AIG Europe Ltd v OC320301 LLP (formerly The International Lawm Partnership LLP) & The Law Society (Intervener) Court of Appeal guidance on aggregation clauses The Court of Appeal has provided…
Published 1 September 2016
Building Information Modelling
From 4 April 2016, Level 2 Building Information Modelling (BIM) became mandatory on centrally procured government projects. BIM involves the creation of a digital model of the building, which is then used by the design team, the construction team and finally the building owner to manage the building through its life. At Level 2, the participants develop their own separate models which are then shared with the project model. Although there are concerns about cyber exposure, the use of Level 2 BIM is not generally causing insurers any major concerns. The use of BIM should reduce claims relating to design and delay.
The 2016 Budget confirmed the government’s intention to develop the next digital standard for the construction sector – BIM Level 3. This will be a significant leap requiring fully collaborative working using a single shared model. However, concerns arise over risk allocation and transfer, intellectual property rights, ownership of the model and confidentiality of the data supplied.
Closely linked to BIM is the Government Soft Landings (GSL) policy under which designers and constructors remain involved with buildings beyond completion. Emphasis is placed on improving ongoing maintenance and operational costs at the design stage. GSL will raise a number of contractual issues. Further, insurance arrangements will need to be considered as it is likely to involve additional risks and responsibilities over an extended period of time. As with BIM Level 3, GSL may lead to an increased use of integrated project insurance.
Claims management regulation
In March 2016, Carol Brady published her ‘Independent review of claims management regulation’ which made several recommendations regarding regulation of the claims management companies (CMCs) sector. Brady called for strict new rules to enforce compliance. These would affect both CMCs, which would be required to seek re-authorisation, and individuals involved, who would need to pass a ‘fit and proper’ test and be personally accountable for breaches. Regulators, she found, should use their warrant and seizure powers more widely and be encouraged to enforce penalties against unauthorised activity and publish these as a deterrent.
At present, CMCs are regulated by the Ministry of Justice (MoJ) through the Claims Management Regulation Unit. Brady recommended that this responsibility be transferred to the Financial Conduct Authority (FCA). The Chancellor has accepted this recommendation in full and will transfer responsibility to the FCA.
The MoJ recently published a consultation paper (‘Cutting the costs for consumers – financial claims’) that recommended the establishment of a framework for fee capping for CMCs working in financial claims. The paper called for comments about expanding this framework to all CMCs. Responses were due by 11 April. DAC Beachcroft submitted its response in favour of the expansion.
Consumer credit regime
On 1 April 2014, the consumer credit regime was brought within the legal framework of the Financial Services and Markets Act 2000. The Financial Conduct Authority (FCA) replaced the Office of Fair Trading (OFT) as the regulator of consumer credit and the statutory regime under the Consumer Credit Act 1974 (CCA) was repealed in part and replaced with a rules and guidance style approach set out in the new FCA consumer credit sourcebook (CONC). The transitional phase to full FCA authorisation ended on 1 April 2016.
CONC applies to all insurers and intermediaries who carry on credit-related activities such as lending and credit broking in relation to customers situated in the UK. They are also subject to the FCA Principles for Businesses and Systems and Controls requirements in relation to their credit-related regulated activities.
In the short term the FCA does not plan to make any changes to the regime inherited from the OFT; however, it issued a Call for Input in February 2016 seeking views on where the current regime should be changed, with a view to completing this review by 2019.
Financial Advice Market Review
Following the implementation of pension freedoms in April 2015 and the introduction of the Retail Distribution Review in December 2012, the Financial Advice Market Review (FAMR) was launched in August 2015 to examine how financial advice could work better for consumers. The final report, published in March 2016, made a number of recommendations. These fall into three key areas: affordability (proposals to make the provision of advice and guidance to the mass market more cost-effective); accessibility (recommendations aimed at increasing consumer engagement and confidence in dealing with financial advice); and liabilities and consumer redress (these recommendations relate to the Financial Ombudsman Service, the Financial Services Compensation Scheme and the availability of professional indemnity insurance for smaller firms giving advice).
To help make financial advice more affordable, the FAMR report recommends HM Treasury should consult on amending the definition of regulated advice so that regulated advice is based upon a personal recommendation, in line with the (narrower) EU definition set out in the Markets in Financial Instruments Directive (MiFID). It is unclear whether this change would be made just for investment advice within the scope of MiFID or more generally.
Financial Conduct Authority rules on whistleblowing
The Financial Conduct Authority has published rules which establish a new whistleblowing regime, designed to encourage individuals with concerns about a firm’s practice or behaviour to report them to the regulator. The rules apply to UK deposit holders with assets of L250 million or more, Prudential Regulation Authority designated investment firms and insurance and reinsurance firms, within the scope of Solvency II.
The rules require firms to have appointed a ‘whistleblowing champion’ by 7 March 2016, who is responsible for oversight of the firm’s whistleblowing policies and procedures. The whistleblowing champion is required to ensure that the firm is compliant with the new regime by 7 September 2016. In the new regime, firms will be required to implement various procedures, which will include internal arrangements to handle disclosures, ensuring all employees and agents are aware of the relevant policies and practices and providing adequate measures to protect whistleblowers from victimisation.
Insurance Premium Tax increased again
Insurance Premium Tax (IPT) was raised for the second time in less than a year when the then Chancellor George Osborne added a further 0.5% to the standard rate in the Budget in March 2016. The rise from 9.5% to 10% comes into effect on 1 October 2016 and follows the increase from 6.5% to 9.5% in November 2015 which is expected to raise L8 billion over five years.
The higher rate of IPT applied to travel insurance and insurance for appliances remains unchanged at 20%.
The government’s own figures predict that the average comprehensive motor insurance policy will go up by L2 while the average combined building and contents policy will increase by L1. This is in addition to last November’s IPT increase, which added nearly L13 to the average comprehensive motor insurance policy and over L10 to the average combined building and contents policy, according to the Association of British Insurers.
The latest increase is intended to fund flood defence and resilience schemes, particularly in the north of England. The Treasury says it will raise just over L200 million in a full year. The ABI has said it will examine the detail closely to ensure the revenue raised is actually spent on new flood defence schemes.
Many commentators predict that the government has a target rate of 12.5% in mind for IPT, so further rises can be expected if pressure on public finances and the government’s debt reduction programme continue.
Rehabilitation Code 2015
A revised Code came into effect from 1 December 2015. Although its use is strictly voluntary, it is recognised by the relevant Pre-action Protocols for the handling of personal injury claims.
The new Code distinguishes between high and low value claims. For low value injury claims, the 2015 Code is prescriptive, making specific reference to triage, assessment and discharge reports. There is a focus on timescales and acknowledgement that a claimant solicitor may need to engage rehabilitation without the specific agreement of the compensator. There is no specific requirement for a medical report to be prepared before the provision of rehabilitation is considered. In these circumstances, a Triage Report (TR) should be obtained to establish the type of treatment required. Where the TR is the only report, a treatment discharge summary should be included within the claimant’s treatment records as a matter of course.
For claims involving more serious injuries, the Code is less prescriptive. It is accompanied by a Guide for Case Managers, who should be independently appointed, with either a nursing or occupational therapy background.
The underlying principles remain the same regardless of case complexity and value, namely to promote early intervention to assess the claimant’s rehabilitation needs and establish a collaborative approach between the parties in order to “restore quality of life and earning capacity as soon as possible and as much as possible”.
Where there is a need for rehabilitation the Code encourages the parties to act without delay and any communication dealing with rehabilitation should be responded to within 21 days.
Once a rehabilitation treatment regime has been agreed between the parties, the compensator agrees that, in any legal proceedings connected with the claim, it will not dispute the reasonableness of any treatment it has funded. If the claim subsequently fails or is discontinued by the claimant, it is not within the 2015 Code to seek to recover funds from the claimant unless it is proven that there has been fraud or fundamental dishonesty on the claimant’s part.
The person or organisation providing the rehabilitation should be entirely independent of the person or organisation that provided any medico-legal report to the claimant. The requirement within the 2015 Code to obtain the other party’s agreement before referring the claimant for rehabilitation via a provider with whom the claimant’s representative has a direct or indirect business connection is welcome.
New guidelines for sentencing in corporate manslaughter, health and safety and food safety offences came into force on 1 February 2016 and apply to all offenders (individuals and organisations) sentenced on or after that date, irrespective of the date on which an offence was committed. This means that for the first time we have sentencing guidelines for all health and safety offences and a suggested starting point and range of fines directly linked to the culpability of the defendant, the risk of harm created and the size of the organisation (based on turnover). The court can also consider other factors such as the profit or wider impact on the defendant.
The guidelines mean significantly higher penalties, particularly for larger organisations who have committed serious offences. Recent fines imposed on organisations have demonstrated that the guidelines are having the desired effect with fines in excess of L1 million becoming more the norm, particularly for larger companies. For individuals there is a much greater risk of a custodial sentence.
Solicitors’ professional indemnity insurance
Since 2010, solicitors’ professional indemnity insurance (PII) arrangements have been undergoing constant review, with the first round of reforms culminating in the closure of the Assigned Risks Pool in 2013. In 2014 significant changes were proposed by the Solicitors Regulation Authority (SRA), including the reduction of the minimum level of cover requirement. The proposals were met with strong opposition and put on hold. The SRA has stated that a substantive review of PII remains ongoing and a further consultation linked to the opportunities for law firms to be regulated by other authorities is underway.
Although some firms are no doubt still facing difficulty in obtaining cover, the Law Society’s 2015/16 PII survey paints a more benign picture for insureds with average premiums said to have dropped by 8%. Reliance on unrated insurers appears to be less of an issue than previously. However, worryingly for the profession, the cost of run-off cover has increased significantly from last year. Six years’ run-off cover is currently compulsory but also one of the requirements under review.
In the meantime, the minimum terms and conditions (MTC) have been amended to bring them into line with the Insurance Act 2015. The standard of disclosure for insureds has been increased by adopting the nonconsumer standard which requires a “fair presentation of the risk” to insurers. The Act requires disclosure of material circumstances to be made “in a manner which would be reasonably clear and accessible to a prudent insurer”. The SRA has stated that this is likely to require the insured to be more selective about the information provided to the insurer.
The position remains that in such circumstances insurers will be unable to avoid cover and so the change will have no impact on the level of consumer protection. It will only be relevant as to whether an insurer may have rights of reimbursement against the firm for what will become a “breach of the duty to make a fair presentation of the risk”. The SRA took the view that as participating insurers generally cannot avoid cover, they were entitled to expect firms to meet a higher standard when presenting the risk.
Whiplash reform – MedCo
It has been a turbulent first year for MedCo – the not-for-profit organisation set up by the Ministry of Justice (MoJ) to administer the government’s reforms on medical reporting in soft tissue injury claims – part of the wider whiplash reform programme.
April 2015 saw the implementation of only part of the MedCo solution – a form of randomised allocation of Medical Reporting Organisations (MROs) or Direct Medical Experts (DMEs) via an online portal which the government saw as necessary to demonstrate independence in medical reporting.
The MedCo portal, which returns a search offer to include a defined number of Tier 1 (large) and Tier 2 (small) MROs plus a number of DMEs, has already faced several challenges in its short life, including a judicial review by an MRO, arguing it is anti-competitive, which was ultimately unsuccessful.
In addition, randomised allocation has resulted in larger MROs creating ‘shell’ companies so they feature in the maximum number of search offers, and smaller MROs pooling their resources in a ‘hub and spoke’ model in order to masquerade as Tier 1 providers. As a result, the industry has been united in its call for MROs to be regulated, but the government is yet to address this.
Among other things, these behaviours have led the MoJ to look at the make-up of the search offer, and this has subsequently been amended to include two Tier 1s, and ten Tier 2s. In addition, the declaration of financial links has been beefed up to cover financial links over the past three years, rather than just the past 12 months.
The other limb of MedCo relates to quality assurance. The issue of expert accreditation was initially rolled over until 1 January 2016 but, owing to difficulties in administering the necessary training for accreditation, the date was put back to 1 June 2016. From 1 June, a medical expert providing a first report in a soft tissue injury claim must be accredited by MedCo. In an ideal world, experts would have been accredited before the system went live.
MedCo has already shown its teeth by temporarily suspending solicitor users who have been attempting to undermine randomised allocation. MedCo will continue to act as a quasi-regulator. It will mandate the provision of management information from MROs and DMEs with a view to aggregating data to identify and address any outliers in relation to diagnosis, prognosis and treatment recommendations, using peer review where necessary.
It is still early days in the life of MedCo, but provided it is successful in achieving its aims of ensuring independence and quality in medical reporting, it seems highly probable that its reach will be extended to other volume claims areas.