The London Insurance Market is gearing itself up to accommodate the LMP2001 reforms, which are due to come into effect in April 2002. Intensive market-wide consultation and discussion has taken place since the LMP2001 Report, known as "The Green Book", was published in November 2000 by a forum consisting of the International Underwriting Association, Lloyd's and the London Market Insurance Brokers' Committee. The Green Book details these reforms and LMP2001 will constitute the single largest market-wide reforms of processes in the London Insurance Market. LMP2001 is one of three projects set up by the forum, with the other two being the Bureau Convergence Project and the Accounting and Settlement Project.
Although the market was first introduced to these reforms in November 2000, potential pitfalls and problems needed to be ironed-out, which resulted in the implementation of the reforms being delayed. The LMP2001 procedures can, however, be used now if parties so wish and indeed the first risk was recently placed using the LMP2001 slip by Aon's Special Risks Division.
As you can imagine on reforms of this magnitude, most of the leading brokers and underwriters have given their support to the reforms and four of the main brokers, Aon, JLT, Marsh and Willis are presently providing training and advice across the market. One significant aspect is that LMP2001 will not be compulsory and it will be left to the parties to decide whether to adopt the new procedures or not. There are therefore no penalties should a broker decide not to use the new procedures.
Is there a need for these reforms?
The considered opinion of the forum is that there certainly is a need for these reforms. Some of the current problems that parties face is that, with slip presentation, there is use of abbreviations, "to be advised", "as amended", "as expired", which ultimately can lead to confusion and uncertainty. Also, there are rarely governing law or jurisdiction clauses. There is also a distinct grey area over whether the slip leader is acting as an agent or a "trigger" for the following market (the current law is that the leader is likely to be acting as an agent, and this will be discussed later). In some cases there is a general lack of understanding of the terms of the policy and premium payment terms are sometimes misunderstood. In addition, quite frequently there can be late provision of documentation and a lack of understanding of the claims notification requirements. Further, warranties and conditions precedents are not always identified, resulting in the clients being inadequately advised in this regard. With regard to endorsements, it is not always clear who exactly should be approached, and policies are sometimes late and incorrect. These are just some of the problems that should be resolved under LMP2001.
Key Reforms
According to the LMP2001 Report, the changes will include the following:
- The clarity of payment terms will be enhanced;
- The broker will be provided with a single underwriter contract;
- Roles, responsibilities and schedules will be clearly set out during placing;
- Premium and claims payment terms must be agreed during placing and will become a contractual obligation;
- Underwriter Agreement clauses will define approaches for processing of contract changes and claims management;
- There will be a nominated lead underwriter who will be the single point of contact with the broker/client during claims administration;
- There will be a single insuring document, providing the client with a single evidence of cover;
- Improved technology will be implemented, allowing concurrent access to contract and claims information by authorised parties; and
- A benchmarking scheme will be introduced, which will assess the performance of brokers, the results of which will only be published at the individual broker's request.
For placing, communication of risk and slip details will be electronic where possible and standard wordings will be used where appropriate. A single Contract Management Register is to be completed by the end of this year, to assist the use of standard wordings. For claims, the slip leader will co-ordinate claims management and effect settlement in consultation with up to four claims agreement parties. Many underwriters expressed concern that they will be effectively "out of the loop" with regard to claims, so, once settlement has been agreed, the following market will be given 24 hours' notice, and during this time they will be given the opportunity to voice any concerns they may have. Further, as the leader will be taking over many of the functions previously performed by the broker, what will no doubt happen in practice is that the underwriter may reduce the commission they pay to the broker or simply charge the following underwriters a fee. The electronic claims loss advice and settlement system (CLASS) is expected to be completed by the end of this year to support the LMP2001 placements, and once it is all claims will be processed using this system.
The LMP2001 Slip
The LMP2001 slip is designed to support and incorporate the General Underwriters Agreement, which will be discussed later. An underlying theme to these reforms is for greater clarity, both at contract formation and at post-placing contract management. The LMP2001 slip will therefore clearly state all contract terms and will avoid the use of "to be agreed", "as amended" or "as expired". Also, standard wordings and clauses will be used where practicable and where non-standard wordings are used, these will be set out in full on the slip. The slip leader will also be clearly identified on the LMP2001 slip, as well as any Agreement Parties for contract changes.
The LMP2001 slip is split into four areas, Risk Details, Subscription Agreement, Information and Fiscal and Regulatory and contains all of the common provisions that you would expect to find on the previous slip. There are, however, new provisions, which include Express Warranties, Conditions Precedent, Choice of Law/Jurisdiction, Payment Terms, Slip Leader, Other Agreement Parties for Contract Changes and Claims Agreement Parties. With express warranties and conditions precedents, for example, the broker will now be forced to clearly identify and detail these on the slip, together with any penalties for non-compliance. From the client's perspective, they ought then to be in no doubt as to what they should and should not do upon receipt of confirmation of the placement.
The Role of the Leader – Pre LMP2001 Position
It is well established that when the lead first accepts the risk they do not owe the following market a duty of care, as a risk may be accepted for various different reasons. This duty does appear to change post-placing, however, according to case law, once the lead has been authorised by a lead underwriter clause. In Barlee Marine Corporation v Trevor Rex Mountain (The Leegas) [1987] it was held that the lead, assuming it has been authorised by a lead underwriter clause, owes a duty of care to the following market. This meant that the usual recourse of seeking damages by proving negligence could be pursued by the following market against the lead. Is the Lead an Agent or Trigger for the Following Market?
The courts have offered conflicting views on whether, post-placing, the lead acts as an agent for the following market or as a trigger. It is safe to say that the current law is not clear in this respect.
- Lead Underwriter – Trigger
Mander v Commercial Union [1998]
Mr Justice Rix held that the lead acts as an agent for the following underwriters when agreeing declarations as to open cover, which effectively means that the followers are bound by decisions that the lead makes but do not actually appoint the lead to make decisions on their behalf: "I would tentatively suggest that a leading underwriter at any rate under an open cover is not constituted the agent of the following market by reason merely of a leading underwriter clause. Rather the following market agree, by subscribing to the Cover, that they will be bound by a declaration falling within the scope of the Cover and agreed by the leading underwriter: i.e. the agreement of the leading underwriter works as a 'trigger' rather than as an act of agency."
This case also held that a contract of agency cannot be implied by custom in the Lloyd's insurance market.
- Lead Underwriter – Agent
Roadworks (1952) Ltd v JR Charman and Others [1994]
A conflicting view was reached by His Honour Judge Kershaw QC in this case, as it was held that a lead underwriter was an agent of the following underwriters:
"Although in the slip there was nothing in the condition itself about the leading underwriter, the Slip was a contract between the insurers and the insured; it was not a contract between the leading underwriters and the following underwriters, although its terms i.e. the leading underwriter's clause evidenced the terms of the contract of agency (between the leader and the followers); the leading underwriter had the actual authority of the following underwriters to waive even a contingent condition."
Conclusion
As can be seen, the case law does not presently offer a clear solution as to whether a lead acts as an agent or a trigger. As it is stands and prior to LMP2001, it is likely that the lead will act as an agent for the following market should it agree to accept responsibilities which have been delegated to the lead by the following market.
The Role of the Leader – Post LMP2001 Position
The General Underwriters Agreement (GUA) is a replacement for existing Leading Underwriter Agreements, and one of the aims of LMP2001 is to prevent any further uncertainty or ambiguity over whether a lead underwriter acts as an agent or a trigger. LMP2001 states that the GUA acknowledges that there is a limited agency relationship between the lead underwriter and the following market, as the lead may act as contract manager and will actively consider alterations on behalf of the following market. This agency, however, will only be for the specific purposes as set out in the GUA and does not, therefore, significantly increase the obligations of the lead.
General Underwriters Agreement (GUA)
The GUA is an agreement between the insurers specifying the terms on which the slip leader acts as agent of the underwriters to deal with alterations, amendments and agreements. The LMP2001 Slip overrules the GUA should there be a difference and ex-gratia payments are specifically excluded, as the leader does not have authority to bind the following market in this regard. Underwriters understandably expressed concern that, due to the increased roles that they would now be undertaking, they would thereby be more at risk to Errors & Omission (E & O) exposure. With this in mind, following underwriters can agree to limit the liability of the lead by including a Hold Harmless Clause on the LMP2001 slip.
The Hold Harmless clause defines the roles and responsibilities of the lead underwriter in agreeing post inception-changes and the handling of claims. If this clause is included on the slip the lead will only be liable to the following market for claims resulting from Dishonesty or Wilful Default. Wilful default can be defined as not doing what is reasonable under the circumstances when acting as a free agent. As you would expect, unless an honest mistake is persisted with once the party in default becomes aware of its mistake, it would not be wilful default.
Single Policy
There was justified concern that as the London Market will issue a single policy there is a risk that the US courts will hold insurers jointly rather than severally liable. Therefore, LMP2001 has addressed this and advises that it must be made perfectly clear at every stage, from the placing slip to policy wording, that the liability of each subscribing insurer is several and not joint. The GUA specifically states that each subscribing insurer is liable to the insured/reinsured only for his proportion of the risk and not for the proportion of any other insurer.
Conclusions
The reforms are certainly a step in the right direction. The present system does need certain changes, in particular to bring it more up to date, and greater clarity and enhanced technology will be welcomed by the market and beyond. The changes will be deliberately gradual and will be rolled-out in different phases, mainly to minimise any potential disruption and to reduce teething problems. A survey of the major London brokers was recently carried out, which showed that use of the LMP2001 slip could exceed 90 percent by the end of this year. In any event, the survey showed that the market expect to see almost 20 percent of 1st April renewals being placed on the LMP2001 slips, with Wellington announcing that they expect to write a considerable proportion of April renewals on the LMP2001 slips. As mentioned previously, both the CLASS claims system and the Contract Management Register are not yet in place and these are expected to be in use in the 4th quarter of 2002. So, although business can already be placed using LMP2001, claims cannot yet be processed.
Given that LMP2001 is not compulsory, certain potential problems can be envisaged. Firstly, with regard to layered placements, there will still be a number of slips on the primary and excess layers. What if some slips are LMP2001 slips and some are not? What is the extent of a lawyer's authority, who is the lawyer acting for? Secondly, it will no doubt take some time for all parties to become familiar with the system, which could perhaps lead to confusion and an increased possibility of E & O claims. Thirdly, there is the question mark as to whether a broker will be deemed to be negligent in failing to use the LMP2001 procedures. Obviously this is not yet known, and we will have to wait and see, as it would depend on whether it is causative of the loss. Nevertheless, if a broker does not use the LMP2001 principles, despite the fact that the principles have been approved by the major insurance bodies, it is likely that this will undermine their credibility when allegations of negligence are levied at them.
For further information, please contact Simon Lambeth by e-mail at simon.lambeth@cms-cmck.com or by telephone on +44 (0)20 7367 2551.
