Action stations: why the EC’s collective redress proposals concern risk managers and insurers

Concerns over a lack of safeguards in the EC’s proposed pan-EU collective redress mechanism focus on the fact that the loser-pays principle and need for consent to be part of an action are missing, as well as fears that rules governing who can bring a class action will not preclude third-party litigation funders from delivering mass US-style litigation in Europe. The EC announced its New Deal for Consumers package last month, which contained details of a pan-European Union collective redress system. Insurance Europe, the insurance industry body, and BusinessEurope, which represents European business associations, were quick to release statements condemning the proposals as too harsh on their members and overly in favour of claimants. Much of their concern is based around the fact that certain key safeguards put forward by the EC itself in 2013 to ensure mass US-style litigation would not cross over to Europe, are missing from current plans. William Vidonja, head of conduct of business at Insurance Europe, said: “Good principles that the Commission promoted to safeguard against the potential abuse of collective mechanisms – such as that the loser pays the costs of litigation and that consumers should actively choose to participate in collective actions – are compromised.” Having looked at text of the directive on representative actions for the protection of the collective interests of consumers, sources say the key safeguard that only a qualified entity can launch a collective redress on behalf of consumers is in the proposals, but watered down from the 2013 recommendations. Meanwhile, two other crucial measures – the loser pays principle and the need to consent to be part of an action, known as opt-in – are both missing. When the EC announced the measures, it said representative actions will not be directly open to law firms. Only qualified entities – such as consumer organisations that are non-profit, fulfil strict eligibility criteria and are monitored by a public authority – will be able to seek redress on behalf of consumers, it added. But an insurance industry insider told CRE that the plans lack safeguards determining who can operate as a qualified entity and how they are funded. This opens the door to third-party litigation funders, she added. “One of our lines of concerns has been the developing risk of third-party litigation funders coming in like the US. We think there is very little in the proposal safeguarding against that or taking that seriously. We are genuinely concerned that the criteria are not sufficiently strict about who can become those entities,” the source said. “Requirements for qualified entities are weaker in the proposals than the EC’s 2013 recommendations. The recommendations talk about the entity having proper financial resource, proper legal expertise and so on – making sure there is a real standard. But that kind of criteria is missing from the proposal. There is a bit about proper resources and proving who is funding you, but some of the other safeguards are missing,” she continued. Adding: “Qualified entities need to be approved in each member state and be non-profit-making. But I don’t think you have to be a particularly clever lawyer to create a vehicle that would be non-profit-making, but still pulling out huge fees while running a litigation. So I don’t think that is a strong safeguard. So there is a real risk that companies could be defendants for the sole purpose of getting some sort of financial settlement rather than on the real harm caused. That is not effective or fair. If you are supercharging litigation by it becoming a business matter rather than quality litigation, then of course you are adding to business costs.” Philip Woolfson, partner, and Alexander Hamels, associate, from Steptoe & Johnson’s Brussels office confirmed to CRE that the current proposals introduce a “low threshold” for entities to be designated as a qualified entity. They explained that qualified entities only need to comply with the following criteria: it must be properly constituted according to the law of a member state; it must have a legitimate interest in ensuring that provisions of Union law covered by this directive are complied with; and it must have a non-profit-making character. The EC’s proposals also stress that as part of safeguards against frivolous litigation, the funding of any qualified entity would need to be transparent and assessed by a judge. This is to ensure that a qualified entity bringing a collective action is not funded by anyone with a conflict of interest, such as a competitor of the firm being litigated. But a source close to risk and insurance managers said the proposal does not make clear how this would work. “The directive says transparency is needed but nothing about what if there is a lack of transparency and what if there is a doubt about the source of the funding. It says member states should ensure that the qualified entity is not funded by a competitor or someone with a conflict of interest, but it is not clear at all how this will be done. So, we think there will be some amendment needed here to explain exactly what is meant,” said the legal expert. Adding: “So even on qualified entities there are concerns that the EC proposals do not have the safeguards we would like, because of this funding issue. Furthermore, it is not clear how you would become a qualified entity.” The source also confirmed that exclusion of the loser-pays principle will only encourage litigation. On no opt-in clause, he said: “As a company, it’s an issue because you cannot know the extent of the damages and the redress measure you will have to take because any affected consumers could say months after: ‘I am part of it too.’ There is a potential safeguard whereby you need to opt in and give your consent to an organisation to benefit from any redress that would be better for business.” The insurance insider told CRE that her industry has always supported opt-in because it can help ensure properly funded claims and commitment from those participating. The source in Brussels close to risk and insurance managers flagged several other details within the directive that will cause concern for readers of CRE, and are likely to be at the centre of lobbying efforts. The directive says that under the collective redress system, punitive damages “should be avoided”. The source feels that this wording is “too light”. “They say it should be avoided but was does this mean legally? I don’t think it is the prohibition of punitive damages that the EC claims and put forward as a safeguard in 2013. So that is a concern. It should be amended and turned into an article towards clear prohibition,” he said. Ferma stressed after news of the proposals broke that punitive damages should not be allowed under any collective redress system “in order to limit the impact on the liability insurance market”. The directive also contains measures that would place huge demands on companies and could compromise confidentiality, according to the risk manager source. It places an “obligation for the organisation to inform all consumers concerned about the final outcome of the collective procedure”. The source said this sounds like a “heavy” burden on companies, but explained that there is not much detail on how this would work in practice. However, he noted that recital 31 and 32 of the directive say organisations must disseminate information through websites, social media, online market places or in popular newspapers. “There is a lot of business disclosure in the directive. This could become a real problem for business to inform all of the consumers that are affected, but also in terms of giving qualified entities the evidence they demand,” said the source. The directive also contains the right for a “claimant to request the disclosure by the organisation of evidence relevant to their claim”. This has big implications for confidentiality, sensitive information and reputation, noted the source. “Under the collective redress proposals, qualified entities would have mutual legal recognition across member states. This means that if Greenpeace, for example, is prosecuting a company in Germany, it can also act on behalf of consumers in another EU country. “So there is no safe harbour. This measure is really empowering for consumer organisations to act across borders in the EU,” said the source. The insurance industry source said that although collective redress can be useful in some instances, it should not be promoted at the expense of alternative dispute resolution (ADR), which she believes currently works well in many EU member states. “Collective redress is coming and popping up in a lot of member states. It is something that has to be part of the environment, and probably cases where it is the most effective way of getting redress. But I think insurers want to stress the value of ADR and its ability to resolve issues and disputes quickly, efficiently and at low cost. It is not clear litigation would always be the best method. Don’t forget ADR, because it is very efficient. Don’t risk disturbing it too much when it works well,” she told CRE.

Action stations: why the EC’s collective redress proposals concern risk managers and insurers

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