11 July 2013

Insurance Europe's Response to Discussion Paper III on European insurance contract law

Insurance Europe commented on Discussion Paper III, forming the basis of discussions during the third meeting of the expert group on European insurance contract law (EICL) (held on 25-26 June 2013).

The diverse definitions of ‘insurance contract’ do not appear to create any impediments to cross-border provision of insurance services in non-life insurance. Insurers appear able to overcome such differences where they choose to provide their services cross–border. The decision is ultimately a commercial decision based on the viability of market-entry and the market in question.

Similarly, the lack of uniformity in definitions of ‘insurance contract’ does not appear to be an obstacle to the development of new insurance products, even where these encompass add-on services. Insurers will be mainly concerned about the breadth of factors that have a greater impact on cross-border provision of services, including factors such as ‘knowing your customer’, understanding the true risk proposed for cover, language, culture (including expectations of the local policyholder), the form and prevalence of frauds (particularly in respect of motor insurance), the tax environment (particularly in respect of private pension products) and the supervisory environment.

Consumers are unlikely to be concerned about the differences in definition of ‘insurance contract’ between member states. The more likely concerns of customers are understanding the product, the scope of cover, the price payable for cover and the excess applicable to their contracts. What may prevent customers accessing cross-border insurance services include language barriers, different cultures and different sales rules.

More sophisticated customers, such as large commercial organisations may wish to save money by exploring more complex methods of obtaining cover. They will do so with professional advice, such as through the assistance of a broker, and are unlikely to be prevented from choosing solutions by different perceptions of insurance contracts.

When considering national differences impacting the availability of private insurance contracts on a cross-border basis, the scope for product development and design by insurers should be safeguarded in the interest of maintaining a competitive and innovative insurance industry, in the interest of both customers (be they consumers or businesses) and insurers. Product design must remain within the remit of the commercial freedom of insurers.

Customer’s disclosure duties & duties after contract-conclusion

Pre-contract

It appears that there may have been a convergence across the internal market on customers’ pre-contractual duties of disclosure. It may be that there therefore is an opportunity for the development of a pan-European approach to duties of disclosure of the costumer and the related remedies.

Understanding differences in disclosure duties of the customer in different markets tend to result in added costs which ultimately are borne by customers. This is particularly the case in relation to insurers’ understanding of the sanctions that follow a breach of the duties of disclosure by the customer.

Variations in the duties of customers depend also on the class of insurance in question, due to limitations on what may or may not be asked by an insurer; life and health insurance being examples of insurance where there are specific requirements and limitations applicable by the host-country (i.e. the country where the customer resides).

Competition within a specific market for insurance will ultimately guide the extent to which contracts are adapted.

During the contract

In respect of mass risks, there may be some uncertainty arising from a lack of clarity of the obligations of disclosure of the costumer during the contract and the consequences flowing from breaches thereof.

It does appear however to be an issue of more relevance to mass risks than large risks. In the case of large risks, solutions tend to be developed by insurers and contained within the contract, and large risk insureds will tend to rely on their broker’s support and expertise in resolving any fall-out from possible breaches of such obligations.

Aggravation of the risk

Contract provisions relating to the customer’s duties, and subsequent consequences, brings into play the freedom to contract and should not be addressed in any potential pan-European contract. The impact of factors that aggravate the risk insured and their impact on other contract-terms (including consequences) must remain a commercial decision of the insurer, just as its impact on pricing is a commercial decision. It is worth noting that a reduction of risk may also occur, to the benefit of the customer.

In general, differences relating to aggravation of risk do not create an obstacle to cross-border insurance but will have an impact on pricing.

Although very complex issues arise in cases where there is multiple cover for the same risk, most costumers (be they consumers or businesses) would seek to avoid being in that situation as, at best, it would mean double-payment of premium to cover one risk and, at worst, could cause uncertainty as to whether cover is excluded as a result of double-insurance.

Although instances of multiple insurance cause practical difficulties of apportionment between insurers and the possible activation of exclusion clauses, it is not an aspect of contract law that causes an obstacle to the cross-border provision of insurance.

Position paper

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