The Comprehensive Multinational Post

Guest Post: Argentina Right to exclude shareholders in closely held corporations

2011-05-24T13:41:00.001+01:00

Contributed by Estudio Garrido Abogados

The Commercial Court of Appeals of the City of Buenos Aires, the most active tribunal for corporate law in Argentina, recently passed a ruling (in In re Microomnibus Ciudad de Buenos Aires SATCI v Martinez) regarding the right to exclude shareholders in closely held corporations in the event of 'just cause'. The court stated that although the Business Association Law 19,550 does not specifically include corporations among the type of legal entities where any equityholder (whatever its stake) may be excluded for 'just cause', such exclusion is valid if the bylaws of the corporation expressly contemplate it.

New ruling

Closely held corporations amount for more than 90% of legal entities in Argentina, employ more than 70% of the workforce and amount for more than 50% of economic activity. The ruling is significant because it will:

reduce litigation;
make the Argentine closely held corporation a more attractive investment instrument, thus reducing the use of foreign vehicles (which contain squeeze-out provisions and would enforce a call option against a shareholder that has engaged in illegal conduct); and
by analogy, eliminate uncertainty in the enforceability of shareholder agreements, in particular in respect of puts and calls, deadlock resolution mechanisms and drag-along rights (all instances where a shareholder leaves a corporation).

However, the ruling does not define:

'just cause';
the price at which the shareholder is to be excluded;
who (the corporation or its shareholders) is entitled to the rights; or
the majority required to amend the bylaws of an existing corporation to include the exclusion right.

Interpretation

The above matters can be interpreted as follows.

Just cause
The bylaws could leave the matter for judicial interpretation or specify what would constitute 'just cause' (eg, wilful misconduct or gross negligence that results in damages to the corporation, diversion of corporate funds, utilisation of the corporation for an illegal purpose or voting under a conflict of interest).

Price
Any reference to fair market value should withstand scrutiny. In addition, references to net worth, even if lower than fair market value in a particular circumstance, should also withstand scrutiny since this is the price at which appraisal rights are exercised.

Entitlement to the rights
The bylaws could provide that the rights belong to the corporation or to the other shareholders. If exercised by the corporation, the stated capital of the corporation will be reduced, unless the corporation has accumulated profits or free reserves.

Required majority
An absolute majority of shares entitled for a vote, with only one vote for shares with multiple votes, would be be required to amend the bylaws of an existing corporation to include the exclusion rights.

UK Government Modern Workplaces Consultation

2011-05-19T21:06:00.001+01:00

In the United Kingdom, when government departments change or make policy, they listen to public views via a consultation. For those of us in the United States, this is similar to the our government's request for public comment on a matter. You can read the consultation paper about what government wants to do or change and then send your thoughts back. For those with clients in the UK, this can have an effect on the administration of people in those offices.

The UK Government has just published consultation (Found Here) on its plans for flexible, family-friendly employment practices. There are four key elements:

System of flexible parental leave,
A right for all employees to request flexible working,
Changes to the interaction of annual leave and sick leave, and
Measures to encourage equal pay for equal work between men and women.

The changes to maternity, paternity and parental leave are likely to be of most immediate interest to employers, who have only just got used to the new rules on paternity leave and pay. The key proposal is that maternity leave and pay, reserved exclusively for mothers, will effectively be reduced to 18 weeks. There will then be an entitlement of 30 weeks flexible parental leave which can be shared between the parents in whichever way they wish, subject to their employers' agreement. 17 weeks of this leave will be paid and 13 weeks will be unpaid. Payment will be on the same basis as now with reference to the same eligibility criteria and set financial limits. Parental leave can be taken by both the mother and father concurrently so that parents can be together. An additional period of 4 weeks paid leave will be reserved for each of the father and the mother. The father will also retain a right to the current 2 week paid paternity leave period available around the time of the baby's birth. Employers will be concerned that the changes will have financial and administrative consequences and that it will be more difficult to plan for absences. The consultation seeks to minimize administration and states that the default position where the parties cannot agree when leave is taken is for parents to take leave in a continuous block.

The consultation also proposes extending the statutory right to request flexible working to all employees. However to reduce the administrative burden the current statutory process for considering requests will be replaced with a new duty on employers simply to consider requests reasonably. A statutory code of practice would be created to demonstrate a reasonable process. An interesting proposal is that employers will be allowed to take account of any factors they consider relevant in the event that they have to choose between multiple requests. The consultation makes it clear that employers would still have to show that all the requests could not be accommodated for purely business reasons and wider principles of discrimination would still need to be respected.

The Government also takes this opportunity to consult on changes concerning the carryover and rescheduling of annual leave in the light of recent European cases. The consultation proposes amending the Working Time Regulations so that where a worker has not been able to take his annual leave (due to sickness absence) in the current leave year he can carry it over to the next holiday year, provided he does not exceed a four week limit. The consultation recognizes that employers would still need to be aware of other contractual or statutory obligations such as the disability discrimination provisions of the Equality Act 2010.

The equal pay proposals would require tribunals (which have found an employer to have discriminated because of gender in relation to contractual terms or non contractual pay matters) to order that employer to conduct a pay audit. The pay audit would involve comparing the pay of women and men doing equal work and investigating the causes of any potential discrepancies.

Small U.S. Businesses Need to Consider Their Global Exposures

2011-05-03T13:39:00.001+01:00

Last week I attended a seminar here in Atlanta designed for small businesses to improve their sales. The attendees were a wide range of business types from heavy equipment sales to document security. I had the pleasure to talk with some of these business owners who were quick to dismiss their 'global' exposures because they are not Coca-Cola, UPS or some other multi-national firm – they are 'Main Street USA'. To their credit, they were willing to spend 3 minutes with me and learn that many of them do have global exposures, and they have no plans for this risk, yet.

What I reminded them of, in a globalized economy all linked by overnight delivery, advanced telecommunications and the internet, even today's small companies increasingly do business with foreign suppliers and customers. For these businesses, conducting business outside of the U.S. has never been easier, but doing so leads to a wide array of risk management and insurance issues.

Like them, it is obvious to most people that companies with foreign subsidiaries, branches or joint ventures need to be aware of their exposure to loss in the various countries in which they do business. They need to be certain that their insurance programs are appropriate to the exposures and in compliance with local regulations. Failure to do so may leave a company without insurance coverage – which may not become apparent until after a loss has occurred – and potentially subject to fines and penalties.

Managing a multinational insurance program can be enormously complicated. Some countries require policies to be purchased locally, meaning that the buyer needs access to distant insurance markets and must be able to manage language issues, especially since the policies are often issued in the local language. One solution is to delegate local insurance purchases to local employees, but this can lead to other issues concerning the quality and consistency of coverages. These 'multi-national' companies oftentimes simplify the insurance process by working with brokers experienced in international insurance programs and multinational insurers that can provide substantially one-stop service, even when local insurance policies are required.

However, a point I made with these small business owners is that most, if not all of them, have a company website, and there is where they are potentially exposed to liability from foreign sources. Even if they do little or no business in a foreign country, since the Internet is borderless, the company could potentially run afoul of various libel, intellectual property infringement and privacy laws. Companies that sell products to foreign buyers have even more opportunities to incur liability, such as product liability lawsuits and enforcement of consumer protection laws. Companies with physical locations outside the U.S. face the full range of property and liability exposures in each country in which they have facilities and people.

Understanding the exposures presented by each country in which a company operates can be daunting. Liability exposures are especially challenging since laws and legal systems vary widely.

Even if not required by law, local policies may be a good idea in many cases. Local policies are more likely to be tailored to local laws and practices, and ready access to local claims personnel may be essential following a loss. Additionally, buying local policies may avoid certain complex tax issues associated with multinational policies.

Globalization is a business and economic reality, but insurance still is regulated locally. A well-structured insurance program with an insurance broker that understands these exposures is critical. Businesses should expect their broker to choose an insurance company that can minimize the friction that can be caused by the myriad of insurance regulation around the world, and allow management of the businesses to focus on growth and profitability without liability and insurance issues being an impediment.

The Impact on D&O for Multinationals with Certain Cuba Sanctions Restrictions Lifted

2011-04-27T16:50:00.001+01:00

Earlier this year, the US Treasury's Office of Foreign Assets Control (OFAC) amended the Cuban Assets Control Regulations, 31 C.F.R. Part 515 (CACR or Cuba sanctions). The amendments implement policy changes announced by President Obama on January 14, 2011 to continue outreach efforts to the Cuban people. The amended regulations took effect immediately and among other things, authorize general licenses for (i) certain transactions with Cuban nationals who are permanent residents outside of Cuba, (ii) travel to Cuba in connection with educational and religious activities, and (iii) remittances to Cuba.

Immediately, I began to wonder about the impact of this lifting on the D&O policies of U.S. firms with local policies outside the U.S. Specifically, I previously had an insured client who had a subsidiary in France. We were looking to provide a local D&O policy in France. The French subsidiary had a Cuban National who sat on their Board. In the case of a claim, we were advised that we would not have had the ability to provide indemnity payments to this board member. The broker and client sought other alternatives. No one wanted to have to tell the French board that one of their members were excluded from payments by the US insurer whose policy was acting as a DIC / DIL.

Prior to the amendments, the Cuba sanctions broadly prohibited transactions with Cuban nationals no matter where they resided. The amended regulations establish a new general license that authorizes persons in the United States to engage in certain transactions with individual nationals of Cuba who are permanent residents outside of Cuba. The general license is subject to the requirement that US persons obtain from the Cuban national at least two documents issued to the individual by the government authorities of the new country of permanent residence. However, all property in which a Cuban national has an interest that was blocked prior to the later of the date on which the individual took up permanent residence outside of Cuba or January 28, 2011, remains blocked.

The amendments to CACR also add general licenses for certain educational and religious activities that had previously required specific licenses from OFAC. A specific license will still be required for any educational or religious activities not authorized under the new general licenses. The new general license for educational activities authorizes accredited US graduate and undergraduate degree-granting academic institutions to engage in travel-related transactions incident to certain educational activities. Students traveling under the general license must carry a letter on official letterhead, signed by a designated representative of the sponsoring US academic institution, stating that the study in Cuba falls within the scope of the general license.

Similarly, the new general license for religious activities authorizes religious organizations located in the United States, including members and staff, to engage in travel-related transactions that are incident to religious activities in Cuba. Under the general license, travelers must engage in a full-time program of religious activities, and donations to Cuba or Cuban nationals are not authorized. In addition, individuals traveling under the general license must carry a letter on official letterhead, signed by a designated representative of the US religious organization, stating that the travel is within the scope of the general license.

Finally, the amended regulations add three general licenses related to remittances to Cuba subject to certain restrictions. Unfortunately, it appears that the D&O claims issue may not be resolved because these new licenses authorize (i) remittances of up to $500 per quarter to any Cuban national, except prohibited officials of the Government of Cuba or prohibited members of the Cuban Communist Party, to support the development of private businesses, among other purposes; (ii) unlimited remittances to religious organizations in Cuba in support of religious activities; and (iii) remittances to close relatives who are students in Cuba pursuant to an educational license for the purpose of funding transactions authorized by the license under which the student is traveling.

New EU insurance sector block exemption adopted

2010-05-18T12:13:00.001+01:00

On 24 March 2010, the European Commission announced that it has adopted a new insurance sector block exemption regulation (BER). The new insurance BER came into force on 1 April 2010 and will last until 31 March 2017. The insurance BER exempts certain aspects of the insurance industry from the EU prohibition on restrictive agreements.

The headline points of the new insurance BER are that it:

renews exemption for joint compilations, tables and studies;
renews exemption for co-(re)insurance pools, subject to some amendments;
no longer exempts standard policy conditions; and
no longer exempts agreements on security devices.

This should not come as a surprise as it is effectively what the European Commission set out in its consultation draft of the insurance BER in October 2009, although there were some slight amendments.

The Commission observed that standard policy conditions are used in other sectors, such as banking, without the need for a specific block exemption. It reasoned that to give the insurance industry special treatment could result in unjustified discrimination against other sectors which do not benefit from a sector-specific BER. Security devices and their installation were found to fall into the general domain of standard setting.

Standard policy conditions

The exclusion of standard policy conditions and provisions on security devices from the BER does not mean that they are necessarily illegal - rather a regular competition analysis is required. This will consider whether the particular arrangements do actually comprise a restriction of competition, whether any other block exemption could apply (e.g. the vertical agreements block exemption) and/or whether the particular arrangement merits an individual exemption.

Associations and their members will need to carry out a self-assessment in relation to proposed standard policy conditions and their terms of use as for any other association activity.

The Commission plans to offer more guidance on standard policy conditions for all sectors (not just insurance) in its guidelines on horizontal agreements which it is currently reviewing and on which it plans to consult "in the first half of 2010".

Joint studies

Key changes to the exemption regarding joint compilations, tables and studies are:

a new right of access to the results for customer and consumer organizations, subject to an exception on the grounds of public security (e.g. where information is related to the security systems of nuclear plants or the weakness of flood prevention systems); and
clarifications to the scope of the exchange of information covered by the BER.

Pools

Key changes to the pools exemption are:

market share calculation now covers gross premium income earned within and outside the pool by participating undertakings – bringing this area into line with other general and sector-specific competition rules; and
a broadening of the definition of "new risks" to cover risks the nature of which has changed so materially that it is not possible to know in advance what subscription capacity is necessary in order to cover such a risk.

The Commission emphasized that the pools exemption is not a "blanket" exemption and that careful legal assessment is required of whether a pool complies with the conditions of the BER. It intends to monitor their operation closely.

Subscription market co-(re)insurance agreements

The Commission has also underlined that ad-hoc co-(re)insurance agreements on the subscription market have never been covered by the insurance BER and remain outside the scope of the new regulation.

Transitional provisions

It is useful to note that there is a 6 month grace period until 30 September 2010 for agreements which comply with the expiring insurance BER but not the new insurance BER. This gives industry a little more time to adapt their agreements to bring them into line with the new rules.

New Mediation Rules in Russia

2010-05-16T14:19:00.001+01:00

On 11 March 2010, draft regulations establishing mediation as alternative procedure for the settlement of disputes were introduced to the Russian Parliament. Assuming they are accepted, they will come into force on 1 January 2011.

Mediation has not previously been expressly provided for in Russian legislation nor has any law contained a detailed description or procedure for it.

In most cases, mediation allows parties to reach the best possible, and a mutually beneficial, compromise without involving judicial bodies or reducing the effectiveness of the settlement process.

The draft regulations contain complex and detailed legal mechanism for mediation, as well as various amendments and additions to civil law, civil procedural law and arbitration procedural law.

It is assumed that mediation can be initiated by agreement between the parties. A mediator may arrange meetings with both sides jointly or individually. This may culminate in the resolution of their dispute, which may be formalized in a civil law contract or an amicable settlement approved by a judge if the dispute has been already submitted to the court.

If the dispute is not resolved, the participants may not disclose during judicial proceedings any information provided by another party to conclude a mediation agreement or about their intentions to do so. They are also prohibited from disclosing any opinions or suggestions made by the parties during the mediation process and any information about a party's readiness to accept any suggestions. The mediator may not provide the parties with legal counseling or other help.

The individual or organization providing mediation services is not authorized to disclose any information about the mediation procedure unless it is expressly permitted by the parties.

The draft regulations also contain certain quality requirements and procedures for the provision of mediation services, as well as some features of mediation in the course of initiated proceedings in arbitration tribunals and courts of common jurisdiction.

Guest Post: Builders and Economic Loss

2010-02-06T14:01:00.001Z

(This post is provided by UK colleague Nadia Lucherini with CMS/Cameron McKenna in Bristol.)

Does a building contractor owe his client a concurrent duty of care in tort and in contract in relation to economic loss? This age-old question was recently addressed by the Manchester TCC in Robinson v P.E. Jones (Contractors). The decision is likely to be of interest to builders as it clarifies the extent of their exposure to claims.

In 1991, P E Jones entered into an agreement with Mr Robinson whereby P E Jones would build and sell him a house. The house featured gas fires in two rooms which were served by chimney flues that P E Jones constructed. In 2006, two years after the gas fires failed a safety test, Mr Robinson started proceedings against P E Jones, claiming that the chimney flues had not been constructed properly.

The claim was well outside the limitation period for a claim in contract. So Mr Robinson was forced to argue that the building company owed him a duty of care in tort.

P E Jones argued that there was no duty of care and that it was an economic loss. The building company argued, relying upon the House of Lords case of Murphy v Brentwood, that a builder did not owe a duty of care in tort to an owner or an occupier where the loss was an economic loss.

In his judgement, Judge Davies sought to reconcile the case law. He stated that the general rule, on which P E Jones sought to rely, that a builder does not owe a duty of care to owners or occupiers is not intended to exclude circumstances where there was a "special relationship of proximity" for example, when the builder is also in a contractual relationship with a client.

In general terms, therefore, the Judge held that, in principle, a builder will owe a tortious duty of care to his client, concurrent with his duty in contract, in relation to economic loss. Practically, this ruling means that claimants are able to take advantage of the remedy, either under contract or tort, which is most favourable to them, making it easier for them to recover economic loss.

However, unfortunately for Mr Robinson, Judge Davies held that P E Jones had, through its Building Conditions, successfully excluded any duty in respect of any defect, error or omission in the execution or completion of the works save for the ten-year period covered by the National House Building Council's agreement (which was, by that point, time-barred). Judge Davies held that Mr Robinson could not challenge the efficacy of the clause in the Building Conditions as it operated precisely to prevent a duty in tort arising. Mr Robinson's assertion that the clause fell foul of the Unfair Contract Terms Act 1977 also failed as P E Jones pointed to an exception which states that the Act does not apply to "any contract so far as it relates to…an interest in land."

This decision acts as a useful reminder that a builder will owe a concurrent duty of care to its client in relation to economic loss. This means that they can be liable in tort long after the expiry of the contractual limitation period in circumstances where discovery of damage happens years down the line. However, the case also shows that a builder can reduce this risk by incorporating a contractual term that limits the tortious duty.

Foreign Corrupt Practices Act -- Probes may hit D&O insurers

2009-12-17T14:57:00.001Z

Frederic Bourke Jr. was convicted in July by a federal jury in Manhattan of violating the Foreign Corrupt Practices Act ("FCPA"), among other charges, in connection with an alleged scheme to bribe Azerbaijan government officials, and highlights an emerging area of concern for directors and officers liability insurers and policyholders.

The FCPA prohibits paying foreign government officials to obtain or retain business. Mr. Bourke did not pay bribes himself. But he invested $5.7 million with a Czech expatriate, Viktor Kozeny, whom he knew—or should have known—planned to bribe Azerbaijani government officials, jurors found.

The FCPA bars attempted bribes, even if unsuccessful, and jurors found that Mr. Bourke must have known Mr. Kozeny's intentions. Mr. Kozeny was sometimes called the "Pirate of Prague" for allegedly stealing investor money as part of a similar scheme in the Czech Republic, and two witnesses said Mr. Bourke knew of the bribes.

The case is part of a pronounced effort by the federal government in recent years to enforce the 1977 statute more aggressively. The Securities and Exchange Commission has established a dedicated FCPA enforcement unit, and the Justice Department says it is investigating at least 120 companies on five continents.

According to attorneys who track these actions, the number of SEC and DOJ enforcement actions has increased 500% between 2004 and 2009. This is why the FCPA could become a significant exposure for D&O liability underwriters.

Fines and disgorgement penalties paid in connection with SEC or DOJ probes likely would be excluded from coverage under most D&O liability policies, legal observers agree. But defense costs for such cases likely would be covered by D&O liability policies. Those costs often can be significant and sometimes blow through D&O liability limits.

In addition, professionals involved with D&O say FCPA violations make follow-on litigation—a securities fraud or derivative suit—more likely. In addition to its bribery prohibition, the FCPA also requires companies to maintain adequate internal accounting controls and accurate and transparent records. Violations of this "books and records" provision of the FCPA often provide a foundation for suits alleging that directors and officers breached their fiduciary duty.

Only 31% of companies report having a "comprehensive" FCPA compliance program, according to a September survey by Deloitte Financial Advisory Services L.L.P.

It is expected D&O underwriters will increase their attention and inquiries into a company's practices in foreign countries with an eye toward FCPA exposure. However, history in our industry tells us that until they have losses, they will ignore the possible risks.

For UK Hotels -- A duty to reduce carbon emissions

2009-12-08T13:57:00.001Z

(This article first appeared in Hotel Report.)

In April 2010, a new regime designed to improve energy efficiency and reduce the amount of carbon dioxide emitted by businesses will be implemented in the United Kingdom. As well as the large hotel chains, this will also affect owners of unbranded hotels that exceed the relevant electricity usage thresholds and all owners of branded hotels.

To be known as the Carbon Reduction Commitment (CRC) scheme, it is a mandatory scheme and will apply to organizations whether in the public or private sector who have at least one electricity meter settled on the half hourly market and whose annual UK electricity usage exceeded 6,000 MWh which represents an annual electricity bill of roughly $985 million at current rates.

What is the CRC scheme?

Under the CRC scheme, participating organizations must purchase "allowances" sold by the government for each ton of carbon dioxide that they emit. The initial price will be nearly$20 per ton. So there is a direct incentive for these organizations to reduce their emissions and therefore their energy bills.

Additionally, the better a participating organization performs at reducing its emissions, the higher its ranking in the annual performance league table that the Government plans to publish showing the comparative performance of all participants. Government proceeds from selling allowances will be handed back to those organizations that feature most highly in the league tables.

What constitutes an 'organization'?

Group organizations will be treated as a single entity under the CRC scheme and all members of that group will be required to participate. There are two main groupings that constitute 'organizations':

Corporate groups, i.e. all parent companies and subsidiaries, including subsidiaries of foreign parent companies; and
Franchise groups, which include not only the franchisor's corporate group, but also all franchisees of the franchisor.

It is important to note that there are significant financial penalties for non-compliance and liability for compliance with the CRC scheme will be joint and several and attach to all entities within the CRC organization.

The implication for the hotel industry

The implications depend on whether the hotel in question is leased, managed or franchised. Whilst a managed hotel is distinguished from a franchised hotel in the hotel industry, any managed hotel that is operated under the manager's brand will be treated as part of a franchise for the purposes of the CRC scheme.

Leased hotels

Under a standard lease, a hotel operator as tenant is likely to be the counterparty to the energy contract in place as opposed to the owner as landlord. Under the CRC regime as currently envisioned, CRC liability for energy use will attach to the hotel operator itself if it is a single entity or where the hotel operating company is part of a group, all of the companies in the group (subject to certain exceptions) which together will constitute the CRC Organization.

In the less common situation where the landlord is the energy contract counterparty (perhaps where the hotel is part of a larger mixed-use building), then the CRC liability will reside with the landlord. The commercial lease arrangement between the landlord and the tenant will determine whether the landlord can recover the cost of the allowances through the service charge and/or whether the tenant is entitled to share in any rebates – the CRC regime does not govern this private matter.

Franchised or branded managed hotels

The definition of a franchisee is where the franchisee "presents or equips [the hotel] premises to a standard or specification which results in that premises having an internal appearance which is substantially uniform with premises belonging to other franchisees of that franchisor or of the franchisor itself." This means that:

The owner of a branded hotel is associated with the operator under the CRC scheme.

The operator's corporate group will be aggregated with all its franchisees' hotels for the purposes of determining the 'CRC Organization'.

The parent of the operator's group (or the UK group company nominated by the parent) will need to purchase allowances for the whole CRC Organization.

The management agreement will need to determine whether the operator can recover the cost of purchasing allowances as an operating expense and, if so, how rebates given back to the CRC Organization will be re-credited to individual owners.

Unbranded managed hotels

Normally the owner will have the liability to purchase allowances, if it is large enough to qualify. However, if the manager has a single contract for electricity under a group-purchasing scheme for all hotels managed by it, and it pays the bill with a re-charge to owners, then the manager may become responsible for purchasing the allowances. If the manager contracts with the electricity provider, but merely as agent for the owner, then that contract will be considered to be the owner's and the owner will be responsible for purchasing allowances.

Next steps for owners and operators

Hotel operators, who may be aware of the need to measure their own electricity usage in owned and leased hotels and their head offices, may need to ensure that they are in a position to measure usage of all UK hotels operated under one of their brands, whether on a managed or franchised basis. On the basis that no management agreements expressly deal with this issue, operators should ensure that they agree a protocol with their owners as to how the system will operate in terms of re-charging for allowances and re-crediting of rebates.

Owners of branded hotels should challenge their operators/franchisors to explain what they intend to do to minimize the cost of the scheme by maximizing emissions reductions and therefore the rebates available under the scheme.

There will also be implications for investors, purchasers and developers of hotels who, together with owners and operators, will need to seek advice on how the CRC scheme will affect their involvement in the sector.

Professional Negligence Claims in UK

2009-11-30T16:04:00.001Z

UK courts have increasingly been finding that professional negligence claims will become time-barred 6 years after the date of advice, regardless of whether the claim is made in contract or tort.

The Court of Appeal has now confirmed this trend and has expressly recognized that the limitation periods in tort and contract ought broadly to be the same where a claim is essentially contractual in nature.

A professional's relationship with his or her client is usually contractual in nature. However, professional negligence claims tend to be made both in contract and in tort. Often this is done because the limitation period allowed for claims in negligence is perceived to be more generous than for those in contract.

For claims in contract, limitation will run from the date the contract is breached by the provision of negligent advice. However, limitation for claims in tort will not begin to run until the claimant first suffers damage as a consequence of the negligent advice. Claimants often use this to their advantage by asserting that they did not suffer damage until long after they received negligent advice, effectively allowing them more time to bring a claim.

Yet the clear weight of case law, to which the Court of Appeal's recent decision can now be added, shows that claimants very rarely succeed with this argument.

Indeed, the Court of Appeal emphasized that in cases of negligent advice the person relying on the advice will usually have entered into a transaction of some kind which has turned out to be flawed in some way. The fact that the flawed transaction has been entered into will usually be damage from the claimant's point of view, meaning that the limitation period in tort begins to run at that point not at some later date when a more tangible loss manifests itself.

Of course, a remaining potential advantage of negligence claims in tort is that the claimant can benefit from an alternative 3-year limitation period running from the date they first acquired knowledge of their potential claim. However, the case law on this issue is also relatively strict on claimants and only allows them 3 years to investigate whether they might have a claim against a professional rather than allowing them 3 years to issue a claim once they have confirmed the existence of such a claim.

Accordingly, professionals and their insurers can increasingly expect to avoid claims for advice given more than 6 years ago and claimants who delay in issuing their claims run a real risk of being time-barred.

Guest Post: European D&O Market Primed for Robust Growth

2009-11-09T13:47:00.001Z

New laws put corporate directors at risk, sparking demand for protection.

Directors of European companies are more likely than ever to be sued by disgruntled shareholders, according to a new report from Advisen Ltd. As a result, directors and officers liability (D&O) insurance is one of the fastest growing insurance products in Europe, and sales will continue to increase at a brisk pace in the coming years.

Accounting scandals and corporate governance shortfalls have led to new laws across Europe requiring greater transparency and heightened shareholder protections. Additionally, legal systems have been reformed to give shareholders unprecedented access to the courts. These governance and legal reforms expose directors to greater liability, and lawsuits naming companies and their directors have increased throughout Europe. Some recent suits have settled for hundreds of millions of Euros.

"The United States is still the world's preferred venue for litigating shareholder lawsuits, but more and more suits are being brought in European courts," said John Molka III, the author of the report. "Increasingly, directors of European companies are demanding insurance protection. The US D&O market has shrunk during the recession, but premium volume is up sharply in Europe."

Securities regulators across Europe have stepped up enforcement activities in recent years, further exposing corporate directors to liability. Regulators across the globe are sharing information and coordinating investigations, putting additional pressure on multinational corporations. Investigations and other enforcement activities not only are costly for companies, they also can spark shareholder suits.

"Underwriters clearly are concerned about the heightened exposure to claims, but at the same time the threat of regulatory investigations and shareholder suits is creating unprecedented demand for D&O insurance," observed Dave Bradford, executive vice president of Advisen. "Most of the largest European companies now buy coverage, and a growing number of mid-size firms are recognizing that they too are potential litigation targets. We expect to see double-digit growth in D&O premium volumes in the coming years, driven by both rate increases and a windfall of new companies seeking to purchase D&O insurance."

Advisen's 20-page report, European D&O Insurance Market to Benefit from Governance and Legal Reforms, tracks the latest developments in legislation, regulation and litigation reform across Europe, and shows how the rapidly shifting management liability landscape is transforming the D&O market. It offers management liability brokers and underwriters a unique pan-European perspective on the D&O market, while presenting actionable information on a country-by-country basis for marketing, sales, product development and strategic planning purposes. The report is essential reading for risk managers of any company with European operations to understand the emerging liability picture and how the rapidly escalating risks faced by their firms' directors and officers vary by country.

European D&O Insurance Market to Benefit from Governance and Legal Reforms can be purchased for $499 at The Advisen Corner, http://corner.advisen.com/reports_topical_european_do.html.

From European Court -- Period of Sickness Occurring During Holiday

2009-10-14T13:43:00.001+01:00

(This information was provided to me by the solicitor firm CMS Cameron McKenna LLP in London.)

The European Court of Justice ("ECJ") has held in Pereda v Madrid Movilidad, that employees who are sick during scheduled annual leave should be permitted to reallocate their holidays, even into the next holiday year.

In 2007, Mr Pereda was injured and he requested his employer to allocate a new period of paid annual leave on the ground that he had been on sick leave during the period of annual leave originally allocated to him. His employer rejected the request. The ECJ ruled that his period of sick leave should not have counted towards his holiday time on the basis that employees are entitled to a minimum period of 4 weeks paid annual leave under the Working Time Directive ("WTD"). The ECJ emphasized the right of employees to a period of actual rest for relaxation and leisure during annual leave, as opposed to sick leave during which an employee is recovering.

This decision is a new interpretation of the WTD; following the ECJ and the House of Lords' recent rulings on the Stringer case that holiday continues to accrue during sick leave. The House of Lords decision in Stringer means that a worker is entitled to take paid annual leave even though they are not at work due to extended sick leave. The question of what would happen if sickness coincided with scheduled leave was not addressed in the Stringer case. Although unlikely to be welcomed by employers, the ECJ's ruling in Pereda has helpful addressed this void however it remains unclear whether employees will be able to claim retrospectively.

As a result of the decision on Pereda, employers should be prepared to manage attempts by workers to exploit the ECJ's decision. A worker could effectively increase their entitlement to annual leave by alleging that they were sick whilst on holiday. Strict requirements on supporting medical evidence should be enforced to avoid abuse.

The judgment is immediately effective for public sector employers but private sector workers may not be able to benefit from this decision until the Government amends the Working Time Regulations. Most employers therefore have time to consider their policies and perhaps even implement changes before the law changes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Sentences of up to 10 years for Insurers or Brokers breaching Export Control Order

2009-10-12T14:47:00.001+01:00

The International Traffic in Arm Regulations ("ITAR") should be well understood by those who operate in the United States. However, if you operate in the UK, you need to also be cognizant of the Export Control Order.

The Export Control Order 2008 is intended to restrict the international movement of arms or other military goods, and penalties for breaching these trade controls can be severe and include an unlimited fine as well as a prison sentence of up to 10 years. Insurers and brokers are caught by the Order if they are involved in insuring, or arranging insurance, in relation to actions prohibited under the terms of the Order.

The Export Control Order is enforced by H.M. Customs & Excise and came into effect on 6th April 2009. Insurance companies and brokers will be expected to comply with the Order, and must have structures in place to ensure that the Order is not being breached. Breaches of the Order can result in criminal penalties being imposed on individual underwriters and brokers as well as their employers, including imprisonment for up to 10 years or unlimited fines.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Chinese Drywall and Product Liability in China

2009-09-29T14:44:00.001+01:00

Recent article from Associated Press (Click here) discusses the issue of Chinese manufacturers ignoring the suits brought against them in the U.S. courts for the products that allege a flood of defective Chinese drywall was sent into the United States after a string of hurricanes in 2004 and 2005. The material is known to decay, creating corrosive chemicals and fumes.

This should not be a shock to anyone who has any dealings with commercial insurance placements in global markets. According to Axco Insurance Information Services Ltd in London, their report on the Product Liability market in China is as follows:

According to official figures from the China Insurance Regulatory Commission ("CIRC"), product liability premiums were around $142.84 million in 2006.

Because of low profit margins and low legal awareness, product liability insurance is rarely purchased in China. Most business is represented by export liability policies, but these are only purchased at the insistence of overseas buyers and normally have indemnity limits of less than $5 million. According to research by Chubb in 2006, only 4% of Chinese exports are insured, the vast majority of overseas buyers apparently accepting the fact that manufacturers' margins are too thin to include an allowance for product liability insurance. There is also the technical difficulty that export liability policies are subject to Chinese law, which means that in some cases US court judgments might not be enforceable against Chinese exporters or their insurers.

The variable quality of Chinese manufactures has been highlighted over the last 12 months by a series of product recalls in the US. Harmful chemicals have been found in toothpaste, seafood and pet food, whilst toys have been found to present toxicity and choking hazards. These problems have led to state-sponsored improvements in risk management rather than increased take-up of product liability or product recall insurance.

Because of lack of experience, reinsurance capacity and overseas claims handling facilities, domestic insurers take second place to the foreign branches in the export liability market. Leading product liability insurers include AIG, Chubb, Huatai (supported by ACE) and Allianz.

Product Liability Legislation

The Product Quantity and Quality Law, effective from 1 September 1993, made sellers and manufacturers strictly liable for injuries resulting from defective products. The law does not apply to unprocessed goods such as fish and defines a defect as "unreasonable danger existing in a product or a product not in conformity with the applicable health and safety standards of the state". Sellers are entitled to recover from manufacturers. Manufacturers can rely on a "state of the art" defence.

The Consumer Rights Protection Law, effective from 1 January 1994, allows a plaintiff to claim against the owner of an exhibition hall or leased premises if the exhibitor or tenant from whom the defective product was purchased cannot be traced. If a consumer is injured as a result of inaccurate advertising, damages can be claimed from the advertising agency if the latter cannot supply the name of the advertiser. Punitive damages are available if the plaintiff can establish fraud.

The concept of product liability is in its infancy in China, unlike the U.S., UK and other countries where the laws and history are more mature. I have to believe that the plaintiff attorneys understood this risk when they took on this action in the courts, and now their need to chase the money around the globe was a worst case scenario for them.

Too often commercial businesses in the U.S. assume that everyone in this global economy are subject to many of the same rules, and therefore insure their risks in similar fashion. There is nothing further from the truth, and this is why it is critical for any business with exposures to overseas risks should have advisors, including their insurance broker, who understand the markets in which they have these exposures.

ECJ Rules on Period of Sickness Occurring During Holiday

2009-09-28T16:05:00.001+01:00

The European Court of Justice ("ECJ") has recently held in Pereda v Madrid Movilidad, that employees who are sick during scheduled annual leave should be permitted to reallocate their holidays, even into the next holiday year.

In 2007, Mr. Pereda was injured and he requested his employer to allocate a new period of paid annual leave on the ground that he had been on sick leave during the period of annual leave originally allocated to him. His employer rejected the request. The ECJ ruled that his period of sick leave should not have counted towards his holiday time on the basis that employees are entitled to a minimum period of 4 weeks paid annual leave under the Working Time Directive ("WTD"). The ECJ emphasized the right of employees to a period of actual rest for relaxation and leisure during annual leave, as opposed to sick leave during which an employee is recovering.

UK Solicitors’ claims arising out of pension schemes

2009-09-21T22:10:00.004+01:00

Pensions is a highly technical and regulated area where trustees and employers are increasingly relying on solicitors (aka attorneys in U.S.) to advise. As a result of poor investment terms and improving mortality rates, defined benefit schemes are, across the board, in deficit. In the recession, where many companies are becoming insolvent, leaving schemes in deficit and without an employer to make good the shortfall, trustees are more inclined to scrutinize the advice they have received to assess whether this has exposed the scheme.

Areas where solicitors may be exposed to claims include:

Drafting scheme documents and amendments to schemes – this remains the principal area of exposure for solicitors;
Conflicts of interest where solicitors act both for the employer of a pension scheme and the trustees; and
Failure to give or to qualify advice.

Solicitors need to analyze areas of potential exposure, and consider the steps that can be taken with a good insurance broker to reduce the risk of claims.

Employment Liability Insurance - Taking precautions in UK

2009-09-17T17:55:00.001+01:00

In the U.S., where employment practices liability insurance ("EPL") originated, claims of this type can typically turn into multi-million dollar lawsuits. While the UK legal system differs vastly from the U.S. - not enabling costly class actions, punitive damages, or juries typically more sympathetic to the claimant to adjudicate - meaning compensation is oftentimes far lower, litigation is undoubtedly on the rise.

According to figures from the Tribunals Service (Click here to learn more about this Ministries of Justice agency) published earlier this year, the number of employment tribunal claims rose sharply to 189,303 for the period of April 2007 to March 2008, an increase of 43% on the 2006/2007 figures.

Despite this, firms that are purchasing EPL, which covers discrimination, harassment and other similar employer-employee disputes, has been relatively low in the UK. For instance, it has been reported by a leading insurance broker that just 17% of the top 100 UK law firms have EPL, compared to 75% of U.S. practices.

Companies which sell EPL in the UK as both a standalone product and as part of its directors' and officers' ("D&O") offering, say that - while the U.S. is more litigious than the UK - England, Northern Ireland, Scotland and Wales are a "long way ahead of many parts of Europe", and that there is an increase in compensation awareness, predicting that interest in EPL will build over the next decade. It has also been reported that the European Union influence will also have an effect because of its focus on protecting consumer rights. The EU is currently consulting on the possibility of bringing class actions, which while they won't be the same as in the U.S., will still provide a vehicle to claim for those that may not singularly do so.

Ignoring obligations

It has long been the case that some firms have a reputation for ignoring their obligations under employment law, and believing that their staff will not take them on in employment tribunals and court, thus choosing to fail to put this type of insurance in place to cover them. There are many reasons for this. Cost is a factor, particularly in the case of larger firms, but also, historically there has not been a range of products in this area on the market - although this is now starting to change. With potential compensation for successful discrimination claims now unlimited, the cost of the premium may be a small price to pay for peace of mind.

The U.S. has seen much higher levels of compensation paid out in discrimination cases, and this may be why a higher percentage of firms in the U.S. have insurance. However, UK employees in all sectors are now more aware of their employment rights than they were 10 years ago and there is no longer the stigma attached to pursuing claims before employment tribunals. The number of discrimination laws in UK is increasing and, therefore, employers are becoming increasingly vulnerable. In a recession, more people become unemployed and, therefore, the prosecution rate for unfair dismissal is bound to increase. Even if the claim is without foundation.

Currently, it is the larger commercial companies (more than 25 employees), rather than the smaller businesses (less than 25 employees), that take out EPL. The theory behind this is mainly because they will have systems in place, an HR department and the right kind of guidance. The company would be UK domiciled, not U.S.

Right fit for all?

Some question whether EPL is the right fit for all firms because the U.S. legal system differs vastly from the UK in a couple of crucial areas - the ability in the U.S. to launch class actions and punitive damages - both of which can lead to multi-million dollar claims. In the UK, compensation is much lower, therefore, while a number of companies buy standalone EPL policies, most of the mid-market companies interested in the product tend to buy an extension to their D&O policy. In a recession, exposure for EPL increases, however, perversely, this is the time where companies are struggling to find the money for extra cover. Most that buy EPL will not cancel it but there are not many buying it for the first time.

Some believe that EPL is not striking the right cord in the UK market. There are reportedly a number of reasons for this. Namely, it was a U.S. product designed for that market, and, in the employment sphere, while U.S. workers have few rights compared to the UK and Europe, they are more prepared to exercise the rights they do have. Also, in the U.S., the cases are determined by jury, not a judge, this is a bigger risk for the U.S. firms.

Given the current economic circumstances and certainty that claims will rise, it is believed this is a market crying out for a good quality EPL policy that is cost effective.

Tougher antitrust penalties for company directors considered in U.K.

2009-08-24T17:14:00.001+01:00

The Office of Fair Trading ("OFT") has announced (here) that it is considering widening its use of competition disqualification orders ("CDO").

Directors of all companies should take note of this proposed tougher stance. At present (and as set out in the OFT's 2003 Guidance) company directors are in practice only likely to face disqualification for breach of competition law if they are found to have personal responsibility for their companies' contravention of the competition rules.

The OFT wants to change this. Note that no changes in the law are required for the OFT to pursue directors with increased rigor. The court's powers already exist. The OFT is simply looking at ways of enhancing company and board competition compliance and explaining how it intends to go about this.

CDOs were introduced by the Enterprise Act 2002, to incentivize compliance with antitrust law by providing sanctions for the individuals responsible. On the application of the OFT or a sector regulator the court can disqualify a company director from acting as a director for up to 15 years if that director's company has breached competition law (for example by price fixing or other cartel offenses), and the court considers the director unfit to be involved in the management of a company as a result. It is also possible for a director to give an undertaking to similar effect to prevent his having to appear in court and have an order made against him.

The OFT thinks that the way in which it has used its powers to seek CDOs so far has not had the desired deterrent effect. It believes that research which it commissioned in 2007 indicates that greater use of CDOs is called for.

The OFT therefore proposes a new approach to maximize the deterrent effect of CDOs. In particular, the OFT would be likely to seek a disqualification order where a director "ought to have known of" or "should have taken steps to prevent" a breach of antitrust law, even if he or she was not personally involved in the breach.

The OFT is also considering extending its discretion to apply for disqualification orders to cases where a company has benefited from the lower levels of leniency. At present the OFT will not apply for the disqualification of a current director of a company which has benefited from any form of leniency, on the basis that to do so might inhibit applications for leniency. The OFT still wants to encourage the early offering of information on cartels, so would not seek disqualification orders against first whistle-blowers or in other cases where a company has qualified for the highest levels of leniency.

The OFT could even in exceptional circumstances seek disqualification orders where no breach of competition law has been proven or where no financial penalty has been imposed.

The OFT asks for comments on its proposals by 20 November 2009.

If any were needed, this certainly provides an extra incentive for directors to get to grips with their companies' antitrust compliance activities.

Piracy in Northern Seas: A New Trend?

2009-08-22T19:21:00.001+01:00

From Business Week Online

These are unpleasant days for the worldwide shipping trade. The global recession and tighter credit markets have sent the Baltic Dry Index, a measure of worldwide shipping prices for dry cargo, plummeting more than 430% from its May 2008 record, to a current level of 2,704. And U.S. ports are expected to see 17% less imported container traffic volume in the second half of 2009 compared with the prior year, according to IHS Global Insight's Port Tracker. Through June, acts of piracy had more than doubled from the same period last year -- and pirates may no longer be confining their traditional zones to East Africa and the South China Sea, based on the experience of the Arctic Sea, the Russian freight vessel allegedly hijacked last month en route to Algeria.

There has been no shortage of intrigue surrounding the disappearance and subsequent retaking of the ship, which had a crew of 15 Russians, and was seized, along with eight hijackers, on Aug. 17 by the Russian Navy hundreds of miles off the coast of Senegal, the Associated Press reported. From piracy to a super-secret state cargo, mutinies, and even an Al Qaeda terror plot, theories abounded on the ship's mysterious experience during what was to be a routine journey. The answer appears to be a much more mundane hijacking and ransom demand. On Aug. 3 the hijackers threatened to sink the boat unless they were paid $1.5 million, CNN Europe reported, quoting a security official with the ship's insurer, Renaissance Insurance Group of Moscow.

The Arctic Sea, operated by the Finnish company Oy Solchart Management under a Maltese flag, left port in Finland on July 23 with a load of timber headed for Algeria. The next day the ship reported to Swedish authorities that masked, armed men boarded the vessel from a speedboat, and over the next 12 hours interrogated and beat crew members, smashed communications equipment, then left. Despite the alleged hijacking, Swedish authorities did not send a ship to check on the Arctic Sea, a fact that raises alarms and questions for Andrew Linington, a spokesman and 25-year veteran at Nautilus International, a London-based seafarers' union. "It's going through the world's busiest waterway, and nobody thinks to send out a naval vessel to see if it's O.K.," says Linington.

On July 28 the boat radioed Britain's Maritime & Coastguard Agency -- a communication protocol -- before heading south down the English Channel. Roughly 400 boats pass through the waterway each day, and there was nothing unusual about the 320-foot vessel's communication, agency spokeswoman Maggie Hill said.

The Arctic Sea was transporting an estimated $1.8 million worth of timber to the Algerian port of Bejaia and had been due to deliver the shipment on Aug. 4. Despite reports that the cargo belonged solely to Stora Enso, the Helsinki-based paper and package maker, company officials say that was not the case. "Out of the 6,700 cubic meters of wood on the ship, only 200 cubic meters are ours," Stora Enso

spokesman Lauri Peltola says. The cargo, he says, is a mix of lumber from UPM Timber, a Finnish competitor, and other lumber providers in the area. Ships and cargo are typically paired by brokers, and boats tend to be loaded up as fully as possible to save costs and increase efficiency.

Circumstances Still Murky

Africa has seen a significant increase in piracy off its eastern coast and in the Gulf of Aden, a high-traffic area that feeds the Red Sea and Suez Canal. In the first six months of 2009, 240 ships worldwide reported being attacked, up from 114 during the same period in 2008, according to the London-based International Maritime Bureau [IMB]. The Arctic Sea's alleged hijacking, however, happened a few thousand miles northwest, in the Baltic Sea. "I've certainly never heard of a ship being hijacked before in these waters," says Paul Gunton, managing editor of Fairplay 24, a London-based Web site that covers international shipping news.

At an Aug. 14 press conference, as the hunt for the ship was in full swing, the European Commission said that the Arctic Sea's experience had "nothing in common with traditional acts of piracy or armed robbery at sea," according to Reuters. Still, while the European hijackers may not have fit the mold of the now-common Somalian pirates, they certainly had the skills to commandeer a large vessel, says Nick Davis, chief executive of the Merchant Maritime Warfare Center, a London- and Yemen-based security firm.

Davis is skeptical that all the facts of the case will be uncovered in light of the complex international politics and diplomatic sensitivities already emerging. Despite the arrest of Estonian and Latvian citizens, Russia has not given either country information on the case, Bloomberg reported on Aug. 18. Swedish, Maltese, and Finnish authorities plan a joint formal inquiry to investigate the incident, which they called "aggravated extortion and hijacking," according to a press release on the Finnish National Bureau of Investigation Web site.

International Networks Face Tests From U.S. Courts – Third in a Series

2009-08-19T17:57:00.001+01:00

This is the third in a series of posts that discuss the challenges now facing certain professional global networks. Specifically, we looked at an accountant's network, and two (2) cases that have affected how they operate now. Today, I conclude this series by discussing what all of this means to professional networks operating globally.

What lies ahead for International networks

There is nothing exceptional about many of the arrangements that were regarded in these two cases as constituting sufficient evidence to allow the "agency" claim to proceed to trial by jury. Networks will rightly object that, if the umbrella entities were to be shorn of all such functions, their ability to promote and safeguard the network brand in the interest of all members would be severely limited. Nevertheless, Parmalat suggests that claimants will be given added encouragement if an umbrella entity, rather than an external party, acts as arbiter between member firms, or gives the appearance of influencing the course or outcome of a member firm's engagement.

Of course, the umbrella entities faced a much higher evidential threshold on the motions which resulted in these two judgments than they would at trial. There they will be able to present evidence of member firms' autonomy and raise other matters which sit uneasily with the agency theory (such as the retention of profit by member firms). The ultimate evaluation of these factors will, however, now lie with the jury in those cases.

The real prize for U.S. claimants is the deep pocket of any member firm that might be attacked through the umbrella entity. It is to be expected that networks will have long sought to protect their members from the risk of being required to indemnify umbrella entities against potential vicarious liabilities. While member firms have recognized the risk of claims alleging their direct control over other firms, the claim against the U.S. firm in Parmalat demonstrates that member firms might also face claims in U.S. litigation involving (in effect) allegations of indirect control exercised through their alleged control of umbrella entities. The liability of the member firm in question is then wholly dependent on the issue of the umbrella entity's own vicarious liability. Pending the final outcome of the claims in Banco Espirito Santo and Parmalat, a member firm that is particularly influential within a network organization should be aware of the danger arising from any activity that might be capable of being presented as consistent with an allegation of control over the umbrella entity (for example through the actions of partners or executives who sit on the board of that entity). Firms may also wish to consider whether their insurance policies provide appropriate protection against claims based on their indirect control of other firms through umbrella entities.

The Banco Espirito Santo and Parmalat cases serve as a reminder that international networks, and leading member firms, continue to face vicarious liability risk in the U.S.. For so long as that remains the case, the current fashion for international integration may be unlikely to lead to true global partnerships or common ownership across the members of each of the large accounting networks. Networks will undoubtedly monitor future developments in order to gauge whether the effect of recent integrations has been to increase the opportunities for claimants to select the U.S. as a forum for litigation, and to balance this against any commercial advantage to be gained from establishing closer legal relationships between member firms in a highly globalised business environment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

International Networks Face Tests From U.S. Courts – Second in Series

2009-08-18T12:46:00.001+01:00

(In this second installment in the three-part series, we will review two (2) cases in the U.S. Courts that have shaped the discussion on how accountants' global networks work.)

The Banco Espirito Santo case

In spring last year, in Banco Espirito Santo International Ltd v BDO International BV, the Florida Court of Appeal (Third District) overturned a judgment in favor of BDO International which had been made following a successful motion at the trial of claims in tort and contract against it and its U.S. member firm. The trial judge had found that the plaintiffs had failed to present sufficient evidence to succeed in their agency claim. However, the appellate court decided that, when seen in the light most favorable to the plaintiffs (the relevant test for the application being made), the evidence was capable of establishing the three requirements of an agency relationship so as to support a verdict in favor of the plaintiffs:

acknowledgment by the principal that the agent will act on its behalf;
acceptance by the agent of the undertaking; and
control by the principal over the actions of the agent.

The necessary evidence was chiefly located by the Florida Court of Appeal in the following:

The objects of business set out in the Articles of Association of BDO International, which included the control and management of partnerships in the international association;
The testimony of BDO International's secretary that it "co-ordinated and monitored" the member firms;
The Member Firm Agreement ("MFA") signed by the U.S. firm. This stipulated that BDO International owned the intellectual property in the technical manuals containing the auditing standards and procedures which the U.S. firm was required to follow and the software it had to use, under the terms of the MFA, in all of its audits (therefore, including the audit that was the subject of the claim). The court also considered that the terms of the MFA "imposed operating directives and restrictions that extend far beyond those utilized in mere licensing agreements" (for example, requiring firms to assist in product development) and bore similarities to operations manuals distributed to mere franchisees; and
BDO International annual reports referred to the quality control exercised over member firms.

The Parmalat decision

On 27 January 2009, a New York court refused a motion for summary judgment made by Deloitte Touche Tohmatsu ("DTT"), its U.S. member firm ("Deloitte U.S.") and the individual who was CEO of both entities, in defense of the class action by investors in Re Parmalat Securities Litigation which alleges violations of U.S. securities legislation. The Parmalat plaintiffs allege that DTT is liable for the acts of its supposed agent Deloitte Italy in auditing Parmalat, and that DTT is the alter ego of Deloitte U.S. and that the CEO is liable under the securities laws as a "control person". A strike-out motion (directed at the adequacy of the pleaded case) in respect of the allegation of agency was dismissed by the same court in June 2005.

The summary judgment motion argued that DTT was merely a secondary actor and, as such, not liable for Exchange Act violations in light of the Supreme Court decision in Stoneridge Investment Partners LC v Scientific-Atlanta Inc. The court rejected the contention that Stoneridge provides a defense for parties sued under U.S. securities legislation for the acts of their agents. The court also held that summary judgment could not be ordered here because agency was capable of being established by various pieces of evidence including:

the objects set out in DTT's Articles;
DTT's role in setting audit methodologies and stipulating software to be used;
the provision made in member agreements for DTT to review compliance with quality standards;
DTT's control over the acceptance of engagements including referrals from other members;
the use of DTT legal staff by member firms; and
the authority conferred on DTT's CEO role, by a practice manual, to arbitrate disputes between member firms, and the role played by DTT in arbitrating such a dispute over the content of an audit opinion in respect of a Parmalat entity. In the court's view, this suggested that DTT had the power to impose its will on a firm's professional judgment

The court repeated its strike-out decision concerning s20(a) of the Securities Exchange Act that DTT could be held liable for parties under its control, irrespective of whether it exercised specific control over them in respect of the particular engagement.

Deloitte U.S. and the CEO were also unable to persuade the court to dismiss the Parmalat claim for lack of evidence. The court found that there was sufficient potential evidence of Deloitte U.S. control over DTT, on the basis that its executives (including the CEO) occupy key positions at DTT, it contributes a significant portion of funding for DTT, and that there was evidence of influence over DTT's decision making.

In the third and last installment of this series, we will discuss what these cases mean, and the impact they have had on theses professional global networks going forward.

International Networks Face Tests From U.S. Courts – First of Series

2009-08-17T00:56:00.001+01:00

(In this first of a series, we will discuss the background of how some global networks of professionals operate. In this series, we will specifically review the global network of an accountant firm.)

Two U.S. court decisions within the last 18 months have demonstrated the perils for international networks when member practices are sued in the U.S.. These decisions coincide with a period in which closer links are being forged within some of the largest networks.

Background

Traditionally, most large accountancy networks have operated as relatively loose associations of national firms, with membership regulated by a non-trading "umbrella" entity which does not own any interest in the member firms. In order to protect and enhance the international brand, the umbrella entity is typically given power to lay down professional standards to be followed throughout the network, and may undertake activities such as quality review, training, arranging staff transfers and client data sharing.

Since June 2006, two of the Big 4 networks have each announced their own plans for much closer legal relationships between some or all of the European member firms within each network. In each case, rather than creating an international legal partnership to take the place of the national firms, the new arrangements involve the establishment of a new LLP as a non-trading holding entity for the national firms which are to be trading subsidiaries.

These new structures exhibit two features that merit comment here:

Although under common ownership for the first time, the national firms will continue to trade separately from each other.
The geographical range of these new arrangements is regional rather than worldwide.

The majority of accountancy networks have not followed this example, although some have indicated that there will be closer relationships between firms at a regional level. Clearly, developments such as these are driven by commercial factors, but issues concerning legal risk are an important part of the background to these changes.

A risk that is particularly associated with network structures is that a member firm may become exposed to allegations that it is vicariously liable for the acts and omissions of other member firms. Although claimants have very rarely seen fit to chance their arm before a judge in an English court on such matters, the decisions of courts in the United States have provided some of the strongest indications of the legal risks involved in closer worldwide integration of firms within accountancy networks. While that much is predictable, the outcome of U.S. litigation in this field is proving to be less so. Over the last decade, U.S. claimants have often failed in their attempts to construct a case against a "deep pocket" member firm such as the U.S. firm, where that case is entirely founded either upon that firm's actual relationship (through the network) with the principal defendant firm, or on the representations made about that relationship.

Claimants have had more success in persuading U.S. courts of the viability of their cases against umbrella organizations. They typically advance their case on one or more of the following theories of liability (which have also featured in the claims attempting to fix member firms with liability for the faults of other members):

the "alter ego" theory, in which it is argued that the international umbrella entity is so dominated by a member firm that it primarily transacted the member firm's business rather than its own affairs;
the "agency" theory, in which it is argued that the member firm is acting on behalf of the international entity and is under its control;
the "partnership" theory, in which it is argued that there is a single business carried out by the member firm and the international entity together. Alternatively, it may be argued that the international entity is in effect bound by a representation made by the member firm that they are in partnership, which the claimant had relied on when engaging the services in question.

Umbrella entities have been relatively successful in dismissing alter ego and partnership claims. However, in the last 12 months U.S. courts have made two decisions which have highlighted the dangers presented by agency allegations. In both cases, the substantive allegations of agency are now to undergo trial by jury.

In the next installment of the series, we will discuss two (2) major cases that have impacted the global accountants' network.

Brazilian Insurance Companies Prepare to Face Market Challenges

2009-08-11T15:28:00.001+01:00

The Brazilian insurance market continues to be the largest in Latin America followed by Mexico, Argentina and Colombia. Despite its low participation in GDP, a time of regulatory transition and deterioration in the macroeconomic environment in the short term, it still presents significant potential for greater development once a consistent recovery in economic growth is observed, according to the Fitch Ratings report published.

The 'bancassurance' process has predominated in the market, as well as the strong presence of large national financial conglomerates, with a relevant participation of the main foreign insurance and reinsurance groups active in Brazil. The growth of the Brazilian market has been favored by greater economic stability and the increase in corporate and personal incomes, which has altered the consumption and savings habits of the population.

Fitch analysts observed that advances in the regulatory framework have been cautious. In their opinion, the effective breakup of the IRB-Brasil Resseguros (IRB) monopoly in the reinsurance market in 2008 is expected to bring progressive benefits and modernization to the industry over the medium and long term. Fitch believes that sector performance will continue to be affected by the slower resumption of local economic growth, due to deterioration of the investment environment and the economy, and the impact of the global financial crisis. In addition, the effects of smaller financial gains due to the return of the declining interest rate cycle are expected to negatively affect the earnings generated by insurers, even though they have maintained high ROA and ROE, around 3% and 20% at the end of 2008, respectively.

To mitigate these effects, the main Brazilian insurers have accelerated their search for greater operational efficiency, reorganizing their main processes and supplier cost controls, as well as streamlining their underwriting models. This has led to better and lower combined and operating margins, with the average of the 10 largest insurance companies having reached 96% and 84% in 2008.

Fitch also expects competition to intensify in some segments going forward, including those that are more relevant, such as pension funds, further pressuring the insurers' generation of earnings.

D&O Insurance In Germany - The New Legislation Arrives

2009-08-10T12:45:00.001+01:00

Unlike in many jurisdictions, directors' and officers' liability insurance is not compulsory under German law. Nevertheless, D&O coverage is expected as a matter of good practice, as set out in the German "Corporate Governance Kodex" ("the Code"). Furthermore, the Code has for some time recommended that listed companies agree in their D&O policies upon an "adequate" deductible to be borne personally by the directors protected by the policy. By imposing a personal interest on the part of the directors concerned, it was sought to motivate them to avoid claims arising, although the question of what constituted an "adequate" deductible has remained vague.

In practice, many German companies have circumvented the requirements altogether, relying upon a standard form of derogation from the Code in their annual filings, with a statement that a deductible "would not improve the consciousness of responsibility" of their directors, or otherwise motivate them to avoid damage arising.

The position has now changed for directors of German stock corporations. Following a period of debate in the Bundestag (Parliament of Germany), the new Act on the Adequacy of Managerial Salaries (Gesetz zur Angemessenheit der Vorstandsvergutung - VorstAG) was passed on 18 June 2009. The new provisions will come into force immediately following ratification by the federal house, the Bundesrat, and subsequent publication in the German Federal Law Gazette (Bundesgesetzblatt).

The Act amends section 93 II 3 of the German Stock Corporation Act (Aktiengesetz - AktG), and requires that listed companies purchasing D&O insurance for their executives must impose a personal deductible to be borne by the directors equivalent to at least 10% of the relevant loss, up to an annual maximum figure calculated by reference to the fixed remuneration of the director from time to time. Practical guidance is to be found in the accompanying Reasons (Begrundung, BT-Drs 16/13433) issued by the legislator, which states that the required personal deductible shall consist of at least 10% of each loss, subject to an absolute annual cap which must be set at not less than one and a half times the annual fixed remuneration of the director. The aggregate cap is to be reviewed annually to reflect movements in the fixed element of the director's remuneration.

The requirements are to be applicable to all stock corporations, whether in fact listed or privately owned, although, under Germany's two tier system of corporate governance for such companies, only members of the board of directors (Vorstandsmitglied) are affected, and not supervisory board members (Aufsichtsratsmitglied).

The provisions will apply with immediate effect to all newly concluded D&O insurance contracts, while those already in existence are to be amended with effect from 1 July 2010 at the latest. There is a transitional exception in the case of those companies already obliged under an existing service contract to provide D&O insurance cover to the director without deductible. In those cases, the policy terms may remain unchanged until the appointment of the director, and the underlying service agreement, expire. The statutory maximum appointment term of a board member is five years.

Interestingly, the legislation does not prohibit directors from insuring their deductible exposure separately, leading to speculation that the reforms will simply give birth to a new line of business in the form of D&O deductible insurance. While responsibility for the premiums for such a product would have to be borne privately by the directors, there is nothing to prevent them seeking a commensurate uplift in their remuneration to cover the outlay. Furthermore, any obligation to disclose such an arrangement in corporate filings would require an amendment to the Code as it stands.

At the same time, the new Act on the Adequacy of Managerial Salaries also brings about an amendment to section 87 I AktG, which will now oblige the supervisory board members to ensure that the total remuneration of members of the board of directors is a suitable reflection of their tasks and performance, and of the performance of the relevant company. It requires that the usual ("ublich") remuneration of a director is not to be exceeded without specific reasons. Furthermore, in the case of listed stock corporations, the directors' remuneration has to be consistent with the sustained ("nachhaltig") development of the company, and the performance elements of directors' remuneration are to be assessed on the basis of several years, up to the entire term of appointment. Short-term performance measures are no longer acceptable. The new provisions also stipulate that the responsibilities of the supervisory board with respect to directors' remuneration may not be delegated to the general meeting.

The new remuneration and D&O provisions expressly do not apply to a private Limited Liability Company (GmbH).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Lloyd's Report Suggests Global Businesses Worry About Wrong Risks

2009-08-07T20:15:00.001+01:00

(This post was written by colleague Robert O'Connor, London editor with A.M. Best. He can contacted via eMail at Robert.OConnor@ambest.com)

Business executives around the world may be more worried about risks that don't pose a threat to them than those that do, according to Lloyd's.

High among the concerns of businesses are external risks such as lost orders and foreign exchange movements, Lloyd's said in a report. Lower on the list are such internal issues as corporate liability and damaged reputations.

The report, "Risk Priorities and Preparedness," was released jointly with the Economist Intelligence Unit. Lloyd's described it as one of the largest surveys ever conducted on risk. It sought the views of 570 board level-executives around the world on 20 risks. Broad risk categories included the environment and health, business and strategy, natural hazards and political risk, crime and security.

"Since late 2007, the contraction of credit in financial markets and the subsequent economic downturn has had a dramatic impact on corporate confidence," the report said. "Across the full range of regions and industries, companies are postponing investment, cutting costs and retrenching into core markets."

Business executives should be aware of the actual risks they face, Lloyd's Chairman Peter Levene said. "While good risk management will help to minimize internal factors, they should recognize that they need to extend their thinking outwards to their suppliers, customers and other stakeholders to ascertain how their behavior will resonate with the company itself," Levene said in a statement.

Levene recalled last year's Lloyds 360 Risk Insight report, which he said warned of the international spread of "a U.S.-style compensation culture."

He said businesses should not ignore such long-term perils as climate change. The current report "will form the basis" of a new interactive global risk map that will be released next year, according to Lloyd's.

The document pointed to what it said is the growing role within organizations of risks managers. The importance of someone who can keep a companys reaction to risk sensible and accurate is essential," Levene said. "Risk is not a dirty word . We just need to understand it to manage it properly.

Businesses in China and Southeast Asia are likely to place particular emphasis on environmental and health risks, the report said. Political risk and crime were given more priority in the Middle East, North Africa and Latin America.

Lloyd's has a current Best's Financial Strength Rating of A (Excellent).

Directors’ Conflicts Of Interest - Getting It Wrong Can Cost Millions

2009-08-04T21:53:00.001+01:00

The Companies Act in the United Kingdom has codified the duties directors owe to a company, one of which is to avoid situations where the director has or can have a direct or indirect interest which conflicts or may conflict with the company's interest. Directors are obliged to declare their interest in any transactions or arrangements with the company and failure to comply with these duties can cost directors dearly. The Courts have recently ordered a director guilty of a serious conflict of interest to repay over £2 million to the Company.

In this case, the two parties were equal owners of Palmier plc and were directors of the business which imported women's clothing. Director A also owned another company which acted as agent for Palmier organizing and paying for shipping of goods to Palmier and being paid a commission for its services (the "Agent"). Palmier found itself in financial difficulties and following negotiations with a large creditor agreed to use funds it expected to receive as the result of a Value Added Tax ("VAT") rebate amounting to approximately £1.6m to pay the sums due. On the day the VAT rebate arrived in Palmier's account it was immediately transferred to another account and the company then went into liquidation. Director B brought an action under Section 212 of the Insolvency Act 1986 against Director A on the grounds that he had misapplied company money and breached his duties to the company.

It was argued that Director A had breached his duties to Palmier by causing the VAT rebate to be transferred from the company's account to the Agent's account and it was also argued that Director A had secretly paid excessive commissions to the Agent for his own benefit.

The court ruled against Director A finding that he had been guilty of a conflict of interest and had acted dishonestly. The Judge declared that Director A was well aware that his duties as a director of Palmier and of the Agent placed him in a conflicting position and that he had fixed commission rates for the Agent which had not been properly declared to Palmier resulting it suffering significant losses. In addition, it was found that he had instructed the transfer of the rebate payment to the Agent and that the transfer was not made for purposes connected with Palmier's business. In essence he was attempting to "milk" Palmier to look after his other business interests and concealing from Palmier his true relationship with the Agent and the profits the Agent had been making.

On that basis Director A was ordered to have the Agent repay £927,000 in relation to overpayment of commission and to ensure that the sum of £1.6 million the VAT rebate was also restored.

This case should emphasize to directors the need to make sure they are open and transparent in all of their dealings with their Company and that any potential conflicts have been properly notified to the board and approved prior to any action being taken.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Directors and Officers Liability insurance develops in India

2009-08-02T16:09:00.001+01:00

Directors and Officers liability insurance (D&O) has become the fastest evolving and most dynamic insurance policy in India. Though the policy was drafted by Lloyds Insurers in the 1930s for an American company, its importance was virtually unknown in Asia and particularly in India for a long time. Only in the last two decades, when overseas investments started flowing into the country, had this product become quite visible and corporations took note of it.

Pharmaceuticals, airlines, IT software and banking were the most crisis prone sectors in the last four years. D&O policy does not belong to a company, even though the insurance is generally bought by the company for the benefit of directors and officers. It is a personal policy belonging to each and every director and officer of the corporation and its subsidiaries.

In commercial crime, internal fraud is on the rise in every country, which is a common development when economic conditions are poor. An increasing problem is the white collar crime involving enormous cost for a company. Company directors believe that absence of any reported fraudulent activity means there is no fraud within and fail to consider the indirect and incidental costs. The most common problem is misappropriation of assets through fraudulent disbursements.

Of crime losses seen by insurers, about 80 per cent came from employee theft and the balance mostly from premises and forgery coverage. The Commercial Crime policy offers a more comprehensive coverage than the traditional fidelity guarantee policy and covered loss caused by unidentifiable employees and loss caused by an employee acting in collusion with a third party.

First charges brought under the UK’s Corporate Manslaughter and Corporate Homicide Act 2007

2009-08-01T15:41:00.001+01:00

This story has been reported in many news sources, and should be of particular interest to those companies with operations in United Kingdom. The first ever charge of corporate manslaughter brought under the Corporate Manslaughter and Corporate Homicide Act 2007 (the 2007 Act) was due to be heard yesterday in Stroud Magistrates Court. The case got off to a bit of a false start, however, as no pleas were entered and the case was referred to Bristol Crown Court. The preliminary hearing was due to begin on Tuesday 23 June where the court will set the timetable for the case. The judge will direct the date on which the prosecution case is to be served, when the defense statement is to be served and when the Plea and Case Management hearing will take place.

Cotswold Geotechnical Holdings Limited is the company being prosecuted, in relation to the death of one of their employees, Mr Alexander Wright. Mr Wright died on 5 September 2008 while taking soil samples from inside a pit which had been excavated as part of a site survey. The sides of the pit collapsed, crushing him to death. Mr Peter Eaton, a director of the company, has been also charged with the common law offence of gross negligence manslaughter, and with a breach of Section 37 of the Health and Safety at Work Act 1974 (HWSA). Aside from the corporate offence, the company has also been charged with a failure to discharge its general duties under section 2 of the HWSA, which requires employers to ensure, so far as is reasonably practicable, the health, safety and welfare at work of employees.

As the first ever prosecution for corporate manslaughter, this will undoubtedly be a landmark case. The company being prosecuted in this instance is however a small, family company where the directors are closely involved with the day-to-day running of the organization. It is therefore doubtful that this case will provide much in the way of significant insight or understanding on how fines under the 2007 Act will be applied to larger corporations. The reputational damage associated with a conviction for corporate manslaughter is arguably the greatest deterrent to companies, and perhaps the most important aspect of this case will be whether, if convicted, the company is made subject to the "publicity order" provided for in the 2007 Act. A publicity order will require a company to advertise their conviction and the penalty imposed. Of course, with or without a publicity order, there will almost always be a great deal of publicity surrounding any conviction for corporate manslaughter, as can be seen from the press coverage to date of the case against Cotswold Geotechnical Holdings.

Arbitration In Australia - Winds Of Change Or Merely A Breeze?

2009-07-31T13:50:00.001+01:00

This article is courtesy of Mr. Ron Salter and he can be contacted as follows:

DLA Phillips Fox

140 William Street

Melbourne Victoria 3000 AUSTRALIA

Tel: +61 39274 5000

Fax: +61 39274 5111

E-mail: clare.buttner@dlaphillipsfox.com

Website: www.dlaphillipsfox.com

Phillips Fox has changed its name to DLA Phillips Fox because the firm entered into an exclusive alliance with DLA Piper, one of the largest legal services organisations in the world. We will retain our offices in every major commercial centre in Australia and New Zealand, with no operational change to your relationship with the firm. DLA Phillips Fox can now take your business one step further - by connecting you to a global network of legal experience, talent and knowledge.

For the better part of a century - or perhaps even longer - arbitration has been the preferred method of dispute resolution in the maritime industry. Just as the concept of 'look and sniff' arbitration developed for commodity quality disputes, arbitration was presumably seen as the ideal means of dispute resolution, involving arbitrators appointed from within the industry seeking to resolve disputes expeditiously and inexpensively without the need for legal intervention.

In this article we look at the current state of affairs for arbitration and the debate surrounding legislative reform.

The changing face of arbitration

In a paper delivered at a Chartered Institute of Arbitrators International Dispute Resolution Conference in Kuala Lumpur last year, and published in (2009) 75 Arbitration 231, Bruce Harris, a leading maritime arbitrator, reflected upon his years of experience in maritime arbitration in London. Harris stated: '45 years ago, most arbitrations were conducted by the parties themselves, their brokers or agents, but not by lawyers. Each would appoint an arbitrator. The claimant would send its nominee a short letter setting out its claim accompanied by the documents it relied on.

The claimant's appointed arbitrator would send that on to his counterpart who, in turn, would pass it to the respondent asking for comments by way of defence and any documents the respondent relied on, and those would then be sent back via the arbitrators to the claimant who would have a right of reply; and the arbitrators would then proceed to their award.

In this very quick and simple (and cheap) procedure there were no, or at least very few, requests for further information and no real question of any type of discovery. Procedural questions were happily ignored, as very often were the subtleties of legal argument. Whilst the arbitrators were bound to apply English law as best they could, they normally reached a commercially sensible decision which, happily, would usually be in line with the law.

In the absence of something going seriously wrong, no one would challenge the arbitrators or their proceedings; and there would be no question of arbitrators' conclusions being reviewed by the judiciary unless one party thought there was a real question of law involved and asked the arbitrators to state their award in the form of what was called a "special case" for the opinion of the court.

This meant that the arbitrators did not generally need any legal expertise either to run these informal proceedings or to reach their conclusions. If they found themselves in difficulty on the law, they would often consult a solicitor or appoint a lawyer as third arbitrator or umpire.'

Of course, as Bruce Harris himself pointed out in his paper, much has changed in the 45 years since he commenced his involvement with maritime arbitration. In particular, he observed that today's cases were often far more complicated, both on the facts and on the law than they had been in times gone by, and that conduct of arbitration had became far more elaborate and legalistic. Nevertheless, it is fair to say that arbitration remains the dispute resolution mechanism of choice in the maritime industry, particularly for disputes arising under charter parties and contracts of affreightment, for disputes arising under ship building contracts, and for salvage disputes.

A need for legislative reform?

In Australia, with its federal system of government, separate arbitration regimes exist in parallel for international arbitration and domestic arbitration. While the states and territories are concerned with domestic arbitration, the Commonwealth Government has a constitutional responsibility for international arbitration.

The relevant Commonwealth legislation is the International Arbitration Act 1974 (Act). As a result of a cooperative effort in the early 1980s, the states and territories each operate under legislation which is fairly uniform, but not entirely so.

The Standing Committee of Attorneys-General (SCAG), which involves state and territory Attorneys-General and the New Zealand Minister of Justice, has been discussing changes to the uniform state and territory legislation for quite some time without moving forward. However, with increased agitation for change emerging from a number of sources, not least Chief Justice Spigelman of the New South Wales Supreme Court, SCAG, at its last meeting in April 2009, agreed to the preparation of new uniform commercial arbitration legislation based on the UNCITRAL Model Law on International Commercial Arbitration, 'supplemented by any additional provisions as are necessary or appropriate for the domestic scheme'. The stated aim of the draft model Bill is to give effect to the overriding purpose of commercial arbitration, which is to provide a method of finally resolving disputes that is quicker, cheaper, and less formal than litigation.

A little earlier, in November 2008, the Commonwealth Attorney-General, the Honourable Robert McClelland announced a review of the Act, and his department published a discussion paper. The paper invited the making of submissions by interested parties, and despite the fact that a relatively short time frame was given for those submissions, some 24 separate submissions were made. Each of those submissions has been taken into account, and the process for the drafting of new legislation has been put into place. The last news we have had is that the Attorney-General's department is hoping to have the legislation ready for the spring session of Parliament.

The November 2008 discussion paper posed eight major questions and also invited other observations. Many of the questions posed received either unanimous or near unanimous responses, but two particular issues, which might be described as territorial disputes, brought a considerable divergence of opinion. One of these issues was whether the Act should allow for the appointment of an arbitral institution to perform a number of the functions set out in the UNCITRAL Model Law, and the other was whether the Federal Court of Australia should have exclusive jurisdiction in matters concerning international arbitration. The latter issue, in particular, provoked a wide divergence of views, with the state and territory Chief Justices pressing strongly for the retention of the jurisdiction of their respective courts.

For the Australian arbitration practitioner, and participants in the maritime industry involved with arbitration, the outcome of the various discussions and debates will be of interest. Whatever side of the argument a particular interest group supports, it is apparent that the common thread binding reform of the domestic and international regimes is one of improving both the substance and the perception of arbitration as a dispute resolution means.

However, it remains to be seen whether the reforms will occur soon, or whether we will be left waiting for several years for any action. The likelihood is that the winds of change will blow through the international arbitration regime while a gentle zephyr will waft through the domestic arbitration regime for a number of years.

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.

Australia Climate Change and D&O Implications

2009-07-30T20:18:00.001+01:00

(Note: I have been away from this post for a few months attempting to develop a more robust site with information from around the world. To date, the primary information available has been with the assistance of colleagues and partners in United Kingdom and EU countries. For the most part, many of my Clients have the bulk of their exposures in that part of the world, therefore, my focus is greater. Recently though, I have been able to develop greater issues-related information from other countries. I hope to continue to develop this broad base of information on risk for you.)

The legislation in Australia for the Carbon Pollution Reduction Scheme highlights the need to consider carefully the scope of D&O insurance policies.

The Bills introduced into Australian Parliament to implement the Carbon Pollution Reduction Scheme will impact directly a large number of entities and their directors and officers. There will also be a broad, indirect impact when emissions trading starts. The CPRS Bills draw attention to key areas of D&O insurance policies.

Liability of executive officers and insurance for pecuniary penalties Under Part 20 of the Carbon Pollution Reduction Scheme Bill 2009, 'an executive officer will contravene a civil penalty provision if they are involved in a contravention by their company'. This makes executive officers personally liable for misconduct of the company if they have been reckless or negligent. The result may be significant pecuniary penalties imposed on the executive officer.

The Consequential Amendments Bill also extends the liability regime under the National Greenhouse and Energy Reporting Act 2007. Part 4 of the NGER Act will no longer be limited to liability of chief executive officers. It will, like the CPRS Bill, soon apply to a director, the chief executive officer, the chief financial officer and the secretary of a company. This would appear to include non-executive directors.

Traditionally insurers in the Australian D&O market have excluded liability for fines and penalties under D&O policies. Recently however there has been a move by some insurers to provide cover for civil penalties in some circumstances. It may be against public policy to cover officers for civil penalties where there has been a willful or deliberate breach of duty. On the other hand, vital cover may be available for officers who have only been negligent. It is recommended that companies and their directors may wish to consider whether their D&O policy provides cover for pecuniary penalties and whether that cover will extend to potential liability under the CPRS and NGER Act.

The new regulator and insurance for investigation costs

The Australian Climate Change Regulatory Authority Bill 2009 establishes the Australian Climate Change Regulatory Authority, which will be responsible for administering the CPRS, the Renewable Energy Target and the National Greenhouse and Energy Reporting System. Since climate change is one of the Federal Government's key priorities, it may well become a powerful regulator.

When ASIC launches an investigation, the company and its directors can incur significant costs. The market for D&O insurance covering investigation costs has grown in recent years. Some policies will now cover directors for their costs in responding to an ASIC notice or attending an examination by ASIC, even if they have not been accused of any wrongful act. A more extensive policy may even provide cover when no formal notice has been served but the director is nevertheless required by the regulator to co-operate in some manner. When the Climate Change Authority exercises its powers, directors may need to look to their insurer to cover investigation costs.

Liability linked to the company and insurance for outside directorships and JVs

In its current form the CPRS Bill allows for transfer of liabilities and the nomination of a joint venture company to be the responsible entity. It is possible that a company may be liable for the control of a facility by an entity which is not a member of the company's group. An executive officer can be personally liable for their company's contravention of a civil penalty provision in the CPRS. That liability is linked to the company and not the operating entity.

The Government is continuing to consult with key stakeholders about controlling corporation liability and mechanisms to transfer that liability within corporate groups. For directors who hold outside directorships and responsibility in relation to unincorporated joint ventures, however, it may be time to consider carefully the scope of their D&O policy as it applies to these issues. Some policies do not provide cover for outside directorships unless specifically requested. Others may automatically cover directors nominated to the boards of other companies but may exclude joint ventures.

Pollution exclusions

Finally, many insurance policies contain an exclusion relating to liability arising from the release, discharge or escape of pollutants. These are generally broadly worded exclusions. They could go so far as to impact cover which may otherwise have been available for liability under the CPRS.

Directors may wish to have frank discussions with their insurer about cover in relation to the CPRS. At a minimum, directors may want to consider a D&O policy which provides cover for "pollution defense costs". They may also consider seeking that cover without a sub-limit of liability. A more extensive policy may even cover shareholder claims arising from pollution issues.

Conclusion

Subject to their passage through Parliament, the Bills establishing the CPRS will herald a new era in corporate responsibility. It is yet another reminder of the importance of considering D&O insurance in the context of the company's broad risk management framework.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Arbitration clauses and anti-suit injunctions

2009-06-05T15:00:00.001+01:00

This topic is important to those of you with policies in UK and EU. It was provided by CMS Cameron McKenna LLP in London, and contains important guidance on this clause within insurance contracts. The entire article follows:

An English court will, in appropriate cases, grant an anti-suit injunction in favour of arbitration to preclude a party from pursuing litigation in another jurisdiction, provided that the matter is not governed by EU Regulation 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (and the Lugano Convention as well) (the "EU Regulation"). Where a dispute is governed by an arbitration clause which identifies the seat of the arbitration that court has exclusive supervisory jurisdiction over the arbitration. As such, any challenge to any award of the arbitration must be brought in that court alone, and an English court will, provided the EU Regulation does not apply, order that the party must not continue proceedings in another court.

In a recent case, claimants sought an anti-suit injunction in this situation. The claimants had benefited from a favourable costs award made by an arbitral tribunal. The defendant challenged the costs award in the Indian courts. The claimants brought proceedings to enforce the award in England. They also sought to restrain the defendant from continuing with the Indian proceedings through an anti-suit injunction.

The court's judgment can be summarised as follows.

1. The underlying claim concerned alleged breaches of a shareholder agreement. The agreement contained an arbitration clause whereby all disputes were to be referred to arbitration in accordance with ICC Rules. The governing law of the agreement was Indian law.

2. The Arbitration Act 1996 states that the seat of the arbitration means the juridicial seat of the arbitration to be designated by the parties or the tribunal or other institution if so authorised by the parties. If there is no such choice, it is to be determined having regard to the agreement of the parties and all the relevant circumstances.

3. The seat of the arbitration designates the court which has jurisdiction to supervise the arbitration, including the enforcement of awards.

4. Seat is not the same as venue - the two places may be different.

5. In this case, however, the fact that arbitration clause stated that the venue of the arbitration was to be London and that it would be conducted in English was used by the court to reach the conclusion that the parties had identified London as the seat of arbitration.

6. The ECJ had decided in the West Tankers decision that anti-suit injunctions were not permitted under the EU Regulation and that this applied to proceedings regarding the enforceability of an arbitration clause (for our law now on that decision, please click here). In this case, it was conceded that the EU Regulation did not apply. Therefore they did not preclude the court from granting the anti-suit injunction.

7. The court was unable to reach a decision on the injunction itself because there were some questions of fact on which evidence was required (for example whether or not the claimant had in fact already submitted to the Indian court).

The decision shows, amongst other things, that the English court is still willing in matters outside the scope of the EU Regulation to grant anti-suit injunctions in appropriate cases. One such case is where the other party is seeking to circumvent an agreed arbitration clause through a court other than the court of the seat of the arbitration.

Further reading: Shashoua & Others v Sharma [2009] EWHC 957 (Comm)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. There are a number of qualified firms with experience of advising firms on governance and risk management arrangements, as well as representing both organizations and individuals involved in FSA investigations and enforcement. You should seek their counsel on specific issues.

UK’s Financial Services Authority talks tough

2009-05-24T18:33:00.001+01:00

The Financial Services Authority ("FSA"), is the regulator for all providers of financial services in the United Kingdom, and the FSA is leaving no doubt in its recent speeches to the industry that it means to get tough with those firms and senior management which fail to meet the required standards. The current economic crisis has caused many to question FSA's effectiveness and it is responding with the introduction of its new intensive supervisory approach and the pro-active use of its enforcement powers to ensure firms and senior management sit up and take notice. It is focusing particularly on achieving more effective governance and risk management.

The intensive Supervisory Model

FSA is adopting a more direct and intrusive approach to supervision. The most important aspect of which is moving away from ensuring that the appropriate systems and controls are in place and relying on management to make the right judgments to a model where it will "seek to make judgments on the judgments of senior management". As FSA has said, this means regulation based on judgments about the future.

As part of this new approach, FSA is also switching its resources to focus on outcomes testing. It has said that, for example, on conduct issues, a better use of resources is 'mystery shopping' and 'branch visits' rather than detailed reviews of high-level management information.

To achieve this end and ensure the resource is of a higher quality than in the past, FSA intends to hire an extra 280 specialist and supervisory staff, a 30% increase in its supervisory capacity, and has introduced a new Training & Competence scheme, which involves a regulatory testing regime for existing supervisors.

These changes are significant; FSA has termed it a "supervisory revolution". Firms will therefore see a much more hands on and intrusive style of supervision from FSA and need to be prepared to deal with this and be able to demonstrate the quality of their decision making and risk management.

The competence of senior management and non-executive directors ("NEDs")

Ensuring that senior management and non-executive directors are competent to carry out their roles is a critical part of this approach. FSA has concluded that it is not the governance structure which needs to be overhauled but the attitude and competencies of the individuals responsible for governance.

As part of its significant influence function ("SIF") review, FSA announced in its consultation paper in December 2008 the introduction of interviews for candidates for key functions. The presumption is that for high impact firms, the Chair, the CEO, Finance Director and Risk Director will be interviewed and FSA supervisors may interview others if they consider it appropriate. In the first six months of this new policy being operative 51 have been interviewed and in a number of cases the applications have been withdrawn following the interview. FSA intends to publish a further statement on the proposed SIF changes it outlined in its December consultation paper.

Firms need to be aware that part of the assessment of a firm's management and governance will include a review of the competence of SIFs looking at knowledge, skills, behavior and expertise. FSA regards ensuring NEDs have the relevant and diverse expertise and willingness to challenge the board as a crucial aspect of its enhanced supervisory approach.

NEDs will need to improve their technical skills particularly in the areas of risk management, regulatory understanding and the business model of the firm. It is envisioned that this will lead to "provisional" NEDs to allow time for current NEDs to acquire the necessary expertise. It will also mean that NEDs will be more full-time and can therefore expect the compensation they receive to reflect that.

FSA is also expecting a greater level of direct communication between NEDs and the FSA and greater use by NEDs of independent advisers. FSA has been careful to stress that it is not seeking to encourage conflict, with the NEDs competing against the executive, but merely to create a culture of challenge, allowing independent views to be expressed without undermining the unitary board model.

Risk Management

FSA has stressed the importance of having effective risk management function with clear independent reporting lines to the Risk Committee. FSA has emphasized the key role of risk officers, which should be recognized by firms by ensuring that the risk officer has the same stature as a unit head. Indeed, FSA expects to see an executive director solely responsible for risk on the main board. Executives must be able to understand the circumstances in which their firm would fail and what plans have been put in place to mitigate these risks.

Enforcement and the Credible Deterrent

FSA's determination has been demonstrated by the first use of its criminal prosecution powers (and the promise of more to come), albeit that it has still to convict any high profile people; the increasing use of its civil market abuse powers; and in the action it has been taking against individuals, particularly those with senior management responsibility. Last year it imposed a record amount in financial penalties - over £27 million ($43 million) - and prohibited a record number of individuals. FSA now seems to be more willing to bring difficult cases which take longer and are more difficult to prove. FSA has said the number of individuals with significant influence functions under investigation has increased threefold in the past 12 months.

It is important that the firms' senior management and NEDs take note of the points made by FSA in recent speeches, particularly with regard to risk management and effective governance. In the future, it is expected the FSA will be assessing the quality of management's judgments. FSA is sending out a clear warning that it will take action against individuals where failings or incompetence are found and this might mean significant personal fines, prohibition and certainly unwelcome publicity.

Coverage for Swine Flu a Concern for U.S Workers Abroad

2009-04-29T20:56:00.002+01:00

With much of the news recently about Swine Flu affecting people who are traveling abroad for their job, I wanted to develop a quick post on for my clients and friends to remind them of insurance coverage that may already available to them for this matter.

Specifically, I have reminded them to review their international insurance policies, and familiarize themselves with the coverage afforded in the International (Foreign) Worker Compensation policy. Under the Employers' Liability and Workers Comp section, you should expect to find coverage for Endemic Disease contracted outside the United States. A definition of Endemic Disease found in the Chubb International Voluntary Workers Compensation policy [Form 11-02-0604 (Ed. 2-87)] "means an infectious disease, including diseases which are borne by air, arthropods (i.e., arachnids, crustaceans, insects), blood, food or water, provided that the disease: 1) is indigenous to a particular region outside the United States and Canada; or 2) occurs in epidemic proportion outside the United States and Canada." You should expect to find similar definitions in policies offered by other insurers.

Continuing to look at the same Chubb International WC policy, they state, "This insurance is intended to be primary for your covered employees whose bodily injuries arise out of and in the course of employment by you outside the United States and Canada or who contract endemic disease while in your employ outside the United States and Canada."

Additionally, all of these insurers offer access to travel assistance services offered by third parties, such as MedEx. Even if you are not a Client, you can visit their website and learn more about this outbreak, and useful tips, tools, and services they have available.

It is understandable for employers to be concerned about the well being of their employees and their company. A quick review of their policy with their broker or agent experienced with the international insurance solutions can help relieve some of their anxiety.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Liability for Losses Caused by Foot and Mouth Outbreak in UK

2009-04-24T19:19:00.004+01:00

(Not to Confused by 'Foot In Mouth' which sometimes afflicts us all.)

In a recent decision which is of interest to liability insurers, the court struck out claims brought by farmers against the operators of a research facility and the U.K.'s Department for Environment, Food and Rural Affairs ("DEFRA") following escape of the foot and mouth virus from the facility.

The first and second defendants ran a research facility at which amongst other things, investigations were undertaken into foot and mouth disease. The virus escaped from the compound and infected livestock in the region. The third defendant, DEFRA, was responsible for licensing and regulating the research site. The claimants alleged that the defendants were liable for the escape of the virus (in the case of the operators of the research facility) or for failure to regulate properly (in the case of DEFRA).

Certain of the claimants owned livestock which had been culled, either because they were infected or because it was suspected they were infected. These claims were settled. The livestock of the remaining claimants were not culled. There were however restrictions imposed on transporting livestock to other land, to market, to abattoirs etc. The remaining claimants claimed that they had suffered loss as a result of the restrictions, and sought to recover these amounts from the defendants. The defendants applied to strike the claims out.

The court upheld the defendants' application to have the claims struck out:

1. where the restrictions imposed caused the animals to pass the stage where they were in prime condition for sale (for example pigs which had become overweight), then there was a "real prospect" of the court concluding that this amounted to physical damage to those animals;

2. otherwise, the losses claimed were purely economic loss, since there was no physical damage to the livestock or the farmers' land;

3. in either case, there was no duty of care owed to the farmers to prevent the losses suffered; and

4. the remaining claims would therefore be struck out.

The decision serves to re-emphasize the fact that the courts in the U.K. are prepared to impose limits on the duties owed by wrongdoers especially where the loss suffered is purely economic, and especially where there is a real risk of an indeterminate liability, in other words, the "floodgates would be opened" if the claim was allowed. This is reassuring for liability insurers, and their insureds. It does, however, limit the ability farmers have to claim for pure economic losses arising out of foot and mouth outbreaks caused through fault on the part of a third party.

Further reading: D. Hare & Partners (a firm) & Others v Institute for Animal Health & Others [2009] EWHC 685

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

No Water Increases Basic Property Risks

2009-04-12T15:26:00.002+01:00

When I read the newspaper or hear a news report on a news channel, I always consider it through my prism of interest – be it geopolitical, global economic, or risk analysis.

An example is the following article which was recently reported by BBC. The lack of water supplies in countries like Mexico is not unusual. In fact, when analyzing the risk to property in Mexico, regardless of its location, oftentimes I am told that a property has a sprinkler system to protect against fire. Unfortunately, when further analysis is done, you discover that there is no reliable water sources, therefore the sprinkler system pipes are filled only with air.

The article concerns me because it points to an increase risk to a basic peril of fire in insurance policies, and risk analysts should be mindful of this increase of exposure.

Water cut off in Mexican capital

Mexico City officials have shut down a main pipeline providing fresh water to millions of residents because reserves have fallen to record low levels.

The closure, due to last 36 hours, will affect five million people, or a quarter of the city's population.

Unusually low rainfall last year and major leakage are blamed for leaving reservoirs less than half full.

Hundreds of water trucks have been deployed in the areas worst affected by the cuts.

The local government says it will carry out emergency repairs to the water supply network.

More than 50% of the water carried by the pipeline leaks out before it reaches its destination.

This is the third time the capital has faced such a drastic form of water rationing this year, the BBC's Stephen Gibbs in Mexico City reports.

It has been deliberately timed to coincide with Easter weekend, when many residents, or at least those who can afford to, leave the city, our correspondent says.

Mexico City was once a floating city, built on a spectacular chain of volcanic lakes, and flooding used to be its main environmental threat.

But since the lakes were finally drained in the 1960s, the city has been struggling with its water supply, our correspondent says.

Piracy Whose Risk Is It Anyway?

2009-04-09T16:59:00.003+01:00

The problem of piracy has once again made the news in the United States with this week's taking of the Maersk Alabama, but had actually recently hit new heights in Somalia with the hijacking of Faina and Sirius Star earlier this year. With the latter, we are talking of insured values of up $100m for the cargo and up to $150m for the hull, at a time when insurers are already under pressure. This is and always has been a problem for London, given that, ultimately, a large proportion of the assets at risk are likely to be insured or reinsured in London. Working with a colleague in London, I wanted to offer the following to you:

Since Hicks v Palington in 1590, it has been assumed that ransom payments are a subject for general average contribution. That seems fair, although the contributing parties should perhaps logically include P&I insurers, which will have a strong interest in releasing the crew and in preventing any major pollution incidents, and sue and labor expenses could well be covered in the relevant P&I rules/cover in any event. The clubs' worst case scenario might include a deliberate pollution incident by 'suicide' pirates just off the beautiful beaches of the Seychelles, for example. Alternatively, it is not difficult to foresee the taking of a cruiseship where the lives of more than 1,000 people could be at risk. So far the legal liability of P&I interests to contribute to ransom payments by way of general average has not been tested in the English Courts, but such a dispute cannot be far off, particularly where, for example, the insurer is not from the international group and the liability is potentially huge. So much for P&I, but there are plenty of other insurers that might be liable in a piracy, including cargo insurers, loss of hire insurers, and, for the vessel, hull or war risks insurers.

It is clear that the ICC(A) cargo clauses cover piracy, and that the (B) and (C) clauses do not (unless additional cover is purchased). The position there is very clear. The same, however, cannot be said in relation to coverage of ransom in respect of the vessel itself, even though ITCH 1983 or 1995 expressly covers 'piracy'.

Assuming that these attacks are covered as 'piracy', then ransom payments (arguably along with all the other expenses involved in dropping off the ransom and recovering the vessel) should be recoverable as a 'sue and labor' expense (to avoid a total loss caused by piracy).

The issue is whether on certain facts this will be excluded from the hull insurance but instead falls on war risks. The issue might be fairly irrelevant in cases such as Sirius Star where it is understood that the hull and war risks underwriters are the same.

However, it is easy to imagine future cases where high-value vessels such as this have the hull and war risks placed with separate underwriters. Further, it is common for there to be no deductible for war risks (compared with a hefty deductible for hull), and likewise there might be separate warranties, such as a warranty not to sail within, say, 250 miles of the Somalian coast, which may only be incorporated in one or other cover.

The ITCH clauses clearly cover 'piracy', but exclude loss or expense "caused by... any terrorist or any person acting from a political motive" (the 'Strikes' exclusion). Likewise they exclude loss or expense "caused by any weapon of war and caused by any person acting maliciously or from a political motive" (the 'Malicious Acts' exclusion).

It is also stated in ITCH that these exclusions "shall be paramount and shall override anything contained in this insurance inconsistent therewith". There is then an express buy back for these exclusions in the institute war and strikes clauses. The purpose of the drafters is clearly that piracy falls on the hull rather than the war risks underwriters, but it could be that this is not the case on certain facts. The Joint Hull and War Committees' 2005 wordings, which are rarely used, place piracy risks squarely on the war risks cover, so the concern relates to the traditionally used 1983 and 1995 wordings, where it could be argued that the position is less clear.

What exactly is piracy? The classic definition of a pirate is in Republic of Bolivia v Indemnity Mutual Mar Ass Co Ltd (1909), which is "a man who is plundering indiscriminately for his own ends, and not a man who is simply operating against the property of a particular state for a public end, the end of establishing a government, although that act may be illegal and even criminal, and although he may not be acting on behalf of a society which is politically organised."

It should be borne in mind, however, that this was an old case, on the f.c&s. (free of capture and seizure) clauses, and modern day pirates are different, especially in the context of Somalia.

It seems that no one has produced any evidence that the acts of piracy that have taken place to date out of Somalia have been carried out for political purposes, but there is a fine line between these latest acts and acts of terrorism, which as above fall clearly on the war risks cover. At the very least, the problem might arise where the motives are a mixture of financial and political. With the sums at stake, one assumes that it is only a matter of time before evidence of political motives surfaces, no matter how dangerous it is to obtain that evidence.

In circumstances where warlords are raising huge sums of money, in a country where there has been no organized government for many years, it is not difficult to imagine ransom monies being channeled into weaponry purchased with the specific aim of gaining political control in Somalia, for example. Evidence of that would be very likely to trigger the 'Strikes' (or terrorism) exclusion in ITCH 83 or 95, passing the whole problem onto war risks.

Further, other difficulties could arise such as the ransom payment being illegal under English law under the Proceeds of Crime Act if, at the time the ransom was paid, the paying parties had reasonable belief that the organization being paid was a terrorist one.

It is also conceivable that a hull insurer could seek to rely on the malicious acts exclusion, which would also put this risk, unwittingly perhaps, onto war risks. It is not difficult to articulate the behavior of the Somalian warlords who are behind these attacks as malicious in the extreme, and clearly they are using weapons that can be described as weapons of war. This point also seems to have been untested in the English Courts.

Against this backdrop of uncertainty, where delays and wranglings with insurers can literally mean the difference between life and death, it is not difficult to see why a proliferation of bespoke kidnap and ransom covers are suddenly being offered to shipowners, although many will have thought they already had this cover through their hull insurance.

Buying a specialised additional cover is one solution for the shipowner, but the likely long-term solution for the London market and its customers is to end the debate by making all forms of piracy, politically motivated or otherwise, a clear subject of the war risks cover, thus joining forces with the approach taken by most of the wordings drafted by London's competing markets. Until then, the ticking time bombs out there might not only be those in the hands of Somalian pirates.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Tax authorities and insurance regulators scrutinise Freedom of Services insurance

2009-04-03T00:52:00.006+01:00

I recently came across this article written by Mr. Richard Asquith of BNA International in the United Kingdom, who is an expert on the Insurance Premium Tax. What caught my attention with this article in particular is the clarity he gives to this very complicated issue. He exposes some very real issues that are going to face insurers who insist on writing global programs, yet ignore their obligation to comply with the rules of taxing authorities.

As I read this piece, it also reminded me of some issues that have been raised by my partners in the Europe. Namely, when the controlling, global company insists on charging a minimum premium for a substantial exposure in a country, this upsets the local insurers in that country. These local insurers are becoming more active in alerting the taxing authorities, and therefore making it extremely important to be in compliance. Otherwise the Clients are the ones who will be given the tax bill, and I can assure you that this will be an unpleasant conversation.

Mr. Asquith's article is as follows:

About the Author

Richard Asquith is the Managing Director of TMF VAT & IPT Services in the United Kingdom, which assists with IPT compliance through 79 worldwide offices. The TMF Group is a global independent management and accounting outsourcing firm.

Since the opening of the European insurance markets to cross-border competition, insurers have successfully developed new multi-territory insurance programmes tailored to the needs of globalisation. Whilst initially neglected by foreign tax authorities, in the last 18 months, they have been actively catching up on missed revenue opportunities. In addition, local insurance regulators are now showing signs of enforcing strict compliance rules on in-bound carriers to provide a level playing field for their own native insurers.

I. How insurance premium tax works ("IPT")

IPT, a global tax on insurance premium contracts, is administered in many ways. Most countries apply a percentage of the total premium, often including broker fees, to calculate the tax due. The time of the tax liability, "tax point", varies – for example when the premium is paid, or when the policy matures.

For most territories, the insurer is responsible for administering IPT. This includes the calculation of the tax, and the collection and settlement of liabilities to each relevant tax authority. However, in most countries, the policyholder is next in line for the tax liability. Should the contract issuer fail to take care of the IPT, then the tax authorities are able to pursue the insured party. For buyers of global programmes, this is becoming a hot issue. Often brokers are confused with the complexities of IPT compliance. This is being picked-up by the tax authorities, who are seeing the policyholder as an easier target for any IPT that is due. As described below, they are now taking direct action in a number of countries.

On top of premium tax, insurance contracts also attract a number of parafiscal charges. These represent additional levies to be settled alongside the IPT, and vary hugely from country-to-country. Again, the insurer, working with the broker, should take care of these. The complexity in this area comes from understanding the variety of taxes, to whom they are payable and how to settle. For example, many taxes can only be paid from a bank account in country – a huge administrative burden on international programmes.

II. Where is IPT due?

Historically, the international IPT liability was assumed to fall due within the territory where the policy was written. In this case, IPT was calculated locally, and paid over to tax authorities all too willing not to challenge this presumption.

The European Union, under its Freedom of Services regime, was amongst the first trade block to review this issue. In its 2nd Non-Life Directive, it clarified the location of the taxable insurance supply as to where the risk was to be located. Therefore, the risks on global insurance programmes had to be allocated by country, and the relevant IPT rules and rates applied.

In 2001, this principle was tested in the European Court of Justice. The Kvaerner Case has come to be cited as a defining moment in the international insurance premium tax market. Kvaerner, a large Scandinavian engineering company, purchased an international insurance plan in the London insurance markets. At the time of writing the contract, the UK IPT rules were applied. This case was brought by the Dutch tax office, which believed that it was due IPT, under its rules, for the Kvaerner risks located in the Netherlands. This case went all the way to the ECJ, which found in favour of the Dutch tax authorities.

Crucially, in addition to illuminating the principle of the location of the IPT liability, the ECJ also stated that Kvaerner, as the policyholder, was liable for the IPT. This put the policyholder directly in the sights of the tax authorities. Since then, there has been a rush by policy issuers and risk managers to ensure that any IPT is properly allocated and accounted for.

Building on the Dutch Kvaerner Case, other tax authorities are looking towards IPT as an additional source of revenue. In 2007, the UK tax authorities brought hearings against DSG (the old "Dixons Group") around its insurance cover provided from the Isle of Man. HMRC attempted to use Kvaerner to demonstrate a UK IPT liability where the Isle of Man issued cover applied to UK-located risks. Whilst DSG escaped on a technical issue, it showed the willingness of the tax authorities to apply Kvaerner. Another recent case of note is Homeserve, where the UK taxman successfully applied IPT on an "arrangement" fee for domestic emergency home cover.

III. European IPT compliance

The EU operates the world's largest trade block. For a number of the European-wide taxes such as VAT, it issues governing legislation and Directives. However, it has no such interest in IPT even though many of its member states now charge IPT on foreign-generated risk programmes. This means there can be large differences in rates, methodologies and timings of taxes between countries.

Some 30 European countries now permit foreign insurers to provide cover in their countries without a local branch or subsidiary. This is provided under Europe's Freedom of Services ("FOS") regime, which has its roots in the EU's original Treaty of Rome. For insurers wishing to use FOS, they simply need to apply for local passporting rights from their local insurance regulatory. This requires the assistance of their home insurance regulator. Often, insurers are obliged to appoint a local fiscal representative who is responsible for reporting and payment of any IPT due.

At present, it is almost entirely "Western" Europe where FOS insurers face an IPT regime. With the exception of Slovenia, there is no IPT on FOS premiums further to the east. This will change as the countries are encouraged by the World Bank and IMF to mature their insurance tax systems. Nevertheless, insurers may still face parafiscal charges, such as fire brigade charges in Hungary.

Many Non-European insurers can often write business across the region on a non-admitted basis. However, the tax authorities often then view the policyholder as liable in the first instance. This has important implications, as we will see below.

IV. International IPT

For global insurance programmes outside of the US and Europe, IPT compliance is tied-up with local insurance regulation. For many global programmes, if there is a local underlying policy, compliance with local tax is taken care of by the local agent/broker. No problem.

However, many insurers still work on a non-admitted basis internationally – despite it being illegal in a number of countries, e.g. Brazil. Since most countries' regulators and legislation actually ignores non-admitted contracts, tax has been overlooked too.

To cover the policyholders' potential IPT liability, it may be required to include a clause indemnifying the insured against any foreign taxes.

V. International tax authorities take note

In the past year or two, IPT has become a "soft" target for foreign tax authorities. Primarily, this is because of the increase in global programmes, fuelled by risk managers attempting to simplify their insurance cover and realise cost savings. A further reason is the pressure felt by national insurers from their global competitors who have been writing premiums across borders. The national insurers, via their local insurance associations, have been pressuring their tax offices to step-up IPT audits.

On a regular basis, new examples of the direct action of the tax authorities emerge. In both Austria and Germany, the tax authorities have been contacting the large global insurers asking for details of international programmes, and confirmation of how the IPT is being administered. In France, there are cases of the direct tax authorities co-operating with their IPT colleagues on identifying policyholders whose tax is non-compliant.

All of this activity is now showing up on the compliance and risk manager's radar – this is no wonder with them fearing that they may have to meet any fiscal shortfall. Most of the large corporations are now asking their insurers to provide clear documentary evidence of the management and settlement of foreign IPT. The largest groups have gone further, and are requiring indemnity against any international insurance premium tax. This is leading to a scramble by insurance auditors looking to spot any unresolved historic charges.

VI. A new, improved mutual assistance directive

For any serious level of co-operation to be undertaken between the European tax authorities, there has needed to be a more rigid set of guidelines for the sharing of data. In the past, it has been all too easy for insurers to be vague about their cross-border activities (even with the best of intentions) as long as foreign tax authorities were unable to cross-check activities with each other.

The EU's original answer to this problem was the Mutual Assistance Directive, which was intended to enable rapid exchange of data and activities on companies between the varying tax authorities. It also included measures to facilitate bringing legal proceedings on behalf of each other. However, it proved unwieldy and underused. There is no doubt that its ineffectiveness contributed to the neglect of IPT on cross-border insurance outlined above.

To help combat this, the Directive was redrafted in the Summer of 2008. This has now tightened up many of the loopholes in the old document. The only question mark now hanging over this otherwise potentially effective tool is workload: insurance centres such as the United Kingdom and Ireland are already deluged by enquiries from other European tax offices.

VII. Insurance regulators toughen up

Whilst few welcome unscheduled visits or even fines from the tax authorities, many insurers seemed to be willing to ride out the risks. Often this was simply down to the low levels of coverage and low risk of immaterial fines. Many managers within the insurance carriers simply had too many other bigger issues to handle.

However, this outlook is going to have to change quickly if the trend for the foreign insurance regulators to get involved with tax compliance continues. It was inevitable that regulators would at some point become more demanding on compliance for Freedom of Services insurers. What seems to be driving a new wave of audits from the regulators are local insurance associations pushing for a more level playing field for their members who are being squeezed by large global insurers moving into their markets.

An interesting case is Italy. A source of huge frustration for insurers has been the inability to get satisfactory "closure" on historic non-compliance in Italy. As with VAT, the Italian tax authorities seemed to be unwilling to accept back filings or confirm payments. However, the Italian insurance regulator has this year been taking a much stricter view. They are insisting on a complete record of all back filings be completed and filed. This can result in hours of work for insurers, and unwelcome questions from the regulator on procedures.

It is apparent that the tax authorities are much more willing to pass over cases of non-compliance to the local insurance regulator. Switzerland features highly in this regard. Many insurers, particularly from North America, have been correctly calculating Swiss Stamp Duties (there is no IPT in Switzerland) when quoting for global programmes. They have then charged this on to the insured – often believing they can pay over the IPT directly to the authorities on behalf of their policyholder. However, in Switzerland, it is often the insured party that must report the tax due. When approaching the tax authorities, such cases may be passed through to the regulator. Global insurers issuing multi-territory programmes centrally, but with local branches are particularly vulnerable to the regulators' wrath in these situations.

Given the ultra sensitivity of insurers to their market reputation, the fear of crossing swords with insurance regulators is certainly going to drive IPT compliance back to the centre of everyone's attention.

VIII. Conclusion

The complex variations in international IPT regulations and rates have often meant that insurers and risk managers have elected to ignore any tax liabilities. However, the foreign taxman and insurance regulator is now forcing a re-think as he seeks to catch-up on outstanding liabilities. With the policyholders now increasingly worried about their liability exposure, it is becoming vital for insurers to tackle this issue.

Anyone who does not may be the next to take a call from the tax authorities or regulators.

European Commission Promoting Class Action In European Union

2009-03-19T12:19:00.001Z

The European Commission has made facilitating private enforcement of competition laws a priority, especially in the area of class actions to complement public enforcement of European Union competition and consumer protection laws. Although some of the key developments remain in the hands of the EU Member States, the Commission is working to promote changes in national laws to enable private damages litigation across Europe. In particular, the EC currently is running two parallel initiatives to develop class actions.

The first initiative is headed by the Directorate-General Competent for Competition ("DG COMP") within the framework of private enforcement of competition law. In April 2008, DG COMP published a White Paper setting out its proposed measures and policy choices. DG COMP suggests two complementary mechanisms of collective redress:

The possibility for qualified entities consumer associations, state bodies, trade associations to bring collective actions on behalf of identified individuals (or, in restricted cases, identifiable victims). These entities would be designated in advance by Member States or certified on an ad hoc basis by a Member State for a particular competition law infringement.
The introduction of opt-in collective actions, in which victims of antitrust violations combine into a single action their individual claims of harm by a single defendant or set of defendants.

In addition, the White Paper suggests a limited system of discovery between parties.

The European Parliament is set to vote on its own report on the White Paper around 20 March 2009. This report is likely to give DG COMP the green light to go ahead with the introduction of antitrust class actions, without waiting for the second, consumer protection initiative described below. However, the report is likely to advocate that the Parliament should be involved in the legislative process, under the co-decision procedure, which is likely to further delay the process. On the basis of the Parliament's report, DG COMP will proceed with more detailed proposal of legislation.

The second initiative is headed by the Directorate-General Competent for Health and Consumers ("DG SANCO"). This effort aims at introducing a system of collective redress for victims of consumer law violations. DG SANCO published a Green Paper on Consumer Collective Redress in November 2008. This Green Paper suggests four options, one of them being introduction of a judicial collective redress procedure on a pan-European basis.

Several law firms have commented on the Green Paper on behalf of several clients, who have argued that, contrary to the Commission's assertions, the introduction of collective redress will not boost cross-border trade and that the introduction of class actions is likely to cause more harm than good. The Commission should focus on more effective ways of solving disputes between traders and consumers, notably the establishment of a better framework for handling consumer complaints by businesses and for alternative dispute resolution mechanisms. Harmonizing national consumer legislations would be more effective in boosting cross-border trade.

Later in 2009, DG SANCO is expected to present another policy paper, reflecting the comments it has received. It is likely that stakeholders will be afforded the ability for further comment on any proposal.

One policy question is whether in practice it would be workable to have two different systems, one for competition law violations and one for consumer law violations. In some cases, a victim may want to bring claims based on both a consumer law and a competition law violation. In response to this question, recently Competition Commissioner, Neelie Kroes, stated that continuing with a separate approach for competition law infringement was likely to be more efficient than implementing a horizontal framework for collective redress applicable to all infringements.

Although aggressive, U.S.-style private litigation should not soon be introduced in Europe, the EC and some Member States are advocating new litigation regimes that will bring significant changes to the legal landscape. Private litigation in England already is especially active (as discussed in this prior Alert on damages in private cartel actions in England). This will be closely watched by the EU legal and business communities.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

D & O disputes: in which jurisdiction will claims against directors be heard?

2009-03-16T14:53:00.001Z

This article was prepared by colleague in London. For more information, you may contact:

Maxine Cupitt

CMC Cameron McKenna, LLP

Mitre House

160 Aldersgate St.

London EC1A 4DD

The issue of what jurisdiction a claim is brought in can have far reaching implications for D&O insurers; affecting the costs of the action, the chances of defending it and any amount ultimately payable by way of indemnity.

In a recent decision (Choudhary and Others v Bhattar and Others [2009] All ER (D) 163 (Feb), the English court has confirmed that the jurisdiction of any dispute involving a company registered in an EU member state which concerns the validity of decisions of organs of the company (such as the board of directors) will be governed by the jurisdiction of the EU member state in which the company has its seat.

This is because the court of the member state will be obliged to apply the EU Regulations that govern jurisdiction (and the enforcement of judgments). Those regulations provide that where a company has its seat in an EU member state, any dispute involving the validity of the company constitution, the nullity or dissolution of the company or the decisions of the organs of the company shall be determined in the courts of that member state. It does not matter that the competing jurisdiction is outside the EU. The key question is: where does the company have its seat? If this is outside the EU, then the regulations do not apply.

The seat of the company is determined according to the law of the EU member state whose courts are hearing the case. So if the case were being heard by the English court, the seat of the company would be the place it was registered.

In this particular case, the company was based in India but registered in England. The claimant directors alleged that the defendants had improperly seized control of the company. The case came before the English courts who concluded it should be heard in England, by virtue of the regulations. Whether the case was "more closely connected" to India or whether India was the "more natural forum" was irrelevant.

If this decision were to extend to all actions of directors of companies, then its application to claims against directors and officers would bring clarity to the law. Unfortunately, this is not the case. Where claims against directors and officers are concerned, the court will ask: what is the substance of the dispute? Is it the validity of the actions of the board? If so, the case may come within the regulation set out above. If not (say where individual directors have been charged with fraudulently appropriating company funds), then different sections of the regulations might apply. So if, for instance, either a derivative action or an unfair prejudice action under the Companies Act 2006 is brought, the court will look to the substance of the dispute not the identity of the parties to determine the correct regulations to apply to the dispute.

Let The Finger Pointing Begin

2009-03-13T17:48:00.001Z

In a 23 February 2009 Business Insurance article entitled "Unpaid Premium Taxes in Europe Put Policyholders at Risk", I found myself screaming at the paper I was reading. In the article, it describes the fact that despite the landmark ruling by the European Court of Justice in 2001 which set a precedent for the payment of outstanding insurance premium tax liabilities across the European Union, the article suggests that experts in the D&O marketplace have ignored the issue. What was more amazing is that the article implies that perhaps brokers, carriers and risk managers were not fully aware. Unbelievable!

If any of these people had wanted to act properly, all that was needed was to discuss it with the international resources within the brokerage and carrier community, and they would have been advised properly on the issue. These resources who structure programs for the U.S. companies on all their other property and liability lines of business, have been addressing tax issues on policies extending to local coverage in countries for years.

I know first-hand that this issue was researched, discussed, and presentations made to management of one carrier, only to have them say that the cost associated with it (read 'being in compliance') was more than they wished to spend. Short sighted for sure. I will be curious who will take the fall for this decision when the tax bills come due.

For those unfamiliar with the case, Kvaerner plc, a UK resident company, purchased an insurance policy from a UK insurance company to cover all of its global operations. Included within its global operations was a Dutch company, John Brown Engineers en Constructors BV, which was held through a wholly owned UK subsidiary company.

The insurance contract stated that the insured could be Kvaerner itself and any of its subsidiaries and associates as instructed by Kvaerner. Kvaerner paid the full premium and passed the costs onto the relevant group companies. Without specific instruction from John Brown to do so, Kvaerner included John Brown within the insurance coverage and indirectly invoiced a share of the premium to John Brown.

Upon discovery of the insurance policy, the Dutch tax authority billed Kvaerner for Dutch premium tax on John Brown's allocated share of the global premium. In 2001, the European Court of Justice ruled that the Dutch tax authorities were entitled to collect this tax and so the decision went in favor of the Dutch tax authorities.

Under Dutch tax law insurance premium tax is levied on insurance premiums covering risks situated in the Netherlands. Location is defined as the principle establishment of the legal person and any other permanent presence of the legal person. Dutch tax law is in accord with EU law which states that every insurance contract shall be subject exclusively to insurance premium taxes in the EU country where the risk is situated. This is further described as the country where the policyholder has habitual residence or where it is a legal person.

The ECJ was asked to rule on three questions;

Can a tax authority of an EU country levy a legal entity established in another EU country for premium taxes due on a business establishment within its boundaries where the premium was paid to an insurer based in the EU? ECJ Ruling: Yes
Does it matter if the policyholder is not the overall parent company, but some other company in the group? ECJ Ruling: No
Does it matter if the cost of the insurance premium is not passed on (wholly or in part) to the subsidiary company? ECJ Ruling: No. The method of payment or invoicing is irrelevant. Even if no intra-group charge exists the tax authority can still impose a premium tax levy.

The obligation to pay premium tax applies to any business operating within the EU, wherever the contract of insurance is entered into or where the head office is located.

The economic conditions in countries worldwide are driving their revenues down. As they look to recoup lost revenues, the simplest thing for them to do is to collect the money that is due to them by law. The premium tax on U.S. policies covering exposures 'Worldwide', e.g., D&O, Umbrella, and Professional Liability to name a few, can generate million of Euros for these countries because they can go back to 2001 and collect.

When these bills come due, it appears that the carriers, brokers, and risk managers are already preparing to plead ignorance and blame others for the problems brought on by their inaction.

U.K. Directors' and Officers'

2009-02-15T14:52:00.001Z

With legal and economic risks increasing for businesses in 2009, many in the U.K. are expected to look at their insurance programs in more detail.

It's set to be a tough year for anyone running a business. As well as the difficulties created by the economic slowdown, the introduction of more legislation will heighten the risk of legal action and financial penalties.

For those involved in insuring those risks, 2009 will bring a mixture of challenges and opportunities.

One insurer, Zurich Insurance, says that there's going to be increased demand for directors' and officers' cover this year as more people think about their responsibilities. Yet after seeing prices fall, often substantially, over the last three years, there will be pressure on price as claims start to come through.

Certainly, claims are on the up. At the end of 2008, insurance research firm Advisen revised its forecast for D&O losses, taking it up to $5.9bn from the $3.6bn it had forecast in February. Its revision resulted from "the mushrooming of the credit crisis into a global financial calamity". It also reflected an increase in securities class-action lawsuits, securities fraud lawsuits brought by regulators and law enforcement agencies, bankruptcies, and shareholder derivative lawsuits.

The number of securities lawsuit filings in the U.S. reportedly has increased sharply in the last two years. There were 119 filings in 2006, 176 in 2007 and 210 in 2008. It is widely held that the statistical average is 200, so we have moved to a position where filings are above that number. Additional concern for some insurers is that it takes three to five years for a lawsuit to reach the filing stage.

See you in court

With new legislation coming into force this year, directors have additional rules to observe. Most recently, the Health & Safety Offences Act came into force on 16 January and will increase the penalties for companies that break health and safety law.

It is not just domestic U.K. regulation that directors need to be mindful of, either. A company can also face legal action from the U.S., regardless of where it is domiciled. A prime example is the German engineering company Siemens, which paid $800m to the US Justice Department and stock market regulator, Securities and Exchange Commission, in December to settle corruption charges. This was on top of the EUR395m it had already paid to German regulators.

There has also been an increase in regulatory risk. The Financial Services Authority and the Serious Fraud Office have become more aggressive in their approach to fraud over the last 12 months. The FSA has beefed up its criminal prosecutor and enforcement teams and sent out a clear message about its intentions by carrying out a series of dawn raids to combat insider dealing.

As well as action from the regulatory bodies, it is believed that there will be more claims brought against former directors this year. There's been a lot of change in boardrooms and as the new directors settle into their roles, it's not inconceivable that there will be claims brought against former board members.

And there has been a steep rise in the number of firms going into liquidation, which will also result in an increase in claims. Figures from the Insolvency Service show that 4001 companies went into liquidation in the third quarter of 2008, an increase of 10.5% on the previous quarter and a rise of 26.3% on the same quarter in 2007.

It is not uncommon to see more claims being brought against directors in a recession. If a company goes out of business, people, including the administrator, look to the directors for potential redress.

Colleagues of mine in the U.K. tell me these factors are starting to influence the market, with rates hardening and terms and conditions getting tougher on some cover.

The market is also very divided, with financial institutions facing very different conditions to companies in the commercial market. Rates are reportedly hardening for financial institution business because of the problems in this sector, whether it's the credit crunch or the alleged Madoff fraud.

The extent to which premiums are rising does vary, with sectors like hedge funds and U.S. banks hit hardest. But while recent press reports have put a figure as high as 50% on the increases, this level of premium hike is still unusual.

But while the financial market may be having a tough time, it's pretty much business as usual for the commercial market, with the 1 January renewal date passing relatively smoothly.

Insurers are fighting for market share and there's plenty of competition for commercial D&O business. The loss ratios are low and profits are good. That market hasn't really been affected by what's happening in the financial market yet, in large part driven by segments like private companies being largely unaffected.

However, this is expected to change. As many insurers have exposure to both the financial and commercial markets, the problems facing financial customers are likely to have a knock-on effect for commercial customers. No longer is pricing falling, but rather many renewals are reported flat. Some are gradually moving up and it is expected that this will accelerate.

Additionally, Clients are paying more attention to the cover they purchase. Rather than buying purely on price, directors are giving more thought to their purchase and analyzing coverage as part of a broader risk management and corporate governance approach.

With a higher level of claims anticipated, capacity could come under pressure this year. It is likely that, although there will still be plenty of cover to go round, it will not necessarily be as easy to obtain. This will require insurers to adjust their pricing strategies.

Underwriters are still basing their pricing on financial stability and other financial factors, but that this does not give sufficient insight into the business which is why risk management can become an even more critical factor. Claims and bankruptcies can come from anywhere but it is more likely to be those companies that have poor controls in place as well as those with weak balance sheets.

In spite of the greater risks present in the market, new players may also be attracted to the market over the next 12 months. With rates hardening and demand for the product. An underwriter coming into the market now wouldn't have a history of claims and, with a good risk management strategy, could maintain a clean and profitable book of business. It could be a very good time to be writing D&O cover.

U.K. Climate Change Act 2008: What You Need to Be Aware Of

2009-01-29T15:30:00.001Z

This article was provided by Mr. Bevan Farmer who is very familiar with the U.K. Climate Change Act of 2008. It is critical for those U.S. businesses to understand the Act and to meet the milestones of the Act. I am happy to present his comments below.

Introduction

On 26 November 2008, the UK introduced a legally binding framework aimed at tackling the dangers of climate change.

The Climate Change Act 2008 ("the Act"), the first piece of legislation of its kind in any country, and its accompanying strategy, establishes a binding framework of measures to move the UK to a low carbon economy.

The Act provides for legally binding emission targets which aim to reduce emissions of carbon dioxide and other gases targeted by the act by 80% by 2050. The 80% reduction target is measured against the baseline of the emission levels of the relevant gases generated in 1990 or, in some cases, 1995.

It is hoped by the Government that the Act will demonstrate that the UK is at the forefront of those countries who are working towards establishing a post 2012 global emissions agreement.

Overview

The aim of the Act is to establish a new approach to the issue of climate change. In order to do this, the act sets out how the UK will:

improve carbon management; and
move towards a low carbon economy (and provides a framework to achieve this).

The Act aims to establish a new approach to the issue of climate change by:

setting ambitious targets in reduction of omissions;
establishing powers to help achieve these targets;
strengthening the institutional framework; and
enhancing the UK's ability to adapt to the impact of climate change.

Key Provisions

Legally Binding Targets

Section 1 of the Act states that the Secretary of State must ensure that the UK carbon account is at least 80% lower than the net UK emissions of carbon dioxide and the other green house gases (GHGs) targeted by the Act in 1990, or, in cases of some of the GHGs, 1995.

A System for Carbon Budgeting

To achieve the targets, the Act introduces a budgeting system. The Act provides that carbon budgets must be set for each five year period, the first period being 2008 to 2012. The budget for the 2008 to 2012 period is to be set before 1 June 2009. The carbon budget "caps" the level of emissions permissible for each five year period.

As soon as practicable after each budget has been set, the Government must provide to Parliament policies and proposals on how the target is to be met.

This section of the Act effectively provides that, of the 80% reduction target, a 26% reduction must be achieved by the end of 2020.

Carbon Credits/Units

These are the "units" which represent either:

a reduction in an amount of GHG emissions;
the removal of an amount of GHG from the atmosphere; or
an amount of GHG emissions allowed under a scheme or arrangement imposing a limit on such emissions (such as the System for Carbon Budgeting).

These units will be used to keep track of the reduction in GHG emissions and set the Carbon Budgets.

Creation of the Committee on Climate Change

The Act established, from 1 December 2008, a Committee on Climate Change ("the Committee").The Committee advises, amongst other things, on appropriate targets for reducing carbon and GHG emissions both in relation to the 2050 target and the five year budgets. The Committee will also provide annual reports on whether progress is being made to achieve the relevant carbon budget in place at that time and to recommend required measures to achieve the budget.

Guidance on Reporting

For companies, two of the main points of the Act are:

the requirement for the Government to issue guidance by 1 October 2009 on the way companies should report GHG emissions; and
the possibility that the Government may make regulations under section 416(4) of the Companies Act 2006, which will provide how information detailing each company's GHG emissions is to be included in the directors' report. The Government must make its decision in this regard by no later that 6 April 2012.

Further Measures

The Act provides that each of the national authorities may establish a trading scheme for GHG emissions faster through secondary legislation. These schemes are schemes that:

limit or encourage the limitation of activities that consist of the emission of GHGs or that cause or contribute, directly or indirectly, to such emissions; and
encourage activities that consist of, or that cause or contribute, directly or indirectly, to reductions in GHG emissions or the removal of GHG from the atmosphere.

In addition, provisions are made to encourage the use of biofuels, provide financial incentives in relation to reducing household waste and to levy a minimum charge on single use carrier bags.

Comment

The UK government should be congratulated for putting forward this piece of legislation. However, whilst the Act does provide for a legally binding target to decrease carbon and GHG emissions by 2050, it is interesting to note that the Act also provides the right, subject to certain events taking place, for the Secretary of State to amend the 80% reduction target and/or to amend the base year on which the reduction measured against (currently 1990 for carbon dioxide and 1990 or 1995 for other GHGs).

To put the 80% target in perspective, in March last year, Defra published figures showing that, for 2007, the total GHG emissions in the UK were estimated at 639.4 million tonnes carbon dioxide equivalent, with carbon dioxide making up 543.7 million tonnes of the total figure (approximately 85%).

The 1990 base for net UK emissions of carbon dioxide and other GHGs under the Act has not yet been published. However, the Kyoto 1990 base for gases of this kind were 592.4 million tonnes for carbon dioxide and 181.1 million tonnes carbon dioxide equivalent for other GHGs. Accordingly, by the end of 2007, on the estimated figures provided in March 2008, the UK had reduced its carbon and GHG emissions by approximately 17%.

Currently emissions from aviation and international shipping are excluded from the ambit of the Act. The Act provides that, by 31 December 2012, the Secretary of State shall, by regulation, provide the circumstances in which and the extent to which emissions from aviation or international shipping are to be regarded for the purposes of the Act or provide a report to Parliament as to why these emissions will be excluded.

Dates for your diary

Spring 2009 Proposals for the first three carbon budgets (to be delivered with the 2009 Budget (fiscal);
1 June 2009 The first three carbon budgets are to be put into legislation (and, therefore, shall be legally binding);
Mid 2009 Government to publish policies and proposals on how to meet the first three carbon budgets.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

You can contact Mr. Farmer at the following:

Mr Bevan Farmer
Shadbolt LLP
Old Change House
128 Queen Victoria Street
London
EC4V 4BJ
UNITED KINGDOM
Tel: 845 4371000
Fax: 845 4371001
E-mail: mondaq@shadboltlaw.com
URL: www.shadboltlaw.com

Environmental liability - No more boom and burst?

2009-01-04T01:00:00.001Z

With the UK preparing to transpose the Environmental Liability Directive into law, what can insurers and their clients learn from the experience of others who are further ahead of the game?

Ana Paula Nacif with Post Magazine reported in an article published on 27 November 2008 that after months of consultation, the Environmental Liability Directive is finally set to be transposed into UK law in December, according to the Department for Environment, Food and Rural Affairs - despite the original deadline of 30 April 2007 being long gone.

Even though some believe that DEFRA's timetable is still a tad optimistic, the insurance industry in the UK has been looking closely at the experience of other European countries to try and make sense of how the changes ahead will affect the market.

The ELD furthers the concept of the 'polluter pays' through the introduction of compensatory and complementary remediation. The aim of compensatory remediation is to make up for environmental loss during the period between the damaging event until primary and complementary remediation reach the baseline condition - that is the environmental condition prior to the damage. This means that compensatory remediation is required both when primary remediation is possible and when it is not.

According to Glen Donaldson, head of environmental liability at Crawford & Company, this poses a significant financial risk to many businesses in the UK. "This is recognised in the ELD whereby member states are asked to promote and encourage the use of appropriate insurances and other alternative financial security instruments to offer some protection to businesses."

In fact, some countries, like Spain, have decided to go the extra mile and make financial provision compulsory in some cases, whether insurance or otherwise.

According to Tony Lennon, European manager for Chubb Environmental Solutions, the Spanish government requires all companies to carry out an environmental risk analysis. If their exposure is below EUR300,000 (GBP255,231), companies do not need to make a financial provision although they are, of course, still liable. If their exposure is between EUR300,000 and EUR2m, providing they can demonstrate they have a robust environmental management system, they are also off the hook. However, if their exposure exceeds EUR2m, they must have a financial provision irrespective of whether they have robust environmental risk management or not.

But many UK companies are not even aware of their exposures, let alone any financial provision they may need. Mr Lennon suggests that perhaps Defra, in trying to not antagonise companies, downplayed the potential liability the new directive would bring. "They underestimated the new exposures, which made people think they didn't need to worry."

Directive, what directive?

As an example, he cites two seminars he attended in November on behalf of trade associations. "Most of the 40 delegates hadn't heard about the directive before seeing the invitation. The reality is that the vast majority of UK industry is simply not aware of it."

David Barr, UK environmental practice leader at Marsh, agrees a lot of work still needs to be done. "In other European countries there is a lot of interest and uptake in this kind of environmental impairment insurance; in the UK it is a different story."

He explains that in other countries companies are used to buying insurance that goes beyond general liability. "They think of insurance programmes from an operational point of view, whereas the UK has been more a transaction type of market. But we are seeing the market becoming more operationally focused here as well."

Apart from raising awareness among potential customers, insurers and brokers operating in the UK also need to keep an eye on what is happening in the rest of Europe.

Cases have already been brought under the ELD in countries, such as Germany, Portugal and France, that should shed light on how insurers are handling such claims. But the market is far from having a clear picture.

"We need to remember that environmental claims, especially complex ones, will take a long time and require a lot of investigation and research," explains Simon White, environmental branch manager at XL Insurance. "So, although we know some cases have occurred, it will take time for them to go through the whole process. We will start to see proper European examples coming into the public arena as and when these are resolved."

Mr White adds that there has been a significant change in attitude in some of the countries that have implemented the new legislation. "There is now a duty of care, so potential polluters need to report to the regulator if they have caused or are likely to cause pollution," he explains. "That wasn't there before. No incident is too small as they can escalate quite quickly; that's one of the problems with pollution, so we are seeing more notifications."

If polluters have a duty to report, regulators have a duty to enforce the legislation. "Historically authorities could take the company's behaviour into consideration and decide on a course of action," explains Mr White. "The directive took that away from them and they do have to enforce the legislation."

But, as member states have a certain level of flexibility as to how they implement the ELD, the legislative landscape is uneven.

Some countries have less developed environmental law, while others already have a wealth of existing legislation that will either be replaced or amended. "Therefore," says Wayne Harrington, environmental risk manager for the UK and Ireland at Ace, "we cannot expect a flood of specific ELD-related claims immediately. But the number of reported incidents and regulatory responses will certainly increase in the short-term as these changes take hold."

Such differences in approach pose difficulties to insureds, insurers and reinsurers. "Environmental impairment doesn't necessarily stop at the country's border," explains Juerg Busenhart, senior product manager at Swiss Re. "So in certain cases they will be faced with different legislation. Even with the directive introducing a level of uniform liability, at the end of the day they are faced with different liability schemes, which make it difficult to put in place trans-European insurance solutions."

Search for a solution

Also, with ELD cases already in the pipeline on the continent, it could be years before a solution is finally reached. "The directive deals with the results of environmental impacts, such as contamination, and remediation can take a long time - up to 50 years," says Mr Busenhart. "So it is difficult to make an assessment of costs and the likely timescale involved."

Anna Nilsson, environmental underwriter manager at AIG, agrees, adding that all the member states are currently looking at each other to find out how they are handling the new legislation. "Although there have been some cases, it will take time until the market fully knows how to interpret and handle them."

Establishing the appropriate course of action and the amount of resources needed following an incident is one of the tricky issues regulators, insurers and policyholders will have to grapple with. And a lot of research has gone into establishing ecological equivalents and calculating natural resource damage, says Graeme Merry, environmental specialist at Heath Lambert.

One such research project is Remede, which draws on both US and EU member state experience. The project's case studies cover resource, habitat and value equivalency approaches and come from six different countries - the Czech Republic, Germany, Poland, Spain, Sweden and the UK.

"These projects are expensive and time-consuming," emphasises Mr Merry. "In the UK, the regulator will be trying to fit the directive's requirements around what is already in place, so there is a degree of uncertainty about how this will be done."

Enforcement is crucial if this certainty is to be achieved and, according to Mr Merry, has been limited with the existing legislation to date. "Until more examples of enforcement come through and companies start facing significant costs, it will be hard to get people's attention."

Although these grey areas remain, it seems the wider market is changing to gear up for new demand. While environmental liability insurers insist this will remain a specialist market, recent moves could prove otherwise. For example, earlier this month Axa launched a new environmental solution designed to cover ELD exposures (Post, 20 November 2008, p3).

Despite this interest from mainstream carriers, others argue that years of environmental liability experience cannot be underestimated. "A lot of expertise is being drawn on from the US experience," says Ms Nilsson. "These are very complex deals that involve not only clean-up costs but also complementary and compensatory remediation."

And, according to Mr White, the ELD takes environmental risk to a different level and general liability policies were never designed to cover environmental exposures to this degree. "We are not trying to reinvent the wheel; we are looking at practices that have been established for a long time, whereas the general liability market doesn't have that experience."

Growing cover gap

Traditional insurance markets have provided an element of environmental liability cover - namely, third-party liability for sudden and accidental pollution - but there has been a long-standing gap in terms of gradual pollution and first-party losses. And, as regulations continue to become more complex, this gap will continue to widen, explains Alexander Pohl, senior project manager for environmental risks at HSBC Insurance Brokers.

He also believes that capacity may drive market changes. "The problem is that, at present, there is not sufficient capacity in the specialist environmental insurance market to insure all affected installations across Europe," he says. "This would require billions of pounds of capacity. So, arguably, is it likely that traditional insurers and pools will need to become involved if insurance is chosen as the mechanism to provide financial security under the ELD."

With environmental liabilities focusing people's minds, some in the market have discovered that certain environmental covers can be found in unlikely places.

Christoph Mocklinghoff, leader of Marsh's environment practice in France, explains that some general liability policies that cover product liability have an element of environmental exposure cover related to that. "This is interesting as the specialist environmental market never thought about covering product liability."

There may already be some overlap and Mr Mocklinghoff explains that policies are evolving to respond to clients' needs. "We are developing complete policies that give both general and environmental liability cover."

He adds that the directive is likely to have a significant impact, citing a landmark decision on the sinking of the Erika ship that could set a legal precedent.

When Erika sunk in 1999, it caused a major oil spill and, in January this year, the Criminal Court of Paris fined the world's fourth largest oil group, Total SA, EUR375,000 - the first time a French court has handed down a conviction for environmental damage.

Mr Mocklinghoff says lawyers are "using the spirit of the directive" to make the company pay for damage. "It's not over yet as they launched an appeal on the basis the directive was not enforced at the time of the accident."

Dampened demand

Wherever happens in France, the UK market will have plenty of challenges of its own. Whether these will translate into more business for brokers and insurers remains to be seen. As Mr Merry points out: "Over the years the expectation was that various pieces of environmental legislation would raise awareness and trigger interest in insurance cover for this type of liability.

"By and large, this hasn't materialised. To a certain extent, people are happy to rely on the existing limited cover they have. They haven't taken into consideration that the situation regarding environmental liabilities has changed a lot."

This situation is likely to change further yet. In 2010 there will be a review across Europe under the ELD into financial security mechanisms to ensure sufficient funds are available to address pollution caused by companies, particularly in the event of insolvency.

According to Nigel Wallis, partner at law firm O'Connors, some large UK companies - especially those with operations in other European jurisdictions - are weighing up their options, with some deciding to set up captives to protect themselves. "With the trend towards balance sheet transparency, brought about by the Companies Act, some companies want to make sure their risks are managed."

Being prepared to deal with new exposures may well be a good idea. As Mr Pohl concludes: "Companies need to keep in mind that the ELD is just the first of a number of new and increasingly stringent environmental regulations that will challenge businesses over the next few years."

US experience

The Environmental Liability Directive's 'environmental remediation' requirement has similarities with the 'natural resource damages' concept in the US. The following case study illustrates how the legislation is applied and how much such claims can cost.

Case study of a US NRD claim

A ruptured pipe at an oil processing facility resulted in around 22,000 litres of waste oil entering a river. The river is used for recreational purposes and has sensitive environments and the emergency response included containing and recovering the oil.

Nearly 16 miles of riverbank were impacted and nearly 100 oiled birds needed cleaning. An additional number of birds died as a result of the oil.

Following the clean-up, the polluter and its insurer hired an NRD expert to conduct a detailed site remedial investigation, which involved reviewing and categorising the ecological damages.

Based on this assessment the impacted ecosystems along the riverbank required either further cleaning or actual removal. The shoreline banks needed flushing and the extensive cleaning process had to be constantly monitored. The ultimate ecological restoration included the replanting of reed beds and other vegetation along the river.

The cost for the emergency response; subsequent pollution; NRD assessments and characterisations; the actual remediation itself, as well as the ecological and species restoration/rehabilitation - similar to the ELD's 'primary remediation' and 'complementary remediation'; and legal costs have so far reached $2.5m (GBP1.6m).

On top of the above actions, aimed at restoring nature back to its baseline condition, the NRD concept assesses interim loss to the environment as a result of the pollution incident. This claim for NRD (compensatory remediation) is currently expected to be in excess of $250,000.

Source: XL Insurance.

New Tort Rules in Hungary

2008-12-11T16:52:00.002Z

(This following post is provided by Szabolcs Dispiter and Péter Mitták in the Budapest office of CMS Cameron McKenna LLP. I appreciate their contribution and keeping us aware of these issues.)

Liability for civil wrongs (torts) is to be governed by new rules in the new Hungarian Civil Code.

There will no longer be the same degree of similarity between liability for tort and for breach of contract as there is in the current Code.

The new rules will clarify current provisions as well as adding new ones. The general position will be that individuals are liable for damage caused to others:

unless they can show that their actions were to be expected in the circumstances
but only for damage that could be foreseen at the time it was caused or was caused intentionally or by gross negligence
a 'prejudice fee' will be payable (instead of damages on the normal basis) to compensate for any damage that does not have a monetary value, such as the loss of an arm or the violation of a personal right
there will be special rules for torts such as product liability and liability for environmental damage which are currently regulated in separate legislation

The new Hungarian Civil Code is now in its final phase of development since work began over 10 years ago. The text is likely to be finalised early next year by the Hungarian Parliament, although a number of details have yet to be decided.

Forecast for Market to Harden in 2009

2008-12-08T19:54:00.003Z

For those readers of this blog who may not be familiar with insurance business, and how pricing for the product hardens or softens, the following news illustrates why many of us are telling Clients to expect increases to their insurance program in 2009:

From BI Europe.com:

Reinsurers report higher combined ratio

By Judy Greenwald
Dec. 01, 2008

Twenty U.S. reinsurers surveyed by the Reinsurance Assn. of America reported a 104.2% combined ratio for the nine months ended Sept. 30, compared with 94.1% reported by a comparable group for the same period a year ago.

The 2008 combined ratio reflects a 75% loss ratio and a 29.2% expense ratio, according to the Washington-based RAA.

The reinsurers wrote $19.01 billion of net premiums written for the nine months, a 6% increase from the total reported by the comparable group. The 2008 policyholder surplus was $72.07 billion.

Oftentimes, our Clients engage us in the discussions as to 'Why are my premiums going up when I haven't had any losses?' These are never easy discussions because frankly, our individual Clients are just one component of a very large network of financial transactions, not the least of which is the reinsurance market. For the novice, the easiest way for me to explain is that the costs of insuring you are increasing, and these costs are being passed along. This is not different from many of the other products you buy. When the cost to manufacture and deliver your product rise, you must pass along the cost to your buyer. The unique component of insurance is that the cost to produce insurance coverage today may not be realized until several years from now.

Increased Risk of Litigation in Europe

2008-11-18T17:27:00.002Z

For those of you doing business in Europe, this post from Stuart Collins may be of interest.

Lloyds warns on litigation risks

Posted by Stuart Collins Business Insurance Europe

LONDON—Lloyd's of London has warned that class actions, forum shopping and third-party funding of litigation are on the increase in Europe and the United States.

In its latest 360 Risk Project report, "Litigation and Business: Transatlantic Trends," Lloyd's said that these three trends are gaining momentum.

The report claimed that the risk to business of mass litigation is likely to increase in Europe, as the opportunities for class actions grow. Lloyd's noted that Portugal, the Netherlands, Spain and Sweden have class action mechanisms in place, while Germany has restricted class action litigation.

"Class actions are common and controversial in the United States, and are looming on the European horizon as well," the report said.

The report also warned that forum shopping can arise in the European Union, despite efforts to harmonize rules in the region. And Lloyd's noted that the risk for European companies of being sued in the United States is high; however; there are benefits to resolving large claims in the United States in order to pre-empt actions elsewhere.

The growth in third-party funding of litigation is likely to accelerate in the current economic climate, according to Lloyd's, as investors see third-party litigation funding as an alternative to investing in financial markets.

Focus on Directors’ and Officers’ Exposures in UK

2008-11-17T01:46:00.001Z

The upheaval over the last few weeks in the financial markets has again placed Directors & Officers ("D&O") insurance in the spotlight. With the move towards a climate of increased regulation globally, exposures for directors, and the companies by which they are employed, has increased greatly. In the UK such additional exposures have followed the enactment of legislation such as the Environmental Protection Act 1990, the Financial Services and Markets Act 2000, the Companies (Audit, Investigation and Community Enterprise) Act 2004, the Companies Act 2006 and more recently the Corporate Manslaughter, Corporate Homicide Act 2007.

D&O cover, of course, protects a director or officer (and the company) against those potentially significant liabilities which may arise from their actions. Such cover is also important to attract high caliber personnel who may otherwise be wary of taking such positions, particularly for large multi-national companies exposed to multi-jurisdictional regulation and legal systems.

Following on from 1 October 2007 when the majority of the director duties as codified in the 2006 Companies Act came into force, on 1st October 2008 certain additional duties of directors will take effect including: a duty to avoid conflicts of interest be it direct or indirect (although there are provisions for such conflicts to be authorized); a duty not to accept benefits from third parties; and a duty to declare an interest (direct or indirect) in proposed transactions or arrangements.

In addition to the duties on conflicts of interest, the other duties for directors which have been codified by the 2006 Companies Act include:

to act in a way which they consider in good faith is likely to promote the success of the company for the benefit of members as a whole (directors have to take into account six separate factors including interests of the company's employees and the impact of the company's operations on the community and the environment);
to act in accordance with the constitution of the company and to exercise powers for purposes conferred by the company's memorandum and articles of association; to exercise independent judgment; and
to exercise reasonable skill, care and diligence.

It is therefore now more important than ever to consider what D&O cover is in place in terms of cover and financial limits. The other type of issues which may arise include the extent of claims control given to the director/company/insurer; the scope of cover available for multi-jurisdictional claims (e.g. cross border extradition actions); and whether defense costs are funded in advance and not at the end of civil or criminal proceedings.

A Simple Check Mark Can Save Millions of Dollars

2008-11-12T03:21:00.001Z

So the other day I am reading an article that a leading insurance broker and they are announcing the formation of a separate retail agency to focus on smaller and emerging growth companies. This segment pays approximately $80 billion in insurance premiums annually. However, the part of the article which really caught my attention was the statement by the executive of this new operation was that they will not be servicing 'global companies'.

I assume I know what he meant by his statement, but I wonder why say it? My experience is that growth companies are 'global' companies. Not in the way that Coca cola or UPS or global companies, but do the owners, or any of their employees travel overseas? Do they have any sales outside of the U.S.? Most companies that provide coverage for the U.S. firms with international exposures make available simple questions to ask Clients. If the Client answers YES to any of them, then the agent has identified a 'global' exposure. Examples of these checklists can be found at ACE Advantage and AIG World Source.

In the last post, I point out that 46% of all U.S. businesses currently have sales in jurisdictions other than the U.S. With this fact always on my mind, I am astounded when I encounter professional insurance agents during my travels who appear oblivious to their Clients operations, knowing how easily they can find insurance products to protect their Clients assets – financial and human.

There is enough uncertainty in today's economy. Take a moment to use a simple checklist, create your own if necessary, and save businesses millions of dollars.

Today We Launch for New World

2008-10-13T20:43:00.007+01:00

Today in the U.S. we observe Columbus Day. The day set aside to recognize the landing in the 'New World' by Christopher Columbus in 1492. Today with the launching of this blog, I am hoping to help others discover that far too many businesses in the U.S. have risks beyond the borders, and do nothing to address these exposures.

This is not a new phenomenon. For many years, sellers of insurance products in the U.S. only recognized the obvious, domestic exposures. In fact, in discussions I have had with businesses over the years, they would tell me that only companies like Coca-Cola, UPS, Microsoft and other Fortune 500 companies need to address international insurance. The fact is that in a 2006 survey of businesses conducted by Grant Thornton, 56% of businesses viewed Globalization as an opportunity; 46% admitted to already selling product internationally; and another 3% have plans to sell product internationally. (For complete survey, Click Here) Unfortunately, many businesses, when assessing their exposures to risks, do not even stop and ask themselves the simple questions that would uncover their 'international' exposures.

The main purpose of this blog is to foster a discussion on issues from around the world that may, or may not impact your business. I want this site to evolve into a dynamic conversation on a wide range of risk exposures, including but not limited to, Product Liability, Professional Liability, Property exposures, Insurance Premium Taxes, Kidnap & Extortion, and their possible solutions. Some will be addressed by insurance products available in the marketplace, and other solutions will describe actions businesses can take to avoid or control their risks.

There are many well-informed professionals in the international insurance business working closely with multinational firms. These people are friends and colleagues of mine and share my passion in seeing a tipping point reached where the discussions on the exposures facing a company traveling to Mexico are as commonplace as the discussions about a company's Workers Compensation. It is from that passion this blog was created.