The past six years has seen a move towards the opening up of collective lawsuits in Europe. Is Europe headed down the same road as the U.S? We review the principal differences and anticipated impact on liability re/insurance.
Overview
Executive Summary
Devices to deal with collective lawsuits in Europe have, where they exist, tended to be complex, narrow in scope and under-utilized. To enhance process efficiency and open up access to legal compensation, the European Union’s 1998 directive (N° 27) required member countries to adopt new laws for group litigation. In the intervening period, the legal landscape in Europe has shifted, with many countries adopting or considering the introduction of new group proceeding devices.
However, whilst a number of the operational or pro-posed collective action procedural device elements in Europe overlap with the U.S.’s class action system, collective lawsuit legislation in Europe appears to be following an overall more cautious route. The same frequency and level of awards is not anticipated. Even so, by opening up the courts in this way, liability exposure, and thus the demand for corresponding re/in-surance capacity, will certainly increase. A recent study by the French insurers association, for example, has suggested that under France’s proposed legislation, the 40 most recent consumer litigation cases would have cost an additional EUR 1 billion.
For liability re/insurers, these legal developments in Europe are a clear signal for the re-evaluation of loss and accumulation scenarios, and for the use of effective measures to control exposure.
Changing mood in the U.S
Efforts to cap class action damages in the U.S. through tort reform have failed at the Federal level, and the Private Securities Litigation Reform Act (PSLRA), intended to reduce the number of securities class actions, instead spawned a new breed of bigger, more credible lawsuits.
On the positive side, recent legislation has curbed some of the more egregious practices in U.S. class action lawsuits, such as venue shopping wherein plaintiffs seek the venue most advantageous to their case to file their class action (including jurisdictions with little or no connection to the matter being litigated). The Class Action Fairness Act, for example, provides for Federal jurisdiction and judicial review of settlements and attorney fees; although even here a number of significant mandatory exceptions (loopholes) remain.
A phenomenon contributing to what is probably a momentary decline in class action filings, has to do with the plaintiff’s bar. Several of the larger class action plaintiffs’ attorney firms in the U.S. have been or are under investigation by state and federal authorities for their practices (which have included using the same lead plaintiff in any number of class action lawsuits). One of the largest attorney firms is currently under indictment, and this is probably contributing to the current lull.
Comparison, Europe and the U.S.
A flood of excessive claims and corporate failures, as has been experienced in the U.S. is not anticipated in Europe because of notable legal procedural differences, namely:
- The “loser pays” rule – to deter frivolous claims made in expectation that the defendant would settle out of court;
- Fees are not contingent on quantum;
- “Opt-in”, rather than “opt-out” – all individuals must demonstrate a loss and identify themselves to the court (those that do not are not then bound by the decision);
- Restrictions on the scope of permissible discovery – the examination of witnesses under oath is not a means of proof and pre-trial disclosure of documents is not permitted;
- Professional judges rather than juries apportion damage awards.
However, not all jurisdictions have adopted or plan
to adopt all of the above points. Where similarities exist, such as the public solicitation of claimants and possibility for contingent fee relationships, these will need to be closely monitored in the respective markets.
Change in Europe
To demonstrate the changing legal landscape:
In November 2005, Germany enacted the Capital Markets Model Case Act1 for sample mass capital market transactions (the Act contains a sunset clause wherein the legislation may be prolonged or extended to other liability forms as of 1 November 2010).
Following a process started in 2004, Italy’s draft bill provides for a class action to be initiated by associations of consumers, investors or professionals, to compensate damages caused by the same unlawful act and committed in relation to a contractual relationship.
Austria began drafting a new law in September 2005 to deal with mass claims, and in France a draft bill was put forward in November 2006. The U.K’s Department of Trade and Industry (DTI) has also issued a proposal (July 2006) which would permit certain approved consumer groups to take legal action on behalf of groups of consumers. In comparison, Swiss law does not provide for any form of class action.
More notably in terms of similarities with U.S legal procedure:
The Netherlands is looking at broader proposals which include the possibility of contingency fees.
Recent changes to Spanish civil procedure rules include the introduction of a quasi-class action right for certain consumer associations to claim damages also on behalf of unidentified classes of consumers – as in the U.S.
The first Swedish Act on group proceedings came into force on January 1, 2003 covering consumer law, environmental law and business and private disputes.
In order to reduce the cost burden from “loser-pays”, the Act makes it possible for the group representative and lawyer to reach an agreement on fees dependant on the extent to which group members’ claims are satisfied. Fees are in this way contingent on liability, but in contrast to the U.S are based on an hourly rate rather than being linked to quantum.
Europe – re/insurance market perspective
Growing demand for liability capacity
As would be expected from the opening up of European courts to collective actions, the demand for liability re/insurance in Europe is in a growth phase – some of the largest industrial groups are purchasing multi-billion euro liability programs and using claims series events as part of their liability threat scenario. However, exactly how much of this growth can be attributed to new collective action procedural devices is unclear because of the many different risk drivers at play, such as Solvency II , the Defective Product Liability Directive and more recently the Safety of Products Directive. The Environmental liability Directive, to be implemented in national legislations later this year, will present another step to increase liability exposures by permitting new parties, such as wildlife protection associations, to sue polluters.
The Class Action
In law, the “class action” is a procedural device used in litigation to determine the rights of and remedies, if any, for large numbers of people whose cases involve common questions of law and fact. The advantages of such a system include improved legal efficiency, reduced cost, consistency of judgment and increased access to legal compensation (particularly for small claims), and thereby also increased accountability for company operating practices and behavior. Permitting such actions is an expected and, many would say, necessary development considering:
- how negligence can increasingly and simultaneously affect large numbers of people; and
- the inefficiency and high costs associated with separately assessing individual claims.
Though the term “class action” is associated with the U.S. procedural device, collective lawsuits of various forms (none of which are exactly identical to the U.S. system) can now be brought in many other global jurisdictions.
Contractual exposure control
When underwriting liability risks exposed to collective action litigation, re/insurers make no distinction between claims arising out of single and group actions. Where a high incidence of such claims is detected in a market or industry, re/insurers carefully control exposure via re/insured limits and specific terms, and/or utilize locally situated, specialist underwriting teams including legal expertise.
Following earlier lessons learned from asbestos liability claims and with consumer associations as one of the most widespread class action representatives, product liability re/insurers have initiated several contractual measures to improve exposure control. The same concepts are an effective tool to control collective action exposure. Whilst product liability is used here, similar measures are also important for other exposed lines, such as environmental liability and directors and officers covers.
In insurance contracts:
Combining bodily injury and property damage coverage within a single sum insured in general third party liabilitypolicies serves to limit the potential loss severity (the “vertical limit”) in the insurance policy due to accumu-lation of bodily injury and property damage from the same loss occurrence. Market standards also stipulate an insured annual limit as two or three times the per loss limit.
The claims series clause was introduced to clarify how loss payments for losses arising out of the same cause erode a policy’s “per loss” and “annual” limits. The clause allows for the aggregation of individual claims arising out of the same cause only up to the “per loss” limit, with payments apportioned chronologically as each claim is settled. The annual limit is the maximum amount available to the insured for all losses or series of losses occurring in that period. The absence of such a clause, as is common in the U.S., leads to the potential stacking of limits from a single insured and due to the same fault.
The batch clause seeks to prevent issues around the correct assignment of time of occurrence. Losses from product liability and other, e.g. occupation exposures, can take decades (as with thalidomide or asbestos) to manifest. Some jurisdictions, including the U.S., apply a “triple triggers” theory in which indemnities are apportioned across all (insured) periods of potential exposure. This allows for the stacking of the annual limit for losses arising out of the same cause. Insurers use the batch clause to allocate a series of claims to a single underwriting period and limit: the date of the first loss of the series determining the contract period to which all losses of that series belong.
Defence cost limitation. Cover for defence costs is frequently unlimited. Pressure is however increasing for defence costs to be better constrained, in particular for policies with U.S. exposure (where litigation costs have increased almost three-fold in fifteen years (1990 – 2005), reaching 2.4% of GDP). Non-U.S. insurers control this exposure by capping defence costs at the policy limit (annual aggregate). The issue is now in the headlines in Israel, where the government is shortly to vote on a law that would limit defence costs to a maximum of 20% of the annual aggregate sum insured of liability policies.
Switching from “occurrence” to “claims-made” covers, in order to assess and control exposure within the current liability climate.
In reinsurance contracts:
Aggregating and limiting the potential exposure from claims arising out of the same cause is also a feature of reinsurance contracts, achieved via:
Definition of the loss occurrence. For liability covers, reinsurance market standards apply the definition from the original insurance contract, in recognition of the fact that respective national legislations or court decisions have definitively provided an occurrence definition in those markets. The reinsurance is thus triggered at the same time as the insurance cover, the date of loss being the date determined by the insurance policy, whether “claims-made” or “occurrence” form.
Reference to the claims series and batch clauses. If these are not mentioned in the underlying policies, the treaty will stipulate these clauses as part of the reinsurance contract wording. Few cause definitions are marketed by reinsurers, although the tendency is to refer to “technical cause” to avoid accumulation of losses when the same brand of product or product component is used in a different manner. If reinstatements of the reinsurance cover are provided, these offer new capacity for new losses/series of losses, the insurer retaining its priority per loss/series of losses as defined in the reinsurance contract.
PartnerRe
Awareness of the shifting legal landscape and the ability to continuously and expertly allocate capacity to this risk is a mainstay of liability risk provision. At PartnerRe, our strong underwriting and accumulation control capabilities helps us to provide our clients with secure and consistent capacity for liability risk. In addition, through open and transparent dialogue, including client audits and follow-up discussions, we offer an objective perspective to exposure and accumulation potential.