The government’s proposals for collective class action-style redress will pose particular challenges for the insurance industry

From time to time, industry commentators warn of the dangers of the UK adopting US-style class action procedure. Warnings are usually accompanied by colourful and extreme examples of US litigation, combined with Cassandra-like prophecies of the cost to the UK economy. Unsurprisingly, therefore, recent proposed legislative changes to permit consumer class actions in financial services claims have attracted considerable comment.

Indeed, in some sectors, collective class action-style redress is already here. For example, the Solicitors Disciplinary Tribunal now asks whether complaints made to a solicitor are typical of service provided to other clients. If the answer is ‘yes’, the solicitor may be asked to invite claims from the client base affected, failing which there will be further regulatory intervention.

Since 2001, our civil procedural machinery has included group litigation orders – an ‘opt in’ model that provides efficient procedure for resolving mass disputes of relatively modest value on an individual basis.

At the end of 2008, the Civil Justice Council (CJC) proposed the adoption of a new collective redress regime, including a controversial ‘opt out’ facility allowing claims to be pursued on behalf of persons who had made no complaint and expressed no desire to claim. The Ministry of Justice appeared to reject the concept in July 2009, however, expressing a preference for sector-by-sector development on an ‘opt in’ basis only.

But the issue did not go away. In November 2009, the Financial Services Bill was laid before parliament. Predictably, the headline writers focused on attempts to check banking excesses, but sections 18 to 25 also create powers enabling the set up of a collective redress regime for consumer financial services claims (namely, those against businesses regulated by the Financial Services and Markets Act 2000). So insurance companies, brokers and financial advisers as well as banks will be in the firing line. The key provisions are:

• authorisation by the court and the making of a ‘collective proceedings order’;

• the appointment of a representative claimant, such as a regulator, consumer organisation or class member; and

• provision for ‘opt in’ and ‘opt out’ flexibility.

So, on ‘opt out’, the government is in the curious position of rejecting the concept in July 2009 only to sponsor it four months later.

These provisions have suffered much criticism for being hastily thought out and incomplete in requiring further regulations and rules to be drafted. For instance, it is still not clear how the proposed regime will interact with other compensation schemes, how damages and costs are to be managed and how limitation will operate.

In fact, the bill is not an isolated innovation. In February, the CJC published draft court rules for a broader collective redress regime if required by future governments. The CJC is also to start work in July on exploring collective redress options for pharmaceutical industry claims.

Does this matter to insurers? Yes, it does. Underwriting decisions are made, policies are written and reserves are created on the assumption that claims will be received only from those sufficiently interested and motivated to bring a claim. The bill does not make it clear how the courts will decide that individual claims are the ‘same, similar or related’ as required.

Equally, it is possible that the bill may have a retrospective effect; so as insurers we cannot predict how many additional claims will be ‘farmed’ by the new procedures, although the potential to increase claims frequency is clear. This will create new challenges for claims teams in managing collective cases, allocating resources and considering the economics of decision-making in an evolving context – and at a time when the financial and reputational stakes for both insurers and their customers may be very high indeed.

Can we rely on the bill failing ahead of the impending general election? It seems not. The core provisions are central to government policy. Plans may be afoot to have the bill passed in bi-partisan parliamentary end-of-term ‘wash up’.

So should we worry about US-style class actions becoming a universal feature of our legal system? Perhaps not quite yet – however, it is clear that piecemeal development of our own collective redress system will pose its own challenges for the insurance industry. IT

Andrew McBride is claims director of QBE European Operations