FINANCIAL LOSS

1. FINANCIAL LOSS LUG Conference - Cambridge August 2000 David James and Robert Hogarth

2. INTRODUCTION • Over the past 20 years - little or no significant development • Junior Books - a false dawn - not another Donoghue or Hedley Byrne • Murphy - a return to orthodoxy • Post Murphy - White and Spring - otherwise status quo

3. THE INSURANCE MARKET RESPONSE • 20 years of development • Financial loss covers adopted into the mainstream of general liability underwriting

4. WHY HAVE FINANCIAL LOSS COVERS BECOME THE TOUCHSTONE OF A COMPLETE LIABILITY COVER? • Historical - Junior Books • General search for the competitive edge • Tendency to extend policy definitions of injury and damage • Growth of multi-line/multi-year concepts • Nature of industrial and commercial development. Note - UK wordings seem to have developed in this area more than most other countries.

5. If market wordings go beyond what law requires, does that mean insurers are collecting money under false pretences?No, for two principal reasons:1. change of law always possible2. covers provided wider than tort exposures

6. INSURERS REMAIN UNCOMFORTABLE • Level of understanding • Lack of information • Difficulty of assessing exposures • Moral hazard • Conceptual issues • nature of Financial Loss • uncertainty of the law LORD OLIVER - a will o’ the wisp LORD DENNING - … you will know it when you see it.

7. What lies ahead? • Will the law become more liberal? Possible influences : - insurance - Human Rights Act - Contracts (Rights of Third Parties ) Act - legal trends overseas - political and social factors - statutory and environmental issues - changing trading and business environment. • How will the market respond? - specialist or mainstream? - civil liability wordings? - underwriting concerns - capacity and rate-on-line - the benefit of the doubt.

8. FINANCIAL LOSS Scope of a typical UK liability cover 1. Physical harm to others, injury or damage. 2. Harm suffered by - third parties - those who have rights in contracts against the insured 3. Harm suffered is unintentional 4. Indemnity provided relates to compensation or damage claims as a result of that harm 5. Harm must occur within the policy period.

9. How is this basic concept typically expressed? 1. Injury * Basic idea - physical injury, disease, death, including mental injury, psychological trauma, shock etc * commonly extended to include - false arrest, imprisonment, detention - stress, humiliation, discrimination - defamation - invasion of the right of privacy - invasion of the right of private occupancy - malicious prosecution 2. Loss of or damage to material property * Does this include relational economic loss claims?

10. PL financial loss extensions • usual to be provided automatically in basic wording • typical expressions of cover - nuisance - trespass to land or goods - obstruction or interference with any easement or right of way light air or water - loss of amenities or loss of enjoyment of property - interference with traffic - sudden escape or discharge of any substance or gas from any premises - “or any like cause”

11. PL financial loss extension (continued) Aspects to note - physical damage arising from these torts - main policy - usually limited to PL - usually part of main operative clause , but sometimes cover given by redefining “damage” - provides cover for financial loss occurring in the policy period - not always expressly shown as a ‘financial loss’ - generally, as with main policy, no exclusion of contractual liability

12. PL financial loss extensions (continued) Typical claims situations: * construction or development interfering with third party rights of way etc or enjoyment of property * obstruction by delivered goods * pollution on own premises affecting the use of neighbouring land or businesses * liability of landlord to tenant (e.g. operators of a shopping mall) * consider Borg v Transamerica Insurance Co. (1996)

13. Scope of a typical Financial Loss extension • Extent of Cover - limited to defective products - full financial loss • Operative Trigger Claims made vs Losses occurring * defining when a financial loss occurs * underwriting control * retroactive date

14. Scope of a typical Financial Loss extension(continued) • Defining what we mean any pecuniary loss cost or expense incurred by any person other than the Insured. • Separate section ? Dominant but not universal trend. - a different operative trigger (claims made) needs a separate section; an extension endorsement can be confusing - relevant exclusions and limitations can be more appropriately applied - helps to focus on the separate underwriting issues - separate limit for financial loss claims

15. Scope of typical Financial Loss extension(continued) • Contractual Liability ? - tort losses only - including contractual liability? Key issue. - over past few years, increasing pressure and tendency to include contractual liability - if ‘tort’ losses only are to be covered, exclusion of contract liability needs to be unambiguous - common exclusion “liability which attaches to the Insured solely under the terms of an agreement unless the liability would have attached in the absence of such agreement” - what does this mean? Consider A/S Screenprint v British Reserve (1995)

16. Scope of typical Financial Loss extension(continued) • Specific exclusions 1. Areas open to discussion or for specialist covers * intellectual property rights * breach of contract * advice design or specification * losses before the Retroactive Date * liability arising overseas * professional advice * internet liabilities * costs of rectifying defective products * costs of recalling defective products * punitive damages 2. To dovetail with other parts of liability policy * losses under other sections of the policy * exclusions within other parts of the policy, insofar as they can apply

17. 3. No go areas * fraud or dishonesty * breach of anti-trust laws or competitions laws * deliberate acts * delays/non-delivery * claims by statutory authority * fines and penalties, liquidated damages * previous known circumstances or incidents

18. Scope of typical Financial Loss extension(continued) • Relationship to other covers - Professional Indemnity - Directors & Officers - Efficacy/ failure to perform • Underwriting considerations - claims information - premium rating and risk assessment - claims/claims handling - limits - deductible/excess/co-insurance • Cover for overseas operations/liabilities - tort or contract ? - attachment point ? - assessment of risk.