LMA Claims Foundation Programme. Module 2. Peter Schwartz Richard Cook

Transcription

1 LMA Claims Foundation Programme Module 2 Peter Schwartz Richard Cook 1

2 Underwriting Considerations which are Critical to Claims Handling Learning Objectives After Module 2, you will be able to understand and explain: the legal principles applied to the main categories of terms and conditions to be found in insurance contracts how the recent developments in the law have changed the way in which breaches of warranty are dealt with in consumer insurance contracts and what is proposed in business insurance contracts the main types of documents used in the contract formation process and their general legal effect upon claims legal and practical issues involved in Claims Handling at Lloyd's The dynamics of the Lead Underwriter and Following Market relationship in contract formation and claims handling 2

3 Categories of Insurance Terms Warranties Conditions precedent Innominate terms The latest position under CIDRA 2012 and The Insurance Bill July

4 Warranties Why insurance warranties are critical: Exact and complete compliance with the wording is required This is necessary even though there is no material connection between the breach of warranty and the loss which occurs Breach entitles the insurers to disclaim all claims after the breach but must honour liabilities incurred before breach But, if breach concerns a fact existing at date of contract - may be a breach of utmost good faith Note CIDRA

5 Warranties Basis of Contract clauses...i/we the Proposer warrant that the statements in this Proposal Form are true and accurate in all respects and acknowledge that they shall be the basis of the contract between me/us and the Insurer and will be incorporated into such contract. These clauses are not confined to consumer insurance contracts but are included in many commercial insurances But, note CIDRA 2012 and The Insurance Bill

6 Warranties Basis of the Contract clauses Strict compliance with the warranty is required Overseas Commodities v Style [1958] No need to show the warranty was material to the risk or, the breach caused or contributed to the loss Dawsons v Bonnin [1922] Breach puts to an end future liabilities ; it leaves in place obligations which have arisen before breach Bank of Nova Scotia v Hellenic Mutual War Risks Assoc. ( The Good Luck ) [1992] 6

7 Warranties Due to the draconian nature of the remedy, even before CIDRA 2012, there was a modern trend towards the limit or erosion of the impact of breach of warranty Restricting the operation of the warranty to a section of the policy only. Printpak v AGF Insurance [1999] Construing the warranty as applying only to the time when insurance was agreed rather than as a continuing warranty Hussain v Brown [1996] Construing a clause labelled warranty as a suspensive condition Kler Knitwear v Lombard General Insurance [2000] 7

8 Warranties Waiver of breach of warranty Traditionally, there are two forms of waiver: By affirmation: with knowledge of the breach of warranty, insurers conduct themselves in a way which is consistent with the continuation of the contract so that they affirm the contract By estoppel: (i) the insurer makes a clear and unequivocal representation that it will not stand on its right to treat the contract as discharged and (ii) the insured relies on that representation, in a situation where it would be inequitable to allow the insurer to resile from such representation express or implied See HIH Casualty v AXA Corporate Solutions [2003] 8

9 Conditions Precedent... shall be conditions precedent to any liability of the company..[insurer]..under this policy.. wide set of claims requirements enforced in Kazakhstan Wool v Nederlandsche Credit [1999] If there is no reference to the sorts of condition in question being conditions precedent to insurer s liability, it is clear that breach does not entitle (re)insurer to repudiate liability Friends Provident v Sirius International [2005] 9

10 Conditions Precedent Two main types: Conditions precedent to enforceability these may prevent the initial attachment of the risk or the creation of the contract; e.g. payment of the premium Conditions precedent to recovery these are generally not of a continuing nature. e.g. where notice of a claim must be given within a certain period of the loss. Where there is a breach, an insurer may decline the relevant claim but, the policy remains in force 10

11 Conditions Precedent Conditions precedent must be clearly and expressly stipulated In Stoneham v Ocean Railway and General [1887] a stipulation that:.. in case of fatal accident notice must be given to the company in 7 days..was not a condition precedent As remedy for breach of conditions precedent are draconian, a presumption exists that conditions are not construed as conditions precedent, unless clearly agreed otherwise - Cox v Bankside Members Agency [1995] 11

12 Conditions Precedent Failure to comply with a condition precedent: If the CP requires claim to be made within specified period and insured defaults, that claim is lost. No affect on other claims, if made in time If the CP requires insured to use reasonable care e.g. in relation to a car, the failure may affect any successful claim in relation to that car but not to other insured cars under the same policy where there has been reasonable care exercised If the CP is of general application, e.g. obligation to pay premium before making a claim, the effect of the failure is suspensory; the right to make the claim crystallises only when the premium is paid 12

13 Conditions Precedent Waiver of a breach of condition precedent may only occur by estoppel See Barrett Bros ( Taxis ) Ltd v Davies [1966] CP in motor policy to forward any notice of intended prosecution. Insured failed to do so after accident and pleaded guilty to charges. Insurers sought to rely on breach of CP in not paying loss. Insurers knew of trial and beforehand had written to insured asking why he had not forwarded notices to insurers but not actually asking him to do so. Court held that insurer s failure to request the notice documents in their pre-trial letter was a waiver of their policy requirement to forward them. Insurer had to pay! See also Kosmar Villas v Trustees of Syndicate 1234 [2008] 13

14 Innominate Terms It has become common recently to refer to bare terms and conditions, which are not expressly stated to be warranties or conditions precedent, as innominate terms (i.e. terms which are not named or classified) In such cases, the Court will review the nature and seriousness of the particular breach in order to decide the appropriate consequences which will follow the breach 14

15 Innominate Terms Potential consequences: Breach which has very serious consequences for insurers may be treated as repudiatory in relation to the policy as a whole Breach which is minor may result in insurers having to pay the claim but insurers may claim damages for the breach (often an empty claim) Breach which is serious but which does not justify treating the whole policy as repudiated may result in the refusal to pay the claim only with other policy obligations unaffected 15

16 Innominate Terms Two leading cases on innominate terms are: Alfred McAlpine v BAI Run-Off Ltd [2000] where the Court of Appeal gave guidance on how to approach the construction of such terms K/S Merc- Skandia v Certain Lloyd s Underwriters [2001] also Court of Appeal If breach of an innominate term is not serious enough to merit repudiation of the whole policy or, of the claim, insurers are left with a difficult action to win reasonable damages for a breach of the innominate term or face an impecunious insured hence the desire of insurers to establish that terms are clear warranties or conditions precedent agreed by the insured 16

17 Warranties (1) Basis of contract terms now unenforceable in consumer insurances under CIDRA 2012 and proposed to be unenforceable in current Insurance Bill ICOBS provides that rejection of a policyholder s claim (absent evidence of fraud), is unreasonable if it is for breach of warranty or condition.unless the circumstances of the claim are connected to the breach Insurance Bill proposes that all warranties become suspensive conditions allowing insured time to remedy breach and upon doing so, reclaim cover after compliance with warranty Insurers liable for losses prior to breach, as before, but policy is not automatically discharged upon a breach of warranty, as under MIA

18 Warranties (2) Although insurer's liability is suspended for duration of breach rather than automatically discharging insurer from all liability, some breaches may not be capable of remedy in policy period Meanwhile, the policy continues and insured still liable for premium and other obligations Insurer is able more coherently to waive particular breaches and adhere to other terms and conditions but clear and unambiguous language must be used Insurers encouraged to focus upon nature of loss not how it is caused and to identify if there is a causal connection between breach of warranty and loss No provisions in current Insurance Bill for payment of damages for late payment of claims: thought to be too controversial at present and much resistance from insurance industry 18

19 Offer and Acceptance Necessary Alternative Theories 1: Offer usually made by insured through a Proposal Form Acceptance if insurer agrees to insure without qualifications If not, maybe a counter-offer which Insured may accept or reject Terms quoted may be open only subject to payment of premium Payment of premium then becomes the acceptance 19

20 Offer and Acceptance Necessary Alternative Theories 2: Completion of Proposal is Invitation to Treat Based on that submission, Insurer offers Terms and Conditions Insured accepts and pays premium or declines Looker v Law Union and Rock Ins (1928) What terms must be agreed all of them? All material terms Nature of risk, Subject matter insured, Parties, Duration of risk, Premium, Limits of Liability (Proposer deemed applied on Insurer s Standard Form Adie v The Insurance Corporation (1898)) 20

21 The Proposal Form Depends upon which Offer and Acceptance process used Does not have to be on Insurer s standard Form If used, usually much information contained in Underwriting Submission Consider price, exclusions, protective terms, claims provisions and dispute resolution mechanisms Basis of the contract clauses now unenforceable under CIDRA 2012 Consider carefully which disclosure regime applies? Is broker/agent up to speed? 21

22 Contracting at the Box at Lloyd s Slip is risk summary prepared by broker for insured (Offer) Underwriter s scratch on unamended slip (Acceptance) Each Underwriter is bound separately for their own share only (separate contracts on one slip) Once scratched, Underwriter cannot unilaterally withdraw, even if slip is not filled to 100% Duty of good faith and disclosure owed to each Underwriter unless otherwise agreed Amendments made by subsequent Underwriters (counter-offer) not binding upon prior Underwriter unless expressly agreed by Insured or broker 22

23 Contracting Online Insured completes online Proposal Form (Invitation to Treat) Insurer quotes premium and standard terms (Offer) inviting Acceptance Insured clicks appropriately signifying Acceptance May be problems with Disclosure Note: - ICOBS 3 - information required to be provided to consumer relating to general insurance contracts, clearly and comprehensibly in good time pre-contract - ICOBS 6 - product information required to be given and right to cancel within 14 days of conclusion of general Insurance contracts 23

24 Form of Contract Surprisingly, apart from marine, motor, life and guarantee policies (Statute of Frauds 1677 s.4) no requirement that insurance policies be in writing, unless otherwise agreed; obviously prudent to record, at very least, the main terms Oral agreement could suffice see Murfitt v Royal Insurance (1922) and Scher v Policyholders Protection Board (1993) Note Contract Certainty Principles: Contract Certainty is achieved by the complete and final agreement of all terms between the insured and insurer by the time that they enter into the contract, with contract documentation provided promptly thereafter An end to deal now. detail later 24

25 Cover Notes Not much English legal authority but, they are fully effective contracts of insurance for relevant period on Insurer s usual terms and conditions Authority to issue cover notes usually vested in agent or broker, who is agent of the Insurer for the purpose of issue Insured still has disclosure obligation To take reasonable care If cover note does not expire without a policy being issued the policy terms supersede the cover note terms from date of issue of policy Implied agreement by insured to pay premium pro rata for period on risk in consideration of being held covered (pending issue of a formal policy) 25

26 Market Reform Contract Huge lessons learnt from Silverstein Properties case following 9/11 WTC attack Built upon London Market Principles (LMP) Slip in October 2001 Large proportion of business introduced into London and Lloyd s Markets are on MRC Contract Certainty Code of Practice But, still need to understand the moving parts 26

27 The Wording When slip used, the slip is the contract not merely evidence of it When a policy is issued, the policy supersedes the slip and is the formal embodiment of the insurance contract Absent a rectification claim, Court will not look to slip to construe policy wording Lloyd s policies and contracts issued by Companies market vary as to their form and content. All policies should be drafted with care If loss occurs between date of slip and before policy issued, insured can recover a covered loss based upon construction of slip terms Beware of the dog s breakfast, as Court described a disputed wording Mr Justice Morison in Eagle Star Insurance v J W Cresswell (2004) 27

28 The Premium Premium is the consideration for the Insurer s promise to pay covered claims A fundamental term which reflects the evaluated risk of a claim (or claims) by the insured and across the business (including a profit element for Insurer) Contract may expressly state, as a condition precedent, that the Insurers not on risk (or claim not payable) unless premium has been paid before loss. (This requirement can be waived) Time of the essence conditions Days of grace provisions in renewals Premium returnable if risk never attaches (e.g. lack of insurable interest or goods insured never made or transported) 28

29 The Premium (Cont.) Note s 52 MIA 1906 In marine business, unless otherwise agreed, duty to pay premium and duty to issue policy are concurrent conditions. Not necessarily so in non-marine Note s 53 (1) MIA 1906 In marine business, unless otherwise agreed, where broker places insurance, the broker is directly responsible to insurer for premium and insurer is directly responsible to insured for payment of losses. Note s 54 MIA 1906 In marine business, where broker receives premium, absent fraud, such receipt is conclusive as between insurer and insured but not as between insurer and broker In reinsurance, note Allianz Ins. (Egypt) v Aigaion Ins. (2009) on importance or pre-contract s agreeing key terms, including premium and wording 29

30 Renewals Renewals are a fresh contract not an extension of the expiring Duty of disclosure arises afresh Note provisions which give a right to automatic renewal or to be subject to annual re-signing or NCAD terms which could be misconstrued Ensure cancellation and termination provisions are consistent 30

31 Exclusions Intention of exclusion clauses is to exclude certain type of risk or loss from scope of cover Note difference between warranty and exclusion. Breach of warranty automatically terminates policy (subject to CIDRA 2012). With exclusion, cover never existed for excluded risk at all Exclusions are construed strictly against the party seeking to rely Ambiguities invariably construed against insurers Exclusions in consumer insurance policies are subject to the Unfair Terms in Consumer Contract Regulations

32 Endorsements Endorsement is a post contract revision or amendment of the cover provided and must be agreed by both parties Depending upon nature of change covered by endorsement, fresh duty of disclosure may arise Sometimes standard form endorsements (identified by Clause number) deal with specific issues and are included, by reference, at time of contract or negotiated during policy period. These should be checked for consistency with other express terms Check for inconsistencies between the endorsements themselves as well as the contract to which they are intended to attach 32

33 Primary and Excess Layers Primary and Excess Layers are separate contracts often involving separate insurers in relation to the same insured subject matter Primary - liability attaches immediately loss event occurs giving rise to liability Excess liability only attaches, after primary liability is exhausted Excess may be (i) Follow Form (ii) Umbrella Excess or (iii) Other Insurance Clauses Generally Excess policies are written in expectation that Primary Insurer will investigate claim, negotiate and defend until Primary cover is exhausted Delicate issues which may arise between Primary and Excess Layers include: Allocation of Defence costs between Primary and Excess Layers Carriage of Defence of Underlying Claim Consequences of Failure by Primary Insurer to Settle at Primary Limits Consequences of Breach of Primary Policy by Insured 33

34 Binding Authorities Insurance at Lloyd s often arranged through underwriting agents acting on behalf of Lloyd s syndicates. Huge volumes involved Agreement under which agent is authorised to accept risks on behalf of participating syndicate(s) is called a binding authority or binder Holders of binding authorities must be approved by Lloyd s and binding authority agreements are registered with Lloyd s Extensive and detailed Byelaws, Codes of Practices and Guidelines help control operations and protect Lloyd s Franchise Contracts for insurance rather than contracts of insurance 34

35 Underwriting Agencies (1) Much business, particularly reinsurance, is written through pools Relationship between agent and principal(s) pool members is governed by agency agreement Agency agreement defines extent of agent s authority, including underwriting and claims handling. Clear written guidelines should be given. Care should be taken to avoid unauthorised sub-delegation. Check, check and check again European Commission carried out investigation in last decade into whether reinsurance pools and subscription market in London were anti-competitive contrary to Art.81 and 82 of the EC Treaty. One area of focus was the harmonisation of terms and conditions in the subscription market. Industry argued that economic benefits to insured outweighed any alleged anti-competitive effects. Insurers argued that simplified market claims settlement procedures were in the best interests of policyholders. EC stopped short of anti-competitive finding but keep situation under review 35

36 Underwriting Agencies (2) Underwriting agent can bind its principal to the extent of any apparent or ostensible authority relevant in particular markets and in accordance with well known customs and usages of that market Underwriting agent must act with reasonable care and skill and to prepare and maintain proper records of the business transacted, including underwriting, premium and claims records. Inspection clause essential Conflicts of interest - especially where agent may act in a dual capacity (see ICOBS ) or be tempted to put own interest above principal(s) see Julien Praet et Cie v H G Poland (1960) Effective inspection of records clauses and proper exercise are important protection to risk carriers In case of dispute, often acrimony over who owns the renewal and/or runoff rights of the book of business underwritten by the agent (Temple Underwriting Agency v QBE Insurance (2008)) 36

37 Reinsurance and Retrocession Reinsurance is insurance between consenting adults Retrocession is reinsurance of reinsurers Implied duty that reinsured will exercise reasonable care in its business A new insurance effected by a new policy on the same risk which was before insured in order to indemnify the underwriters from their previous subscriptions; and both policies are to be in existence at the same time (Delver v Barnes (1807)) Separate contract from underlying but, is it back to back? Covers original Insurer s liability to original insured rather than replicating Insurer s exposure to original risk Variety of forms Facultative and Treaty Proportional Quota Share or Surplus Non-Proportional Excess of Loss or Stop Loss Consider (as relevant) reinsuring clause, reinsured s retention, previous losses/claims history and extent of reinsured s liability under original Important clauses for claims professionals include: As original, Loss settlements, Follow the settlements, Claims co-operation/claims control, Applicable law, Inspection of records,.and many more! 37

38 Proximate Cause Insurer is generally liable only for a loss which has been proximately caused by an insured peril (MIA 1906 s.55 (2)(a)) Insured has the burden of proof to show proximate cause If the policy is "all risks", the insured must simply prove that a loss has been suffered. The insurer can only be discharged from liability by proving that the loss was proximately caused by an uninsured peril A loss may have a series of contributing factors - each case turns on its own facts Most difficulties arise when there are two operative and interacting events, which occur sequentially Cases usually fall into one of three categories: unbroken chain of events broken chain of events linked events 38

39 Leader and Follower (1) Lead : The underwriter who first accepts a share or line of an insurance Witherby s Dictionary of Insurance The Leading Underwriter is the reinsurer with whom the ceding insurer negotiates the terms and conditions of such.reinsurance and who in the London market signs his line on the reinsurance slip in the first place Dr Klaus Gerathewohl: Reinsurance Principles and Practice Any amendments, additions, deletions and alterations of any description to be agreed by Leading Underwriter and to be binding on all others hereon All alterations additions deletions extensions agreements rates and changes in conditions to be agreed by the Leading Lloyd s Underwriter only. Such agreement to be binding on all Underwriters subscribing hereto 39

40 Leader and Followers (2) Underlying the whole relationship between the leading underwriter and the following underwriters, furthermore, is the former s manifest duty of care Barlee Marine Corporation v Trevor Rex Mountain ( The Leegas ) (1987) Was Leading underwriter, under clause in insurance, the agent of the following market for purpose of waiver of a contingent condition on their behalf? Yes Roadworks (1952) v Charman (1994) Some leading underwriters market agreements state: This agreement does not form part of the contract with the insured No standard wording for leading underwriter clauses Care to be taken in drafting to reflect negotiated agreement 40

41 Leader and Followers (3) Lead underwriter clause not of assistance unless the terms have been agreed on behalf of the following market It is ineffective in placement process, if following market demand alterations to slip which had not been secured by leading underwriter. Lead underwriter is bound to terms originally agreed by him even if less favourable than terms imposed by followers Lead underwriter clause is a contract between the insured and the underwriters. It is usually irrevocable and does not lapse because it has not been exercised Line slip: an authority conferred by a number of syndicates upon one other syndicate, which authorises that syndicate to accept, on their behalf, a particular class and limits/amount of risk. The insured is not a party and the underwriters on the line slip are not bound until the off-slip has been issued 41

42 Leader and Followers (4) If a lead Underwriter is to have claims settlement authority on behalf of followers an express clause is required Submission in Roar Marine v Bimeh Iran Insurance (1997) was rejected that operation of follow the leader clause was subject to condition that the settlement must have been concluded in a proper and businesslike way Judge said the followers trusted and followed their leader and accepted both the advantages and any risk of the leading underwriters handling of settlements and of other matters affecting them Note express terms of Lloyd s Claims Scheme 2010 Lead agrees standard claims for all Lloyd s markets Second Lead shares responsibility for complex claims Followers have a right to be informed Although duty of care exists, capped limitation of liability exists for individual claim and annual aggregate 42

43 Leader and Followers (5) How do these rules work in practice? Are they fair and reasonable? Still uncertainties and precise language used is critical See: San Evans Maritime and Others v Aigaion Insurance (2014).. Agree to follow London s Catlin and Brit Syndicate in claims excluding ex gratia payments.. Construction consistent with commercial aim to simplify settlement process Are there potential conflicts of interest between lead and broker to insured which lead to settlements which are in best interests of Lead but not necessarily of Followers? What about interaction between Lloyd s and Companies markets in claims handling - especially if there is also involvement of international markets? Should each Syndicate or Insurer retain responsibility for its own claims decisions? Would the market work less efficiently in consequence? What steps can be taken to protect the interests of all stakeholders in the claims process and the market as a whole? 43

44 Claims Handling at Lloyd s Richard Cook, Head of Technical Adjusting Charles Taylor Insurance Services Limited Lloyds Chambers 1 Portsoken Street London E1 8BT 44

45 Agenda 1. Are you a Claims Person? 2. What is a Claim? 3. Why is Lloyd s Different? 4. The Electronic Claim File 5. The Claims Transformation Programme 6. The Duties and Responsibilities of the Leader 7. Settlement of Claims in the Lloyd s Market 45

46 Natural Born Claims Person A Quick Quiz What do you see underneath? A glass half full? A glass half empty? ml of clear liquid? You are an inveterate optimist suited to be an Underwriter You are a cynical pessimist and a perfect Claims Adjuster You are clearly temperamentally suited to be an Actuary 46

47 Claims People Are CYNICAL A person who sees things as they are, not as they ought to be. (Ambrose Bierce The Devil s Dictionary ANALYTICAL Not everything that can be counted counts, and not everything that counts can be counted. (Albert Einstein) FACT-DRIVEN Most people use statistics the way a drunkard uses a lamp post, more for support than illumination. (Mark Twain) 47

48 What is a Claim? A claim can be defined as a demand made by a policyholder for payment or some other contractual benefit under a (re)insurance policy. Occurrence or Claims Made? Occurrence Trigger: Claims Made Trigger: Whenever the loss event happened Whenever the claim/potential claim is notified to insurer Why does it matter? 1 st Party Policies: Invariably on occurrence basis 3 rd Party Policies: Both occurrence and claims-made basis What are the advantages and disadvantages of both? Claims-made variants: Retroactive Limitation Clauses Retroactive Date Inception Clauses Claims-made and Losses Occurring Clauses 48

49 Why is Lloyd s Different? Lloyd s is not a company Lloyd s is a market where members join together as syndicates to insure risks Lloyd s is comprised of 56 Managing Agents and 91 Syndicates Lloyd s syndicates often participate on the same risk together allowing other syndicates to set the terms of the policy; price the risk and agree the claims on their behalf 49

50 The Electronic Claim File Some Facts What is it? It is the combination of the Insurers' Market Repository (IMR) and the Claims Loss Advice and Settlement System (CLASS) and maintained on behalf of the Market by Xchanging. Project started by Lloyd s Managing Agents in 2004 First transactions by agreed Managing Agents in November 2006 (but, I put through the first live one at on 13 September 2006!) Extended to non-lloyd s bureau insurers in 2011 As at 2014, usage stands at 95%+ of in-scope claims for Lloyd s and at 85% for non-lloyd s claims More information can be found at 50

51 The Claims Transformation Programme Why do it? CTP aims to enhance Lloyd s reputation for fair and fast claims handling and to place claims on a par with underwriting in terms of creating competitive advantage for firms and the market as a whole. What is its relevance for claims handing? All claims are triaged into either Standard or Complex categories by applying a set of financial and non-financial triggers. For complex claims, the financial trigger is 250,000 for all in-scope classes except property treaty and energy claims where the trigger is 500,000. All claims involving a coverage dispute must be triaged as Complex. Soft triggers for Complex claims is there agreement on the rules? How is it governed? By the Lloyd s Claims Scheme (Combined) issued on 30 September

52 The Claims Transformation Programme What claims are included? Since July 2012, all new ECF claims have been in-scope for CTP Legacy Marine and Energy claims 31 December 2013 Legacy, Property, Treaty Reinsurance and A & H claims 30 June 2014 All remaining claims (mainly Aviation, Casualty, Professional Indemnity, Financial Lines and Motor) 31 December 2014 Who agrees claims? The Lloyd s leader acts as the single agreement party for Standard claims and will bind the following Lloyd s market. For Complex claims, agreement is by the leader and the second Lloyd s underwriter. 52

53 The Duties and Responsibilities of the Leader The Severability Conundrum Business rivals or collaborators? Putting competitors in charge of your money Is business efficiency worth the risk? Quis custodiet ipsos custodes? (Juvenal Satire VI, lines 347-8) What does the Lloyd s Claim Scheme say? Leaders (and second underwriters where applicable) have an express duty of care to followers, but with limitation of liability. Currently, this is 2m any one claim and 10m per calendar year. 53

54 The Settlement of Claims in the Lloyd s Market At 5.13 am on 18 April 1906, San Francisco - the seventh largest city in the US was struck by a massive earthquake, measuring 7.8 on the momentmagnitude scale. The earthquake ruptured gas lines, sparking fires that devastated 80% of the city. These fires raged for three days, destroying approximately 25,000 buildings on 490 city blocks and taking over 3,000 lives. Between 227,000 and 300,000 people were left homeless out of a population of about 410,000 and refuge camps across the San Francisco bay in Oakland and Berkeley were still in operation two years later. 54

55 The Settlement of Claims in the Lloyd s Market Cuthbert Heath famously instructed his San Francisco agent to pay all of our policyholders in full, irrespective of the terms of their policies. The loss ended up costing Lloyd s over $50m - a staggering sum in those days and equivalent to more than $1bn in today s dollars and cemented Lloyd s reputation in the USA for paying claims. But if he were around today, would Cuthbert Heath be at risk of being sued by his reinsurers and capital-providers? 55

56 Questions 56

57 Take-Aways Basis of contract clauses unenforceable under CIDRA 2012 and to be outlawed for business insurance Consider in light of diluted utmost good faith obligations upon insured, how can insurers best protect themselves in contract formation terms and claims process under new regime; play a more active role Familiarise with core legal rules which affect each document and relationship in the contract formation and claims processes Lloyd s underwriting and claims processes are unique; be familiar with operation of Lloyd s CTP but, consider other markets also Leader and follower arrangements in underwriting and claims require special thought and drafting attention at contract stage. Recycle claims expertise and experience to secure appropriate claims language in contract 57

58 Next Time Key Issues in Claims Handling Subrogation and Contribution Measurement of Loss and Settlement The Role of the Broker Reserving Potential Areas of Dispute/Conflict 58