  • policies intended to cover multiple lives: the bill provides that trustees of pension and other group schemes have an insurable interest in the lives of the members of the scheme.

Non-Life Insurance

In respect of non-life insurance, the draft bill provides a non-exhaustive “definition” of insurable interest. It also provides that an insured has an insurable interest if it:

  • has a right in the subject matter of the insurance;
  • has a right arising out of a contract in respect of the subject matter;
  • has possession or custody of the subject matter; or
  • will suffer an economic loss if the insured event relating to the subject matter occurs.

The accompanying guidance to the draft bill notes that the first three limbs of the test are largely focussed on property insurance, and reflect the current state of the law. It goes on to note that the final limb is intended to be broad in nature, and covers the types of insurance which previous consultees had been keen to include, such as liability insurance, D&O and business interruption cover.

The draft Insurable Interest Bill can be found here.

The accompanying guidance notes to the draft bill can be found here.

Enterprise Act 2016

The Enterprise Act 2016 received royal assent on 4 May 2016. The key provisions from an insurance perspective are as follows:

  • Part 4A of the Act introduces an implied term into every contract of insurance obliging insurers to pay insurance claims within a reasonable time.
  • The concept of ‘a reasonable time’ is not expressly defined, but factors such as the type of insurance, size and complexity of the claim and compliance with regulatory guidance will be relevant in the circumstances.
  • If an insured party has suffered loss as a result of the insurer’s breach of the implied term, the insured can claim damages in respect of this over and above the sums due under the contract. 
  • The insurer will have a potential defence if it has reasonable grounds for failing to pay.
  • Parties to a non-consumer insurance contract can choose to contract out of the requirement to pay claims in a reasonable time period. 

A link to the Eversheds briefing note on the Enterprise Act 2016 may be found here.

Third Party (Rights against Insurers) Act 2010

The Third Party (Rights against Insurers) Act 2010 came into force on 1 August 2016.

The Act replaces the Third Party (Rights against Insurers) Act 1930. The 2010 Act, amongst other things, allows a third party to issue proceedings, directly against the insurer, where a relevant insolvency event applies, at the time at which the liability arises.

The Act also makes it easier for a third party to elicit information about the policy in question. It widens the number of people who may be asked to provide information to a third party, and requires that the relevant information be provided within 28 days.

A link to the Act is set out here.

Insurance Act 2015 (the Act)

The Act came into force on 12 August 2016. The Act replaces the existing duties of disclosure and misrepresentation with a new duty of fair presentation which requires the insured to disclose material circumstances which it knows or ought to know.

Where the duty of fair presentation has been breached, the Act provides a system of proportionate remedies, based on what the insurer would have done had the risk been fairly presented, replacing the existing remedy of avoiding the policy. Where an insured has breached this duty recklessly or deliberately, the insurer remains entitled to avoid the policy.

The Act also abolishes “basis of contract” clauses, which have the effect of converting pre-contractual information supplied to the insurer into warranties and, in the event of breach of warranty, the Act provides that the insurer’s liability is suspended, rather than terminated, therefore, the insurer is liable for claims which arise after a breach of warranty has been remedied.

Eversheds Essential Guide to the Insurance Act

Case Law

Minister Finansów v Aspiro SA formerly BRE Ubezpieczenia sp. z o.o., (Case c-50/15)

The case was concerned with Aspiro, a Polish company, which provided services for the settlement of insurance claims. Article 135 (1) (a) of Council Directive 2006/112/EC on the common system of value added tax, provides that insurance transactions, as well as certain services provided by insurance brokers and agents, are exempt from VAT.

The key question under consideration in the case was whether, Aspiro, as service provider, could be seen as having acted as an insurance broker or agent such that it could be exempt from VAT. The ECJ held that such a provider could only be deemed to be acting as a broker or agent to the extent its activities included finding potential customers and introducing them to the insurer in question. In this instance, it was held that Aspiro had not performed such a function, and that its activities were therefore not subject to the VAT exemption.

The full text of the judgment can be found here.  

Versloot Dredging BV and another (Appellants) v HDI Gerling Industrie Versicherung AG and others (Respondents) [2016] UKSC 45

The recent decision in Versloot Dredging BV and another (Appellants) v HDI Gerling Industrie Versicherung AG and others (Respondents) [2016] UKSC 45, handed down on 20 July 2016, has clarified the law for both insurers and insureds in relation to “fraudulent devices” or “collateral lies”.

The case confirms that:

  • a lie told by an insured when making a claim which has no relevance to the insured’s right to recover (i.e. a fraudulent device), does not give an insurer a right to repudiate a claim; and
  • also provides further detail on the meaning of “fraudulent device” for the purposes of the Insurance Act 2015.

A link to the Eversheds briefing note on the case can be found here.

Regulatory

General Insurance Add-Ons Market Study

The ban on financial services firms using pre-ticked boxes and other opt-out methods of selling additional 'add-ons' with purchases of regulated financial products came into force on 1 April 2016 (see PS15/22).

The non-Handbook guidance contained in Appendix 2 to PS15/22 also came into immediate effect on publication of the policy statement (28 September 2015).

Senior Insurance Managers Regime (SIMR)

The Senior Insurance Manager’s Regime is in force from 7 March 2016. The deadline for firms to submit their “Scope of Responsibilities” is Wednesday 7 September 2016.

Insurance Fraud Taskforce

The Insurance Fraud Taskforce published its report in January 2016 following a year-long investigation into the causes of fraudulent behaviour and has produced recommendations to reduce the level of insurance-related fraud.

The Taskforce produced a list of 26 recommendations. These include the following:

  • to improve consumer understanding of insurance products;
  • to ensure anti-fraud messaging is targeted and hard-hitting; and
  • to encourage the insurance industry to strive to improve the quality and quantity of data available in fraud databases and data sharing schemes.

On 26 May 2016, the Economic Secretary to the Treasury, Harriet Baldwin, announced that the Government accepts the recommendations contained in the report and will set out a process for implementing them in due course.

A link to the statement from the Economic Secretary to the Treasury can be found here.

Principals and their appointed representatives in the general insurance sector

On 22 July 2016, the FCA published a thematic review entitled ‘Principals and their appointed representatives in the general insurance sector’ (TR16/6).

The FCA findings may be categorised into three main areas:

Business models and risk management

  • The FCA considered principals’ business models / risk management frameworks and found that almost half of the principals in the sample could not adequately demonstrate they were fully aware of the full extent of the risks arising from the activities of their AR.

Governance and oversight

  • When considering the appointment of ARs, the FCA found that a number of principals in the sample were not able to adequately demonstrate that they had met their obligations to consider the solvency and suitability of the AR, the impact on their own compliance with threshold conditions, or the adequacy of their own controls and monitoring resources.

Customer outcomes

  • The FCA raised concerns about the ability of principals to ensure that customers were adequately protected (having regard to the requirements of PRIN and ICOBS).

Dear CEO letter - FCA expectations of principal firms operating in the general insurance sector

On 26 July 2016, the FCA published a “Dear CEO letter” in connection with the publication of TR 16/6.

The letter affirms a number of the points set out in that review, including, amongst other things, a finding that:

  • when considering the appointment of ARs, many principal firms had not taken reasonable steps to assess their ability to oversee them effectively;
  • some principals had not assessed the solvency and suitability of their ARs; and
  • some principals had not put in place compliant contracts with their ARs.

A link to the letter can be found here.

Rules and Guidance on PPI complaints

The FCA released a feedback statement on 2 August 2016 indicating it believed that, overall, the package of proposals on PPI complaints set out in CP15/39 should be taken forward.

The FCA also noted that it was seeking to consult on further changes to the proposed rules and guidance concerning the handling of PPI complaints following Plevin, in a further consultation (CP16/20).

The proposed changes relate in particular to three key aspects of the rules / guidance:

  • to include profit share in the FCA’S approach to the assessment of fairness and redress;
  • to allow previous rebates to a consumer when they cancelled their PPI policy to be partly reflected in (and so reduce) any redress due; and
  • to clarify how firms should assess fairness and redress where commission or profit share rates vary during the life of the PPI policy.

A link to the feedback statement can be found here.

Increasing transparency and engagement at renewal in general insurance markets

On 10 August 2016, the FCA published PS16/21: “Increasing transparency and engagement at renewal in general insurance markets”.

The statement sought to report on the main issues arising from Consultation Paper 15/41, which attempted to address concerns about levels of consumer engagement and the treatment of consumers by firms at renewal, and the lack of competition resulting from this.

It also set out the FCA’s final rules in this area, which included guidance on ensuring customers:

  • are provided with appropriate information and communications;
  • have sufficient awareness regarding options on renewal (including switching and cancelling); and
  • are able to evidence their compliance with the FCA’s principles and any applicable fees and charges customers are obliged to pay.

FCA statement on review of the client money rules

On 16 August 2016, the FCA published a statement announcing that it has written to firms in relation to its consultation paper on its review of client money rules for insurance intermediaries (CP12/20).

It believes that the industry has increased its focus on protecting client money. In addition, the FCA states that a number of initiatives have taken place, which are leading to improvements. These include:

  • An enhanced pro-active CASS supervision strategy for general insurance intermediaries.
  • An updated reporting requirement applicable to general insurance intermediaries holding client money, which is enabling the FCA to collect more robust information from these firms.

 

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