Risk, Re-/Insurance and Future Thinking

No, this isn’t a story about how junior assistants (yes, I think they still do have them) are made to work 27 hours a day at this top tier City law firm, but rather that, a long time ago, Mr Freshfield had some clients who had links to the slave trade.

The FT today reveals that Freshfield

and his sons had several slave-owner clients, mostly based in the Caribbean. The lawyers acted as trustees of the owners’ estates and in one case tried to claim unpaid legal fees for the firm through the government scheme set up to compensate owners after abolition.

Given the then-pervasive nature of the slave trade in British society, this seems to me not un-akin to marvelling nowadays that a lawyer has clients with links to the haulage industry. That is not remotely to excuse the practice of slavery, which must, in any culture at any time, be abhorrent. But to indulge in hand-wringing now seems to me questionable. To paraphrase from William Monahan’s generally good script in Kingdom of Heaven, “those who gave offence are not now alive; nor those who were offended”.

Mind you, it’s topical because I was lunching with a friend the other day who noted that his business card did not bear the full address of the company for fear of ramifications, given that the company has a large presence in the US. The offending part of the address? “Plantation Place”. I guess it plays differently in the States, where the ghastly realities of slavery were much closer to home.

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It’s been a long time coming, but someone has finally seen the sense in outsourcing not just support functions but more routine legal work. Rio Tinto are parceling up their more everyday lawyering to an outfit called CPA Global in India:

It works like this: Rio Tinto is building a team of CPA lawyers in India who will operate, effectively, as an extension to its in-house legal department. That will free Rio Tinto lawyers to focus on more complex tasks. More ambitiously, on all assignments involving external law firms, Rio Tinto will ask these firms to pass tasks that can be done by lower cost lawyers to CPA people in India and elsewhere. [Source: The Times]

As Prof. Susskind (specialist subject: “the Future of Law”, or at least the future of legal practice) notes, the system already demonstrably works: “A team of 50 CPA lawyers was assembled in under 48 hours to work with a US law firm on a document review for the Federal Trade Commission. This yielded savings of $1 million (£600,000).” Ouch. Scale that up and you are looking at a lot of lost revenue for the big firms.

Now as I have never had the pleasure of working for one of the huge shops, I’ve only looked at their business model from the outside, so take what I say with a pinch of the proverbial. While I can see the financial sense of it (to them), it’s long struck me as a bit odd that clients didn’t see that there were cheaper and better ways of getting much of the work done, though I put it down to a combination of the old boy network (albeit in its modernised form) and the ‘never get shot for using IBM’ mentality. The sort of work I do is fairly ‘partner-intensive’ and therefore there is limited scope for having armies of assistants ploughing through vast amounts of paperwork (which is in any event pretty easy to deal with now with the help of electronic tools). It is also more intellectually stimulating, which is, of course, part of the reason why some of us get into the job in the first place. But I’ve little doubt that an awful lot of transactional work and even some aspects of contentious work could be handled relatively easily by less specialist, less expensive people elsewhere.

Susskind is correct, of course, to point out the step-change here: the impetus comes from the clients, not the law firms. While there has been a certain amount of tinkering from the firms in sending back-office functions offshore, that has really been aimed at saving money for the firms, money which then goes straight to the equity partners, for pensions or Bentleys as the case may be. Here, the clients are demanding–and getting–an overall reduction in costs and requiring that their law firm ‘partners’ accept that they are going to be bearing the cost of that themselves. Novel? Not really in the wider global economy, but perhaps new in the legal world.

Generally, the puritan in me thinks this is a Good Thing for lawyers and for the profession generally. I like things done efficiently–doing them inefficiently, and thereby making more money, has always struck me as Not a Good Thing.

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In a 3-0 decision the Court of Appeal has today ruled decisively that it is beyond the power of any local authority to set up and participate in a mutual insurer.

The unanimous decision of their Lordships in the case of RMP -v- Brent [2009] EWCA Civ 490 not only reinforces but goes further than the original twin decisions, Part 1 (on vires) and Part 2 (on procurement — see below). At first instance, the Court found that Brent had not shown that it had properly considered whether its area would benefit from the supposed savings to be had from participating in LAML. The Court of Appeal has now held that question to be irrelevant — all that counts is whether an authority can participate in a mutual insurer such as LAML, and the short answer is that it cannot.

RMP is an open-market supplier of insurance services to the local authority sector. LAML is a mutual insurer set up by a number of London local authorities to provide, on a monopoly basis, insurance to London authorities. RMP were invited to tender by Brent, who then abandoned the process and awarded the contract to LAML. RMP contested this decision in two ways: first, by arguing that it was beyond any authority’s powers to set up and participate in such an insurer (the vires case); second, by contesting Brent’s decision to award the contract to LAML outside the public procurement rules, which Brent did in reliance on a European decision known as Teckal (the procurement case).

Harrow and LAML were Interested Parties, and fully legally represented, in both the original hearing and before the Court of Appeal.

The vires case

Brent relied on two statutes: s.2 of the Local Government Act 2000 (the so-called ‘well-being’ power), and on s.111 of the Local Government Act 1972.

The first argument, under s.2 LGA 2000, is that an authority is permitted to do anything which might improve the well-being of its area. Brent said that the money that it hoped to save via its participation in LAML would be put to the well-being of the area for which it is responsible and hence that its participation in LAML was thus legitimate. At first instance, Brent failed in this argument because it could not show that it had properly considered whether any such savings would, in fact, be applied thus. This part of the judgment allowed other authorities, and LAML, to claim that the decision did not apply to them, but rather applied to the particular facts of Brent’s decision to participate in LAML.

That claim has now been firmly squashed. In the leading judgment, Pill LJ said that the s.2 well-being power

“…does not extend to a power to enter into the complex and somewhat speculative attempt to save money which is the mainspring of the LAML arrangement. The guarantees and degree of speculation involved, in my view take the activity proposed beyond what Parliament intended by the well-being clause” (emphasis added).

That view was shared by Moore-Bick LJ (paras. 180-182) and Hughes LJ (para. 255(ii)).

Section 111 of the 1972 Act allows an authority to do anything that is ‘incidental’ to the carrying out of its normal functions. Those normal functions might include running schools and highways in its area, and it is plainly incidental to those functions to buy insurance to allow the authority to operate safely. To buy insurance from LAML is, it was argued, simply a form of purchasing that insurance.

The judge at first instance dismissed this defence, and the Court of Appeal has done the same. Moore-Bick LJ commented that

“…participation in LAML cannot… be treated in the round as merely one recognised way of obtaining insurance with nothing to distinguish it for present purposes from more usual forms of commercial insurance… In my view membership of the company and the obligations to which it gives rise involve a significant departure from conventional insurance arrangements and are properly to be viewed in this context as incidental to the incidental.” (para. 170)

Importantly, the Court of Appeal resoundingly rejected the idea that the LAML arrangement could be saved by relying on some form of associated risk management service. Lord Justice Moore-Bick held that

“it could [not] be said that the benefits in terms of risk management were sufficient to justify participation in LAML as incidental to those functions.” (para. 172)

The procurement case

Even had it been within Brent’s power to participate in LAML, it breached the Public Contracts Regulations 2006 by failing to award the contract by means of open tender. Brent admitted the fact, but argued that it was entitled to do so by reason of the so-called Teckal exemption (named after the EU decision of the same name). The exemption applies where the authority contracts with a third party over which it exerts the same degree of control as it has over one of its internal departments and where that third party does most of its work for the authority.

The Court of Appeal found there was insufficient control by Brent (and effectively by any other authority) over LAML for the Teckal exemption to apply. Lord Justice Pill observed (at para. 131) that “the nature of the business, and the possibly differing interests of different authorities and affiliates, are antithetic to the necessary local authority control.” Therefore, any authority seeking to join LAML would have to hold a proper open, competitive tender for the award of the insurance contract (though the point is plainly moot, given that no authority has power to participate in LAML).

Since Brent awarded the contract to LAML without the requisite tender process, their Lordships held that RMP is entitled to damages from Brent as a result.

The shared services agenda

None of this affects the government’s shared services agenda, which remains vigorously in force. Indeed, Lord Justice Pill makes specific reference in his judgment (paras. 114-120) to the government’s aim in the well-being power—to reverse the “traditionally cautious approach” to “innovation and joint action”.

But his Lordship also went on to stress that Parliament had not given carte blanche to local authorities to do whatever they wish, that there must be limits on what was permissible and that “Analysis of the expression “promote the well-being” is still required to decide what the limits are”.

The limits are still there; the LAML arrangement simply lay beyond them.

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Sedgwick Detert Moran & Arnold LLP acted for RMP in this case. Please feel free to contact either me or my colleague, Luke Johnson (luke.johnson@sdma.com) for further information on the decision and its ramifications.

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Last week I was a speaker at the Financial Institutions Insurance conference in Munich, sharing the platform with Dr. Philipp Wassenburg, Global Head of Casualty Treaty Global Clients/North America, and Alexander Stampf, 
Head of Financial Institutions, both of Munich Re.

Philipp and Alexander are both great guys and have that wonderful and particularly European sense of excitement, professionalism and curiousity about what they do–they are interested in their jobs, rather than simply getting through them. And so many of the younger people at the conference were cosmopolitan, multi-lingual and utterly clued-up about the world and the world they live in, in particular. It was a real buzz, and I came away feeling very invigorated.

After the talk–we were the final slot on Day 2–Alexander took me to the Seehaus in the Englischer Garten for beer, spargel (asparagus) and ham, before I had to hot-foot it back to the rail station to get back out to the airport. Alexander and I share a loathing of commuting and will shortly form the Anti-Commuting Club to encourage the greening of inner cities and an increased use of bikes, local shops, community etc. Or something like that.

The beer is good at the Seehaus, too.

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In the very recent (20 May 2009) case of Flexsys America L.P. -v- XL Insurance Co Ltd, the UK Commercial Court considered some interesting issues of overlap between different parts of the same overall programme, and in particular whether reinstatement provisions in the master cover could be used to provide extra cover for the same claim. (Short answer: No)

The Claimant, Flexsys, is the US subsidiary of a global corporation based in Belgium. It bought a master policy providing cover, including to its subsidiaries, in excess of any local policies issued to those subsidiaries.

Flexsys was insured locally under a CGL policy, and incurred legal costs of over US$2m in defending a claim brought in the US by a Korean company. It settled with local policy carriers (who expressly denied liability) for the policy limit of US$1 million, and then sought to recover the balance of its legal costs from the master policy insurers.

However, cover under the master policy was narrower than under the local policy. Memorandum E (the “Drop Down Clause”) of the master policy provided that:

In the event of partial exhaustion of a local policy this Policy will pay in excess of the reduced underlying Limit of Indemnity. In the event of total exhaustion of a local policy this Policy will continue in force as the underlying insurance subject to the terms Exceptions and Conditions of the particular local Policy.

Flexsys argued that, the local policy being exhausted, the master policy should drop down to provide further cover for this claim on the same terms as the local policy (save for limits).

Tomlinson J sensibly rejected this argument. He held that such drop-down cover did not apply where a claim was recoverable under the local policy but not under the master policy. There would have to have been some express wording to allow for recovery where the master policy terms were narrower than those of the local policy. The true intention of the second part of the Drop Down Clause, he found, was to provide “a reinstatement of the local policy to be available to meet subsequent claims….It means that in the case of either partial or total exhaustion there is cover available from the ground up for the next claim” (emphasis added).

His Lordship also rejected Flexsys’s argument that it made no commercial sense for it to have chosen to have only US$1 million of cover in certain circumstances. Such a case was meaningless, he held, without considering further commercial questions, such as the cost of buying further cover and balancing that additional cost against the perceived risk involved.

Finally, the judge considered whether the local policy gave Flexsys cover for the legal expenses which it had incurred—it did not. Cover for ‘product disparagement’ was subject to Exclusion 2, where the insured had acted knowing that its actions would violate the rights of a third party, and/or that the material published was false. The Korean company’s claims were that Flexsys had intimidated customers into boycotting it.

In my judgment the allegation made against Flexsys is not that it said things which turned out to be incorrect which conduct might therefore have occurred through mere negligence or recklessness but rather that Flexsys set out deliberately to injure KKPC by saying things about it and its products which it knew to be untrue. Liability in respect of such conduct is plainly excluded from the ambit of the local policy cover.

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This is what happens when you start meddling in the insurance markets for short-term political gain — the markets dry up and blow away. In the Gulf and southern states likely to be affected the situation is thus:

• Primary capacity is down by an estimated 30-40%
• Traditional RI capacity is down by about 10%
• There have been cutbacks in the State reinsurance fund
• Capacity from hedge funds has dropped by about 30%

Net result? If they can get it at all, putative insureds are seeing rate hikes of anywhere between 20% and 100%.

If we have a hard hurricane season, the whole area could get a severe stress testing.

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Now that the 2009 Hurricane Season is officially upon us, I am looking forward (if that’s the right expression) to testing out how this iPhone app works. I bought it some months back so only have historical data on it, from 2008 and prior, but it promises great things.

The app — “Hurricane”, from Kitty Code LLC — displays all 2008 Atlantic storms and tapping any storm gives a plot of its position over time, the maximum (sustained) wind speed, the time and date of any given plot point, the barometric pressure at the eye of the storm, and the direction the storm was moving in when the measurement was taken.

The data goes back to the mid 1800s — 1914 seems to have been a good year, with only one storm (Hurricane No Name 01) and even that one only peaked, for a short time, at 70mph. 1933, on the other hand, was bad, with 21 storms, of which 2 were Cat 4 and a number Cat 3.

OK, you can get the same data elsewhere for free (the app is $3.99) but it’s pretty cool to look at and worth a price of beer in my money.

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According to the FT today

Companies based in the UK, Bermuda and the Cayman Islands account for 16 of the 29 ongoing investigations in Washington’s fast-expanding assault on graft by overseas companies.

Thus far, US prosecutors have secured fines of over $1bn against 43 companies in relation to bribery and corruption charges.

At the same time, a North London lawyer, Jeffrey Tesler, could become the first Briton extradited to the US on corruption charges (the NatWest 3 case did not involve corruption). Tesler is said to have channelled very large sums of cash to Nigerian officials, along with a Ugandan accomplice (bring on Private Eye!).

This corruption case is being closely watched, as the first of its kind. Interestingly, it was only in 2002 that anti-corruption law in the UK actually made it an offence to bribe foreign officials. Tesler’s activities are said to have spanned the period 1995 to 2004, and he may argue that the US has no right to extradite him for alleged involvement in activities that were not, for at least part of the time in question, offences in the UK.

The US is focusing heavily on UK and UK-dependency based companies because of their close ties with the US. There is little doubt that centres that make a selling point of privacy are going to be on the short-list for investigations into alleged corruption, and that is why the BVI, the Caymans and, to some extend, even Bermuda are coming under greater scrutiny.

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At least from Barlows.

Word is that “Barlow Lyde & Gilbert (BLG) insurance heavyweight Colin Croly has left the firm following the merger of its insurance and ­reinsurance practices. Croly was tipped to take the senior ­partner position last year, but was beaten to the post by ­professional ­liability head Simon Konsta. It is not yet known whether Croly is planning to join another firm.”

ReRisk wishes both Mr Croly and Barlows all the best in their mutually exclusive futures.

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