Professor Rob Merkin

26 JANUARY 2010

  Q60  Lord Goodhart: What is a material damage policy?

  Professor Merkin: Damage to property and business interruption, policies like that. In liability policies, if you get arbitration clauses, they tend to cover everything because one of the objects is to keep the thing confidential very often.

  Q61  Lord Goodhart: If there is an arbitration clause and it does cover both the amount of damages and the liability and this is something which was written into the contract, why should it not continue to be treated as written into the contract here?

  Professor Merkin: I think it would be. I think the issue is that what the Bill is proposing is extending the arbitration clause to matters which it was never intended to cover. It was only intended to cover the issue of coverage under the policy, which may mean the construction of words, it may mean the construction of an excess deductible, it may mean the construction of a condition. What it will not deal with is the underlying liability; that is a matter for the insured to be sued to judgment on in some other place.

  Q62  Lord Goodhart: But, if the arbitration clause does not provide for the question of liability to be investigated, how does it then happen that under this Bill it would apply? I do not really follow that.

  Professor Merkin: I think I owe you an apology because the word "liability" has been used in two senses. I am talking about the liability of the insurers and of the policy, not the liability of the insured to the third party as that is a completely different issue and that would not be a matter of arbitration in the ordinary course of events. The issue would be: does the policy cover the liability of the insured? That would depend upon the wording of the policy. The liability of the insured could come from any one of many sources, some of which may be within the expertise of the arbitrators and some of which may not.

  Q63  Lord Goodhart: Given that this Committee is well aware that it is desirable in order to avoid difficulties here to make as few amendments as possible, how important would you regard this particular amendment as being? What do you suggest?

  Professor Merkin: As I said at the outset, whatever you do is wrong on this. This is as good a way of being wrong as any, I would have thought! The alternative is to remove the arbitration clause if you want to have the two things settled in the same set of proceedings and, if you take away the arbitration clause, the confidentiality which the parties have insisted upon would disappear. I think that probably is the overriding consideration when it comes to arbitration, the confidentiality, so my guess is that what the Law Commission has come up with is problematic, but it is probably the best solution.

  Q64  Chairman: Are there any further questions on that? So, in effect, although an arbitrator appointed under the policy will not necessarily be the best person to determine the liability of the insured to the third party, nevertheless, that is all one can do?

  Professor Merkin: Yes.

  Q65  Chairman: That is what they have come up with and you cannot think of a better solution? Is that right?

  Professor Merkin: If you are going to maintain the concept of a single set of proceedings, that is all you can do.

  Q66  Lord Sheikh: There are merits in having an arbitration clause. Even if you look at a dispute on a liability policy, quite often the two parties would let the matter be decided by mediation, so the point is that there is some merit in keeping the arbitration clause. You made the point about confidentiality and we really do not want to go to court, but we want to try to resolve the matter by mediation, even if there is no arbitration clause.

  Professor Merkin: Yes, I think we are looking at the three or four per cent of cases that do not settle, but of course, as lawyers, you always do!

  Q67  Chairman: Can we then move on to paragraph 7. Am I right in thinking that we ought to have in mind also what you said in paragraph 13 in relation to obtaining information? Are these connected or are they unconnected?

  Professor Merkin: Information conditions are policy conditions which the insured has to comply with, but has not because of his insolvency.

  Q68  Chairman: I see, so they are separate points.

  Professor Merkin: Yes, completely separate points.

  Chairman: Does anybody have any problems with paragraph 7? Is there anything which needs further explanation? I have got a query against paragraph 7.6, the last sentence, but are there any other questions before we come to that?

  Q69  Lord Sheikh: On clause 9.4, I just want your opinion on this. You see, it talks about a condition requiring the insured to provide information or assistance to the insurer, but in regard to liability policies it is imperative that an investigation be carried out as quickly as possible and loss adjustors need to be appointed, they need to visit the scene of the accident and make a statement, but do you see this working against the insurer in the case where an investigation could not be undertaken as quickly as possible?

  Professor Merkin: Yes, it may or it may not; it depends upon the nature of the policy and the nature of the claim, I think. There are some situations where co-operation with the insurer is of no particular assistance to the insurer and there are other situations in which it may be very important very quickly as there may be another third party who is potentially liable by way of subrogation, or it may be that there is no evidence of what happened, so in some cases it may be very important, but I think it is very difficult to generalise and say, "Yes, it is always going to be" or "It is never going to be".

  Q70  Chairman: Could you just explain again to me why you say that clause 9 is of limited effect because it only refers to the notification of a claim?

  Professor Merkin: Yes, this goes back to the way that claims-made policies operate in practice. Claims-made policies are used almost universally for professional indemnity insurance and they are now even creeping into employer's liability, although I think they are probably unlawful in that context, but the way they work is that the insured can either notify circumstances which may give rise to a claim and then, when a claim arises at a later date, the claim is dragged back into the year of the notification of the circumstances, or he can notify a claim made against him. Now, either of those two are triggers of liability under the policy. The problem arises in that, if circumstances arise in year one which are not notified, the year two policy is likely to exclude any claim arising from circumstances which could have been notified under an earlier year, so, if the insured has not notified circumstances in year one, maybe a different insurer in year two is going to say, "Well, you should have notified that in year one. We're not liable", so it is going to be of limited assistance.

  Q71  Chairman: Is there a solution to that particular problem which you can recommend?

  Professor Merkin: The only solution is to override the rights of insurers which they would have against the insured himself, but again that is not consistent with the policy of the Bill, so I am just pointing it out as an issue. There is a case in the Court of Appeal at the moment, we are awaiting the outcome on it, on the way that employer's liability policies respond to asbestosis and other meso claims, but, as long as those types of policies are not used for personal injury matters, I do not have a problem. If they are used for professional indemnity, then so be it.

  Q72  Lord Sheikh: The point is that in the past claims-made conditions have appeared in employer's liability policies, and I appreciate and understand that generally they would be present in professional indemnity policies where the claim has got to be notified. That also works against a normal policy-holder, for example, never mind the complexity of third parties, so the point I am making is that in the past, particularly four or five years ago when the liability market hardened considerably, it was difficult to get cover for certain types of risks and claims-made policies did appear with regard to employer's liability, so it is likely to happen in the future if the market becomes hard.

  Professor Merkin: Well, I hope that the Court of Appeal in the Durham case is going to say that it is not lawful to use that type of policy in employer's liability cases. That is one of the side issues in that case.

  Q73  Lord Archer of Sandwell: One can envisage two quite different scenarios. Most of the contracts of insurance that we are concerned with here will be by commercial people who operate normally and fulfil their obligations, but the insured of course in some of these cases might be a little old couple who never deal with their correspondence at all, so they never get round to notifying their insurers. I gather from clause 9(4) that that does not let out the insured, but you could envisage a situation, could you not, where, without anyone knowing that there is an insurance policy, there is litigation between the third party and the initial party and then you have an elaborate series of litigations, judgments and summons, and at the end of all that someone says, "Oh, we didn't know there's a policy of insurance". Is there any way of avoiding that situation, or is it something we can deal with in this Bill?

  Professor Merkin: I do not think it is a particular risk because there is actually no point in suing an individual without assets, unless you know that there is an insurance policy somewhere in the background, so I am not sure it would actually happen. It could happen in some cases if you have got maybe a retired couple who own their own home and somebody comes along and trips on the step and thinks, "Well, I can claim against these people and sue them to bankruptcy, if necessary". That may happen, but I do not think it happens very often.

Chairman: Can we then move to paragraph 8, which concerns P&I clubs. Are there any questions? The P&I clubs seem to be satisfied with the Bill as it stands, provided there is no amendment. Could we then move to what is obviously an important question here, set-off, paragraph 9.

  Q74  Lord Sheikh: I raised this point last week as it is causing me a little bit of concern and that is in regard to employer's liability policies where, you will appreciate, the premiums can be quite substantial. If you have an injury to an employee and if we were going to invoke this clause, it would mean that the injured person would not be able to get adequate compensation because of that. Do you have any comment?

  Professor Merkin: Yes, you can imagine a situation where the premiums are large and the claim is relatively small.

  Q75  Lord Sheikh: Which most of the claims are. Normally, they would be £3/4/5,000.

  Professor Merkin: Yes, in that case, as you say, the victim would obtain no compensation, but again, if you alter that rule, you put the insurer in a worst position dealing with a third-party claim than dealing with a first-party claim, and I think that the insurance industry would probably not appreciate that and suddenly this Bill would become contentious.

Lord Sheikh: But it could happen.

  Q76  Lord Goodhart: We have heard the statement of the view of the Association of Personal Injury Lawyers here who say that they think there should be no set-off. Now, I think that would be difficult for us because it would of course mean that the insurance companies would be very unhappy with this, but is this something that could be dealt with by the point which you raised at the beginning, which we have not reached yet here, which is information so that, if you made it possible for the third party to get the information from which they could appreciate that there was no worthwhile amount available after set-off had been taken into account, then that would, at any rate, prevent the third party from having to waste money on a valueless claim?

  Professor Merkin: I think that is probably right, that would help. It does not deal with the problem of how you compensate that employee of course. One of the weaknesses with the 1969 Act is that maybe a dozen or more years ago it was decided that there is no personal liability on directors who cause their company to be uninsured because they do not pay the premiums. That would be a very useful reform, but maybe not for today.

  Q77  Chairman: Are there any further questions on set-off? We have had some evidence from, as has already been mentioned, the Association of Personal Injury Lawyers and they suggested that it might be possible to modify the rule of set-off in relation to personal injury claims beneath a certain level, and £5,000 is what they suggest. They say one could make an exception in relation to personal injury claims in the same way as we have done in relation to marine insurance. Do you see any merit in that?

  Professor Merkin: I see every merit in giving injured employees compensation, yes. The difficulty is how you do that without offending the rights of the insurers, but yes, I do see merit in that.

  Q78  Chairman: I think the point is that, if we persuade the insurers to accept the marine insurance position that it will not apply that exception to personal injury claims, they would be saying, "Well, could that not be applied in relation to personal injury claims in set-off?"

  Professor Merkin: If insurers could be persuaded of that, that would be great, but whether they could or not, I do not know. You are talking about P&I clubs for personal injury claims?

  Q79  Chairman: No, I am not talking about P&I clubs specifically now, I think we have left that one, but we are talking about set-off in general. The argument, as I understand it, is that you are bound to allow set-off in the ordinary way because, otherwise, one is interfering with the rights of the insurer. But an exception could be made in relation to small personal injury claims where the set-off would wipe out the claim altogether. That is the point they are making. I do not know whether others have understood it in the same way. Is there some merit in that?

  Professor Merkin: I am just wondering whether there is some method of maybe requiring the insurers to seek their remedy against the employer rather than by way of set-off, which might resolve the problem, but maybe only if the sum is irrecoverable from the employer do they have the right of set-off. Of course, the employer, by definition, is insolvent anyway, so I suppose it does not really get you much further.

Chairman: Are there any follow-ups on that?