02 September 2013

Insurance Europe's response to Discussion Paper IV on European insurance contract law

Insurance Europe commented on Discussion Paper IV, forming the basis of discussions during the fourth meeting of the expert group on European insurance contract law (EICL) (held on 17-18 July 2013).

Insurance Europe has yet to receive evidence that differences in contract law represent a major obstacle to cross-border insurance provision; instead, discussions have been theoretical and lacking concrete evidence of problems related to contract law differences. In discussions with Insurance Europe’s member associations and in Insurance Europe’s responses to the Commission’s discussion papers, it is clear that differences in contract law do not feature as an object of complaint by insurers to cross-border provision of insurance. Care should be taken to avoid drawing conclusions that could have a negative, practical effect on insurance provision based merely on theoretical or legal abstract problems or situations. The practical and commercial reality must be considered in the work of the expert group. Several of the listed topics of contract law are theoretic/legal abstract problems that are not reflected in the commercial realities and experiences of insurers as is apparent from Insurance Europe’s responses. Policy must not be developed based on a faulty basis or without a strong evidence base for a need to address obstacles. Otherwise there is a risk of negatively impacting insurance provision within the internal market without a clear cause or purpose to the detriment of consumers and business customers.

At this stage, Insurance Europe remains to be convinced that there is evidence to support the need for further action by the European institutions in this area.

Insurance Europe remains uncertain of the scope of the work to be conducted by the expert group. For instance, the Commission Decision establishing the expert group refers to considering “insurance contract law” and “contract law” interchangeably. Clarity is necessary to limit the scope of the work to a realistic sphere in the light of the tight timeframes. Further, considering contract law more widely is likely to be very complex and potentially pointless as it straddles into an area of national competence.

It remains unclear whether there is any evidence to suggest that a cross-border insurance market, particularly in respect of mass risks, would develop if differences in contract law were overcome. It also remains uncertain, for lack of evidence, whether there would be sufficient demand to overcome and warrant the inevitable business costs associated with the supply of cross-border insurance products. Therefore, there is as yet little evidence to suggest that consumers, businesses or insurers would benefit substantially from any attempt to address differences in national contract law provisions which may be identified by this expert group as causing obstacles to the supply of cross-border insurance.

Additionally, the mere fact that there is a difference in national contract laws does not mean that contract law differences pose a problem and deters insurers from offering their products cross-border or makes it more difficult for them. Many important factors affect the decision to offer, or refrain from offering, insurance services cross-border. Insurance Europe repeats its members’ joint position that differences in contract laws represent only a minor aspect of the totality of obstacles considered and weighed up by insurers when considering whether to offer cross-border insurance within the internal market.

Differences between member states in unfairness controls of standard terms and conditions of insurance contracts may have an impact on the cross-border provision of insurance services, in particular because consequences differ.

The differences between member states arise not only as a result of harmonised legislation (the Unfair Contract Terms Directive) being in the form of “minimum harmonisation” permitting member states some flexibility of application locally, but reflect also cultural differences in member states.

The example in Discussion Paper IV of a legal possibility for a UK insurer to rely on a breach of promissory warranty seems outdated, as UK FCA regulation states that insurers cannot rely on these breaches for consumer insurance unless there is a causal connection. These rules have been in place since at least 2005. In any event, English and Welsh courts have tended to disapprove of insurers relying on such defences. Local practices and enforcement therefore can differ from the strict letter of the law.

Although insurance contracts may need to be adapted to reflect differences in rules on the payment of premium and the consequences of non-payment before they can be offered cross-border, the impact on adaptations to standard terms is likely to be small.

The impact of these differences on the decision to offer insurance products cross-border is minimal. Other more important factors impact the decision to offer insurance cross-border, including ‘knowing your customer’, understanding the true risk proposed for cover, language, culture (including expectations of the local policyholder), the form and prevalence of frauds, the tax environment and supervisory environment.

The biggest impact, from an insurance provider’s perspective, of rules on payment of premiums and consequences of non-payment are on the internal procedures for the administration of the policy. Automated procedures for premium collection and the sending of notices of non-payment will have to be adapted to each market. This leads to added costs for the administration of insurance policies.

It should be added that many other factors have an impact on how payment of premium and the consequences on non-payment are dealt with, depending on how the payment is effected, e.g. by credit agreement, direct debit or as an online transaction, as different consumer protection provisions may come into play. As in the context of unfairness controls, this is therefore not merely an insurance contract law issue but again is affected by wider provisions.

Lastly, the practical impact of non-payment by a policyholder may, depending on the circumstances, be dealt with by the insurer on a commercial basis rather than a strict application of the law, in order to maintain the relationship with the policyholder.

Position paper

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