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BROAD NOTICE TRIGGERS COVER IN U.K.

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LONDON -- A policyholder's broad notification is sufficient notice of a claim under a claims-made policy, according to the first U.K. ruling involving pension misselling.

Justice Rix, sitting in the Queens Bench division of the Commercial Court, ruled that professional indemnity insurers must pay the costs incurred by J. Rothschild Assurance P.L.C. in compensating investors found to have been missold pensions as a result of an industrywide pensions review.

The ruling late last month by the judge says a letter advising underwriters of a circumstance that "may give rise to a claim" constituted valid notification under a claims-made policy.

The circumstance referred to was a letter sent out by the Life Assurance and Unit Trust Regulatory Organization advising all members that there was a "problem to be tackled" over pensions. It was sent out shortly before the expiration of a policy taken out by Rothschild and before any claims had arisen or the Pensions Review had started.

Justice Rix rejected the underwriters' argument that a claims-made policy is not designed to respond to a situation where the pensions industry had undertaken to discover non-compliance and to volunteer compensation to investors.

"This judgment clarifies that, under the usual form of claims-made policy, an insured can notify a problem in broad terms and be entitled to cover. There does not have to be a defined claim or clear knowledge of the likely implications," said Bernard Caulfield, a partner in Titmuss Sainer Dechert, the London-based law firm that represented Rothschild in the case.

"It is a position that insurers do not like to see spelled out," he

noted.

Mr. Caulfield illustrated the degree to which blanket notification leaves insurers open to responsibility for claims.

"A possible application of this principle is with Year 2000 claims. Many insureds have notified the Y2K problem as a circumstance that may give rise to claims. These notices may well be effective," he said, noting, however, that "much will turn on the precise wording, remedial steps and so on."

While the judgment likely will have no impact on insurance rates in the current soft market, the ruling may prompt a change in policy wordings, predicted Reg Brown, a leading professional indemnity underwriter at Lloyd's of London.

For example, Judge Rix ruled that Rothschild's failure to advise its insurers of the contents of an earlier LAUTRO communication prior to inception of the policy did not allow the insurers to opt out of the contract.

"This could lead to a review of innocent non-disclosure clauses in policies," said Mr. Brown.

Professional indemnity underwriters from around the London market are to meet today to discuss the ruling. The underwriters are concerned about the decision, as it has been estimated that, by the end of the pensions review process, compensation levels of more than L11 billion ($18.83 billion) will have been paid out.

Meanwhile, the ruling that allows a policyholder to issue a blanket notification of losses under a claims-made policy is likely to cause concern among all liability underwriters. It also has implications for underwriters of any industry sector that chooses to compensate its customers as a result of a regulatory review, lawyers point out.

Martin Butterworth, a partner in the London-based law firm Davies Arnold Cooper, said he agrees that the Rothschild ruling "is a very important case."

Mr. Butterworth said the decision could have wide implications beyond the pensions industry, despite having a "very specific background."

Blanket notifications generally are not accepted by claims-made underwriters, and the judge's ruling on what constitutes notification that could be viewed as bad for insurers, said Mr. Butterworth.

However, professional indemnity underwriters should focus on the details and limits of the judgment; for example, not all companies involved in the pension review will have received the regulatory authority's letter, Mr. Butterworth said.

The review of pension sales covers a period during the late 1980s and early 1990s when the pensions industry encouraged people to opt out of occupational pension plans and sign up for personal pensions instead.

However, it was subsequently realized that many investors would have been better off remaining in their employer-sponsored pension plans, according to a spokeswoman from the government Treasury.

As a result, LAUTRO, at that time the industry's regulatory body, reported a problem to its members in December 1993, making it clear that the financial services industry would have to establish a mechanism for checking all pension transfers.

The pensions review was divided into two phases. Phase 1, which is due to be completed at the end of December 1998, dealt with priority cases involving investors near retirement. Phase II, which is just beginning, will deal with younger investors who have 15 years or more before retirement, according to a spokeswoman for the Financial Services Authority, the new umbrella regulatory organization for the financial services sector.

So far, 650,000 investors have come forward under Phase I, while up to 1.8 million investors may have to be contacted during Phase II, according to the FSA spokeswoman. The deadline for sending letters out to Phase II investors is March 31, 1999, she said. Current estimates of compensation for the whole review are about L11 billion, the spokeswoman noted.

The unique situation, whereby pension companies were effectively "inviting" investors to make claims, led pension companies and their professional indemnity insurers to agree to a methodology, known as the Accord, for handling the situation, according to Mr. Brown.

As a result of the Accord, many professional indemnity insurers have been "taking the losses on the chin," despite the fact that tracing investors and offering compensation is "in breach of the spirit of a professional indemnity policy," he said.

However, with Phase II not yet under way and a possible review of free-standing voluntary contributions (see story, page 65) as well as the Rothschild court judgment leaving a lot of unanswered questions, Mr. Brown predicts that the situation will become more complex.

Hugh Gladman, legal and compliance director for Rothschild, could not estimate how much the ruling will cost insurers.

The judgment dealing with 10 sample cases was on preliminary issues, and the level of compensation has not yet been addressed. In its most recent financial results, Rothschild made an L8 million ($13.7 million) provision for the pensions review.

A spokesman for Chartwell Managing Agents Ltd., which manages the leading Lloyd's of London syndicates on the policy slip, said it was too early to comment on the ruling.

Justice Rix rejected the underwriters' argument that a claims-made policy is not designed to respond to a situation where the pensions industry had undertaken to discover non-compliance and to volunteer compensation to investors.

"This judgment clarifies that, under the usual form of claims-made policy, an insured can notify a problem in broad terms and be entitled to cover. There does not have to be a defined claim or clear knowledge of the likely implications," said Bernard Caulfield, a partner in Titmuss Sainer Dechert, the London-based law firm that represented Rothschild in the case.

"It is a position that insurers do not like to see spelled out," he noted.

Mr. Caulfield illustrated the degree to which blanket notification leaves insurers open to responsibility for claims.

"A possible application of this principle is with Year 2000 claims. Many insureds have notified the Y2K problem as a circumstance that may give rise to claims. These notices may well be effective," he said, noting, however, that "much will turn on the precise wording, remedial steps and so on."

While the judgment likely will have no impact on insurance rates in the current soft market, the ruling may prompt a change in policy wordings, predicted Reg Brown, a leading professional indemnity underwriter at Lloyd's of London.

For example, Judge Rix ruled that Rothschild's failure to advise its insurers of the contents of an earlier LAUTRO communication prior to inception of the policy did not allow the insurers to opt out of the contract.

"This could lead to a review of innocent non-disclosure clauses in policies," said Mr. Brown.

Professional indemnity underwriters from around the London market are to meet today to discuss the ruling. The underwriters are concerned about the decision, as it has been estimated that, by the end of the pensions review process, compensation levels of more than L11 billion ($18.83 billion) will have been paid out.

Meanwhile, the ruling that allows a policyholder to issue a blanket notification of losses under a claims-made policy is likely to cause concern among all liability underwriters. It also has implications for underwriters of any industry sector that chooses to compensate its customers as a result of a regulatory review, lawyers point out.

Martin Butterworth, a partner in the London-based law firm Davies Arnold Cooper, said he agrees that the Rothschild ruling "is a very important case."

Mr. Butterworth said the decision could have wide implications beyond the pensions industry, despite having a "very specific background."

Blanket notifications generally are not accepted by claims-made underwriters, and the judge's ruling on what constitutes notification that could be viewed as bad for insurers, said Mr. Butterworth.

However, professional indemnity underwriters should focus on the details and limits of the judgment; for example, not all companies involved in the pension review will have received the regulatory authority's letter, Mr. Butterworth said.

The review of pension sales covers a period during the late 1980s and early 1990s when the pensions industry encouraged people to opt out of occupational pension plans and sign up for personal pensions instead.

However, it was subsequently realized that many investors would have been better off remaining in their employer-sponsored pension plans, according to a spokeswoman from the government Treasury.

As a result, LAUTRO, at that time the industry's regulatory body, reported a problem to its members in December 1993, making it clear that the financial services industry would have to establish a mechanism for checking all pension transfers.

The pensions review was divided into two phases. Phase 1, which is due to be completed at the end of December 1998, dealt with priority cases involving investors near retirement. Phase II, which is just beginning, will deal with younger investors who have 15 years or more before retirement, according to a spokeswoman for the Financial Services Authority, the new umbrella regulatory organization for the financial services sector.

So far, 650,000 investors have come forward under Phase I, while up to 1.8 million investors may have to be contacted during Phase II, according to the FSA spokeswoman. The deadline for sending letters out to Phase II investors is March 31, 1999, she said. Current estimates of compensation for the whole review are about L11 billion, the spokeswoman noted.

The unique situation, whereby pension companies were effectively "inviting" investors to make claims, led pension companies and their professional indemnity insurers to agree to a methodology, known as the Accord, for handling the situation, according to Mr. Brown.

As a result of the Accord, many professional indemnity insurers have been "taking the losses on the chin," despite the fact that tracing investors and offering compensation is "in breach of the spirit of a professional indemnity policy," he said.

However, with Phase II not yet under way and a possible review of free-standing voluntary contributions (see story, page 65) as well as the Rothschild court judgment leaving a lot of unanswered questions, Mr. Brown predicts that the situation will become more complex.

Hugh Gladman, legal and compliance director for Rothschild, could not estimate how much the ruling will cost insurers.

The judgment dealing with 10 sample cases was on preliminary issues, and the level of compensation has not yet been addressed. In its most recent financial results, Rothschild made an L8 million ($13.7 million) provision for the pensions review.

A spokesman for Chartwell Managing Agents Ltd., which manages the leading Lloyd's of London syndicates on the policy slip, said it was too early to comment on the ruling.