In review: the essentials of insurance and reinsurance law in United Kingdom (England & Wales)

All questions

Introduction

i The UK insurance and reinsurance market

The UK insurance and reinsurance industry is the largest in Europe and the fourth largest in the world.²

Commercial insurance business in the UK is dominated by the ‘London Market’, which is the world’s leading market for internationally traded insurance and reinsurance.

The London Market has two strands: the company market and the Lloyd’s market. Traditionally it has been primarily a ‘subscription market’ in which the broker places a risk with a variety of insurers willing to accept a share.

The company market is composed of corporate insurers and reinsurers. It is organised through a market body, the International Underwriting Association, and operates principally out of the London Underwriting Centre.

Lloyd’s is not itself an insurance company but rather a society of members, largely corporate but still involving some individuals, that accepts insurance business through their participation in competing ‘syndicates’. Each syndicate is administered by a ‘managing agent’ and makes its own business decisions, but Lloyd’s provides both a physical location in which to carry out this business and a regulatory framework of rules with which the syndicates must comply. Lloyd’s also manages the unique regime that protects the security underlying the Lloyd’s market.

A key feature of the London Market is the presence of highly skilled ‘lead underwriters’ whose judgements on the terms to be offered for different risks are followed by other insurers in London and overseas. Another important attribute is geographical concentration, with many insurers and intermediaries located in the EC3 district, an insurance hub in the City of London. Thus, brokers have a personal relationship with the underwriters with whom they deal.³

ii The legal landscape for insurance and reinsurance disputes

It is common for insurance and reinsurance contracts placed in the London Market to be governed by English law and subject to the jurisdiction of the English courts, or heard in London arbitration, even where, as is often the case, not all the parties to those contracts are UK companies. There are several reasons why London is a premier venue for insurance and reinsurance dispute resolution.

Perhaps the most important factor is the specialist judiciary who are familiar with the practices of the London Market. Disputing parties may expect that the judges of the Commercial Court (a specialist court handling complex national and international business disputes), and indeed the appellate courts, understand the London Market.

Second, England and Wales have a highly developed body of insurance and reinsurance case law. Court judgments create binding precedent, such that they can be relied on to determine future disputes. This means that parties can expect a fair and rigorous judicial system and a reasonable degree of predictability.

Arbitration continues to be a popular alternative to court proceedings (particularly for reinsurance disputes), in part at least because of its confidential nature. The pool of arbitrators available to deal with insurance and reinsurance disputes benefits from many of the same attributes as the court system and parties can be confident of a fair resolution of the issues by arbitrators who understand them.

The English courts encourage the use of alternative dispute resolution, and in particular mediation, to settle insurance and reinsurance disputes.

Regulation

i Introduction

The regulatory sections of this chapter describe the regulatory position as it applies at the time of writing; however, this is subject to change following ongoing discussions and developments post-Brexit that are likely to impact the regulatory framework in the near future. In particular, the Financial Services and Markets Bill⁴ is currently before Parliament and is intended to set out the basis for a new regulatory framework for financial services and to repeal tranches of retained EU law in the sector. In November 2022, the UK government also announced the ‘Edinburgh Reforms’⁵ to build on and supplement the Financial Services and Markets Bill. A number of changes to regulatory structure proposed in these various reforms are currently being implemented or consulted upon, and we have highlighted below, where appropriate, the areas in which reform is to be expected during 2023.

ii The insurance regulator

Since 1 April 2013, the regulation of insurers and brokers (as well as other financial services providers) has been divided between two regulators: the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). The PRA is responsible for prudential matters (e.g., regulatory capital requirements) while the FCA is responsible for conduct of business issues (e.g., the distribution of products). Insurers are regulated by both the PRA and the FCA, whereas insurance intermediaries such as brokers are regulated only by the FCA.

The regulation of the Lloyd’s market is more complex. Lloyd’s managing agents are regulated by the PRA, FCA and Lloyd’s itself. Lloyd’s brokers and members’ agents are regulated by the FCA and Lloyd’s. However, Lloyd’s members (who provide capital and participate in Lloyd’s syndicates) are only subject to Lloyd’s regulation. The Society of Lloyd’s is regulated by the PRA and the FCA.

On 1 April 2015, the FCA also became a ‘concurrent regulator’ alongside the Competition and Markets Authority (CMA) with ‘concurrent powers’. These powers are in addition to its regulatory powers under Financial Services and Markets Act 2000 (FSMA) as amended by the Financial Services Act 2012. The FCA can now enforce the prohibitions in the Competition Act 1998 on anticompetitive behaviour in relation to the provision of financial services, together with investigatory powers under the Enterprise Act 2002, to carry out market studies and to make market investigation references to the CMA relating to financial services.

iii Regulatory framework

In the UK, insurers and reinsurers have, since 1 January 2016, functioned under the Solvency II Directive (Solvency II)⁶ in respect of their insurance and reinsurance activities. Following the UK’s exit from the EU (Brexit),⁷ the UK has retained the laws, regulations and rules that originally implemented Solvency II, insofar as possible, and has replicated EU Regulations made under Solvency II in UK law and regulation to ensure the regime continued to operate efficiently.⁸ Like its EU equivalent, the UK Solvency II regime is also applied in the UK principally by FSMA (as amended) and the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO) among other statutory instruments and rules,⁹ which deliver the structure for the regulation of insurance and reinsurance activities. The directly applicable Solvency II delegated acts that used to apply prior to Brexit have also been transposed into UK law and continue to apply. They provide comprehensive guidelines on solvency and capital calculations, governance and reporting (including the use of these requirements at group level).The FCA handbook and the PRA rulebook provide rules and guidance on governance, capital and conduct of business obligations. In November 2022, following a period of consultation, the UK government announced proposals for the reform of the Solvency II and the development of a new ‘Solvency UK’ regime. The PRA is engaging with stakeholders about the detail of these changes, which will be implemented through the PRA Handbook.

The Insurance Distribution Directive (IDD)¹⁰ is the EU’s framework for regulating insurance intermediaries and distributors. The IDD became effective in the UK on 1 October 2018. Following Brexit, the UK has used statutory instruments to replicate IDD Regulations in UK law and regulation.¹¹ The IDD and the corresponding UK legislative requirements deal with the authorisation, ‘passporting’ and general regulatory requirements for insurance and reinsurance intermediaries and distributors. It also encompasses organisational and business requirements for insurance and reinsurance undertakings. Insurance distribution is, however, one of the areas that is subject to the UK government’s overhaul of the regulation of financial services. In particular, the Insurance Distribution (Regulated Activities and Miscellaneous Amendments) Order 2018 (SI 2018/546) and Insurance Distribution (Amendment) (EU Exit) Regulations 2019 (SI 2019/663), which had replicated IDD rules in UK law and regulation following Brexit, are among the legislation to be revoked and replaced when the Financial Services and Markets Bill is passed into law.

iv Principle of ‘regulated activities’

The UK regulatory regime prohibits the performance of regulated activities within the UK by unauthorised firms. These include insurer activities such as effecting and carrying out contracts of insurance, and distribution activities such as arranging, advising upon, selling and administering contracts of insurance.

It is a criminal offence to perform a regulated activity without being an authorised (or exempt) firm.¹² Additionally, an authorised firm commits a regulatory breach if it does not have specific permission (or exemption) for a particular regulated activity that it performs.

Provisions in the legislation can deem regulated activities to be taking place in the UK (e.g., where there is a binding authority granted by an offshore insurer to a UK broker) and so care needs to be exercised by offshore insurers seeking to underwrite risks in the UK.

v Position of brokers

Insurance intermediaries such as brokers are also required to be authorised when they perform regulated activities.

vi Requirements for authorisation

A firm intending to carry on insurance or reinsurance business must obtain Part 4A FSMA permission from the PRA unless it is exempt. The FCA must also consent to the PRA’s granting authorisation. Such firms are required to meet a number of threshold criteria set out in FSMA, primarily relating to geographic location, regulatory capital and systems and controls. A condition of obtaining permission is that the threshold criteria must be satisfied on authorisation and must continue to be maintained.

Authorisation for insurance intermediaries is similar to that of insurers except that application for authorisation is made to the FCA alone and the FCA has a shorter time window (three months) than the PRA (which has six months) in which to process the application and make its decision.

For both insurers and brokers, certain senior individuals will need to be assessed as fit and proper persons and able to perform senior management functions and must be ‘approved persons’ (see Section II.vii).

Application for authorisation is made to the PRA for insurers and to the FCA for intermediaries (such as brokers).

Following Brexit, UK regulators have implemented a temporary permissions regime (TPR) that allows EEA firms that had passported into the UK prior to the end of the transition period to continue to do so for a limited period until they obtain UK authorisation. The relevant period is three years from the end of the transition period on 1 January 2021.

vii Regulation of individuals employed by insurers

Certain activities, such as being a director (including a non-executive director) or a chief executive (or a manager who can exert significant influence over the business) of an insurer or insurance intermediary, are controlled functions, meaning that the appropriate regulator must approve an individual in that role before they can perform those functions. That approved person is then subject to the senior managers and certification regime (SM&CR). Other employees of the company whose role could cause significant harm to the firm are also subject to the SM&CR. The SM&CR sets out the responsibilities of the individual, including those around personal conduct. The PRA and FCA are currently reviewing SM&CR with a view to improving the current regime.

viii The distribution of products

The IDD was implemented in the UK through domestic legislation and FCA rules prior to Brexit.¹³ Until the UK repeals these rules, intermediaries will need to continue complying. The Insurance Distribution (Amendment) (EU Exit) Regulations 2019¹⁴ came into force on 31 January 2020. The purpose of the Regulations is to correct deficiencies in retained EU law relating to the IDD that arose from the UK leaving the EU. The Regulations are, however, among those that are due to be revoked and replaced when the Financial Services and Markets Bill becomes law.

ix Compulsory insurance

Within the UK, the principal compulsory covers are motor liability and employers’ liability. There are also requirements specific to certain industries such as nuclear power, merchant shipping (pollution cover) and riding establishments. The FCA requires insurance intermediaries such as brokers to have professional indemnity cover and indeed many professions (such as the legal profession) require such cover as a condition of membership.

x Compensation and dispute resolution regimes

If a regulated firm cannot resolve a customer complaint, then certain complainants – generally consumers, small businesses and some other small organisations – have the right to use the services of the Financial Ombudsman Service.

If a regulated firm is unable to meet its financial obligations, for example because of insolvency, then the Financial Services Compensation Scheme is available to compensate policyholders. However, the regime is generally restricted to consumers and small organisations – although there are important exceptions for compulsory insurance (notably employers’ liability) where large organisations are also able to bring a claim. Compensation available under the scheme will also depend on the type of claim.

xi Taxation of premiums

Insurance premiums, for general insurance, are subject to insurance premium tax (IPT) where the risk is located in the UK. This also applies to overseas insurers covering a risk located in the UK.

Reinsurance is exempt from IPT, as is insurance for commercial ships and aircraft and insurance for commercial goods in international transit. Premiums for risks located outside the UK are not subject to IPT but may be liable to similar taxes imposed by other countries.

Insurance premiums are exempt from UK value added tax (VAT), as are commission payments to brokers and insurance agents. However, the analysis is more difficult in relation to payments between entities in the insurance ‘supply chain’, such as introducers, and case law is still developing as to which of those payments are VAT-exempt and which are not.¹⁵ His Majesty’s Revenue and Customs has updated its internal guidance on tax, confirming that an introducer-appointed representative selling leads is not perceived to act as an intermediary and therefore is unlikely to be exempt from VAT unless it meets certain requirements.¹⁶

xii Other notable regulated aspects of the industry

A purchaser of a regulated firm such as an insurer or intermediary requires prior consent from the appropriate regulator. It is a criminal offence¹⁷ to acquire or increase control in an insurer, reinsurer or intermediary without notifying and obtaining prior approval from the relevant regulator, which can lead to a fine and the transaction being held void. A purchase of a book of business from an insurer will require both regulatory and court consent under the UK’s Part VII FSMA process. In terms of the regulators, the PRA will be principally responsible for the process. However, the FCA also has an interest and will need to satisfy itself that, as a minimum, the transfer will not adversely impact the customers of the firms involved in the transfer.

Both regulators are able to make representations to the court during the transfer process. The PRA is also required to consult the FCA at the start of and during the transfer process.

The legal framework

Insurance and reinsurance law

i Sources of law

The basis of insurance law lies in the general law of contract. Until August 2016, the most significant legislative provision in relation to commercial insurance was the Marine Insurance Act 1906 (MIA), which codified the case law as it existed at the time. In August 2016, however, the Insurance Act 2015 (IA15) came into force. This introduced the most significant changes to English commercial insurance law in over 100 years and swept away central provisions of the MIA (although parts of the MIA remain in force). The IA15 applies to contracts and variations of contracts agreed on or after 12 August 2016. Most provisions of the MIA and IA15 apply equally to marine and non-marine insurance and to reinsurance. Other relevant legislation includes the Consumer Insurance (Disclosure and Representations) Act 2012, which applies to consumer contracts.

ii Making the contractEssential ingredients of an insurance contract

Under English law, an insurance contract is an agreement by the insurer to provide, in exchange for a premium, agreed-upon benefits to a beneficiary of the contract upon the occurrence of a specified uncertain or contingent future event, affecting the life or property of the insured.

The distinguishing features of a contract of insurance are the transfer of risk and the requirement for an insurable interest. These are considered in more detail below.

The transfer of risk when the uncertain event occurs

The contract must be such that, when the insured-against event occurs, the insurer responds by bearing all or part of the risk. Often, this response will mean that the insurer pays money to the insured. However, the contract may require the insurer to provide benefits in kind, rather than a monetary payment, such as the reinstatement of property damage,¹⁸ the cost of a hire car while the insured vehicle is repaired or the restoration of a computer network.

The insured-against event must be uncertain in its occurrence.¹⁹ This uncertainty is tested at the time that the contract is concluded.²⁰ The element of uncertainty may relate to whether the event will occur at all (e.g., a house fire), how often or to what extent the event will occur (e.g., damage to taxis) or when a certain event might occur (e.g., death).

The requirement of insurable interest

There is no all-embracing definition of insurable interest. In practice, the requirement has generally been taken to mean that the insured must have a legal or equitable relationship to the adventure or property at risk and would benefit from its safety or may be prejudiced by its loss. This can be an issue in particular in relation to complex forms of insurance-backed financial instruments.

Modern case law suggests that the courts will lean in favour of finding insurable interest where possible. It is obviously unattractive for insurers to take the premium and then deny the existence of an insurable interest.

Utmost good faith

Unlike other commercial contracts, insurance contracts are contracts of utmost good faith, which imposes an obligation of ‘the most perfect frankness’ on the parties. For contracts entered into before 12 August 2016, the statutory basis for this obligation is set out in Section 17 MIA, which imposes a duty on the party seeking insurance to disclose all material facts pertaining to the risk of which it is, or ought to be, aware, and to avoid misrepresenting any of the material facts.

Under the MIA a similar duty is imposed on the insured’s placing broker.

Material facts are judged objectively and are defined as those that would be likely to influence the judgement of a hypothetical prudent insurer in determining whether and on what terms to accept the risk, and in fixing the level of the premium. In this regard, it is not necessary to show that a prudent insurer would have refused the risk, or even charged a higher premium, but enough to show that it would have liked the opportunity to consider the position.²¹ In the event of a material misrepresentation or non-disclosure, the insurer is entitled to avoid the contract from inception if it can demonstrate that the individual underwriter to whom the misrepresentation or non-disclosure was made was induced by that misrepresentation or non-disclosure to write the contract on the terms that he or she did.²²

Following a lengthy review of British commercial insurance law by the Law Commissions, IA15 was passed in 2015 and came into effect on 12 August 2016. It introduces, however, several changes to the insured’s pre-contractual duty. IA15:

1. replaces the pre-contractual duty of disclosure with a ‘duty of fair presentation’, whereby the insured is required to disclose all material circumstances about the risk or give the insurer sufficient information to put it on notice that it needs to make further enquiries for the purpose of revealing all the material circumstances about the risk. This puts a greater emphasis on the insurer to ask questions about the risk and to make clear what information it requires;
2. replaces the single remedy of avoidance for breach of the duty with a system of graduated remedies based on what the insurer would have done had it received a fair presentation; and
3. requires the insured to carry out a ‘reasonable search’ prior to the placement for material information available to it within its own organisation and ‘held by any other person’.

Consumer insurance has already been the subject of similar reforms, as enacted by the Consumer Insurance (Disclosure and Representations) Act 2012.

Recording the contract

Insurance contracts are usually evidenced by a written policy, and the London Market has introduced the standard form ‘market reform contract’ that is widely used in practice and that aims to increase contractual certainty.

iii Interpreting the contractGeneral rules of interpretation

Insurance and reinsurance contracts are subject to the same general principles of construction that apply to other commercial contracts. The guiding principles are as follows.

Interpretation is the ascertainment of the meaning that a document will convey to a reasonable person having all the background knowledge that would reasonably have been available to the parties in the situation in which they were at the time of the contract.

The background knowledge includes anything that would have affected the way in which the language of the document would have been understood by a reasonable person. This is subject to two points: first, that the background knowledge should have been reasonably available to all the parties; and second, that the law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent.

Incorporation of terms

Reinsurance contracts often contain general words such as ‘all terms, clauses and conditions as original’ or ‘as underlying’. Such general words are not necessarily sufficient to incorporate a term from the insurance contract into the reinsurance contract. In HIH Casualty & General Insurance Ltd v. New Hampshire Insurance Co,²³ the court held that a term will be incorporated only if it:

1. is germane to the reinsurance, rather than being merely collateral to it;
2. makes sense, subject to permissible manipulation, in the context of the reinsurance;
3. is consistent with the express terms of the reinsurance; and
4. is apposite for inclusion in the reinsurance.

By way of example, arbitration clauses, jurisdiction clauses and choice of law clauses are unlikely to be incorporated from an insurance contract into a reinsurance contract because they are not considered germane to the reinsurance. These provisions should, therefore, be dealt with specifically in the reinsurance contract.

Types of term in insurance and reinsurance contracts

Terms in insurance and reinsurance contracts may be divided into three broad categories: conditions, conditions precedent and warranties. Of these, the latter two require some comment.

Conditions precedent

A term can be a condition precedent to the existence of a binding contract, the inception of the risk or the insurer’s or reinsurer’s liability. This is a matter of the wording of the particular clause. Whatever the type of condition precedent, there is no need for an insurer or reinsurer to prove it has suffered any prejudice before it can rely on a breach of the term. A condition precedent to the contract must be satisfied, otherwise the contract will not come into being. A condition precedent to the inception of the risk presupposes a valid contract but one where the risk does not attach until the condition precedent has been met. A condition precedent to the contract or to the risk may, for example, relate to the provision of further information by the insured or payment of the premium. Both types (in the absence of any specific wording) mean that the insurer cannot be liable for any loss that pre-dates the fulfilment of the condition precedent.

A condition precedent to the insurer’s liability usually means that the insurer will not be liable for a claim unless the condition precedent is satisfied but the contract will generally continue in force. These conditions precedent are often concerned with the claims process. For example, the period within which notification of a claim must be given is often expressed as a condition precedent to the insurer’s liability.

Warranties

An insurance warranty is not the same as a warranty in an ordinary commercial contract. For contracts entered into before 12 August 2016, warranties are defined by Section 33(1) MIA as ‘a promissory warranties, that is to say, warranties by which the assured undertakes that some particular thing shall or shall not be done, or that some condition shall be fulfilled, or whereby he affirms or negatives the existence of a particular state of facts’. A warranty is a way in which the insurer or reinsurer can procure from the insured or reinsured a guarantee of the accuracy or continued accuracy of a given fact or a promise that certain obligations will be fulfilled.

Under the MIA, the effect of a breach of warranty is to discharge the insurer automatically from liability as from the date of breach. The insurer is not required to show that the warranty was in any way material to the risk or that the breach has contributed to the loss.

The severity of the remedy for a breach of warranty under the MIA attracted considerable criticism from insureds and their brokers, and IA15 radically amended the law relating to warranties when it came into force in August 2016. Under IA15:

1. A breach of an insurance warranty no longer automatically discharges insurers from further liability under the contract.
2. Instead, the contract is suspended until the breach of warranty is remedied. Insurers remain liable for losses occurring or attributable to something happening prior to the breach but are not liable in respect of losses occurring or attributable to something happening during the period of breach. Once the breach is remedied, insurers are liable for losses attributable to something happening after the remedy (subject to the remaining terms of the contract).

iv Intermediaries and the role of the broker

English law usually views an insurance broker as the agent of the insured for the purposes of placing an insurance contract. The essence of the relationship between the broker and the insured is one that gives rise to a number of fiduciary duties, including an expectation that the broker will put the insured’s interests before its own.

Commission

Notwithstanding that the broker is the agent of the insured at placement, the commission or brokerage that it earns when an insurance contract is placed may be agreed and paid by the insurer – often as a percentage of the premium.

Consistent with ensuring that brokers act in the best interests of their clients, English regulation places a strict prohibition upon additional payments that are contingent upon the amount of business placed by the broker with a particular underwriter or the profitability of the business being entered into by an underwriter.

v ClaimsNotification

An insurance contract, particularly in liability classes, often requires the insured to notify a claim to its insurer in a particular way and within a particular time frame for the claim to be valid. Prompt notification is often stated to be a condition precedent to coverage under a policy and failure to comply with the notification requirements can give an insurer or reinsurer a complete defence to the claim.

The specific terms of a notification clause are, of course, crucial. Liability policies will, however, usually require notification of a ‘circumstance’ that ‘may’ or ‘is likely to’ give rise to a claim. ‘Circumstance’ has not been judicially defined. ‘Likely to’ has been held to mean a 51 per cent chance of a claim.²⁴ ‘May’ means a circumstance that ‘objectively evaluated, creates a reasonable and appreciable possibility that it will give rise to a loss or claim against the assured’.²⁵ Finally, the term ‘give rise to a claim’ requires a causal as opposed to a mere coincidental link between the circumstances notified and the ultimate claim.²⁶

Good faith in claims

As noted above, insurance contracts are contracts of the utmost good faith. The duty of good faith is mutual and is not limited to the pre-contract negotiations. Nonetheless, the courts have preferred to use an independent common law remedy of forfeiture to regulate fraudulent claims.

IA15 seeks to clarify insurers’ remedies for fraudulent claims. The statutory regime, which came into effect in August 2016, stipulates that, in the event of a fraudulent claim, the insurer will have no liability to pay the claim and will have the option, by notice to the insured, to treat the contract as having been terminated from the time of the fraudulent act (and to retain all the premiums); however, the insurer will remain liable for legitimate losses before the fraud. The burden is on the insurer to prove fraud by an insured, and any allegations of fraud must be pleaded specifically.

Prior to the coming into force of the Enterprise Act 2016 (EA16) on 4 May 2017 under English law punitive damages against an insurer or reinsurer were not available for breaches of this duty; nor could an insurer be made to pay compensatory damages for any losses caused by an unreasonable declinature of a claim or delay in processing it. From 4 May 2017, however, EA16 introduced a new Section 13A into IA15, which implies a term into every insurance contract subject to English law made on or after 12 August 2016, requiring insurers and reinsurers to pay claims within a reasonable time. A breach of that term gives rise to a right to claim damages. However, there is a special one-year limitation period for such a claim; and damages will be subject to the usual criteria for assessing contractual damages, which are that the loss must have been: (1) foreseeable when the contract was entered into; (2) caused by the breach of contract; (3) not too remote; and (4) mitigated against by the insured having taken all reasonable steps.

Dispute resolution

i Jurisdiction, choice of law and arbitration clauses

It is usual for the parties in their contract to submit to the courts in a selected jurisdiction to hear disputes arising between them. The parties may also agree that any dispute is to be determined by arbitration rather than in the courts by insertion of an arbitration clause. Arbitration may be favoured for a variety of reasons but in particular for confidentiality. English courts generally will uphold and enforce these choices.

ii LitigationLitigation stages

Civil proceedings in the High Court are governed by the Civil Procedure Rules (CPR).²⁷ Once proceedings have been commenced and written statements of a case filed and served, the litigation stages are as follows:

1. case management conference (the judge will set down the pretrial timetable);
2. disclosure (each party is under a duty to undertake a reasonable search for, and disclose to the other parties, documents on which they rely, those that adversely affect their own case and those that support the other party’s case). Documents attracting legal advice or litigation privilege are not required to be made available for inspection by the other party. The duty of disclosure continues until proceedings have been concluded;
3. witness statements (see below);
4. expert reports (see below);
5. trial; and
6. appeal – an unsuccessful party may, with the permission of the court, appeal an order or judgment to a higher court.

Evidence

Witness evidence is provided by signed statements setting out the evidence a witness would be allowed to give orally at trial. If a party has served a witness statement and wishes to rely on the evidence of the witness at trial, the witness must be called to confirm his or her written evidence in court and may be cross-examined by the other party or parties.

The court’s permission is required if the parties wish to adduce expert evidence at trial. The expert’s duty is to set out an independent, objective, unbiased opinion on matters within his or her expertise, arrived at without regard to the exigencies of the dispute or of either party’s position in it, based on and taking account of all the factual evidence provided for their review. The expert’s overriding duty is to assist the court (not the party who has undertaken to pay their fees). If a party puts an expert’s report in evidence at trial, that expert may be cross-examined by the other party or parties to the case.

Costs

The default position in English proceedings is that the losing party pays the reasonable costs of the successful party. These costs are assessed by the court.

The parties can alter a costs outcome early in the proceedings, however, by utilising the mechanism afforded by Part 36 CPR. If a party makes an offer to settle (in the prescribed form) that is rejected by the other party but the other party fails to ‘beat’ the offer at trial then the declining party, even though ultimately successful at trial, will be liable for the offering side’s costs (including interest) from the date of expiry of the offer.

The ‘Jackson reforms’, implemented on 1 April 2013, introduced a further 10 per cent sanction payable by defendants who decline a reasonable offer.

Under the CPR, each party is required to submit a budget for the case to the judge for approval by the court and the court may order the budget to be reduced or disallowed in certain respects. The parties are entitled to apply to the court for variations in the budget during the case if new developments justify additional expenditure.

iii ArbitrationFormat of insurance arbitrations

The Arbitration Act 1996 codified English arbitration law and will govern the terms of an arbitration unless the parties have determined that different rules are to apply, for example, by reference to the rules of a particular institution.

Procedure and evidence

Many London arbitrators will follow Commercial Court procedure, particularly in relation to evidence. It is open to the tribunal, however, to adopt different rules; for example, the International Bar Association Rules on the Taking of Evidence in International Arbitration.

Costs

In the absence of a particular provision or agreement between the parties, costs in a London insurance arbitration will usually be payable by the unsuccessful party on the same basis as in the courts. While arbitration can be quicker than litigation, there are also added costs to consider, including arbitrators’ fees and expenses and venue costs.

iv Alternative dispute resolution

The courts actively encourage mediation and routinely ask the parties whether they have considered it. The courts also have the power to penalise the parties in costs if settlement options have not been adequately investigated. Given the soaring cost of litigation, an adverse costs order can be grave, so a threat of this kind is substantial.

Various alternatives to litigation, arbitration and mediation have been devised over the years to fast-track a resolution and keep costs down. These include expert appraisal (early neutral evaluation), expert determination, final offer arbitration, mediation-arbitration and the structured settlement procedure.

Year in review

The past 12 months have seen some interesting developments in the regulatory and legislative landscape.

i RegulationSolvency II

After Brexit, the financial sector, including insurance, continued to operate under a system that replicated Solvency II in UK law. Following a period of consultation, however, the government is in the process of implementing a new regime, Solvency UK. Although this will retain many of the core aspects of Solvency II, there will also be significant changes that are intended to address what is seen by some as the excessively conservative nature of Solvency II. Among these changes will be a significant reduction in required risk margins in order to release insurer capital for other purposes. There will also be reforms to the calculation of matching adjustments allowing greater flexibility. The new measures are expected to be implemented during the course of 2023 and 2024.

The senior managers and certification regime

The SM&CR was extended to insurance intermediaries on 9 December 2019, and as noted above, the FCA and PRA are currently consulting on changes to the SM&CR regime.

Outsourcing by regulated firms

The PRA published a Policy Statement in March 2021,²⁸ along with a Supervisory Statement,²⁹ which intends to clarify, develop and modernise the regulatory requirements and expectations relating to outsourcing and third-party risk management. The Supervisory Statement began to apply on 31 March 2022.

ii Dispute resolution

The past year has provided some further limited guidance from the courts on the construction and operation of the Insurance Act 2015. In Quadar Commodities v. XL Insurance & Others,³⁰ the High Court was asked to consider the operation of Section 13A Insurance Act 2015, which requires insurers to pay claims within a reasonable time. In that case, the Court considered the tests of reasonableness set out in the Act, which are: (1) the type of insurance involved; (2) the size and complexity of the claim; (3) compliance with any statutory rules or guidance; and (4) factors outside the insurer’s control. Applying these tests, the judge concluded that a reasonable time for settling the claim at issue was one year. Nonetheless, the insurer in this case had not acted unreasonably in taking longer than a year to resolve the claim because it had reasonable grounds for disputing the claim. This was so even though, in this case, the Court ultimately ruled in favour of the insured in relation to the insurers’ legal defences to the substance of the claim.

Elsewhere, the courts have continued to deal with issues concerning coverage for business interruption losses caused by the covid-19 pandemic. Following the Supreme Court’s decision in the test case Financial Conduct Authority v. Arch & Others,³¹ some further, unresolved coverage issues under non-damage denial or prevention of access clauses and disease clauses were addressed in Corbin & King v. Axa Insurance³² and Policy Holders v. China Taiping Insurance Co Ltd.³³ The important issue of the aggregation of covid-19 claims was addressed in a series of three related cases, Stonegate Pub Co v. MS Amlin,³⁴ Greggs Plc v. Zurich Insurance³⁵ and Various Eateries Trading Ltd v. Allianz Insurance Plc,³⁶ in which judgment was given on 16 October 2022. On the wording at issue in these cases, the judge held that the imposition of each lockdown measure by the governments of the UK amounted to a separate ‘occurrence’ for aggregation purposes. This trio of cases is expected to be appealed during 2023.

Outlook and conclusions

i Insurance contract law reform

The first court decisions on the interpretation of IA15 are welcome, and it is to be hoped that in 2023 the courts will give further guidance on, for example, the application of the new proportionate remedies for breach of the duty of fair presentation and the operation of Sections 10 and 11 IA15, which deal with the operation of warranties.

ii Coverage issues

In 2023 we may expect to see the first cases relating to coverage for war risk and the construction of war exclusion clauses following the Russian invasion of Ukraine. Disputes over coverage for malicious cyberactivity associated with the war are also likely, and uncertainty over the scope of insurance in this area has already led to attempts by insurers to redraft some contract wordings. Climate change will continue to be a growing issue for insurers across many classes of business, such as property insurance and catastrophe reinsurance. The covid-19 pandemic has highlighted the uncertainty surrounding the coverage afforded by non-damage business interruption insurance, and we can expect further litigation on this issue, and in respect of the reinsurance coverage for covid-19 losses, during 2023. Policy wordings are already being updated to reflect the lessons learnt from the pandemic.

iii Impact of Brexit on insurance regulation

In December 2020, the UK and the EU committed to establishing a memorandum of understanding (MoU) by March 2021 setting out a framework for structured regulatory cooperation in financial services between the parties. Although both the EU and UK confirmed that a text had been agreed in principle in March 2021, the MoU has not been formally agreed or published. Progress in finalising the MoU is expected shortly; however, following the agreement of the Windsor framework on Northern Ireland trade the resolution of which had acted as a block to discussion on a number of areas of financial cooperation.

iv Summary

The insurance industry in England has undergone some of the most significant regulatory and legal reforms to affect it for many years. These changes have provided both challenges and opportunities for the London Market, whose strength historically has been built, inter alia, on its ability to adapt to change. The London Market appears to have embraced the rapidly changing landscape and many within it have begun setting their sights on growth and evolution outside the London Market.

The most interesting development will of course be the changes affecting the insurance and reinsurance regulatory framework for the UK, which will, inevitably, reflect matters arising from the aftermath of Brexit. At the time of writing, it seems clear that the London Market will face many challenges yet.