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Post Magazine & Insurance Times 6 November 2008 Editions

To request the full text of the ‘feature articles’, please email: [email protected] Post Magazine

News Law firm calls credit hire sector to account over signatures Aon renews Airmic relationship after hiatus RBSI: Cornish departure won't hinder commercial MP calls for overseas compensation overhaul Bright pays liquidators £1.2m Towergate content with £108m profit XL expands environmental insurance offering Workplace deaths to rise Common-sense victory applauded North of the border: Damages review for wrongful death in Scotland

Feature articles Mutuals - Mutual haven or hell With mutual insurance companies claiming that customers are turning to their model as a safe haven as a result of the current financial climate, Post Magazine explores if this market is ripe for expansion.

Fraud - An old familiar tale Significant strides may have been taken in identifying and combating insurance fraud but the stakes are rising and public apathy remains all too prevalent. Phil Bird (director of claims at Groupama Insurances) gives a personal perspective on the problem.

Food fraud - Hungry for justice Sales of unfit or mislabelled food by fraudsters keen to make a quick buck are worryingly on the rise. Alison Clarke and Miranda Rushton explain the insurance implications of this dangerous practice.

Ogden tables: Legal update - The price is right Clare Malpus examines how, in light of their sixth revision, the courts are using the Ogden tables as a mere reference point in assessing appropriate damages and what this means for claimants and defendants.

Data loss: Financial implications - Lost vagueness A combination of media attention, legislative changes and action by credit card companies may result in serious financial consequences for companies involved in the loss of sensitive data. However, as Graeme Newman (CFC Underwriting) explains, it is time insurers reacted to this emerging risk.

Insurance Times

News Reinsurance rates ‘to harden’ Former executives face life in jail after $544m case

Feature articles Profile - Fresh air Oxygen has sold off its underwriting arm and now has ambitious plans for its broking division. Chief executive Nigel Barton outlines the strategy to Insurance Times.

Insurance - So that's where the office budget went Insurance companies need to cut costs as the economy lurches towards recession, but slashing IT investment will do more harm than good. Insurance Times finds out how outdated systems are wasting thousands of pounds – and which new programs can help.

Law Society Gazette Solicitor poised to sue broker as Society takes action

The Lawyer Camerons rehouses insurance group

Legal Week Howard Kennedy seals merger with City boutique Law firm calls credit hire sector to account over signatures

The use of electronic signatures in the credit hire industry has been denounced as a "shark practice" by law firm Browne Jacobson.

The company called into question the enforceability of agreements between credit hire organisations and customers when a signature is electronically generated and placed in the appropriate sections by the hire company.

Paul Smith, legal executive at Browne Jacobson, said: "The customer and CHO agree to an unregulated customer agreement but they have to follow certain principles in order to make that agreement binding. The customer has to be aware of the terms and conditions in order to know what they are signing - otherwise they may not be aware that they are personally liable."

The firm has called for test cases to clarify this issue. It singled out Drive Assist in a bulletin that was emailed to insurer clients, and advised an analysis of all claims submitted by Drive Assist "in order ensure that the appropriate action is taken."

However, Ralph Ferguson, claims director at Drive Assist and chairman of the National Association of Credit Hire Operators, said: "We have been operating in hand-held technology and electronic signatures for more than four years, and have never experienced any problems from customers or our insurer partners. We give customers a copy of the terms and conditions when they sign, and send them an electronic document immediately. At the same time, everything is voice recorded."

Mr Ferguson added: "We already have legal opinion on the document that was sent out by Browne Jacobson that supports our position. We are satisfied that our procedures for ensuring customers understand the credit hire agreement are rigorous and would stand up to any scrutiny. and that the agreements are enforceable."

Brian Cashinella, Nacho treasurer, supported this, and said it was an example of "administrative efficiency.”

Even insurers backed this view, with one senior source accusing Browne Jacobson of "exploiting a technical loophole to discredit CHOs.”

In addition, Roy Hebburn, divisional claims manager at Allianz Insurance, said his company always takes the view that the hirer has reviewed the mitigation statement and read the terms and conditions prior to signing, which would make the agreement valid and enforceable.

He added: "It is unlikely that a reputable company such as Drive Assist would risk non- recovery by generating agreements that the hirer knows nothing about and are, therefore, not enforceable."

However, Trevor Harrison, head of technical at the Motor Insurers' Bureau, said: "This new practice could lead to inappropriate behaviour by hire companies and mean hirers are held to conditions they had previously been unaware of." Aon renews Airmic relationship after hiatus

AON has rejoined the Association of Insurance and Risk Manager's partnership scheme in a move that marks a u-turn for the broker, having exited it last year.

In 2007, Aon failed to exhibit at and sponsor the Airmic conference after two years as strategic partner, stating it had made a "business decision to use its resources through other channels to support its activity in the marketplace" (Postonline, 7 June 2007). But the broker has signed up again for another two years following a recent invitation by Airmic.

Ken MacDonald, chief executive officer of Aon Global, asserted that the broker has been an active supporter of Airmic for many years from both a financial and intellectual perspective, "being fully committed to the businesses represented by Airmic members".

He added: "We did not sponsor Airmic last year but presented a workshop on environmental liability at the conference in 2007 and many of our team attended as delegates - alongside supporting the risk community through a number of other initiatives.

"Aon also attended the Edinburgh conference this year in June, hosted a dinner for more than 100 attendees and took stand space in the exhibition hall."

The broker maintained that breaking the partnership with Airmic did not impact its commercial relationship with the association's blue-chip client members, adding: "Aon has always retained strong links with Airmic and its members. We're delighted with its future direction and strategy, and excited about working with its members in these challenging times."

Meanwhile, Airmic said Aon's decision to join its partnership scheme means that all the major insurance brokers will be Airmic partners at a time when the association has ambitious plans to forge ahead with market initiatives.

John Hurrell, Airmic CEO, cited the planned claims index and the effects of the current financial climate as examples of areas where Aon's support would add value.

Under the scheme, Airmic's partners provide financial backing and expertise - including insurance and risk management advice. RBSI: Cornish departure won't hinder commercial

Royal Bank of Scotland Insurance chief executive officer Chris Sullivan has denied the departure of commercial boss Andy Cornish will change the course of its commercial business.

As previously reported in Post (30 October, p2), Mr Cornish is to take up the role of chief executive officer of Insurance Australia Group's Australian direct insurance division following his imminent departure from RBSI in January.

In a staff memo, Mr Sullivan said: "Andy's departure does not change the course of our commercial business or our continued commitment to its future success. I know Andy remains fully and personally committed to commercial, and therefore he will continue in his current role until the end of January 2009."

He added that RBSI is set to make an announcement on Mr Cornish's replacement "in the near future.”

Mr Cornish's RBSI role included managing Direct Line for Business and broker-only insurer NIG, which he recently told Post had turned a corner.

Interestingly, he is quitting one insurer, which is for sale - RBSI - to join another - IAG - which has been subject to takeover bids by Australian rival QBE.

IAG managing director and CEO Michael Wilkins said: "Andy is a 32-year veteran of the general insurance industry with a strong track record in successfully growing profitable businesses across insurance classes and distribution channels." He added that Mr Cornish successfully grew RBSI's commercial insurance division, including launching Direct Line for Business in the UK last year, and previously "led the lucrative expansion of RBSI across Europe and China.”

Mr Wilkins said: "I look forward to the contribution Andy will make leading our largest business, Direct Insurance in Australia."

In his new role Mr Cornish will have responsibility for the provision of personal and business insurance products directly to customers through a network of branches, franchises and country service centres throughout Australia, as well as call centres and online facilities under the NRMA Insurance, SGIO and SGIC brands.

Mr Cornish will take over the role from Mr Gary Dransfield who has been acting CEO, direct insurance. MP calls for overseas compensation overhaul

An MP is calling for an end to the "discrepancy" between how UK victims of terrorism are compensated on home soil and overseas.

Tobias Ellwood MP, whose brother died in the 2002 Bali bombings, said much can be learnt from compensation models that already exist abroad, including in the US.

He suggested looking at schemes that already provide "a form of insurance collection", which he claimed would allow an emergency fund to be set up that could be "dipped into.”

As reported on Postonline last week, MP Tessa Jowell is setting up a working party to examine how best to compensate UK victims of terrorism overseas.

She announced the move following discussions led by fellow Labour MP Ian McCartney in the House of Commons last Wednesday (Post, 30 October 2008, p.2).

Ms Jowell is expected to report back on the group's findings within the next two months.

The debate in Westminster Hall focused on the fact the Criminal Injuries Compensation Authority currently only compensates victims of terrorism on British soil.

Mr McCartney mentioned the Victims of Overseas Terrorism Bill, which was introduced by Lord Dan Brennan QC almost two years ago, but has failed to make it to law.

However, instead of backing the funding scheme mentioned in the Bill, which could result in costs being evenly split between the government and travel insurers, Mr McCartney suggested insurers meet 87% of costs, with the government picking up the remainder. He said that, according to market analysts, at the current time this would cost the Treasury £330,000 per year. Bright pays liquidators £1.2m

Former Independent Insurance chairman and managing director Michael Bright avoided a confiscation order after agreeing to pay liquidators more than £1.2m from his pension fund.

At Southwark Crown Court, on Monday, Judge Rivlin QC said he was satisfied that civil proceedings had been settled by the payment.

The payment represents 63% of Mr Bright's pension fund and interest accumulated in a restrained bank account since his conviction in October 2007.

A spokeswoman for the Serious Fraud Office told Post: "Michael Bright was no longer in possession of any significant assets apart from his pension fund, which is not ordinarily a realisable asset in bankruptcy.

"This payment therefore achieves a result which provides greater recompense to the victims of this fraud than the court may have been able to achieve under the confiscation regime in the Act." The court also made a confiscation order against former Independent finance director Dennis Lomas.

He was ordered to pay £470,113 within six months or receive a term of imprisonment of 30 months in default. A compensation order for the same amount was made in favour of Independent's provisional liquidators.

In addition, Mr Bright was ordered to pay £10,000 in costs, and Mr Lomas £5000.

Proceedings against former deputy managing director Philip Condon have been adjourned. He is due to reappear at court on 17 December. Towergate content with £108m profit

Towergate's group chief executive officer has described its overall £12m deficit in 2007 as a technical loss attributable to an accounting anomaly.

Andy Homer told Post that Towergate Partnership's underlying £108m trading profit in its annual report was excellent and in line with its plan of consolidating and reinvesting profits.

Earnings before interest, tax, depreciation, amortisation, directors' bonuses and other non- operating costs were up from £94.4m in 2006, to £108m in 2007.

The Partnership also reported pre-tax profit of £47.1m (2006: £39.2m) and executive bonus costs of (£13m).

Regarding the £12m loss, Mr Homer said: "We have preference shares with US hedge funds Och-Ziff and Reservoir Capital; of those preference shares, they earn dividends. While we have not paid those dividends in cash yet, we are still required to add that to the debt. This is not a trading loss, and the results will correct themselves next year."

Meanwhile, Mr Homer confirmed Towergate would consolidate Paymentshield and Open International with Towergate Partnership, adding: "The Countrywide business has already been taken out of Open International and integrated into the company, but Open GI will continue to exist as a separate entity focused on pure technology."

Mr Homer said Towergate would focus on a quiet year for acquisitions. "There will be a change in balance," he said. "We will concentrate on investing in sales, marketing and customer relationship management in an effort to improve the business process. However, we will still be looking for acquisition opportunities."

Towergate Underwriting Group recorded a loss on ordinary activities of £14.7m (2006: £4.19m profit), on turnover of £268m (2006: £237m).

Meanwhile, Towergate has agreed a covenant waiver with its banks after missing its deadline by three weeks. Sources close to the firm said the recent potential merger between its banks - Lloyds TSB and HBoS - slowed down the agreement talks. Towergate is now looking at options for reducing its £580m of debt next year.

In addition, Towergate said it would seek fresh private equity investment in 2009 in a separate move from the negotiations to reset its banking covenants. It is believed any additional investment would go towards smoothing the path to an initial public offering in three years time. XL expands environmental insurance offering

XL Insurance has rolled out an expanded environmental insurance policy for the UK market to cover - as standard - potential liabilities arising under the European Union's Environmental Liability Directive.

Although the ELD is yet to be formally transposed into UK law, companies can already be held liable under the directive if, through their activities, they cause damage to water, soil, protected species and natural habitats - not just sudden pollution incidents. Simon White, XL Insurance environmental branch manager, said that environmental liabilities for companies are set to "rise considerably", adding: "It is important that risk managers understand the large gaps in traditional insurance policies when it comes to environmental liabilities. In order to offer the best cover for UK companies we have extended our policy to provide comprehensive protection." Workplace deaths to rise

A Health and Safety Executive report has suggested the annual number of work-related cancer deaths is likely to be in excess of 6000, although it said estimates were being updated. Work is also underway to better assess deaths due to mesothelioma, with past exposure to asbestos accounting for 4000 deaths. Overall, the annual report - Health and Safety Statistics 2007/08 - revealed major injuries at work have fallen by around 9% since the start of the decade. Common-sense victory applauded

Ecclesiastical has said it hopes a judgment handed down last month will set a precedent to help protect heritage buildings.

In Jennifer Hunt v the Chapter of Ripon Cathedral, a visitor to the cathedral had suffered an ankle injury after stepping in a depression on a step leading to the crypt. She sued for damages but the judge ruled in favour of the cathedral, finding that its owners had taken reasonable care to protect visitors - including a risk assessment, the area being well-lit and a one-way system and signage being in place to guide visitors.

David Bonehill, claims and risk services director at Ecclesiastical, said he was pleased the court had taken a "common sense approach".

He added: "Heritage buildings can't be treated like modern buildings; they are bound to have uneven floors and it is reasonable to expect visitors to take a little more care."

He said if every indentation or crack in ancient stone floors or walls had to be filled, "not only would it cost an extraordinary amount, it would ruin the character and history of these buildings forever.” North of the Border: Damages review for wrongful death in Scotland

For the past 32 years, compensation in Scottish fatal claims has been governed by the Damages (Scotland) Act 1976 - but this could be about to change. Following a request by Scottish ministers to consider the current law, the Scottish Law Commission reported on 1 September to Kenny MacAskill, Cabinet Secretary for Justice in the Scottish parliament. The report made a variety of recommendations for changes to the law of damages when someone is killed as a result of suffering personal injury. The first and most important recommendation was repeal and replacement of the 1976 Act. To this end, the report contained a draft Damages (Scotland) Bill 2008, which was designed to restate the current law in a simpler and more straightforward form.

Perhaps the most practical suggestion made in the Bill was a new method for quantifying loss of support claims; the report recognised in paragraph 3.36 that it would be desirable to give clear guidance. Section 7 of the draft Bill, therefore, proposes the starting point for assessing loss of support claims would be to take 75% of a deceased's net annual income and make that the total annual figure available to relatives for loss of support. The courts would retain discretion over the multiplier to be applied and the division of the total figure between the relatives. This is to recognise that traditional family roles - often with a single breadwinner - are changing. Instead, families must be considered as a whole.

The draft Bill also proposes to limit the classes of relative who have a claim for damages in order to focus more clearly on the immediate family of the deceased. At present, the 1976 Act distinguishes between those having a claim for loss of support and those having a claim for loss of society - for example, distress, grief and anxiety. Under the current legislation, only the immediate family may make a claim for loss of society. A broader category of relatives may bring a claim for loss of support, including great grandparents, great grandchildren, uncles, aunts, nieces, nephews, cousins, former spouses or former civil partners. The draft Bill proposes to restrict the relatives who may claim either for loss of society or loss of support to "immediate family" only and would, therefore, mean the more distant relatives listed above would no longer be able to make claims for loss of support.

Susan Sutherland, a project manager with the Scottish Law Commission, was quoted as saying: "One of the main recommendations is to tidy up the Damages (Scotland) Act 1976, which has been heavily amended since it was enacted. That would aid accessibility of the law on damages for personal injuries causing death. Our recommendations about calculation of damages for loss of the deceased's support would result in a clear and distinct rule, which would save court time and encourage early settlement of cases."

Neither this report nor the Bill recommends any changes to the law where a person has died from mesothelioma. Such cases will continue to be governed by the Rights of Relatives to Damages (Mesothelioma) (Scotland) Act 2007.

It remains to be seen what the Scottish ministers and parliament will make of the report and draft Bill but there is little contentious within either, so it is to be expected that legislation will follow shortly.

Bruce Goodbrand, associate at Scottish law firm Simpson and Marwick Reinsurance rates ‘to harden’

Benfield says only "significant removal of capital" will harden market.

Reinsurance rates will harden in the January renewal season, according to broker Benfield.

Rates are finally hardening as reinsurers try to soak up losses from natural catastrophes, such as hurricanes Ike and Gustav, and from investments affected by the credit crisis, the Benfield report said.

This could kick-start a hard market in the general insurance sector.

“ The onset of global recession and associated increase in cost of claims could act as a catalyst for both insurers and reinsurers alike. As always in the reinsurance market, only significant removal of capital will harden the market,” said the Benfield study, Capital Consequences – The Billion Dollar Question.

Gustav and Ike are set to be the most costly catastrophe events of 2008. Estimates of damage from Ike continue to rise and losses are likely to top the $14.1bn (£8.9bn) cost of hurricane Ivan, which would place Ike fifth in the global list of the most costly insured catastrophe losses.

Investment losses have hit the reinsurance industry too. Property and casualty balance sheets tend to be invested in high-quality investment-grade fixed-income securities, but this has not made reinsurers immune to the collapse of financial institutions, increased volatility in foreign exchange and falling stock markets.

Losses are unlikely to be recouped quickly as companies set about “de-risking” their balance sheets by investing in more conservative instruments that produce lower yield. Some reinsurers exposed as much as 19% of their portfolio to equities.

“The report looks at the impact of events in the third quarter on balance sheets of reinsurers,” said Angela Coad, a member of Benfield Research.

“ Hurricane Ike and poor investment returns have left their mark but it may be the fear of restricted markets as much as the increased cost of capital that constitutes a market- changing event.

“Reassessment of risk is likely to increase demand from insurers and the same forces may restrict its supply.” Former executives face life in jail after $544m case Five former insurance executives on trial over AIG shareholders loss.

Five former insurance executives may be sentenced to life in prison after a US federal judge ruled AIG shareholders lost at least $544m (£343m) because of financial manipulation.

The case is unrelated to the subprime losses that led to the Federal Reserve’s $85bn rescue package, but the ruling is another blow to the insurer.

Four former executives of General Re and one former executive of AIG were originally convicted in February of conspiracy, securities fraud, mail fraud and making false statements to the US Securities and Exchange Commission.

The ruling by Judge Christopher Droney last Friday means the five could face life in prison, but a probation report recommended a sentence of 14 to 17 years for each defendant. A sentencing date has yet to be decided.

Prosecutors said the five participated in a scheme under which AIG secretly paid General Re to take out reinsurance policies with AIG, helping to prop up its stock price and inflate reserves.

The five – Ronald Ferguson, Christopher Garand, Robert Graham and Elizabeth Monrad, formerly of General Re, and Christian Milton, previously of AIG – claim there was no loss to investors.

Meanwhile, AIG has obtained more government help by tapping into the Federal Reserve’s commercial paper programme – a type of short-term loan.

The US insurer has registered to access about $20.9bn from the programme so it can pay back some of its original loan from the Fed.

The commercial paper programme has less harsh terms than the government bail-out and may give AIG more time to gain a decent price for its assets.

Some of AIG’s most prized assets are in its Asian division, with Prudential among the companies expressing an interest in the operation.

Fred Langhammer, an AIG director, resigned last week.

The insurer stated no reason for Langhammer’s departure from the board in a filing with the Securities and Exchange Commission. Solicitor poised to sue broker as Society takes action

A two-partner firm is set to sue its broker after its professional indemnity insurance (PII) premium quadrupled, the Gazette has learned – while in a parallel development, the Law Society has created a PII crisis group and hinted it could launch its own action.

Joe Golstein, partner at London firm B&G Solicitors, alleged his PII broker’s failure to provide him with premium quotes quickly enough meant he missed the 1 October renewal deadline and was forced to pay for more expensive cover. He said his premium leapt from £20,000 to £80,000.

Meanwhile, Society chief executive Des Hudson told the Gazette that there appear to be ‘inconsistencies’ in the way indemnity cover has been applied across small firms, and that legal action ‘could be a possibility’.

He said a special PII crisis group, comprising members of the Society’s Regulatory Affairs Board (RAB) and President Paul Marsh, would look into the difficulties faced by solicitors following a chaotic renewals season.

‘ The problems in terms of access to cover and the price of that cover seem to be largely concentrated in small firms,’ Hudson said. ‘We know some people have withdrawn cover from certain firms, but as far as we can see, that’s not being applied evenly.’ Golstein said he wrote to his broker last week, and that if they fail to respond, he will pursue legal action.

Golstein said his previous PII provider was Norwich Union, which pulled out of the market at the end of the summer. He said he asked his broker for quotes from other insurers immediately, but waited until late September to receive a £40,000 quote, which was conditional on him completing a conveyancing questionnaire. He said the questionnaire was returned on the same day, but the insurer declined cover less than 48 hours before the renewal deadline. He eventually found cover through another broker a week after the deadline had passed.

He declined to name the broker or the company that declined cover.

The Society’s group will look at the hardening of the run-off market, and the impact this has on sole practitioners looking to retire. Hudson has asked affected firms to contact the Society through normal channels. Camerons rehouses insurance group

CMS Cameron McKenna is set to relaunch its insurance practice as a dispute resolution group with a focus on litigation arising from the credit crunch.

If the move is rubber-stamped by the board this Wednesday (5 November), it will be a major departure for the firm, which was created when insurance specialist Cameron Markby Hewitt merged with City firm McKenna & Co in 1997.

Former Markby Hewitt partner and ex-head of insurance Anthony Hobkinson has decided to leave in the wake of the plans.

Currently, insurance and reinsurance is one of the six practice groups at Camerons but litigation is not, with litigation partners working across other departments.

The new group will focus on contentious insurance matters, as well as disputes arising from the corporate, finance and other departments. It will continue to advise clients on non- contentious insurance issues.

It is understood that insurance head Liam O’Connell will lead the team.

Sources close to the firm said the insurance practice had not made expected gains since 13 partners moved to Leadenhall Street to be closer to clients two years ago. The firm declined to comment on the plans. Howard Kennedy seals merger with City boutique

Howard Kennedy has completed its second merger in as many months with a tie-up with London boutique DMA Legal.

The merger will see DMA practising under the Howard Kennedy name and follows the firm’s tie-up with personal injury specialists Douglas-Mann & Co.

The merger was officially completed at the beginning of the month (1 November).

As part of the arrangement, DMA Legal partners Deborah Mills, David Hill and Andrew Pike will all become partners of Howard Kennedy, with a further eight fee earners also making the transfer.

Commenting on the merger, Howard Kennedy senior partner Trevor Newey said: "The arrival of DMA Legal partners and staff is a major development for Howard Kennedy.

“ DMA Legal has a great international strength and client base, and we look forward to enhancing our international corporate and energy offering.”

He added: “We also look forward to building an even stronger partnership and practice with the full support and involvement of our new partners and staff.” Deborah Mills, the founder and senior partner of DMA Legal, said: “We are extremely pleased to be merging with Howard Kennedy, a recognised top 100 firm.

“Our key practice areas and specialist skills complement each other well. We will ensure that both firms' clients will enjoy greater depth and breadth in the services that we offer.”

News of Howard Kennedy’s merger comes days after Spanish firm Garrigues announced its tie-up with Canary Islands-based firm Llorens, which will bring five new partners to the firm. Berrymans Lace Mawer is regulated by the Solicitors Regulation Authority and accredited to quality standards ISO 9001 and Lexcel. This e-bulletin is designed to keep readers abreast of current developments, but is not intended to be a comprehensive statement of law and no liability for errors of fact or opinions contained herein is accepted. Please take professional advice before you apply this e-bulletin content to your particular circumstances.

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