Insurance law

Question 1

How do you define insurance law?

Answer 1

1. Differentiation on private insurance law and social security law
2. Insurance always means private insurance law - not social security law
3. Who is the contracting party on the supplier’s side? Private enterprise.
4. How does one become insured? By concluding a contract
5. Is it compulsory? No (except motor vehicle insurance)
6. Decisive factor on the premium? The likelihood of an incident

Question 2

What does “private insurance law” mean?

Answer 2

It includes insurance contract law and supervisory law. So both terms are covered by umbrella term of private insurance law.

= private insurance law includes public law as well

In insurance contract, supervisory law is executed by supervisory authorities. This is not possible by private parties (e.g. impose fines, deny or accept market access)

Question 3

what is the difference of indemnity insurance and insurance of fixed sums?

Answer 3

→ non-life insurance vs. life insurance

indemnity insurance = the insurer obliges itself to pay amount of money in the case of occurrence of damage - the amount of money if restricted to the damage.

insurance of fixed sums = there is no damage, but you get a fixed sum. E.g., life insurance sector

Question 4

How do you assess regulatory rules in insurance from the internal market point of view?

Answer 4

Legal basis EU primary legislation:

1. Art. 49(2) TFEU in conjunction with 54 (1TFEU) = freedom of establishment
   and
   Art. 56 TFEU = freedom to provide services
2. These articles grant protection against discrimination and unjustified restriction of market entry
3. Criteria for examining unwritten justifications
4. absence of secondary legislation
5. Cassis & Gebhard = mandatory requirements in the public interest
6. suitability for the attainment of the legitimate objective
7. in particular: as restrictive as necessary for the pursuit of the legitimate objective?

Question 5

What is the main legal consequence of unjustified restriction?

Answer 5

Discrimination: The most severe discrimination is a measure directly based on nationality

Indirect discrimination: Hidden discrimination is not directly linked to nationality, but substitute characteristics of it lead to the same outcome as direct discrimination

Not every different treatment represents necessarily a legal discriminations. This applies to criteria of nationality
–> justifications e.g. ECJ case law and Art. 52 TFEU

Question 6

What is the purpose of the freedoms of internal market in insurance sector`

Answer 6

This fundamental freedom allows cross-border contracts
• The purpose of having such freedom to provide services is that insurer may act cross-border without having to establish a branch

Question 7

How do you define between freedom of establishment and freedoms to provide services?

Answer 7

The main tools to make the differentiation possible is to ask whether a given office of another MS is a permanent or temporary nature

Freedom of services:

• Active case: insurer from country A enters MS B seeks potential customers and concludes contracts
• Passive component - customer side: a policyholder seek for insurance from the other country

Question 8

Who is obliged by these fundamental freedoms?

Answer 8

Governments, national legislators, supervisory authorities

Question 9

What does the term “service” mean?

Answer 9

Art. 57 TFEU - independent service which must be non-physical nature, provided against payment

• Independence: there are a lot of services like buying a washing machine where you get a guarantee in it. In essence, it is not the same as insurance because it is not independent - it depends on the sales contract
• Non-physical immaterial nature: differentiation from goods
• Provided against payment - because it is a business
• The only problem remaining is that in practice, sometimes it can be difficult to say whether the insurer is acting within freedom of establishment or freedom of services.

This is important because if you act in freedom of services, the intensity of supervisory measures you have to fulfil in a state where you have business is much lower than compared to the situation where you establish a branch.

So, the supervisory law applies to a different extent whether or not you are having an establishment in a certain place

Question 10

What is the issue with the meaning of “service”?

Answer 10

The problem remaining is that in practice, sometimes it can be difficult to say whether the insurer is acting within freedom of establishment or freedom of services.

This is important because if you act in freedom of services, the intensity of supervisory measures you have to fulfil in a state where you have business is much lower than compared to the situation where you establish a branch.

So, the supervisory law applies to a different extent whether or not you are having an establishment in a certain place

Question 11

Commission/Italy

Answer 11

The obligation, imposed by the law of a Member State, to provide coverage for third‑party motor vehicle liability insurance restricts the freedom of establishment and the freedom to provide services enshrined in Articles 43 EC and 49 EC.

However, that obligation is suitable for securing the attainment of the objective which it pursues and does not go beyond what is necessary to attain it. Thus, the very aim of obligatory third‑party liability motor insurance is to ensure that victims of road traffic accidents are compensated.

On regard of the necessity of the measures, the member states have a broad discretion. Therefore, absenve of comprablr regulations in other MS or the absence of proof that the objective would not be attainable with any other measure does not speak against necessity

Question 12

In a given area of Member State A, floods are particularly frequent and regularly cause major damages. Homeowners therefore are often faced with the problem of not being able to obtain adequate insurance cover for the risks arising from the floods.

Against this background, Member State A decides to introduce an obligation to insure against natural disasters and to impose an obligation to contract on all insurers offering such products within the territory of Member State A.

Answer 12

kato notes

Question 13

Practical problem: demarcation between the fundamental freedoms of establishment and services

Answer 13

ECJ 205/84 Commission v Germany
+
Interpretative Communication of the COmmission 2000 C43/03 of 16 Feb 2000
- supervisory management powers of the insurer
- power of representation with regard to the insurer
- permanency/durability of the activities abroad
–> is all these elements are fulfilled = acting within the freedom of establishment

–> regarding the limited powers of the supervisory authorities of the host country in the event of an insurer acting within the freedom to provide services - Onix and Art. 155 Solvency II

Question 14

Commission/Germany C 205/84 in defining freedom of services / establishment

Answer 14

An insurance undertaking of another member state which maintains a permanent presence in the member state in which it provides services comes within the scope of the provisions of the treaty on the right of establishment even if that presence has not taken the form of a branch or agency , but consists merely of an office managed by the undertaking ‘ s own staff or by a person who is independent but authorized to act on a permanent basis for the undertaking , as would be the case with an agency . Such an insurance undertaking cannot therefore avail itself of the provisions relating to freedom to provide services with regard to its activities in the member state in question.

Question 15

Is the mere existence of the freedoms enough for internal market in insurance?

Answer 15

No, we need secondary law measures: harmonisation of insurance contract law and insurance supervisory law. Normally, this is done by a type of secondary law - directives. This is one of the most traditional instrument for the unification of law.

Question 16

Harmonisation of European Insurance Law

Answer 16

• First, all secondary law measures in our subject were divided within the areas of non-life insurance and life insurance.

three generations:
o Non-life insurance
o Life insurance
o Next generation

If we have a look at the substance, we will see that there is a clear focus on the harmonisation of supervisory law.
o So clear focus on public law harmonisation
o Broad unification reached

All the 3 directives are now included in Solvency II Directive

Question 17

Why there are differentiation with three generation directives?

Answer 17

1. First: the main purpose was to realise the freedom of establishment - specific unifications to serve fundamental freedoms
2. Second: main goal is all about the realisation of freedom of services

Since this goal was not completely achieved, third generation with same aim and in 1990s, we have a formally completed single market of insurance.

Question 18

Why did the legislator concentrate so much on supervisory law instead contract law?

Answer 18

o It doesn’t make beneficial if any member state is allowed to phrase its own market entry requirements
o Those various national supervisory law regimes could establish a significant obstacle for the realisation of single market
o The legal landscape is still a bit scattered in comparison with other areas of law, but still much more contributed now

Question 19

key features of harmonisation of insurance law

Answer 19

1. focus on the supervision law

2. important implications for insurance contract law

Question 20

1st generation of Directives

Answer 20

1970s
primary aim: abolishing restrictionson freedom of establishments

achievements:

• need for official admission to carry on insurance business: all MS required that an insurer has a national license
• legal form requirement: only specific legal forms were open for conducting insurance business (most common - stock corporation, societas europea)
• minimum financial resources: the benefits of insurance contract depends on the ability of the company to pay the insurance
• elimination of “needs test” and
• deposit requirements for insurer interested in accessing foreign markets

“door opener”

Question 21

Commission/Germany

Answer 21

Question A) Is it violation of EC law that national german supervisory law requires insurer a special admission to the market

ECJ ruled that there is no violation of EU law as long as it could be justified by mentioned reasons. Nowadays not would be the result anymore because supervisory law is harmonised

Question B) If that is ok, is it compatible if authorities require a physical establishment for a foreign insurer?
This would mean a mere negation of fundamental freedoms because it is the very characteristic of freedom of services that you do not need establishment. So, yes it is a violation

THIS CASE BROUGHT DISCUSSION ON THE 2nd GENERATION DIRECTIVE

Question 22

2nd generation of directives

Answer 22

primary aim: facilitating free movement of services of insurers

achievements:
abolition of the systematic and preventive control of general insurance contract terms in the area of large risks (Art. 13 para 27 Solvency II)
standardisation of international insuracne contract law (free choice of law for large risks; from recent case law relating to agreements on jurisdiction - ECH 803/18 AAS Balta UAB Grifs) –> conflict of law approach

Question 23

why was the abolition of the systematic and preventive control of general insurance contract terms in the area of large risks an achievement in the second generation of directives?

Answer 23

Although this revolution applied to large risks, it still was a revolution because the general terms and conditions are the actual means of product design: it is the insurance product.

For reasons of policyholder protection, there was a principle that these terms and conditions cannot be used unless approved by national authority beforehand. However, this led to most of the contracts being the same

• -> So competition was based only on price
• -> Detrimental to single market since supervisory authorities have discretion whether certain products are allowed

Question 24

how do you define large risks

Answer 24

Article 13 para 7 Solvency II:
Qualitative features: Those contract which fall in certain categories of classes (transport risk area, credit insurance) are per se large risks

Quantitative features: Second possibility of large risk is that a specific contract contains some quantitative features (balance sheet total 6.2 million …. Etc.)

If any of these features are fulfilled –> large risk contract –> huge freedom of contract, no preventive control —> you can choose the law to such large risk insurance contract

Question 25

3rd generation of Directives

Answer 25

1990s
primary aim: further realisation of the freedom to provide services
–> formal completion of the European Internal Insurance Market

Achievements:

• single license
• principle of home country control (financial cs legal supervision)
• general abolition of the systematic and preventive control of insurance contract terms also for mass risks (–> special importance of the Directive on unfair terms in consumer contracts)
• Again, main focus on public law: principle of single license and home country control are supervisory law

Question 26

Allocation of supervisory competences

Answer 26

authorisation to carry on insurance business = single license principle refers to only initial stage to the admission to the market

continuing supervision
- relating to financial matters = home country control
- relating to legal matters
= home country control BUT subsidiary residual power of the country of the activity

settlement supervision
= home country control

Question 27

competences of ongoing supervision

Answer 27

ongoing supervision: differentiation of financial / legal supervision
o financial: insurers compliance with e.g. solvency regulation, minimum equity, enough reserves, accounting correct etc. The authority of the home state is exclusively competent for this kind of supervision

o when it comes to legal supervision, in principle competence of the home country authority. BUT remaining supervisory competence of the authority of the target market
= subsidiary supervision
Onix case

Question 28

Onix

Answer 28

SUBSIDIARY supervision - very restricted competence
Onix: in principle, even in the supervision relating to legal matters, only the home authority is competent. But
- If the home authority does nothing,
- Or they do something but the insurance company still continues illegal behaviour,
= Competence on the subsidiary power of the target market authority

Question 29

Harmonisation of European insurance contract law - why is the law a mere Europeanised instead of a truly European insurance contract law?

Answer 29

Proposals on the harmonisation of contract law in non-life insurance failed.

However, numerous advances and improvements in the field of motor liability insurance

There are also branch-specific legislative measures, e.g. in the area of legal expenses insurance, credit and surety insutrance

Question 30

What are the advantages and disadvantages of reregulation in insurance contract law?

Answer 30

Abolitiong of the systematic and preventive control of general terms and conditions means:

1. elimination of product design by supervisory authorities, and
2. ideally: higher product diversity and better products (as a consequence of more competition)

However, deregulation also entails risks such as lack of transparency and the overreaching of overburdened policyholders

Countermeasures of contract law:

• information duties
• cooling-off rights

Question 31

Direct claim

Answer 31

Normally, we have a problem of tortfeasor who is insured and then victim. And then the insurer of the tortfeasor.

So the victim has problem:

• there is no contractual relationship to the insurer
• The insurer is not a tortfeasor towards the victim: no contractual / extracontractual relationship

o So without the directive, there would be no possibility for the victim suing directly the insurer of tortfeasor

• To avoid this situation where you have to sue the tortfeasor first, EU introduced a direct claim

• So even if there is no relation to insurer, you are entitled to sue

Question 32

Two main dangers when liberalising the insurance market:

Answer 32

1. the policyholder does not understand what he is buying
2. if he concludes an insurance contract, it can be that you sign a contract but after the intermediary left the building, you realise that it is expensive and you regret the decision.
   - -> Need for specific cancellation right that does not require justification - cooling off period
   - -> This is common in the general consumer, we have the same guiding rules

Question 33

Information duties of the insurer

Cooling off rights of the policy holder

Answer 33

Information duties of the insurer:
Non-life: Art. 183, 184 Solvency II
Life: Art. 185 Solvency II

Cooling off rights of the policy holder:
NO withdrawal right in non-life
Art. 186 Solvency II on life insurance: cancellation period

Question 34

Information duty: typical division in non-life / life insurance

Answer 34

1
Non-life: applies where the policyholder is a natural person
Life: no limitation to natural person

2.
non-life: no product specific information from the insurer
life insurance - series of product related information owed by the insurer towards the policy holder

3. In non-life insurance, there is no cooling off period.
   Art 186 In life insurance, cancellation period that is mandatory

Question 35

Heininger

Answer 35

Example on conformity of national implementations with secondary legislation
- Directive on doorstep selling (nowadays, consumer rights directive)
- Provision: less than seven days
- German legislator implemented this in national law
o Creation of legal certainty
o Legislators do not usually like eternal cancellation period

• ECJ: violation of directive
  o Limit is the fait utile: it must be appropriate conusmer protection measure
• Is this appropriate? No
  • How can a consumer know what to cancel when they are not even aware
  • What you do not know you will never exercise
  • So the information duty is very important
  • Legal certainty? Seller always have the legal certainty - just with the duties.

Question 36

Endress

Answer 36

on Conformity of national implementations with secondary legislation in the case of insurance law:

• Introduction of general expiration - 1 year after first premium
• ECJ:
  o Does this violate the directive?
• This general limitation also violates the directive

BUT Eternal withdrawal rights are in conflict with legal certainty

• Huge scandal in the industry: insurance contracts that grant the eternal cancellation right did not usually make consumer aware of the right
  o Often, especially in life insurance, people want to get rid of it after like 10 eyars
• Finding an error in the information duty, they rely on that and cancel

Question 37

Rust-Hackner

Answer 37

• Rust Hackner: it was not a question of informed rights, but wrong information (formal requirement on how the cancellation should be exercised).

ECJ says that inaccurate information leads to eternal right of cancellation, provided that the mistake did not allow the policyholder to be in the same status about the knowledge / exercise of the cancellation right

Question 38

Kunsthaus Muerz

Answer 38

Art 186 reference to policyholder
o Is this cancellation right restricted to consumers? NO
- It is not necessary that the policyholder acts for the private purposes, he still has the cancellation rights
• On condition that it is life insurance (where there is cancellation period) - because nonlife does not have cancellation period

Question 39

Harmonisation of European Insurance Contract law in the area of general consumer protection

Answer 39

Secondary legislation:
1. Directive on Consumer rights NOT applicable to insurance contracts (Art. 3 para 3 in connection with Art. 2 no 12)

2. Directive on unfair temrs in consumer contracts 2011:
    Applicability to not individually negotiated contract terms in consumer insurance contracts

Question 40

the issue of “control-free area” in the Directive on unfair terms

Answer 40

Controversial: scope of the “control-free area” (core of the contract)
→ Recital 19 in connection with Art. 4 para. 2 of the Directive
- Control free area, where we do not have this judicial review of terms and conditions
- Disputes arise because of Art 4 para 2, and also because recital 19 that tries to exemplify the special provision of art. 4
o But in fact creates confusion because it is very opposite

“… assessment of unfair character shall not be made of terms which describe the main subject matter of the contract nor the quality/price ratio of the goods or services supplied; […] whereas it follows, inter alia, that in insurance contracts, the terms which clearly define or circumscribe the insured risk and the insurer’s liability shall not be subject to such assessment since these restrictions are taken into account in calculating the premium paid by the consumer;”

1. there should be no control of aspects relating to subject matter of the contract
2. no judicial review on the adequacy of the performance ratio
   These are exempted because we do not want interference on the freedom of contract.
   In contrast to a car sale, however, when we talk about insurance, there are more complicated things and subject matters like premium and the parties (beneficiary, policyholder, insurer, insured).

Since the recital makes it sound like all aspects have premium relevancy and thus not included in control area, this recital has to be assessed in a very narrow sense.

Question 41

Unfair terms directive: Which provision would you start the examination process on whether the clause is problematic in the European perspective?

Answer 41

1. Transparency requirement Art. 5
2. Control-free area under Art. 4 para 2
   HOX If there is untransparency as per Art. 5, control-free area is not applied
3. Abuse control: the fairness test under Art. 3 para 1
4. In case of a violation: Art. 6 para 1

Question 42

Transparency requirement

Answer 42

Art. 5 Unfair terms Directive
= the terms must be clear and comprehensible

Even the clauses outside of the scope of control-free area are required to be transparent.

In case of a violation: abuse control Art. 3 para 1 fairness test

Sanctions:
contra preferentem: most favourable clause to consumer.
There are no other sanctions in article 5 - much discretion to MS for other sanctions e.g.
- Exclusion of the clause from the contract
- Damages to the party involved in the contract
- Right of avoidance

Question 43

Abuse control

Answer 43

Art. 3 para 1 Unfair terms Directive

1. Significant imbalance with contractual rights
2. Results in disadvantage for the consumer
3. Specific disadvantage is a breach of good faith

• Article 3 sanctions
  o In conjunction with Art 6 - non-binding nature of the effected term
  o The rest of the contract remains in place

Question 44

Directive concerning the distance marketing of consumer financial services (2002/65/EC)

Answer 44

1. Art. 3 – information duties
   • Two different types of informations: Status-related information duties and Product-related information duties.
   • According to Art. 4, all information requirements apply in addition to all other information requirements from other directives
   - E.g. insurance from internet - distance marketing directive + solvency 2 directive
   - Information overload - it is doubtful if the concept of informed choice works in practice
2. Art. 6 – general cancellation right (cooling-off)

Question 45

Harmonisation of European Insurance Distribution law

Answer 45

IDD 2016
Meta aims:
1. insurance intermediation
2. certain qualification standards (including compulsory liability of the intermediary)
3. Approximation of insurance distribution laws within the EU - promoting internal insurance market
4. consumer protection (or broader way, customer protection)
5. principles-based supervision

Question 46

principles-based supervision IDD

Answer 46

a new regulatory technique:
the intermediaries are also subject to supervision by principles-based supervision
= giving standardised basic supervisory principles and you leave discretion to the sales company on how they implement these requirements

However, but there is not that much of freedom in the end, because both legal acts established lots of new obligations and considerably expanded on what already existed under the former regime. e.g. the same applies to solvency 2 which is a prototype of principles-based supervision

Question 47

concept of the “insurance distributor” - scope of application

Answer 47

NEW in IDD 2016 Art. 2 para 1 no 8
= insurance distribution replaced the term intermediation. This means that insurers the company are now also within the obligations of the entire directive.
This is fair because it is not uncommon that the insurer today acts also as an intermediary. So this is a very essential broadening of the obligation

Exemptions:
1. continuing exemptions for employees of the insurer (art. 2 para 1)

2. and exemption for ancillary insurance intermediaries carrying out insurance distribution activities in view of cover complementary to goods and services (Art. 1 para. 3 IDD). If you do fulfil the requirements of the said paragraph = you are not intermediary and the directive not applies to you
3. existence of an exception for mere ad hoc advisers (Art. 2 para. 2 a and d)

Question 48

means of achieving the aims of IDD

Answer 48

1. mandatory register entry – Art. 3 (except insurers and reinsurers)
2. single license in the area of insurance distribution
3. Professional and organisational requirements – Art. 10
4. Safeguarding the financial capacity of the intermediary: compulsory professional liability insurance – Art. 10 para. 4 (→ principle of own liability of the intermediary)
5. Transparency about the status of the intermediary through information duties – Art. 18 para. 1 (intermediary) und para. 2 (insurer),Art. 21 (ancillary insurance intermediary)
6. Advisory standards – Art. 20
   - Obligatory further training for all (not only brokers!)
7. Pandora’s box: commissions (no general prohibition) (no general prohibition; cf. Art.19)

Question 49

commissions in IDD

Answer 49

There are no general prohibitions in commissions under the IDD (cf. Art.19)

Idea of prohibiting the commissions is the danger that commission create bad intentions in recommending products

However, due to huge resistance, now there is only partial transparency but no full disclosure

Question 50

What is the central problem of insurance contract law in EU?

Answer 50

27 different mandatory insurance contract laws.

Negative effects

1. The internal insurance market works only partially
2. At present, the main beneficiaries are large insurance companies that operate abroad through branch offices
3. The freedom to provide services is hardly used in the area of mass risks. This leads to the danger that insurer dictates the legal order applying to insurance contract. This results to currently harmonized conflicts of law - law applies which is in the force of the domicile of the policyholder

This puts insurers in a difficult position. If you want to contract with a German policyholder, you must apply German law
o Costs
o Large insurers can handle costs, but it would help with competition with smaller companies if we would reduce these costs

Question 51

Desirable characteristics from the insurance point of view in European insurance contract law

Answer 51

A. voluntary application by consensus of the party (“2nd regime”)
B. no law mix
C. technical conception: 2nd regime vs. 29th regime
D. Content: Recourse to scientific preparatory work (PEICL), i.e.
E. restriction to (semi-)mandatory law (Art. 1:103 PEICL)
F. full harmonisation of high consumer protection standards
G. Need for reference to a general part of contract law, such as the PECL, the CFR or similar
H. Suitable legal form?

Question 52

What would be the advantages of having European Insurance Contract Law?

Answer 52

1. Foreign risks would be comparable with domestic risks (→ possibility of EU-wide risk pooling) → transaction costs
2. Ensuring the effective functioning of the internal market, including in the area of mass risks
3. Beneficiaries would be in particular (but by no means exclusively!)
   - small and medium-sized policyholders
   - small and medium-sized insurance undertakings
   - National legal traditions would remain unaffected