In our Law Now last week we identified some urgent issues that the market would need to think about as a possible Grexit emerged as a real possibility. Seven days on, following the “No” vote in Greece, “thinking the unthinkable” has potentially developed into a need to “plan for the thinkable”.
Of more immediate concern is, arguably, the need to address what should be done with instant premium and claim obligations, with the political situation in a great degree of flux, Greek banks closed and increasingly frequent warnings about real solvency concerns going forward.
The market has been helpfully guided to the potential issues by the reminder guidance issued by the LMA on 25 June and in the current banking lockdown these and other issues are pertinent to consider in the specific Greek context.
The lockdown of the Greek banking system raises immediate issues of how premium payment obligations may be discharged, whether they have been discharged through risk transfer provisions, and what the legal result is of on-going non-payment.
Mere non-payment of premium does not, alone, constitute an event terminating a contract of insurance or reinsurance; the ability otherwise to do so will be governed by relevant express contract terms. There can be no certainty or comfort that force majeure clauses can be relied upon (in fact the addressing by a contract of Eurozone issues cuts across those reliance arguments), nor is it certain that such contracts are frustrated by events such as we see in Greece at the moment.
The LMA guidance provided a reminder that in 2012 the possibility of a Eurozone exit was canvassed generally in the market, and the use of “continuity clauses” (to offer certainty that policies could not terminated) was suggested; if such clauses exist then this will determine the matter.
What certainly will be pertinent to consider is whether policies contain clauses making payment of premium a condition of (on-going) cover, such as premium payment warranties. Simple non-payment by a due date may allow for termination and if that is the case, and monies are not paid or deemed paid to (re)insurers, then unless there is successful renegotiation or broking away of the issue, a termination of the contract may be a lawful result.
Relevant will be the choice of law and the forum for the hearing of any issue - very different outcomes to these questions may result if any legal issues fall to be determined under Greek law or in Greece, whatever the governing law to be applied to the dispute.
Quite likely the banking closures may mean that monies are trapped in the intermediary chain; in that event whether premium payment obligations are breached will also depend on an analysis of whether there has been any relevant risk transfer. If a premium has been paid to a local broker but has not been remitted to London, it is necessary to consider whether risk transfer has been agreed by the insurer with the local broker, as if there has been, then it may not be legally possible to terminate the policy. However, where there is no risk transfer to the broker, the insured will be vulnerable to termination of the insurance contract in the event of delay or non-payment of the premium.
The interplay between local laws and terms of business between the parties will again be relevant to determine the point at which any premium payment obligations are satisfied by transmission in the (international) intermediary chain. In each of the above cases, with a Eurozone exit, an insurer may itself have grounds for concern over the solvency of the banking system in which the monies are locked, as well as the substance and application of any fiscal law change that introduces a new Drachma, with the resulting devaluation of currency and asset base that this is forecast to bring.
The market will be aware that where marine business is being transacted, the London market broker may be liable to pay the premium whatever the actual status of the transmission of premium monies.
In any Grexit, insurers and brokers alike will need to ensure they have fully clarified the relevant premium payment arrangements
If a Eurozone exit occurs, and a new currency is issued, before a claim payment has been made, both the insurer and the broker will need to confirm the currency of payment and to confirm the party to whom remittance is to be made. Releases will need to be carefully drafted.
If claims monies have been remitted to an intermediary when a Euro exit happens, then the risk transfer obligations that have been agreed, if any, will need to be considered to see if the payment constitutes payment to the insured. If no risk transfer terms are in place then payment to a London broker may constitute payment to the insured; if, however, monies rest with a local Greek broker, this may not constitute payment to the insured – advice will need to be taken on the Greek law position and its relative impact.
Direct settlements to insureds, accompanied by appropriate releases, may seem a more attractive risk management option in these scenarios. For marine claims, the insurer is considered directly responsible to the insured for claims and return premiums and if section 53 of the Marine Insurance Act applies then the risk of monies in transit through the intermediary chain will rest with the insurer.
For coverholder business, one can reasonably expect funds held by the local coverholder to be held as agent of the insurer - but again the application of local Greek law would need to be considered. Local solvency issues and issues over predomination of local currency would remain.
Complex issues can also be foreseen in reinsurance scenarios, for example whether back to back cover remains with a potential currency clash upon any redenomination of currency at a local Greece level.