1.1. Insurance Bill – Law Commission Revisions (UK)

The Law Commission published a revised draft Clause 11 to the Insurance Bill, which the Law Commission hopes will be agreed in time to be included in the Insurance Bill currently before the House of Lords. The new draft Clause 11, together with a note, relates to breaches of terms and warranties of an insurance contract that are irrelevant to the actual loss.

The original draft Clause 11 was not included in the Insurance Bill introduced to Parliament in July 2014, as there were some concerns from stakeholders that the Clause was uncertain. The concern related to the fact that the Clause may be interpreted to apply to terms that described the risk as a whole.

The revised Clause 11 applies to terms which could affect the risk of a specific type of loss occurring, or the risk that a particular type of loss would be more extensive. The Clause does not apply to terms which reduce the risk profile as a whole and provides that the insurer should only have to pay if the insured can show that the breach was totally irrelevant and could not have affected the actual loss suffered.

The Law Commission believes that the draft new Clause 11 captures its policy aims, and gives insurers and insureds more clarity with respect to the application of the statutory benefit.

To view the revised draft Clause 11, please see: http://lawcommission.justice.gov.uk/docs/insurance-clause_terms_not_relevant_to_actual_loss.pdf

To view the accompanying note to the revised Clause 11, please see:http://lawcommission.justice.gov.uk/docs/insurance-clause_terms_not_relevant_to_actual_loss_note.pdf

To view the Law Commission’s explanatory note relating to the Third Parties (Rights Against Insurers) Act 2010, referred to in the Insurance Bill, please see:http://lawcommission.justice.gov.uk/docs/Third_Parties_and_Insurance_Bill_2014.pdf

1.2. FCA – Brokers’ Conflicts (UK)

The UK Financial Conduct Authority (FCA) has recently reviewed the potential conflict of interest that may arise amongst brokers that use “integrated models”, including managing general agency (MGA) agreements, as a means to increase income.

The FCA is particularly interested in brokers whose internal systems for managing potential conflicts the FCA deems to be unsatisfactory. The consequences can be severe for those brokers whose systems the FCA considers to be inadequate. This includes expensive Section 166 Reviews (at the brokers’ expense) and potentially large fines. It would be prudent for affected brokers to take early action in order to avoid later problems and financial implications.

This follows the FCA Thematic Review of brokers that arrange cover for SMEs. The FCA was highly critical of what it considers to be a systematic conflict of interest at the centre of business models used by the brokers. The FCA was particularly critical of The FCA “integrated models”, where brokers undertake broking activities as agent for insureds, in addition to acting as agent of insurers. The FCA perceives there to be a conflict of interest between the broker’s fiduciary duties to its client insured and to the insurer, given the broker’s own financial interest.

Unfortunately, there is no detailed guidance as to what amounts to an “effective control framework”. In light of this, brokers may well think it advisable to obtain advice on their structures and procedures, or otherwise risk the implications of a Section 166 report.