Insurance annual review 2018/19
insurance annual review
As we look back on legal developments in 2018 and to the challenges and opportunities for the insurance sector that lie ahead, it is clear that the market’s resilience and ability to embrace change will remain critical to its success.
As preparations for a ‘Hard Brexit’ continue apace, dealing with whatever emerges out of the fog of uncertainty that currently hangs over the country is the clear priority for 2019. The market should be in reasonable shape to cope with whatever is thrown at it after overcoming some of the difficulties of embedding ‘privacy by design’ into business models in response to GDPR and what should by now be the successful implementation of the requirements of the Insurance Distribution Directive.
Since GDPR-day on 25 May 2018, we have worked with a number of clients on the question of whether insurance policies can indemnify policyholders against the potentially very large fines and penalties (if you didn’t already know: up to €20m or 4% of global turnover whichever is the greater) for breach of its data protection laws. In short, although certain breaches may be insurable, it is unlikely that such fines and penalties can be indemnified, due to being contrary to public policy and the common law, especially if the fine is for serious misconduct and breaches. However, the market will watch closely as the jurisprudence around GDPR develops in the coming years.
In a similar vein, in 2018 we did welcome a Commercial Court decision on sanction exclusions which helped shed light on how the market is expected to react to claims caught by a sanction order. The recent case of Mamancochet Mining Limited v Aegis Managing Agency Limited and Others dealt with the effectiveness of a fairly standard sanctions exclusion, which did not prevent underwriters from being required to pay. However, there was useful judicial guidance about the suspensory nature of such exclusions with regard to valid claims, which cannot be wholly declined, but can remain unpaid until the relevant sanction is lifted.
2019 will see a number of important regulatory developments for the insurance sector. During the course of the year the FCA’s General Insurance Market Study into pricing practices will run its course, whilst we expect the sector to continue to see Investigation and Enforcement action arising out of the FCA’s work on delegated authority business. The Senior Management and Certification Regime will also come into force across the whole sector from December 2019, heralding a new era of personal accountability of senior management.
In the context of regulatory complaints, another significant development will be the increased powers of the Financial Ombudsman Service (“FOS”), which determines complaints based upon what the Ombudsman considers is fair and reasonable, rather than by simple application of law. The FCA has proposed that FOS award limits should increase from £150,000 to £350,000 and its small-business jurisdiction increased so as to allow complaints from SMEs with a turnover of up to £6.5m with less than 50 employees. If the FCA goes ahead with this plan, it will mean that policy coverage disputes with commercial policyholders up to a value of £350,000 might now be routinely referred to and dealt with by FOS.
We hope that our summary of some of the developments in 2018 and some of the other important issues on the horizon that are relevant to the insurance sector will help to ensure that you are informed and prepared for what lies ahead.
If you have any queries or would like more information about any of the articles in our review please do not hesitate to contact the authors; we would be delighted to hear from you.
t: +44 (0)115 976 6581
legal - professional indemnity
Ground rent review clauses – a new wave of claims against solicitors?
A new wave of claims has recently emerged against conveyancing firms in relation to the purchase of new build leasehold properties subject to onerous ground rent review clauses.
The owners of leasehold properties have always been liable to pay ground rent to the freeholder in recognition that they do not own the property outright. Historically this has tended to be a peppercorn rent or no more than £100 a year. However, over the last 10 years onerous ground rent review clauses have been inserted into long leasehold titles increasing the value of the freehold which can then be sold on or retained as an investment.
These can be onerous in two key respects. First, the leaseholder derives no benefit from the ground rent and it represents a payment of pure profit to the freeholder. Second, some provide that ground rent, whilst initially low, is doubled every 10 years leading to a significant liability for the leaseholder in years to come. Lenders may refuse to lend on the property in such circumstances leaving it unsaleable.
Homeowners could bring claims where their conveyancer has failed to give proper advice on the nature and effect of the ground rent clause. However, whilst it is clear that there would be a problem if a solicitor failed to mention a rapidly escalating ground rent clause at all, the extent of the advice required is a factually sensitive area and depends on whether the ground rent is truly onerous as well as the sophistication of the purchaser. Even if inadequate explanation was given, it may be the case that the client would have proceeded with the purchase in any event.
Claims by lenders will rest on an assertion that the ground rent clause has diminished the value of the lender’s security below the level of its advance. The CML Handbook suggests that lenders have no objections to ground rents per se but they must in all cases be reasonable and not materially affect the value of the lender’s security.
Conveyancers must be more wary than ever of the risk of ground rent claims. It is important that the nature and effect of the ground rent clause is explained to purchasers and lenders alike with the onus being put upon those parties to satisfy themselves that the clause in question does not materially affect the value of the property.
Defences and mitigation
In respect of any claim that is brought against a conveyancer, all is not lost. There are good defences and mitigation strategies to explore aplenty such as whether the ground rent clause was “market standard” at the time, the effect it has on the value of the property, if any, and whether it can be renegotiated.
The most recent Government Consultation on the issue concluded that ground rent should be capped at £10 per year. This is a positive move but does not assist those already tied to onerous clauses. Unless the Government is able to persuade (or force) the house developers and institutional freeholders to offer more assistance, it seems inevitable that claims against conveyancers will gather momentum. Conveyancers should not automatically surrender but assess each claim on its own merits.
t: +44 (0)115 976 6084
t: +44 (0)330 045 2393
accounts and auditors - professional indemnity
Professional Indemnity – accountants
Since writing last year’s review, the Finance (No.2) Act 2017 came into force; accountancy firms continue their incursion into the legal profession whilst at the same time facing record fines; and the court has decided some important cases on the duty to warn of the risks that professional advice is wrong and on auditors’ responsibility for certain losses.
In November 2017 the Finance (No.2) Act 2017 introduced new penalties for enablers of defeated tax avoidance schemes, under which any person responsible for the design, marketing or facilitation of such a scheme can be liable for a penalty assessed at 100% of the fees received. These can be very substantial. Some accountants will no doubt be caught by this.
The Institute of Chartered Accountants in England and Wales (ICAEW) has now authorised 280 firms to carry out probate work. Following the rejection by the Lord Chancellor of its latest application to regulate the remaining reserved legal activities, in June 2018 the ICAEW launched judicial review proceedings to challenge that decision. Additionally in June 2018, Deloitte became the last of Big Four to be granted an Alternative Business Structures license from the Solicitors Regulation Authority.
This year also saw a record level of fines against accountancy firms, including the largest ever fine of £10m against PwC in connection with their audit of BHS. Other fines during the year included two fines of £3m for KPMG in connection with Quindell and Ted Baker. In addition to increased penalties by the Financial Reporting Council, the Competition and Markets Authority has announced that it is launching an investigation into the Big Four in the audit market and the lack of competition in the sector.
In Barker v Baxendale Walker  EWCA Civ 2056, a solicitor specialising in tax avoidance strategies recommended a scheme using an employee benefit trust based on his interpretation of the relevant legislation. The scheme was later challenged by HMRC and the Claimant paid £11.2m to settle with them following receipt of advice from another firm.
The Court of Appeal held that although a reasonably competent solicitor could also have advised that the same interpretation of the relevant statutory provision was correct, the Defendant was nevertheless negligent because he failed to warn the Claimant of the risk that his interpretation was wrong and he should have given a general health warning as to the likelihood of challenge.
Although this was a case involving a solicitor, it is likely to be of wider application and may apply where accountants give similar advice.
In Manchester Building Society v Grant Thornton UK LLP  EWHC It swapped variable interest rates on funds that it borrowed for fixed interest rates, in order to give certainty on the cost of funding lifetime mortgages to borrowers. Grant Thornton negligently advised MBS to use hedge accounting to limit its balance sheet volatility.
In 2008, interest rates dropped and MBS began to suffer substantial losses. In 2013 it was told that it couldn’t use hedge accounting and when it recalculated its accounts they showed significant losses. MBS needed to close out the interest rate swaps, sell the lifetime mortgages and stop lending in 2013, suffering losses of approximately £48.5 million.
Negligence was conceded and despite finding that the traditional requirements of causation were met, the Court held that the Defendant was not liable for the majority of losses on SAAMCO grounds as it had not assumed responsibility for them. An accountant advising a business on how its activities should be reflected in its accounts does not assume responsibility for the financial consequences of those activities. An appeal will be heard by the Court of Appeal in January 2019.
t: +44 (0)20 7871 8535
t: +44 (0)330 045 2378
insurance brokers - professional indemnity
Avondale Exhibitions Limited v Arthur J. Gallagher Insurance Brokers Limited  EWHC 1311 (QB)
A decision of HHJ Keyser QC in May 2018 considered an insurance broker’s duty regarding the obligation of disclosure (in particular, whether questions in proposals were sufficient to discharge the duty).
Avondale Exhibitions Limited (Claimant) had instructed Arthur J. Gallagher Insurance Brokers Limited (Gallaghers) since 2010. Gallaghers had arranged Commercial Combined Insurance with QBE for the Claimant in the policy years 2010/11 to 2012/13. In August 2012 a fire occurred at the Claimant’s premises. Subsequently QBE avoided each of the policies, having identified the non-disclosure of two serious criminal convictions (which did not concern dishonesty) of a Mr Watkins (a director of the Claimant).
Neither party contested the right of QBE to avoid but which party was responsible for the non-disclosures? The Claimant argued that Gallaghers was negligent in failing to submit information about the convictions to QBE; alternatively, Gallaghers should have obtained this information from the Claimant and warned of the consequences of non-disclosure. A trial of preliminary issues was ordered, including whether Gallaghers was in breach of duty and whether, had the Claimant been advised to do so, the convictions would have been disclosed.
The Judge considered the cases of Jones v Environcom Limited  EWHC 759 (Comm) and Synergy Health (UK) Limited v CGU Insurance PLC  EWHC 2583 (Comm). In the former case it had been held insufficient to rely on standard forms to set out the requirements of disclosure. The latter case decided that the insurance broker was not required in every case to provide oral advice regarding disclosure (this would depend on the circumstances).
The Judge concluded that Gallaghers did not have knowledge of the convictions. Further reflecting upon Mr Watkins’ background, an obligation to provide oral advice as to the requirements of disclosure did not arise. The claim was dismissed. The Judge concluded that Mr Watkins would have disclosed the convictions in a face to face meeting.
The decision confirms that it is necessary to consider a claimant’s background and knowledge before the extent of the broker’s obligations concerning disclosure can be determined.
t: +44 (0)330 045 2223
t: +44 (0)115 976 6581
property professionals - professional indemnity
Assessing diminution in amenity value in Japanese knotweed cases
The recent Court of Appeal decision in Williams and Waistell -v- Network Rail (3 July 2018) could lead to an influx of new instructions to surveyors. Landowners and their lawyers may need to enlist expert assistance on some tricky issues of valuation.
The Court of Appeal ruled that the mere presence of knotweed on a claimant's land means that the intangible amenity value of that land is diminished.
The concept of amenity value
The Court also made clear that - conceptually - the following right is not included within a particular piece of land's amenity value:
" ... the claimant's right to realise or deploy the value of the property in his or her financial interests ..."
The Court was referring here, for example, to the claimant's right to let out his property or to sell it in order to make a capital gain. (But again, according to the Court of Appeal, this does not form part of what should be regarded as the amenity value of the land in question).
The Court of Appeal explained that this is because "... the purpose of the tort of nuisance is not to protect the value of property as an investment or a financial asset ..."
Market Value vs. amenity value
In the Network Rail case, at County Court level (in July last year):
- Mr Williams was awarded £10,500 for the residual diminution in the value of his property after the knotweed had been treated; and
- Mr Waistell was awarded £10,000 on the same basis.
However, those awards seem to have been for residual diminution in Market Value. Almost all the discussion in the County Court judgment is centred on the two experts' approaches to the full Market Value of Mr Williams' and Mr Waistell's properties (and on whose comparables were the more reliable, etc.)
It is much less clear what attention (if any) the respective valuation experts, at the County Court hearing, gave to residual diminution in amenity value.
Expert valuers will have to wrestle with an assessment of intangible amenity value. It is conceivable - likely even - that they will need to have regard to how prospective purchasers in the market would react to learning that the subject property had been through knotweed control or eradication treatment.
Taking account of the actual impact of the knotweed on the occupier(s) of the land
It seems clear from Williams and Waistell -v- Network Rail (3 July 2018) that there is a movement away from considerations of Market Value and towards impact on use and enjoyment of land instead.
If this is right, I anticipate that expert valuers will want to see 'impact statements', by which the claimant-landowner will explain what his or her personal (adverse) experience has been of the knotweed. How has the presence of the knotweed spoiled his or her use or enjoyment of the property?
t: +44 (0)115 976 6143
t: +44 (0)115 976 6219
recruitment - professional indemnity
Further changes ahead to disguised employment rules
In this article, we look at some upcoming changes to the IR35 tax regime for personal service companies and, in particular, the possible impact on recruitment professionals and umbrella companies.
IR35 – a reminder
IR35 was introduced in 2000 to combat tax avoidance by ‘disguised employees’. The rules specifically concern workers who set up limited personal services companies to minimise their tax and national insurance contributions.
At the heart of the IR35 legislation is the relationship between a contractor and the end client, which can be classified into two categories:
- a contract for services (self-employed); or
- a contract of service (‘disguised employment’).
If a relationship is deemed to be a ‘disguised employment’ then IR35 will apply, meaning that contact will be subject to the normal tax and national insurance deductions for an employee. If, however, the contractor is deemed to be self-employed, they will fall outside the scope of IR35.
Until April 2017, employment status for the purposes of IR35 was declared by the contractor and not the client. In 2017, the rules changed for the public sector by placing the onus of establishing the employment status on to the client (usually an agency of the public sector body) rather than the contractor.
Extension of the new regime
From April 2020, these rules will be extended to the private sector, to include large and medium-sized businesses. Medium-sized businesses will be classified as those with 50-249 employees, with large businesses being those with 250 or more employees. This will mean that if a contractor is considered to be a disguised employee, those businesses will have to deduct PAYE and NI before making a payment to the contractor. The liability for any unpaid tax will also now attach to the fee-payer, i.e. the end client, and not to the personal services company as has previously been the case.
Impact on recruitment professionals
These changes are likely to result in end clients becoming more wary of engaging personal service companies for fear of taking on an unexpected tax liabilities. Recruitment professionals and umbrella organisations are likely to be asked by both clients and contractors to advise on issues relating to the new rules, which gives rise to an increased liability risk. Additionally, whilst it will be the end client's duty to determine the status of the contractor engaged to them, the financial liability and responsibility for applying IR35 lies with the ‘fee-payer’, which may be the recruitment agency themselves depending on the contractual structure.
An additional risk may arise for recruitment professionals depending upon the contractual terms with their client. Over the past decade, we have seen a steady shift in contractual terms in favour of the end client. All recruitment professionals and umbrella companies would be advised to check their contractual terms to ensure they adequately deal with the new rules. At the very least, indemnities may be required from the end client in respect of any additional liability for PAYE or NI.
Whether or not a contractor falls within the scope of IR35 will continue to depend upon the precise facts of each case. It is clear, however, that with implementation of the new rules the focus on the status of contractors will continue, increasing the focus on – and risk for - professionals operating in the recruitment sector.
t: +44 (0)330 045 2254
t: +44 (0)115 976 6557
financial institutions and FI professionals
Is the general insurance industry (price) walking to its doom?
In October 2018 the FCA published its terms of reference (ToR) for a market study on general insurance pricing practices, focused on the home and motor markets. The FCA’s aim is to “deepen our understanding of consumer outcomes from pricing practices, the scale and nature of any harm and inform how to, if necessary, improve the market” with a view to delivering “competitive and fair pricing outcomes for consumers”.
The FCA said that “potential remedies … could include:
- Changes to the way that firms price insurance.
- Contractual changes, such as limiting auto-renewal.
- Limits on differences in prices between different groups of consumers.”
A particular concept that the FCA wishes to explore is that “inert customers [who don’t shop around] can be very profitable”, and whether this means pricing practices are competitive and fair: are the home and motor insurance industries benefiting not from diversification of risk, but customers’ potentially uninformed acceptance of paying diversified prices for essentially the same risk? The risks associated with differentiated pricing have been readily apparent for a number of years, including from findings in the 2013 Final Notice for Swinton in which Swinton’s sales methodology was found to reveal “a culture of placing the drive for profit over the fair treatment of customers”.
The remedies the FCA is considering could have profound effects on longstanding practices and operating systems across the general insurance industry. Depending on the findings, some firms, not just in motor or home insurance, may have to change radically in order to be viable. More may be understood when the FCA publishes “an interim … report in Summer 2019” ahead of a consultation on proposed remedies later that year.
In addition, the FCA’s Wholesale Insurance Broker Market Study remains ongoing, with an interim report due in early 2019. Both studies potentially raise implications for the way that close relationships between risk-carrying and distribution players within the general insurance marketplaces may or may not be clearly understood factors in insureds’ purchasing decisions.
t: +44 (0)20 7337 1010
t: +44 (0)20 7871 8539
Landmark privilege ruling – Serious Fraud Office v Eurasian Natural Resources Corporation  EWCA Civ 2006
This Court of Appeal judgment, handed down in September, allowed UK businesses and their lawyers to breathe a collective sigh of relief.
Since the first instance judgment of May 2017, there had been a concern that communications and documents created within early stage internal investigations may no longer benefit from legal privilege and could fall to be disclosed to regulators.
The first instance judgment
The SFO sought a declaration that disclosure of various categories of documents created by ENRC and their lawyers during internal investigations into allegations of apparent fraud, bribery and corruption could be compelled. ENRC argued that the documents were protected by litigation privilege and could be withheld.
Justice Andrews held that, at the time that the documents were created, there could be no reasonable contemplation of criminal proceedings since the SFO investigation was at such an early stage. On that basis, the documents did not attract litigation privilege and ought to be disclosed. ENRC immediately appealed.
The Court of Appeal
The Court of Appeal found that the majority of the documents did, in fact, have the benefit of litigation privilege. The judgment highlighted the public interest in allowing companies to undertake internal investigations without losing privilege. The court emphasised that advice in respect of which the dominant purpose is to avoid legal proceedings, or given with a view to settlement, is as much protected by litigation privilege as advice given for defending such proceedings.
What this means for businesses
The judgment provides reassurance that corporate bodies can conduct internal investigations with the protection of privilege, so long as they are structured and conducted in the proper fashion. Important considerations:
- Litigation must be reasonably contemplated;
- Communications must be for the dominant purpose of conducting litigation;
- A corporate body has a stronger argument to assert privilege if lawyers are engaged to advice on an internal investigation from the outset;
- Lawyers can assist with key early decisions such as who the “client” providing instructions and receiving advice ought to be; who should investigate and author any report; the purpose and remit of and how it is to be delivered.
t: +44 (0)330 045 2652
Cyber trends and predictions: what do they mean for insurers?
Cyber remains one of the fastest changing areas of insurance business. In this article we look at some key trends and analyse the potential impact on insurers.
2018 saw a number of high profile data breaches, together with some maximum penalties of £500,000 ordered by the ICO. However, those penalties were ordered under the pre-GDPR regime. In 2019 we are likely to see the first investigations for a breach of GDPR, bringing with them the prospect of fines up to €20 million or 4% of global turnover. Although such penalties are uninsurable as a matter of public policy in the UK, there will potentially be much more at stake for policyholders, which could significantly increase cyber insurers’ exposure to investigation costs.
2. Shift in attack vectors from networks to users
According to the Nuvias Group, there is an ongoing shift of attack vectors from the network to the user. In other words, attackers are increasingly realising that people – and not systems – represent the most significant vulnerability. Underwriters should consider what they ask about their policyholders’ procedures for employee awareness and training, and not just their systems.
3. The rise of cryptojacking
According to research by QuickHeal, the number of cryptojacking variants trebled between 2017 and 2018 and the period January to May 2018 saw over 3 million cryptojacking hits. This type of attack, which involves hijacking a target’s processing power in order to mine cryptocurrency, is rising rapidly. Underwriters should carefully check their policies (many of which were drafted before the prevalence of cryptojacking) to ensure they respond as intended, to avoid unexpected exposures.
4. Ransomware and IoT
Ransomware continues to be prevalent. However, in addition to the traditional approach of encrypting documents (which are decrypted upon payment of a ransom), criminals are increasingly using the Internet of Things (IoT) to target physical items such as equipment and production lines. Generally the hacker will disable the item until a ransom is paid. Again, underwriters are advised to check their policies will respond as intended to this relatively new form of attack.
5. Security by design
Cyber security specialists increasingly advise that one of the most effective ways to protect against attacks is to ensure ‘security by design’. This means that software and systems are designed from their very foundation to be secure, rather than security being ‘bolted on’. Underwriters may want to consider asking their policyholders whether and how security by design is built into their organisation.
Cyber is a fast-changing world. Each year we see new and more sophisticated forms of attack. It is important for underwriters to keep a constant review of developments to ensure their products remain fit for purpose and that they do not open themselves up to unexpected exposures.
t: +44 (0)115 976 6557
t: +44 (0)115 976 6219
corporate and management liability
The Criminal Finances Act 2017 – A Year In
The Criminal Finances Act 2017 (“the Act”) is one of the latest legislative crackdowns on corporate financial crime. Law enforcement agencies such as HMRC and the Serious Fraud Office are equipped with new powers to investigate and prosecute financial crimes. Pursuant to the Act, businesses are required to implement reasonable prevention procedures to avoid being held criminally liable or fined for failing to prevent the facilitation of tax evasion by their staff, agents or other persons associated with them.
Under Part 3 of the Act, companies and partnerships incorporated or operating in the UK will be held vicariously liable for failing to prevent “an associated person” from facilitating UK or non UK tax evasion. Where an associated person (i.e. anyone performing services for and on behalf of the business such as independent contractors) dishonesty and deliberately facilitates a tax evasion offence by a tax payer, the company can be held strictly liable for failing to prevent that facilitation, even where the business and its senior management were not involved or aware of the tax evasion. So for the offences to apply there must be (i) the fraudulent tax evasion by a tax payer (ii) the facilitation of the tax evasion for “an associated person” and (iii) the failure to prevent the facilitation by the business.
A business can avoid liability if it can show it had reasonable prevention procedures or that it was not reasonable in the circumstances to expect the company to have any prevention procedures in place. HMRC has issued guidance on the reasonable steps companies should follow including regular risk assessments, commitment from top level management, training and monitoring.
It has been slightly over a year since the Act into force and so far we have no reported cases. This could be due a number of reasons. However, we do not consider that a lack of appetite by HMRC or the SFO to investigate and prosecute these offences is one of them; HMRC has a track record of aggressively pursuing tax evasion. The lack of reported cases may be down to timing as these investigations are often lengthy. It may down to the fact that these offences simply do not occur as often as the government imagined and therefore the impact of the Act was destined to be minimal. It may be owing to the fact that businesses have followed HMRC’s guidelines to the letter and therefore the third element of the offence cannot be made out.
If businesses have successfully implemented prevention measures then this is good news for insurers. However insurers and business should be cautious as to what will be deemed to be reasonable prevention procedures. They should bear in mind that reasonable prevention will be measured against a number of factors and a failure in respect of any of these factors such as risk assessment is likely to lead to a successful prosecution against the business.
If the last year is setting the trend, one can expect very few prosecutions flowing from the Act in the coming years. There are statistically low numbers of successful tax evasion prosecutions for a myriad of reasons including evidentiary difficulties and the complexities of taxation law. As the strict liability offence against corporations requires an underlying tax evasion by a person, it is in turn, unlikely to result in a prosecution of that corporation. Whilst insurers should at least require their policyholders to confirm that tax evasion prevention measures have been implemented in their businesses where required, we do not expect the Act to throw up volumes of claims under corporate liability insurance policies for which investigation or prosecution costs would often be covered.
t: +44 (0)115 976 6133
t: +44 (0)115 976 6280
Directors and Officers
D&O Issues in 2018
In the usual course of things, very few D&O disputes reach a full court hearing. However 2018 has seen an exception to this with two inter-related Commercial Court disputes going to trial. The common theme of these disputes is the involvement of the Olympus Group and the departure of Mr Woodford as CEO in 2011 after he had exposed a $2bn unexplained discrepancy and payments in the Olympus Group accounts.
Olympus dismissed Mr Woodford, and some of his colleagues as a result of the disclosure of the irregular payments. Subsequently Mr Woodford sought to deal with his pension arrangements which were refused by Olympus KeyMed, being the subsidiary that dealt with the executive pension arrangements. This subsidiary issued proceedings against Mr Woodford, and a colleague, making various claims against them and seeking a declaration that they were not entitled to their pension arrangements as a result of various breaches of duty to the company. As a result Mr Woodford was required to defend the action and establish his pension rights and entitlement, which were substantial. To pursue his claims for pension rights Mr Woodford claimed for his legal expenses from an Olympus Group D&O policy issued in Germany by AIG. This is where the first trial comes in: Woodford v AIG Europe Ltd & Anor  EWHC 358 (QB).
In this action, Mr Woodford and one of his colleagues were seeking a “legal expenses claim” against AIG under the D&O policy issued by AIG. The Claimants were seeking reimbursement of their defence expenses/costs incurred in the related and ongoing pension fund claim which had been commenced by Olympus KeyMed (managers of the pension scheme).
AIG had declined to reimburse the legal expenses on various grounds, being principally (a) that Olympus as policyholder had prior knowledge of the potential claim circumstances prior to the inception of that particular D&O policy issued by AIG and (b) that Olympus KeyMed had failed to provide relevant information to AIG concerning the Olympus Group claim against Mr Woodford in the action involving the pension entitlement. AIG failed on all grounds of its defence, even when applying general German law and the court held that the policy was a contract of indemnity for relevant legal expenses incurred by directors, and ordered AIG to meet the costs of Mr Woodford in defending his claim in the other action pursued by the Olympic KeyMed subsidiary relating to his pension rights and entitlement.
And so to the second action: Olympus KeyMed Ltd v Woodford and Hill. This claim was commenced by Olympus KeyMed (as a subsidiary within the Olympus Group) seeking a declaration that Mr Woodford had no pension rights or entitlement under the Olympus Executive Pension Scheme. This action came to trial in the Commercial Court in May 2018 but as yet judgment has not been handed down. It is somewhat ironic that in the event that Mr Woodford (and his colleague) successfully defend the pension action then they will be entitled to recover their legal costs/expenses as part of any judgment order. In doing so, AIG will then be entitled to seek an element of reimbursement for the defence costs paid to Mr Woodford, as part of the defence costs order obtained against the Olympus Group. Consequently, there is an element of subrogated recovery for the benefit of AIG.
On other D&O issues in the market, probably the two most high profile are the notifications to the VW Group D&O US$500m programme which includes involvement by London market insurers. As yet these claims have not been fully established or notified to insurers but this may develop during 2019. The other high profile D&O is Carillion, on which the London D&O market is keeping a close eye with full notifications being given to all lawyers of this programme, but as yet there is little progress as to how the exposure will develop.
t: +44 (0)20 7337 1027
t: +44 (0)330 045 2205
Health and Safety
A number of serious incidents, including the Shepherd’s Bush Tower Fire in August 2016 and the Grenfell Tower Fire have been linked to faulty domestic appliances. As a result the Government set up a working party in 2017 to examine the UK’s product safety regime. The working party made eight substantive recommendations and key to implementing those is the creation of a new Office for Product Safety and Standards. The new Office is part of the Department for Business, Energy and Industrial Strategy (BEIS).
What are the recommendations?
- Recommendation 1: Establish a centralised technical and scientific resource capability
- Recommendation 2: Consolidate guidance on product corrective actions and recalls
- Recommendation 3: Establish a hub to co-ordinate product safety corrective actions at a central level
- Recommendation 4: Capture and share data and intelligence
- Recommendation 5: Develop technological solutions to product marking and identification
- Recommendation 6: Encourage Primary Authority relationships, with BEIS acting as a Supporting Regulator
- Recommendation 7: Encourage consumer registration of appliances and other consumer goods
- Recommendation 8: Establish an expert panel to oversee the delivery of all Working Group recommendations and explore further issues
What will the OPSS do?
- Identify risks to consumers and be involved in responding to large-scale product recalls and repairs
- Provide support and advice to local authority Trading Standards teams
- Ensure the UK continues to carry out the appropriate border checks on imported products once the UK leaves the EU
- Coordinate with HMRC and Border Force
- It will cover general (non-food) consumer product safety e.g. white goods, electrical goods, toys, clothes, and cosmetics but not cover construction products, vehicles, medicines and medical devices, or workplace equipment, which are already covered by other agencies.
There will be opportunities for businesses – whether insurers or insured - to participate in consultation as the OPSS develops. In addition the working group and government have already focussed upon other recommendations namely that :-
- Businesses should have a product recall plan
- Businesses should work with standard-setting bodies to develop technological solutions to product marking and identification
- Businesses should enter primary authority schemes with local authorises to receive advice upon complying with the General Product Safety Regulations 2005
From an insurer’s perspective, in the event of claims or regulatory enforcement linked to product safety, there is now, through the OPSS , a specific and centralised body which is likely to influence standards and benchmarking and which should provide a useful resource and touchstone in respect of product liability claims.
t: +44 (0)121 237 4584
t: +44 (0)115 908 4113
Employment practices liability
The Gig Economy
Claims relating to employment status in the Gig Economy continue to grab headlines and have shown little sign of slowing down over the last year. Whether an individual is an employee, worker or independent contractor has consequences on their statutory rights and the general direction of travel could rightfully alarm organisations who wish to use a freelance workforce.
The Supreme Court decision in Pimlico Plumbers Ltd and another v Smith  UKSC 29 affirmed the decision of the Court of Appeal, Employment Appeal Tribunal (EAT) and Employment Tribunal (ET) in finding that the claimant plumber Mr Smith was a worker. The key elements of the decision were the highly limited nature of the substitution provisions under the contract and the high level of control of the company that led the court to decide they could not be regarded as a client or customer of Mr Smith.
There has also been a spate of courier cases with findings along similar lines. In both Dewhurst v CitySprint UK Ltd  and E Leyland and others v Hermes , couriers were held by the ET to be workers as the reality of the working conditions did not match the contractual drafting in terms of control, substitution and payment. In Addison Lee v Gascoigne  the EAT upheld the ET’s decision in favour of a cycle courier finding him to be a worker for similar reasoning, though based on the relationship between the claimant and company during the period the claimant was logged into an app and prepared to work.
In Daugvila and Petrulaneus v Expert Logistics  however, the ET found against the claimants who were delivery drivers. The reasoning was similar to that in the widely publicised Deliveroo case with the central issue being the genuine and utilised ability to substitute.
Whilst each decision is case specific, and it would be unwise to rely too heavily on any one as precedent (particularly as ET decisions are not binding), the clear movement of the Courts has been to increasingly look behind a contract at the reality of the relationship. With unclear or “unreflective of reality” contracts, organisations may find themselves at increased risk of claims. With publicised cases and a trajectory favourable to claimants, there is likely to be no shortage of these cases in the near future.
Employment Law Hearing Structures Review – further rise in claims and delays on the horizon?
Since Employment Tribunal fees were abolished in July 2017, there has been a marked increase in the number of claims being issued. This was evidenced in the recent statistics published by the Ministry of Justice in September 2018, which stated that, for the period April to June 2018, the number of single Employment Tribunal claims had increased by 165% compared with figures obtained for the same period in 2017.
This rise in the number claims has put employers and their HR teams under increased pressure in terms of being able to dedicate the appropriate amount of time required to handle both potential and ongoing claims, brought by individuals. Furthermore, it is fair to say that this pressure is similarly felt by the Employment Tribunals as the increase in claims has caused a delay and backlog in the system with the number of claims outstanding also up by 130% since fees were abolished.
It is therefore of some concern that the Law Commission’s recent consultation on Employment Law Hearing Structures paves the way for potentially increasing the number of claims brought by individuals which, without further resources, is likely to result in further delays in the system. In particular, the consultation proposes widening the Employment Tribunal’s jurisdiction to allow Employment Judges to hear claims that are currently dealt with in the civil courts, such as non-employment discrimination matters.
Additionally, in the 54 questions posed, the Law Commission asks for the views on increasing the time limit for making a complaint to the Tribunal from the traditional 3 months to 6 months “or some other period”. Coupled with this, it suggests widening the Tribunal’s discretion to extend the time limit where it is “just and equitable to do so” when strictly speaking, the claim would ordinarily be considered out of time.
The consultation does not close until 11 January 2019 and while these are just some of the questions posed, it is clear that should the responses weigh in favour of introducing these changes, it is likely that employers can expect a further increase in the number of claims brought before the Tribunal.
In contrast to the above, the Ministry of Justice has, this month, confirmed it may reintroduce employment tribunal fees that are “proportionate and progressive”. No further details have yet been confirmed. Therefore, it will simply be a case of waiting for any future updates regarding this and the potential impact that this may have on claim levels.
Discrimination, gender equality and employment
Gender equality and sexual harassment is not a new topic of debate. However, the first gender pay gap reporting and the ongoing effect of the Times Up and #MeToo movements in 2018 have propelled the issue of widespread sexual harassment to the forefront, raising awareness and encouraging individuals to come forward.
Gender pay reporting starkly demonstrated what has been claimed for many years - the difference in pay between men and women across the UK. 78% of reporting organisations had a pay gap in favour of men whilst 14% had a pay gap in favour of women and 8% of companies reported no pay gap at all. Men make up the majority of higher paid jobs and more senior roles. The measurements may be seen as fairly crude without being put in context, but it does highlight ongoing issues that need to be addressed, such as why there is still such a significant majority of men in more senior well paid roles. Men still make up the large majority of positions in the board room.
Employment equal pay claims rose from 10,467 to 35,117 in the year 2017-2018, partly due to larger organisations having numerous claims being made against them. However, now that company figures can be more easily scrutinised, it seems that the trend in claims is not likely to slow down. Further, there is an increasing trend for such claims to be brought against private sector companies – with a number of high profile claims hitting the press.
In early 2018, the Women and Equalities Committee of the House of Commons launched an enquiry into sexual harassment in the workplace. The report says it is a “call to action” and notes that 40% of women and 18% of men have experienced unwanted sexual behaviour in the workplace. Those most at risk are women with precarious employment arrangements, such as those with irregular hours. The report also mentions the impact it has on health and wellbeing, development, morale and staff retention more widely.
In October 2018, the Fawcett Society, a charity campaigning for gender equality and women’s rights released a briefing “#MeToo one year on – what’s changed” which found 35% of participants were more likely to challenge behaviour or comments they considered to be inappropriate and that 38% think differently about what is and is not acceptable.
Employers need to be alive to these issues, and reflect on their approach to complaints and policies. Individuals are feeling more encouraged to raise incidences of sexual harassment or discrimination, increasing the risk of potential employment claims, as well as reputational damage.
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Vicarious liability – not just an issue for employers?
Vicarious liability, the situation in which someone is held responsible for the acts of another is common in an employment context in which an employer is responsible for the negligent acts or omissions of their employees acting in the course of their employment.
Case law in recent years has sought to expand the definition of employer and employee when considering acts committed “in the course of their employment”, none more so than the recent case of Various Claimants v Barclays Bank plc . This case concerned allegations of sexual assault against a doctor who was carrying out pre-employment health assessments for Barclays. The bank denied the doctor was an employee or was in a situation akin to employment as he was a self-employed contractor. The Court disagreed. The bank challenged this decision at the Court of Appeal suggesting the court at first instance had wrongly concluded the doctor’s relationship with the bank was akin to employment and that just because the doctor carried out a service for the bank did not mean he was not an independent contractor. The Court of Appeal upheld the first instance decision, suggesting that the activity was carried out on behalf of the bank and the bank benefited from the health assessment given their position as prospective employers. The risk to the Claimants arose from the arrangements of the bank, who specified the nature of the examinations, as well as the time, the place and the examiner. The examinations were closely connected with the relationship between the bank and the doctor, without them the relationship would not exist therefore the bank should be vicariously liable.
The case effectively confirms that an individual’s employment status is not always the primary consideration when considering vicarious liability. Instead the focus should be on the nature of the task being undertaken by the individual and whether or not there is sufficient connection between the task and the wrongful conduct so as to make it just for the organisation to be held liable. The implications of this judgment are far reaching and could impact on a range of different organisations who do not fit the usual employer profile and who may not have appropriate insurance in place to deal with such claims such as sports clubs, faith organisations, charities, outward bound and activity organisations. These organisations, their brokers and insurers, need to consider the level of scrutiny undertaken in relation to contractor and volunteer risks when engaging third parties and managing those relationships and ensuring that adequate insurance is put in place to deal with any risk.
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A Judgment on ERRA
Section 69 of the Enterprise and Regulatory Reform Act 2013 (ERRA) removed the mechanism by which employees could claim for damages against their employers for breach of regulations passed under the Health and Safety at Work etc Act 1974, for example the Provision and Use of Work Equipment Regulations. Breach of the regulations continues to be a criminal offence but is no longer actionable in the civil courts.
Despite this, Claimants continue to plead a breach of the regulations and whilst civil liability could be firmly denied in respect of such allegations, it has not been clear whether employers should be held to a similar standard in their post-ERRA duties to employees as the regulations had previously imposed.
After 5 long years we now have a decided case to demonstrate how ERRA should work in practice. Cockerill v CXK Ltd & Artwise Community Partnership  concerned a tripping incident which occurred the day ERRA came into force. The Claimant, who was employed by the first Defendant, was working in a building owned by the Second Defendant. The First Defendant relied on the Second Defendant’s risk assessment of the premises and did not carry out her own. There was a 7 inch step down into a kitchen and whilst the Claimant observed signs warning of the drop as she entered the building, she said she did not see a further warning by kitchen door as the door was propped open, contrary to the risk assessment, blocking the sign. As she walked into the kitchen she missed the step and fell. The Claimant brought a claim for significant damages. The basis of her case was that the door being propped open gave rise to a breach of the duty of care owed to her and that more should have been done to warn of the step’s existence such as signage, lighting or extra hazard tape. The Defendants denied liability, suggesting there was no duty to keep the door closed and the step was clearly marked and well lit, with sufficient warnings.
The Judge considered the purpose of s.69 ERRA was “to effect some degree of rebalancing in the legal relationship between employers and employees in the field of health and safety at work" and that "by enacting s.69, Parliament evidently intended to make a perceptible change in the legal relationship between employers and employees in this respect". She held that any breach of statutory duties would be actionable "if, but only if, it also amounted to a breach of a duty of care owed to a particular claimant in any given circumstances; or in other words, if the breach was itself negligent."
Applying that reasoning to the facts the Judge found the area was well lit, there was hazard tape on the step and the basis for not propping the door open within the risk assessment was security rather than safety and to do so was not negligent. Whilst there was no visible warning sign on the wall, that was not material given the visibility of the step and it was appropriate for the First Defendant to rely on the Second Defendant’s risk assessment – there was nothing more they could reasonably have done to warn the Claimant of the risk. The claim was dismissed.
The decision provides comfort to employers faced with civil claims, and their insurers, reaffirming the position we have taken in relation to post-ERRA claims, that whilst the court can consider the regulations when assessing the reasonableness of the steps taken by an employer to meet its common law obligations, it had to be appreciated that some breaches of the regulations would also be negligent whilst some would not. The key consideration is whether reasonable steps have been taken.
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Property Damage – round up
This article looks at some of the key cases and developments in the property insurance market in 2018 and what might lie ahead.
1. Causation, Measure of Indemnity, and Business Interruption
The year started with a Technology & Construction Court (“TCC”) decision in the case of Contact (Print and Packaging) Ltd v Travelers Insurance Co Ltd which discussed key issues including causation, measure of indemnity, and business interruption.
Contact was a printing business which suffered a sudden failure of one of its printing presses. Contact claimed under its combined property damage and business interruption policy on the basis that the damage arose out of ‘sudden subsidence’. Travelers argued that the failure was due to ‘normal settlement’ and declined the claim as not an insured cause. Travelers also challenged the quantum of both the PD and BI claims.
The claim for PD turned on the expert evidence. The Judge found, on the balance of probabilities, in favour of Contact awarding its PD claim in full. However, Contact was less successful in relation to the BI claim, recovering only 5% of its claim. The Judge found that Contact had fallen well short of satisfying the burden of proof, submitting little evidence other than its audited accounts and a report from its forensic accountant. There was no evidence as to pre and post-damage performance of the business (‘business trends’), and a lack of contemporaneous documentation and witness evidence. The Judge found that Contact’s business was in decline before, during and after the failure of the press; there was insufficient evidence that the failure prevented Contact from fulfilling or accepting customer orders; and no evidence to support a loss of any customers.
2. Sub-contractors and rights of subrogation
In March the TCC handed down its judgment in Haberdashers’ Aske’s Federation Trust Ltd and another v (1) Lakehouse Contracts Ltd (2) Cambridge Polymer Roofing Ltd and others. This case arose out of a serious fire at Hatcham College, London following ‘hot works’ by a roofing sub-contractor.
Insurers intended to pursue a subrogated recovery against the roofing sub-contractor to access the sub-contractor’s liability insurance. The sub-contractor argued it was covered under the project insurance, as a ‘sub-contractor of any tier’, so preventing subrogation. The sub-contractor wasn’t named when the project insurance incepted and was required in the underlying sub-contract to carry its own liability insurance.
The Court considered the recent Supreme Court decision in Gard Marine & Energy Ltd v China National Chartering Co Ltd (2017) and held that a sub-contractor who has already contracted with the main contractor prior to project insurance being taken out would ordinarily be covered. Sub-contractors who were appointed after inception of the project insurance would also ordinarily be covered by the implied term of a ‘standing offer’ to be included under the project insurance. However, both principles were subject to the express terms of the underlying sub-contract. In this instance, the parties had intended that the sub-contractor take out its own insurance and not be covered under the project insurance.
Accordingly, project insurers were entitled to bring a subrogated claim against the sub-contractor.
Then in May the Scottish Inner House, Court of Session decided the case of SSE Generation v Hochtief Solutions. The Inner House held there was no implied term preventing the employer from bringing proceedings against the contractor, notwithstanding a joint names project insurance policy, given the express terms in the underlying contract apportioning liability for claims due to an event at each party’s risk. Joint names insurance gives rise to an implied term precluding claims between the contracting parties, however in this instance the joint insurance only operated to indemnify loss or damage to the contract works, not loss or damage arising out of the contractor’s breach of contract in failing to carry out repairs. The decision in SSE Generation is subject to appeal to the Supreme Court.
3. Predictions for 2019
Natural catastrophes such as the Carr and the Camp Wildfires in California, Hurricane Florence, and Hurricane Michael continued to buffet the world and the global insurance/reinsurance industry in 2018. Expect to see continued interest in the development of Cat Bonds and Parametric insurance products.
Cyber moves to PD & BI - cyber attacks, like the Marriott Hotel breach, have focused on the theft of data. Expect to see a shift from liability claims to property damage and business interruption claims arising out of cyber attacks.
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Foreign Qualified Lawyer
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Internal Employee fraud is a significant risk to businesses and control measures including staff training, policies and risk management often fail to detect or prevent staff who exploit loopholes which their insider knowledge.
The example below is an example of how to deal with the situation where this has occurred and how to respond to, recover from and obtain redress.
GEH NHS Trust v HDK (2018) (unreported)
Browne Jacobson was instructed to recover funds from an employee of the Trust after it was discovered that she had falsely submitted timesheets for work she had not carried out as an auxiliary nurse. A “tip off” was received when a photograph of night shift staff on New Year’s Eve failed to show the employee with the other nurses. This raised suspicions when a timesheet was submitted for that shift and was checked against the rota. Investigations revealed that the same MO had been used over an 18 month period, defrauding the Trust of just short of £50,000.
Proceedings were issued for unjust enrichment and knowing receipt against the employee and the co-beneficiary of the employee’s bank account, and judgment secured promptly. Disclosure revealed limited assets, and the significant part of the funds had been spent, save for the matrimonial home but enforcement was pursued without the need for a freezing injunction but with the co-operation of the co-owner. Charging orders and an order for sale were obtained and the full amount recovered with interest and costs.
Parallel criminal proceedings were being pursued with BJ’s support which were contested until the 11th hour. This included preparation of victim impact statement and recovery of the internal investigation costs by way of Compensation order.
The defendant was sentenced to 24 months in prison, suspended for a year, at Warwick Crown Court in July 2018 and she was also made subject to the Proceeds of Crime repayment scheme to repay a proportion of the investigation costs.
“Fundamental dishonesty” defined – the leading case
Mr Justice Julian Knowles sitting in the High Court has assisted practitioners with the correct approach to S 57 dismissals of claims where there is evidence of fundamental dishonesty and importantly explained when the “substantial injustice” bar to such a step would apply.
London Organising Committee of the Olympic and Paralympic Games (In Liquidation) v Sinfield  EWHC 51(QB)
The Claimant was a volunteer assistant at London 2012, when he broke his left arm after a fall, for which the Defendant organisers admitted liability.
The question in the case centred on the consequential losses arising from the injury – and in particular the presence in the Schedule of Loss of a significant claim for gardening expenses. The claimant claimed that his injury required him to employ a gardener to assist with his 2 acre garden – and the amount claimed – some £14,000, amounted to 42% of the Schedule and 28% of the total claim. In support he alleged that both he and his wife had done this work before.
Mr Sinfield produced invoices from the gardener but the Defendant approached the gardener whose evidence revealed that he had been employed since 2005, and that there was no additional work following the incident, and that the invoices were not his. At first instance the Defendants sought to strike out the Claimants claim under s 57, but the application was rejected. The Judge found instead that in trying to explain the need to employ a gardener “for the first time” ( which was plainly untrue), and the manufacture of the false invoices, which sought to show lower hours spent by the gardener pre-accident that the Claimant was “just muddled and careless”. As a result this did not contaminate the entire claim – and even if he had been dishonest it would be unjust to strike out the whole claim, as the dishonesty only related to a peripheral element of the claim. The Defendants appealed.
The discussion from Mr Justice Knowles in the full transcript of the appeal is worth reading as it shows the clear distinction with CPR Part 44.16:
- under s 57 the court must find the Claimant to be “dishonest” rather than the claim;
- the Defendant is not entitled to recover his entire costs but the balance of his costs after deducting the claimant’s “genuine damages”.
The appeal was granted and judgment was set aside.
Knowles J found that a Claimant is fundamentally dishonest (on the balance of probabilities) where he acts dishonestly in a way which substantially affected the presentation of his claim – and this could apply to both liability and quantum; and which would adversely affect the Defendant in a significant way. Dishonesty is to be determined by the objective test as set out in Ivey v Genting Casinos UKSC  UKSC 67.
In this case the actions of the claimant had been premeditated and sustained over a significant period of time and could have meant the Defendant paying significantly more damages than might have been the case had the evidence been presented honestly.
There was nothing preventing the Court striking out the claim on grounds of substantial injustice under s57(3) as in his view, that would require something more than the “mere loss of damages”, and the gardening claim was incorrectly characterised as peripheral by the Judge at first instance as it was in Knowles J’s view a “very substantial” part of the claim.
Cyber – Court of Appeal clarifies vicarious liability for data breach by malicious employees
What are the consequences for an employer who finds that personal data (of its staff) has been misused, in breach of confidence and its duty of privacy implied by the Data Protection Act 1998?
The case of Wm Morrison Supermarkets Plc v Various Claimants  EWCA Civ 2339 considered by the Court of Appeal revolved around a disgruntled former senior IT auditor Mr Skelton who was reprimanded for private use of postal facilities (for his online business) leading to a formal verbal warning.
When auditor KPMG asked for payroll data he also copied the data onto his own private USB stick. He then unlawfully posted nearly 100,000 staff details including sensitive personal details – name address, gender, NI and pay details, and bank account details on a sharing website, and in so doing tried to frame another employee. Not satisfied, he also sent a CD of the details to three newspapers who informed Morrisons who immediately took steps to remove the website and alert the police.
Mr Skelton was charged with fraud, breach of s 55 of the Data Protection act 1998, and Computer Misuse Act offences in 2014 and sentenced to eight years in July 2015. In 2015, 5518 employees claimed damages for breach of confidence and misuse of private information as well as breach of the Data Protection Act 1998 arguing that Morrisons was either directly liable or vicariously liable.
At first instance the Court held Morrisons not liable as it was not “data controller” of the information disclosed on the web by Mr Skelton, who had wrongfully copied, acted criminally and without authority. Where an employer had not directly misused or permitted the misuse, they could not be primarily liable, but due to the sufficiently close connection between the position held in the organisation and his wrongful act, Morrisons was vicariously liable. Morrisons appealed.
Morrisons argued that the Data Protection Act expressly excluded the scope for vicarious liability for wrongful acts which was a common law principle; and, Mr Skelton’s actions were “outside the course of his employment”.
- After careful analysis the Appeal court found for such an exclusion to apply Parliament would have expressly included it in statute, and this would negate the operation of both equitable and common law remedies. In fact, they act in parallel with the statutory regime in order to protect privacy and offer the right to a remedy.
- Secondly the events leading to the theft of the data and the use of it afterwards in temporal terms as well as opportunity were within the “field of activities assigned to the employee”, even sending this information to third parties, such that it made it difficult for Morrisons to distinguish the case from the established line of authorities on vicarious liability.
Despite the employee’s motive being to damage the employer (rather than benefit himself financially) the court found that motive was not a relevant consideration; and reassuringly this would not imply that the employer was an accessory to the criminal activity. The tribunal did not accept a policy argument that damages would be ruinous. Notwithstanding the regulatory implications of notification, and potential fines through the ICO under GDPR of up to 2% of annual turnover (or 10 million euros), this case offers a salutary warning to employers.
It sets out a clear basis for recovery where an individual’s privacy is infringed and there is misuse of personal information. In their parting comments, by way of consolation, the Court felt that employers should insure against dishonest and malicious acts of employees to avoid possible doomsday scenarios. Morrisons now wait to hear what the actual cost to the business in damages will be.
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Costs: looking in the crystal ball
So what do we anticipate will happen next in the costs world? Also what do we think needs looking at? Lord Justice Jackson conducted a series of roadshows looking at increasing fixed recoverable costs (FRC) to cases up to a value of £250k. A pilot was proposed in various specialist courts. However the scheme has been put on hold whilst the new mandatory disclosure pilot takes effect. The disclosure pilot comes into force on 1st January 2019 and anticipates that disclosure will be more limited in scope. Under the FRC proposals £6,000 was being proposed as the claimable figure for costs whereas if disclosure is more limited in scope this may well be too generous. Once the disclosure pilot is bedded in we anticipate that FRC will be revisited. So watch this space this time next year.
In the recent LASPO Part 2 review the question as to whether or not QOCS should be extended to professional negligence cases was asked. This issue was considered by Lord Justice Jackson in his original report and the view was taken that QOCS should not apply. It is our view that QOCS should not be extended to professional indemnity cases. Further in the near future Claimants with lower value cases worth up to £25k will have access to the Online court at a reasonable cost.
Clarity is needed in relation to assessment proceedings and whether QOCS applies. It is our view that QOCS should not apply; the risk factors are not the same as in litigation. Taking for example the case of Hislop v Perde  WECA Civ 1726, a case which went to the Court of Appeal on a question of whether FRC applied where a Part 36 offer was made. Whilst the Claimant failed in its attempts to have the FRC dis-applied the sting in the tail was that the court took the view that the Claimant could not be ordered to pay the Defendant’s costs beyond the level of the Part 36 offer because of the effects of QOCS.
We frequently see cases with poor prospects of success but with QOCS protection run until the doors of the court when the inevitable Notice of Discontinuance arrives. Is it fair and equitable for a party to continue to enjoy QOCS protection in those circumstances? Is it not right to assume that the Claimant’s representative should be in a position to review prospects well in advance of trial? That being the case we believe that it would be appropriate for QOCS protection to be removed in the event that a Notice of Discontinuance is served less than 28 days before trial
Cost management: “In accordance with the recommendations of Lord Justice Jackson in his supplemental report we would hope that 2019 is the year when judges can look at the question of historical costs at the first CCMC”.
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Part 36: the provision that keeps on giving (or taking away…)
Part 36 of the CPR 1998 is a Rule which never fails to surprise. Out of a book which totals over 3,070 pages, it accounts for a mere 34 of them – including the Practice Directions. It is, undisputedly, an incredibly small part of the CPR as a whole.
But for what it lacks in size in makes up for in its pedantries. There are around 400 reported cases quoting this section of the CPR within their headings, and despite now being in the 20th anniversary year of the CPR, 2018 has only added to this number.
Liability Offers, and the Consequences thereof
In JMX v Norfolk and Norwich Hospitals NHS Foundation Trust  EWHC 185 (QB) the Claimant made a Part 36 offer to accept 90% of liability which expired the day before Trial. The Claimant succeeded at Trial, but the Defendant argued that the consequences of CPR 36.17 should not apply as the offer was not a ‘genuine offer to settle’. The Court disagreed and the sanctions as set out in CPR 36.17 applied.
But then there was a twist. In applying the sanctions at CPR 36.17 the Court declined to award the Claimant the 10% uplift on their costs and/or damages on the basis that the case had not been “decided” pending the final resolution of “all issues in the case”.
Tuson v Murphy serves as a stark reminder of just how powerful Part 36 can be. The Claimant accepted a Part 36 offer out of time for a fraction of the value of her pleaded claim (c. £350,000 against £1.5million), and the Defendant argued that they should have costs both pre and post the Part 36 offer due to the Claimant’s conduct.
On appeal, the Court disagreed. The Defendant had made the offer when the facts of the Claimant’s exaggeration were known, and were therefore prepared to pay the costs to that point had the offer been accepted in time. There was no reason to therefore depart from the general presumption.
Failing to Accept a Part 36 offer in Time
It is trite law that the late acceptance of a Part 36 offer out of time is insufficient to trigger an award of indemnity costs without some form of unacceptable conduct from the parties.
It is even insufficient, as one can see from the case of Hislop v Perde  EWCA Civ 1726, to justify a departure from the fixed costs provisions of CPR 45.
Hats off therefore to Judge Allan Gore QC, who concluded that the Defendant’s ‘bimbling’ in the case of Holmes v West London Mental Health Trust was sufficient to justify a departure from the norm in a case where the Claimant’s liability offer was accepted a year late where the Defendant had unnecessarily prolonged the litigation of a mentally fragile Claimant without a good reason to do so.
In Ballard v Sussex Partnershire NHS Foundation Trust  EWHC 370 (QB) the Defendant withdrew a Part 36 offer and made a second one. At Trial, the Claimant failed to beat either. The Judge at first instance ordered the Claimant to pay the Defendant’s costs from the expiry of the first, but was overturned on Appeal on the grounds that it must have been the Defendant’s intention to pay the Claimant’s costs up to the expiry of the second offer.
On reflection, it seems that it would have been far more sensible for the Defendant to have simply reduced the Part 36 offer and maintain its protection as per Burrett v Mencap Ltd (14 May 2014) – but then hindsight is a wonderful thing.
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insurance law and practice
Insurance law and practice round-up
With Brexit dominating the news and the net on financial crimes closing in, one would be forgiven for thinking there might be an absence of interesting issues to discuss in this section of the review. I am pleased to say that is not the case. The cases highlighted in this section are intended to draw together a few key aspects of insurance law and the related developments.
Costs are a longstanding bugbear for insurers and quite rightly insurers are costs sensitive. However the decision in Travelers Insurance Co Ltd v XYZ  EWCA civ 1099 has not done much to ease insurers’ sensitivity on this issue. In that case, Travelers had advanced cover to its policyholder in respect of 197 of the 623 claims it faced in a group litigation concerning defect breast implants. The insured and uninsured claims (426 in total) were dealt with by solicitors acting for the policyholder and Travelers as one would expect. However the claimants whose claims were not covered by Travelers were unaware of the insurance position and therefore when the insured claims were settled and following the insolvency of the policyholder, they sought a non-party costs order against Travelers pursuant to s.51 of the Senior Courts Act 1981. Travelers relied on the principles which had seemingly been established by cases such as Palmer v Palmer  namely that such an order would only be made if there is evidence that insurers controlled the litigation for its own interest, without paying any regard to inconsistency or contrary to the interest of its insured. Despite Travelers’ compelling arguments that there was no good reason for an order to be made under s.51, its appeal failed because the Court of Appeal applied Deutsche Bank AG v Sebastian Holdings  which set out the sole absolute principle which the court will adopt in the exercise of its discretion was to do so in a manner which is just. Previous cases give guidance but they do not lay down prescriptive rules. The situation for insured and uninsured elements of claims crops up regularly and one wonders whether in exercising justice the outcome would have been different if the claimants were well aware of the insurance position.
Breach of warranty is another recurring theme for insurers and Bluebon Ltd (in Liquidation) v Ageas (UK) Ltd  provides a useful reminder of the position post- Insurance Act 2015. This claim concerns a claim for cover to premises damaged by fire within the first 12 months of the policy period. The policy contained an “electrical installation inspection warranty” (EIIW) which required Bluebon to test and inspect electrical installations every five years. The debate concerned the date from which the 5 year period should apply. Bluebon argued that it should be from the date of the policy and insurers argued it was from the date of last inspection which was in 2003 and therefore Bluebon had been in breach of the warranty and was not entitled to cover. The court agreed with the insurers’ position because this was the only commercial interpretation of the warranty bearing in mind the purpose was to minimise fire risk. More interestingly the court also considered the effect of the breach, in other words: was the warranty a true warranty (meaning that the breach would render the policy void ab initio), a suspensive warranty (meaning that that cover is suspended from the inception of the policy) or condition precedent which was specific to the risk. The court held that the EIIW was a warranty and not a condition precedent but it was a suspensive warranty. This decision sits well with s10 of the Insurance Act which modifies insurers’ rights to avoid the policy entirely in the event of a breach of warranty but rather allows for cover to be suspended until the breach is remedied.
As demonstrated throughout this review, it has been an active year for litigation and we expect more of the same in 2019 peppered with the uncertainty which Brexit brings.
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Browne Jacobson is the sole UK member firm of The Harmonie Group, an invitation-only international network of insurance/reinsurance law firms providing defense services to insurers, reinsurers, TPAs, RRGs, and captives. The Harmonie Group has member firms throughout the USA and Canada, and in 29 other countries across the globe.
Below we include some guest articles from member firms in Spain, Netherlands and California, USA.
Exculpatory Agreement Enforced and Primary Assumption of Risk Applied to Dispose of Skiing Accident Case
In California, individuals have a duty to exercise due care to avoid causing injury to others. However, under the doctrine of primary assumption of risk, a defendant owes no duty to protect a participant in a sports or recreational activity against risks that are inherent in that activity. (Knight v. Jewett (1992) 3 Cal.4th 296, 315.) The doctrine of primary assumption of risk has been applied to bar personal injury actions involving sports and recreational activities such as football, skiing, water-skiing, rock climbing, horseback riding and martial arts. Further, parties are free to contract away liability so long as doing so does not violate public interest.
Recently, in Willhide-Michiulis v. Mammoth Mountain Ski Area, LLC (2018) 25 Cal. App. 5th 344, the Court of Appeal reaffirmed the application of a release and the primary assumption of risk doctrine in a case involving a skiing accident. Specifically, the Court held that both because of a release executed by the plaintiff as well as under the doctrine of primary assumption of risk, defendants were not liable for injuries sustained by a snowboarder who collided with snow-grooming equipment.
Plaintiff Kathleen Willhide-Michiulis was involved in a tragic snowboarding accident at Mammoth Mountain Ski Area. On her last run of the day, she collided with a snowcat pulling a snow-grooming tiller and got caught in the tiller. The accident resulted in the amputation of her left leg, several skull fractures and facial lacerations, among other serious injuries. She and her husband appealed after the trial court granted defendant Mammoth Mountain’s motion for summary judgment finding the operation of the snowcat and snow-grooming tiller on the snow run open to the public was an inherent risk of snowboarding, that the claim was barred by the waiver and release plaintiff signed as part of her season-pass agreement, and that the actions of Mammoth Mountain did not constitute gross negligence (which would survive the application of both the release and the primary assumption of risk doctrine).
The Court of Appeal affirmed summary judgment, finding that although snowcats and snow-grooming tillers are capable of causing catastrophic injury, as evidenced by the subject accident, the presence of the equipment is an inherent part of the sport of snowboarding and the way in which the snowcat was operated in this case did not rise to the level of gross negligence. Therefore the trial court properly granted summary judgment based upon both the waiver and release signed by the plaintiff and the primary assumption of risk doctrine.
In addressing the motion for summary judgment the trial court as well as the Court of Appeal must accept plaintiffs' factual allegations as true, and decide all disputed facts in plaintiff’s favor. Thus the court accepted that the operator of the snowcat and tiller was on an open run, he failed to use a turn signal when making a sharp left turn from the center of the run to turn onto Old Boneyard Road, he failed to warn skiers of his presence, and no signs marked the existence of Old Boneyard Road. Still the court held that plaintiffs could not show Mammoth was grossly negligent or lacked all care because Mann took several safety precautions while driving the snowcat including turning on the snowcat's warning lights, beacon, and audible alarm, and because warning signs were posted throughout Mammoth Mountain, on trail maps, and in plaintiff’s season-pass contract.
This decision provides a thoughtful analysis on both the application of exculpatory agreements and the doctrine of primary assumption of risk. It also addresses the issue of gross negligence and where, when appropriate, courts will find that a defendant’s actions to not rise to the level of gross negligence as a matter of law. It also provided further confirmation that trial courts should, where appropriate, dispose of cases based upon the application of an exculpatory agreement and/or the primary assumption of risk doctrine through summary adjudication.
Manning & Kass Ellrod, Ramirez, Trester, LLP
801 S. Figueroa Street, 15th Floor, Los Angeles, California 90017
The insurability of fines arising from a breach of the General Data Protection Regulation 2016/679
On October 2018 the “Harmonie Group” organized in London an event analyzing the legality of insuring fines and penalties in different jurisdictions: Holland, Denmark, United Kingdom, Australia and Spain. Although logically there is no uniformity in all these countries, there are certain common elements. Due to space constrains, I will focus on the Spanish jurisdiction.
In Spain this debate has been on the table for years. Since 2008, several companies launched the first policies insuring fines derived from breaches of privacy laws. The Spanish Supervisory Authority (DGS-FP), despite knowing the terms of these policies, stated that this fact does not imply their approval and sat on the fence.
Notwithstanding the above, as of a consequence a general enquiry about the insurability of fines and penalties, the DGS-FP issued a note dated 31st March 2008, recalling that the freedom of covenants is not absolute but limited by law, morality and public order. In addition, it states that the principle of personality of the penalty must be respected, concluding that the coverage of administrative sanctions was not admissible because it “could” contravene public order.
The concept public order is related to the protection of the “common interest” or those of the “community”. However, the GDPR 2016/679 protects private rights: the protection of personal data. It is quite significant that the regulation of data protection is widely known as “privacy laws”.
We cannot put at the same level a criminal sanction and a fine that arises from the infringement of the privacy laws. If we connect the concept of public order with the legal prohibition of insuring criminal, quasi-criminal or malicious acts –which we must agree with-, this lead us to differentiate these acts from insuring negligent acts. In a context where the law protects the private interest, insuring negligent acts do not contravene the public order or the “common interest”.
The principle of the “personality of the sanction” should not be a relevant inconvenient. As it is a principle of criminal law, it cannot be automatically transferred to privacy law because of the different nature of these legal branches. Furthermore, in most cases we cannot speak of strict liability, but of vicarious liability or, in other cases, actions or omissions of third parties (e.g.: a tax advisor). Moreover, taking into account the extraordinary amount of the fines regulated in the GDPR, only part of the risk is transferred to the insurer.
The Spanish Contract Insurance Act only prohibits insuring fines and penalties in a very specific type of insurance: legal expenses insurance. This permits us to interpret that the will of the legislator was to limit this prohibition, because on the contrary he would have established it as a general interdiction.
As a conclusion we will say that, despite there is no legal prohibition of insuring fines arising from the infringement of the GDPR, it would be positive a future legal reform backing up a practice that the insurance market has been exercising for more than 10 years and from which, to date, no one has been able to demonstrate that is detrimental to data protection or public order. Hopefully, in 2028 we will be dealing with other issues.
Muñoz Arribas Abogados, S.L.P
C/ Orense, 34-10 (20820) Madrid, Spain
The ever developing opportunities for collective redress in the Netherlands
In the past ten years, the Netherlands has developed into a prime venue for (cross-border) collective settlements. This is testified to by the settlements in Royal Dutch Shell and Converium and, more recently, Ageas (formerly: Fortis). These matters concerned collective settlements with respect to damages allegedly suffered by (foreign) shareholders as a consequence of misleading statements.
These collective settlements were declared binding by the Amsterdam Court of Appeal under the Act on the Collective Settlement of Mass Damages, known in the Netherlands as the ‘WCAM’ (Wet Collectieve Afhandeling Massaschade). The WCAM is inspired by the U.S. damages class-action mechanism. The fundamental difference with the American system is that the WCAM requires that parties representing the purported injured parties first agree a settlement with the alleged wrongdoer(s). Subsequently, the parties representing (potential) injured parties and the alleged wrongdoer(s) request the Amsterdam Court of Appeals to declare the settlement binding on all injured parties, including those not represented in the discussions with the alleged wrongdoer and the application for a binding declaration of the settlement agreed in such discussions. If a settlement is declared binding, in its decision the Court sets a deadline within which aggrieved parties may choose to opt-out of the settlement, which otherwise binds them.
Apart from this mechanism for the binding declaration of collective settlements, Dutch law provides for the possibility for a foundation or association which pursuant to its articles of association represents the interests of a group of claimants, to file a claim against a purported wrongdoer. The (collective) claim may take various forms. The representative foundation or association may (for example) claim for specific performance, for avoidance of an agreement or for declaratory relief that the wrongdoer has acted unlawfully. Also, the representative organization may file a petition for preliminary witness or expert hearings.
Currently, parliamentary discussions are pending on proposals for offering representative foundations or associations the right to claim for damages. At the same time, stricter rules are proposed as to who may act as a representative of (alleged) injured parties. Under the proposed changes to the collective redress regime, claim vehicles are to meet stricter standards as to governance, funding, and representativeness. These measures are proposed to further enhance the effectiveness of the remedies available.
In sum, Dutch law provides for two separate mechanisms for the resolution of mass claims. These mechanisms have each proven effective. Their effectiveness is further increased by the fact that they may be applied in combination, i.e. a request for binding declaration of a settlement under the WCAM may be preceded by a claim for declaratory relief that the purported wrongdoer has in fact acted unlawfully. The legislator has proven pro-active in taking action to further improve the Dutch jurisdiction's status as a prime venue for the resolution of mass claims, also in cross-border matters.
Prof. B. van Zelst
Van Doorne N.V.
Jachthavenweg 121, 1081KM Amsterdam, P.O. Box 75265