The Lloyds’s Market Association (LMA) has joined central banks and other financial instiutions in preparing for a possible euro zone exit. It has issued a “note” giving insurers and brokers guidance on what they should be prepared to do in the event that one or more of the 17 countries currently using the euro leaves the monetary system. It deals only with immediate issues, and doesn’t cover trust funds or other investments in euros.
The LMA prepared the “note” to highlight “a number of premium and claims payment issues, if there is euro “fall-out”, indicating that there “is a high level of uncertainty in respect of the consequences of any euro zone country leaving the Euro and the mechanism which may be used. This Note contains a number of points to bear in mind where the insured or reinsured is resident in the “exiting” country.”
The points given by the LMA cover “the settlement of premium and claims” described as follows:
(i) an insurance contract is underwritten in Lloyd’s or the London company market;
(ii) the insurance contract is denominated in euros;
(iii) the insured business, organization or person is domiciled or resident in a territory within the “euro zone”, and
(iv) that territory enacts a law to “exit” the euro zone and create a new national currency (referred to below as the “re-denomination law”) or this is in prospect.
The LMA’s note gave the following advice concerning premium payments:
– Where premium has not been paid by the insured: if the Country in which the insured is resident “exits” the Euro and creates a new currency, this would not necessarily be an event which in itself terminates or frustrates an insurance contract. However, for contracts at risk, the carrier/London broker may nevertheless consider amending such contracts to include a “continuity clause”, to prevent arguments on this point, and a “re-denomination clause” to deal with premium payment in a new currency if the Country in question exits the Euro (example clauses have been circulated to the LMA Lawyers’ Forum and Wordings Group for comment).
– Where premium has not been paid by the insured by the due date: the carrier may have a right to terminate the contract (for example, if the contract contains a premium payment term which is breached). The carrier should clarify the position with the insured through the London and local broker and may wish to renegotiate the currency of payment or premium payment terms to continue cover as an alternative to issuing a notice of termination.
– Where the premium has been paid to the local broker but has not been remitted to London:
QUESTION: has “risk transfer” been agreed by the carrier with the local broker (i.e. “cascaded”)? If yes, then the carrier is unlikely to be able to terminate the contract for non-payment of premium (if late). The re-denomination law is likely to be relevant. There may be a conflict between this law and the insurance contract (e.g. if the applicable law of the contract is English and/or the contract was underwritten in London).
It also advised a close reading of the insurance contract, particularly as regards the law(s) applicable to its enforcement, whether they are the UK’s or local. In the case of local brokers handling funds different terms may apply, depending on what arrangements have been concluded. Where the broker receives premium payments they should be remitted to the carrier.
However, as is often the case, marine coverage has special rules. The LMA stated: “Where the contract of insurance is for marine business, the London broker may be liable to pay the premium whether or not it has been received from the insured in accordance with section 53 of the Marine Insurance Act 1906 (unless otherwise agreed). This position would need to be reviewed before any step is taken to terminate the contract for non-payment of premium.”
Concerning claims payments, the LMA gave the following advice in the case where the carrier has not yet paid an agreed claim:
– Where a euro zone country has enacted a re-denomination law, before the claim is paid, the carrier through the London and local broker should (i) confirm the currency of payment – the re-denomination law may have implications regarding a payment in Euro to a resident insured; and (ii) confirm the party to whom remittance is to be made and obtain appropriate releases – there may be a particular solvency risks relating to a local bank.
– Where the claim has been paid to the London broker: if there is a risk transfer TOBA in place, this would not constitute payment to the insured unless otherwise agreed. If there is a non risk transfer TOBA in place, this may constitute a valid payment to the insured but it is recommended that steps above are taken.
– Where the claim has been paid to the local broker:
- If risk transfer has been granted to the local broker (“cascaded”), then this may not constitute payment to the insured.
- Where a local law or regulation provides that a claim is only paid when actually received by the insured, there may be a conflict between the local law or regulation and the insurance contract, if the latter is subject to English law or underwritten in London.
“In these cases, the claims monies may be held at the carrier’s risk potentially in a bank where the solvency position is uncertain; and the funds may be subject to the re-denomination law, e.g. the locally-held balance may be converted to the new currency,” the LMA noted. “In these circumstances, the position needs to be investigated by the carrier and London broker and monies at risk ascertained. A carrier is directly responsible, however, for marine claims.
The LMA also offered advice to coverholders and others involved in euro-zone business. It pointed out that “Lloyd’s and Xchanging have extensive experience of introducing new settlement currencies into the market settlement process; Lloyd’s also provides its currency conversion service (which supports Xchanging settlements) where central settlement counterparties do not have bank accounts for a given currency.”
In conclusion the LMA said: “Managing agents and brokers will be keeping euro–denominated insurance contracts relating to euro zone territories under review to monitor outstanding premium, outstanding claims, and premium and claims monies in transit; and the materiality of this business to their firms and principals.
“The points made above are general observations and are made to assist in the assessment of risk in this area. Where appropriate, legal or other professional advice would need to be sought in relation to particular contracts and transactions.”
Source: Lloyd’s Market Association