Insurance Market Conditions & Trends 2015/16: Legislation

Published 1 September 2015

In a world of breathtaking change, keeping abreast of legislative, judicial and regulatory developments is essential for managing risk and business planning. Our guide will ensure you have a concise summary of the key legal events from the last 12 months at your fingertips.

1.  Brussels Regulation recast 1215/2012

For proceedings commenced on or after 10 January 2015, this recast Regulation now determines which court(s) will have jurisdiction to hear disputes.

Although there are some important new provisions, many of the key jurisdictional rules – including that a party should generally be sued in its country of domicile, and the exceptions to this rule for contract, tort and insurance claims – remain unchanged.

The recast Regulation addresses the problem where proceedings are brought in a member state court in breach of a clause giving exclusive jurisdiction to another member state court: the first court ‘shall decline jurisdiction’.

This means, in theory at least, that a party can no longer commence tactical proceedings to bog down a dispute in slow-moving courts, leaving the validity of an exclusive jurisdiction clause to be decided there, delaying resolution of the dispute in the courts of the contractually agreed forum.

The recast Regulation also addresses what happens if parallel proceedings are started in a non-EU state. The EU member state court has a discretion to stay its proceedings if they involve the same cause of action and same parties as, or are related to, proceedings in a non-EU state.

2.  The Construction (Design and Management) Regulations 2015

These Regulations came into force on 6 April 2015, replacing the 2007 Regulations and bringing significant changes to the old health and safety regulatory regime. The aim is to cut bureaucracy for businesses and to be simpler to understand, thereby improving health and safety on small construction sites. The Regulations apply to almost all construction projects and criminal sanctions can apply to a breach of them.

Important changes include the abolition of the role of CDM Co-ordinator and the introduction of the role of Principal Designer for those projects where there will be more than one contractor working at any time. A key difference is that these Regulations will apply to domestic clients as well as commercial clients. The health and safety responsibilities for clients are increased. As a consequence of the changes, fewer projects will need to be notified to the Health and Safety Executive.

Transitional arrangements will come to an end on 6 October 2015. For existing projects where a CDM Co-ordinator has already been instructed, the client must appoint a Principal Designer by this date. The creation of the new Principal Designer role and the increased responsibilities for other duty-holders mean that it will be important for insurers to understand the extent of the duties owed by their policyholders.

3.  Consumer Rights Act 2015

This Act comes into force on 1 October 2015. In the main it consolidates existing consumer law relating to statutory contractual terms (such as services being provided with reasonable skill and care, or goods being of satisfactory quality) and unfair contract terms. However, there are several key changes.

Consumers are given new, direct remedies if traders breach the statutory contractual terms. Digital content is dealt with as a category on its own, with its own statutory contractual terms separate from goods and services. There are new investigatory and enforcement rights for both regulators and consumers. Of note, for the first time there is an opt-out class action where there are proven breaches of competition law.

Many insurance firms are in the process of reviewing terms and conditions, and sales and complaints processes, to realign with the Act. The biggest impact may come much later, if a group of consumers is supported to bring an opt-out class action – there is power to allow a representative body to bring the claim on behalf of consumers. If successful and if permitted by the court, compensation could be awarded in respect of all consumers who are impacted by the breach (unless a consumer has expressly opted out), which could run into millions of pounds. Consumers then have a time period to step forward to claim the compensation, with money unclaimed going to a charity supporting access to justice.

4.  Counter-Terrorism and Security Act 2015

This Act creates a new offence in respect of insurers. Under the Terrorism Act 2000 it is an offence to enter into an arrangement as a result of which money or property is to be made available to another party whom the payer knows or has reasonable cause to suspect will or may use it for the purposes of terrorism. The offence is punishable by up to 14 years in prison and a fine.

This new Act adds a new provision to the Terrorism Act, clarifying that it is an offence for an insurer to make a payment under an insurance contract in respect of money that has been, or is to be, handed over in response to a demand made wholly or partly for the purposes of terrorism and the insurer knows, or has reasonable cause to suspect, that the payment has been, or is to be, handed over in response to such a demand. Upon conviction the court may order the forfeiture of the amount paid under the policy.

In addition to the insurer’s offence, a director, manager or similar officer may also be guilty of an offence if the payment was made with their consent or connivance or it is attributable to their negligence.

5.  Criminal Justice and Courts Act 2015

This Act presents claimants with increased risks in the event that their personal injury claim is exaggerated or fraudulent.

While historically the courts have had the opportunity to dismiss dishonestly exaggerated claims, a more common route has been to allow the damages which the claim merited, rather than the inflated claim presented, and penalise the claimant in costs. Fundamental dishonesty fell within the exceptions to qualified one-way costs shifting, allowing costs orders to be enforced with the court’s permission.

In proceedings issued on or after 13 April 2015, where the court decides on the balance of probabilities that the claimant has been fundamentally dishonest in relation to the primary personal injury claim, section 57 provides that it must dismiss the claim (including elements of the claim which are not fundamentally dishonest) unless satisfied that it will cause substantial injustice to the claimant.

The provision relates to the personal injury claim, which is expected to include intrinsic heads of loss, such as loss of earnings and care, but will not extend to related property damage claims such as vehicle repairs and hire charges. It will also allow the courts to dismiss a genuine injury claim if the claimant supports the dishonest claim of a fellow claimant, for example, a phantom passenger.

6.  Deregulation Act 2015

This Act came into effect from 30 June 2015 and is aimed at cutting red tape by reducing the burden of legislation on businesses, organisations and individuals.

Section 9 is of specific relevance to motor insurers, as it amends section 147 of the Road Traffic Act 1988. There is no longer a requirement for insurance certificates to be delivered in order for a policy to be effective. Rather, a policy is now deemed effective from inception.

Furthermore, where a motor policy is cancelled mid-term (whether by insurer or policyholder), the policyholder is not required to surrender the certificate of insurance. Significantly, insurers no longer need physically to recover the certificate, nor issue proceedings to obtain a declaration in order to avoid a Road Traffic Act liability to deal with a third party claim. It is, however, anticipated that an article 75 liability will remain until such time as the Motor Insurance Database is updated.

The Act represents a welcome change for insurers, who have previously struggled to end their potential liability for third party claims in circumstances where a policy is cancelled mid-term. It may, however, lead to increased scrutiny of purported cancellations. If not carried out in accordance with the wording of the policy, a Road Traffic Act liability will remain.

7.  EU Data Protection Regulation

This Regulation, which should harmonise the current data protection laws in EU member states, continues its slow progress through the EU policymaking processes. At the time of writing, it is hoped that the trialogue procedure will produce a finalised text by the end of 2015. There will then be a two-year implementation period.

Key changes have remained constant throughout the text’s legislative journey:

• Increased fines: Whether 3% or 5% of annual turnover for breaches of the Regulation, fines will undoubtedly be greater than the current maximum of £500,000;
• Mandatory security breach notification: Whether the final wording requires notification of a breach within a specified period, or as soon as reasonably practicable, notification to the local regulator is likely to become obligatory;
• Increased administration: Organisations must ensure that privacy impact assessments are carried out for certain systems processing personal data (threshold to be determined), maintained ready for inspection and built in accordance with the new principles of ‘data protection by design’ and ‘data protection by default’.

Prior to the final text, organisations should be placing data protection on the boardroom agenda, noting that compliance with current best practice guidance from the Information Commissioner’s Office goes a long way towards compliance with the proposals of the new Regulation.

8.  General Product Safety Directive

The revision of the main EU rules on product safety is long awaited. The European Commission undertook a public consultation on its proposed Product Safety and Market Surveillance Package and the proposal is currently being discussed in the European Parliament and by the Council of Ministers. No indication has been given as to when the new measures will come into force.

The core provisions are unchanged from the current General Product Safety Directive, focusing on whether the product is safe and using risk assessment tools to assess this. The key reforms are to tighten up traceability and market surveillance provisions of EU product safety law. Better identification of suppliers and traceability along the supply chain are key objectives. For example, ‘economic operators’ along the supply chain will likely have to keep records for ten years to show from whom they acquired the product and to whom they supplied it.

The reforms are likely to remove the distinction between consumer and non-consumer products. Previously, the Directive focused on consumer products and other specific sector rules dealt with specific products, from medical devices to tyres and children’s toys. The reforms will also focus on ‘professional products’, namely those used by workers.

9.  Insurance Distribution Directive

The Insurance Distribution Directive (IDD), previously known as the Insurance Mediation Directive 2, is expected to replace the current Insurance Mediation Directive with effect from 2017. Key changes include mandatory pre-contractual disclosure of an intermediary’s remuneration as a standardised product information document for non-life products. Other proposals include stricter requirements for insurance-based investment products, particularly around conflicts of interest, similar to the existing rules that apply to investment firms. The IDD also includes additional rules for the sale of bundled insurance products.

The IDD is a minimum harmonisation directive, meaning that member states can set higher standards if they so choose, provided that they do not conflict with the IDD.

10.  Infrastructure Act 2015

With the objective of making it ‘easier, quicker and simpler to get Britain building’, this Act received Royal Assent on 12 February 2015. It contains a diverse range of provisions, including headline-making changes such as the creation of Highways England, a government-owned company that will use stable long-term funding to improve the country’s road network, and a right of access to ‘deep level’ land (at least 300 metres below surface level) for exploitation of petroleum or deep geothermal energy (including by fracking), but coupled with provisions to protect the environment and ensure appropriate health and safety.

Planning changes include a new ‘deemed discharge’ provision on planning conditions to end unreasonable and excessive delays on projects that already have planning permission. The Act also aims to cut red tape for Nationally Significant Infrastructure Projects (NSIPs) to boost investment. Following a review of how the Planning Act 2008 has operated, several technical and administrative improvements are made. The NSIP changes are welcomed but some believe that this was a lost opportunity to make more radical changes to the regime.

11.  Insurance Act 2015

This is the standout piece of legislation for this year. It received Royal Assent in February 2015 and comes into effect on 12 August 2016.

Under the Act, the duty of disclosure remains for non-consumer policyholders but is reframed as a broader ‘duty of fair presentation’ of the risk. The duty is satisfied either if all material circumstances are disclosed or if sufficient information is provided to put a prudent underwriter on notice to make further enquiries. Remedies are proportionate.

The Act abolishes ‘basis of the contract’ clauses for business insurance and parties cannot contract out of this. An insurer’s liability is also merely suspended, rather than discharged, in the event of breach of warranty.

As anticipated in last year’s report, the Act also includes provision that non-compliance with a warranty or other term (such as a condition precedent) designed to reduce particular types of loss occurring at a particular time or place, will not debar a claim if the policyholder can show that the non-compliance could not have increased the risk of the loss in the circumstances in which it occurred.

Fraud is clarified as forfeiting the whole claim, with insurers being able to terminate the policy with effect from the date of the fraudulent act, but previous valid claims are unaffected.

The provisions of the 2015 Act have the status of default rules for non-consumer insurance, but contracting out is prohibited for consumer insurance. The damages for late payment provisions did not survive the legislative process and are therefore not included in the Act.

12.  Markets in Financial Instruments Directive II

The Markets in Financial Instruments Directive (MiFID I), implemented in 2007, established the current regulatory framework for investment services and activities. In response to the financial crisis and to strengthen investor protection and financial market transparency, it has been reviewed and revised. A new Directive and Regulation (together known as MiFID II) were published in June 2014 and will take effect from 3 January 2017.

Although MiFID II, like its predecessor, does not apply to insurers, there are still points to note. Due to the uncertain timetable for the IDD, as an interim measure MiFID II amends the existing Insurance Mediation Directive (creating the so-called IMD 1.5) to impose some additional requirements on insurance mediation activities and for sales of insurance-based investment products by insurers. These requirements (which will be familiar to UK insurers) cover obligations to identify and manage conflicts of interest, obligations to act fairly and honestly, and a requirement for marketing communications to be fair, clear and not misleading.

In addition, the Financial Conduct Authority is considering whether its conduct of business rules implementing MiFID II should apply to insurance-based investments and personal pensions (on the basis that these products are often substitutable for MiFID investment products). The Financial Services Authority took this approach at the time of MiFID I.

13.  Mutuals’ Deferred Shares Act 2015

This Act will enable mutual insurers to raise subordinated capital while protecting the interests of existing members. This could throw a lifeline to small mutual societies in need of Solvency II capital but without the benefit of the capital-raising powers historically available to friendly societies, co-operatives and industrial and provident societies. The Act received Royal Assent on 26 March 2015 but will come into force only on a date to be decided by HM Treasury.

14.  Network and Information Security Directive

This Directive, commonly known as the Cybersecurity Directive, was published by the European Commission in February 2013 and adopted by the European Parliament in March 2014. The wording and scope of the Directive is currently subject to trialogue negotiation between the Commission, Parliament and European Council.

The purpose of the Directive is to ensure that member states and private sector bodies providing certain critical infrastructure (for example, utilities, communication, transport and financial institutions) within the EU take appropriate steps to deal with cybersecurity threats and share information across EU states. The Directive would ensure that entities responsible for critical infrastructure are subject to a series of new incident reporting requirements.

The Directive’s proposals would also help ensure that critical infrastructure operators are adequately prepared to deal with cyber threats by providing a common baseline of shared standards. The Directive is the EU’s first comprehensive attempt to establish a set of minimum cybersecurity standards that would apply across the EU.

The Directive is expected to be formally adopted later in 2015. Member states will then have 18 months to adopt national implementing legislation.

15.  Public Contracts Regulations 2015

These Regulations came into force on 26 February 2015 and affect the way in which public bodies buy services, including insurance.

The purchasing of insurance and related services remains a regulated activity requiring public bodies to follow formal procurement procedures when they spend over £111,676 (central government) and £172,514 (non-central bodies). This value includes any insurance premium, services costs and other remuneration net of VAT.

Some key changes to note, many driven by the government’s transparency and small and medium-sized enterprise agendas, are:

• Clear details of the means by which contracts can be modified and extended during their term without procurement risk;
• The publication (on the Contracts Finder website) of otherwise advertised contract opportunities and awards over £10,000 for central government bodies and £25,000 for non-central bodies, and all awards made under framework agreements;
• An implied contract term for payments of undisputed invoices within 30 days;
• The introduction of a standardised pre-qualification questionnaire (mandated for use in England) to streamline the process of applying for contracts.

16.  Riot Compensation Bill

This draft Bill was published on 12 March 2015 as part of the Home Office’s response to its consultation on the reform of the Riot (Damages) Act 1886. It had its first reading in the House of Commons on 24 June 2015. While the public and insurers can claim compensation from the police, the key proposals have significant implications for insurers, including:

Consequential loss will be expressly excluded (regardless of the appeal scheduled to be heard in the Supreme Court later this year):

• A compensation cap of £1 million per claim will be introduced;
• The definition of ‘riot’ will be limited to the provisions of section 1 of the Public Order Act 1986;
• There will be no cover for riot damage to various secure facilities such as prisons and immigration centres;
• Claims will be able to be made for damage to semi-permanent structures;
• There will be limited cover for motor vehicle damage;
• Expenses incurred in bringing claims, such as loss adjusters’ fees, will be recoverable.

Although not set out in the Bill, the report states that claimants will have 42 days to notify the compensation authority, followed by a further 90 days to submit supporting documentation.

Insurers will need to consider whether to amend policy wordings in light of the carve-outs.

17.  Serious Crime Act 2015

This Act, which received Royal Assent on 3 March 2015, amends the Computer Misuse Act 1990, which makes hacking a criminal offence under English law. The amendments include a new offence of carrying out an unauthorised act in relation to a computer with the intention of causing serious damage to human welfare, the environment, the economy or national security of any country. This amendment is interesting because it highlights the serious physical damage that can be caused by hackers. Where human welfare or national security is damaged, conviction could result in life imprisonment. The maximum sentence for existing Computer Misuse Act offences was ten years, indicating how seriously the government is now taking these threats.

18.  Small Business, Enterprise and Employment Act 2015

Receiving Royal Assent in March 2015 but coming into effect in stages, this Act makes directors more financially accountable for their actions. Among its provisions, the Act has strengthened the director disqualification regime with the aim of enhancing transparency in ownership of UK companies and increasing trust in UK businesses. Not only does the Act introduce measures designed to strengthen rules preventing individuals from acting as directors where those individuals have committed misconduct, it also allows compensation for creditors who suffer as a result of misconduct.

The Act also permits liquidators and administrators to assign certain legal claims to third parties (such as creditors) that currently only the liquidators or administrators may pursue.

In addition, the Secretary of State will be able to apply to the court for a compensation order against the director of an insolvent company who has been disqualified, where creditors have suffered identifiable losses from a director’s misconduct.

Compensation is not automatic, however, and will be for a specified creditor. Factors such as the amount of the loss caused, the nature of the director’s conduct and whether the director has made any financial contribution in recompense for the conduct will be taken into account when the amount of any award is considered.

19.  Social Action, Responsibility and Heroism Act 2015

Described in its own preamble as an Act to make provision as to matters to which a court must have regard in determining a claim in negligence or breach of statutory duty, there has been much debate as to whether this Act adds to the Compensation Act 2006, and whether it will make any difference to the way in which the courts consider questions of liability.

In requiring courts to consider whether a person (alleged to have been negligent or in breach of duty) had been acting for the benefit of society, in a responsible manner or heroically in an emergency, the intention is to reduce the discouraging of volunteering and rescuing that litigation has caused.

The consideration of the above questions is now mandatory rather than an option for the courts, but many (including Lord Lloyd, Lord Pannick and Lord Beecham) have criticised it as a “nothing Bill”.

Moving forward, the extent to which the application of the Act will cause a change in the courts’ decisions will become clear as judgments are handed down.

20.  Third Parties (Rights Against Insurers) Act 2010

This Act received Royal Assent in 2010 but has still not yet been brought into force because it does not cover all relevant insolvency circumstances. Some of the necessary amendments were included in Part 6 and Schedule 2 of the Insurance Act 2015. The government is still working with the Law Commission to draft the related regulations and it is anticipated that they will be laid before parliament in the autumn and the 2010 Act will finally come into force in April 2016.

When implemented, the Act will replace the Third Parties (Rights against Insurers) Act 1930. Under the 1930 Act, a third party cannot issue proceedings against an insurer until the insured is insolvent and without first establishing the existence and amount of the insured’s liability. The 2010 Act removes the need for multiple sets of proceedings by allowing the third party to issue proceedings directly against the insurer and resolves all issues (including the insured’s liability) within those proceedings.

Under the 1930 Act, where a corporate insured had been struck off the register of companies, the third party had to take proceedings to restore it to the register before litigation. By removing the need for the third party to sue the insured, the 2010 Act also removes the need for such restoration.
 
The 2010 Act also improves the third party’s access to information about the insurance policy, allowing the third party at an early stage to obtain information about the rights transferred in order to enable an informed decision to be taken about whether or not to commence or continue litigation.