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June 2012 – edition 1

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Reputational risk still ranks as a keyconcern for most organisationsÊÂ

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ContactBLM London

Helen Grimberg T 020 7865 8473 E [email protected]

BLM Manchester

Helen Devery T 0161 838 6761 E [email protected]

Changing your detailsIf any of your details have changed, you would prefer to receive publications by email alert, or you no longer wish toreceive this publication, please let us know by emailing Janet Willmott at [email protected]

This new Berrymans Lace Mawer publication has been produced to raiseawareness of liability risks both current and emerging, which are facingbusinesses and organisations in every sector. It is also in response to themany concerns we hear you voice about legal risks. Risk wise aims toprovide ideas and solutions to those challenges.

Risk is a part of everyday business and organisational strategy. We are,however, in fast changing times. The increased complexity of businesstransactions, globalisation, technological advances and the turbulence ofthe global economy have increased the volume and complexity of risksfacing boards and management teams. Reputational risk still ranks as akey concern for most organisations, and failure to manage risk whichleads to business interruption and loss has the ability to devastatebusinesses overnight.

An effective approach to risk management must be communicationthroughout the business which is supported by clear ownership of the risksand an allocation of responsibility for their day-to-day management. The challenge is always to identify and assess legal risks, and the absenceof a risk identification process means potential exposure to liability.

Our articles review a broad spectrum of risk from the impact of regulatoryreform, the challenges of cyberspace fraud, product liability and recalldevelopments, contract risks and the challenges of fleet management andcompliance. We also look at placement issues in the insurance market, thehot topic of bribery, and consider how changes to employment law andthe issue of costs can impact on any business.

We hope that by exploring the range of risks and exposures that we canprovide insight and ideas to support businesses. By focusing on causesand influencing factors of legal risk, businesses can put in place – nowand for the future – robust strategies for effective liability control andmanagement.

I hope that you enjoy reading this first edition. As always we welcomefeedback on this inaugural issue, and any topics which may be of interestto you for future editions.

Helen DeveryPartner

Welcome to the 1st editionof Risk wise

Page 2 - Risk management in cyberspace

Page 3 - Practicalities: the Löfstedt review

Page 5 - Bribery and corruption – a rude awakening?

Page 7 - All change: employment reforms ahead

Page 9 - Product safety: recession-proof?

Page 11 - Corporate carbon credit –greening business

Page 13 - Driving force: balancingrisk

Page 16 - Costs – is your business ready?

Page 17 - Mactavish Report and Protocols

Page 19 - Pre-contract disclosure – where next?

Editorial

Contents


Risk management in cyberspace

In modern business environments,the use of and interaction withcyberspace (including the internet,wider telecommunications networksand computer systems) is acommonplace business activity. Aswell as transacting business online,common social media strategiesemployed by organisations mayinvolve maintaining a Facebookpage or Twitter feed or monitoringblog conversations.

The benefits v The risks

While the benefits of using internet-based and other technologies arenumerous, so too are the inherentrisks, creating exposures that werevirtually unheard of 20 years ago.These include:

n theft or manipulation of sensitiveor private information

n accidental loss of data

n computer viruses that candestroy data, damage hardware,cripple systems and disrupt abusiness’ operations

n hacking

n physical loss of systems

n key supplier failure

n data protection risks

n cyber crime and terrorism.

These risks are real. The InformationSecurity Breaches survey waspublished on 24 April 2012 by PwC.The report highlights the ongoingand changing threat to UKbusinesses from cyber securityincidents and that one in seven largebusinesses have been subject tohacking attacks in the last year.

The risks may be costly to businesses,may expose them to litigation andmay seriously damage reputation,which in turn can lead to loss ofrevenue or diminution of sharevalue.

The cost of cyber crime has beenestimated at £27 billion a year, ofwhich £21 billion is cost tobusinesses. In November 2011, thegovernment published its new CyberSecurity Strategy setting out how theUK will support economic prosperity,protect national security andsafeguard the public’s way of life bybuilding a more trusted and resilientdigital environment. The governmenthas ranked cyber security as a tier 1national security priority andcommitted £650m over the next fouryears to bolster its cyber defences,working to make the UK one of thesafest places to do business.

On 26 April 2012, the SeriousOrganised Crime Agency (SOCA)announced that it had taken down 36 website domains which werebeing used to sell compromised credit card and financial data. This operation was part of aninternational effort with the FBI and US Department of Justice. The potential international fraudprevented by this operation isestimated to be in excess of £500 million.

page 2 Berrymans Lace Mawer

SOCA has been allocated £19million over four years through theCabinet Office’s National CyberSecurity Programme to improve theUK’s response to tackling cybercrime.

Insurance complications

Commercial general liability andproperty policies were originallydesigned to respond to liabilities andnatural perils that damage physicalassets. The internet is producingmany exposures of which are largelyintangible, the result of human erroror deliberate malicious acts orcrimes. These ‘i-exposures’ areincreasingly subject to exclusion fromtraditional insurance policies.

An analysis of the extent andlimitations of a businesses existinginsurance protection for cyber risksshould be undertaken so that ifrequired, specialist computer orwider cyber risk insurance covertailored to the needs of yourorganisation or business can beobtained.

Risk management

To protect against these and similarexposures, a cyber risk assessment isessential as part of any riskmanagement programme.

As a starting point, you shouldidentify and assess the risks specificto your business. By way of example,you may want to consider how muchof your data is held in electronicformat, what the impact would be ifyou lost any of it and whether anyimprovements could be made.Another consideration may be howmuch your employees are engagedwith social media networking sites.How much are they identified withyou, their employer? Consider theneed for a social networking policyand the need to communicate thiseffectively to all employees.

When considering security risks, itmay be appropriate to consider the

physical security at operatinglocations. For example, is thereintruder detection, CCTV, locks etcfor key areas such as server rooms.Data security, eg, encryption mobileequipment, anti spyware, etc is alsoa relevant consideration.

Where key services are to beoutsourced, an assessment of theproviders’ risk management controlsshould be undertaken. If the provideris interacting with your informationtechnology systems or data, youshould ask to see their cyber riskmanagement policy and procedures.

Work with your legal advisers toensure you have robust legalprotections in place where possible.These include the following:

n Patents.

n Copyrights.

n Secrecy and confidentialityclauses in contracts, includingemployment contracts.

n Data Protection Act 1998compliance.

Once the risks to a business areunderstood, appropriate policies andprocedures can be established.These should be communicated torelevant individuals within thebusiness, periodically reviewed andformally managed.

Implementing an effective andadaptable cyber risk strategy reducesthe probability of having costly anddamaging incidents that result frombeing unaware of the business’evolving cyber risk position.

Naomi GrantPartner

Practicalities: theLöfstedt review

In March 2011, Professor RagnarLöfstedt, Director of the King’sCentre for Risk Management atKing’s College was commissioned bythe government to conduct anindependent review of health andsafety legislation. He was asked tolook into the scope for reducing theburden of health and safetyregulation on business, and inparticular the extent to which theregulations had led to positive healthand safety outcomes and the extentto which they have created significanteconomic costs for businesses of all sizes.

His report ‘Reclaiming health andsafety for all: An independent reviewof health and safety regulation’ waspublished on 28 November 2011. Reaction to the review has beengenerally positive, with mostcommentators pleased at hisconclusion that the current healthand safety landscape is broadly fitfor purpose. The review andsubsequent recommendations havebeen welcomed by the HSE.

Löfstedt: key findings

After a wide consultation and areview of 200 health and safetyregulations plus 53 ACOPS(Approved Codes of Practice), heconcluded that the regulations are‘broadly fit for purpose’ and rightlyplace responsibility on those whocreate risks but that, especially withregard to civil litigation, not enoughconsideration is given to the actionsand responsibilities of employees inthe workplace.

He states that the concept ofreasonable practicability isappropriate to the legislation andshould remain at the heart of healthand safety legislation to provide forthe flexible management of risk andimportantly that risk assessments are


‘fundamental’ to the management of risk.

The guiding principle for the reviewis that regulation should be based onrisk and not hazard.

Key recommendations included:

1 The ‘headline’ recommendationis for the removal of 35% ofhealth and safety legislationthrough the HSE undertaking aprogramme of sector-specificconsolidations (ie, those whichrelate to one specific sector ofindustry) with a view toproducing one single set ofregulations per sector by April2015. The Report recognises theneed for further clear guidancefrom the HSE – to be includedon its website – so that the limitsand scope of the changes areclear.

2 The Report recommends thatfive Regulations out of the 200be repealed. Some areredundant because they areduplicated elsewhere and othersbecause there is no evidencethat they reduce any risk ofinjury. Löfstedt alsorecommended that fiveregulations should be amended,clarified or reviewed and theseinclude the Construction Designand Management Regulations2007 (CDM), the Reporting ofInjuries Diseases and DangerousOccurrences Regulations 1995(RIDDOR) and the Work atHeight Regulations 2005. WithRIDDOR amendments aresought to remove uncertaintyover what injuries should bereported. It is estimated thatuncertainty has contributed toalmost 50% of all non fatalinjuries being reported.Additionally, the Work at HeightRegulations and associatedguidance will be reviewed by2013 to ensure that the UKRules do not extend beyondwhat is required by the relevant

EU directive.

3 The HSE is to review all ACOPsto give businesses betterguidance to help employersunderstand what is expected ofthem under the regulations sothey can focus on addressingreal risks. The initial phase ofthe review is to be completed byJune 2012.

4 That the government worksmore closely with the EuropeanCommission and others,particularly during the plannedreview of EU health and safetylegislation in 2013, to ensureboth new and existing healthand safety legislation is risk-based and evidence-based.

5 The review of strict liabilityregulations. He was critical ofthe existence of strict liabilityprovisions which makebusinesses liable for damageand loss caused by technicalbreaches regardless ofculpability. These strict orabsolute duties are at kilter withthe general concept ofreasonable practicability.Löfstedt criticises the ease with

which employees can bringclaims under these provisionsfollowing technical breaches byemployers. He recommendedthat by June 2013 every strictliability duty should be reviewedand where possible qualified byreference to reasonablepracticability.

6 The report proposes anexemption from health andsafety law to self employedpeople whose work activitiespose no potential risk or harmto others. The report refers toself employed persons as ‘thosewho do not have anyemployees’. This presents achallenge and further guidancewill be required as to whatamounts to activities that poseno potential risk of harm toothers.

7 Enforcement. Currently healthand safety legislation is enforcedin some premises by the HSEand in others by localauthorities. The report identifiesinconsistencies of theenforcement in localgovernment and recommendsthat legislation is changed so


that the HSE should be givencontrol of all local authorityhealth and safety inspection andenforcement action, in order togive consistency betweendifferent local authorities andbetween the HSE and localauthorities. It is hoped that thiscentralisation should alsoreduce the disproportionatenumber of local authorityinspections of low riskbusinesses compared with thenumber carried out by the HSEon the more high risk businesseswhich it tends to regulate.

There are some practicalimplications for businesses,particularly when account is taken ofthe preceding ‘Common SenseCommon Safety’ report by LordYoung of October 2010.

1 The Löfstedt review is foundedon the basis that regulationshould focus on the likelihoodof something happening ratherthan on theoretical/potentialhazards. Businesses shouldassess the risk posed by its work.Low risk businesses – forexample, office basedenvironments, will have differentrequirements to high riskbusinesses such as thoseinvolved in construction andmanufacturing. The HSE haspublished online tools to assistlow hazard workplaces tocomply with health and safetylegislation. Higher riskenterprises are likely to requiremore in-depth systems in place.The approach taken to healthand safety needs to be tailoredappropriately.

2 Once risks have been identified,a transparent risk assessmentprocess is key in identifying theactual risks of the business, thelikelihood of those risksoccurring and the controlmeasures required to reduce therisks. Businesses should alsoarticulate the thought process

behind safety systems todemonstrate an understandingof risk.

3 A positive safety culture withinthe business is key. Everymember of staff must be awareof the risk assessments in placeand ensure implementation,from director to worker. Withoutthis, the system will fail.

4 It is hoped that a change toRIDDOR will reduce theadministrative burden onbusinesses. In addition toreporting fatalities, majorinjuries and some categories of‘near misses’, employers will berequired to report employeeabsence from work for morethan seven consecutive daysfollowing a work-related injury(an increase from threeconsecutive days).

5 Employers will need to watchclosely those recommendationsthat might have an impact upontheir day-to-day activities. Anychanges to the Work at HeightRegulations 2005 andConstruction Design andManagement Regulations 2007would be likely to impact on awide variety of businesses as willany of the proposed changesrelating to the self employed.

It is to be hoped that the proposalwill have a positive impact onbusiness. The elimination of strictliability duties and unburdeningbusinesses with ‘over compliance’will no doubt be welcome relief.Much will depend on how the HSEtake these recommendations forwardbut essentially the report should bewarmly welcomed.

Helen DeveryPartner

Bribery and corruption – a rude awakening?

Damaging corporate scandals acrossthe globe have hit the headlines andraised awareness of the thorny issueof bribery. Bribery and corruption hasrisen to both the political andcorporate agenda in recent yearsand high profile briberyinvestigations have includedSiemens, Daimler and BAE Systems.Investigations and penalties provedcostly with Siemens paying $1.6bnfor the US settlement alone, whileBAE paid $400m and Daimler$185m.

Reputational damage and potentialloss in revenues are key factors inthe fall out from investigations andfines. Steering a course through thisminefield can be problematic butone which must be managedeffectively from the outset.

In the UK, The Bribery Act 2010 hasnow been in force for some time andthe first conviction under the Actcame at the end of 2011. A courtclerk in London admitted takingbribes to avoid putting details oftraffic summons on a court database.He is currently serving a three yearsentence for bribery which is runningconcurrently with a six year sentencefor misconduct in a public office.

This judgement shows that courts arewilling to impose harsh penalties onthose who are found guilty ofcommitting bribery.

The question for business andindividuals then is how to avoidcommitting bribery offences?

There are four main categories ofoffence under the Act:

n Section 1 relates to giving,


promisingor offering abribe.

n Section 2relates torequesting,agreeing to receive or acceptinga bribe.

n Section 6 relates to bribing aforeign public official to obtainor retain business, and of mostconcern to a lot oforganisations, is the newcorporate offence that the Acthas introduced.

n Under section 7, a commercialorganisation can be liable if itfails to prevent bribery beingcarried out by an ‘associatedperson’. If found guilty a thecommercial organisation canface an unlimited fine.

The definition of associated personsis wide and is intended to cover thefull range of people and personswho may commit bribery on itsbehalf.

Who an associated person isdepends on the circumstances ofeach case.

There is a full defence if the businesscan show that it has adequateprocedures in place to preventpersons associated with it fromundertaking such conduct. There isno definition of adequate proceduresin the Act, however, guidance hasbeen published to assistorganisations in putting proceduresin place to prevent bribery. Theguidance has been split into six

sections. It appears that the over-riding message is that the proceduresonly need to be proportionate inrelation to the risk of bribery facedby that particular organisation.

1 Proportionate Procedures – theprocedures have to beproportionate to the risk, theintention is not to placeunnecessary burden onorganisations and therefore theprocedures will be different foreach organisation. Policiesshould be in place to preventbribery, there should be astrategy to implement thesepolices and a risk assessment.The policies should mitigateidentified risks as well as tryingto prevent deliberate conduct ofassociated persons. Examples ofthe types of policy to beimplemented includetransparency, control, duediligence and enforcement.

2 Top Level Management – themessage that bribery isunacceptable should come fromthe people at the top level of theorganisation who should foster aculture where bribery is neveracceptable. Attention should bedrawn to this message, themethod of doing so isdependant on the business andcould be done in a number ofways. It is suggested that ananti-bribery policy is drawn upand that associated persons aremade aware of it.

3 Risk Assessment – the riskassessment should be periodic,informed and documented. Itshould assess the nature andextent, of the potential externaland internal exposure to the riskof bribery being committed onits behalf, by persons associatedwith it. The guidance sets outsome factors to have in mindwhilst completing the riskassessment. These include, therisk of bribery in the country, thebusiness sector, the type of

transaction, the businessopportunity, and the businesspartnership risk. Once the riskassessment is complete, stepsshould be taken to minimise therisks identified. This may involvetraining, introducing newpolicies and new tighterfinancial controls.

4 Due Diligence – this involveschecking the background of thepeople or organisations that willact on your behalf. Checks thatyou will need to carry out willlink back to the risk assessment.If the risk is low then the amountof checking involved willprobably be limited to ensuringthat these people are genuineand can be trusted to act onyour behalf. If the risk is higherthen more research may berequired. The guidance hassuggested a variety of methodsincluding general research,checking references and indirectinvestigations.

5 Communication (includingtraining) – communication of theanti-bribery policies andprocedures may be internal andexternal dependant on the levelof risk. Internal communicationshould convey themanagement’s message thatbribery is unacceptable. Theinternal communication shouldalso provide a secure andconfidential means for internaland external parties to raiseconcerns about bribery on thepart of associated persons.There should be adequateprotection for those who doreport their concerns. There maybe a need for externalcommunications which sends amessage that bribery isunacceptable. This will reassureexisting and prospectiveassociated persons and alsodeter those intending to bribeon the organisations behalf. The guidance suggests that thereshould be some training in


relation to the bribery polices.This should be proportionate tothe risk the organisation faces,training is likely to be effective incommunicating the anti-briberyculture of the organisation.

6 Monitoring and Review – theguidance suggests that thepolicies and procedures in placeshould be reviewed on a regularbasis to ensure that they areeffective and that improvementsare made where necessary. Thisis especially important as theorganisation evolves andchanges over time.

There is a lot of concern regardingcorporate hospitality and what isacceptable. Corporate hospitality isacceptable as long as it isreasonable and proportionate.Organisations should have a clearpolicy on gifts and hospitality, thereshould be clear records of theexpenditure on hospitality, if theexpenditure falls outside the confinesof the usual policy, there should be arecord that special permission for ithas been sought at a high levelwithin the organisation and thatexpenditure was proportionate to therecipient.

It is likely in the coming months thatthere will be further developments inthis area and additional clarificationwith regard to what organisations willneed to do to prevent themselvesbecoming liable for a briberyoffence.

Julian SmartPartner

All change: employment reforms ahead

There has been a great deal ofpolitical activity surrounding theCoalition Government’s plans toreform certain aspects ofemployment law and in particular thepractice and procedures ofemployment tribunals. As with manyother previous reforms of the system,money is at the root of the plans.Many of the reforms will be couchedin terms of improvements to thelabour market and stimulation ofenterprise with the draft Bill beingentitled the Enterprise and RegulatoryReform Bill. However, few

employment lawyers are fooled bythis and when the business secretaryVince Cable says that the Bill isintended to ‘scrap unnecessary redtape and help ensure that peoplewho work hard and do the rightthing are rewarded’ lawyers see onlycost reduction measures in theEmployment Tribunal (ET) system.

This article includes some of theproposals and comments on theirlikely efficacy.

Pre-claim ACAS conciliation

It is intended that the EmploymentTribunals Act 1996 will be amendedto require prospective claimants tosubmit their prospective claims toACAS before they are entitled toproceed to issue in the ET. Detailed


regulations will stipulate the periodof time that must elapse before theycan issue proceedings aftermandatory referal to ACAS. Oneimmediately asks where all theseconciliation officers are going tocome from and what the impact ofthis pre-claim conciliation is going tohave on the ongoing claims. Further,this revisits the problems of tinkeringwith the limitation period for ETclaims. Since the start of employmentlaw in the late 1960s, the threemonth period of limitation has beenan important feature of litigation. Ifthe claimant misses the three monthsthen, save in exceptionalcircumstances, the tribunal has nojurisdiction to hear the claim. Thenew regulations mean that theabsolute nature of the three monthsfrom the date of termination ofemployment will be changed.Political memories appear to beshort. This was one of the issueswhich arose during the unsuccessfulStatutory Disciplinary and GrievanceProcedures Regulations 2004. It wasa source of more litigation andwasted ET time than had been seenin the previous 30 years. To revisitthe possibility of satellite litigationarising out of a claimant’s failure touse the mandatory pre-claim ACASconciliation could turn out to beshort sighted.

Rapid resolution scheme

This is a scheme whereby someoneother than a judge sitting alone or ajudge with lay members will make adetermination on simple or low valuetribunal claims. The parties will haveto consent to the matter being dealtwith in writing. It is difficult to seeprecisely how many of these claimswill fall into this category and whatthe uptake of the same will be. Whatis a ‘simple’ claim is difficult toknow. The nature of the employmentrelationship is such that once it isbroken down, no dispute is simple.As regard the low value, again thisquestions the principle set out by DrCable to reward hard workingemployees. For the chief executive of

a PLC, a low value claim might bean argument about a percentagepoint to his bonus scheme whichmight be valued at £100,000. Forsomeone working at minimum wagein a part-time job, £50 may not looklike a low value claim.

Judges sitting alone

The rules have already changed toallow the ET to determine that claimspresented after 5 April 2012 can bedetermined by a judge sitting withoutlay members. The intention is toextend this in certain circumstancesto the EAT. This type of cost savingmakes sense as the cost of laymembers is considerable and mostpractitioners would say that mostemployment judges have sufficientexperience of the ‘real’ world toensure that fairness will prevail, or atleast the decisions will be as fair asunder the old system.

Changes to compensatory award forunfair dismissal

The Bill proposes changes to limitthe maximum compensatory award.Experience shows that very fewclaimants get anywhere near themaximum award. It is only thoseemployees who are highlyremunerated that are likely to comenear to the maximum award and sothis is not predicted to be a majorprovision to assist employers oremployees.

Financial penalties

There is a radical proposal that thetribunal will be given a discretionarypower to impose financial penaltieson employers who have acted inbreach of employment legislation incircumstances where it is consideredthat one of the various aggravatingfactors are involved. The ExplanatoryNotes to the Bill suggest that thetribunal may find aggravatingfeatures where there has been adeliberate flouting of the law orwhere the employer has acted in badfaith or with malice. It also suggests

that an employer which has adedicated human resources teamought to be punished more than onethat does not. This seems somethingas a paradox as most employmentlawyers believe that the employmentof HR professionals within anorganisation is beneficial to reducingclaims. To indirectly reward thosecompanies that do not incur thecosts of an HR team seems strange.

The financial penalties are going tobe calculated by reference to thecompensation that is paid to theclaimant with a suggested figure of50% of that amount subject to aminimum of £100 and a maximumof £5,000. Payment within 21 dayswill reduce the ‘fine’. This is perhapsa bargaining chip for claimants whomight be able to persuade therespondent employer to paycompensation before the mattercomes to final hearing because ofthe financial penalties that may beimposed. As with new innovativeamendments like this, it is alwaysdifficult to predict the likely impact inthe real world. It is difficult to knowthe extent to which judges willimpose this fine and it may well turnout that cases that would otherwisesettle do not because the claimant’ssolicitor feels that an ET fine willincrease the last minute offer madeby the respondent. As with mostthings in litigation, and the lawgenerally, where there is uncertaintyas to the likely impact of statutoryprovisions there tends to be more,not less, litigation.

‘Whistleblowing’ claims

Clause 14 of the Bill makes achange in relation to public interestdisclosures. Whilst the protection ofwhistleblowers is an extremelyimportant characteristic of modernemployment law, the use of protecteddisclosures has grown substantiallyand has provided many claimantswith an ability to pursue a claimwhere they have less than 12 monthscontinuous service. An area ofparticular difficulty arises where


employees make disclosures aboutthe conduct of fellow workers forwhom the employer is vicariouslyliable. Often these claims will be bysomeone meddling into the affairs ofother individuals and making adisclosure that has little publicinterest. The changes mean that anydisclosure, in order to be protected,must pass a public interest test.Again, one might imagine that morerather than less litigation will arise asthis public interest test is applied.

Settlement agreements

The Bill will re-name compromiseagreements as settlementagreements. A relaxation of thetechnicalities of such agreements isnot proposed and this willundoubtedly mean that employerswill continue to churn out substantialdocuments intended to ensure thatthe compromise agreement onlysettles existing claims. There willalways remain an issue as to whatclaims cannot be compromised. Thewhole idea of compromiseagreements was to create a genuine‘full and final’ settlement. This Billwas an opportunity to look morecarefully at this and to ensure that acompromise agreement definitivelyclosed the employee’s file. Alas, itseems a lost opportunity.

Overall, it is difficult to see eitherside of the employment relationshipbeing overly pleased with thesechanges. The prospect of morerather than less litigation is a spectrethat has always accompaniedpolitical tinkering. No doubt thecoalition will get the appropriatepolitical plaudits but watch this spaceto see if substantial sums are savedor the lofty principles set out by DrCable achieved.

Michael ParrPartner

Product safety:recession-proof?

Publication of the annual EU reporton product safety enforcementprovides a regular snapshot of safetyissues in particular sectors, the levelof Far East involvement in unsafeproduct risks and plans for increasedregulation. Published on 8 May thisyear, the 2011 report provides aninsight into all these issues but alsosuggests the recession and budgetcuts may have reduced the numberof notifications and surveillance workby EU members.

The report is the eighth since theRapex system – the EU’s rapid alertsystem for non-food dangerousproducts – was introduced. Over thatperiod notifications of unsafeproducts have risen annually from139 in 2003 to a high of 2,244 in2010. However, the figures for 2011show a decrease to 1,803, areduction of 20%.

This drop is attributed to variousfactors. The last year has seen theconclusion of a number of targetedjoint enforcement actions in certainproduct categories. In addition, theuse of improved risk assessmentguidelines issued by Rapex isbelieved to have allowedidentification of the correct level ofrisk at an earlier stage. Hence, thereport suggests that the quality andreliability of notifications has beenenhanced, allowing follow-up actionsagainst dangerous products to bemore carefully targeted.

However, it is difficult to avoid theconclusion that reduced funding hashad a significant impact onsurveillance by national authorities.The drop of 20% in 2011 is asignificant shift, although any changein risk assessment has not beenanalysed.

Risk and insurance managers shouldbe aware of the latest trendsidentified in the report. While morethan familiar with pressure on their


own resources, they will be interestedto learn of funding cuts which maybe affecting regulators’ ability torespond to safety issues.

It is also likely that pressures from therecession may be relevant whenbusinesses decide whether to notify apotential safety issue. If a riskassessment suggests that thelikelihood of a health and safety riskis negligible, financial pressures maydiscourage businesses from making anotification whereas previously theywould have done so. Today, byreference to the new EU guidelineson risk assessment, and with a gooddeal of justifiable discretion to beexercised, the expense of a publicitycampaign, consultancy and logisticalcosts of collection/destruction maydeter a decision to recall.

Risk by sector

The most notified product categorylast year remained clothing, textilesand fashion items, representing 27%of notifications. The safety risk relatesprimarily to the anti-fungicide DMFwhich was involved in the so-calledtoxic sofa group litigation and hasbeen used as an anti-mouldtreatment especially in shoes, sometextiles and other furniture. Inaddition, there has been a significantjoint market surveillance action oncords and drawstrings in children’sclothing which saw the participationof nine member states.

As in previous years, toys representeda significant proportion ofnotifications at 21% with the risk ofswallowing being the key identifiedrisk. The next three sectors by level ofnotification were motor vehicles 11%,electrical appliances and equipment8%, and cosmetics 7%.

Far East

Products of Chinese origin havealways featured as the most notifiedcountry source under the Rapexsystem; 2010 saw 58% of notifiedproducts originating in China – 2011

has seen that figure drop for the firsttime over recent years, to 54%. Whilethe high number of notificationsconcerning Chinese products can beexplained by the similar market shareenjoyed by Chinese manufacturedproducts in the consumer goodssector, the level of notifications hastriggered continuing co-operationwith the Chinese authorities inrespect of traceability and correctivemeasures to be taken in China.

One positive statistic is that only 8%of all notifications contain noinformation about the country oforigin of the notified product. Thiscompares to a figure of 23% whenrecords began in 2004. It isapparent that the GPSD has led tocompanies ensuring greater recordkeeping, traceability and audits ofincoming products and componentsin the supply chain.

As to the future, despite apparentchallenges caused by lack of fundingand project constraints, the EuropeanCommission (EC) promise newlegislation including an improvedGeneral Product Safety Directive andincreased market surveillance. TheEC has no intention of slackening thepace of product safety regulation.Whether the continuing recession willprevent local implementation remainsto be seen.

Assessing your risks

While the Rapex annual report is auseful benchmark of developments inproduct safety across the EU, it isarguable whether the actions of theEC have had such a practical impactas the development of internetcampaigning and the media. Productrecalls and interim correctivemeasures are a fact of life andassessing the potential risks, liaisonwith the regulators and formulating aresponse which will protect reputationand market share present continuingchallenges.

Key areas for continuing action are as follows:

n Maintain and regularly test thecompany policy and procedurefor corrective action/recall.

n Ensure that you are familiar withthe recently updated EuropeanCommission guidance ondealing with correctiveactions/recall – CorrectiveAction Guide: Guidelines forbusinesses to manage productrecalls and other correctiveactions and also with the newrisk assessment methodologypublished in CommissionDecision 2010/15/EU.

n Ensure a ‘corrective action’ teamis identifiable and trained,including quality control officers,legal advisers, insurancemanagers, risk managers, PR,marketing/distribution directorsand company servicerepresentatives.

n Check lines of communicationand that authority from seniormanagement is available whenrequired. Also ensure all staffare familiar with the risks of disclosure of emailcommunications in the event of later claims.

n Address contractualarrangements with suppliers andcustomers, particularly those inthe Far East.

n Review quality controlprocedures and compliance withlegal and regulatoryrequirements within your sector.Ensure batch numbers and serialnumbers for all products areretained and review supply andcustomer databases.

n Ensure product safety ismonitored including therecording of complaints, reportsof accidents, insuranceobligations, results of producttesting and compliance with theproduct safety regulations.


n Review retention of design andsafety records relating toparticular products which willenable a swift risk assessment inthe event of a safety risk beingidentified.

As ever, statistics are open tointerpretation and the latest reportfrom Rapex only touches upon thereality behind the drop innotifications of product safety issues.In times of recession businesses willlook closely at their costs whether insourcing components and materialsfrom abroad, the funding of theirsafety response teams, or thereaction to potential issues withproducts in the marketplace. Hencepotential risk to reputation may beexacerbated.

The potential criticism of the speedand efficiency of product recalls hasbeen illustrated recently in the safetyissues concerning McLaren andToyota. Financial pressures shouldnot prevent businesses from heedingthese examples.

Jim SherwoodPartner

For a full review of preparing for andhandling a product safety issue ProductRecall: regulation, reputation and riskmanagement contact [email protected]

Corporate carboncredit –greeningbusiness

The ‘green’ agenda was aninteresting focus of the Queen’sspeech and one for businesses toconsider.

Various comments suggest acontinuing commitment to animprovement in UK Plc standing inrelation to energy efficiency and

climate change. One mechanismthat has been adopted in reducingthe UK’s carbon footprint is the CRCEnergy Efficiency Scheme which iscurrently the focus of a consultationperiod having originally beenimplemented by the LabourGovernment. The current intention isthat this scheme is simplified by theCoalition Government and theobligations on participants arereduced. The main focus has beenon large offices and retailers both inthe private and public sector, with theimposition of targets to make themless energy intensive. The targets setin the Climate Change Act 2008 forthe UK derive from the internationalcommitment set by the KyotoProtocol. As the current internationalcommitment under the Protocol isdue to expire at the end of 2012,there is immense speculation asto what will follow. Areplacement treaty has yetto be agreed and there isthe possibility that theprotocol will beextended beyond 2012to allow more time foragreement. Thecurrent targets are:

1 Participants tothe InternationalForum agreed toreduce CHGemissions by5.2% below1990 levelsbetween 2008and 2012.

2 The EU’s collectivetarget is an 8%reduction below 1990levels between 2008 to2012.

3 The UK and other memberstates also agreed to areduction across the EU of 20%by 2020.

4 The UK’s target is a 12.5%reduction below 1990 levelsbetween 2008 to 2012.

The Climate Change Act sets alegally binding target of an 80%reduction in greenhouse gas levelsbelow 1990 levels by 2050. Inassessing greenhouse gasses, 85%are attributed to carbon dioxideemissions. Accordingly, in order toachieve this target, the governmentdecided target mechanisms neededto be put in place to ensure that acompulsory move is made to reduceCHG emissions. One mechanism isthe CRC Energy Efficiency Scheme.

The Carbon Reduction CommitmentEnergy Efficiency Scheme

This scheme formerly known as theEnergy Performance Commitment/Carbon Reduction Commitment, isthe mandatory emissions tradingscheme for large private and public

sector organisations.Organisations that are likely tobe affected include banks,supermarket chains, localauthorities and any largecorporate organisations.The drive behind thescheme is to encourageenergy efficiencyamongst theparticipants and toallow the UK tobecome a leadingnation in climatechange. The schemecame into force on 1April 2010 andapplies to the whole ofthe UK. Currentassessments suggest thatit will affect an estimated5,000 organisations thatare not in the energyintensive sectors. The focus

of the scheme is to encourageenergy efficiency with the

concept of carbon budgets and anet carbon account. The scheme isregulated by the Environment Agencyin respect of England and Wales andthe EA (termed the Administrator)under the scheme is responsible forauditing an enforcement.

In brief, the scheme works on a


carbon trade basis. This enablescompanies to buy carbon allowancesto cover their carbon emissions andmeasure and record energy use incalculating carbon dioxide (CO²)emissions (not including transportemissions).

As the scheme progresses, eachcompany will receive a larger orsmaller amount than they originallypaid for, their ‘carbon allowance’,according to their performance in theCRC league table (first published in2011). A quick review gives an ideaof the range of companies affectedby the scheme: water companies,banks, hotel chains, educationalinstitutions and supermarkets.

Whilst at present it has beencalculated that the scheme applies toapproximately 5,000 organisations(those with an annual electricity bill

of £500,000). Other organisationsthat could be affected may not haveto participate in the scheme, but willbe required to provide informationon their energy usage. This group issaid to consist of at least 20,000organisations. The scheme onlyrelates to energy use in the UK, butoverseas companies can still becovered by the scheme if they have aUK subsidiary meeting the qualifyingcriteria, or have a presence in theUK that meets the criteria. A detailedanalysis of the scheme suggests thatjoint ventures, franchises and evenprivate equity funds will be caught bythe scheme.

With regards to landlords andtenants, whilst it is the organisationthat is responsible for the energysupply that will be required tocomply with the order, those that buyenergy supplies on behalf of a third

party, for example, in the capacity offacilities management companies,will not be deemed responsible. Ifthe landlord receives energy suppliesand provides some or all to itstenants, then the landlordorganisation would be deemedresponsible. This is because thegovernment believes that landlordshave the ability to influence theenergy consumption of tenants.However, these obligations can bepassed on in a lease agreement andthe costs incurred or penalties fornon-compliance could be dealt withby way of commercial negotiationbetween the parties.

Summary

Current data suggests thatorganisations within the scheme areresponsible for around 10% of theUK’s emissions. Whilst the current


impetus of the scheme really doesseek to put in place reputational,behavioural and financial drivers toencourage organisations to developan efficient and adequate energymanagement strategy, to the author,it is obvious that there is still a longway to go to encourage UK Plc as awhole to make a real commitment toefficient energy use. However, thereis little doubt that even the CoalitionGovernment seeks the necessity ofcompliance with the UK’s climatechange commitment. It isrecommended that anyone withresponsibility for this issue must try toobtain feedback on the consultationevents.

Michael SalauPartner

Driving force:balancing risk

Where driving forms an integral partof the working day, the challengeinvolved in balancing the competingdemands of work and driving,without adversely affectingperformance of either, should not beunderestimated.

Operating any size of fleet bringschallenges to businesses. The impactof a serious incident sendsshockwaves across the organisationand can result in personal orcorporate liability.

Ideally, driving requires totalconcentration. It follows that anydistraction potentially heightens therisk of some lapse or failing. This

dilemma becomes all the more acutewhere the actual ‘work’ occupiesrelatively short periods of time inbetween bouts of driving, forexample, meetings with customersand suppliers, sales and businessdevelopment. In this context, driving,whilst forming a substantial part ofworking time, is only the means toachieving an end, namelycompletion of the actual task inhand.

There is an obvious temptation – andfrequently perceived necessity – todrive excessive distances for anextended period, so as to meettimelines and achieve targets.However, this may in itself becounter-productive. The greater thedistance driven, the more fatigue setsin, affecting concentration overall,whatever the task in hand. Whilstthere is little (other than working time


regulations) to restrict the time thoseusing smaller vehicles (under 3.5tonnes) spend behind the wheel,comparison with the drivers’ hoursregulations governing larger vehiclesis helpful. Those rules require abreak of at least 45 minutes after4½ hours continuous driving. HSEGuidelines for drivers of smallervehicles recommend breaks of notless than 15 minutes per two hoursdriving and are, therefore, roughlycomparable.

Similarly, heavy goods drivers musttake a minimum nine hour daily rest(technically even this is a reducedperiod) and actually drive amaximum of 10 hours per day; thetotal daily duty being limited to 15hours. Subject to involvement inloading or unloading, however,driving time is likely to be theirprincipal work. By contrast, where acar or smaller vehicle is simply themeans of travel between meetings indifferent locations, the driving(though vital) is not an end in itself.The real ‘work’ comes in thosemeetings ‘sandwiched’ by periods ofdriving.

Mandatory checks

Effective time management (whetherbehind or away from the wheel) is

key to both safe driving andmaximising working performance.No less significant are questions ofgeneral health. Cars and vans areserviced at regular intervals and,subject to age, tested annually.However, that alone is not enough.Regular checks should be made,even if only visually or by simpleexamination of tyres, wheels, lights,oil, fuel levels, water, electricalsystems, seat belts, steering and soforth. With larger vehicles, a dailysystem of walk around checks andcompletion of defect report forms ismandatory. A prudent driver should,at least, carry out a walk aroundvisual check before taking over anddriving any vehicle. Provision of asimple checklist makes this astraightforward and routine exercise.

The health and condition of drivers isequally important. It is a soberingthought that holders of heavy goodsand public service vehicle licencesmay undergo no medical, sight orhearing tests between the ages of 21and 45. This is in stark contrast withrequirements for their vehicles tohave planned, documented safetychecks every few weeks, undergoannual tests and be the subject ofboth daily walk around checks anddefect reporting procedures. Intheory, their drivers could go in

excess of 24 years without theirgeneral health, visual or hearingacuity being checked. It is notsuggested that drivers should besimilarly ‘health checked’ every fewweeks or even months. However,common sense suggests that thosedriving any category of vehicle aspart of their work should undergomedical checks at least every twoyears, with vision and hearing beingchecked at the same time. Thiswould be in the interests of theindividual concerned, their employerand other road users/safetygenerally.

The profile of driver health is nowmuch higher on the agenda ofinsurers, regulators and theenforcement agencies thanpreviously. Recently, in a wellreported instance, prominent insurersrefused to indemnify the operators ofa vehicle where the driver had beeninvolved in a serious accident. Theycontended that the incident mayhave been caused, wholly or partly,by the driver who was suffering froma condition which, had appropriateprocedures been in place, shouldhave been detected. Consequently,proper declaration of any illness orcondition, or indeed medicationtaken or prescribed, which mayaffect alertness and the ability to


drive safely, is crucial. Theconsequences of failure to do so (fordriver and employer) may involve notonly civil liability for damages, butalso criminal liability for a variety ofpotential offences which may lead tofines, disqualification and evenimprisonment.

Additional obligations

Turning to other obligations,particularly affecting larger vehicleoperation, the completion – or inmany instances the commencement –of mandatory driver Certificate ofProfessional Competence trainingprogrammes must now be an urgentpriority. The end of the five yearperiod within which, first passenger(September 2013), and then goodsdrivers (September 2014) mustcomplete their 35 hours approvedtraining is rapidly approaching.

Astonishingly, some still assume thatif sufficient numbers ignore theseregulations, the DFT will somehowmake them go away. This is not arealistic view.

There is much speculation as to howthe ‘bulge’ of untrained drivers likelyto have built up when deadlinesapproach might be accommodated.There is even talk of stadium-sizedgroup training sessions, though thisis unrealistic since class sizes arestrictly limited and subject toregulation. Demand for trainingcourses is likely to increase steeply(as in some instances may the cost)as the months pass. Prudentoperators will no doubt ensure theirdrivers fulfil the requirements as soonas possible, so as to avoid theanticipated eleventh hour stampede.Sight should not be lost, however, ofthe value of properly targeted and

effective training of drivers, not onlyas a means of managing andreducing risk, but also in enhancingthe standing of their vital role in themovement of goods and people.

Compliant management andoperation of both well informeddrivers and roadworthy vehicles willmaximise the prospect of the safeand successful completion ofjourneys undertaken, whilstminimising the risk of incidents givingrise to the damaging effects ofliability for breach, whether civil,criminal or regulatory in nature.

Michael OliverBLM consultant


Costs – is your business ready?

Costs reform is rapidly approaching.Is your organisation aware of theimpact the changes will have on itsoperation?

There are calls for further changes tointroduce fixed costs to low valueemployers and public liability casesthat are settled without proceedings.This would mirror the process in RTAmatters where claims are dealt withthrough an electronic portal, thechanges would introduce shorterdeadlines and fixed costs payable ateach stage of the process.

The benefits include shorter cycletimes which should lead to areduction in claimant’s solicitorscosts and introduce more certainty inrelation to the overall cost of claimsspend. Despite these seeminglyobvious benefits, it must be borne inmind that employers’ and publicliability cases pose differentchallenges to RTA claims andcompanies must consider whetherthey will be able to adapt to the new process.

Under the RTA protocol, defendantshave 15 days to make a liabilitydecision or the claim will exit theprocess. It is likely that this will beextended for employers’ liability and

public liability claims and a 30 daydeadline is being discussed. If thisdeadline is missed, the cost of theclaim will increase.

One obvious check to undertakenow is to ensure that your businesshas the capacity to be able supplyyour insurers and legal advisors withthe necessary information within thetimescales to formulate a view onliability. Early and effectiveinvestigations of incidents are key tobeing able to respond.

As the new process will mean allclaims are dealt with electronically,organisations will also need to checktheir technology will enable them torespond to requirements for earlynotification and actions under theportal. It is as yet unclear what role,if any, businesses managing theirown claims will have in the portalprocess but it may be thattechnology will be required to enablethem to connect to the electronicportal and monitor their ownnotifications. This may requireinvestment and training of staff.Again it will be important to discussthis with insurers as their experiencewill be useful when making decisionsabout how to implement the changesinternally.

The fixed costs attached to theprocess must be paid at definedstages through the claim and within14 days. Failure to do this will mean

the claim falls out of the process andfixed costs will no longer apply.Organisations need to be aware ofthe trigger points for when costs aredue and comply with them or theywill lose the benefit of the scheme.As ‘cash is king’ for manybusinesses, these incrementalpayments should be monitored andaccounted for in advance so they donot have an adverse effect on cashflow.

Summary

As consultation regarding thesechanges is still ongoing, with theearliest implementation expected inApril 2013, businesses should takethis opportunity to consider therecommendations and discuss themwith their advisors. The streamlinedprocess could be very beneficial; butit will depend on lean and effectiveinternal systems to ensurecompliance.

Victoria CargillHead of costs, BLM Manchester


Mactavish Reportand Protocols

A clear understanding of risk,accurately described to aknowledgeable risk carrier who canthen correctly price that risk is aparadigm around which everystakeholder in the insurance sectorcan agree. Yet a clear and analyticalreport on the corporate insurancemarket by the Mactavish Group, aresearch consultancy specialising inrisk and insurance, suggests thatthere are a host of reasons why afog of uncertainty can shroud thebest intentions of those looking toplace and bear risk.

The risk, if the picture that Mactavishpaints is accurate, is twofold:damage to the commercial interestsof small to medium-sized enterprisesand a loss of confidence in theinsurance market.

The report goes further. It suggestsseven areas of reform: the‘Mactavish Protocols’. BLM endorsesthose recommendations, believingthat they could serve the insuranceindustry and its customers well. Abetter description of risk would meanthe following:

n Improved (perhaps cheaper)pricing.

n A focus on risk resulting inbetter coverage andopportunities for newproducts forcustomers.

n Reducing thetransactional costs associatedwith the problems of partiestrying to define and understandrisks thought to have beenplaced after the contract isformed.

‘A real threat to UK firms’

What makes the Mactavish reportstand out is the access to marketparticipants which informs itsconclusions. The report abounds withincisive quotations from companysecretaries, risk managers, brokersand underwriters.

Many of the difficulties may stemfrom the fact that insurance lawoperates on principles which are notintuitive, nor widely known beyondinsurance law specialists. First, thereport identifies the onerous duty ofdisclosure as the chief problemleading to firms’ policies beingineffective when they bring a claim.Second, the terminology in insurancecontracts often has a differentmeaning to ordinary commercialusage.

There are powerful justifications for aheavy burden of disclosure fallingupon the insured that are related tothe problem of moral hazard.However, as an innocent failure todisclose a material fact can lead to apolicy being declared void, it is

arguable that the insurance industryshould do more to ensure that theextent of the duty of disclosure isunderstood by its customers. The report’s analysis of thewidespread failings in disclosuredocuments, to identify clearly the riskfactors underpinning business’operations, can also be traced backto firms’ lack of understanding of theseriousness of the duty to disclose. Alack of careful scrutiny of thedisclosure documents prior to a

claim, by either brokers orunderwriters, alsoappears to becontributing to theproblem. Mactavishsuggest that stiff

competition results in consumershaving little means of distinguishingbetween competing insuranceproducts.

The other broad criticism of thestatus quo relates to the operation ofthe market. According to the report,the placement process wherebybrokers submit risk to underwriters isa ’black box‘ to buyers, 65% ofwhom do not review the submissiondocuments used to place risk (raisingthe likelihood that material risks willnot be disclosed). Furthermore, fewerthan 2% of buyers review wordingand have a discussion with theirbrokers about how their policy wouldrespond to various loss scenarios.The information which brokersprovide buyers about potentialunderwriters therefore appears to belimited to details about credit-worthiness, rather than how theunderwriter would respond to theclaim. Another factor in this complexpicture is the role of re-insurers,whom the report claims rarelycommunicate with the buyer but mayplay a key role in determiningwhether a claim will be disputed.

Mactavish fairly point out thatinsurers are not regularly refusingclaims on the basis of poordisclosure, although it does suggestthat the avoidance of policiesthrough courts is increasing. The


87% of buyersare unaware of theextent of duty.

Update

Employment law warning

Changes to the law relating tounfair dismissal, whilstwelcomed by employers,should be treated with care.Employees will have to havebeen continuously employedfor two years (less one week) inorder to present a claim forunfair dismissal. This onlyapplies for employeesemployed on or after 6 April2012. A person employed on 5April 2012 or before has onlyto work for one year (less oneweek) to get protection fromunfair dismissal.

Michael ParrPartner

main consequences identifiedare delays in processingclaims and refusals byinsurers to meet the fullamount of the claim.

The Mactavish Protocols

The reforms which the report calls forare:

1 ‘Explaining the burdensomenature of the duty of disclosure‘and ’other tenets of insurancelaw’, including providing buyerswith a briefing on developmentsin case law.

2 All involved in the process shouldtake steps towards ’more forensicrisk assessment‘. Company riskmanagers or insurance buyersshould conductfullerinvestigationsprior todisclosure, withinput fromoperationalmanagers. Also,there should becustomer reviewand approval of submissions tounderwriters.

3 An ‘enhanced two-stage tenderprocess’ would encourage fullerrisk assessment rather than thecurrent single deadline, whichthe report suggests leads torushed submissions. A pre-tendersubmission exercise would allowfor a ‘beauty parade’ ofshortlisted insurers, and foster adialogue between buyer andunderwriter.

4 Buyers should insist on insurerpresentations of riskunderstanding.

5 Buyers should quantify thefinancial value of insurance totheir business.

6 Insurers should ‘discuss majorloss scenarios’, so that a

commonunderstanding of coverage maybe encouraged at the start of thepolicy period.

7 ‘Detailed loss response serviceelements’ should be specifiedup-front, including informationand resource requirements in theevent of a claim.

Response to the sevenProtocols

Identification of areaswhere the insurancemarket could beimproved is, in BLM’sview, a significantstep forward. Such

reform would represent a ‘win-win’ forall involved in the insurance market:firms would find it easier to obtain thecoverage they deserve, underwriterswould obtain a fuller understandingof the risks which they are taking on,and brokers would be able to offer aricher level of service. For brokers,products based upon implementationof the Protocols could allow them tocompete on value as well as price.

Although promising, doubts ariseabout whether, even with fullerdialogue, businesses will be able toobtain security of coverage. Forexample, discussion of some riskscenarios with insurers may not meanthat the actual risk scenarios whichmaterialise will have beencontemplated. Also, it is not clear ifinsurers will be comfortable discussingthe meaning of policy wording, giventhe danger of making misleadingrepresentation to buyers. Perhaps

businesses could obtain comfortfrom legal advisors reviewingthe terms of policies and the

content of disclosure submissionsduring the course of an extendedtwo-stage tendering process.

The problems of internal riskassessment have also beenhighlighted by a Cass BusinessSchool report produced on behalf ofAIRMIC, Roads to Ruin: A Study ofMajor Risk Events: Their Origins,Impact and Implications. Case studiesof 18 recent major corporate failuressuch as Enron, Northern Rock andthe Buncefield explosion led Cassresearchers to suggest that failures atboard or executive level tounderstand or respond to risk were aroot cause. Cass suggests thatorganisational complexity or ‘glassceilings’ may lead to risks not beingcommunicated through acorporation; lower ranks of riskprofessionals may be less inclined tooffer independent critique to seniormanagement. This analysis supportsthe conclusion that, unless thebroader understanding suggested byMactavish does become embeddedand percolate upwards in some largerorganisations, increased dialoguebetween insurers and riskprofessionals or insurance buyers maycontinue to hide the true risks thatbeset companies.

Doubts aside, the Mactavish Reportand Protocols are a reminder that, asa commodity, the value of insuranceto its consumers depends upon thequality of the dialogue betweenpurchasers and sellers. Buyers ofinsurance, as with any other product,cannot expect to have their optimalinsurance needs met unless theybecome active in the formation oftheir insurance contracts.Implementation of the Protocols,together with a review of their effects,would help empower and informinsurance purchasers.

Helen GrimbergPartner

I’ve never looked atinsurance law myself. I firmlyput myself in the category ofnot having a clue.

Company secretary,manufacturing firm


Pre-contract disclosure – where next?

The preceding article deals in detailwith the 2011 report of theconsultancy firm Mactavish entitledCorporate Risk & Insurance: the casefor placement reform. Beneath therather dry title lay a detailed analysisof what commercial insurance buyersunderstand, or misunderstand, aboutthe process of selecting cover, buyinginsurance and their obligationsthroughout. Mactavish noted that:

The system through whichcorporate insurance is arrangedin the UK prioritises, above allelse, low (and declining)transaction costs, ie, brokerfees. This means relatively littletime is devoted to getting thecustomer a reliable contract.This is understandable given theneed for all businesses to keepcosts in check. However, itultimately leads to a low level ofcontract certainty. Given that theinsurance industry, in its ownwords, ‘sells promises’, this ishighly damaging for thecustomer. Not only does itundermine the perceived valueof insurance, it also guaranteesa position low down on thecustomers’ corporateagenda.

The report recommendedreform of the insuranceplacement and purchasingprocess and set out sevenaspects of the transaction inwhich the authors argue thatchange is required. Briefly,these seven

points (for more detail see page 18)are: clarification of insurance law,more forensic risk assessment,reformed two-stage insurer tender,underwriter presentation of risk,understanding analysis of insurancemateriality, pre-inception workshopon loss scenarios and policywordings loss response and serviceplanning – have become known asthe Mactavish Protocols.

At the same time, the LawCommission is continuing its reviewof insurance contract law in the UKand has now turned to businessinsurance contracts. Not surprisingly,it is examining issues and concernssimilar to those identified byMactavish. The Commission has longregarded the present basis ofinsurance contract law – the MarineInsurance Act 1906 – as in need ofupdating.

It has already completed statutoryreform in respect of consumerinsurance, culminating in theConsumer Insurance(Disclosure andRepresentations) Act2012. In essence, this

Act replaces the duty to on theconsumer to disclose materialinformation with a duty to takereasonable care not to makemisrepresentations when enteringinto the policy. If the consumermakes a deliberate or recklessmisrepresentation the insurer maytreat the contract as void. If,however, the misrepresentation was(merely) careless, then insurer may:

n either refuse the claim entirely ifit would not have entered intothe contract but for themisrepresentation, or

n the claim will be adjusted toreflect different terms imposedhad the insurer entered into thecontract knowing of themisrepresentation.

The Commission’s work on businessinsurance is not quite so faradvanced. In a paper in 2007,

which, with the benefitof hindsight, seemsto preface theMactavishprotocols, itnoted that:

in some aspectsthe current law isso far removedfrom what abusiness insuredwould normally want,and from what theunadvised businessinsured wouldreasonably expect, that itis no longer fit forpurpose.


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Here, and in contrast to consumerinsurance, it recommended retainingthe insured’s duty of disclosure butmodifying it. The obligation wouldno longer be to disclose all materialfacts a prudent underwriter wouldwant to know, but instead to discloseinformation that a reasonableinsured would think would berelevant to the insurer. So the testwould focus on the mind of theinsured or proposer, rather than thatof the underwriter.

The detail of this new test and othergeneral matters of pre-contractdisclosure and misrepresentation inbusiness insurance are to be thesubjects of a further round ofconsultation by the Law Commissionlater in 2012. That timetablesuggests that the very earliest onemight see legislative reform of the(pre) contractual basis of businessinsurance would be mid-2013.

In the meantime, the MactavishProtocols should be seen as a well-researched and largely objectivecritique of the current process forplacing business insurance. Whatthey do not have – yet? – is anoverwhelming weight of eithermarket or political support in favourof change.

Despite that, the protocols have been welcomed by insurance buyersin particular. In autumn 2011, somesix months after publication of theprotocols, the risk managers groupAIRMIC sought to introduce new and voluntary terms on non-disclosure terms into the businessinsurance market.

AIRMIC’s model clause would restrictwhat it called ‘the nuclear option’ ofavoiding the policy to 1) fraudulentnon-disclosure or misrepresentationand 2) to other circumstances wherethe insurer would not have enteredinto the contract at all had the facts

been disclosed or properlyrepresented. If, however, the facts (ifknown) would merely have causedthe insurer to enter into the contracton different terms then proportionateremedies would apply to adjust thepolicy terms and/or the claimssettlement.

In perhaps the strongest practicalecho of the Mactavish Protocols, theAIRMIC model clause isaccompanied by detailed specimenchecklists aimed at assisting theproposer/insured in pre-contractdisclosure. These do not duck thekey question of the insured’sobligations, stating clearly that:

The insured is responsible fordisclosing all material facts andinformation about the business,its activities, products/services,geographical spread, insurancehistory and loss experience, sothat the insurer can providepolicy terms and conditions.

There is as yet little evidence that theAIRMIC clause is being adopted bycommercial insurance markets. Whatis clear from both the MactavishProtocols and the AIRMICdocuments, is that commercialinsurance buyers want moreinformation and advice not onlyabout the type of information theyshould disclose in process of buyingand renewing insurance, but also thepotential legal consequences of non-disclosure.

It is probably inevitable that someinformation relevant to the decisionto insure, and on what terms to, willbe misplaced or misinterpreted fromtime to time. As has been said:

Seldom, very seldom, doescomplete truth belong to anyhuman disclosure; seldom can ithappen that something is not alittle disguised, or a littlemistaken (Emma, Jane Austen,1815).

What is critical is that the


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consequences of such disguise ormistake are clear and clearlyunderstood at the outset of theprocess.

These issues will be at the heart of

the Law Commission’s nextconsultation on reforming businessinsurance law. The terms of itsconsultation and of any proposals forlegislation which follow that willdefine the extent to which pre-

contract disclosure is likely to bereformed in the manner proposed byMactavish and supported by AIRMIC.

Alistair KinleyHead of policy development


KEEP CALM AND STAY

RISK WISEManaging risk should be at the top of any business agenda. Failure to have a robust system place can havemajor consequences. Below are the HSE’s latest annual statistics for work-related injuries and deaths in2010/11.

Construction, agriculture and waste/recycling sectors accounted for 93 out of the 171 work-related fatal incidents.

n There were 115,379 reported non-fatal injuries to employees.

n Of these, 24,726 were reported major injuries and 90,653 were over-3-day RIDDOR injuries.

n Historically the most common types have been, and continue to be, caused by manual handling, lifting or carrying– these account for 36% of all RIDDOR injuries.

n Slipping/tripping – these account for 23% of all RIDDOR injuries.

n Falls from height – these account for 16% of all reported major injuries.

n As for ill health, some 1.2m people who worked during this year suffered from an illness caused, or made worseby, their work.

n Stress, depression or anxiety gives rise to most working days lost.

BLM has a 24-hour dedicated Safety, Health and Environment emergency helpline: 07972 999 999

n Investigative support.n Attendance at the scene at the earliest opportunity.n Legal advice and representation.

Market sectorsn Construction.n Environment.n Local authorities.n Retail.n Distribution.n Leisure.n Manufacturing.n Transport.

Berrymans Lace Mawer

0612_781

Events 2012Today, perhaps more than ever, the risks faced by individuals and businesses have come to the fore with therecent strengthening of health and safety and corporate manslaughter laws. Are you completely up to date withhow these and other laws can affect you and your business? BLM specialists are active in providing key corporaterisk updates and information for handling a response to an incident, managing reputation and liabilities.

Corporate risk seminars26 September − The Lowry, Manchester27 November − BLM London, venue TBCFind us at Airmic on stand 37 from 11-13 June in Liverpool.

BLM’s specialists are involved in a number of in-house and externalevents throughout 2012. For up-to-date details, please visit the eventspage at blm-law.com

Claims reviewPlanning is already under way for BLM’s ever-popular Claims review events. These will be held on 8 November inLondon and 14 November in Manchester. Details will be released closer to the time on the events section at blm-law.com

News

For updates or furtherdetails of any of the eventslisted, visit the eventssection at blm-law.com

Details of these events maychange at any time.

Risk wise is published by the marketing department of Berrymans Lace Mawer LLP (Castle Chambers, 43Castle Street, Liverpool L2 9SU) on behalf of Berrymans Lace Mawer. Visit blm-law.com for electroniccopies. This information is correct at the time of printing. Printed in England by The Pureprint Group.

Birmingham63 Temple RowBirminghamB2 5LST 0121 643 8777F 0121 643 4909

LiverpoolCastle Chambers43 Castle StreetLiverpool L2 9SUT 0151 236 2002F 0151 236 2585

BristolSt Thomas CourtThomas LaneBristol BS1 6JGT 0117 933 7700F 0117 933 7777

LondonSalisbury HouseLondon Wall, London EC2M 5QNT 020 7638 2811F 020 7920 0361

Cardiff23 Neptune CourtVanguard WayCardiff CF24 5PJT 02920 447667F 02920 489041

ManchesterKing’s House42 King Street WestManchester M3 2NUT 0161 236 2002 F 0161 832 7956

LeedsPark Row House19–20 Park RowLeeds LS1 5JFT 0113 236 2002F 0113 244 2002

Southampton2 Charlotte PlaceSouthampton SO14 0TBT 023 8023 6464F 023 8023 6117

Client area web siteHave you visited our exclusive website? The area provides access to a wide range ofinformation tailored to specific interests, including event and publication documents,tools and other material which is only available to BLM clients.

Visit www.clients.blm-law.com to access the login page to ‘Register’.

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