Commercial Awareness Update – W/C 5th February 2024

THE EVERYDAY MUNDANE: CAN AI COMPLETE TASKS THAT HUMANS DON’T WANT TO DO MORE EFFECTIVELY?

Following the development of AI technology, businesses seem keen to implement new strategies to keep up with competition in their respective industries. AI can forecast demand by analysing data at a speed that is humanly impossible to keep up with.

This efficiency helps minimise human error when employees carry out tedious, repetitive tasks. These tasks can now be replaced with AI-generated algorithms that provide certainty in analysing data trends, performance and inventory management.

Furthermore, this allows employees to focus on tasks that hone interpersonal skills that AI-developed technology cannot complete. Thus, the deployment of AI has the potential to save time and money by optimising routine processes.

A revolutionary collaboration: Hiscox and Google

Hiscox is a specialist global insurer that collaborated with Google Cloud to create the first AI-led underwriting model in the London market insurance industry. This marks an unprecedented step forward in the London market.

According to the Economic Times, underwriting is when ‘an individual or an institution undertakes the risk associated with a venture, an investment, or a loan in place of a premium’. Precisely in the insurance world, underwriters determine whether an insurance company should undertake the risk of insuring a client. This includes insurance employees assessing, for example, how much insurance should be granted to a client.

Therefore, to provide this advice to the company’s clients, employees from the insurance company must undertake extensive research to determine the risk and exposure of clients.

Human employees can assign tedious tasks to their AI platform during the collaboration between Hiscox and Google. Accordingly, human employees can focus on generating profit for the company in alternative ways.

As part of its functionality, the AI platform used by Hiscox and Google drafts email replies to brokers, including a summary of what Hiscox has agreed to insure. To provide further certainty and accuracy, a human underwriter reviews the summary prior to sending it. These AI practices have generated a demand for protecting companies’ and consumers’ rights.

Consequently, the EU has devised the landmark legislation EU Artificial Intelligence Act (AIA), which will be one of the world’s first comprehensive regimes for policing AI. This Act ensures regulation over AI in that AI systems used in the EU are made ‘safe, transparent, traceable, non-discriminatory and environmentally friendly’.

Additionally, provisions are provided to oversee AI outcomes by people rather than by automation in order to prevent damaging outcomes. Hiscox ostensibly fulfils the latter requirement as it demands human verification of the summary before sending it to the client.

The UK government’s approach

In the absence of a standardised piece of legislation that manages AI fully, lawyers must work with fragmented provisions from multiple legislation.

According to Forbes, UK AI companies have increased by 688% over the last ten years. Therefore, legislation must be devised to regulate such a prevalent feature that affects businesses.

Nonetheless, the UK government has noticed the rise in the use of AI and has presented some proposals to manage it. In March 2023, the Department for Science, Innovation and Technology published a White Paper that suggested a somewhat different approach to the EU AIA by establishing a non-statutory, principles-based framework that regulators in each sector would use. This contrasts with the EU’s AIA, a prescriptive legislation that applies across all sectors.

Unfortunately, since the White Paper was published, the UK government seems reluctant to continue down this path for safety issues and believes that AI legislation arguably disincentivises innovation in the short term. Furthermore, Prime Minister Rishi Sunak posits that the UK will not ‘rush to regulate’ AI, especially when it is nearly impossible to make laws for technology that users and creators have yet to grasp its abilities and performance fully.

Without these provisions, there will be distrust among companies, consumers, and the government. Notably, the Law Commission has strongly encouraged the government to ‘adopt a nuanced, balanced approach to the development and use of AI within the legal system’. However, implementing AI presents a problem where it is not governed by a statute provision, as the lack of legislation can obscure the realities of using AI technology.

Therefore, despite the rising reliance on AI technology across the insurance and legal sectors, the absence of such provisions demands that the government provide clarity by creating a comprehensive piece of legislation to address how discrepancies across industries will be mitigated.

Article written by Shruti Viththiananthan

THE MT POLAR: INSURANCE, LIABILITY AND PIRACY ON THE HIGH SEAS:

HERCULITO MARITIME LTD & ORS V GUVNOR INTERNATIONAL BV & ORS [2024]

Pirates!

The ‘MT Polar’ was a fully laden fuel cargo vessel transiting the Gulf of Aden off the East Coast of Africa from Russia to Singapore to deliver its cargo for the charterer (‘Gunvor’).

The Gulf of Aden is designated a ‘high-risk’ area for marine insurance because of the presence of pirates and the likelihood that a vessel might be captured and held for ransom.

On 30 October 2010, that is precisely what happened.

Pirates seized MT Polar, and the vessel and its largely intact cargo were only released ten months after the vessel’s owner (‘Herculito’), the respondent in the appeal, paid a ransom of $ 7.7 million.

Insurance

The issues arising out of this case relate to insurance claims, attribution of liability, and their intersection with a unique maritime insurance concept – a sort of co-op emergency fund that can be initiated if a vessel needs to be saved in an emergency. The idea is that of ‘general average’.

General average is declared when a vessel is in peril from an unexpected or unanticipated emergency so that interested parties can bear losses proportionately.

Examples of this might be the crew needing to jettison cargo to save the ship from sinking in an unexpected storm or to assist with tugging following a grounding.

Liability

A concurrent issue surrounded an extended insurance policy taken out by Gunvor for the high-risk section of the voyage. In the event of an insurable action, it is established law in contractual agreements that loss or damage covered by insurance is claimed from the insurers rather than the contracting parties. This doctrine does not necessarily apply to marine contracts in the same way.

The general average ‘adjustment’ made concluded that $5.9 million was due to Herculito by Gunvor, the appellants in the case.

Supreme Court thoughts

The issues considered by the Supreme Court were:

• If Herculito were precluded from claiming general average from Gunvor because they had taken out extra insurance to cover the high-risk portion of the voyage through the Gulf of Aden.
• If war risk clauses in the voyage charter (vessel hire contract) were adequately incorporated into the bills of lading (shipping and goods contract).
• If properly incorporated, did clauses in the bills of lading prevent Herculito from claiming losses for which they had paid a premium for the extra insurance?
• Did the clauses require manipulation, substituting the word ‘charterers’ for ‘owners of the bills of lading’ to correctly assign the responsibility for paying the insurance premium?

The original hearing, an arbitration, upheld Gunvor’s case on all four issues, holding that they did not have to contribute to the general average.

Herculito appealed to the High Court, which agreed with the arbitrators on the first and second issues but disagreed on the third and fourth issues, ruling in Herculito’s favour.

Gunvor appealed to the Court of Appeal (‘CA’).

The CA dismissed Gunvor’s appeal, reaching the same decision as the High Court on all but the first issue. The CA held that Gunvor did have to contribute to the general average.

Gunvor appealed… again.

The Supreme Court Judgment

The Supreme Court made a detailed analysis and noted the following four points concerning its conclusion;

• The common law right to general average requires relinquishing explicit agreement (Gilbert Ash [1974] AC 689 at 717).
• An agreement to incorporate an insurance code between charter parties is to be considered in light of implied contract terms doctrines and, as such, must meet a high standard to be construed.
• Insurance cases bearing joint named recipients are excluded from the analysis in this ruling.
• Charterers are not exempt from contractual breach or participation in general average simply by virtue of having directly or indirectly insured against perceived risks relating to loss and damage.

Before stating its judgment as follows, the Court opined that an insurance code could be said to exist between the parties because:

• The importance of certainty and predictability concerning commercial and particularly maritime contracts is sacrosanct.
• No express fund was agreed, nor could one easily be inferred from the charterparty terms as a whole.
• Parties wishing to ensure that no right of recovery or subrogation exists in commercial contracts must expressly state this in their contractual arrangement.
• Insurers could not adequately ascertain a suitable risk rating from the documents when analysing their risk level when insuring parties.

Therefore, the shipowner was not precluded from claiming against the charterer for its losses relating to the vessel’s seizure, and the SC found that no insurance code or fund was agreed upon between the parties.

Gunvor, the shipowner, succeeded on point one. All the other points ceased to exist in that case, but the Supreme Court briefly noted each extraneous point, concluding that Gunvor was also successful on points three and four.

Thus, the appeal was dismissed.

The Appellant was represented by Stephen Hofmeyr KC of 7KBW and Mark Jones of 36 Group. The respondents were represented by GuyBlackwood KC of Twenty Essex and Oliver Caplin of Quadrant.

A copy of the full judgment can be read here: https://www.bailii.org/uk/cases/UKSC/2024/2.html

Recording of the judgment summary can be found here: https://www.supremecourt.uk/watch/uksc-2022-0009/judgment.html

Article written by Natalie Campbell

EU ADOPTS NEW GREENWASHING RULES

On January 17^th, 2024, the European Parliament gave its final green light for the new Empowering Consumers for the Green Transition Directive.

The Council is anticipated to officially approve the provisional agreement, following which the Directive will be published in the EU Official Journal and subsequently implemented.

What is greenwashing?

Greenwashing refers to misleading practices that companies use to appear more environmentally friendly than they are.

The European Insurance and Occupational Pensions Authority’s progress report included an example of greenwashing.

The report stated, ‘ An insurer declared it would plant a tree for every new life insurance policy subscribed. At the same time, this insurer still invests in companies developing new fossil fuel projects.’

Such actions mislead customers into thinking that buying this product would positively affect the environment.

What is the new Directive?

According to the Environmental Coalition, around 50% of green claims are misleading and unverifiable. With the EU making a green transition, the directive aims to protect consumers from deceptive marketing practices and help them make more informed purchasing choices.

This would be achieved by clamping down on false greenwashing claims made by companies. Products or services labelled with terms like ‘environmentally friendly’ and ‘biodegradable’ would no longer be permitted in advertising or packaging without solid evidence to support these claims.

Other standard greenwashing techniques are included in the list of unfair business practices in the Empowering Consumers for the Green Transition Directive, including, but not limited to:

• Claims that a product has a reduced or neutral impact on the environment based on using carbon offsetting credits, which are unconnected to actual emissions reduction. A recent investigation by The Guardian revealed that 90% of the offsetting projects examined proved ineffective.
• Displaying a sustainability label that did not have proper certification from a third party or public authority.
• Generic environmental claims (with no labels) such as ‘environmentally friendly’ and ‘green’.
• A misleading claim that relates to the future environmental performance of the company with no objective and implementation plans.

The broader implications

Firstly, adopting the Directive emphasises the growing scrutiny surrounding greenwashing, highlighting the increasing demand for corporate accountability and transparency. Businesses that fail to comply with these regulations could face legal consequences and damage their reputations.

From a consumer standpoint, it returns power to the people. If companies are not working to be more sustainable, the Directive would make it more difficult to make green claims, meaning more businesses would be prevented from misleading customers into thinking that their purchasing decisions positively impact the environment.

The shift towards more informed decision-making aligns with the broader trend of customers being more inclined to purchase environmentally friendly products, which will likely benefit companies that make genuine efforts to be more sustainable.

As the EU takes a leading, strict role in tackling greenwashing, it may influence global standards for companies making green claims. Other non-EU regulators, such as the FTC and CMA, may need to reassess and possibly amend their rules.

Furthermore, this could lead to a trend where companies operating beyond the EU find it beneficial to maintain consistency in their environmental claims worldwide.

How might a law firm be involved?

Law firms could assist companies operating in the EU understand the Directive and its specific requirements. This assistance could involve reviewing current business practices, advertising materials, and sustainability claims made by the company, thereby helping to identify potential greenwashing risks.

In addition, the growing awareness of climate change is expected to bring in new clients for law firms. The Directive will inevitably lead to more disputes relating to greenwashing allegations, creating more opportunities for litigation lawyers.

Article written by Chirag Morar