HC Deb 04 May 1964 vol 694 cc1073-84

Motion made, and Question proposed, That this House do now adjourn.—[Mr. McLaren.]

11.10 p.m.

Mrs. Judith Hart (Lanark)

I apologise to the Parliamentary Secretary, Board of Trade, who has had an extremely hard day and who, through my luck in the ballot for raising matters on the Adjournment, is having that day prolonged.

I wish to raise questions which arise from troubles experienced by two of my constituents which seem to have general and very important implications. I hope the hon. Gentleman will bear with me while I relate the story of what happened to two individual constituents in the new town of East Kilbride. A very young couple who recently moved into a new house there had a car accident on 8th December, 1962. Fortunately, no one was seriously hurt, but their car and the car with which it came into collision were considerably damaged. My constituents denied responsibility for the accident.

They trusted the handling of the matter, as people normally do in circumstances of this kind, to their insurance company. They handed all the details to the insurance company and set in motion the busi- ness of having their car repaired at a cost of £140. They were at that time very much occupied by other anxieties because the wife was about to have her first child. Matters were left for several weeks and they naturally trusted their insurance company to do everything and assumed that it would keep them in touch whenever necessary. The next they heard was when on 12th July, 1963, a sheriff's warrant arrived sueing them for £205 which had been incurred by the owners of the other car for repair of that car, hire of a substitute car while those repairs were being carried out and legal and interest costs.

My constituents were terribly concerned and consulted their insurance broker, a firm known as Dixon Kerr of Hamilton. The firm assured my constituents of its astonishment that this should have happened and asked them to forward the sheriff's writ and said the firm would deal with anything that was necessary. They were assured that a mistake had been made somewhere. At that stage my constituents would have been wise to have consulted a Solicitor, but they did not do so. They trusted the insurance broker to look after their interests in the matter.

They heard nothing further for three weeks and assumed that the matter had been dealt with. Then, suddenly, a sheriff's officer came to their home. The case, apparently, had been before the court and they had known nothing about it. The sheriff's officer informed them that the husband's wages would be arrested and possibly their furniture would be impounded. They then realised that the insurance company had been the subject of an injunction brought by the Board of Trade in the High Court. They discovered that their insurance company was bankrupt and they had no protection. Suddenly they were plunged into an immense personal financial crisis through what seemed to be no fault of theirs, other than trusting an insurance company in the way that people in these circumstances do.

The story of my constituents is not yet ended; it is still going on. After the sheriff's officer called on them they consulted their solicitor and discovered that even if at that stage they tried to reverse the legal process and if fifty-fifty were the outcome they would still lose financially because it costs a great deal of money to reverse a legal process by appeal to the High Court. They discussed with their solicitor the general implications of their lack of knowledge of what had been happening in the court. I need not concern the Parliamentary Secretary with that.

But the solicitors whom my constituent consulted at this point apparently advised him at one stage that the best thing for him to do was to give up his job and to plead bankruptcy. I am glad to say that he did not take that advice and undertook the very lengthy and almost intolerable burden of paying the money by instalments which ought to have been paid for him by his insurance company. The amount totalled £345. He is still paying that back at £15 a month. His wife has had to go out to work and to leave her young baby in the care of friends. Their whole personal lives have, at least temporarily, been shattered, largely because they trusted an insurance company because they thought that all insurance companies were to be trusted.

There have been other cases in my constituency; this is not the only case, although it is by far the most outstanding. The other cases have involved much smaller sums as a result of loss of insurance cover and having to reinsure at maximum premiums, because other companies at one stage apparently were not recognising any insurances of the bankrupt company. I do not know where else these cases have occurred, but no doubt they have occurred in other parts of the country. Certainly there have been a number of cases in the new town of East Kilbride, partly because the insurance company concerned was offering cut-price rates. It was offering the county rates for car insurance instead of the Glasgow City rate, which is higher and which normally applies in the new towns. A number of constituents were tempted by the lower rates.

After having looked at the effect of all this on one family—I do not know how many other cases there may be—I want to turn to the insurance company itself. I have had correspondence with the Department about this company over the last few months. It is, as the Parliamentary Secretary knows, the American Military International Insurance Association. I was grateful to be given some information about the company by the United States Embassy, who told me that there were three companies interlinked—two registered in the State of Delaware and one registered in Nassau. The one registered in Nassau was the First General Assurance Company. The second was the American International Insurance Association, and the third was the American Military International Insurance Association, which has been a subsidiary front organisation, so to speak, doing the broking and dealing with the public.

The company started its operations two or three years ago. The Delaware registration is no doubt accounted for by the fact that it is apparently very easy to register a company in the State of Delaware, which has very easy jurisdiction on company registration. In the United States insurance is a function of the State, and in order to conduct business in any State a company must go through the necessary formalities. This does not seem to have been done in other States in respect of this company, and there is no indication of the company doing business in the United States itself. It seems that most of the operations were in France and Germany.

The owner of the companies—and it seems that this was pretty much a one-man concern—is Mr. Stewart Rechstein. He is apparently an American citizen who lives in Frankfurt in West Germany. It seems that his activities and those of his companies arise to some extent out of the somewhat cut-throat business which has been going on among a number of doubtful companies in the last two years. I understand that about two years ago a company sold out to American Military and went out of business.

The implications of all this for us are that the insurance company's activities here are founded on the principle of giving complete freedom of operation to all insurance companies which wish to do business here. I understand that they fear a certain amount of reciprocity if restrictions are imposed, and have in mind the very considerable invisible exports in insurance which this country has. I am told that about 70 per cent. of the insurance premiums of British firms come from abroad and that a good proportion of this is reinsurance. One can see that insurance companies here, because they do so much exporting of their business, are anxious to have absolute freedom to operate in other countries and might fear that restrictions would be imposed against them if restrictions were imposed here against foreign companies seeking to do business here. Nevertheless, I understand that this is a case where the Board of Trade must sit back and watch an insurance company which sets up to do business in this country for a year, at the end of which it may ask to see its accounts. In other words, only after a year's operations, if there seems to be something doubtful about the company, can the Board of Trade send in its inspector and set investigations in motion.

This, as the Parliamentary Secretary knows, was done in the case of the American Military International Insurance Association about a year after the firm began business here. The Board of Trade sent in its inspector and the result was that within two or three months—and the timing is important, and I would like to know precise details of the dates—proceedings were set in motion for an injunction to the High Court. In July the firm was said to be bankrupt and the Board of Trade sent in the liquidator.

The first official reports in the newspapers which I have been able to find were at the end of July of last year, when at least the Financial Times and the Guardian carried brief reports of the High Court proceedings, followed by a warning that people should look after their insurance if they had been insured with that company; that they could not be covered for, for example, third party risks.

Of the points which arise from this case, some should receive the immediate attention of the Board of Trade to see what possible ways there are in which people like my constituents could have been protected against the enormous personal burden being imposed on them. The first way would have been if the Motor Insurance Bureau, which now by agreement with the Ministry of Transport safeguards injured third parties, were able to help with damage to vehicles and associated costs. This is not the case at present, although I realise that this is a matter which it might be best to pursue with the Ministry of Transport.

The second way might have been if the British insurance companies, with their high reputation, either individually or through their association, made it their concern to assist what must be the very tiny number of cases which find themselves in these kind of difficulties because of their trust in a doubtful insurance company. It should be remembered that that arises out of their general trust of insurance companies in Britain. Insurance companies in general here have such a high reputation that to the majority of people it is unrealistic even to consider one of them going bankrupt. Because of their enormous profits and assets, coupled with their reputation, to the ordinary working class person the average insurance company has his complete trust.

Would it not be possible for British insurance firms to regard sympathetically a case of the kind I have raised, a case which must involve, even if one takes into account other people similarly concerned, very few people? It must also be remembered that one is dealing only with those who have been involved in accidents during the period after the firm had got into difficulties and before it was publicly announced that it was in difficulties.

The third possibility—and this is one the Parliamentary Secretary could consider—is whether it would not be possible, even within the terms of the Insurance Companies Act, to prescribe regulations which would offer some protection. I have in mind the kind of thing now done in Holland, where until recently there was complete freedom of operation to insurance companies, both foreign and home. The Dutch have recently inaugurated a system of deposits. A new company, home or foreign, operating for the first time in that country must deposit enough money to cover its first year's operations. That seems reasonable enough.

I should like the Parliamentary Secretary to consider this point and to tell me what the latest information is from the liquidator. I understand from a letter that I had from the Board of Trade at the end of March that the liquidator in the United Kingdom had made contact with the German and the French liquidators, but, the letter says, whether it will be possible to pool assets and liabilities is very doubtful, and each liquidator may act within his own jurisdiction. The assets in the United Kingdom are certainly much less than the liabilities and consist of balances, often disputed, owing from agents. The ratio of assets to liabilities is almost certainly better in Germany and France, but whether a claim to a proportion of those German and French assets can be made and sustained in the German and French courts has yet to be decided. I wonder if the Parliamentary Secretary has any more up-to-date information than that. If he has not, or if the information that he has is somewhat depressing, it means that my constituents have no hope whatever of having any redress for what is an undoubtedly very serious grievance. They feel that in this country there has been a failure to protect the interests of ordinary citizens who, through no fault of their own, can find themselves in this kind of predicament.

I ask the Parliamentary Secretary to consider the possibility, within the terms of the Act, of introducing Regulations. I am certain that in the next month or two the House will have time to consider this matter. I am sure that most of my hon. Friends would welcome such a method of protection for ordinary citizens.

The second point that I would like the hon. Gentleman to look at is the matter of the timing. My information is not complete, but I am told that the insurance brokers in this case were still advertising this same American Military International Insurance Association as late as January and February, 1963. What responsbility does the Board of Trade accept for informing insurance brokers that it is not altogether happy about the state of affairs of the company after its first year's operations, and that it has in fact sent in an inspector? It would seem to me most urgent that the Board of Trade should take the responsibility for informing insurance brokers of such a matter in order that they may not be misled into continuing to insure clients with a company whose financial background has become doubtful. If this degree of information is not conveyed by the Board of Trade, it means that there are bound to be some people who insure for the first time with such a company and who are bound, if they are unfortunate enough to have an accident during that period, to find themselves in the position of my constituents.

I am certain that the Parliamentary Secretary will have a great deal of sympathy with my constituents. I am sure he will have a great deal of concern that such a company should have been operating in this country. I would ask him to look at the possibility of providing some protection so that this may never happen again. This, indeed, is the main concern of my constituents. They recognise that what has happened to them could happen to others, and they have asked me to raise this matter because they are concerned that it should never happen to anyone else.

11.29 p.m.

The Parliamentary Secretary to the Board of Trade (Mr. David Price)

I thank the hon. Lady the Member for Lanark (Mrs. Hart) for her courteous references to my repeated appearances at this Box today.

I think that the most useful way in which I can reply to the hon. Lady would be for me, first of all, to give an account of the company's history; secondly, to outline the current responsibility of my Department for insurance companies; and thirdly, to relate to the hon. Lady, in the light of this background, what has led to the present difficulties in the company's affairs.

I start with the history of the company. The hon. Lady knows quite a lot of it. She will, I hope, forgive me if I repeat what she knows, but I want to give a complete and coherent history.

The American Military International Insurance Association, shortly known as American Military, was, as the hon. Lady rightly observed, incorporated in the State of Delaware, in the United States of America, in 1959 and licensed by the insurance commissioner of that state to write insurance business. American Military had a subsidiary, also incorporated in the State of Delaware, to engage in insurance brokerage under the name of American International Insurance Association, shortly known as American International.

American Military also had a second subsidiary in the Bahamas to write insurance under the name of the First General Assurance and Guarantee Company Limited, shortly known as First General. There are, therefore, the three companies: American Military, American International and First General.

American Military had comparatively little business in the United States. Early in 1960, it began to write motor business principally for American Service men in the United Kingdom, Germany and France. Before commencing business, American Military conformed with the requirements of Section 2 of the Insurance Companies Act, 1958, about which I shall say more presently, which applies to both British and overseas insurance companies, by delivering to the Registrar of Companies a statutory declaration that not less than £50,000 of the share capital had been paid up. The company also complied with Section 23 of the Act, under which overseas insurance companies have to file certain formal particulars with the Registrar. I remind the House that these are the only conditions imposed by our legislation which have to be satisfied by an overseas company on commencing insurance business in the United Kingdom.

First General—the Bahamas subsidiary—began business in the United Kingdom in July, 1961. It conformed with the requirements of the Insurance Companies Act. The purpose of the company was to write motor insurance for civilian drivers, leaving to the parent company—American Military—the business with American Service men. American International, the brokerage subsidiary, also operated in the United Kingdom, but because it was a brokerage company it did not come within the scope of the Insurance Companies Act since it did not itself undertake insurance. Owing to the similarity of name, there has, I think, been confusion between the parent company and this subsidiary.

Under the Insurance Companies Act, accounts must be submitted to the Board of Trade in a prescribed form annually. The responsibility of my Department is to satisfy itself that the accounts properly represent the company's financial state. During the first two years of its existence, such a company must be solvent within the meaning of Section 222(e) of the Companies Act. Thereafter, a sol- vency margin operates as regards the non-life insurance company. Such a company must possess assets the value of which exceeds the amount of its liabilities by either £50,000 or one-tenth of the general premium income of the company in the last preceding financial year.

The Board of Trade has power to require a company to furnish such information as it considers to be necessary for the purpose of determining whether the company is solvent in the sense which I have just described. If the Board of Trade, after considering the information furnished, thinks it expedient to do so, it may serve upon the company a notice in writing stating that it proposes to appoint one or more inspectors to investigate the affairs of the company. The company may, within a specified period, give notice in writing to the Board of Trade that it objects to such an appointment being made. If it does so, the Board of Trade may apply to the court for leave to make such an appointment. Under the Act, the court has power to grant leave unless the company can satisfy the court that such an appointment cannot reasonably be required for the purpose of determining whether the company is solvent.

If an inspector is appointed and the company refuses to give the inspector proper information and assistance, or if, in the light of his report, the Board of Trade is satisfied that the company is insolvent, the Board may petition the court to order the winding up of the company. The House will observe that what the Act does is give the Board of Trade power to satisfy itself whether a company is insolvent, which, of course, involves judging the adequacy of the provision made under its contingent and prospective liabilities.

The Act does not empower the Board of Trade to intervene in the management of the company because the Board of Trade may think that policies pursued by that company are of a kind which might be held as likely to lead to insolvency. Therefore, I have to point out that our current legislation, which, incidentally, is based on an Act of 1946, does not envisage that we in the Board of Trade should intervene in the management of an insurance company's affairs. What it does do is enable us to apply to the court for the winding up of a company if and when its affairs are in a state in which it ought to cease to do business because it cannot cover its liabilities.

This prevents a company from getting into worse difficulties—I will admit that it does not necessarily prevent it from getting into difficulties—and from continuing to collect premiums in an effort to pull things round. Throughout, the Board has to be able to satisfy the court on the matters which I have just described to the House.

It is against this setting that I will now endeavour to tell the story of American Military as we have seen it at the Board of Trade. American Military submitted accounts in the prescribed form for the year 1960, but the Board had doubts about them and asked for clarification. As a result, amended accounts were submitted. These accounts did not suggest that the company was insolvent. The insurance writing subsidiary, First General, failed to furnish within the six months allowed a return to cover its first accounting period, July to December, 1961. This fact, added to deficiencies in the American Military accounts for 1961, the next year, caused the Board to doubt the solvency of the two companies.

The Board of Trade accordingly notified them on 14th September, 1962, that it proposed to appoint an inspector under Section 14 of the Insurance Companies Act. I have a far fuller timetable of dates and I point out to the hon. Lady that the accounts for 1961 were due on 30th June, 1962—she wondered why they had taken so long. In the intervening time, requests had been sent to the company and so on.

As I have said, the insurance companies had a right to challenge the need for inspection, and they exercised this right. Accordingly, the Board of Trade applied to the court for leave to appoint an inspector and the court granted leave on 17th December. The Board duly appointed a chartered accountant to inspect the company's affairs on 21st December, 1962.

Mrs. Hart

If the court granted leave for the Board to appoint an inspector in December, 1962, the court's findings would be publicly known and insurance brokers should have known about them. Is that so?

Mr. Price

The fact that the court grants the Board leave to appoint an inspector does not, at this stage, mean that the company is in difficulties. This is a rather important legal point. All that happens is that the court gives the Board leave to inquire. A chartered accountant was duly appointed on 21st December, four days later.

Despite repeated attempts, the inspector found it impossible to establish contact with the principal shareholder, an American citizen named Reichstein, as the hon. Lady rightly said, in whose hands lay the ultimate direction of the two companies. In an interim report dated 1st July, 1963, the inspector informed the Board of his almost complete failure to obtain answers to his questions. Such information as he had obtained strengthened the doubts as to the solvency of the company. In the light of the inspector's report, the Board exercised its powers under the Act to present petitions for the winding up of both the insurance companies. An order for the winding-up of First General was made on the petition of a private creditor on 15th July, 1963. Accordingly, the Board of Trade was concerned only with American Military and the action for——

The Question having been proposed after Ten o'clock and the debate having continued for half an hour, Mr. SPEAKER adjourned the House without Question put, pursuant to the Standing Order.

Adjourned at nineteen minutes to Twelve o'clock.