Professor Rob Merkin

26 JANUARY 2010

  Q40  Chairman: Are there any other, as it were, defects? We have one or two noted which we are going to come to as we go through them clause by clause.

  Professor Merkin: I think that one and there are two others. There is the issue of set-off in clause 10, and I am not sure if I am using the right version of the Bill, but in the version I have it is clause 10, the insurer's right of set-off.

  Q41  Chairman: Again, I have that noted as one of the things we are going to have to consider.

  Professor Merkin: Because, in practice, many policies, probably most policies, do not simply require a premium to be paid, but they are required to be paid as a condition precedent to cover and, if the premium is not paid, then there is simply no cover and there is nothing the third party can do about it.

  Q42  Chairman: That will be another area which we must explore.

  Professor Merkin: The difficulty of course is that, if you do modify that, what you are then doing is altering the insurer's rights to be adverse in a third-party claim, which is not what the Bill is trying to do, so I think it is just an issue that I wanted to point out, but whether you can deal with it or not, I do not know. Then there was the rather curious provision in clause 2(7) about the issue of arbitration.

  Q43  Chairman: Yes, I agree and again I have noted that as another area where there is a difficulty which may arise.

  Professor Merkin: I think, whatever you do, it is not going to be right in this one because, once you have a situation where the policy has an arbitration clause, but there is no arbitration between the claimant and a defendant, either you waive the arbitration clause or you extend the arbitration clause or you have two parallel sets of proceedings. There is nothing else you can do, so something has to give. My own personal preference is that the arbitration clause gives, but that is another story.

  Q44  Chairman: So those are the three areas which you have now, as it were, highlighted.

  Professor Merkin: Sorry, there are four. The other one is the issue of claims-made policies, professional indemnity policies, and how they work when the insured has failed to notify circumstances and thereby finds himself debarred from notifying claims in a later year because they were notifiable under an earlier year's policy, but claims-made policies are a nightmare anyway.

  Q45  Chairman: Well, I think that is very helpful in, as it were, highlighting, as I say, the points which the Committee may wish to consider. Now, I think the best thing would be for us to look through your paper more or less paragraph. I suspect that the simplest thing to do is to ask any member of the Committee whether they have any points before we come to paragraph 6. Are there any questions which anybody would like to ask on paragraphs 4 or 5? No, so is there anything you would like to add on those paragraphs?

  Professor Merkin: No, thank you.

  Chairman: Is there anything on paragraph 6?

  Q46  Lord Borrie: I have one or two on 6, my Lord Chairman. On paragraph 6(6), and I have the Bill at clause 2(9), I can see the advantages of joinder, especially because there is a need for uninsured losses to be claimed and a desirability to do that in the same proceedings. May I suggest that at line 3, the fourth word should be "if" rather than "of"?

  Professor Merkin: Yes, quite right.

  Q47  Lord Borrie: Then may I go down to the sentence beginning, "It is possible to contemplate the situation in which the third party's claim against the insured arises under a contract containing an arbitration clause" et cetera, et cetera, and then you have made the point, Professor Merkin, just touching on this subject a moment ago, that of course "the arbitration clause is irrelevant because the insurer is not a party to the arbitration clause. However, if the third party has a residual claim against the insured or, for procedural reasons, wishes to join the insured, the arbitration clause presents a potential bar to such joinder". It is impossible to have a joinder in that case, I think.

  Professor Merkin: Indeed.

  Q48  Lord Borrie: The Bill does not reconcile this conflict. I think you have just alluded to this point in saying to my Lord Chairman that there are different ways of dealing with it.

  Professor Merkin: I was actually dealing with the situation where the insurance contract has an arbitration clause. What I am dealing with here is where the dispute between the insured and the third party has an arbitration clause.

  Q49  Lord Borrie: Indeed you are. Then on this point that 6.6 is dealing with, the Bill does not reconcile the conflict, but it would simply mean, would it not, that there would have to be parallel proceedings, one an arbitration against the insured who was bound by the arbitration clause and the other in the courts?

  Professor Merkin: Quite.

  Q50  Lord Borrie: I am not sure whether I know what "parallel" might mean, if one could follow the other or what they do.

  Professor Merkin: Well, they may be simultaneous, depending on what the arbitrator decides to do. The arbitrator might decide to stay his proceedings so that other issues can be resolved first.

  Q51  Lord Borrie: That seems to me a nuisance rather than a conflict, but I am only saying that to inspire your response! It is a nuisance of course to have two types of proceedings going on on the same subject, but I do not see how you can avoid that. One has signed up to arbitration and the other has not.

  Professor Merkin: Yes, as I said before, whatever you do in that situation is wrong. If you force somebody to arbitration when they should not be there, that is wrong and, if you take them out of arbitration when they have got a right to be there, that is wrong too, so I do not think there is any easy solution to this. In fact, there is not a solution to it and I think you have to just live with it.

  Q52  Lord Goodhart: Well, I was wondering here whether we, as the parliamentarians, should say, "Well, it's too bad. It's a bit of nuisance, but does it really matter?"

  Professor Merkin: I think it might matter, but there is nothing you can do about it, I think, is the answer.

  Chairman: Are there any further questions on that particular point? No, but it is observed that that point has been made, so there is a conflict there and it cannot be reconciled or we cannot reconcile it, which brings one to 6.8 which is the case where the arbitration clause is in the insurer's contract rather than in the contract between the third party and the insured. Are there any questions on 6.8?

  Q53  Lord Borrie: There seems to be an assumption here, which I would be very grateful if Professor Merkin could explain, that, if there is a liability matter in issue, arbitration is inappropriate.

  Professor Merkin: What I am saying is that the sort of arbitration panel you would have in order to resolve an insurance dispute may not be an appropriate arbitration panel to resolve a liability issue. Insurance arbitration panels vary. Sometimes they are sole and sometimes there are three people, a QC and two wing people, and, if the issue is something to do with, I do not know, occupier's liability or something, it may be completely inappropriate for that particular panel to deal with that issue of liability. That is the point I am making.

  Q54  Lord Borrie: Well, I am just wondering if it is a question of appointing appropriate members. If appropriate members are appointed, knowing in advance the kind of case they are going to have to determine, including matters of liability, then why cannot the choice of members set the issue?

  Professor Merkin: Because very often the arbitration clause in the insurance policy will specify who the arbitrators are to be, not by name, but by qualification. A chief executive of an insurance company is quite often nominated or the Arbitration Service for Insurance, ARIAS, has a panel of arbitrators, all of whom are either insurance people or qualified lawyers and, if it is an ARIAS arbitration clause, then you are stuck with the people on that panel.

  Lord Borrie: Thank you, you have explained that very well.

  Q55  Lord Sheikh: My Lord Chairman, generally the arbitration clause is only present in material damage policies, which means covering damage to property rather than liability. I have not seen any policy containing an arbitration clause relating to liability. It normally refers to a dispute between the insurer and the insured.

  Professor Merkin: I am not sure that is right for the full range of liability policies; they are many and varied.

  Q56  Lord Sheikh: I have not seen any policies like that.

  Professor Merkin: I think the more sophisticated, for example directors' and officers' policies, may contain arbitration clauses, but you are certainly right that material damage is where you would tend to see arbitration clauses, and they would be confined to quantum rather than liability anyway.

  Q57  Lord Sheikh: And the arbitration is binding, unless of course there is a mistake in law, so, therefore, both parties agree on the arbitrators.

  Professor Merkin: Yes, indeed.

  Q58  Lord Sheikh: And, if they cannot agree the two arbitrators, then of course there will have to be an umpire, so that situation where agreement cannot be reached is normally umpired.

  Professor Merkin: Well, it depends upon what the appointment rules say. Umpires are not used these days in practice, but the way that it would normally work is that each party would appoint one and those two would appoint a third who would be a chairman, and each side would tend to appoint an arbitrator who is most likely to be favourable without being biased, favourably inclined to their side of the argument. You may be right in practice, but certainly in employer's liability cases you would not get arbitration clauses. You would get them in more sophisticated forms of professional indemnity, I think, and many of the cases that we have are indeed of that type.

  Q59  Lord Goodhart: I am not very familiar with the way that these insurance policies work in this field, but the arbitration clauses may deal only with the question of the amount of damages, or they may deal with both the question of the amount of damages and liability. Is that right?

  Professor Merkin: In material damage policies it tends to be just quantum.