Competition liability is a growing risk. Can insurance help? Nick Stanbury lays out the ground rules.

Competition liability is a growing risk. Can insurance help? Nick Stanbury lays out the ground rules.

Competition provides choices - choice of supplier and also, usually, of specification, quality and price. Anything that artificially limits choice is an unwelcome and potentially damaging restriction on the freedom of the consumer to make the best use of the resources available to him. Restricted competition also tends to stifle innovation and improvement to the detriment of a business's efficiency and the economy in which it operates.

Successive UK governments have recognised the essential role of competition and all that it represents. They have progressively introduced legislation to outlaw practices regarded as "anticompetitive" - those carried on by a particular business or a co-operating group of businesses that limit the consumer's freedom of choice. The Fair Trading Act 1973, the Restrictive Trade Practices Act 1976 and the Resale Prices Act 1976 are examples. These Acts address issues such as monopolies, mergers and agreements which restrict the availability of goods or the ability to sell them at a freely-negotiable price.

Added dimension
The Competition Act 1998 came into force on 1 March 2000. It adds a new and significantly more powerful dimension to existing legislation, bringing UK competition law into line with that of the rest of the European Union. Much of the earlier legislation is repealed (although most of its intentions remain). There is a shift of emphasis towards looking at the true substance of what is done (or agreed) and not merely its form.

The Office of Fair Trading (OFT) oversees and enforces the Act. It has real and extensive powers to investigate and to punish. Many commentatorr. have described the overall effect of these powers a.s "draconian". But there are positive aspects. The OFT does not intend to interfere with normal, straightforward business practices (particularly those carried on by smaller businesses where there is no collusion) where they have no appreciable anti-competitive effect. The OFT will also give advice on, and clearance for, any proposed action that might prove anti-competitive.

In essence, the 1998 Act prohibits anything that may affect trade within the UK as a result of an agreement or practice that prevents, restricts or distorts competition, as well as conduct that amounts to an abuse of a dominant market position. This applies to any "undertaking", i.e. any natural or legal person capable of carrying on commercial or economic activities relating to goods or services, irrespective of its legal status and the manner in which it is financed.

In many cases, a group of companies will be such an undertaking, if they operate as a single economic unit.

It is not only the Government, through the OFT, that can take action against those who behave anti-competitively. For such behaviour will not necessarily be without victims, nor will it necessarily be detected and quashed before it has undesirable effects. Individual consumers or groups of consumers, who suffer through inability to avoid, for example, a reduced choice or increased price, may be entitled to take civil action for compensation.

In some cases, OFT action will highlight the injustice and open the door for consumers to pursue a civil remedy. In others, consumer action may encourage the OFT to investigate a particular undertaking or market. In short, the 1998 Act (and indeed other existing legislation and common law rights) can be invoked by the individual as well as by the public at large.

Potential costs
All but the simplest of businesses should consider the new regulations. You need to ensure that you are not breaching the prohibitions, whether by accident or design. The costs of monitoring compliance, taking external professional advice where interpretation of the law becomes necessary and any required OFT advice or clearance (for which a fee is generally charged) will not be trivial.

If, despite good housekeeping and honourable conduct, there is an alleged or actual transgression, you can expect some form of official investigation, with the possibility of further action. At the very least, you will need costly professional advice and representation.

If a breach is proved, sanctions can take several forms:

  • civil (statutory tort) liability to those who are personally damaged by the breach (which might involve a group or class action) « civil (statutory penalty) liability to the government
  • criminal punishment (ie a fine).

    Any liability in tort will depend entirely upon the number of consumers who have suffered and the nature and extent of their aggregate loss -which may be formidable. The penalty imposed for a breach can be equally significant. It can be as much as 10% of your business's turnover from the relevant activity in the UK for each of the previous three years. Leaving aside the associated legal costs and the indirect cost of a tarnished reputation, the outcome for the business could be crippling and possibly fatal.

    In addition to sanctions against corporate undertakings, directors and officers may face action if they are implicated in the breach (or in any failure of the business to take whatever remedial action is later required) and their "consent, connivance or neglect" is established. In addition to defence costs, they may face personal liability for damages or a penalty. If criminal punishment arises, imprisonment is a possibility. However deep their individual pockets, few directors or officers can afford to ignore the potential consequences.

    Minimising exposure
    You should take every reasonable step to understand and comply with the 1998 Act and other legislation and to fulfil your obligations.

    The OFT publishes a wide range of booklets that give detailed information on competition liability in general and on the specific implications of the 1998 Act for particular types and business activity. There is a helpful web site at You may also need to get professional advice on your existing or potential exposure. Most of the larger law firms have expertise in this field.

    Whatever steps you take to recognise, understand and minimise exposures, there will always be the possibility of an investigation or action alleging a breach or a right to compensation, even if unwarranted. At the very least, legal costs will arise. If the allegation is proved, you are likely to be liable for damages and/or a financial penalty and possibly a fine. The overall cost will depend upon the seriousness and extent of the wrongdoing and the size of your business, but is potentially unlimited. Few businesses are likely to be willing or able to absorb such a loss without severe difficulty.

    Can competition liability be insured and, if so, how? No insurance can prevent loss, nor is it a substitute for good business practice. However, it should provide an adequate and independent indemnity when, despite careful conduct, a loss arises. Such insurance should allow you to keep your exposures within affordable limits by eliminating the "catastrophe" element.

    Essential elements of cover

  • Indemnity to the business for its liability for damages, civil penalties and the costs of representation and defence arising from business activity contrary to the Competition Act 1998 and related legislation applicable in the UK. Where appropriate, cover could be extended to embrace liability arising under the equivalent legislation of EU member states and other territories
  • Indemnity to the business's directors and officers for their corresponding personal liability, if any. Alternatively, if in practice the undertaking provides this indemnity to its directors or officers, where permissible, the insurance should reimburse it accordingly. The second element of this cover is, in principle, provided under conventional Directors and Officers liability insurance (D&O), which the various companies or groups of companies that comprise the undertaking will probably have. However, it is essential to check its scope, to ensure it fully addresses competition liability exposures. If you arrange any form of competition liability insurance, it is unnecessary and, indeed, inadvisable to duplicate any existing management liability protection. Instead, seek to confine the competition liability cover to the undertaking itself.

    Likely limitations
    Creating a good fit with existing or intended D&O, is desirable, but it is also necessary to recognise the possible limitations of competition liability insurance. Some potential civil or criminal liabilities that would fall within the general concept of competition exposure may not be insurable at all, or only on unrealistic terms or at unreasonable cost. Others may be better addressed by alternative covers that, like D&O, are likely to be included in your existing insurance programme.

    Like D&O, competition liability insurance would almost certainly be provided on a "claims made" basis. That is to say that the event that triggers the claim for indemnity must be identified within the period of insurance, even though it may have occurred before that period. Although the consequences of past events will not therefore remain covered if the insurance is not renewed, the insurer may grant a further period of limited indemnity after expiry, to address events discovered subsequently. Similarly, cover may be restricted to events that take place before an undertaking is taken over (should this happen within the period of insurance), although the insurer will probably agree to cover those discovered later or to maintain the full cover after a takeover, on the basis of a reappraisal of the overall risk at that time.

    Full analysis of your competition liability exposure is vital both for your business itself and for any potential insurer. This includes looking at the way your business is structured and managed and, in particular, its philosophy where competition is concerned. The insurer will probably require some form of "healthcheck", or a survey by an independent professional before underwriting the risk.

    The main purpose of competition liability insurance is to provide a "catastrophe" cover. Aggregate potential liabilities are high and you should set the limit of indemnity accordingly; a limit of several million pounds maybe appropriate. Your insurer is likely to expect you to bear a significant excess before meeting a particular claim, particularly in respect of damages or penalties. You may also be asked to meet a percentage share of the liability over and above such an excess. If you can afford a high excess, you may achieve a worthwhile premium saving.

    The Competition Act recognises that merely encouraging or facilitating competition is not enough. It must be true and fair competition - and seen to be so.
    Nick Stanbury, a chartered accountant and chartered insurance practitioner, is an insurance consultant and writer

    Competition liability insurance - common exclusions

  • anything arising from circumstances known to anyone who is to be insured at the time of taking out cover,
  • anything which is done knowing it to be wrong or (unless it is the subject of regulatory action) with a proven dishonest or malicious intent
  • any non-compensatory damages or any fine, penalty or exemplary or punitive damages for which insurance indemnity cannot be lawfully provided. (The main practical point here is that a criminal fine cannot be insured but a civil penalty, such as that based on the undertaking's turnover and imposed for flouting the regulations, is in principle lawfully insurable)
  • liability for bodily injury, property damage, " infringement of intellectual property rights or breach of professjonal duty, for all of which specific liability insurance is normally arranged

    The competition regime - key points

  • Prohibition of agreements or practices that prevent, restrict or distort competition
  • Prohibition of conduct that amounts to an abuse of a dominant market position * Direct civil liability to those who are personally damaged by anti-competitive activity
  • A civil penalty payable to the Government - up to 10% of the turnover from the relevant UK activity for each of the previous three years
  • Criminal punishment for serious misconduct - a fine or imprisonment
  • Potentially formidable costs of compliance, representation and defence
  • Possible action against management as well as against the business itself
  • Requirement for a proper "healthcheck" to establish the true exposures
  • Liability may be insurable - but DSO is not enough