Lord Bach and Mr David Hertzell

12 JANUARY 2010

  Q20  Lord Sheikh: Can I make the point, and it is an important point with regard to France and Germany. If you look at the five largest insurers three of them are French and German-owned so it is important therefore that we establish this. If you look at them, and I will not mention names, they are very large European insurers and therefore we need to ensure that what we agree here, particularly in light of the fact that we have a domicile provision written in the Act, that we do get co-operation from those two countries which have been already mentioned.

  Mr Hertzell: We will have a look at what procedures they have and let the Committee know. As you say, there is a provision in this Bill to deal with the foreign element if there is a foreign insurer.

  Q21  Lord Hunt of Wirral: My Lord Chairman, I think it is an important point here because discussions have been taking place in the European institutions and in the European Parliament in particular around this area. Are you aware of anything there which might be relevant?

  Mr Hertzell: I am not. The discussions I am aware of are more in the context of reciprocal arrangements around insolvency rather than insurance. We will have a look at the situation.

  Lord Hunt of Wirral: Cross-border.

  Q22  Chairman: I think that would be of interest and it would be helpful as well.

  Mr Hertzell: Yes.

  Chairman: Lord Borrie, have you any questions to ask?

  Lord Borrie: No, thank you.

  Q23  Lord Archer of Sandwell: I do not know whether this is the moment to raise it, my Lord Chairman, but this is something that has been troubling me and I wondered how it was dealt with under the Motor Insurers Bureau. If the insured fails to give information to the insurers that would normally defeat the claim because it would be a condition of the insurance. We are told by clause 9(3) that that does not apply to the giving of assistance to the insurer, but then clause 9(4) says that does not apply, so that we are back to saying that the liability of the insurer is defeated if the insured fails to give him notice that a claim has been made.

  Mr Hertzell: Yes, although the third party does have the option to give that notice. However, the third party would have to do so quite quickly.

  Q24  Lord Archer of Sandwell: It just seems to me that it might duplicate the amount of litigation if before anyone knows that there is an insurer they have litigated the liability in the first place, possibly because the insured did not defend and so there was a default judgment.

  Mr Hertzell: Yes.

  Q25  Lord Archer of Sandwell: That has already been decided. Now the insurer comes along and says, "Well, that is not fair because I did not have an opportunity to argue the case." Does that mean then that the whole thing has to be litigated again?

  Mr Hertzell: Well, we have attempted to address that issue. The first point to make I think in answering that is that the third party does not acquire any better rights against the insurer in general than the insured has, so if there is a deficiency with the underlying insurance I am afraid the third party is bound and affected by that as well. However, the declaration procedure we put in place in clause 2 of the Bill does address your concern which is the entire proceedings involving both the insurer and the insured are heard in one go, so if there is a deficiency with the insurance that should hopefully become apparent early on. Schedule 1 of the Bill allows the third party access to information in a way which is more extensive than the 1930 Act so, again, hopefully they would know any deficiencies with the insurance before embarking on litigation.

  Q26  Lord Sheikh: Could I raise another point. Clause 10 causes me a bit of concern and that is the insurer's right of set-off. It causes me concern on two points. Firstly, let us say there is a policy holder who has not paid their premium and therefore it can be argued that the policy is not valid from day one, from the insurer's point of view, but let us look at the other side vis-a"-vis the third party's point of view, if a claim arises, let us take an employers' liability claim (and in fairness you said that 30 per cent of actions relate to EL) if you have a hazardous risk the premium could be quite substantial. I have policies where a premium of £1 million can arise depending on the work which is being done. The third party has been hurt. The policy holder has not paid their premium. How is that premium going to be deducted in a case where the premium is very substantial is something we need to address basically from two points of view. Number one, non-payment makes the policy void and number two recovery with regard to payment of premiums from the third party.

  Mr Hertzell: I am afraid you are absolutely right, the right of set-off here would in one of your examples effectively wipe out the third party claim if there was a huge unpaid element of premium and a relatively small third party claim, yes, I am afraid that would happen. If the insurance policy itself was invalid then again the third party would have no better rights than the insured and therefore again the third party would not be able to pursue the insurer. Although these are not deficiencies in this context there are intrinsic risks for the third party, in the context of having a situation in which the third party steps into the shoes of the insured. In a way, the answer to your question lies outside this Bill or the work we have done because what effectively you are looking at here is uninsured risk and perhaps it raises a question of whether there should be some procedure to deal with uninsured risk, which I mentioned earlier on. In the context of this Bill I am afraid you are right the third party could potentially be unprotected.

  Q27  Lord Sheikh: The intention I presume was to protect the third party. This is beyond protection to a third party, is it not?

  Mr Hertzell: The intention of this legislation is to protect the third party in the context where first of all you have an identified insured and identified insurer and secondly where there is a valid insurance policy that could respond to the insured and therefore to the third party. If those criteria are not met then the third party is outside the scope really of this Bill.

  Lord Hunt of Wirral: My Lord Chairman, may I first of all just declare—and I did declare it at the second reading—the interests set out in the Register.

  Chairman: I should have mentioned that we all ought to do that and I hope we will before the meeting closes.

  Q28  Lord Hunt of Wirral: Particularly as a partner in Beachcroft. I was just going to ask about legal expenses insurance because they are covered for the first time. A lot has happened in the last eight and a half years about legal expenses insurance. Are you reasonably content with the provisions now in the way that they are being extended? Are they extended far enough to cover this sector? To what extent have you consulted those who do not appear in the consultation list, particularly major companies like DAS and other very substantial companies in the area of legal expenses insurances? Are you reasonably happy that all is well in that area?

  Mr Hertzell: The part of the Bill which addresses legal expenses insurance is not specifically about legal expenses insurance per se it is about voluntary incurred liabilities of which that would be an example, so it is addressing it in the round if you like. We have not specifically spoken to DAS or any others only to their representatives such as the ABI on that point. Of course this whole area is subject to review at the moment with Lord Justice Jackson so it is quite difficult for me to answer the question. As far as we have gone we are relatively satisfied but we do not know what the outcome of that review would be and whether it would have an impact on this.

  Q29  Lord Hunt of Wirral: You should know that by our next meeting. If I could just move on to ask again because of the delay, you have never really consulted with the Financial Ombudsman Service because they were not created as such until about the time you were producing your report. As I understand it, they are going to deal with any claims which arise now because the Insurance Ombudsman Bureau, which was taken over by the FOS, was consulted. Are you happy that the FOS are content that they have the requisite material and resources to deal with any claims that will now arise under that extension?

  Mr Hertzell: I find that hard to answer in terms of the full FOS resources. The FOS itself is a supporter of this measure and we did discuss it with them in the more recent consultation we have done since 1998 so they have signed up to it but I cannot really comment on their resources.

  Lord Sheikh: Apart from legal expenses technically health insurance could come under the same umbrella.

  Lord Hunt of Wirral: Good point.

  Q30  Lord Goodhart: On the point that Lord Sheikh raised about whether the insurer can deduct unpaid premiums, it does seem to me that the insurer must be entitled to do that because it would be, I would have thought, unreasonable to expect an insurer to pay more because the insurer has gone into insolvency than they would have had to pay if the insured had remained solvent.

  Mr Hertzell: Certainly.

  Q31  Lord Goodhart: Certainly if that was not the situation insurance companies would not be very happy with this Bill.

  Mr Hertzell: That is correct.

  Q32  Chairman: Your answer was that is correct?

  Mr Hertzell: That is absolutely correct. The third party is stepping into the shoes of the insured and therefore has only the same rights and obligations as the original insured, that is quite right.

  Q33  Chairman: Does that conclude everything that anybody would like to ask? Thank you very much both of you. Did you want to add anything at the end, Lord Bach?

  Lord Bach: No, it has been fascinating.

  Chairman: Perhaps we should just go back to where we should have started and if you have any interests that should have been declared would you now declare them. Lord Hunt and Beachcroft. Any other interests that need to be declared? Well, thank you both very much indeed.