Out-Law News 2 min. read

IUA Brexit insurance continuity clause available for use


A model 'continuity clause', designed to clarify how insurers will pay claims in the event of Brexit-related disruption to contracts, has been published by the International Underwriting Association (IUA).

The clause, which can be downloaded from the IUA website, was drafted to cover the situation where a UK-based insurer is no longer able to rely on the EU financial services 'passport' to conduct cross-border business after the UK leaves the EU in March 2019. It allows a 'contingent' EU-based insurer to step in and fulfil any policy obligations that the original insurer is no longer able to cover once a defined 'Brexit event' occurs.

The wording of the clause limits its effect to Brexit scenarios where the original insurer is no longer able to perform its obligations under the contract. It would not come into effect if the UK and EU come to an agreement that would allow UK insurers to continue to perform their obligations under the contract without being exposed to any sanctions.

Although the clause is primarily intended for use in contracts of insurance, the IUA said that it could be applied to reinsurance risks "in principle". Firms will also be free to adopt and adapt its provisions as they see fit. Use of the clause requires firms to identify and contract separately with a suitable contingent EU-based insurer, which may be another company within their corporate group or a third party. Whether an insurer is able to make use of the clause will therefore depend on its own operational needs, the IUA said.

Chris Jones, the IUA's director of market and legal services, said that the clause would help insurers to prepare for Brexit despite continuing uncertainty over the future trading relationship between the UK and EU.

"A number of other market clauses have already attempted to address the issue of contract continuity, but it has proved difficult drafting a solution that covers all political eventualities," he said.

"Another problem has been catering for the many different corporate structures, both currently present in the London market and planned by firms as part of their Brexit contingency responses. Consequently, a key concern of the IUA's new clause has been to ensure that the legal principles underpinning the contingent insurer approach are sound and that the terminology and intent of the wording is as clear as possible," he said.

The IUA is the trade body for insurers that trade in the London insurance market outside Lloyd's. It is one of a number of insurance bodies that have now produced model Brexit continuity clauses. The Lloyd's Market Association (LMA) published a model EU contract continuity clause in March while specialist trade bodies, including the Aviation Insurance Clauses Group (AICG), have also published model clauses.

"This step from the IUA to assist firms in managing their insurance contracts as the UK leaves the EU is to be welcomed," said insurance law expert Tobin Ashby of Pinsent Masons, the law firm behind Out-Law.com.

"Insurers will still be hoping that a political solution to the problem for cross-border financial services will emerge, and indeed firms will be waiting to hear the UK's plans following the forthcoming June 28-29 summit. However, in line with repeated warnings from insurance regulators, firms are expected to have good contingency plans in place now in preparation for the most difficult Brexit scenarios, essentially on the basis of an assumption of no future agreement," he said.

"There will be some reassurance in the market around the careful development of this clause by the IUA. The success of the operation of the clause, should it be triggered by a relevant Brexit event, will be dependent on firms' individual operational circumstances and legal structures. It is therefore not an answer to all insurers' Brexit challenges. As the IUA points out in its commentary to the clause, for some insurers there will be no suitable 'contingent' insurer within their corporate group and identifying such an insurer outside of their group may not be viable. However, for those that can identify a suitable contingent insurer, where it is possible to enter into appropriate terms with them, the clause will offer reassurance around this difficult issue," he said.

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