Perspective on the Mactavish report

The Mactavish report identifies a series of issues around the insurance placing process. What stands out is that these issues appear now to be taking place against a background of dynamically changing risk exposures within insurance buyers’ organisations. Under English insurance law the responsibility for making a fair presentation of the risk falls squarely on the insurance buyer. A failure to do so can put the entire insurance protection at risk. The ultimate objective for all parties in the insurance transaction – buyers, brokers and insurers – should be certainty as to the agreed risk transfer. That is the best way to avoid disputes which are costly, time consuming and serve none of their interests. If the Mactavish Protocols are adopted even in part then insurance buyers are likely to stand a better prospect of getting claims paid when they need it most – at the critical time of a major loss.

Ignorance of the law is no defence, goes the old adage. The latest Mactavish Report suggests that when it comes to insurance law, however, a material number of insurance buyers may be hoping that the old adage is not true. The reality is that English insurance law in the 21st century contains a number of pitfalls into which insureds must take care not to fall. Indeed many insurance buyers perceive that the scales are still tipped in favour of the insurer. The on-going review of insurance contract law by the Law Commissions of England and Wales and Scotland is unlikely to lead to any changes in the law for insurance buyers in the commercial arena until at the very earliest 2013.

Against that background the Mactavish report identifies a series of issues – insurance buyers failing to check crucial documents, insurance underwriting submissions which do not reflect the risks presented and insurers and brokers not understanding the risks insured – which have regularly come before the English courts in insurance cases over the last several years. What stands out from the Mactavish report is that these familiar issues appear now to be taking place against a background of quick change in underlying risk exposures with the result that the risks associated with achieving appropriate insurance protection fall almost entirely upon buyers.

Mactavish describe a picture of a continuing soft market in which transaction costs are driven ever downward, with the effect that, Mactavish believe, insurance for commercial organisations is treated as a commodity to be purchased on price alone (including how much buyers are prepared to pay their brokers). From a legal perspective, however, the risk exposures Mactavish identify indicate that more attention may need to be paid to the preparation of insurance submissions, developing a deeper understanding of risks in the underwriting process and a more rigorous approach to insurance policy wordings if policy disputes are to be minimised or avoided.

Most insurance lawyers will have no difficulty in confirming that the claims market, which was for a number of years in the second half of the last decade “quiet”, has now begun to show signs of heating up. Claims arising out of the financial crisis are beginning to make an impact. Certainly the recently published statistics from the Royal Courts of Justice cited by Mactavish confirm our experience that contested claims and the volume of litigation is now starting to rise. Further, it seems to some policyholders that, year on year, they have to work harder to collect their claims and that claims settlement is generally taking longer to achieve on large and complex losses. It may, however, be the correction from soft market to hard market which precipitates a step change in the number and severity of insurance disputes in the London market, just as was the case when the soft market of the late 1990s corrected in the period either side of “9/11” in 2001. Mactavish’s findings could cause some insurance buyers to be concerned that when the market correction comes and the “tide” of a relatively benign claims environment “goes out”, a material number of them may be found to be swimming naked.

So do the Mactavish Protocols make sense from the perspective of an insurance lawyer to the challenges that Mactavish identify? The answer is fundamentally “yes” given that it must be in all parties’ interests to reduce the number of disputes. Do we envisage that there will be some significant practical challenges to implementing the Protocols? Undoubtedly there will be. Take the proposal of enhancing buyer understanding of insurance law on an

annual basis. While continuing professional development is a concept familiar to insurance lawyers, insurance practitioners and brokers, it represents a real practical difficulty to buyers who do not have the ability to carry in-house insurance expertise. The delivery of appropriate legal education on insurance law issues represents a major challenge but one we believe the insurance industry and lawyers serving it will be able to meet in a cost effective way with appropriate imagination.

Buyers that have a clear understanding of the duty of disclosure and of the important differences between insurance contract law and the general contract law inevitably take their disclosure obligations seriously. The attention focussed on underwriting submissions and engagement with insurers will increase as a result. It also follows that buyers are likely to expect their brokers and insurers to engage on the same level and, presumably, will recognise that this is likely to increase the cost of insurance.

However, the upside is that all of these proposed steps should be valuable in ensuring that risks are understood by all parties so that insurance contracts properly reflect the agreed transfer of risk.

As to Mactavish’s proposals regarding policy wordings it is fair to observe that the FSA’s Contract Certainty project has seen a profound change for the better in the way in which insurance contracts are documented in the London market in particular. The days of policy wordings issued months or years after the contract had been concluded are now happily a rarity. No doubt there is still more that could be done to improve policy wordings and the Mactavish Protocols represent an important step in the right direction. To put this in context, our experience is that whilst commercial organisations often seek legal advice in connection with M&A, real estate, finance, competition and many other commercial matters, it is much less common for them as insurance buyers to seek a detailed policy wording review to gain comfort that the policy responds to the exposures they expect it to cover.

So in summary, do we expect there might be some opposition to or scepticism over the Mactavish Protocols?

Will the Protocols give rise to some difficult legal and regulatory issues to be worked through? On both counts: yes. The ultimate objective for all parties in the insurance transaction – buyers, brokers and insurers – should be certainty as to the agreed risk transfer. That is the best way to avoid disputes which are costly, time consuming and serve none of their interests. If the Mactavish Protocols are adopted even in part then insurance buyers are likely to stand a better prospect of getting their claims paid when they need it most – at the critical time of a major loss.