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ENERGY
QUARTERLY NEWSLETTER | A LLOYD & PARTNERS PUBLICATION | OCTOBER 2015
FOCUS ON:
‘LITIGATION SOLUTIONS’
The decision to take legal action is less clear-cut than some legal
advisers portray and requires careful consideration of costs,
expected outcome and commercial relationships.
20
21
22
Oil and Gas Industry
Developments
Atlantic Named
Windstorm update
UK Insurance Premium
Tax Increase
24
General State of the
MARKET OVERVIEW
We are pleased to provide our existing,
and potential clients with our fourth
Energy Insurance Quarterly Newsletter
of 2015.
GENERAL BACKDROP
The 2015 insurance year of account will be remembered as
suffering the most violent downward swing in energy premium
income in recent memory.
In addition to our regular features,
in this edition we have a focus on
‘Litigation Solutions’.
We hope that readers will find this
newsletter interesting and informative
and would welcome any feedback you
may have, positive or negative, which
Unfortunately for Underwriters, the
new environment has begun in earnest.
moderation in losses over recent years
Even the buoyant parts of the energy
has now ended; the only good news for
sector such as refinery and
the market has been the continued
petrochemical companies, which have
absence of insured catastrophes.
had economically excellent results,
you can email to:
The tectonic movements of capital
[email protected] or pass on
organizing itself to be fit for purpose
to your usual L&P contact.
in a hyper competitive environment
If you are reading this in hard copy or
have been forwarded it electronically,
and would like to be added to our
mailing list, or you wish to unsubscribe
from our electronic mailing list, please
email: [email protected].
M&A activity continues within the
continued with the last of the supersized
insurance industry with the current
mantra that bigger is better. Mergers of
buying the Lloyd’s operation Amlin plc.
operational areas that have business
This now leaves only four independent
sector crossover appear not to wish to
Lloyd’s operations.
The best indication of the waning health
Berkshire Hathaway from its last
automatic quota share capacity granted
Senior Partner and Chief
to a mega broker. There is now a
Operating Officer, Energy
resigned acceptance that the ultimate
energy business will be down for 2016
and 2017 and therefore planning for a
2 ENERGY | October 2015
reduced the premium spend significantly.
Japanese insurance companies Mitsui
of sector’s profitability was the exit of
John Cooper
suffered severe overcapacity which
proportionally reduced collective
capacities. This has as much to do with
geographical demarcations as it does
with maintaining market share and
premium income. Clearly there have
been dramatic mid-term corrections to
budget estimates and a number of
Insurers are looking hard at where they
can achieve additional earnings.
INSIDE...
UPSTREAM ENERGY
The sentiment in this area for insurers,
intermediaries and clients is well summed
2
GENERAL STATE
OF THE MARKET
OVERVIEW
6
RECENT QUOTES
9
MARKET MOVES/
PEOPLE IN
THE NEWS
up in the following recent quote:
“Baby, it’s raining. It’s going to
rain for a long time and we’re all
going to get wet. A few people
are going to drown.”
Jim Flores (CEO - Freeport McMoran
Oil & Gas)
The sagging oil and gas price has
increased pressure on Insurers as
upstream activity continues to dissipate.
The tapering of premium has continued
apace in the last quarter. However, the
generally high limits exposed at any one
location have tended to remain in place.
At the end of the second quarter
10
in 2015 Lloyd’s energy premium
income was 32% off with a prognosis
of finishing the year at least 40% off.
WHAT’S NEW?
NEW PRODUCTS AND
MARKET DEVELOPMENTS
The dramatic increase in capacity has
now exceeded its ability to generate
commensurate premium to sustain
adequate profitability in the future.
Lloyd’s of London writes about half
the worldwide upstream income.
11
BRIEFLY
12
UPDATE ON
LOSSES
15
SECURITY RATING
UPDATE
16
LEGAL ROUNDUP
NEWS SNIPPETS
The 2014 premium total was
USD 1,732,000,000 of which
USD 190 million was US wind and
USD 300 million in respect offshore
construction. The premium breakdown
split of the majority of underwriters is
The loss ratio in this part of the book has
20% drilling contractors, offshore
also been poor (particularly with regard
construction up to 15%, Gulf of Mexico
to jack-up total losses). The mega
windstorm about 10% and the
construction projects of recent years are
balance general operating accounts.
now developing loss records at least
The offshore drilling contractor segment
is suffering in particular as value
equal to the premium paid with often
quite substantial periods still to run.
reductions, decommissioning of obsolete
With no new large scale projects on the
units, lay-up returns and the impact of
horizon the class will revert to its
red hot competition materially reduce
historical difficult status. We confidently
the previously healthy levels of cash
predict the tail is about to deliver some
enjoyed by Underwriters.
very, very large losses.
www.lloydandpartners.com | 3
GENERAL STATE OF THE MARKET OVERVIEW
This is a time of business planning and
the syndicates and companies are
surveying the collapse in premium flow
ENERGY CASUALTY
and deciding how to address the
Until very recently ‘stand-alone’ energy
bleakness awaiting them in 2016.
casualty capacity had remained at the
sharply reduced levels post-Macondo.
Now however, for the first time since
Macondo, we are seeing new standalone casualty capacity looking to
enter the market which is starting to
have a downward effect on rates.
The attitude now is negative as the
This allowed Insurers to maintain
gloomy business outcome is
rating levels in this class whilst other
Whether this will be as stark as we
acknowledged by the front line
Energy classes experienced freefall.
have seen in other areas is yet to be
underwriters who are beginning to
Some relief resulted from additional
seen. At this stage, whilst we anticipate
really feel the consequences of
capacity from package markets willing
rate reductions on business with good
this downturn.
to increase liability lines within
loss records (those with losses are less
Underwriters are struggling to make
packages in an attempt to preserve a
likely to secure reductions), we doubt
their business plans make sense and
position on the physical damage
there will be any relaxation of
these will require a great deal of fine
sections of the package.
tuning and/or goodwill to gain sign off.
Energy Insureds were also able to
The lowering of expectations as to
secure reductions in premiums in
what premium can be garnered will
recognition of any exposures
mean a lot of Underwriters will be
reductions, as industry activity
more likely to decline or reduce their
slowed down as a result of the low
participations as the chase for
premium income experienced gets
replaced by a fear of losses.
On a happier note there will continue to
be reductions in pricing as the
overhang of surplus capacity does not
grant Insurers any pricing power.
However, the mood from Underwriters
is to allow only circa 10% cuts to rates.
One note of caution is that in respect
of Gulf of Mexico shelf windstorm
risks, the dearth of general premium is
making this sub-sector less attractive
as the inherent volatility really requires
it to reside within a large overall book.
We believe the leaders will feel they
gave everything to be had in 2015
and are minded to face down any
requested premium cuts.
In summary we will see a retrenchment
in the upstream space with resultant
difficult and protracted negotiations
more likely. The golden period of
the last few years has come to a
sad close.
oil price environment.
underwriting discipline in terms of the
breadth of cover offered, with scaling
of limits and aggregate limits likely to
be a continuing feature in London and
Bermuda layers for the foreseeable
future (with only the US Domestic
market offering ‘for interest limits’.)
GENERAL STATE OF THE MARKET OVERVIEW
MIDSTREAM/
DOWNSTREAM ENERGY
impacted as Windstorm patterns typically
curl eastwards in late season.
The sector remained relatively quiet
It continues to be an excellent market for
during the third Quarter with no significant
customers who continue to benefit from
losses excepting a serious explosion at a
the availability of surplus capacity and
chemical facility in the Czech Republic in
the continuing downward rate trend.
August. As such large commercial market
Unlike the E&P market which is
losses at year to date remain minimal with
shuddering under the collapsed
even the one notable loss in the USA
commodity pricing Mid and
earlier this year seemingly diminishing in
Downstreamers continue to do good
quantum outside of the mutualised
business and enjoy decent margins.
element. The US Gulf Coast has again
avoided any catastrophic windstorm
losses albeit the season has a small way
to go. Certainly at this time assets along
the Texas coast are unlikely to be
ENERGY MARINE
EXPOSURES
A continued glut in Hull capacity worldwide means that rates in the offshore
craft and work boat Hull market remain
very soft or ultra-competitive depending
which side of the fence you’re on. As
we progress into the last quarter all
Underwriters seem to be under
increasing pressure to fill what seem
ever larger premium income limits.
Attention is now moving to January 2016
business and how the platform should
be set for the forthcoming year. With a
stable Treaty market it looks like more
of the same.
To counter the above we are seeing
Long term ‘flat’ policies for either 18
occasionally an established Hull Leader
or 24 months, without review clauses,
baulk at further reductions and present
are now becoming normal practice
a client with a decision of whether to
which of course help to negate the
remain loyal and play the longevity
above scenario.
game or simply bring in new, perhaps
more naive capacity in order to
continue a year on year downward
trajectory for premiums spend and we
think that for many fleets this may
become the most prevalent decision
for a lot of clients at renewal.
A softening trend in the Marine liability
markets seems to have flattened out;
With London being the predominant
force for this class the Underwriters are
well positioned to exercise a little more
combined restraint when compared to
other classes. 
Recent quotes
RECENT
QUOTES
The following are ‘sound bites’ taken
from speeches, statements or articles
by prominent market figures about the
insurance market and whilst we have
tried not to take their words out of
context, the excerpt may not be the
entire speech or article.
NICK METCALF, PRESIDENT AND GROUP MANAGING
DIRECTOR OF LIBERTY SPECIALTY MARKETS
“What will ‘good’ look like for a specialty insurer in 2025? “I don’t know
the answer, but it’s a question we must keep asking ourselves. Will we
be working like this in 10 years’ time with all the technology, freedom of
PAUL JARDINE, XL CATLIN CHIEF
EXPERIENCE OFFICER
movement and flexibility that is coming down the line? It’s critical for
insurers to maintain our place in the value chain, providing the unique
advice, guidance and innovative thinking around products and risk that
“The traditional [insurance] industry is facing
multiple challenges from alternative capital,
low interest rates, big data, intrusive and
inappropriate regulation, as well as
geopolitical uncertainty. You name it, we’ve
got it. The perfect storm has arrived. The
entire industry is also being challenged on
the distribution side because of a whole
host of new potential competitors such as
Google or Samsung having the ability to
remove real chunks of value out of the
[insurance value] chain from client all the
way to reinsurer. However, anybody that
thinks that Lloyd’s and the London market
might disappear under the weight of
challenges that it faces, I’d say that they are
fundamentally wrong. Lloyd’s was the first
to write a range of pioneering risks and will
be able to again source new opportunities
for risk transfer. Insurers need to innovate in
order to maintain clients which increasingly
know more about their risk and risk
management than insurers ever could. The
[insurance] industry has to drive business
efficiency to make it easier and cheaper for
insureds and brokers to deal with the
market. I really don’t understand why in the
modern world I still receive funds from the
client via a broker and I still pay my claims
to my client via a broker.”
only we can give. Brokers are very good at acquiring business from
their networks, but intermediation is expensive, particularly in London,
and they can ill afford maintaining an army of brokers – so the
distribution model is changing. I believe technology will bring a
transformational – even tectonic – change in our business, and not
everyone realises that yet. Analytics are extremely important and I think
the brokers are winning that part of the data war at the moment.
Perhaps this hasn’t mattered too much to date, but if we don’t get the
right technology in place our business will be absolutely sub-optimal
compared to where it should be in the future. The pace of
technological change is unbelievable. New technology coming through
used to last seven or eight years but now it lasts three years, or
sometimes less – especially smartphone technology, which is evolving
all the time. The implications of this permeate throughout the modern
insurer’s business model. The huge changes in data analytics suddenly
make activities that have been traditionally quite specialist relatively
mass market. We have to recognise the possibility of totally
unexpected competitors seeing the potential in this and moving into
our markets. For an industry known generally for being relatively slowmoving, and even inert, this requires quite a shift in our attitudes. The
long awaited switch to electronic trading is painful but necessary in
order for the market to get to where it needs to be. History has been
littered with some expensive, painful steps and that will carry on until
we get to our Shangri-La. I don’t know exactly what that will look like,
but how well we operate by 2025 will be dependent on how quickly
technology comes in and how well we embrace it. Back in 2000, UK
10-year treasuries were earning 300%-400% more than they are now,
so think what pressure you would have to put on the underwriting side
of your balance sheet to get the same ROE today. You could have a
box of fireworks underwritten and you might get lucky, but I reckon you
should de-risk on the underwriting side of the balance sheet in today’s
world. It’s a world in which major insurance cycle swings appear to be
a thing of the past.
Recent quotes
Post-9/11, catastrophe loss values have continued to
rise but their impact on rates is increasingly localised
around loss-affected areas and sectors, and the
capital that has flooded into the insurance market
since 2001 – effectively nullifying the traditional rate
cycle – is here to stay. Data and technology are lifting
the lid on some of the secrecies of certain product
lines and making them more attractive to a wider
audience, broadening the industry’s appeal. I don’t
think we will see big cross-portfolio rating shifts again
in my lifetime, which means the ROE hurdles
expected to be met across the industry have to be
looked at through a wider-angled lens. I’ll be happy if
I’m proved wrong because it will bring serious
ALEX MALONEY, CEO OF LANCASHIRE
“When I commented last quarter that we were starting
to see some signs of a floor being reached in
catastrophe bond and ILW pricing, we hoped that this
signalled the start of a return to discipline. Whilst there
has been some evidence of the brakes being applied to
premium reductions in natural catastrophe markets
during the second quarter, indiscipline in the specialty
markets continues. There’s no hiding the fact that this is
a difficult market and we have to work hard and, if
necessary, decline inadequately priced business.”
opportunities for underwriting propositions.”
CHRIS O’KANE, CEO ASPEN
PAUL GREGORY, CHIEF UNDERWRITING
OFFICER AT LANCASHIRE
“Aspen are allocating capital away from the Lloyd’s
”Specialty insurance lines are now facing the same
energy market, which saw increasing downward
competitive pressures that have swept through the
pressure to the point where the rates were not
reinsurance market in the past 18 months. Energy is
reflecting risk, as well as away from more competitive
one of the lines of business feeling the most
property/casualty reinsurance lines. In the energy
pressure. Increasing capacity, coupled with the oil
sector, Aspen is moving away from Gulf of Mexico
price decline, has created a perfect storm in the
risks, where competition is the highest, to focus on
energy market. Historically, losses tend to follow a
North Sea and south-east Asia energy risks, where
period of low oil prices.
rates are under less pressure. This [energy] market is
experiencing intense competition and in our
assessment the rates offered do not adequately reflect
the underlying risks. We are redeploying that capital
DENIS KESSLER, CHIEF EXECUTIVE
OFFICER OF SCOR:
into areas where the rates are not as pressured, such
“The overall market conditions are fuelling the
as financial and professional lines and our UK property
consolidation movement we have observed over the
and casualty business.”
last 12 months. Our industry is undergoing longterm structural consolidation, with industry players
BRONEK MASOJADA, CEO OF HISCOX
seeking sufficient scale and diversification to absorb
pricing pressures as well as the consequences of
“The rating environment in some of the traditional
the low investment yield environment and increasing
open market specialty classes in London is
regulatory requirements. The consolidation to date
disastrous, what’s happening is that offshore energy,
has primarily involved Lloyd’s platforms and
big ticket property, aviation war and normal aviation
Bermuda-based reinsurers that entered the market
are all suffering big declines. It’s like the late 1990s.”
post-9/11, and are attempting to diversify away from
ROBERT CHILDS, HISCOX CHAIRMAN
insurance and reinsurance business. Many of these
their concentrations in US-based commercial
“It [the rating environment] feels like 1997, rates
may have a couple of years to run before hitting
companies will soon realise that size alone will not
meet the innovation and service levels requirements
of their growing insurance clients.”
the bottom.”
Recent quotes
STEPHEN CATLIN, EXECUTIVE DEPUTY
CHAIRMAN OF XL CATLIN
“The risk transfer industry and governments should
partner to form a state-backed risk pool designed to
cover worst-case scenario cyber-attacks. A devastating
and/or prolonged cyber-attack is the most serious threat
facing society and one of the few that could have truly
global implications. Yet governments are ill-prepared for
such a scenario and the industry is very limited in its
ability to help. Only a partnership and the formation of
some kind of risk pool could help mitigate the
consequences of such a scenario. Terrorism is a
relatively local threat, so are earthquakes and hurricanes,
but a cyber-attack has the potential to affect the entire
world in a nanosecond. As things stand, governments
are ultimately exposed to anything happening on this
front, which means we are all personally exposed. We all
More recently, the London Market Group is exploring
ways of modernising the market but no matter what the
resources thrown at the project or the brains behind it,
the market will act and come together only when it is
forced to—usually by adversity. The trouble is, unless the
bridge is burning it is very difficult to implement any
change in adversity, the market comes together, but the
rest of the time, people are loath to change. The other
problem with previous initiatives was that they were not
driven by senior enough people. You then get people
working on it who do not understand the bigger picture
and lack the power to drive it forward. Something needs
to change. So many processes in the industry are still
reliant on manual data entry and are duplicated many
times. The only answer is collaboration and an
acceptance that the industry must embrace this or risk
being completely left behind.”
live through the internet these days. If someone was
able to knock the entire internet down, the whole
economy would fall apart very quickly. It would be very
painful for society. I believe a mechanism could be put in
place to move a chunk of this risk into the private sector.
We manage to do it for terrorism risk, through
mechanisms such as the Terrorism Risk Insurance Act
SIMON WILLIAMS, ENERGY
UNDERWRITER AT HISCOX AND CHAIR
OF THE IUMI OFFSHORE ENERGY
COMMITTEE
(TRIA) in the US and Pool Re in the UK, and I believe we
“The Energy Market faces yet another year of
should do the same for cyber. The industry could take a
relentless rises in capacity. The rate of increase in
meaningful amount of risk—enough that it would be
capacity has accelerated – reaching around
painful if a big event occurred but not so big that it
USD7bn in 2015 – as has the softening of prices,
would damage the industry. Such ideas take time to
although things have some way to go before
come to fruition and it often takes a disaster to elicit a
reaching the historic lows of the late 1990s.
response. My only hope is that when that happens, the
It’s a telling sign, really, that we don’t
first event is big enough to prompt action but not
know where the bottom is in
actually cataclysmic. I just believe that governments and
this marketplace. If cracks
industry should start working on a solution now. One of
were apparent in the dam
the great failings of the re/insurance industry is that it
last year, a full-scale
tends to view risk through a rear-view mirror. Risks are
collapse is now
changing so rapidly now, that is very unhelpful, we need
evident. Our sector
to start looking forward at how things can change in the
has already racked
future. This is also the flaw underpinning its other great
up more than
failing, the industry’s reluctance to embrace technology
USD2bn in a series
to make processes faster and more efficient. I was on
of losses, including
the Lloyd’s Franchise Board around a decade ago when
incidents in Mexico,
Kinnect was rolled out, an electronic risk exchange
the Falklands and
which, it was claimed, would revolutionise the market.
Brazil, and the
Well over £50 million was spent on the project before it
2014 underwriting
was unceremoniously scrapped due to a lack of
year still has a way
adoption and the view that it was not fit for purpose.
to go.” 
MARKET MOVES/PEOPLE IN THE NEWS
MARKET MOVES/
PEOPLE IN THE NEWS
Ernesto Berger has resigned
Andrea Cupido of Swiss Re’s Genoa
Daniel Hiller has joined the Watkins
from Zurich where he was Head
office has been appointed Head of
Syndicate as Senior Political Violence
Global Hull and will relocate to London
Underwriter, from Markel.
of Onshore Energy to pursue other
opportunities.
Stephen Gargrave has been named
Chief Underwriting Officer and sole active
underwriter for syndicates Canopius
4444 and 958.
Suzanne Ward is leaving the Barbican
syndicate where she underwrote their
marine / energy casualty book to join
Pembroke’s Acappella syndicate (2014)
to start up and head their Energy
casualty team.
Mark Johnson, Sinead Cormican and
Miles Osorio (onshore Energy/ property
uwrs) have all resigned from Hardy
and are said to be joining Hamilton’s
new Lloyd’s syndicate that is awaiting
Lloyd’s approval.
Howard Burnell has resigned from
Amlin (where he was the Energy Liability
underwriter), to join Apollo where he
with immediate effect. He is joined by
Dimas Ortuzar Fernandez as Senior
Hull Underwriter, who has joined Swiss
from Mapfre in Madrid.
Ray Miller has left Liberty to be a
downstream/onshore underwriter at
Energy Risk Indemnity SCC a company
registered in Barbados in 2013 with an
office in Lloyd’s.
Samson Rathaur, who has 20 years’
Connie Germano (previously Ace Zurich
and prior to that president of AIG Global
Marine and Energy) has been named
leader of Everest Re’s US specialty
casualty operation in Bermuda. She is
joined by ex Global Special Risks
underwriter Tom Morelli, who has been
appointed leader of a new energy
casualty group.
609 with effect from 1 January 2016.
Toby will be replacing Richard Harries
who will be taking up the newly created
role of Chief Executive Officer of
Atrium Underwriters Limited (Atrium’s
from passenger ferries to bulk carriers
to his existing position as the Atrium
and container ships, has been appointed
Group CEO.
as a Senior Marine Risk Consultant for
Allianz Global Corporate & Specialty
within their London Marine Team.
Kevin Hanington has resigned from
XL/Catlin to join Lancashire where he will
write their global energy liability account.
Energy product head at Ace Global
head of Energy for XL Catlin.
Toby Drysdale has been appointed
Active Underwriter of Atrium Syndicate
Lloyd’s managing agency) in addition
liability book.
New York. He remains in his role a global
this stage is unknown.
experience in the marine industry
Matthew Hardy has been appointed
London having spent time with Catlin in
international casualty team CV Starr
which he headed up, his destination at
working on a variety of different vessels;
will build an Upstream Energy / Marine
Huw Jones has returned to XL Catlin
Giles Quartly has resigned from the
Charlie McDonagh has left JLT/L&P to
take up an underwriting role at the Aegis
Syndicate.
James Green has left JLT’s Renewable
Energy team to join Novae as Class
Underwriter for Renewable Energy. 
markets and Head of International Energy,
at Ace Overseas General (AOG). Andy
Brown has been promoted to Global
Head of Downstream Energy at
AOG.
Dervla Lynchehaun
has resigned from Arch
International Casualty
team and will be
joining Chris
Jones’s
International
Casualty team at
Kiln after she has
Laura Wood has re-joined Arch as an
worked her 3
underwriting assistant.
months’ notice.
WHAT’S NEW?
WHAT’S NEW?
NEW PRODUCTS AND MARKET DEVELOPMENTS
Endurance has rebranded the
Lloyd’s syndicate it acquired as
part of its purchase of Montpelier
Re, as Endurance at Lloyd’s.
Torus’s holding company is
changing its name to StarStone
with immediate effect to reflect their
major shareholders, Enstar Group
Limited and Stone Point Capital. Its
six insurance platforms in the
Lloyd’s and London markets,
Continental Europe and the United
States, as well as its other group
companies, are in the process of
being renamed to incorporate the
StarStone brand and is expected to
be completed in January 2016.
In the latest of M&A activity, Mitsui
Sumitomo Insurance Company
has announced that it has agreed
terms to buy London-listed Amlin for
£3.47 billion.
The following is a recap of recent
M&A activity:
•
Catlin purchased by XL
•
Brit purchased by Fairfax
•
Montpelier purchased by
Endurance
•
HCC purchased by Tokio Marine
•
Chubb purchased by Ace
•
Partner Re purchased by Exor
•
Ironshore purchased by Fosun
•
Zurich offer to purchase RSA
(subsequently withdrawn).
BRIEFLY
BRIEFLY
Lloyd’s have published a new
A new Lloyd’s report - Drones Take
research report: Business Blackout –
Flight: Key issues for insurance - looks
The insurance implications of a cyber-
at the challenges around the
attack on the US power grid. Working
development of insurance solutions for
with the University of Cambridge’s Centre
drones. The drones sector is expanding
for Risk Studies, the report examines the
rapidly with global expenditure on the
insurance implications of a major cyber-
emerging technology set to double to
attack, using the US power grid as an
USD 91 billion over the next decade.
example. The loss scenario envisaged
Drones are now used for a range of
would have an estimated total impact
activities including military, agriculture,
to the US economy of USD 243 billion,
public services, wildlife protection and
rising to more than USD 1 trillion in the
research. The Lloyd’s reports highlights a
most extreme version of the scenario.
number of concerns around safety,
Under the scenario Insurance claims
security and surveillance that could pose
arise in over 30 lines of insurance,
significant risks to drone operators
with total insured losses estimated
and manufacturers, and could hamper
at USD 21.4 billion, rising to
the sector’s growth.
USD 71.1 billion in the most extreme
version of the scenario. The report can
be downloaded from:
www.lloyds.com/news-and-insight/riskinsight/library/society-and-security/busi
ness-blackout
The report identifies three key areas
that must be developed for the
effective provision of insurance for
drone operations:
•
A new Lloyd’s index has found a total of
internationally-harmonious
USD 4.6 trillion (GBP 3 trillion) of
regulatory framework
projected gross domestic product is at
risk from manmade and natural disasters
Regulation, through the
implementation of a robust,
•
in cities around the world. The Lloyd’s
Safety, through the continued
development of training and licensing
City Risk Index, claims to present the first
schemes, and further enhancements
ever analysis of economic output at
in ‘sense and avoid’ technology
gross domestic product risk in 301 major
cities from 18 man-made and natural
threats over a 10 year period and is
•
Security, through the application of
sufficient cyber security measures
based on original research by the
The report concludes that drone
Cambridge Centre for Risk Studies at the
manufacturers and users could face
University of Cambridge Judge Business
increasingly complex and high value risk
School. For more details go to:
exposures as the market continues to
www.lloyds.com/cityriskindex
expand, and will need to work with
regulators and insurers to ensure the
technology is used safely and
responsibly. The report can be
downloaded from:
www.lloyds.com/news-and-insight/
risk-insight/library/technology/dronestake-flight
UPDATE ON LOSSES
UPDATE ON LOSSES
2015 Energy losses of USD 10 million or more that we are aware of
at the time of writing are as follows.
We also show the total of all claims under USD 10 million (with a
minimum claim USD 1 million) to give an overall total for the year
so far.
2015 Major Upstream Energy Losses (in excess of USD 10 million ground-up)
January
Blowout
Russian Land Rig
USD 11,540,000
January
Leg/Spud can damage
Jack-up rig Offshore Africa
USD 12,480,000
January
Rupture
Montana Onshore pipeline
USD 20,000,000
January
Collision
Gulf of Mexico Platform
USD 14,800,000
January
Anchor/jacking/trawl
Offshore China Pipeline
USD 14,000,000
January
Blowout
Offshore Qatar well
USD 51,000,000
February
Fire
Gulf Of Mexico Semi-sub Rig
USD 20,000,000
February
Explosion
FPSO Offshore Brazil
February
Anchor/jacking/trawl
Malaysian Offshore Pipeline
USD 14,570,000
February
Fire
Alaskan Land Rig
USD 13,395,360
February
Damage
Offshore Australia pipeline Construction
USD 35,000,000
March
Damage / S&P
Canadian Onshore Pipeline
USD 32,500,000
March
Windstorm
Australia Offshore Semi-sub Rig
USD 15,000,000
March
Stuck Pig
Malaysian Offshore Pipeline
USD 14,500,000
April
Fire
Mexican Offshore Platform Complex
USD 780,000,000
April
Collision
Seismic Equipment Offshore Egypt
USD 15,000,000
April
Faulty work/op error
FSO Offshore Brazil
USD 70,000,000
May
Leg Punch Through
Jack-up Offshore Mexico
USD 240,000,000
May
Rupture /S&P
California Onshore pipleine
USD 190,000,000
May
Faulty Design
Ghana Offshore FPSO Riser
USD 50,000,000
May
Blowout
Falkland Island Offshore Well
USD 90,000,00
June
Mooring Damage
Gulf of Mexico TLP Construction
July
Punch Through
Jack-up Offshore Qatar
To Date
Total under USD 10,000,000
USD 362,500,000
USD 250,00,000 (est)
*
USD 89,863,999
Total (known) for year (excess of USD 1 million)
USD 2,406,149,359
Source: Willis Energy Loss Database / JLT market knowledge (as of 18 September 2015)
Figures shown as “(est)” are estimates from various press or market sources.
Figures do not take into account the effect of any self-insured retention, deductible or policy limit and therefore losses are not necessarily those which insurance
markets have actually suffered but give a rough guide to the overall magnitude of industry loss.
*Reports would suggest in excess of USD 10 million
UPDATE ON LOSSES
2015 Major Downstream/Midstream Energy Losses (in excess of USD 10 million ground-up)
January
Contamination
Saudi Arabian Chemical Plant
USD 21,500,000
January
Fire
Saudi Arabian Refinery
USD 17,500,000
January
Fire & Explosion
Ohio Refinery
February
Fire & Explosion
Californian Refinery
February
Explosion
Argentinian Fertilizer Plant
USD 41,200,000
March
Fire
Saudi Arabian Chemical Plant
USD 25,000,000
March
Fire & Explosion
Chinese Chemical Plant
April
Fire
Finnish Refinery
April
Fire & Explosion
South African Refinery
*
May
Fire
French Chemical Plant
USD 22,300,000
May
Fire
Indian Refinery
*
May
Fire
Greek Refinery
*
May
Fire
Bulgarian Refinery
*
May
Fire
German Refinery
*
May
Fire
Kuwait Refinery
*
May
Fire
Philadelphia Refinery
*
May
Fire
Iraqi Refinery
*
June
Fire
Brazilian Onshore pipeline pump station
June
Fire & Explosion
Pennsylvania Chemical Plant
*
June
Fire & Explosion
Chinese Chemical Plant
*
June
Fire & Explosion
Ukraine Fuel Storage Facility
*
July
Flood
Bolivian Onshore Pipeline
July
Fire & Explosion
South Korean Chemical Plant
*
July
Fire & Explosion
Chinese Petrochemical Plant
*
July
Fire & Explosion
Oil storage tanks at Turkish Refinery
*
July
Fire & Explosion
Oil storage tanks at French Petrochem plant
July
Fire & Explosion
*
August
Fire
Californian Refinery
*
August
Fire & Explosion
Texas Chemical plant
*
August
Lightning strike / Fire
Texas Refinery
*
August
Fire
Singapore Refinery
*
August
Fire & Explosion
Indian Refinery
*
August
Fire & Explosion
Japanese Refinery
*
August
Fire & Explosion
Czech Republic Petrochemical Plant
*
September
Fire & Explosion
*
To Date
USD 480,000,000
*
*
USD 13,555,000
USD 11,500,000
USD 12,600,000
USD 30,000,000 (est)
USD 32,407,000
USD 707,562,000
UPDATE ON LOSSES
2015 Major Power Losses (in excess of USD 10 million ground-up)
January
Faulty work / operator error
Utah Gas Power Plant
USD 30,000,000
January
Fire
Egyptian Gas Power Plant
USD 34,250,000
January
Mechanical Breakdown
Algerian Gas Power Plant
USD 49,000,000
January
Mechanical Failure
New York Coal Power Plant
USD 18,250,000
February
Mechanical Failure
UK Offshore Wind Farm
USD 12,000,000
February
Fire
French Gas Power Plant
USD 38,000,000
February
Fire
Russian Coal Power Plant
USD 50,000,000
March
Mechanical Failure
UK Offshore Wind Farm
USD 14,000,000
April
Fire
Canadian Oil Power Plant
USD 33,500,000
May
Mechanical Failure
Abu Dhabi Gas Power Plant
USD 10,485,000
To Date
USD 92,473,000
USD 381,958,000
Insured losses from the explosion in Tianjin port in August are
It has been suggested at the IUMI conference in Berlin that
now expected to amount to USD 2 billion - USD 3 billion,
growing fears of cyanide contamination to containerised cargo
according to a number of market sources. Very provisional
could see the total loss figure balloon to USD 5 billion to
estimates in the immediate aftermath of the disaster had
USD 6 billion, although this was confirmed as was pure
implied that losses would be in the region of USD 1 billion -
conjecture at this point as large areas of the port are still
USD 1.5 billion, but the market is now expecting a much
under lockdown preventing access to surveyors and loss
higher figure.
adjuster to assess the damage.
SECURITY RATING CHANGES
SECURITY RATING CHANGES
The following rating changes affecting Insurers
writing Energy business have occurred in the
past three months or so.
Insurers Name
Previous Rating
PartnerRe
AM Best A+
Emirates Insurance
Company
N/A
Generali
Fitch BBB+
Scor
S&P A+
Tokio Marine & Nichido Fire
Insurance Co Ltd (Japan)
S&P AA-+
/Tokio Marine Kiln
Insurance Ltd (UK)
Up/Downgrade
▼
–
▲
▲
▼
New Rating
Effective Date
AM Best A
4 August 2015
S&P A-
5 August 2015
Fitch A-
26 August 2015
S&P AA-
7 September
S&P A+
16 September
Note: The above are rating moves we thought warrant mention but are not necessarily all rating changes
that have occurred in the past three months effecting Insurers that write Energy business and do not
include changes in individual Lloyd’s syndicate’s rating (as Lloyd’s as a whole continues to be rated as an
overall entity). 
LEGAL ROUNDUP
LEGAL ROUNDUP
ENGLISH LAW MEANING OF THE
WORDS “AS SOON AS POSSIBLE”
IN THE NOTIFICATION CLAUSE OF
A LIABILITY POLICY
An English Commercial Court recently
The Insured argued that the words “as soon as possible”
simply referred to the promptness with which notice in writing
is to be given if there has been an event likely to give rise to a
claim. The court declined to accept the Insurers argument as
to the extended meaning of the words in question, preferring
instead the simple interpretation proposed by the Insured.
considered the meaning of the words “as
The court concluded that there was no obligation of a “rolling
soon as possible” in the notification clause of
assessment” of claim likelihood when the policy does not
a liability policy. In particular, the court
considered whether these words created a duty of inquiry, so
as to in effect require the Insured to undertake a “rolling
assessment” of claims likelihood, or whether they simply
referred to the promptness with which notice must be given.
specifically provide for it.
Applying this conclusion to the facts, the court went on to
hold that the occurrence of the accident giving rise to the
liability was not in itself an event “likely to give rise to a claim”.
This was on the basis that, when the accident occurred,
The liability policy in question included a clause beginning
there was not, in the court’s view, at least a 50% chance that
with the following sentence: “The Insured shall give notice in
a claim against the Insured would materialise. The accident
writing to the Insurer as soon as possible after the
was very serious, but that seriousness did not increase the
occurrence of any event likely to give rise to a claim with full
likelihood that an allegation of wrongdoing would be made
particulars thereof.”
against the Insured in particular.
It was argued by the Insurer that the words “as soon as
In the context of this case, the likelihood of a claim could not
possible” indicated that the obligation to notify arises
simply be inferred from the happening of an accident.
when an insured could with reasonable diligence discover
Accordingly, on the facts, the Insured had not breached the
that an event was likely to give rise to a claim, and such
notification provisions in waiting until it received a solicitors’
interpretation was supported by the obligation to provide
letter informing it that a claim was to be made against, it
“full particulars”.
before advising their Insurer.
LEGAL ROUNDUP
TEXAS SUPREME COURT
RULING ON THE WORD
“SUIT” IN A GENERAL
LIABILITY POLICY
The Texas Supreme Court
has ruled that the
meaning of the word
“suit” in a comprehensive
general liability (CGL) policy wording
where insurers had the “right and duty
to defend any suit” can include EPA
CERCLA pollution clean-up
proceedings. In McGinnes Industrial
Maintenance Corp. v. The Phoenix
Insurance Co., the Court was asked a
certified question by the Federal 5th
Circuit Court of Appeals: Whether the
EPA’s PRP letter and/or unilateral
administrative order, issued pursuant to
CERCLA, constitute a “suit” within the
‘BORROWED’ WELDER
WORKING BOTH
OFFSHORE AND INSHORE
ABOARD VARIOUS
VESSELS NOT A
‘SEAMAN’ UNDER THE
JONES ACT
The United States Court of
meaning of CGL policies, triggering
the duty to defend.
The Court answered the question
“yes.” The court concluded that
CERCLA, authorizes the EPA to
conduct what are in essence pre-trial
proceedings and to issue notice letters
that serve as “pleadings” without
having to initiate a suit and can issue
unilateral administrative orders similar
to a summary judgment and as such
part of the judicial function was ceded
to the EPA. Further, the Court reasoned
that since it is relatively well settled in
the 5th Circuit that CERCLA clean-up
costs are considered “damages” under
a CGL policy, it would create perverse
incentives and consequences if the
insurers did not have the right and duty
to defend.
The injured welder argued that the
The court held however that there
district court erred by not determining
was good reason to distinguish the
his status with reference to his period
welder from the company he was lent
of employment with a company he was
out to’s permanent employees,
assigned to for one specific project
because he had worked for 34 different
where his injuries occurred.
customers on 191 jobs, both offshore
On appeal, the Fifth Circuit affirmed the
district court’s decision and in so doing
noted that the seaman status of an
Appeals for the Fifth
employee who spends time between
Circuit affirmed a New
land and the vessel is determined in
Orleans federal court
decision that denied Jones
and onshore, and was assigned to
work for the company for only one
specific project.
the context of his entire employment
with his current employer.
Act seaman status to a welder who
worked both offshore and inshore
aboard various vessels. The plaintiff
was a welder who suffered injuries
arising out of an explosion that
occurred on a platform and sought to
be classified as a seaman under the
Jones Act (where superior remedies
would be available to him).
The Fifth Circuit held that a borrowed
employee was a seaman with regard
to his borrowing employer where the
court found there was no reason to
distinguish the plaintiff from payroll
employees simply because he
received his pay check from the
nominal employer.
LEGAL ROUNDUP
PENNSYLVANIA SUPREME COURT
HOLDS THAT AN INSURED MAY
SETTLE TORT CLAIMS WITHOUT
INSURER CONSENT
A federal class action was brought against
Insureds by plaintiffs who claimed to have
suffered bodily injury and property damage
caused by emissions from nuclear facilities
owned by the Insureds. The class eventually included over
500 named plaintiffs, and a 1998 jury trial of eight test cases
resulted in a USD 36 million verdict. The Insureds, however,
obtained a retrial due to evidentiary issues. However, Insurers
refused to consent to any settlement offers they were
presented, believing that plaintiffs’ claims lacked medical and
scientific support, and because the court had issued
favourable decisions on certain procedural and evidentiary
issues during the retrial, a defence verdict was likely.
Nevertheless, the Insureds ultimately settled the class action
for a total of USD 80 million, which they claimed on their
insurance policies along with USD 40 million in defence costs
they had incurred. Insurers refused to pay, citing policy
language prohibiting the Insureds from making any
payments, assuming any obligations, or incurring any
expense without Insurers consent. The trial court held that an
insurer defending under a reservation of rights is required to
reimburse an insured for a settlement reached in violation of
the consent to settle clause if coverage exists and if the
US COURT DECLINED
TO BROADEN
ADDITIONAL INSURED
COVERAGE UNDER
COMMERCIAL GENERAL
LIABILITY POLICY
An employee filed a claim
for personal injuries
arising out of an allision
of a vessel he was a
passenger on with an unmanned
production platform in the Gulf of
Mexico off the Louisiana coast. The
vessel owners filed an action against
his employers and the platform owner
seeking defense and indemnity and
insurance coverage. The plaintiff’s
employer had agreed to defend and
indemnify the platform owner against
settlement is fair, reasonable, and made in good faith without
collusion. Insurers appealed and the appellate court held that
where an insurer defends subject to a reservation of rights,
the insured must choose between accepting the defence
(and be bound by the consent-to-settle provision) or decline
it, pay for its own defence, and recover its costs of
settlement to the extent that they are found fair, reasonable
and non-collusive. The Insured then appealed to the
Pennsylvania Supreme Court who reinstated the judgment of
the trial court, stating if an insurer breaches its duty to settle
while defending subject to a reservation of rights and the
Insured then accepts a reasonable settlement offer [within
the policy limits], the Insured need only demonstrate that the
Insurer breached its duty by failing to consent to a settlement
that is fair and reasonable.
claims arising from injuries to their
employees and to maintain liability
insurance naming the platform owner
as an Additional Insured. The plaintiff’s
employer obtained the required
CGL cover and the platform owner
paid a premium to be named as an
Additional Insured as required by
Marcel v. Placid Oil Co.
The Platform owners alleged that if
they owed the vessel owners defense
and indemnity, then they were entitled
to contractual liability coverage as an
Additional Insured under the CGL
policy. CGL insurers argued that the
contractual liability coverage which the
platform owner sought under the policy
as an Additional Insured, was
precluded by the policy’s terms since
such coverage is reserved solely for
the Named Insured. The platform
owners argued that CGL policy
language was ambiguous and that it
should be entitled to contractual liability
coverage because they paid a Marcel
premium and because the purpose of
its indemnity provisions in its contract
with the vessel owner was to ensure
that the vessel owner would be
responsible for any injuries to its own
employees. Ruling in favour of CGL
insurers and dismissing the platform
owner’s claims for insurance coverage,
the court found that the platform owner
was an Additional Insured, not a
Named Insured, and only Named
Insureds are entitled to contractual
liability coverage under a commercial
general liability policy.
LEGAL ROUNDUP
CANADIAN APPEAL
COURT ANALYSIS OF THE
LONDON ENGINEERING
GROUP’S (LEG)
EXCLUSION
A Canadian Court of
Appeal affirmed the trial
court’s decision in a
case relating to cracks
in concrete in a construction
replacement or rectification … had
been put in hand immediately prior to
said damage.”
The trial Court determined that the root
cause of cracking was an overload to
the slabs during construction.
The insurers argued, to both the trial
and appellate courts, that the loss did
not fall within the policy’s insuring
clause because the slabs were just
defective and did not suffer physical
cause of the cracking/deflection was
builders risk policy covering “All Risks
damage. But both Courts dismissed
an inadequate reshoring
of direct physical loss or damage.”
this argument and found that the
analysis/procedure, which they
However, the policy contained a LEG2
permanent stretching of the rebar, with
characterized as a defect in
exclusion that excluded “all costs
the accompanying cracking/deflection,
workmanship. This determination
rendered necessary by defects of
was both unexpected and unintended
triggered the exclusion’s application.
material workmanship, design … and
and therefore constituted fortuitous
should damage occur ... the cost of
physical damage.
project. The insurers provided a
replacement or rectification which is
hereby excluded is that cost which
would have been incurred if
Both courts then interpreted the
exclusion—as written—and eliminated
Regarding the LEG2 exclusion, the
from the claim only the rectification
appellate court accepted the trial
damage (i.e. the stretched rebar). 
court’s determination that the root
cost “immediately prior” to the resulting
OIL AND GAS INDUSTRY DEVELOPMENTS
OIL AND GAS INDUSTRY
DEVELOPMENTS
POTENTIAL CHANGE TO
PLUGGING AND ABANDONMENT
PRACTICES
ALTERNATIVE USES FOR
OFFSHORE PLATFORMS
When the production from an oil or gas reservoir
thousands of offshore oil and gas platforms around
ceases or is no longer profitable, authorities require
the world, many of them built during a global
In the next several years, hundreds or even
the well to be plugged and abandoned (P&A’d).
construction boom in the 1970s and ‘80s, will reach
The purpose is to establish a permanent barrier to
retirement age and require decommissioning.
prevent the migration of hydrocarbons to the
Removal of these structures is costly leading to
surface. Traditional P&A methods are time
innovative ideas on alternative uses. Ideas mooted
consuming, costly and have remained unchanged
include; supermax prisons, private homes, scuba
despite technological advances across many other
schools, fish farms, windmill stations or sinking of
aspects of the industry. A new DNV GL guideline
rigs to promote aquatic life. An architectural
introduces a risk-based approach instead of the
organisation based in London hosted a competition
current prescriptive practice to the plugging and
for design plans to build a prison on new or
abandonment of offshore wells. DNV GL estimates
refurbished platforms. “Sea-steaders” have
that when combined with optimized project
proposed buying platforms to create offshore
execution and new technology, the P&A cost can be
communities with a hope of escaping urban noise,
reduced by 30-50%. There are currently around
crowds, crime and pollution, or potentially to move
2,350 wells that will require P&A on the Norwegian
beyond the reach of certain laws and taxes in
Continental Shelf (NCS) alone, with close to 5,000
international waters. Other suggestions include
wells offshore UK that will need to be P&A’d. With
offshore platforms being converted into tourist
current practices, the wells on the NCS will require
attractions for recreational divers. It is yet to be seen
the deployment of 15 rigs full-time over the next 40
years. Based on the 2013 cost, this is equivalent to
more than a tenth of the current value of Norway’s
sovereign wealth fund says DNV GL who stated that
they believe the time has come to tackle this issue
head on by assisting regulators and the industry to
establish a new methodology for dealing with the
decommissioning of wells. The main barrier to
change in this sector has been today’s prescriptive
approach to the regulations, which represents a
conservative interpretation of past experience.
Practice also differs from country to country. In the
upcoming P&A Guideline, DNV GL will use wellknown and accepted risk-approach methodology in
which both environmental and safety risk aspects
will be key factors. DNV GL say they have already
worked with international operators to develop an
initial set of criteria. This means that hazardous wells
will get the attention they deserve, and benign wells
will avoid excessive rig-time and expenditure. The
guidelines are under development and will be issued
in the second half of 2015.
whether these ideas will turn into reality. 
AtlAntic nAmed windstoRm 2015 FoRecAsts
ATLANTIC NAMED WINDSTORM
UPDATE
The Atlantic Hurricane season to date (midSeptember) has not caused any significant
loss or damage to onshore or offshore oil
and gas assets.
The season to date activity is plotted below,
against the April forecasts from Colorado
State University and Tropical Storm Risk,
along with the 65 year average.
2015 Atlantic Hurricane Season Forecasts
12
11
NUMBER OF STORMS
10 11
Tropical
Storms
7
7
6
6
6
5
Hurricanes
3
2
Intense
Hurricanes
Tropical Storm Risk
33
1
Colorado University
65 Year Norm
2
1
Activity to date
2015 Atlantic Storms - Names to Watch
Ana (an early starter this year as a Tropical Storm in May)
Larry
Bill (Tropical Storm in June)
Mindy
Claudette (Tropical Storm in July)
Nicholas
Danny (Major Hurricane in August)
Odette
Erika (Tropical Storm in August)
Peter
Fred (Hurricane in August)
Rose
Grace (Tropical Storm in September)
Sam
Henri (Tropical Storm in September)
Teresa
Ida (Tropical Storm in September)
Victor
Joaquin (Hurricane in September)
Wanda
Kate
UK INSURANCE PREMIUM
TAX INCREASE
With effect from 1 November 2015 the standard rate of UK insurance premium tax (IPT)
will increase from 6% to 9.5%. The higher rate of IPT remains at 20%.
This change affects all policies incepting on or after 1 November 2015, but there are also some additional
arrangements that clients need to be aware of for additional premiums and instalments on policies incepting prior
to that date. These are as a follows:
•
Additional premiums (AP) or
•
adjustments in relation to policies
•
In relation to business incepting prior
to 1 November 2015; if the premium
that incepted prior to 1 November
payments are paid on an instalment
will be taxed at the 9.5% rate if they
basis, i.e. under arrangements such
are processed after 1 March 2016.
as a credit agreement or a deferred
If the policy includes a Lloyd’s market
scheme, the business will attract the
then the AP will need to be signed by
6% rate, subject to the first
Lloyd’s on or prior to 1 March 2016.
instalment being processed before
1 March 2016. However, if the
Additional premium applied as a
instalments are processed in parts as
result of a change in the nature of the
additional premiums, and tax is
cover effective after 1 November
brought to account on each
2015 will be taxed at the old rate,
instalment, then the 9.5% rate will
but only if it is the underwriter’s
apply to those processed on or after
normal practice for such adjustments
1 March 2016. If the policy has a
to be made. Such adjustments
Lloyd’s market then the AP will need
must be processed on or prior to
to be signed by Lloyd’s on or prior to
1 March 2016. If the policy includes
1 March 2016.
a Lloyd’s market then the AP will
need to be signed by Lloyd’s on or
prior to 1 March 2016.
•
If the cover is provided via a series
of policies, e.g. monthly policies,
then those policies incepting on
or after 1 November will attract
the 9.5%.
UK INSURANCE PREMIUM TAX INCREASE
For clarification, return premium will be
processed using the tax rate that was
applied to the transaction to which it
relates irrespective of inception date or
processing date.
This note is based on guidance provided
by Lloyd’s Tax Department in their recent
bulletin; however, arrangements for nonLloyd’s insurers are likely to be similar if
they follow the special accounting
scheme for tax purposes. If your insurers
follow the cash receipt method we will
advise you separately.
The full Lloyd’s bulletin can be accessed
via the following link:
http://www.lloyds.com/Search?q=IPT 
LITIGATION SOLUTIONS
focuS on
LITIGATION
SolutionS
TO ARBITRATE, MEDIATE OR LITIGATE?
The decision to take legal action is less clear-cut than some
There is no simple route to establishing which option is best as
legal advisers portray and requires careful consideration of
this will depend on individual circumstances, but there are some
costs, expected outcome and commercial relationships.
key pros and cons that senior management should consider
Few executives will actively seek a dispute with a supplier
when weighing up their options, most notably around:
or business partner, but sometimes they are unavoidable.
•
Cost
Yet potentially costly litigation is not the only recourse.
•
Speed of resolution
•
Finality of the decision
Too often, senior management are not as well informed
about alternatives to litigation as they could be.
Businesses are not always made fully aware of the all the options
available to them. Talk often turns quickly to litigation, while
details on settlement or arbitration are not discussed in depth.
There are three main options for resolving a commercial dispute:
•
Mediation and arbitration are generally considered to be faster
and cheaper. There are many twists and turns to litigation that
can drive up the cost and the time it takes to achieve resolution,
especially for a complex case.
With arbitration, the costs are typically limited to the arbitrator’s
Mediation
fees and the venue hire, while the process may take a few
•
Arbitration
weeks to conclude.
•
Litigation
REACHING RESOLUTION
The arbitrator’s decision may not be binding, however,
depending on what is agreed by both parties at the outset. So
the likelihood of reaching a resolution should be an important
consideration in whether to pursue the arbitration option.
Arbitration is faster and less costly, but the facts of the case,
willingness of parties and the quality of the arbitrator are all
factors to be considered.
If a non-binding arbitration is selected and you can’t reach an
agreement, then you will have to go down the litigation route
anyway and will have only succeeded in adding to your costs.
Arbitration and mediation are less confrontational and more
conciliatory ways of settling disputes. Consequently, they
may be more suitable to disputes between parties where
maintaining an amicable or ongoing relationship is an
important consideration.
Mediation is the softest form of dispute resolution, and is less
widely used than arbitration. It may be a good option where
parties can find common ground and want to maintain an
ongoing contractual relationship, but it does not result in a
binding decision.
In mediation the parties make the decision – the mediator just
helps the parties to work out their differences – while in
arbitration it is the arbitrator that makes the decision after
hearing from both parties.
FLEXIBILITY AND CONTROL
RISK TRANSFER
In recent years, arbitration has become a much
When considering litigation and arbitration,
more popular way of settling disputes and is often
companies should factor in how such actions can
stipulated in commercial contracts, in particular
be funded and whether it is possible to transfer
contracts involving international trade.
some of the risk.
Flexibility and control are big benefits of arbitration.
Litigation funding and after the event (ATE) insurance
Arbitration gives the parties greater control than
are increasingly used in both commercial litigation
litigation, as the parties can select the arbitrator and
and arbitration. Critically, funding takes liability off a
the venue and set the ground rules.
company’s balance sheet and can free up capital
The ability to select the arbitrator is a particular
that can be put to use elsewhere in the business.
strength of arbitration and lends itself to disputes of
There may also be the option of using ATE insurance
a technical nature –such as a dispute about the
to transfer some of the risk of litigation or arbitration.
quality of a material supplied, or where specific
technical expertise is required, like construction.
In contrast, litigation may be the better option for
more complex legal disputes – those that turn on a
legal interpretation of a contract wording, for example
– or those where the parties are unable to cooperate.
If a defendant loses, ATE insurance covers the cost
of paying opponents’ legal fees, including
disbursements, such as expert fees.
Funding and ATE are both flexible and can be
tailored to meet clients’ needs. For example, funding
can be used to cover some or all disbursements,
Litigation can also accommodate related claims from
court or arbitration fees, legal fees, etc., while ATE
third parties. The court process allows parties to be
premiums can be paid upfront or deferred and paid
joined to an action – this may be desirable, for
from any damages award.
example, where a company wishes to bring in
another company, such as a supplier or contractor,
to share liability.
Finality of the decision is another important
When combined, ATE insurance and litigation can
mean risk-free commercial litigation or arbitration –
if you win, your opponent pays your costs but, if you
lose, your insurer and funder pays.
consideration. Unlike litigation, there are few, if any,
opportunities to appeal an arbitrator’s decision.
In a binding arbitrator’s decision, both parties can
move on and resume business quickly, whatever
the outcome.
JURISDICTIONS
We can fund and insure in the vast majority of
jurisdictions, although in some jurisdictions this is
more difficult due to the enforceability of awards.
Usually commercial litigation is a public affair, while
arbitration offers the benefit of privacy and can be
The ideal jurisdictions are the ones where the loser
kept confidential, therefore keeping reputation intact.
pays, as they will have the adverse costs risk.
In the United States, generally each party bears their
own costs, so there is no real adverse risk although
Courts can make an adverse costs award in some
circumstances. 
For more information
To discuss the issues raised in this article and
to seek further information on ‘After the Event’
insurance products, please contact Sanjay
Desai on:
+44 (0) 20 7558 3145 or
[email protected]
ABOUT LLOYD &
PARTNERS
Lloyd & Partners was established in 2005.
Developing and sustaining market leadership
in our core sectors, we rapidly grew to
become one of the largest wholesale
insurance brokers of our kind
in the world.
Our clients benefit from our scale, our
collaborative approach and our
specialist knowledge.
We provide wholesale services for
independent brokers and benefit from being
part of the JLT Group which provides us with
access to wider skills and products, including
the JLT International Network.
CONTACT
If you require any further information or have
any feedback on this edition, please email
[email protected]
This newsletter is compiled and published for the benefit
of clients of Lloyd & Partners Limited. It is intended only
to highlight general issues relating to the subject matter
which may be of interest and does not necessarily deal
with every important topic nor cover every aspect of the
topics with which it deals. It is not designed to provide
specific advice on the subject matter.
Views and opinions expressed in this newsletter are
those of Lloyd & Partners Limited unless specifically
stated otherwise. Whilst every effort has been made to
ensure the accuracy of the content of this newsletter,
neither Lloyd & Partners Limited nor its parent or affiliated
or subsidiary companies accept any responsibility for any
error, omission or deficiency. If you intend to take any
action or make any decision on the basis of the content
of this newsletter, you should first seek specific
professional advice and verify its content.
If you are interested in utilising the services L&P provide
you may be required by your local regulatory
requirements to obtain the services of a local insurance
intermediary in your territory to export insurance and
(re)insurance to us unless you have an exemption and
should take advice in this regard.
Please refer to our website for all recent publications:
http://www.lloydandpartners.com/publications/
Lloyd & Partners Limited
The St Botolph Building
138 Houndsditch
London EC3A 7AW
www.lloydandpartners.com
Lloyd & Partners is a trading name of JLT Specialty
Limited, Lloyd’s Broker. Authorised and regulated by the
Financial Conduct Authority.
A member of the Jardine Lloyd Thompson Group.
Registered Office: The St Botolph Building, 138
Houndsditch, London EC3A 7AW. Registered in England
No. 01536540. VAT No. 244 2321 96
© October 2015 270452

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