The Lloyd's 2010 Claims Scheme (2010 Scheme), which came into force on 1 January 2010, introduces a three-tier categorisation of claims. It places the responsibility for handling claims on managing agents of leading and second Lloyd's syndicates. Those managing agents are expressly stated to act not only on behalf of themselves but also on behalf of the following market and, in so doing, are required to exercise the reasonable care of a reasonably competent managing agent. This alert looks at the key features of the 2010 Scheme and what steps managing agents can take to limit their potential liabilities.
Why is this important?
If the managing agents of the leading and second Lloyd's syndicates fail to exercise the prescribed standard of care in handling claims under the 2010 Scheme, they could be exposed to claims by the managing agents and members of the following Lloyd's syndicates on whose behalf they are now expressed to act.
Additional key points
- The 2010 Scheme:
- will run for a period of 12 months
- applies to claims under policies incepting on or after 1 January 2010
- applies to specific risk codes – essentially certain Casualty Treaty, Marine and Property (D&F) – notified via ECF (it does not apply to claims notified from contracts under binding authorities).
- It is anticipated that the scope of the 2010 Scheme will be extended to other classes of business following completion of the 12 month trial period.
- The Lloyd's 2006 Claims Scheme continues to cover all claims which do not fall under the scope of the 2010 Scheme.
- The 2010 Scheme introduces three categories of claim:
- claims in excess of £5m (category 1)
- claims between £100k and £5m (category 2)
- claims less than £100k (category 3)
- Category 1 and 2 claims will be handled by the managing agent of the leading Lloyd's syndicate and the second Lloyd's syndicate each, on behalf of themselves and the following Lloyd's syndicates. Category 3 claims will be handled solely by the managing agent of the leading Lloyd's syndicate.
- If there is disagreement between the managing agents of the leading and second Lloyd's syndicates which remains unresolved:
- in the determination of a category 2 claim, those managing agents must consult with the managing agents of the following Lloyd's syndicates in order to agree the way forward
- in determination of category 1 claims, the managing agent of the leading Lloyd's syndicate must convene a market meeting to which all following Lloyd's syndicates must be invited.
- In respect of category 1 claims, a market meeting can also be requested at any time by the managing agents of one or more following Lloyd's syndicates who have underwritten in the aggregate at least 50% of the insurance (excluding any share of the insurance underwritten by a non-Lloyd's insurer).
- The managing agent of a leading Lloyd's syndicate may outsource claims handling to a third party, provided it is properly documented and notified to the managing agents of the following Lloyd's market. There are restrictions on the circumstances in which a second Lloyd's syndicate may outsource to a third party other than XCS.
- The 2010 Scheme includes provisions capping the total liability of managing agents in either the lead or second lead roles under the scheme to all members of following Lloyd's syndicates, whether in contract, in tort, in relation to a breach of fiduciary or statutory duty, or otherwise. These caps are £2m in respect of any one claim and £10m in respect of all claims made in any one calendar year.
In light of the changes under the 2010 Scheme, it is our view that in order to limit potential liabilities, managing agents of leading and second Lloyd's syndicates should consider the following issues:
- whether they have appropriate professional indemnity insurance cover;
- when outsourcing to third party administrators (TPAs):
- those TPAs they utilise have the necessary expertise, a proven track record in handling the claims and have adequate professional indemnity insurance cover; and
- that they enter into agreements which include clear settlement and handling authority levels, duties and responsibilities, and an indemnity in respect of any claims against the managing agent that it has failed to handle claims to the standard required under the scheme, where that handling was undertaken by the TPA;
- the scope of authority conferred on the leading underwriter (if the slip contains a leading underwriter clause) and how that impacts on the relevant duties under the 2010 Scheme; and
- the need for all their claims processes, procedures and decision making to be documented, so they can demonstrate if challenged that they have fulfilled the necessary standards. (We have also seen FSA ARROW Reports criticising managing agencies for inadequate documentation of claims processes and lack of evidence that processes were being actively followed).