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French liability prices could soar by up to 20%

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[PARIS]—A proposed class action bill in France could cause liability premiums to spike by as much as 20% and could cost businesses and insurers a combined euro;1 billion in its first year of application, some of France's biggest insurers say.

The French parliament in February is expected to take up a consumer rights bill that, among other things, introduces a modified form of class action suits.

And while analysts believe passage of that bill is unlikely before presidential elections next April, class actions were high on the list of discussion topics at this year's gathering of the French insurers association, the Federation Française des Societes d'Assurance, on December 11 to 12.

The Paris-based FFSA conducted a study to estimate the law's potential cost to insurers and businesses. It examined 40 recent consumer cases that could have been class actions under the proposed law, said Emmanuel Argod, director of institutional affairs at AXA Enterprises, a unit of AXA S.A. Assuming 30 to 40 suits in the first year, the law would raise costs by €1 billion, in the form of additional liability claims, a cost that would be split by insurers and businesses, said Mr. Argod. "Based on these calculations, premiums could increase 20% to cover additional damage claims," said Mr. Argod. "Of course, not everything would be insured. There are certain limits."

The bill creates a four-step process in which judges could hear class-action complaints only for consumer goods linked to a contract, and only cases filed by government-approved consumer organizations. It purportedly caps damages at €2,000, but this limit is not firm, insurers claimed.

Once a judge determines "professional fault," plaintiffs would have to individually negotiate with the company for compensation, then personally appear before the judge if the company refuses to settle.

The bill does not allow lawyer contingency fees, punitive damages or civil jury trials. Actions for medical complaints, transportation accidents, or other personal injury or non-commercial disputes, would remain barred, explained Nicole Bricq, a French senator who co-introduced the bill into the senate in April 2006 and served as moderator of a workshop on class actions at last week's FFSA meeting in Paris.

Ms. Bricq said that while the bill had been criticized by sections of the consumer and business community alike, there is a need to find a way to better resolve consumer disputes in France.

Worried insurers

Reine-Claude Mader, president of the consumer association Consommation, Logement et Cadre de Vie said that "insurers are worried about covering these risks, but frankly I think it will actually be good for them. They will be able to market new products to their customers."

Ms. Mader said the CLCV hoped the damage cap under the bill will be raised to "a strict minimum of €4,000."

François Devaux, technical manager for civil liability at Generali Assurances, a unit of Assicurazioni General S.p.A., said that is exactly what insurers fear.

"The bill has no protection on the damage limit. We see already that there are seeds of further overruns," he said.

Mr. Devaux said companies compensating consumers "could have problems with their insurer if they are too generous and a problem with the judge if they are too tight-fisted. They could also risk a legal penalty, which would be uninsurable."

Remi Pendaries-Issaurat, president of the civil liability commission of France's risk manager association, Association pour le Management des Risques et des Assurances de l'Entreprise, said the reputational risk attached to a case with 50,000 complaints could "tempt a company to write a check before a trial to save its reputation. But the insurer will take a different attitude. They'll say, 'You paid out too fast, so we won't reimburse you.' "

Consumers lose

"In such a case, even if the settlement is only an average €5 to €10 per claim, you are talking potentially E2.5 million in claims," said Mr. Pendaries-Issaurat, who is also risk manager for the Accor Group. "Premiums will have to rise, so the price of products will go up. In the end the consumer is the de facto loser."

Jean-Marc Sarafian, claims manager for Swiss Reinsurance Co. in France, said the reinsurer already has experience with class actions in Switzerland. "It does make it difficult to calculate capacity, so there will be a big debate between insurers and reinsurers, especially for big customers," he said. "Coverage will probably be insufficient and have to be raised, but we're waiting to see what form the law takes," he added.

Speaking from the audience, Alain Mourot, director of financial-risk underwriting at AIG Europe, a unit of American International Group Inc., said that AIG Europe thought a French class action law might do some good.

"Having a French law on the books could help avoid the major risk of extra-territorial cases, in which class actions are exported to other countries," for example the United States, where settlements can be huge.

He added that right now, "the problem for us is that we have to do contract renewals in January and this law could be passed in February."

However, Ms. Bricq said the bill was unlikely to pass before June 2007. "There will be a lot of debate in Parliament. That will take time," she said.