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LONDON-Proposed amendments to a 1975 U.K. law might prevent North American professionals from recovering 90% of their claims if their U.K.-based insurers become insolvent.

The British government is expected soon to pass into law amendments to the Policyholders Protection Act 1975. The amendments would close loopholes that allow North American professionals to get their claims paid almost in full from a guaranty fund when British insurers fail.

The amendments to restrict the geographical scope of the act for future claimants were first announced in October 1995 by Ian Lang, president of the Board of Trade. The changes would not be retroactive and would pertain only to policies written after the amendments become law.

The Policyholders Protection Bill incorporating the amendments was introduced in the House of Commons in December, but it already has gone through the process of readings and committee stages in the Commons and House of Lords with virtually no opposition. The bill is expected to clear the last hurdles in the House of Lords in the very near future.

Whether the amendments in the bill have shut some doors but opened others through which North American professionals could qualify for recovery remains to be seen.

British insurers have been seeking amendments to the Policyholders Protection Act since a 1993 House of Lords decision required the Policyholders Protection Board-administered fund to pay 90% of professional liability losses of North American doctors, lawyers, accountants and other individual professionals insured by the defunct H.S. Weavers (Underwriting) Agencies Ltd. (BI, Nov. 29, 1993).

An annual levy of up to 1% of net non-life premium income finances the fund. To date, the Policyholders Protection Board has collected (British pounds) 340 million ($548.7 million) in levies from British insurers and has paid out (British pounds) 203 million ($327.6 million), said Derek Wright, secretary to the board. Most of the funds are paid to policyholders of the KWELM companies, which underwrote on the Weavers stamp.

British insurers always have maintained that the Policyholders Protection Act was designed to protect U.K.-based individuals who bought policies in the United Kingdom.

However, in the 1993 decision in Scher vs. the Policyholders Protection Board, the House of Lords ruled that a "U.K. policy" as defined by the act was one that was issued by an authorized insurer in the United Kingdom, regardless of where the obligation under the policy is located.

The Lords also ruled that a "U.K. policyholder" as defined under the act included partnerships, provided that none of the individual partners is incorporated.

The amendments to the Policyholders Protection Act in the latest bill would not affect the protection of partnerships.

"From the general U.K. insurance industry perspective, they will be disappointed because partnerships remain protected," said Andrew Wilkinson, partner in the insurance group of London-based law firm Clifford Chance. "There was a lot of lobbying that went on to remove them (from protection), but the protection remains."

However, the bill does redefine the "boundaries of protection" to exclude risks and "commitments" outside the European Economic Area, the Isle of Man and the Channel Islands, according to an explanatory memorandum to the Policyholders Protection Bill.

The EEA consists principally of European Union member states, Norway and Switzerland.

The new law, therefore, would "now protect policyholders on the basis of the location of the risk or commitment," Richard Spiller, partner with law firm D.J. Freeman, stated in a recent in-house newsletter.

The intention is to "exclude primarily North American policyholders from future protection," said Roger Enock, a Freshfields law firm partner who represented some of the plaintiffs in the Lords' decision.

Mr. Enock thinks it's a "shame" that the government has decided to change the law. "It is a reaction to an exceptional circumstance-the collapse of Weavers. . . .Will it be repeated? Who knows?"

"U.S. situs risks are no longer protected," which is a plus for the U.K. insurance market since these were the more "grievous" claims, said Mr. Wilkinson.

Rules for determining the location of risks and commitments are incorporated in the amendments to the act, said Mr. Spiller. A property risk will be located where the property is situated, and an auto risk will be located where the vehicle is registered, for example.

In other cases, the risk or commitment is deemed to be located where an individual has his habitual residence or where the risk or commitment is situated at the date the policy comes into effect.

"In the case of international commercial risks, there may be difficulty in some cases in determining where the risk or commitment is situated," noted Mr. Spiller. "For example, if an international accountancy firm is instructed to conduct worldwide due diligence for a merger, where is the risk or commitment situated?"

It is a novel idea to offer protection for insolvent insurers based on the location of the risk, especially when the act offered protection based on the location of the insurer, added Mr. Enock. The act as it stands "made sense to me. But to go out looking at where the risk and the policyholder is located doesn't to us make sense."

The amendments also change the way relevant insurance companies pay levies in order to fund any losses to be paid by the Policyholders Protection Board.

The maximum annual levy on insurance companies will be no more than 0.8% of gross non-life premium income instead of the current 1%

on net premium income. "This change could adversely affect insurers with significant reinsurance protection, such as smaller insurers and London market companies," said Mr. Spiller.