Insurance and reinsurance in the UK (England and Wales): overview

A Q&A guide to insurance and reinsurance law in the UK (England and Wales).

The Q&A gives a high level overview of the market trends and regulatory framework in the insurance and reinsurance market; the definitions for a contract of insurance and a contract of reinsurance; the regulation of insurance and reinsurance contracts; the forms of corporate organisation an insurer can take; and the regulation of insurers and reinsurers, including regulation of the transfer of risk. It also covers: operating restrictions for insurance and reinsurance entities; reinsurance monitoring and disclosure requirements; content requirements for policies and implied terms; insurance and reinsurance claims; remedies; insolvency of insurance and reinsurance providers; taxation; dispute resolution; and proposals for reform. Finally, it provides websites and brief details for the main insurance/reinsurance trade organisations in the UK (England and Wales).

To compare answers across multiple jurisdictions visit the Insurance and Reinsurance Country Q&A tool.

This Q&A is part of the global guide to insurance and reinsurance. For a full list of jurisdictional Q&As visit www.practicallaw.com/insurance-guide.

Contents

Market trends and regulatory framework

1. What were the main trends in the insurance and reinsurance markets over the last 12 months?

Insurance

Insurance premium rates have continued to be under pressure in a soft market. In the London market, downward pressure on rates has been exacerbated by another year of low natural catastrophe losses, although there were some significant claims such as the Tianjin explosions (the one exception to the downward pressure was some improvement in the motor insurance market). Currency swings have continued to take their toll on insurers and reinsurers alike, in particular:

  • A material devaluation of sterling against the US dollar.

  • Continuing low investment returns.

Insurers have also had to contend with the significant changes to insurance law introduced by the Insurance Act 2015 and the introduction of Directive 2009/138/EC on the taking-up and pursuit of the business of insurance and reinsurance (Solvency II Directive) with effect from January 2016.

Reinsurance

In contrast to 2014, the reinsurance markets generally (including Lloyd's) had improved financial results in 2015, with some reinsurers being assisted by the fact that there were few significant natural catastrophe losses. However, claims relating to the Tianjin explosions dented the profitability of some major reinsurers.

Cost and scale considerations continued to drive significant mergers and acquisitions activity.

The growing market for cybercrime insurance and the extent to which cybercrime was either being specifically excluded or unwittingly included in coverage was highlighted by Lloyd's.

 
2. What is the regulatory framework for insurance/reinsurance activities?

Regulatory framework

The Financial Services and Markets Act 2000 (FSMA) as amended, and the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) (RAO), provide the framework for the regulation of insurance and reinsurance activities. The Financial Conduct Authority's Handbook and the Prudential Regulation Authority's Rulebook provide detailed rules and guidance on governance, capital and conduct of business requirements.

In the context of groups, the regulators in the UK generally regulate the entity established in the UK but can also act as the group supervisor of a group if so designated by a college of supervisors.

Regulatory bodies

The regulation of insurers and reinsurers in the UK is undertaken by the:

  • Prudential Regulation Authority (PRA) for prudential purposes.

  • Financial Conduct Authority (FCA) for conduct purposes.

Lloyd's managing agents are regulated by:

  • The PRA.

  • The FCA.

  • Lloyd's itself.

Lloyd's brokers and members' agents are regulated by the FCA and Lloyd's. Intermediaries are regulated by the FCA. The Bank of England and Financial Services Act 2016 makes the PRA a part of the Bank of England.

 

Regulation of insurance and reinsurance contracts

3. What is a contract of insurance for the purposes of the law and regulation? How does it differ from a contract of reinsurance?

There is no definition of a contract of insurance or reinsurance under the law. In Prudential Insurance Co v IRC [1904] 2 KB 658, Channell J held that the essential requirements of a contract of insurance were:

  • The payment of one or more sums of money, generally called premiums, by one party (the policyholder). In return for these payments the other party (the insurer) undertakes to pay a sum of money on the happening of a specified event.

  • The event must be one that is adverse to the interests of the policyholder. In Hall D'Ath v British Provident Association [1932] 48 TLR 240 it was held that a profit motive was essential for the existence of a contract of insurance.

Also, in order for a contract of insurance to exist there must be:

  • An insurable interest.

  • An uncertain future event adverse to the interests of the policyholder over which the policyholder has no control.

An insurable interest means that the insured must have a legal or equitable interest in the subject matter of the insurance cover and would either be prejudiced by its loss or benefit from its safety. For reinsurance contracts, there must be an effective transfer of risk.

 
4. Are all contracts of insurance/reinsurance regulated?

The Financial Services and Markets Act 2000 (FSMA) regulates the two categories of insurance activities set out in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) (RAO):

  • General non-life insurance.

  • Long-term life insurance.

There are 18 classes of general insurance and nine classes of long-term insurance.

 

Corporate structure

5. What form of corporate organisation can insurers take?

The Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) have their own individual threshold conditions. The FCA, which also regulates entities other than insurers or reinsurers, has different threshold conditions to the PRA. Following the implementation of the Solvency II Directive, there is a distinction between those entities that are subject to the Solvency II Directive (whether established in the UK or elsewhere in the EEA) and those entities that are not what the PRA defines as "Solvency II undertakings". Accordingly, for an insurance special purpose vehicle (ISPV), for example, there is no requirement for it to be incorporated, but for "Solvency II undertakings" the PRA requires the applicant for a Part IVA permission to effect or carry out contracts of insurance to be:

  • A body corporate (limited or unlimited, including a company limited by guarantee but excluding an LLP).

  • A registered friendly society.

  • A registered industrial and provident society.

  • A member of Lloyd's (other than a managing agent) that may be a body corporate or a Scottish limited partnership.

 

Regulation of insurers and reinsurers

6. Are all insurers and reinsurers regulated? Are they all regulated in the same way?

All insurers and reinsurers are regulated.

All firms that provide insurance, insurance intermediation or reinsurance services by way of business in the UK must be authorised to do so under Part IVA of the Financial Services and Markets Act 2000 (FSMA). The Prudential Regulation Authority (PRA) is responsible for authorising firms to carry out these activities. The Financial Conduct Authority (FCA) is responsible for regulating the conduct of the firm in question on an on-going basis. These firms are known as "dual regulated" firms because they are regulated by both the PRA and the FCA. The level of ongoing regulatory oversight varies according to, among other things:

  • The size of the firm.

  • The types of business it writes.

  • The risks it poses to consumers and the financial system.

 
7. Can insurers and reinsurers carry on non-insurance business? Are there any restrictions on their business activities?

Firms must have specific regulatory authorisations for the particular insurance or reinsurance business they operate. Insurers can only carry out insurance business and activities that are ancillary to that insurance business. They cannot perform other commercial business activities. A reinsurer must not carry on any business other than the business of reinsurance and ancillary activities such as actuarial advice or risk analysis.

 
8. Are there any statutory limits or other restrictions on, or requirements relating to, the transfer of risk by insurance or reinsurance companies?

A firm can only take credit for reinsurance if there has been an effective transfer of risk from the firm to a third party.

 

Operating restrictions

Authorisation or licensing

9. Does the entity or person have to be authorised or licensed?

Insurance/reinsurance providers

A person must not carry on a regulated activity by way of business or purport to do so unless authorised to do so or unless he is exempt from authorisation (section 19, Financial Services and Markets Act 2000 (FSMA)).

A firm intending to conduct insurance and reinsurance business must obtain a Part IVA FSMA permission from the Prudential Regulation Authority (PRA), unless it is exempt or able to rely on the EU's passporting regime (however, this may change following the outcome of the UK's referendum on EU membership on 23 June 2016). The Financial Conduct Authority (FCA) must consent to the PRA's grant of permission. Insurance intermediaries must apply to the FCA for permission. In order to obtain a Part IVA FSMA permission, an applicant must satisfy the "threshold conditions" both on authorisation and on an on-going basis. The "threshold conditions" include satisfying the regulator that the applicant:

  • Has its head office in the UK or it carries on business in the UK.

  • Is adequately capitalised to conduct the (re)insurance business in question.

  • Has appropriate management systems and controls in place.

  • Has suitably qualified persons that are "fit and proper" and capable of performing senior management functions.

Insurance/reinsurance intermediaries

Insurance and reinsurance intermediaries must be authorised by the FCA.

Other providers of insurance/reinsurance-related activities

Lloyd's managing agents are authorised and regulated by the PRA and the FCA in the same way as insurance and reinsurance firms. The Society of Lloyd's is regulated by the PRA and the FCA.

Insurers and intermediaries regulated in the European Economic Area (EEA) have the right to "passport" their permissions into the UK. While an EEA regulated firm does not need to seek permission from either UK regulator to carry on a regulated activity, it must adhere to the notification requirements.

Directive 2005/68/EC on reinsurance (Reinsurance Directive) entered into force on 10 December 2005 and established a new system for regulating reinsurance in Europe. The Reinsurance Directive follows the framework for regulating primary insurance by adopting the principles of harmonisation and mutual recognition.

 
10. What are the main exemptions or exclusions from authorisation or licensing?

Insurance/reinsurance providers

For insurers and reinsurers, there are available exemptions and exclusions from the requirement to:

  • Be authorised to carry on (re)insurance business in the UK.

  • "Passport" into the UK from another European Economic Area (EEA) jurisdiction where the company is authorised.

  • Be excluded from the regime in Directive 2009/138/EC on the taking-up and pursuit of the business of insurance and reinsurance (Solvency II Directive) subject to Prudential Regulation Authority (PRA) regulation and the need to obtain a Part IVA permission or "passport". These fall broadly into two categories:

    • a common law test on whether the company is effecting and carrying out contracts of insurance by way of business in the UK (the business test); or

    • whether certain threshold tests in the Solvency II Directive, as adopted into the PRA Rulebook, have been satisfied (the threshold test).

The business test is complicated and depends on the specific facts of the case, including, for example, whether the company:

  • Is actually carrying on business in the UK.

  • Actually takes all decisions, binds risks, collects premiums and pays claims outside the UK, therefore possibly not "carrying on business in the UK" even if the insured is a UK resident.

The threshold test in the PRA Rulebook adopts, among other things, Article 4 of the Solvency II Directive, which contains exclusions from being subject to the Solvency II regime (but not from the application of the "business test") for insurers who have, for example, gross written premium income not exceeding EUR5 million and certain other de minimis thresholds.

Insurance/reinsurance intermediaries

Regulation of intermediaries is largely a function for the Financial Conduct Authority (FCA), on whose register an intermediary must be entered if it is to be authorised to intermediate in the UK or for the intermediary to exercise passporting rights if authorised elsewhere in the EEA. There is also an "appointed representative" system where an intermediary that is not itself authorised can be "grandfathered" by an authorised intermediary that appoints it as its appointed representative and under whose authorisation it operates. The appointing authorised person is responsible for the conduct and compliance of its appointed representative.

As with insurers, there are certain "business test" exemptions from the need for intermediaries to be authorised in the UK and certain exclusions under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) (RAO).

Other providers of insurance/reinsurance-related activities

The authorisation regime focuses on the activity being conducted (for example, if it is a "regulated activity" under the RAO) and the jurisdictional and other elements of the "business test", both in considering the activities of mainstream insurers and when considering the activities of Lloyd's and organisations such as Friendly Societies. Therefore, there are exemptions and exclusions applicable to Lloyd's and Friendly Societies.

 

Restrictions on ownership or control

11. Are there any restrictions on the ownership or control of insurance-related entities?

It is a criminal offence to acquire or increase control in a UK-regulated insurance or reinsurance company without the prior approval of the Prudential Regulation Authority (PRA) (Part XII, Financial Services and Markets Act 2000 (FSMA)). "Control" is defined as the acquisition of 10% or more of the shares or voting power of the regulated entity or its parent entity with an overarching (and ill-defined) concept of the ability to exercise significant influence over the management of the regulated entity by virtue of a shareholding or voting power in the regulated entity or its parent. Prior regulatory approval is also required where an existing controller proposes to increase its shareholding or entitlement to exercise voting power in the insurer or reinsurer or its parent above 20%, 30% or 50%. The PRA must consult with the Financial Conduct Authority (FCA), and the FCA can request the PRA to reject the application or impose conditions on the approval of the change in control.

Applications for a change in control of insurance intermediaries are made to the FCA. Directors and officers of the proposed acquirer may have to apply to become senior managers in respect of exercising senior management functions in the regulated target entity and are subject to background investigations.

For insurance intermediaries, the FCA must approve acquisitions or changes in control above 20%. Any person seeking to acquire control of a Lloyd's of London managing agent by 10% or more must obtain prior approval from the PRA, FCA and Lloyd's of London. Notification of the change of control must be made to Lloyd's of London before and after the proposed change of control.

There are no age, nationality or foreign investment restrictions on acquiring regulated entities in the UK.

 
12. Must owners or controllers be approved by or notified to the relevant authorities before taking, increasing or reducing their control or ownership of the entity?

See Question 11 for the acquisition of and increasing control in a regulated entity. Where there is a reduction of control from 50% of the shares or voting power in a regulated entity or its parent entity, or if the reduction reduced through any of the 30%, 20% or 10% thresholds, it must be notified to the relevant regulator in writing. There is no particular form for this notification and the regulator is not required to approve the reduction of control.

 

Ongoing requirements for the authorised or licensed entity

13. What are the key ongoing requirements with which the authorised or licensed entity must comply?

Regulated entities are subject to on-going regulatory monitoring and oversight. The regulated entity must comply with the detailed requirements set out in the Prudential Regulation Authority's (PRA) Rulebook and the Financial Conduct Authority's (FCA) Handbook on governance, regulatory capital requirements, systems and controls and other conduct matters. They must also comply with the principles for business and threshold conditions on an on-going basis. The regulated entity must ensure that its senior managers are fit and proper as well as suitably qualified to carry out the functions they are responsible for in the regulated entity on an on-going basis.

There are no specific rules mandating or prohibiting any particular transaction. However, intra-group transactions and the issuance of debt or equity can affect the solo insurance entity's (or the group's) regulatory capital position under the Solvency II Directive. It must also be considered if any of the acquisition financing or debt "push down" to the target or targets within a group would come within the financial assistance regime under Part 18, Chapter 2 of the Companies Act 2006.

 

Penalties for non-compliance with legal and regulatory requirements

14. What are the possible consequences of an entity failing to comply with applicable legal and regulatory requirements? What recourse do policyholders have if they have done business with a non-approved entity?

Insurance/reinsurance providers

Insurers are dual regulated by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). Each of these regulators has a rulebook or handbook and principles for business and threshold conditions that need to be complied with by the insurer and by its executives (and possibly parent executives) who are subject to the Senior Insurance Managers Regime. The FCA is the conduct regulator for insurers prudentially regulated by the PRA, but the PRA and the FCA have statutory duties to co-ordinate in policymaking and supervision and do so through a memorandum of understanding. Failure to comply with the applicable regulations at a corporate or individual level can result in the imposition of:

  • Regulatory enquiries.

  • Statutory investigations.

  • Financial penalties.

  • Public censures.

  • Prohibition orders.

  • The withdrawal or curtailment of permissions to conduct insurance and other regulated activities in the UK.

The PRA and FCA also have the power to institute criminal proceedings for certain offences. The regulators can take action for a breach of the principles for business alone.

Carrying on a regulated activity in the UK without authorisation or the benefit of an applicable exemption, such as effecting and carrying out contracts of insurance, is a criminal offence for which PRA or FCA can instigate proceedings and for which, on conviction, a fine or imprisonment can be imposed under section 23 of the Financial Services and Markets Act 2000 (FSMA). Notwithstanding the illegality of the unauthorised insurance contract in question, the FSMA provides that the contract (although unenforceable by the insurer) is enforceable by the insured insofar as the insured can nevertheless recover sums paid under the policy.

Insurance/reinsurance intermediaries

See above, Insurance/reinsurance providers.

Other providers of insurance/reinsurance-related activities

See above, Insurance/reinsurance providers.

 

Restrictions on persons to whom services can be marketed or sold

15. Are there any restrictions on the persons to whom insurance/reinsurance services and contracts can be marketed or sold?

The marketing and sale of insurance products is regulated by the Financial Conduct Authority (FCA). The FCA Handbook imposes both principles and rules on how customers and potential customers can be approached and marketed to, and on the requirements on the suitability of products and customer needs to be assessed. Different rules apply to different types of product:

  • The FCA Insurance Conduct of Business Sourcebook (ICOBS) applies to the selling and administration of non-investment insurance contracts by insurers and intermediaries, including on the formation and execution of the contract, paying claims and promoting and marketing products.

  • The FCA Conduct of Business Sourcebook (COBS) governs investment products (for example, life insurance). ICOBS does not apply to activities relating to reinsurance contracts.

  • The FCA's overarching principles for business also apply. Of particular relevance in this context are:

    • Principle 6, which requires an authorised person to "pay due regard to the interests of its customers and treat them fairly"; and

    • Principle 7, which requires that an authorised person must "pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair and not misleading".

 

Reinsurance monitoring and disclosure requirements

16. To what extent can/must a reinsurance company monitor the claims, settlements and underwriting of the cedant company?

It is open to the cedant and the reinsurer to agree the terms of whatever monitoring (or more stringent) provisions they choose. However, given that there is no specific legal or regulatory requirement dictating these terms, it would be unusual and contrary to the reinsurer's interests for there not to be clauses requiring the cedant to provide regular underwriting information (including premium income, claims notified and claims paid) to the reinsurer, together with rights of audit and inspection for the reinsurer. Most facultative reinsurances contain "follow the settlements" clauses that make the reinsurer liable for claims that the cedant has settled in a "bona fide and business-like fashion". Accordingly, the reinsurer has a fundamental commercial interest in claims and settlement activity by the cedant and would therefore protect its interests by requiring either:

  • A claims co-operation clause (obliging the cedant to notify the reinsurer of any loss, provide information to the reinsurer and generally giving the reinsurer the ultimate right to contest settlements if it is to be bound by them).

  • A claims control clause (that gives the reinsurer the right to control and settles claims direct with the assured and to the exclusion of the cedant).

 
17. What disclosure/notification obligations does the cedant company have to the reinsurance company?

Before the Insurance Act 2015 comes into force in August 2016, a cedant has been under a duty of utmost good faith requiring it to disclose to the reinsurer before the reinsurance contract is entered into all material circumstances that the cedant knows or ought to know.

Under the Insurance Act 2015, a reinsurance contract will be classified as a "non-consumer insurance contract" meaning that:

  • The cedant's disclosure obligation will be re-characterised as a "duty of fair presentation".

  • The cedant's fair presentation of the risk must be reasonably clear and accessible to a prudent reinsurer.

  • The cedant must disclose every material circumstance that it knows or ought to know or, failing that, must give the reinsurer sufficient information to put a prudent reinsurer on notice that it needs to make further enquiries.

The Insurance Act 2015 also substantially reforms the previous law on what should have been known to a cedant. The Act introduces a new concept that the cedant should have known anything that would reasonably have been revealed by a reasonable search of "information" available to the cedant. For this purpose, "information" includes any held within the cedant's organisation or by any other person (not merely the cedant's agent or broker).

 

Insurance and reinsurance policies

Content requirements and commonly found clauses

18. What are the main general form and content requirements for insurance policies? What are the most commonly found clauses?

Form and content requirements

There are few form and content requirements applicable under the law. General contractual principles usually apply to insurance and reinsurance policies as with any other contract, subject to some significant exceptions such as:

  • The requirement for a written policy in some cases (such as under the Marine Insurance Act 1906 and under the Life Assurance Act 1774).

  • The specific requirements applicable to consumer insurance under the Consumer Rights Act 2015 and in the Consumer Insurance (Disclosure and Representation) Act 2012.

  • The regulatory requirement for consumer insurance contracts to be written in plain intelligible language.

  • The use of the Market Reform Contract in the London market.

Commonly found clauses

Insurance and reinsurance policies usually contain (among other things) clauses covering the following:

  • Identity of the (re)insured.

  • Scope of cover.

  • Premium and payment.

  • Exclusions from cover.

  • Warranties and conditions.

  • Applicable law and jurisdiction.

  • Dispute resolution.

 
19. Is facultative or treaty reinsurance more common? What are the most commonly found clauses in reinsurance policies?

Facultative/treaty reinsurance

In terms of overall premium income, overall facultative (including direct business) reinsurance income is more than three times the size of treaty income in the London Market, according to figures released for 2014. There are reconciliation differences between Lloyd's and non-Lloyd's information, but the relative sizes of facultative and treaty business in London are apparent.

Commonly found clauses

Reinsurance policies of the facultative kind usually strike a balance between incorporating into the reinsurance the terms of the direct policy and adding those clauses that are necessary to supplement or distinguish reinsurance and reinsurer's rights from those in the direct policy. Therefore, clauses such as "leading underwriter" clauses in the direct policy are ancillary but exclusive jurisdiction clauses, arbitration and choice of law clauses are usually expressly stated in the reinsurance policy rather than merely incorporated by reference to the direct policy.

Other clauses that reinsurers wish to draft specifically into the policy or treaty include those on:

  • "Follow the fortunes" or "follow the settlements" (see Question 16).

  • Claims co-operation or control (see Question 16).

  • Inspection and audit of cedant's records.

  • Reporting and bordereaux.

 

Implied terms

20. Are there any terms that are implied by law or regulation (even if not included in the insurance or reinsurance contract)?

Insurance and reinsurance contracts are subject to the usual law principles on implied terms, but with some additional provisions specific to (re)insurance contracts.

The general principles on implied terms are, in summary, that:

  • If, having regard to the express words of the contract, it is not possible to ascertain their true meaning, the court may be willing to imply certain terms if there is a persuasive reason for doing so, but in general courts are reluctant to look behind the express words or imply new words into a contract.

  • Terms implied by law, custom or dealing can be implied if the express wording of the contract is not at odds with the implied terms. A course of dealing may be sufficient to imply terms if those terms have been the ones on which the parties dealt in practice.

  • The presumed intentions of the parties is implied if it is necessary for business efficacy or if so obvious as to go without saying that a reasonable reader of the contract knowing all its provisions and the surrounding circumstances at the time would judge it as such.

Against this background, specific (re)insurance issues regarding implied terms include:

  • The implied duty of fair presentation under the Insurance Act 2015.

  • Incorporation in reinsurance contracts (see Question 19).

  • (Re)insurance industry custom and practice (including use of slips) and market-recognised terms.

 

Customer protections

21. How do customer protections in the general law affect insurance contracts? What customer protections are generally included in insurance policies to supplement this?

General law

The general law provides enhanced protections for consumers under insurance policies. Although there is no single codification of applicable laws and regulations, principal sources applicable to insurance contracts with consumers include:

  • Financial Services and Markets Act 2000.

  • Financial Conduct Authority (FCA) Insurance Conduct of Business Sourcebook (ICOBS).

  • Consumer Insurance (Disclosure and Representations) Act 2012.

  • Consumer Rights Act 2015.

  • Insurance Act 2015.

Provisions formerly in the Unfair Contract Terms Act 1977 or in the Unfair Terms in Consumer Contracts Regulations (SI 1999/2083) are now within the Consumer Rights Act 2015.

Insurance policies

To give effect to the general law, insurance policies provide enhanced protections for consumers in the following areas, among other things:

  • "Utmost good faith". The duty of utmost good faith is abolished for consumers and replaced with a duty to take reasonable care not to make any misrepresentations when applying for cover.

  • Information. It is for the insurer to specifically ask for information in a manner that is clear to consumers rather than rely on the insured to disclose all material facts.

  • Remedies. Rights of the insurer to terminate for non-disclosure (short of fraud) are reduced in consumer insurance.

  • Contracting out. Any contractual terms of a consumer contract that would put the insured in a worse position under the law on warranties and representations made by the insured, insurer's rights and remedies for breach of warranty or as to fraudulent claims, as in each case established in the Insurance Act 2015, are void.

  • Unfair contract terms. In addition to requirements as to clarity of language and the need to be brought to the consumer's attention, contract terms that are unfair are unenforceable.

 

Standard policies or terms

22. What are the main standard policies or terms produced by trade associations or relevant authorities?

In the London insurance market, there are many standard policy wordings produced by Lloyd's or the International Underwriters Association (IUA) and through various market committees adopted as standard wordings. Wordings are available from the Lloyd's Wordings Repository and the London Market Association. The IUA also makes available the IUA Clauses Document Library. The Market Reform Contract is available for download and use from the London Market Group and its participating bodies (see Question 18). Other trade bodies have produced standard policies or terms for use by their members.

 

Insurance and reinsurance policy claims

Establishing an insurance claim

23. What must be established to trigger coverage under an insurance policy?

In the absence of any statutory or regulatory requirements governing the notification of claims or the identification or happening of the insured event giving rise to the claim by the insured (except for consumer insurance contracts where claims and notification requirements must not be unfair), the establishment of a claim and its notification are left to the terms of the insurance policy.

Under common law, there must have been an event or loss that is an insured event. Different types of insurance provide coverage against different events or losses.

The insured must then notify a claim to the insurer. The procedure for notifying the claim based on the occurrence of the insured event or loss varies between an occurrence based policy (under which the policy will only respond to losses occurring during the policy period) and a claims-made policy (under which the insured has to submit a claim during the policy period but where the liability on the insured may have occurred prior to the policy). In either case, the policy has a claims notification procedure and often a time limit for claims to be notified. If the notification clause is drafted as a condition then the insured's failure to comply with the notice clause enables the insurer to avoid liability even if the insurer suffers no prejudice through late or non-compliant notification.

Notification is important to insurers not least given their rights to pursue third parties for claims that the insurer may be liable to the insured. Under this doctrine of "subrogation", applicable in indemnity contracts principally, the insurer can step into the shoes of the insured and pursue in the insured's name or require the insured to pursue claims that may lie against third parties in respect of the insured event giving rise to a claim under the policy. To trigger subrogation, it is necessary (at common law) for the insured to be fully indemnified as a condition to the insurer exercising subrogation rights. In practice, the extent of, and circumstances for, exercise of subrogation and procedures applicable is specified in the policy.

 

Third party insurance claims

24. What are the circumstances in which third parties can claim under an insurance policy?

An insured can assign his rights under a contract of insurance to a third party.

Under the Third Parties (Rights Against Insurers) Act 1930 and the Third Parties (Rights Against Insurers) Act 2010, as amended by the Insurance Act 2015, a third party with a claim against an insured can bring proceedings against the insurer in the event of the insured's insolvency. It is not possible to contract out of this. The rights transferred to the third party are the rights of the insured against the insurer under the contract of insurance in respect of the liability in question. Rights that do not relate to that liability are not transferrable. The above-mentioned third-party actions do not apply to reinsurance contracts. It may be possible to bring a third-party claim under the Contracts (Rights of Third Parties) Act 1999. However, in practice, most (re)insurance contracts exclude the Contracts (Rights of Third Parties) Act 1999.

 

Time limits

25. Is there a time limit outside of which the insured/reinsured is barred from making a claim?

There is no specific statutory limitation period for making a claim under an insurance or reinsurance contract. Insurance contracts are subject to the normal limitation period under the Limitation Act 1980 for causes of action founded on breach of contract (six years from the date on which the cause of action accrues).

A contract of insurance is a contract of indemnity. A breach arises as soon as the insurer fails to hold the insured harmless against the relevant loss. Usually, the cause of action and right of recovery against the insurer accrues on the happening of the loss. However, the terms of the policy can specify that the indemnity is not payable until a later time, in which case the cause of action only accrues at the later time.

As well as the statutory limitation period, insurance and reinsurance contracts typically include a notification clause requiring the insured to give the insurer notice of claims or losses, or of circumstances which give rise to a claim or loss, in a particular manner (usually in writing) and within a particular period (for example, "as soon as reasonably practicable"). An insured can lose the right to an indemnity for failure to comply with a notification clause where compliance is a condition precedent to bringing the claim.

The Enterprise Act 2016 gives policyholders a legal right to enforce prompt payment of insurance claims (see Question 36).

 

Enforcement

26. Can the original policyholder or other third party enforce the reinsurance contract against a reinsurer?

A contract of reinsurance is a contract between the reinsured (the primary insurer) and the reinsurer. The starting point is that there is no privity of contract between the original policyholder and the reinsurer. Consequently, the original policyholder or third party has no rights under the reinsurance contract. The original policyholder's rights are solely against the primary insurer. Where the primary insurer is insolvent, or where the contract of primary insurance is for some reason defective, the original policyholder cannot rely on the reinsurance arrangements in the same way as the insolvent insurer could have.

The Contracts (Rights of Third Parties) Act 1999 allows for third party enforcement in certain circumstances. For example, an original policyholder may be able to enforce a contractual term in the reinsurance contract if he is specifically mentioned in the contract as someone who has rights under the reinsurance contract or if the reinsurance contract seeks to confer a benefit on him. In practice, contracts of insurance and reinsurance usually exclude the Contracts (Rights of Third Parties) Act 1999.

 

Remedies

27. What remedies are available for breach of an insurance policy?

The law in this area will change when the Insurance Act 2015 comes into force in August 2016 (see Question 34). The current law is as follows.

Insurer

Under the current law, a breach of policy by the insured can give rise to a range of remedies for insurers.

A breach of warranty by the insured automatically discharges the insurer from further liability under the policy from the time of the breach.

If an insured fails to comply with a condition precedent to the risk, the risk will not attach to the insurance until the condition precedent is complied with. If an insured fails to comply with a condition precedent to liability, the insurer can refuse to pay the claim to which the breach relates, but not reject subsequent losses where the insured has complied with the provision.

Breach of a term that is not a warranty or a condition precedent allows the insurer to claim for damages for any harm caused by non-compliance, but will have no other consequences.

Under the law, contracts of insurance and reinsurance are contracts of "utmost good faith". Either party can avoid the policy if the other failed to act with utmost good faith. The most important part of the duty of good faith is the duty of disclosure. The insurer can avoid the policy and refuse all claims where there has been a non-disclosure or misrepresentation of material facts by the insured (or its broker) at placement.

Insured

An insured can sue an insurer to recover a valid claim. However, the law did not historically provide any additional remedy for the insured where an insurer has unreasonably refused to pay a claim or paid it only after unreasonable delay.

However, provisions relating to the late payment of insurance claims were incorporated into the Enterprise Act 2016, which inserted additional provisions into the Insurance Act 2015, by introducing an implied term into every insurance contract that insurers must pay claims within a "reasonable time".

 

Punitive damage claims

28. Are punitive damages insurable? Can punitive damages be reinsured if they are covered by an underlying policy?

Subject to the terms of the insurance contract, as a matter of general principle and public policy, damages awarded by a court, whether ordinary or punitive, are insurable. This insurance can be reinsured in the ordinary way.

 

Insolvency of insurance and reinsurance providers

29. What is the regulatory framework for dealing with distressed or insolvent insurance or reinsurance companies, or other persons or entities providing insurance or reinsurance related services? What regulatory and/or other protections exist for policyholders if the insurance company is insolvent?

Relevant legislation includes the:

  • Insurers (Reorganisation and Winding Up) Regulations 2004 (2004 Regulations).

  • Insolvency Act 1986.

  • Part XXIV of Financial Services and Markets Act 2000 (FSMA).

  • The Insurers (Winding Up) Rules 2001.

The 2004 Regulations set out a governing framework to determine issues arising in insurance insolvencies within the EU, and provide for mutual recognition of member states' insurance insolvency and winding-up measures. The 2004 Regulations also establish the priority of payment of insurance and other claims in an insurance insolvency.

The Insolvency Act 1986 provides the basic law and framework for insolvency, administration and voluntary and involuntary liquidation and applies to:

  • Insurers.

  • Other corporate entities.

  • Procedures for the appointment of administrators and liquidators and for the winding up of insurers by court order.

Lloyd's has its own procedures where a syndicate or member is in financial difficulties, including:

  • A cash call on syndicate members to pay losses.

  • The syndicate year of account being unable to close at 36 months and being left open in effective runoff until closure is possible.

  • The liabilities being settled in whole or in part by (and at the discretion of) the Lloyd's Central Fund.

One key point of the insolvency regime for insurers (as opposed to companies that are not subject to Prudential Regulation Authority (PRA) or Financial Conduct Authority (FCA) regulation), is the statutory powers vested in the regulators to be notified of, and involved in, insolvency proceedings, and to initiate them if they wish to apply for the compulsory winding-up of an insurer.

Policyholder protection in an insurance company insolvency is overseen by PRA or FCA as part of their statutory function of consumer protection, but in the event of an insurance insolvency, policyholders may also have direct rights under the:

  • Financial Services Compensation Scheme (FSCS):

    • in the event of the insolvency of an insurer or insurance intermediary (including a branch of an EEA entity) and where a default is declared by the FSCS, which can happen when an entity with UK authorisation is considered to be unable or unlikely to meet claims against it (even if not yet wound up), the FSCS may pay compensation;

    • there is no upper financial limit for the amount of claims for FSCS protection but whereas claims under life insurance, compulsory insurance and certain injury, sickness and disability policies are protected 100%, other types of claim may be limited to 90% of value.

  • Third Parties (Rights Against Insurers) Act 1930 (as amended).

In the event of an insured (whether an individual or a corporate) becoming insolvent or dying insolvent at a time when the insured has insurance against liabilities to third parties, either before or after the insolvency, then the third party to whom the insured had incurred the liability can claim directly against the insurer in the manner that the insured could have done. The effect of the Third Party (Rights against Insurers) Act is to prevent claims available to third parties against an insolvent insured that held indemnity insurance falling into the general assets of the insured, rather than being preserved for the third party claimant.

 
30. Can excess insurance policies "drop down" to provide coverage if the primary insurer goes into insolvency?

Excess of loss reinsurance cover typically provides layers of reinsurance that operate in excess of each other and in a "stack" above the original insurer(s) for whose reinsurance cover the stack is created. Insolvency of the insured is not usually a trigger for liability on the part of the excess layers (subject to contractual wording). The usual policy provision is that liability under the excess layer only attaches as and when the primary insurer(s) pay, or admit, or are held liable to pay, the original insured(s)'s ascertained liability, and this liability exhausts the primary policy and triggers the attachment point under the excess reinsurance layer. The order of "drop down" and the triggers for "drop down" were considered by the Supreme Court in Teal Assurance Company Limited v WR Berkley Insurance Europe Limited [2013] UKSC 57.

 
31. Is a right to set-off mutual debts and credits recognised in an insolvency proceeding involving an insurer or reinsurer?

If the insolvent entity is a company incorporated under the Companies Acts, the insolvency will be subject to the provisions of the:

  • Insolvency Act 1986.

  • Insolvency Rules 1986 (as amended).

Rule 4.90 of the Insolvency Rules governs mutual credits and set-offs. Rule 4.90 provides that, before the company goes into liquidation, where there have been mutual credits, mutual debts or other mutual dealings between the company and any creditor of the company, then (subject to certain important exceptions and exclusions) an account is taken of what is due from each party to the other in respect of the mutual dealings, and the sums due from one party (be it the insurer or the creditor) are set off against the sums due from the other.

Where the company, as a third party, is subrogated to the rights of another party under an insurance policy by reason of the Third Party (Rights against Insurers) Act (see Question 24) the insurer cannot set off against the company's subrogated claim any arrears of premium due by the third party under the policy.

 

Taxation of insurance and reinsurance providers

32. What is the tax treatment for insurers, reinsurers, and other persons or entities providing insurance and reinsurance-related services?

There is a distinction between life assurance (long-term business) and general (non-life) insurance business in the tax regime as operated by HM Revenue & Customs (HMRC).

General insurance business is a class of insurance business as specified in Schedule 1 to the Regulatory Activities Order 2001 (SI 2001/544). Insurers that write healthcare insurance can write both long-term and general business but can account for all their business within the tax regime applicable to long-term business, rather than separately applying the different tax regimes for long-term and general businesses. Composite insurers that carry on both long-term and general business are treated for tax purposes as carrying on only one undivided trade but are nevertheless required to prepare separate tax computations for long-term and general business, which are then combined to compute the overall figure of profit or loss.

A company carrying on general insurance business in the UK, or an intermediary trading in the UK, is subject to normal taxation rules governing the taxation of companies in the UK. That is, the company is subject to corporation tax on the annual profits or gains arising or accruing from its trade.

Different taxation treatment applies to life insurers and to Lloyd's corporate members.

For life assurance, the advent of the Solvency II Directive and the discontinuance of the Financial Services Authority (FSA) Return (previously the basis for corporation tax computations) led to the introduction of a new regime in 2013 for taxing life insurers. In place of the FSA Return, corporation tax on life insurers is assessed by reference to their profit before tax, according to their statutory accounts. If the life insurer is carrying on different types of long-term business, the profit must be allocated between the different types of business and is taxed differently according to the type of business, a distinction being made between:

  • Basic life assurance and general annuity business.

  • Other long-term business.

Basic life assurance and general annuity business is taxed as though it were separate, and investment income and gains on the business is taxed by HMRC as they arise each year, with a deduction for business expenses. Other long-term business that is not basic life and general annuity business, is taxed according to the normal rules for UK trading companies (see above) with some specific insurance provisions applicable.

 

Insurance and reinsurance dispute resolution

33. Are there special procedures or venues for dealing with insurance or reinsurance complaints or disputes?

For litigation, these disputes are usually heard in the Commercial Court, which is a part of the Queen's Bench Division of the High Court of Justice of England and Wales. These hearings are governed by the Civil Procedure Rules that are slightly modified in the Commercial Court. The Commercial Court publishes its own Guide or Practice Direction that should be consulted by parties wishing to litigate there.

The International Chamber of Commerce (ICC) and the London Court of International Arbitration (LCIA) are frequently used international arbitration venues with their own rules for governing the proceedings. In the absence of any provision to the contrary in the arbitration clause in the (re)insurance contract, the parties to an arbitration can choose to adopt the Insurance and Reinsurance Arbitration Society's Arbitration Rules.

The courts have afforded substantial deference to arbitration proceedings. An arbitration award is generally only annulled if the arbitral process was "so removed from what could reasonably be expected of the arbitral process that the Court should be expected to intervene" (Latvian Shipping Co v Russian Peoples' Ins Co [2012] EWHC 1412 ( Comm)).

 
34. Are arbitration clauses in insurance and reinsurance agreements enforceable?

Arbitration clauses in insurance and reinsurance agreements are enforceable.

 
35. Are choice of forum, venue and applicable law clauses in an insurance or reinsurance contract recognised and enforced?

Choice of forum, venue and applicable law clauses in an insurance or reinsurance contract are recognised and enforced.

 

Reform

36. What proposals are there for reform of the law, regulation or rules relating to the provision of insurance or reinsurance services?

Significant changes in the law have already been brought into effect in 2016 under the Consumer Rights Act 2015 (in force from April 2016) and under the Insurance Act 2015, which will come into effect in August 2016.

Of concern to the broader EU and EEA insurance industry may be the report published by the European Commission in March 2016 that, following a consultation process in 2014, the Commission is minded to not renew the insurance block exemption when it expires in 2017. This would impact the ability of the European insurance industry to co-operate in research and data compilation and exchange, and to form insurance pools to provide insurance capacity in certain markets.

The Insurance Act 2015 received Royal Assent on 12 February 2015. With the exception of the amendments that it makes to the Third Parties (Rights Against Insurers) Act 2010 and the provisions introduced via the Enterprise Act 2016 (see Question 27), the new Act will come into force in August 2016.

With limited exceptions, it applies to non-consumer insurance contracts and reinsurance contracts entered into (and renewed) after the Act comes into force and to endorsements to contracts after that date regardless of when the original contract was made.

The key changes introduced by the Insurance Act 2015 include:

  • The duty to make a fair presentation of the risk replaces the obligation under the Marine Insurance Act 1906 to disclose "every material circumstance". Guidance is given as to what is taken to be known by the insured and the insurer for these purposes, the manner in which disclosure must be given and what information must be disclosed.

  • Failure to comply with the duty to make fair presentation only entitles the insurer to avoid the contract if the failure was deliberate or reckless. In all other cases, the insurer's remedy depends on whether (had a fair presentation been made) it would have:

    • refused the risk altogether;

    • written the risk on different terms; or

    • written the risk on the same terms but for a different level of premium.

  • "Basis clauses" are abolished. It will no longer be permissible to convert representations made in the proposal form into warranties using a "basis of contract" clause.

  • Breaches of warranties will be remediable (section 10) and breach of a warranty will suspend cover until the breach is remedied.

  • Non-compliance with a term of the contract will not prevent a claim from being paid if the non-compliance could not have increased the risk of the particular loss, unless the term defines "the risk as a whole".

  • In the event of a fraudulent claim, the insurer is not liable to pay. It can treat the contract as terminated from the time that the claim was made and keep the premium.

The parties can contract out of the provisions of the new Insurance Act 2015 (with some exceptions), provided that this is done in a clear and unambiguous way.

The Insurance Act 2015 also contains amendments to the Third Parties (Rights Against Insurers) Act 2010. The purpose of the Third Parties (Rights Against Insurers) Act 2010 is to make it easier for third parties to bring direct actions against insurers where an insured has become insolvent. It was scheduled to become law by March 2011, but the discovery of a defect in its references to insolvency procedures prevented it from coming into force. The amendments made by the Insurance Act 2015 remedy this defect.

The Enterprise Act 2016 contains measures, among other things, to:

  • Introduce a requirement into every contract of insurance for the insurer to pay sums due within a reasonable time.

  • Give policyholders a legal right to enforce prompt payment of insurance claims.

 

Main insurance/reinsurance trade organisations

Association of British Insurers (ABI)

Main activities. The ABI represents insurers and seeks to provide consumers of insurance services with general information on insurance and related products and services. It is also an advocate on insurance issues in the insurance and wider financial services industry.

W www.abi.org

British Insurance Brokers Association (BIBA)

Main activities. BIBA is the leading general insurance intermediary organisation representing the interests of insurance brokers, intermediaries and their customers.

W www.biba.org.uk

International Underwriting Association (IUA)

Main activities. The IUA represents non-Lloyd's insurance and reinsurance companies operating in the London market.

W www.iua.co.uk

Lloyd's Market Association (LMA)

Main activities. The LMA represents the interests of Lloyd's and provides professional and technical support to its members. All Lloyd's managing and members' agents at Lloyd's are members of the LMA.

W www.lmalloyds.com



Online resources

Financial Conduct Authority (FCA)

W www.fca.org.uk

Description. This is the official website of the FCA.

Prudential Regulation Authority

W www.bankofengland.co.uk/pra

Description. This is the official website of the Prudential Regulation Authority.

Parliament website

W www.parliament.uk

Description. This is the official website of the UK Parliament.

Parliament legislation

W http://services.parliament.uk/bills/2015-16/bankofenglandandfinancialservices.html

Description. This is the official website of the Parliament of the UK that tracks the progress of draft legislation through Parliament. Maintained by the government, it contains official up-to-date information.



Contributor details

Jeremy Hill

Debevoise & Plimpton LLP

T +44 20 7786 9140
E jhill@debevoise.com
W www.debevoise.com

Professional qualifications. England and Wales, Solicitor

Areas of practice. Corporate; insurance; mergers and acquisitions; corporate finance; regulatory; compliance.

Recent transactions

  • Global Atlantic Financial Group in the sale of its Bermuda and Lloyd's insurance and reinsurance businesses to BTG Banco Pactual.
  • GreyCastle Holdings in its US$570 million acquisition, backed by a consortium of investors, of the run-off Life Reinsurance operations of XL Group.
  • A subsidiary of Berkshire Hathaway in its acquisition of Hartford Life International Limited, an Irish domiciled variable annuity writer, for about $285 million.
  • TIAA-CREF in its partnership with Henderson Group PLC to create TIAA Henderson Real Estate Limited, a new global real estate investment management company, with total assets under management of over US$25 billion.

Publications

  • "The Importance Of Being A Global Systemically Important Financial Institution", Insurance Day, April 2016.
  • "Development of International Regulatory Capital Standards Continues", Insurance Day, September 2015.
  • "The EU Solvency II Regime For Insurers: An Update On Implementation", FC&S Legal, May 2015.
  • "The Shape Of EU Banks To Come", Banking Law Journal, April 2014.

Edite Ligere, Barrister

Debevoise & Plimpton LLP

T +44 20 7786 5422
E eligere@debevoise.com
W www.debevoise.com

Professional qualifications. England and Wales, Barrister

Areas of practice. Corporate; insurance; banking; mergers and acquisitions; corporate finance; regulatory; human rights.

Recent transactions

  • AmTrust in its US$218.7 million acquisition of ANV Holding BV.
  • AIG with the preparation of a Resolution Plan under section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
  • American International Group in the proposed sale of AIA Group Limited to Prudential plc for US$35.5 billion.

Publications

  • "The Importance Of Being A Global Systemically Important Financial Institution", Insurance Day, April 2016.
  • "Age of Aquarius for Individual Accountability in Financial Services?", Journal of International Banking Law and Regulation, Issue 3, 2016.
  • "Development of International Regulatory Capital Standards Continues", Insurance Day, September 2015.
  • "United Kingdom – Insurance & Reinsurance", Getting The Deal Through, July 2015.
  • Insurance and Investment Management M&A Deskbook by Debevoise & Plimpton LLP, April 2015.

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