Transparency in Insurance Contract Law 9783030311988, 3030311988

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AIDA Europe Research Series on Insurance Law and Regulation 2

Pierpaolo Marano Kyriaki Noussia Editors

Transparency in Insurance Contract Law

AIDA Europe Research Series on Insurance Law and Regulation Volume 2

Series Editor Pierpaolo Marano, Catholic University of the Sacred Heart, Milano, Italy Editorial Board Members Juan Bataller Grau, Polytechnic University of Valencia, Valencia, Spain Johnny Chang, National Chengchi University, Taipei, Taiwan Christos S Chrissanthis, University of Athens, Athens, Greece Herman Cousy, KU Leuven, Leuven, Belgium Simon Grima , University of Malta, Msida, Malta Ozlem Gurses, King’s College London, London, UK Helmut Heiss, University of Zurich, Zurich, Switzerland Peter Kochenburger, University of Connecticut, Hartford, CT, USA Tadao Koezuka, Kagawa University, Takamatsu, Japan Jérôme Kullmann, Paris Dauphine University, Paris, France Birgit Kursche, University of Pretoria, Pretoria, South Africa W. Jean J. Kwon, St. John’s University, New York, NY, USA Sara Landini, University of Florence, Florence, Italy Margarida Lima Rego, NOVA University Lisbon, Lisbon, Portugal JJ Lin, National Chengchi University, Taipei, Taiwan Katarzyna Malinowska, Kozminski University, Warsaw, Poland Leo P. Martinez, University of California - Hastings, San Francisco, CA, USA Patricia McCoy, Boston College, Newton, MA, USA Gary Meggit, University of Hong Kong, Hong Kong, Hong Kong Robert Merkin, University of Exeter, Exeter, UK Daleen Millard, University of Johannesburg, Johannesburg, South Africa Satoshi Nakaide, Waseda University, Tokyo, Japan Jaana Norio, University of Helsinki, Helsinki, Finland Kyriaki Noussia, University of Exeter, Exeter, UK Laura Núñez, IE Business School, Madrid, Spain Stefan Perner, University of Linz, Linz, Austria Ioannis Rokas, Athens University of Economics and Business, Athens, Greece Michele Siri, University of Genoa, Genoa, Italy Caroline Van Schoubroeck, KU Leuven, Leuven, The Netherlands Wouter Verheyen, University of Antwerp, Antwerp, Belgium Manfred Wandt, Goethe University Frankfurt, Frankfurt am Main, Germany Hsin-Chun Wang, National Taiwan University, Taipei, Taiwan

Ecehan Yeşilova Aras, Izmir Democracy University, Izmir, Turkey Ling Zhu, Hong Kong Polytechnic University, Hong Kong, Hong Kong

The AIDA Europe Research Series on Insurance Law and Regulation is the first book series of its kind and area of specialization. It comprises volumes on topics researched and written with an international, comparative or European perspective. The regulatory response to the financial crisis in 2008 has pushed towards the adoption of transnational principles and rules also in the field of insurance by encouraging the convergence of national regulations to common regulatory framework. The need for a common legal language emerges to fully understand the process of transnational convergence in place and its impact on national legislation. On the other hand, persisting national peculiarities must be examined in the light of the transnational convergence of rules and concepts. Moreover, new risks, business practices and customers’ issues are emerging worldwide, so requiring increasingly global responses. The scope of the series is to bring together academics, practitioners and policy makers in order to exchange views and approaches to the topics concerned, which are based on the new transnational dimension of insurance law, business and regulation.

More information about this series at http://www.springer.com/series/16331

Pierpaolo Marano  Kyriaki Noussia Editors

Transparency in Insurance Contract Law

Editors Pierpaolo Marano Department of Legal Studies Catholic University of the Sacred Heart Milano, Italy

Kyriaki Noussia School of Law University of Exeter Exeter, United Kingdom

ISSN 2662-1770 ISSN 2662-1789 (electronic) AIDA Europe Research Series on Insurance Law and Regulation ISBN 978-3-030-31197-1 ISBN 978-3-030-31198-8 (eBook) https://doi.org/10.1007/978-3-030-31198-8 © Springer Nature Switzerland AG 2019 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG. The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Foreword

The concept of “transparency” in insurance is potentially exceedingly wide. Virtually all jurisdictions recognise a duty on the assured to make a fair presentation of the risk when submitting a proposal for cover to the insurers, although there is little consensus on the scope of that duty. Disputed matters as to the duty include: whether it is satisfied by honest answers to express questions or whether there is a spontaneous duty of disclosure; whether facts relating to the assured’s character (moral hazard), as opposed to the nature of the risk itself, are to be presented to the insurers; the role of brokers in the placement process; and the remedy for breach of duty. Transparency is, however, a much wider concept. Potential policyholders are in principle entitled to be made aware of the key terms of coverage and to be warned of hidden traps (such as conditions precedent, average clauses and excess provisions), but there is a range of different approaches. Some jurisdictions have adopted a “soft law” approach, using codes of practice for pre-contract disclosure: since 2018, the EU has introduced minimum standards for marketing and selling policies; Australia has a detailed regime demanding the provision of Key Fact Sheets; yet other jurisdictions rest upon the rather nebulous duty of utmost good faith. The outcome is that unclear or disguised restrictions may not be enforceable. Leaving aside placement, transparency is also demanded after the policy has incepted. The assured is required to be transparent in the claims process. There is less consistency in national laws as to the operation of transparency by insurers in handling claims. For example, is an insurer required to be open about the various reports commissioned by it into the circumstances of the claim and the amount of the loss? The present work consists of a series of reports on transparency from a range of civil and common law jurisdictions, along with overview chapters from the editors. The chapter authors are leaders in their respective fields, and all have strong links with the International Association of Insurance Law (AIDA). Each chapter reviews the transparency principles applicable in the jurisdiction covered by it. The difference in approach between nations is a fascinating study of how universally shared problems can be addressed in entirely different ways and with varying solutions. v

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Foreword

The two editors, Pierpaolo Marano and Kyriaki Noussia, are both leading lights in AIDA and also highly respected authors and speakers nationally and internationally. They have done a superb job in collating these chapters. Academics, legal and insurance practitioners, researchers, regulators and law reform bodies will find a wealth of valuable—and otherwise inaccessible—information in this volume. Demystifying the differences between the civil and common law approaches is a key theme. Anyone with an interest in insurance law and regulation will benefit hugely from the efforts of the editors and the contributors. All involved are to be congratulated. University of Exeter, Exeter, UK

Rob Merkin QC

Preface

The role of transparency in insurance is multi-faceted, with its importance being undoubtedly critical. In an age where transparency has arisen to a widely acknowledged “maxim” and whereby every aspect of our everyday life—insofar that it entails both private and business interactions—falls under strict regulation to abide with the transparency requirements that legislation imposes, it has become, more than ever before, imperative to look into the subject of transparency in insurance law. The current work is the first of two parts of an edited and comparative work, which is looking into the topic of transparency in insurance law and regulation in various common law and civil/continental law jurisdictions. The book, which forms Volume I, effectively discusses transparency in insurance contract law in the major common law and civil/continental law jurisdictions. Volume II focuses on the equally important aspect of transparency in insurance regulation in the various common law and civil/continental law jurisdictions. The jurisdictions selected form some of the major players worldwide in insurance law and in the insurance market; however it has been felt that small jurisdictions must be also inserted, in an effort to provide a varied picture of the different declinations assumed by transparency. In effect, identifying and critically discussing transparency in insurance contract law will help better assess the contemporary challenges imposed in the various legal systems. In the common law world, transparency is of great importance to the eyes of both the common law legislator and the common law judge. Transparency in common law is depicted within the requirement for the standard terms to be drafted in “plain, intelligible language” and within the notion of utmost good faith. In the more recent years, jurisprudence in some common law jurisdictions (for example, the case of Tay Eng Chuan v Ace Insurance Ltd [2008] SGCA 26, [2008] 4 SLR(R) 95 in Singapore) has started depicting a tendency to accept the application of the duty of utmost good faith in a broader manner. Transparency is important in the field of insurance law because insurance is a complex legal product, accompanied by a complex legal framework, which is often supplemented by a seller’s market focused on a relatively few insurance companies. This is, even more than elsewhere, apparent in the civil/ vii

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Preface

continental law jurisdictions, whereby transparency predominantly relates to fairness and is often embedded as a requirement codified within the civil code provisions on good faith. Hence, it follows that any sort of autonomy or relevance of the notion of transparency with respect to the long established concepts of fairness and good faith is variably understood in the civil/continental law jurisdictions. Notwithstanding the differences that exist in the various legal systems, the overarching aim behind the regulation of transparency is to promote fairness and protect both the assured and the insurer. The discussion of the notion of transparency in the various regimes has allowed us to recognise that further steps, which would allow the concept to broaden itself, would be highly beneficial. This is even so due to the fact that transparency is not systematically and uniformly enshrined in all legislations; hence the level of shield that it can offer to the assured varies. In effect, transparency helps into making accessible, to insurance customers, all the necessary data and better protect them. It follows from the above that an improved regime of transparency is likely to lead to less litigation. It also follows that transparency should not be applied universally and without limitations or “at all costs”. Voices raised against it have argued that the diversity that characterises transparency is more problematic than beneficial. Against this background, with regard to transparency in insurance law, it has been argued that the pre-existing standardisation of the insurance contracts made ground for a common knowledge of parties to an insurance contract and that the current need for total immersion to transparency requirements merely creates havoc, rather than assist the assured to make an informed decision for an insurance product “fit for purpose”. It is accepted that the fragmentation that exists at the level of legislation worldwide, which has been enacted to safeguard transparency, should not hinder further efforts to ameliorate its level of existence in insurance contract law. The above arguments apart, it is also admitted that—at the same time—a balance needs to be sought, so that the necessary limits are set and transparency exists only in cases where its application is deemed as absolutely necessary to impose a yardstick and a threshold for the better protection—and not for the detriment—of the parties to an insurance contract. Milano, Italy Exeter, UK

Pierpaolo Marano Kyriaki Noussia

Contents

Part I

Civil Law: European Union

Transparency in the Insurance Contract Law of Austria . . . . . . . . . . . . Sebastian Wöss

3

Transparency in the Insurance Contract Law of Croatia . . . . . . . . . . . . Loris Belanić and Dionis Jurić

33

Transparency in the Insurance Contract Law of Germany . . . . . . . . . . . Manfred Wandt

63

Transparency in the Insurance Contract Law of Greece . . . . . . . . . . . . Christos S. Chrissanthis

95

Transparency in the Insurance Contract Law of Italy . . . . . . . . . . . . . . 131 Sara Landini Transparency in the Insurance Contract Law in the Netherlands . . . . . . 163 Joasia Luzak Transparency in the Insurance Contract Law of Poland . . . . . . . . . . . . 183 Katarzyna Malinowska and Anna Tarasiuk Transparency in the Insurance Contract Law of Portugal . . . . . . . . . . . 211 Margarida Lima Rego Transparency in the Insurance Contract Law of Spain . . . . . . . . . . . . . 241 Rafael Lara Transparency in the Insurance Contract Law of Sweden . . . . . . . . . . . . 257 Jessika van der Sluijs

ix

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Contents

Transparency in the Insurance Contract Law: A Comparative Analysis Between the Principles of European Insurance Contract Law (PEICL) and Selected European Legal Regimes . . . . . . . . . . . . . . . . . . . 279 Marta Ostrowska Part II

Civil Law: Other Jurisdictions

Transparency in the Insurance Contract Law of Chile . . . . . . . . . . . . . . 295 Roberto Ríos Ossa Transparency in the Insurance Contract Law of China . . . . . . . . . . . . . 315 Zhen Jing Transparency in the Insurance Contract Law of Colombia . . . . . . . . . . 351 Rebeca Herrera Díaz Transparency in the Insurance Contract Law of Georgia . . . . . . . . . . . . 369 Ketevan Iremashvili Transparency in the Insurance Contract Law of Japan . . . . . . . . . . . . . 389 Tadao Koezuka Transparency in the Insurance Contract Law of Peru . . . . . . . . . . . . . . 409 Alonso Núñez del Prado Simons Transparency in the Insurance Contract Law of Russia . . . . . . . . . . . . . 431 Zubarev Leonid Vladimirovich Transparency in the Insurance Contract Law of Turkey . . . . . . . . . . . . 459 Ecehan Yesilova Aras Transparency in the Insurance Contract Law of the Western Balkans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 485 Nikola Filipović Comparative Analysis of Transparency in the Insurance Contract Law of Colombia, Chile, Peru, and Spain . . . . . . . . . . . . . . . . . . . . . . . . 517 Rafael Lara and Iñaki Zurutuza Comparative Analysis of Transparency in Insurance Law in the Civil/Continental Law Jurisdictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 535 Kyriaki Noussia Part III

Common Law

Transparency in the Insurance Contract Law of Australia . . . . . . . . . . . 549 Robin Bowley Transparency in the Insurance Contract Law of England . . . . . . . . . . . 573 Kyriaki Noussia

Contents

xi

Transparency in the Insurance Contract Law of Israel . . . . . . . . . . . . . 591 Peggy Sharon Transparency of the Insurance Contract Law of Singapore . . . . . . . . . . 633 Christopher Chen Transparency in the Insurance Contract Law of South Africa . . . . . . . . 655 Birgit Kuschke and Daleen Millard Transparency in the Insurance Contract Law in the United States . . . . . 683 Aviva Abramovsky and Peter Kochenburger Comparative Analysis of Transparency in the Insurance Contract Law of the Common Law Jurisdictions . . . . . . . . . . . . . . . . . . . . . . . . . 705 Kyriaki Noussia

Contributors

Aviva Abramovsky University at Buffalo School of Law, The State University of New York, Buffalo, NY, USA Ecehan Yesilova Aras Izmir Democracy University, Izmir, Turkey Loris Belanić University of Rijeka, Rijeka, Croatia Robin Bowley University of Technology Sydney, NSW, Australia Christopher Chen Singapore Management University, Singapore, Singapore Christos S. Chrissanthis University of Athens, Athens, Greece Nikola Filipović University of Graz, Graz, Austria Rebeca Herrera Díaz Rebeca Herrera Abogados SAS, Bogotá, Colombia Ketevan Iremashvili Tbilisi Open University, Tbilisi, Georgia Zhen Jing Bangor University, Bangor, UK Dionis Jurić University of Rijeka, Rijeka, Croatia Peter Kochenburger University of Connecticut School of Law, Storrs, CT, USA Tadao Koezuka National University Corporation – Kagawa University, Kagawa, Japan Birgit Kuschke University of Pretoria, Pretoria, South Africa Sara Landini University of Florence, Florence, Italy Rafael Lara Public University of Navarra, Pamplona, Spain Joasia Luzak University of Exeter, Exeter, UK Katarzyna Malinowska Kozminski University, Warszawa, Poland Daleen Millard University of Johannesburg, Johannesburg, South Africa xiii

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Contributors

Kyriaki Noussia University of Exeter, Exeter, UK Marta Ostrowska Warsaw University, Warsaw, Poland Alonso Núñez del Prado Simons Catholic University of Peru, Lima, Peru Roberto Ríos Ossa Pontificia Universidad Católica de Chile, Santiago, Chile Margarida Lima Rego NOVA University School of Law, Lisbon, Portugal Peggy Sharon Tel Aviv, Israel Jessika van der Sluijs Stockholm University, Stockholm, Sweden Anna Tarasiuk Kozminski University, Warsaw, Poland Lyszkiewicz Tarasiuk Kancelaria Radcow Prawnych Sp.p., Warsaw, Poland Zubarev Leonid Vladimirovich Moscow, Russia Sebastian Wöss University of Vienna, Wien, Austria Manfred Wandt Goethe University Frankfurt, Frankfurt, Germany Iñaki Zurutuza Public University of Navarra, Navarra, Spain

Abbreviations

1990 Act 2003 Act ABGB

Act nº 1480 Act nº 20,667 Act nº 29,946 Act on Unfair Practices ACT AGB AGBG AGBG

AGCM AID AIRA ALI ALRC ANZ APECOSE APESEG APLA ASF ASIC Act

Insurance Activity Act Act on Insurance Activity dated 22 May 2003 Austrian General Civil Code (JGS 1811/946) (österreichisches Allgemeines Bürgerliches Gesetzbuch – ABGB) Act nº 1480 of 2011 Act concerning the insurance contract nº 20,667 of 2013 Act nº 29,946 Insurance Contract Act Act dated 23 August 2007 on counteracting unfair market practices Australian Capital Territory General terms and conditions (Allgmeine Geschäftsbedingungen – AGB) Croatia and Slovenia Austrian Civil Code of 1811 Unfair Terms and Conditions Act (Gesetz zur Regelung des Rechts der Allgemeinen Geschäftsbedingungen – AGBG) Italian Competition Authority Polish Act on Insurance Distribution Act on Insurance and Reinsurance Activity American Law Institute Australian Law Reform Commission Australia and New Zealand Peruvian Association of Insurance Brokers Peruvian Association of Insurance Companies Application of English Law Act Portuguese Insurance and Pension Funds Supervisory Authority Australian Securities and Investments Commission Act 2001 xv

xvi

AtomHG AVB B2B B2C BaFin

BGB BGB BGB-InfoV BGH C.Com. CBIRC CC CCC CE CEIOPS CG CIDRA CIDRA CIRC CMVM Compact Cons. Cod. Consob CPA CPC DFL 251 dVAG 1901 dVVG 1908

EBA EGBGB

Abbreviations

Nuclear Liability Act (BGBl 1998/170) (Atomhaftungsgesetz 1999 – AtomHG). General policy conditions (Allgemeine Versicherungsbedingungen – AVB) Business to business Business to consumer German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) Bürgerliches Gesetzbuch (German Civil Code) German Civil Code (Bürgerliches Gesetzbuch – BGB) BGB-Information Duty Regulation (BGB-Informationspflichtenverordnung – BGB-InfoV) German Supreme Court (Bundesgerichtshof – BGH) Colombian Commercial Code China Bank and Insurance Regulatory Commission Civil Code Colombian Civil Code Spanish Constitution Committee of European Insurance and Occupational Pensions Supervisors General Conditions of Insurance Consumer Insurance (Disclosure and Representations) Act (CIDRA) 2012 Consumer Insurance (Disclosure and Representations) Act 2012 China Insurance Regulatory Commission Portuguese Securities Market Commission Interstate Insurance Product Regulation Compact Consumer Code Italian Commission responsible for regulating financial markets Consumer Protection Act Consumer Protection Code Decree in Force of Law number 251 about Insurance Companies German Insurance Supervisory Act 1901 (deutsches Versicherungsaufsichtsgesetz 1901 – dVAG 1901) German Insurance Contract Act 1908 (dRGBl S 263) (deutsches Versicherungsvertragsgesetz 1908 – dVVG 1908). European Banking Authority Introductory Act of the German Civil Code (Einführungsgesetz zum Bürgerlichen Gesetzbuch – EGBGB)

Abbreviations

EIOPA ESMA FAA FAIS Act FCA FernFinG

FFFS

FIDReC Financial Services ADR FSA FSA FSB FSBA FSC FSCA FSOC FSRA GCI GCI GIA GIA GTC control GTC HANFA HCA HPC IA IAC IBA IBA IBIPs ICA ICA ICA ICA ICAA

xvii

European Insurance and Occupational Pensions Authority European Securities and Markets Authority Financial Advisers Act Financial Advisory and Intermediary Services Act Financial Conduct Authority Austrian Distance Financial Services Act (BGBl I 2004/ 62) (österreichisches Fernfinanzdienstleistungsgesetz – FernFinG) Rules and general recommendations on information concerning insurance and occupational retirement pension Financial Industry Disputes Resolution Centre Financial Services Alternative Dispute Resolution Financial Service Agency Financial Services Authority Financial Services Board Financial Services Board Act The Financial System Council Financial Services Conduct Authority Financial Stability Oversight Council Financial Sector Regulation Act (German) General Conditions of Insurance (Allgemeine Versicherungsbedingungen) General Conditions of Insurance (Allgemeine Versicherungsbedingungen – AVB) General Insurance Association of Japan General Insurance Association of Singapore General terms and conditions control (AGB-Kontrolle) General insurance terms and conditions Act on the Croatian Agency for Supervision of Financial Services High Court of Australia High People’s Courts Insurance Act Insurance Activities Code (Swedish) Insurance Business Act Swedish Insurance Business Act Insurance-based investment products (Australian) Insurance Contract Act (Swedish) Insurance Contract Act of 2005 Australian Insurance Contract Act Swedish Insurance Contract Act of 2005 Insurance Contracts Amendments Act 2013

xviii

Abbreviations

IDA IDD

(Swedish) Insurance Distribution Act 2018 Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution (IDD) Insurance Distribution Directive Insurance Mediation Directive National Institute for the Defense of Competition and the Protection of Intellectual Property Insurance Code Insurance Product Information Document Italian Institute for the Supervision on Insurance Motor Vehicles Act (Kraftfahrzeug-Haftpflichtgesetz – KHVG) Key Information Document Austrian Consumer Protection Act (BGBl 1979/140) (österreichisches Konsumentenschutzgesetz – KSchG) General Conditions of Contract General Contracting Conditions 29,946 Insurance Contract Act Insurance Contract Law Act 26/1984, General Act for Defense of Consumers and Users Life Insurance Advisory Form Policyholder Protection Rules for long-term insurance Commerce Code and Law number 19.496 Act 19.496 on the Protection of the Rights of Consumers of 1994 Consumer Protection Law number 19.496 of 1994 Long-Term Insurance Act Monetary Authority of Singapore Marine Insurance Act National Association of Insurance Commissioners Natural Disaster Insurance Review New South Wales New South Wales Court of Appeal Polish Civil Code Principles of European Insurance Contract Law Polish Financial Services Authority Professional Indemnity Portuguese Insurance Contract Act Portuguese Insurance Contract Act of 2008 Portuguese Insurance Distribution Act Portuguese Insurance Supervision Act 2018 Policyholder Protection Rules for long-term insurance

IDD IMD INDECOPI Ins. Code IPID IVASS KHVG KID KSchG LCGC LCGC LCS LCS LGDCU or TRLGDCU LIA form Long Term PPR LPC LPC/1994 LPC/1994 LTIA MAS MIA NAIC NDIR NSW NSWCA PCC PEICL PFSA PI PICA PICA PIDA PISA PPRs

Abbreviations

PRIIPs RTIC SBS SERFF SFSA Short Term PPR SMEs SOKik SPC STA STIA SVS TCC The Act The Control Law The Insurance Law The Maritime Code The SPC Interpretations TIA TPD TRLGDCU TUF Unespa UPKiK VAG 1978 VAG 2016

VAG VAG-Novelle 1994 VersVG

VersVG-Novelle 1994

xix

Packaged retail and insurance-based investment products Regulation on Transparency of Information and Insurance Contracts Supervisory Authority (Superintendencia de Banca, Seguros y Administradoras de Fondos de Pensiones) System for Electronic Rates & Form Filing Swedish Financial Supervisory Authority Policyholder Protection Rules for short-term insurance Small and medium-sized enterprises Court of Competition and Consumer Protection The Supreme People’s Court Standard Terms Act Short-Term Insurance Act Superintendency of Securities and Insurance Turkish Commercial Code Consumer Rights Act 2015 Control Law over Financial Services (Insurance) Law, 1981 The Insurance Law of the People’s Republic of China The Maritime Code of the People’s Republic of China The SPC on Certain Issues Concerning the Application of the Insurance Law Transparency in Insurance Act Total and Permanent Disability Revised Text of the General Act for the Defense of Consumers and Users of 2007 Legislative Decree 58/1998 Spanish Insurance Business Association Office for Consumer and Competition Protection Insurance Supervisory Act 1978 (BGBl 1979/568) (Versicherungsaufsichtsgesetz 1978 – VAG 1978) Austrian Insurance Supervision Act 2016 (österreichisches Versicherungsaufsichtsgesetz 2016 – VAG 2016) German Insurance Supervisory Act (Versicherungsaufsichtsgesetz – VAG) Amendment of the Insurance Supervisory Act in 1994 (VAG-Novelle 1994) Austrian Insurance Contract Act (BGBl 1959/2) (österreichisches Versicherungsvertragsgesetz – VersVG) Amendment of the Insurance Contract Act in 1994 (VersVG-Novelle 1994)

xx

VVG WG WG

Abbreviations

Insurance Contract Act (Versicherungsvertragsgesetz – VVG) The Working Group on the Status of Insurance Products, Service, etc. Working Group

Part I

Civil Law: European Union

Transparency in the Insurance Contract Law of Austria Sebastian Wöss

1 Introduction Transparency plays an important role in insurance law. However, this does not mean that transparency as a legal requirement only exists in this field. On the contrary, considerations and efforts to create (more) transparency are made in almost all fields of law. For example, legislation should be drafted transparently1; state processes, e.g. the award of public contracts, should be designed in a transparent way.2 In general, the administration should act transparently.3 However, transparency has to be applied not only between the legislator respectively the public authorities and the legal subject respectively the citizens and taxpayers but also between private individuals: the customer should be provided with adequate information, depending on the specific situation.4 In addition, contracts or contractual clauses in particular shall be formulated in such a way that they are understandable and comprehensible to the parties involved.5 Transparency therefore serves to make processes comprehensible for the individual. As a rule, it is about compensating a gap between the parties involved in a concrete legal relationship. There may be several reasons for this gap: e.g. a knowledge or information advantage on one side, an unequal distribution of

1

Bdylinski (2015), p. 140 seqq. Cf. the materials on the Austrian Federal Procurement Act 2006, BGBl. I 2006/17 (österreichisches Bundesvergabegesetz—BvergG 2006), 1171 BlgNR 22 GP. 5. 3 Cf. Art 15 TFEU. 4 See only the ‘information model’ pursued by the EU legislator to protect the consumer. 5 Cf. Art 5 para 1 Directive 93/13/EEC. 2

S. Wöss (*) University of Vienna, Wien, Austria e-mail: [email protected] © Springer Nature Switzerland AG 2019 P. Marano, K. Noussia (eds.), Transparency in Insurance Contract Law, AIDA Europe Research Series on Insurance Law and Regulation 2, https://doi.org/10.1007/978-3-030-31198-8_1

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S. Wöss

the available (financial) resources or an unequal position on the market.6 Frequently, a combination of several factors occurs. Adequate transparency is intended to compensate or at least to mitigate these discrepancies. Whether and how much transparency is necessary depends, in particular, on two factors: on the one hand, it depends on the level of complexity of the concrete matter. Thus, transparency considerations and efforts are always focused on circumstances or legal issues that are not necessarily self-evident for the individual and therefore require a corresponding presentation. On the other hand, it strongly depends on the specific market situation. State-imposed and state-regulated transparency is always necessary when there is no competitive market balanced between the supplier and the customer, which guarantees transparency out of itself.7 This is particularly the case when there is not enough competition between the market participants (whether on the offeror’s side or on the customer’s side), which allows one party an unfavourable contract design, which leads to an unwanted conclusion of the contract on the other hand.8 Keeping that initial situation in mind, transparency must also be seen in the perspective of insurance law. The particular importance of transparency in the field of insurance law already indicated above is now given by the fact that both of the factors outlined before are more pronounced in comparison to other fields of law. Thus, on the one hand, insurance is a complex legal product.9 It is characterised by a risk description, exceptions from this risk description, counter-exceptions and other ‘small print’.10 In the absence of physically existing contract items, it is less comprehending for the contract parties—in particular but not only for the purchaser of an insurance product—than a contract respectively the content of a contract on the exchange of goods.11 Above that, the complex legal product is accompanied by a complex legal framework. It consists of European as well as national legal provisions, inaccessible formulations, technical terms, exceptions and counter-exceptions.12 This interplay of complex legal product on the one hand and a complicated legal framework on the other, supplemented by a seller’s market focused on relatively few insurance companies, requires a high level of transparency. If now one considers transparency more closely from the perspective of insurance law, it must be noted at the outset that the subject is not limited to the insurance contract. On the contrary, it is a topic that concerns insurance law as a whole respectively all of its sub-sectors. The objective is basically the same in each case: it is about keeping the power and/or information gap between the actors involved as

6

Leverenz (2008), para 3/55. Stagl (2006), p. 4. 8 Schimikowski (2007), p. 135. 9 Dreher (1991), p. 148. 10 Cf. Wandt (2012), p. 343. 11 Wandt (2012), p. 343. 12 Wandt (2012), p. 343. 7

Transparency in the Insurance Contract Law of Austria

5

low as possible.13 However, the methods with which the legislator tries to achieve transparency, as well as the addressees of the provisions creating transparency, are different. When it comes to transparency in the context of insurance mediation, mostly the relationship between the insurance intermediaries and the policyholder is meant. In terms of content, it is usually about a transparent disclosure of the relationship between the insurance agent and the insurance company towards the policyholder. In particular, it is about his legal and economic dependence on specific insurance companies, his professional qualifications and possible conflicts of interest.14 If one is, on the other hand, looking at insurance supervisory law under the aspect of transparency, it is primarily a question of transparent rules of procedure, as well as transparent business activities and financing (see Art 268 para 1 and Art 268a (österreichisches Austrian Insurance Supervision Act 201615 16 Versicherungsaufsichtsgesetz 2016—VAG 2016)). Finally, transparency in the context of insurance contract law is commonly equated with the requirement for the legislator to create a most possible transparent relationship between insurers and policyholders. In this chapter, the importance of transparency in Austrian insurance contract law will be illustrated. Subsequently, legislator's efforts to create (adequate) transparency are to be shown.

2 The Importance and Definition of Transparency in Austrian Insurance Contract Law If transparency is discussed in the context of insurance contract law, it often refers to the requirement of transparency (Art 5 para 1 Directive 93/13/EEC,17 implemented into Austrian law by Art 6 para 3 Austrian Consumer Protection Act18 (österreichisches Konsumentenschutzgesetz – KSchG). The first thing that one would think of is the relationship between the insurer and the policyholder. It is characterised by an information and knowledge gap; hence the insurer has to draft the contractual components containing the general policy conditions in a clear and comprehensible way (see below Sect. 3.3.3.4). This is obvious. Thus, the value of Art 5 para 1 Directive 93/13/EEC and Art 6 para 3 Consumer Protection Act, which are, in general, intended to ensure a transparent business relationship between

13 See e.g. the Solvency II Directive, of which the primary objective is—despite the fact that most of the standards are concerned with the regulation and supervision of the insurance and reinsurance industry—the protection of policyholders (recital no○ 16 Solvency II Directive). 14 Wandt (2012), p. 341. 15 BGBl I 2015/44. 16 Wandt (2012), p. 343. 17 Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts, OJ n○ L 095 of 21.04.1993. 18 BGBl 1979/140.

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entrepreneurs and consumers, is undisputed. However, it should be noted that the issue of transparency—especially in insurance law—cannot be reduced to the requirement of transparency of the terms and conditions of the insurance contract alone. Rather, apart from the general requirement of transparency, the legislator tries by a multitude of measures to assure the transparency of the product insurance in general respectively in the individual insurance contracts. Apart from information duties, which are specific to the insurer prior to the conclusion of the contract (Art 128 et seqq Insurance Supervisory Act 2016), the specific requirement of transparency for these duties can be mentioned here (Art 128 para 2 Insurance Supervisory Act 2016). Also, the information duties are based on the nature of the conclusion of the contract (Art 5 et seqq Austrian Distance Financial Services Act19 (österreichisches Fernfinanzdienstleistungsgesetz— FernFinG)),20 which therefore occasionally also apply to an insurance contract. In addition to these information duties, the legislator tries to achieve transparency through a tight network of substantive and formal requirements to the contract, which is, even though it is of great importance, not limited to the transparency requirement alone. An example is Art 864a Austrian General Civil Code21 (österreichisches Allgemeines Bürgerliches Gesetzbuch—ABGB). The provision states that unusual, surprising and disadvantageous provisions in general terms of contract are invalid. Furthermore, one should point out that transparency in insurance law is not only one directional (the direction of the insurer to the policyholder). Basically, the before-mentioned aspects in insurance contracts, in particular the requirements of transparency, are higher than in other types of contracts.22 However, this applies not only to the policyholder but also to the insurer. Thus, the insurer has to insure an initially unknown and uncertain risk (see Sect. 3.3.2).23 The legislator also attempts to deal with this need for transparency by imposing pre-contractual and ongoing disclosure duties on the policyholder (Art 16 et seqq Austrian Insurance Contract Act24 (österreichisches Versicherungsvertragsgesetz—VersVG)). If finally the term ‘transparency’ shall be defined, one can start with the fact that transparency is a state. Something is transparent when it is comprehensible (in German durchschaubar or nachvollziehbar).25 Transferred to insurance contract law, transparency can therefore, in general, best be described as a condition that makes the insurance product as such, and thus the insurance contract, its content and its consequences, comprehensible to the parties involved. Specifically on the

19

BGBl I 2004/62. With the Distance Financial Service Act the Directive 2002/65/EC had been implemented into Austrian Law. 21 JGS 1811/946. 22 Wandt (2012), p. 343. 23 Heiss and Lorenz (2014) pre Article 16–22, para 4 seqq. 24 BGBl 1959/2. 25 Cf. Korinek (2016), p. 26. 20

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insurance contract, its form and content, transparency can be understood as comprehensibility supplemented by certainty, clarity and completeness.26 The insurance contract respectively its parts (in particular the general terms and conditions) must meet these requirements in order to be sufficiently transparent and valid (as a whole). If transparency is meant to be described with the words ‘comprehensibility’, ‘certainty’, ‘clarity’ and ‘completeness’, there is again much room for interpretation. In brief, and in accordance with the principles developed by the Austrian jurisprudence for the requirement of transparency (Art 5 para 1 Directive 93/13/EEC and Art 6 para 3 Consumer Protection Act) (see Sect. 3.3.3.4), the following may be said about the individual points, i.e. that a legal norm is comprehensible if it is understandable to the legal user with regard to its purpose and the legal consequences resulting from it.27 A legal norm is certain if it does not offer an unjustified margin of discretion and thus, although it is possible to prevent it by a more precise wording, would make it impossible to foresee (interpret) results from the policyholder’s point of view.28 A norm is sufficiently clear if it does not try to conceal the rights that the legal user derives from it or deceive his rights at all.29 Finally, completeness means that the effects of a legal norm must not be obscured by omitting certain parts.30

3 Transparency in Austrian Insurance Contract Law 3.1

Preliminary Remarks

Before the provisions that shall guarantee transparency are described in detail, a few preliminary remarks are beneficial. Like other European jurisdictions, the Austrian jurisdiction is also broadly defined by European legal standards. This applies in particular to insurance law.31 At the same time, European directives that are not specifically designed for insurance law are also emanating from this. The European influence makes obvious in several respects: on the one hand, it is clear that information duties of the insurer, as well as the insurance agent, towards the policyholder are becoming more and more extensive according to the ‘information model’. These information duties may be directly

26

See also the explanation of the Austrian Supreme Court (Oberster Gerichtshof—OGH)—in turn, however, to the transparency requirement of Art 6 para 3 Consumer Protection Act—to OGH 4 Ob 28/01y. 27 Wandt (2012), p. 343. 28 Fenyves (2007), p. 37. 29 Faber (2003), p. 51. 30 Fenyves (2014a) pre Article 1, para 106. 31 See only Baran and Peschetz (2015), p. 4.

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linked to the insurance contracts (see Art 17 et seqq, Art 29 Directive 16/97/EU32) or to b2c contracts (see Art 3 et seqq Directive 93/13/EEC). On the other hand, the European legislator also places far-reaching substantive and formal criteria on the (insurance) contract. However, the modern Austrian insurance law is founded not on European law but rather on German insurance law. This is because both the Insurance Supervisory Act 197833 (Versicherungsaufsichtsgesetz 1978—VAG 1978), replaced in 2016 by the Insurance Supervisory Act 2016, and the original Insurance Contract Act from 1958, which is still in force, have taken over the German Insurance Supervisory Act 190134 (deutsches Versicherungsaufsichtsgesetz 1901—dVAG 1901) respectively the German Insurance Contract Act 190835 (deutsches Versicherungsvertragsgesetz 1908— dVVG 1908).36 The Insurance Contract Act 1958 is therefore still the primary source of the Austrian insurance contract law. In addition, some types of insurance are regulated by special acts (for example, the motor vehicle liability insurance, regulated by Liability Against Motor Vehicles Act37 (Kraftfahrzeug-Haftpflichtgesetz—KHVG). Since the Insurance Contract Act (and other acts regulating special branches of insurances) only provides for certain aspects of the insurance contract, the Civil Code applies whenever there is no provision or no more specific provision in the Insurance Contract Act (or the other concerning act).38 If the contract is to be classified as a b2c contract, the Consumer Protection Act also applies. Finally, if the insurance contract, which is a b2c contract at the same time, is concluded exclusively by means of distant communications, the Distance Financial Services Act applies. With regard to transparency in insurance contract law, the Insurance Contract Act plays only a subordinate role. Its role is essentially limited to how information has to be passed on to the policyholder (e.g. in the case of an agreement to provide the information by electronic means, see also Art 5a para 7 Insurance Contract Act), as well as the legal consequences, which are linked to a non-disclosure of the necessary information (e.g. the right of withdrawal of the policyholder under Art 5b para 2 Insurance Contract Act). The information duties imposed on the policyholder are,

32

Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution (recast), OJ n○ L 26/19 of 02.02.2016 (IDD). 33 BGBl 1979/568. 34 dRGBl S 139. 35 dRGBl S 263. 36 This has historical reasons. Thus, both the German Insurance Supervisory Act 1901 and the German Insurance Contract Act 1908 were introduced in Austria in the course of the ‘Anschluss’ of Austria to the German Reich. After the war, both remained in force under different names and with slight changes. The fact is also worth to be mentioned because it can explain the still existing influence of German literature and jurisprudence on the Austrian insurance law (see also Fenyves 1997, p. 296). 37 BGBl 1994/651. 38 Cf. Schauer (2010), p. 195.

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however, in the supervisory law. The Insurance Supervisory law is therefore of particular importance. The same applies for the general civil law, which sets out the substantive and formal requirements of a contract, thus also of an insurance contract, and sanctions its non-compliance. If, however, transparency in insurance contract law is understood in a broad sense, the Insurance Contract Act also plays an important role: thus, the customer is obliged to make special disclosures before the conclusion and during the existence of an insurance contract (Art 16 et seqq Insurance Contract Act), which shall prevent the insurer from taking incalculable risks. With this framework, the legislator tries to ensure the necessary transparency in insurance contract law. The system, as well as the interplay of the respective provisions, will be presented in sequence. In the first place, an overview of the previous legal situation shall be given. Therefore, one element is to be emphasised, namely the amendment of the Insurance Supervisory Act in 1994 (VAG-Novelle 199439), which, together with the amendment of the Insurance Contract Act in 1994 (VersVG-Novelle 199440), both enacted on 1 January 1995, caused a departure from the ex ante control of the insurance conditions by the supervisory authority to a (deeper) ex post control by the common courts.

3.2

The Previous Regime

Until the amendment of the Insurance Supervisory Act in 1994, transparency, at least in the relationship between the insurer and the policyholder, was mainly based on insurance supervision law.41 The majority of the information duties addressed to the insurer were found there. Moreover, the pre-control respectively approval of the general policy conditions, which was also found in insurance supervision law, made the application of the general provisions (Arts 864a and 897 para 3 Civil Code) to the content and formal control of the insurance contract and the general policy conditions largely obsolete. Only the departure from this ex ante control by the supervisory authority led to far-reaching changes. This is evidenced by the upcoming activities of the courts concerned about the question of the admissibility of general policy since the amendment.

39

BGBl 1994/652. BGBl 1994/509. 41 However, in the Austrian insurance supervisory law, provisions aimed at providing transparency in the relationship between the insurer and the policyholder are already based on the year 1939 and on the German Supervisory Act 1901 respectively (after the war) the (Austrian) Insurance Supervisory Act 1978. Thus, the German Supervisory Act 1901already contained the first requirements on the transparency of the insurance contract (Art 9 para 1 leg cit). The provision had listed some essential elements that the general policy conditions had to contain; e.g. a compulsory risk description, provisions on the duration of the insurance contract, the cases in which compulsory performance should be excluded or abolished etc.). 40

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Formerly, the central provisions regarding the relationship between the insurer and the policyholder were found in Artt 4 para 6, 10 para 1 and 8 para 5 of the Insurance Supervisory Act 1978. Article 8 para 5 of the Insurance Supervisory Act 197842 stipulated that the general policy conditions should be submitted to the supervisory authority43 as part of their business plan before its admission. The supervisory authority had to examine and approve the general policy conditions. Only then were insurers permitted to use them in their insurance contracts. The aim of the statutory pre-control of the general policy conditions was customer protection.44 This should have been achieved by creating market transparency. The general policy conditions were, however, reviewed in a quite non-transparent way.45 Thus, the negotiation of the insurance conditions between the insurance companies and the supervisory authority took place on a small scale and behind closed doors. The approved general policy conditions, specimen conditions and business plans had finally been published, if at all, only in the VersVVers,46 a journal hardly known outside the insurance industry. If the policyholder wanted to check his insurance contract to determine whether his conditions corresponded to the model conditions, special inquiries had to be made—largely without the current possibilities of the electronic data processing, as well as the Internet. However, the co-operation between the supervisory authority and the insurers could largely prevent serious social injustices. In the daily insurance business, the pre-control and authorisation of the policy conditions led to a standardisation and limitation of the insurance products available on the market. This was, however, certainly intended by the national legislator at that time.47 The pre-control of the general insurance condition was, however, not compatible with the European legislator’s efforts to create a European single market for insurance products. Thus, it was, and still is, the aim of the European legislators, by means of deregulation of the market, to create the largest possible market for insurance products from which the policyholder could choose the appropriate product. This aim should have been achieved, in particular, by the three generations of life and non-life directives,48 whereas the pre-control and approval of the general policy conditions had been specifically the victim of the implementation of the third

42

The provision was situated in Art 4 para 2 of the original version of the Insurance Supervisory Act 1978. 43 Until 1.4.2002, this was the Federal Ministry of Finance, since then the Financial Market Supervisory Authority (Finanzmarktaufsicht—FMA) (Art 1 para 1 Financial Market Supervisory Act, BGBl 2001/97 [Finanzmarktaufsichtsgesetz—FMAG] in conjunction with Art 268 para 1 and 2 Insurance Supervisory Act 2016). 44 Cf. Evermann (2002), p. 4. 45 To the following: Ertl (1997), p. 2 seqq. 46 ‘Veröffentlichungen des BMF betreffend den Versicherungsvertrag’. 47 Evermann (2002), p. 4. 48 First directive 73/239/EEC, second directive RL 88/357/ EEC, third directive 92/49/ EEC (non-life insurance); first directive 79/267/ EEC, second directive 90/619/ EEC, third directive 92/96/EWG (life insurance).

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generation of the directives into national law. This was, however, also in the interests of the Austrian legislator: he mentioned in the materials49 of the amendment that the ‘prudent’ handling of the supervisory law would have led to the fact that insurance protection could not keep pace with the realities of the insurance market. Furthermore, he pointed out that the legal regulation of the relationship between the insurer and the policyholder would no longer meet modern requirements. The implementation of the third generation of policies also led to a system change from a regulated but clear market for insurance products to a wider range of insurance products at the price of a certain market intransparency.50 At the same time, it represents a partial relocation of ‘transparency’ from insurance supervisory law to (insurance) contract law. The legislator has attempted to compensate the legal protection deficit of the policyholder resulting therefrom by increased transparency, both with regard to the content of the insurance contract and its representation. In particular, the system had been replaced by extended information duties of the insurer (in particular the general notification duties in Art 9a Insurance Supervisory Act 1978, as well as the information duties for the life insurances in Art 18b Insurance Supervisory Act 1978, both then relocated to Art 252 et seqq Insurance Supervisory Act 2016 and – the in implementation of the Insurance Distribution Directive ([EU] 2016/97)51—now situated in Art 128 et seqq Insurance Supervisory Act 2016). With the entry into force of the Insurance Supervisory Act 2016, the prohibition of a general preliminary examination and approval of the general policy condition has been standardised in Art 272 Insurance Supervisory Act 2016 (see also Art 181 et seqq Solvency II Directive52). The partial duty of the insurer to notify the supervisory authority of the general policy conditions only remained in certain types of compulsory insurances, for example in the motor vehicle liability insurance (Art 18 para 1 Motor Vehicle Liability Act).53 The same applies to the nuclear liability insurance (Art 8 para 1 Nuclear Liability Act54 (Atomhaftungsgesetz 1999— AtomHG)).

49

EB 11. For the comparable German situation Wandt (2012), p. 346. 51 The IDD has meanwhile, in relation to information requirements contained in the directive (Artt 17 seqq IDD), been partly implemented to the Insurance Supervisory Act 2016. Namely by the Insurance Distribution Law Amendment Act 2018 (Versicherungsvertriebsrechts-Änderungsgesetz 2018—VersVertrRÄG 2018), enacted on 1.10.2018. 52 Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II), OJ n○ L 335/1 of 17.12.2009. 53 Based on Art 30 para 2 directive 92/49/ECC. 54 BGBl 1998/170. 50

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The Current Regime

In addition to this system change described, further European specifications have a major influence on the transparency of the insurance contract. They are essentially limited to the expansion of the information duties, either by extending the information duties, which apply specifically to the insurer (see Art 183 et seqq Solvency II, which, however, only required minor modifications in Austria55), or by extending the general information duties in consumer law, which occasionally also apply to the insurance contract (see Directive 2011/83/EU56). The IDD ([EU] 2016/97), which—although primarily addressed to the insurance intermediary – also introduced new information duties for the insurer, sets the end point at this time (Art 17 et seqq leg cit). In addition to this continuous expansion of the information duties, Directive 93/12/ECC57 is of particular importance. With this directive, the general requirement of transparency for all general terms and conditions used in b2c contracts has been defined (Art 5 para 1 leg cit). The directives mentioned here also constitute the main framework in which the national legislator has to ensure transparency. How this framework has been achieved in Austria will be presented in the following. The system of ‘transparency’ in today’s insurance contract law (in the relationship between the insurer and the policyholder) is therefore essentially based on two pillars: the first pillar is the extensive and close meshed network of information duties, sanctioned by extended rights of withdrawal, claims for damages and fines.58 The second pillar is based on legally standardised requirements on the insurance contract respectively its general policy conditions, which are based on high substantive and formal criteria controlled by the courts and sanctioned usually by the invalidity of the contractual component that does not fulfil these criteria, exceptionally also by the invalidity of the entire insurance contract. At the same time, the use of such clauses may lead to claims for damages, as well as to the right to contest or adjust the contract due to error. In both cases, it must be differentiated between b2b insurance contracts and b2c insurance contracts since in the latter case, both the pre-contractual information and the substantive and formal criteria are significantly increased to the insurance contract.

55

See the materials of the Insurance Supervisory Act 2016 354 BlgNr 25 GP. 55 seqq. Directive 2011/83/EU of the European Parliament and of the Council of 25 October on consumer rights, amending Council Directive 93/13/EEC and Directive 1999/44/EC of the European Parliament and of the Council and repealing Council Directive 85/577/EEC and Directive 97/7/EC of the European Parliament and of the Council (Consumer Protection Directive), OJ n○ L 304/64 of 22.11.2011. 57 Directive 93/13/EEC of the European Parliament and of the Council of 5 April 1993 on unfair terms in consumer contracts, OJ n○ L 95/29 of 24.04.1993. 58 See also Korinek (2016), p. 25. 56

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In the reversed ratio, the relationship between the policyholder and the insurer is characterised by pre-contractual and current disclosure duties of the policyholder. They are proven by a right of withdrawal by the insurer in the event of failure or incorrect information.

3.3.1

Information Duties of the Insurer

As already mentioned, the Insurance Supervisory Act 2016 primarily regulates the state supervision of the activities of insurance companies. However, the Act also radiates to insurance contract—also and in particular when it is considered under transparency aspects. The essential ‘general’ information duties of the insurer are found in in the Insurance Supervisory Act 2016 (Art 128 et seqq). The purpose of these extensive information duties is—also in the case of insurance law—seen in providing the addressee of the information, in this case the policyholder, with all the information he needs in order to make a well-informed and therefore—from his subjective perspective—a correct decision.59 In consequence, the policyholder is enabled to conclude a need-oriented contract, which corresponds to his ideas and motives.60 Brought to the point, the policyholder should receive a contract that is appropriate to his needs. Due to the circumstances already described at the outset, these goals are—without correspondingly directing legislative influence—difficult to achieve in insurance law in particular. Beyond doubt, however, the path taken by the legislator can also be questioned critically. The Insurance Contract Act, on the other hand, (only) sanctions the non-compliance of these duties (Art 5b et seqq). Additional information duties are found in the Distance Financial Services Act (Art 5 et seqq). The latter are not always to be complied, but only if the contracting party of the insurer is a consumer and the insurance contract has also been concluded in a special form. However, the information duties pursuant to Art 128 et seqq Insurance Supervisory Act 2016 are often in line with those of Art 5 et seqq Distance Financial Services Act. In addition, general civil law, as an outflow of the contractual relationship, is aware of certain (pre-contractual) information duties, whose non-fulfilment may result in claims of damages and in the right to contest or adjust the contract due to an error.

The Information Duties of the Insurance Supervisory Act 2016 The core elements of the information duties and now also of the advisory duties of the insurer can be found in the 6th main section of the Insurance Supervisory Act 2016. In Art 128 leg cit, the key elements of the IDD’s advisory and information

59 60

Cf. Rudy (2015), Art 7, para 2. Cf. Schauer (2005), p. 158.

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duties has been transposed into national law. While Art 128 et seqq leg cit contain duties of a general nature, Art 135 et seqq leg cit contain special advisory and information duties for life insurance, insurance investment products and health and accident insurance according to the type of life insurance (Kranken- und Unfallversicherungen nach Art der Lebensversicherung). They go beyond Art 128 et seqq leg cit and have to be provided in addition to the general information for specific types of insurances. The content of these information duties takes the peculiarities and complexity of the respective types of insurance into account. It would be beyond the scope of this article to discuss all the provisions in detail, especially since the provisions—as stated—are often based on the implementation of the IDD.61 Therefore, only an overview of the essential provisions shall be given, which relates to transparency of the insurance contract. Art 135 et seqq leg cit will not be discussed. Pre-contractual Advisory Duties Before the implementation of the IDD into the Insurance Supervisory Act 2016, the latter only contained advisory duties to a limited extent.62 In accordance with Art 132 para 1 Insurance Supervisory Act 2016, however, the insurer now has to make a personal recommendation to the policyholder for the conclusion of an insurance contract. In this recommendation, the insurer has to explain why the recommended contract meets the requirements of the policyholder in the best way. The intensity of this advisory duty depends on the complexity of the recommended insurance product. The more complex the recommended insurance product is, the more accurate and clear it must be explained by the insurer why exactly that contract seems to be the most suitable for the insurance company.63 Only a few areas are exempted from this general advisory duty: in particular, the advisory duty can be dispensed if major risks shall be insured (Art 132 para 1 leg cit). There are also exceptions if the contract is distributed by a third party entitled to do so, i.e. an insurance intermediary or an insurance company, unless the insurance company has reason to believe that the insurer is not properly advised by them (Art 132 para 3 leg cit). The advisory duty also lapses if the policyholder waives the advice after a prior warning by the insurer (Art 132 para 2 leg cit). In order to be able to comply with the advisory duties, Art 132 leg cit provides for a mandatory demand analysis. Thus, before concluding an insurance contract, the insurer must obtain from the policyholder the information needed to ascertain his needs (para 1 leg cit). The aim is to determine that the contract offered by the insurer 61

Cf. also the materials on the Insurance Distribution Law Amendment Act 2018, 26 BlgNR 26 GP. 4 seqq. 62 Before, advisory duties existed only according Art 254 Insurance Supervisory Act 2016, which required insurance undertakings to provide investor and property-specific advice on the sale of unitlinked and index-linked life insurance contracts. In addition, there were and still are situationdependent information and advisory duties under general civil law (see below Sect. 3.3.1.3). 63 Cf. Böhm (2018), p. 1068.

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meets the needs of the policyholder (para 2 leg cit). As with the advisory duty, the obligation does not exist if the contract is distributed through a third party entitled to do so unless the insurer has reason to believe that the policyholder will not be offered contracts that meet his needs (para 2 leg cit). Pre-contractual Information Duties The general information duties addressed to the insurer can be found especially in Artt 128, 128a, 130, 133 Insurance Supervisory Act 2016. Article 134 Insurance Supervisory Act 2016 contains special information duties for ‘cross-selling’ (Querverkäufe), i.e. insurance products offered together with an ancillary product or service that is not insurance, as part of a package or the same agreement. Article 128 Insurance Supervisory Act 2016 contains general principles for insurance distribution, especially para 2 leg cit, which contains a general prohibition of misleading statements (Irreführungsverbot).64 Thus, all information that the insurer has to address to policyholders or disseminated in such a way that policyholder is likely to be aware of has to be given in a clear, non-misleading way. The provision is to be understood comprehensively, which means that all information must be provided in a clear and comprehensible way. A piece of information is ‘clear’ or ‘comprehensible’ when it can be understood by an average insurance customer.65 Article 128a Insurance Supervisory Act 2016 contains details on how the information according to the 6th main section of the Insurance Supervisory Act 2016 has to be provided. With regard to the transparency of the product ‘insurance’, it should be emphasised that all information must be provided in a clear, precise and understandable form for the policyholder (para 2 no○ 2 leg cit). In addition, they must in principle be issued in German unless the policyholder agrees to a different language (para 2 no○ 3 leg cit).66 The general information requirements are to be found in Art 130 and Art 133 Insurance Supervisory Act 2016. The articles specify what the policyholder has to be informed about. Pursuant to Art 130 para 1 leg cit, the policyholder must be provided with the essential information about the offering insurer (no○ 1),67 the name and address of the supervisory authority responsible for the insurer (n○ 2) and the legal protection

64

The provision shows systematic similarities with the transparency requirement of Art 6 para 3 Consumer Protection Act (Kronthaler 2016a, p. 166). Both are about representation. The difference is however that Art 252 para 8 Insurance Supervisory Act 2016 means the representation of information, while Art 6 para 3 Consumer Protection Act means the representation of contact terms. (For the different legal consequences, see below respectively point Sect. 3.3.3.4). 65 Leitner (2005), p. 52. 66 Art 128a para 2 no○ 2 and 3 Insurance Supervisory Act 2016 also apply if the information is not provided on paper but on a durable medium or on a website. 67 The information must be provided to the policyholder before the demand analysis (see above Sect. Pre-contractual Information Duties).

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options available to the policyholder in addition to the general court procedure (n○ 3).68 For the insurance of major risks, there are certain easements with regard to the duties to provide information, especially if the policyholder is a legal person. Article 133 leg cit specifies what the policyholder has to be informed about the insurance product. With regard to the individual minimum information to be provided (para 2 leg cit), reference shall be made to the text of the IDD, which has been largely adopted (Art 20 IDD). In general, however, the insurer must provide—in an understandable form—the objective information about each insurance product offered to the policyholder and the relevant information about each insurance contract offered to the policyholder, in order allow him to make well-informed decision. Again, the complexity of the insurance product must be considered (para 1 leg cit). The information has to be given prior to the conclusion of the insurance contract. The obligation to provide the mentioned information, however, also affects the insurer during the entire duration of the upright contractual relationship (Art 133 para 4 Insurance Supervisory Act 2016). This ongoing information duty is intended to ensure that the policyholder has the necessary information not only before but also during the entire duration of the contractual conditions. The information requirements must always be fulfilled. Each policyholder should—in any case be—provided with the information relevant to his decision making. An alleged specific need for information is not necessary. Concerning Art 34 ‘ cross-selling’, it is also referred to the IDD (Art 24). From a civil law perspective, it is first to say that an infringement of Art 128 et seqq Insurance Supervisory Act 2016 does not lead to the invalidity of the contract.69 The policyholder is, however, granted special right of withdrawal in case of infringement of Art 130 Insurance Supervisory Act 2016 (Art 5b para 2 no○ 3 Insurance Contract Act). The policyholder may withdraw from the contract within 14 days. This applies not only to an already concluded contract but also to an application by the policyholder. As set out in Art 5b para 4 Insurance Contract Act, the period for withdrawal shall only begin to run if the policyholder has been provided with all information, the insurance policy and the general policy conditions. Furthermore, he needs to be informed about his right of withdrawal. The right of withdrawal expires 1 month after receipt of the insurance policy and the information of the right of withdrawal at the latest (Art 5b para 5 Insurance Contract Act). If the insurer fails to provide information about the possibility of the withdrawal, the policyholder’s right to withdraw is not subject to the statute of limitations. The withdrawal itself has to be given in writing and is on time, when it is sent within the deadline. Therefore it is sufficient, if it is departed in time, see Art 5b para 5 sentence 1 Insurance Contract Act. Finally, it is worth saying that the insurer has to prove that

68 69

This information must be provided before submitting policyholder's declaration of the contract. Cf. Kronthaler (2016b), p. 231.

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he has complied with his statutory information duties in accordance with the Insurance Supervisory Act 2016 (Art 5b para 3 Insurance Contract Act).70 In addition to this ‘indirect’ sanction, the infringement of the information duties may also give rise to claims of damages and may entitle the customer to contest or adjust the contract due to error.71

The Information Duties of the Consumer Protection Law Insurers are naturally entrepreneurs (see Art 8 Insurance Supervisory Act 2016).72 For this reason, in addition to the general information duties of the Insurance Supervisory Act 2016, the information duties of consumer protection law may also apply. Since all types of insurance contracts subject to Insurance Supervisory Act 2016 are to be classified as financial services73 within the scope of the Distance Financial Services Act, (only)74 the information requirements of the Distance Financial Services Act can be considered. In case the policyholder is a consumer within the meaning of the Consumer Protection Act and if the respective contract is concluded by only using remote communication, the information duties of the Insurance Supervisory Act 2016 also have to be complied by them of the Distance Financial Services Act (see Art 5 para 3 Distance Financial Services Act).75 The content of the information duties of the Distance Financial Services Act is essentially the same as those of Art 130 Insurance Supervisory Act 2016. However, the duties in the case of a ‘financial service’ are not specifically tailored to the insurance contract. A detailed description is therefore omitted here.76 Still it is necessary to mention that in case the information duties are not identical, both

70

Insofar as the policyholder is a consumer, the Insurance Contract Act allows him to withdraw from the insurance contract or his contract declaration without any reason within 14 days (Art 5c para 1 Insurance Contract Act). Also in this case, too, an in time transmission shall be sufficient— despite the fact that no explicit mention is made in Art 5c Insurance Contract Act (Fenyves 2014b, Art 5c, para 6). The right to withdraw the contract pursuant to Art 5c Insurance Contract Act expires 1 month after the receipt of the insurance policy and the information on the right of the withdrawal at the latest. As long as the insurer does not inform the policyholder of his right of withdrawal, the withdrawal period is not subject to the statute of limitations. In this respect, a right of withdrawal is also conceivable here (Kronthaler 2016b, p. 227). 71 This is the ruling, though not undisputed, view, cf. Kronthaler (2016b), p. 227. 72 Cf. Kronthaler (2016a), p. 167. 73 Cf. only Graf 2015a, Art 3, para 8. 74 Thus, Art 5a of the Consumer Protection Act as well as Artt 4 seqq of the Remote and External Business Act (Fern- und Auswärtsgeschäfte Gesetz—FAGG [BGBl I 2014/33]) which stipulate certain information duties for each b2c-contract respectively for that one concluded in the distance or in the case of a foreign business, are expressis verbis not applicable (Art 5a para 2 no○ 6 Consumer Protection Act or Art 1 para 2 no○ 5 Remote and External Business Act). 75 Cf. Kronthaler (2016a), p. 167. 76 See Graf (2015a), Art 3, para 1 seqq.

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must be provided (Art 5 para 3 Distance Financial Services Act). The stricter scale must be applied. The insurer has to fulfil the more detailed information duty. Article 5 Distance Financial Services Act states not only which information is to be provided but also—as in the case of Art 128 para 2 Insurance Supervisory Act 2016 (or Art 6 para 3 Consumer Protection Act)—in which form the information has to be provided. Under Art 5 para 1 Distance Financial Services Act, the information must be made available to the consumer in a clear and comprehensible way adapted to the nature of the used remote communication. The information moreover has to be given in such a way that its purpose is clearly recognizable. It has to be provided in such a way that the consumer can understand and process it without further effort.77 With regard to the infringement of the mentioned information duties, the following applies: Art 8 para 1 Distance Financial Services Act provides for a general right of withdrawal. This is not subject to special reasons. The only requirement is that the b2c contract has been concluded exclusively by means of a remote communication. The withdrawal period is 2 weeks78 after conclusion of the contract (Art 8 para 2 Distance Financial Services Act). The limitation period doesn’t start running when the insurer does not provide the information, does not provide it at the right time (until the conclusion of the contract) or is in a proper form (i.e. in a clear and comprehensible manner). The right to withdraw the contract pursuant to Art 8 Distance Financial Services Act exists in addition to the general right of withdrawal in Art 5c Insurance Contract Act, but the exercise of the one excludes, of course, the other. Provided as information duties respectively as a transparency duty to the insurer, an infringement of this provision described here may also be followed by claims of damages, as well as by contesting or adjusting the contract due to error.

Pre-contractual Information Duties of General Civil Law As shown, the insurer is subject to extensive information requirements. These will be intensified furthermore if it is a b2c contract. Therefore, the policyholder is no doubt, at least theoretically, given all the information necessary to get a comprehensive picture of the insurer, the insurance contract and the resulting rights and obligations. The general information requirement of the policyholder is therefore largely met. However, the extensive list of duties cannot hide the fact that this is a rigid system that does not take the concrete circumstances of the individual insurance business and the actual situation of the policyholder in account sufficiently. In Austria, this deficit is mitigated by the legal institution of culpa in contrahendo. The legal institution of the culpa in contrahendo, which is alien to written Austrian law but derived from Artt 866, 869, 874 ABGB, lays down specific duties

77

Graf (2015a, b), Art 5, para 4 seqq. For life insurances as defined in Directive 2002/83/EC on life assurance, OJ no○ L 345 v 19.12.2002 it is 30 days (Art 8 para 2 Distance Financial Services Act). 78

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of care, in particular information duties, as well as protection duties, to those who seek to establish a legal relationship. The question of whether, and to what extent, the additional information requirements exists with respect to the insurer, besides the general duties in the Insurance Supervisory Act 2016, as well as the Financial Distance Service Act, depends on the respective concrete situation.79 It is always to question with which information the (future) contract partner, the policyholder, could reasonably have reckoned.80 The insurer’s (or the insurance broker’s) obligation to provide information exists if the policyholder asks questions,81 a misrepresentation occurs to the policyholder82 or the insurer otherwise becomes aware of the policyholder’s need of information.83 But the insurer’s duty to provide information or advice may not be overstretched. As a consequence, the ruling opinion rejects a ‘spontaneous’ advisory duty of the insurer.84 In particular, in general, the policyholders themselves have to take care of the insurance cover they need and have to provide themselves with the necessary knowledge.85 The Austrian case law, for example, agrees to the duty of the insurer to provide comprehensive information on the amount and limits of the cover in the case that the insurer is aware that the policyholder wishes a ‘comprehensive’ insurance protection (in the specific case, a doctor with regard to any kinds of treatment errors).86 Also, the insurer has to inform the policyholder of the beginning of the insurance cover or the possibilities of a provisional cover if the policyholder is mistaken and supposes that the risk to be insured is already covered by the submission of the application.87 Finally, the insurer has to point out to a new insurance product when the policyholder is not aware of this variant and the insurer is able to realise that this product could fit to the policyholder (in the specific case about a new variant of the group health insurance for civil servants, as the insurer was aware that the policyholders were civil servants).88 The sanctions of the infringement of these pre-contractual information duties are claims for damages.89 In addition, a contestation or adjustment of the contract due to error is also conceivable.90 However, the policyholder is not entitled to withdraw the contract unless the insurer (also) infringes his information duties standardised in the

79

OGH 2 Ob 151/02y. OGH 5 Ob 524/79. 81 Fenyves (2009), p. 19. 82 OGH 7 Ob 9/94, OGH 7 Ob 20/14p. 83 Fenyves (2009), p. 20. 84 See only Fenyves (2009), p. 20, following OGH 7 Ob 20/14p. 85 Fenyves (2009), p. 19. 86 OGH 7 Ob 72/11f. 87 SZ 62/157. 88 OGH 7 Ob 9/94. 89 Wiebe (2015), Art 861, para 31. 90 Cf Wiebe (2015), Art 861, para 50. 80

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Insurance Supervisory Act 2016 respectively the Financial Distance Act or the policyholder has a general right of withdrawal due to his status as a consumer.

3.3.2

The Information Duties of the Policyholder (Art 16 et Seqq Insurance Contract Act)

Not only the policyholder has a need for transparency but also the insurer. However, this is less a matter of a transparent presentation of the content of the insurance contract and of its legal consequences (which the insurer is usually aware of anyway) but rather a matter of the assessment of the profitability of the contract to be concluded. In order to be successful in the long term, the insurer must, in particular, be able to calculate a risk-adequate premium.91 To achieve this goal, the insurer needs sufficient knowledge of the individual risk situation of the policyholder. Article 16 et seqq of the Insurance Contract Act are intended to ensure this by arranging disclosure duties of the policyholder and, at the same time, regulating the consequences of an infringement of these duties. In accordance with Art 16 para 1 Insurance Contract Act, the policyholder must notify the insurer of any significant circumstances that are known to him and suitable to influence the risk calculation of the insurer. The duty to notify is independent of whether the insurer asks for it or not (spontaneous disclosure duty (spontane Anzeigpflicht)).92 Significant are those circumstances that are likely to have an influence on the insurer’s decision to conclude an insurance contract or to conclude it at the underlying conditions (sentence 2 leg cit).93 That is regularly the case when a circumstance is (objectively) suitable to alter the insurer’s decision regarding the conclusion of the contract.94 Those circumstances that could cause the insured event or that could influence the nature and the extent of the insurance performance to be provided shall be, in any event, perilous,95 such as illness symptoms96 or a failed suicide attempt.97 If the parties agree to exclude a risk, the excluded risk shall be a non-significant circumstance.98 Finally, Art 16 para 1 sentence 2 Insurance Contract Act provides for a (rebuttable)99 presumption rule for the significance of a circumstance. A circumstance shall in no doubt always be significant if the insurer expressly and in written form asks for information about a circumstance.

91

Heiss and Lorenz (2014) pre Article 16–22, para 4. Cf. Heiss and Lorenz (2014) pre Article 16–22, para 13. 93 See also OGH 7 Ob 266/02x. 94 OGH 7 Ob 250/06z. 95 OGH 7 Ob 18/91. 96 OGH 7 Ob 170/13w. 97 OGH 7 Ob 17/86. 98 See Heiss and Lorenz (2014) Article 16–17, para 8. 99 OGH 7 Ob 60/87. 92

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The duty of disclosure applies to the policyholder only insofar as he knows about a circumstance. This means positive knowledge. Need to know shall be not enough.100 The policyholder also has no obligation to investigate.101 However, he must not act fraudulently (see Art 16 para 2 sentence 2 Insurance Contract Act).102 The disclosure must be given by the time of the conclusion of the contract at the latest (Art 16 para 1 Insurance Contract Act). The consequences of an infringement of the disclosure duties are explicitly and complexly regulated in Artt 16, para 2, and 17 et seqq Insurance Contract Act. Only the principles can be described here. In principle, the insurer has a 1-month right of withdrawal, both in the case of non-disclosure and in the case of misinformation. Article 16 para 2 sentence 1 Insurance Contract Act regulates the non-disclosure of significant circumstances. The 1-month right of withdrawal also applies if the disclosure of a significant circumstance is omitted because the policyholder has deliberately deprived himself of the knowledge of the circumstance (para 2 sentence 2 leg cit). However, a withdrawal is excluded if the insurer obtains knowledge of the indicated circumstance in another way (para 3 sentence 1 leg cit). A withdrawal is also excluded if the information is not given but the policyholder’s acts without fault (para 3 sentence 2 leg cit).103 If the policyholder has not disclosed a circumstance that the insurer has not asked expressly and precisely, the insurer can only withdraw if the non-disclosure is intentionally or grossly negligent (para 3 sentence 3 leg cit). Pursuant to Art 17 para 1 of the Insurance Contract Act, the insurer can also withdraw from the contract if an incorrect disclosure has been made concerning a significant circumstance. Here, too, the withdrawal is excluded if the incorrectness was known to the insurer or the disclosure was made incorrect without fault of the policyholder (para 2 leg cit). This, for example, shall be the case when the insurer formulates his questions unclearly or the policyholder follows an instruction from an intermediary.104 Under Art 20 para 1 Insurance Contract Act, the right of withdrawal is only permitted within 1 month. The period begins with the date on which the insurer becomes aware of the infringement of the duty of disclosure. The withdrawal is to be explained to the policyholder. In the event of a withdrawal, both parties are obliged to return the received services to each other (para 2 leg cit). If, however, the insurer withdraws only after the occurrence of the insured event, his obligation to perform shall remain in force. That should be the case if the circumstance that should have been disclosed (but had not been disclosed) has not affected the occurrence of the insured event (Art 21 Insurance Contract Act).

100

OGH 7 Ob 52/86. Schauer (1995), p. 108 102 Heiss and Lorenz (2014) Article 16–17, para 20. 103 However, in this case the insurer has an exceptional right to increase the premium (Art 41 para 1 Insurance Contract Act). 104 See Heiss and Lorenz (2014) Article 16–17, para 59. 101

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Article 16 et seqq Insurance Contract Act are only compulsory to the insurer. The policyholder’s disclosure duties can therefore be restricted by contract. Also, the legal consequences could be weakened. The policyholder has to provide information not only before concluding the contract but also if a significant circumstance changes during the contractual relationship, as well as in the case of an increase of the insured risk by the policyholder himself (for the subjective increase of the insured risk, see Art 23 para 2 Insurance Contract Act) and in the case of an increase of the insured risk by other circumstances that cannot be influenced by the policyholder (objective increase of the insured risk, Art 27 para 2 Insurance Contract Act). Both cases can exceptionally lead to a right of withdrawal of the insurer (Artt 24 para 1 and 27 para 1 Insurance Contract Act).

3.3.3

The Judicial Review of Insurance Contracts and General Policy Conditions

The second pillar, with which the European and the national legislators try to ensure sufficient transparency in the insurance contract, is the judicial review of the insurance contract in terms of its content, as well as its formal aspects. In contrast to the information duties, the insurer is not actively obliged to act transparently due to the case-by-case review of the court. However, if he uses an unlawful, in particular non-transparent contract formulation, he bears the risk of its invalidity. Furthermore, he exposes himself to the risk of claims of damages and a contention or an adjusting of the contract due to an error. The possible judicial review and the resulting risk of invalidity of the clauses, which have been determined to be unlawful, are intended to lead the insurer to a transparent contract.105 The countless publications on the topic testify to the importance and at the same time to the complexity of the subject. Subsequently, the principles are to be outlined from the Austrian perspective.

Preliminary Remarks In principle, the Austrian legal system does not have any special control over insurance contracts or their clauses. Hence, they should rather be measured against the requirements that apply to contracts in general. Thus, an insurance contract is also subject to a general review against unlawfulness (Gesetzwidrigkeit) and violation of moral principles (Sittenwidrigkeit).106 If the court detects a violation of a mandatory law or moral principles, it usually declares invalid the reviewed contract or at least parts thereof. In particular, with respect to the use of general terms and conditions (Allgmeine Geschäftsbedingungen—AGB) or contract forms

105 106

Cf. Stagl (2006), p. 4 seqq. Graf (2015b), Art 879 para 14 seqq.

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(Vertragsformblätter), the legal system places specific requirements in terms of content and form.107 The general terms and conditions play a special role in insurance contracts. As a rule, these pre-formulated parts of contracts, which in insurance contracts are usually referred to as general policy conditions (Allgemeine Versicherungsbedingungen— AVB), often not only include ancillary clauses—unlike other contracts. Rather, they generally (also) include the risk description (as well as their exceptions) and thus, besides the premium to be paid, the essential component of an insurance contract. This fact also explains the special importance of the GTC control (AGB-Kontrolle) for insurance contract law. From the perspective of transparency, the transparency requirement (Transparenzgebot) standardised in Art 6 para 3 Consumer Protection Act plays a special role, as well as the so-called validity control (Geltungskontrolle) standardised in Art 864a Civil Code and the ‘content review’ (Inhaltskontrolle) standardised in Art 879 para 3 Civil Code. The ‘Validity’ of General Policy Conditions According to Art 864a Civil Code According to Art 864a Civil Code, clauses in general terms and conditions (or other contract forms) that contain unusual content and are used by one contracting party are not going to be part of the contract if they disadvantage the other part and the latter, especially according to the external appearance of the document, did not have to reckon with them, unless the party using the clause would have specifically pointed out the clause that is disadvantageous. The purpose of the provision is to prevent the contractual partner, who does not lead the negotiations, from being taken by surprise.108 The scope of the provision is expanded, compared to Art 879 para 3 Civil Code and to Art 6 Abs 3 Consumer Protection Act. Thus, Art 864a Civil Code—due to the fact that it is situated in the Civil Code—is used in every contract, whether it is a b2b contract or a b2c contract. Moreover, it is not limited to ancillary clauses of a contract (like Art 879 para 3 Civil Code). But the condition in question must be used in general terms and conditions. That means it must not be negotiated individually. Due to those facts, insurance contracts are largely covered by the scope of Art 864a Civil Code. To the invalidation of a term pursuant to the quoted provision, all legal requirements must be fulfilled cumulatively. Therefore, a term used in the GTC must be unusual, surprising and disadvantageous. Whether a term is ‘unusual’ is to be judged according to objective criteria.109 This can be done in two ways: on the one hand, objective unusualness can result from the outward appearance of the contract. Thereby, it is sufficient that a clause is hidden and the average policyholder does not have to anticipate it, irrespective of whether it

107

To the legal policy justification of the special requirements related to Austrian insurance law Stagl (2006), p. 6 seqq. 108 Riedler (2015), Art 864a, para 32. 109 To the following Fenyves (2014a), pre Art 1, para 48 seqq.

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is (also) unusual.110 On the other hand, a clause is objectively unusual if it is formally in the right place but the policyholder does not have to reckon a clause with such content.111 This is especially the case if a clause is not customary. The question to be put is what expectations the average policyholder has in the content of the concrete contract.112 In addition to the requirement of objective unusualness, it is required that the clause is disadvantageous. The disadvantage does not have to be a ‘gross disadvantage’ within the meaning of Art 879 para 3 Civil Code.113 However, according to the case law, the clause must clearly differ from the usual legal standard.114 With regard to insurance contract law, it is provided that objective unusualness is not presumed from the fact that a clause rules the restriction of risks. On the contrary, the policyholder cannot expect every risk to be covered.115 Conventional risk restrictions are therefore regularly considered ordinary.116 The same applies to clauses that are linked to circumstances associated with the increase in the risk to the insurer.117 In addition to this objective ‘unusualness’, the legal consequences of Art 864a Civil Code shall also apply when a clause is subjectively unusual.118 This is the case if—by negotiations—specific expectations of the policyholder in terms the content of the contract are awoken, which have been finally disappointed by the formulation used by the insurer.119 The standard for the assessment is the average policyholder. Again, the legitimated expectation of the policyholder shall be taken into account.120 Once again it has to be pointed out that Art 864a Civil Code is only applicable if the policyholder has not been particularly pointed to the clause in question. The more unusual a clause is, the more clearly it must be pointed out.121 The legal consequence of using a term against Art 864a Civil Code lies in its nullity. But the policyholder must explicitly invoke the invalidity pursuant to Art 864a Civil Code (relative nullity [relative Nichtigkeit]).122 He also bears the burden of proof.123

110

Riedler (2015), Art 864a, para 35. Fenyves (2014a), pre Art 1, para 49. 112 Cf. OGH 7 Ob 201/12b. 113 OGH 7 Ob 216/11f. 114 OGH 7 Ob 194/11x. 115 OGH 7 Ob 250/07a. 116 OGH 7 Ob 18/00y. 117 OGH 7 Ob 12/90. 118 To the following Fenyves (2014a), pre Art 1, para 52 seqq. 119 Schauer (1995), p. 86. 120 Riedler (2015), Art 864a, para 35. 121 Fenyves (2014a), pre Art 1, para 54; OGH 7 Ob 22/10a. 122 OGH 8 Ob 85/13b. 123 OGH 8 Ob 85/13b. 111

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The Content Control of General Policy Conditions According to Art 879 Para 3 Civil Code Like other general terms and conditions, general policy conditions are also subject to the so-called content control pursuant to Art 879 para 3 Civil Code. A clause contained in general terms and conditions and that does not specify the main services of a contract shall be invalid if it is—considering all the circumstance of a case— grossly disadvantageous (gröblich benachteiligend). This provision is applicable not only to b2c contracts. However, unlike Art 864a ABGB, the provision is—at least according to the wording—limited to ancillary clauses of the provision. However, as the Austrian jurisprudence broadly understands the concept of the main services of a contract, it shall also be possible to apply the provision to the risk descriptions, which are regularly to be found in the general policy conditions.124 In the meaning of Art 879 para 3 Civil Code, a major disadvantage shall exist, on the one hand, if a clause deviates significantly from non-mandatory law.125 Since, however, the Insurance Contract Act mainly stipulates the rights of the policyholder in a non-mandatory way, the assessment of whether a term is grossly disadvantageous must be carried out in other ways. Thus, according to Austrian jurisprudence, gross disadvantage is given if the formulation of a clause would thwart the purpose of the contract for the other contractual party.126 The insurer’s risk description therefore is already grossly disadvantageous if this would jeopardise the achievement of the contractual purpose.127 The benchmark is the expected covering of the policyholder.128 At the same time, the Supreme Court also uses the principles developed in general whereby in the absence of corresponding non-mandatory provisions, a weighing of interests has to be made and the legal position of the contracting parties has to be compared.129 If a weighing of interests results in the inadequate protection of the legitimate interests of the contracting parties, the clause shall be ineffective. The legitimate interests must be formulated in each case individually. The insurer’s legitimate interests therefore usually lie in offering an insurance product for which the risk can be calculated and that allows the insurer to generate profits through an appropriate premium calculation.130 The policyholder’s legitimate interest, in return, lies in an adequate covering.131 If a term is grossly disadvantageous, it is ineffective (unwirksam). This means relative nullity, which again means that the court only takes it up if it is claimed.132

124

See only Fenyves (2014a), pre Art 1, para 62 seqq. Graf (2015b), Art 879 para 279. 126 Fenyves (1998), p. 364. 127 Fenyves (2014a), pre Art 1, para 69. 128 Fenyves (2014a), pre Art 1, para 71. 129 Fenyves (2014a), pre Art 1, para 73. 130 OGH 7 Ob 2137/96g. 131 Fenyves (2014a), pre Art 1, para 73. 132 Cf. OGH 7 Ob 15/92. 125

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Only in b2c business that the court examines ex officio if there is gross disadvantage, but only in the event that the disadvantage is evident.133 In b2b business, a majorly disadvantageous term shall be allowed to be reduced.134 This means that the clause is reduced to the permissible core and is applied (geltungserhaltende Reduktion). If a reduction is not allowed—as in the case of b2c contracts135—the contract becomes incomplete. In this case, the missing clause must be replaced by non-mandatory provisions. If there is no such provision or if the contractual parties reveal that both of them do not want to use existing provisions, a supplementary interpretation of the contract is to be performed (ergänzende Vertragsauslegung). It is thereby necessary to ask which clause would have been agreed upon by reasonable contractual parties who have knowledge of the incomplete nature of the contract (hypothetischer Parteiwillen).136

The Transparency Requirement According to Art 6 Para 3 Consumer Protection Act Finally, one of the major elements to achieve transparency is the transparency requirement of Art 6 Abs 3 Consumer Protection Act. It again is not a special feature of insurance law. According to the provision, a clause situated in general terms and conditions (or contract forms) is invalid if it is ‘unclear’ (unklar) or ‘incomprehensible’ (unverständlich). Article 6 Abs 3 Consumer Protection Act has been enacted in the course of the implementation of Art 5 para 1 Directive 93/13/EEC. The provision is not only limited to ancillary conditions. This circumstance distinguishes Art 6 Abs 3 Consumer Protection Act from Art 864a Civil Code. Also its scope is broader. In particular, the provision does not presuppose any substantive disadvantage.137 According to the Austrian case law,138 the transparency requirement is met if the clause was formulated in a comprehensible way. Furthermore, it is necessary that the content and scope of the clause is transparent. The relevant clause must reliably inform the consumer of his rights and obligations under the contract. The clause must enable the policyholder to enforce his rights and must not impose unauthorised duties on him. Furthermore, the policyholder must not be deceived or left in uncertainty about the legal consequences of the specific clause. In accordance with this definition, transparency requirements are made up of certain criteria: comprehensibility, certainty, clarity and completeness (regarding the content of these

133

OGH 6 Ob 507/95. Fenyves (2014a), pre Art 1, para 90. 135 ECJ C-618/10, (Banco Español de Crédito SA/Joaquin Calderon Camino); OGH 2 Ob 22/12 t. 136 Rummel (2014), Art 914, para 20. 137 Cf. Faber (2003), p. 37. 138 See the leading decision OGH 4 Ob 28/01y; see also EuGH C-96/14 (Jean-Claude Van Hove/ CNP Assurances SA). 134

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criteria, see Sect. 2). The criteria are measured by an average policyholder.139 In general, however, the requirements for the transparency of the general policy terms shall not be seen as too high. This shall all the more apply to the insurance contract where the product insurance can hardly be provided without using pre-formulated contract components.140 This fact is also taken into account in the definition of the average policyholder. Thus, the general policy conditions—as they contain essential elements of the insurance contract—require increased attention of the policyholder compared to other GTC.141 The policyholder has to read the insurance contract and its general policy terms in a careful way.142 The requirements to transparency subject to Art 6 para 3 Consumer Protection Act finally find their limits where the insurer would have to refrain using a clause only because of its complexity. On the premise that they are necessary, legal language, specialist terminology (such as illness pictures) or cross-references to other clauses or legal provisions shall also be allowed. If a term is non-transparent, it is invalid (unwirksam). It is again a matter of relative nullity.143 A reduction of the clause to its permissible core is ruled out according to the case law.144 It therefore comes to the application of non-mandatory law or to a supplementary interpretation of the contract.

4 Conclusion The explanations given here show only an overview of the complex issue of the requirements on transparency of insurance contracts in Austria. However, the overview already shows a few things in a clear way: transparency is a topic in the entire insurance law and therefore also is of particular importance to insurance contract law. Furthermore, it is to say that transparency aspects play a greater role in insurance law than in other legal areas. The focus is clearly on the protection of the policyholder. Finally, the issue of transparency is, however—as shown—not to be restricted to the protection of the policyholder alone. The insurer is also faced with a serious need for transparency. The reasons why transparency plays such an important role in insurance contract law can be seen quickly: the complexity of the product insurance as an exclusively legal product on the one hand and the complexity of the legal framework on the other. This will not change in the future as both of them—the complexity of the insurance product and the resulting complex legal framework—are inherent in the

139

OGH 7 Ob 216/05y. See only Fenyves (2014a), pre Art 1, para 115. 141 OGH 10 Ob 67/06k. 142 Korinek (1999), p. 159. 143 Cf. only Faber (2003), p. 39. 144 ECJ C-618/10, (Banco Español de Crédito SA/Joaquin Calderon Camino); OGH 2 Ob 22/12 t. 140

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nature of things. They arise from the fact that the product insurance is abstract and non-tangible for both sides and has—apart from the obligation to pay premiums—no direct impact on the policyholder. The summary can finally be rounded off by stating that insurance is only rarely voluntarily concluded.145 On the contrary, insurance is usually concluded when it has to be, when it is mandatory by law or because it appears reasonable for the policyholder. Thus, unlike the purchase of consumer goods, for example, it is usually only a necessary evil, which is why the interest in product insurance is generally limited. This fact, too, will not change in the future. Before this initial situation, the efforts of the legislature to provide for (more) transparency are now to be appreciated. Looking at the first pillar with which the legislator tries to achieve transparency— as outlined above—the (preliminary) contractual information requirements, the following can be said: like the different directives and their implementation in national law show, the legislator attaches particular importance to this first pillar. The last issued—and meanwhile partly implemented—IDD shows that the end of the flagpole has not yet been reached. In general, a need for sufficient information to be provided by the policyholder cannot be denied. As is often emphasised, a transparent relationship between the insurer and the policyholder is to be established through the mandatory provision of information. In the best case, the insurer should—by providing all necessary information—be enabled by the policyholder to make an informed decision as to whether and, if so, with what content an insurance contract should be concluded. The fact that legislative efforts make a significant contribution to providing the policyholder with the information necessary for this decision is unquestionable, but as is often pointed out, too much information can also have disadvantages146: on the one hand, the administrative burden for the insurer increases. This, in turn, indirectly affects the premium payable by the policyholder.147 On the other hand, it is questionable whether the information provided to the policyholder is actually perceived by the policyholder.148 It is questionable whether the policyholder really read the content of the contract and also understood it. Already the first point is to be doubted in many cases. Thus, overkill of information can also have a deterrent effect on the policyholder. In the worst case, it prevents him from dealing more deeply with the insurance contract. This, although a great deal of information would have been available—theoretically. Too much information can therefore be detrimental to the aims of the legislator. An extension of the information requirements therefore should only take place gingerly, if at all. Looking at the second pillar, the judicial review of the general policy conditions, one can say that—apart from all the efforts of the legislator—still an imbalance between the insurer and the policyholder exists. This has two reasons: first, the 145

This is especially the case if the policyholder is a private individual. Cf. Kalss (2015), pp. 8 seqq. 11, 20 seqq. 147 Cf. Wandt (2012), p. 353. 148 Kalss (2015), p. 8. 146

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policyholder himself. The legislator can do hardly more than to make sure that the policyholder is provided with all necessary information. In the end, it is, however, up to the policyholder to read and to process this information, to compare the different insurance products and to decide based on well-grounded knowledge.149 The reality often looks different.150 Of course the policyholder cannot be blamed too much—a certain imbalance will remain anyway, independently of a well-informed policyholder. This already results from the generally unequal distribution of (financial) resources between the insurer and the policyholder, which allows the insurer to unilaterally set the terms of the contract. The policyholder has only the option to accept this fact, to renounce the insurance or to switch to another insurer whereby the last option bears, of course, the risk that the terms and conditions of the other insurance company are problematic in the same way. In front of this initial situation, Artt 864a and 879 para 3 Civil Code and Art 6 para 3 Consumer Protection Act, however, have turned out to be quite useful tools for the courts to compensate or at least mitigate this discrepancy. Over the years, a clear set of criteria has been developed, which must be met in order to comply with the transparency requirements both in substantive and in formal terms. The fact of the (now) clearly circumscribed criteria on the one hand, together with the legal consequence of the ineffectivity of the incriminated clause on the other hand (supplemented by the court decision that a reduction of the clause to its core is not permissible), is an important factor to encourage a transparent insurance contract. These effects are strengthened in Austria by the possibility of collective legal actions (Verbandsklagen). Thus, consumer protection law enables certain associations to let general terms and conditions be reviewed in court without being affected by these terms and conditions themselves (Art 28 et seqq Consumer Protection Act). Legitimate associations,151 above all the Association for Consumer Information (Verein für Konsumenteninformation—VKI), make use of this possibility quite frequently— also in insurance law.152 Finally, regarding the relationship between the policyholder and the insurer, it is to be said that, by means of Art 16 et seqq Insurance Contract Act, a high level of transparency is created for the insurer, achieved by the disclosure duties to the policyholder. According to Artt 16 and 17 Insurance Contract Act, the policyholder has to transmit information about all circumstances to the insurer that are significant for the calculation of the premiums of the insurer. The disclosure duties strictly sanctioned have to be complied with before the conclusion of the contract and—if there are significant changes—also during the existing insurance relationship. In general, the interplay of these provisions guarantees a high level of transparency for the insurer. However, the current system of spontaneous disclosure risks entails risks for the policyholder and—in general—legal uncertainty. Therefore, the Austrian

149

Cf. Korinek (2016), p. 25. Cf. also Kalss (2015), pp. 8 seqq. 11, 20 seqq. 151 See Art 29 para 1 Consumer Protection Act. 152 Cf e.g. OGH 7 Ob 131/06z; OGH 7 Ob 82/07w; OGH 7 Ob 201/12b; OGH 7 Ob 216/11g. 150

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legislator should – like it had happened in other countries—also be encouraged to take a (complete) turn from the current system of spontaneous disclosure duties to a questionnaire system—this also under the aspect of transparency. Such a system could in particular increase the legal certainty on the side of the policyholder as he would only have to answer questions posed to him. As long as he would have answered completely and truthfully, he would no longer be confronted with the question of which information, from the insurer's point of view, could be relevant and must therefore be communicated. At the same time, it could—if one looks at the complex regulations in Art 16 et seqq Insurance Contract Act—also help to simplify the law.153

References Baran B, Peschetz A (2015) Österreichisches Versicherungsrecht, 3rd edn. Manz, Wien Bdylinski F (2015) Fundamentale Rechtsgrundsätze. Verlag Österreich, Wien Böhm (2018) Informations- und Beratungspflichten für VU nach dem VersicherungsvertriebsrechtsÄnderungsgesetz 2018 (VersVertrRÄG 2018) (I) in: ecolex 2018, 1068 Dreher M (1991) Die Versicherung als Rechtsprodukt. Mohr Siebeck, Tübingen Ertl G (1997) Neuerungen im Versicherungsvertragsrecht. ZVR:2 seqq Evermann M (2002) Die Anforderungen des Transparenzgebotes an die Gestaltung von Allgemeinen Versicherungsbedingungen – Unter besonderer Berücksichtigung der Richtlinie 93/13/EWG. Verlag für Versicherungswirtschaft, Karlsuhe Faber I (2003) Inhaltskontrolle allgemeiner Versicherungsbedingungen und Transparenzgebot. ÖJZ:49 seqq Fenyves A (1997) Deutsches und österreichisches Versicherungsvertragsrecht – Gemeinsamkeiten und Unterschiede. ZVersWiss:295–323 Fenyves A (1998) Article 43. In: Fenyves A, Kronsteiner F, Schauer M (eds) Kommentar zu den Novellen zum VersVG. Springer, Wien Fenyves A (2007) Das Transparenzgebot aus der Sicht des Versicherers. VR:36–43 Fenyves A (2009) Die Konsequenzen der Intransparenz von “Kostenklauseln” in den AVB der Lebensversicherung. VR:20 seqq Fenyves A (2014a) pre Article 1. In: Fenyves A, Schauer M (eds) Kommentar zum VersVG. Verlag Österreich, Wien, pp 1–55 Fenyves A (2014b) Article 5c. In: Fenyves A, Schauer M (eds) Kommentar zum VersVG. Verlag Österreich, Wien, pp 81–84 Graf G (2015a) Article 3 FernFinG. In: Kodek G, Schwimann M (eds) ABGB Praxiskommentar, 4th edn. LexisNexis, Wien Graf G (2015b) Art 879. In: Kletečka A, Schauer M (eds) ABGB-ON - Kommentar zum Allgemeinen bürgerlichen Gesetzbuch. Manz, Wien Heiss H (2009) Die Informationspflichten des Versicherers. VR:25 seqq Heiss H, Lorenz B (2014) pre Article 16–22. In: Fenyves A, Schauer M (eds) Kommentar zum VersVG. Verlag Österreich, Wien, pp 1–38 Kalss S (2015) Das Scheitern des Informationsmodells gegenüber privaten Anlegern, 19. ÖJT II/1:9 seqq

153 Cf. Heiss (2009), p. 25, p. 27; see also Principles of European Insurance Contract Law Art 2:101 para 1.

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Korinek S (1999) Das Transparenzgebot des § 6 Abs 3 KSchG – Teil I. JBl:149 seqq Korinek S (2016) Information und Transparenz beim Vertragsschluss. VR:24 seqq Kronthaler Ch (2016a) Die Informationspflichten des Versicherers vor Vertragsabschluss nach dem VAG 2016 - Teil 1. ZFR:164 seqq Kronthaler Ch (2016b) Die Informationspflichten des Versicherers vor Vertragsabschluss nach dem VAG 2016 - Teil 2. ZFR:226 seqq Leitner M (2005) Das Transparenzgebot. Manz, Wien Leverenz E (2008) Vertragsschluss nach der VVG-Reform. VVW, Dresden Riedler A (2015) Article 864a ABGB. In: Kodek G, Schwimann M (eds) ABGB Praxiskommentar, 4th edn. LexisNexis, Wien Rudy M (2015) Article 7. In: Prölls J, Martin A (eds) Beck’scher Kurzkommentar zum Versicherungsvertragsgesetz, 29th edn. C.H. Beck, München Rummel P (2014) Article 914. In: Rummel P, Lukas M (eds) Kommentar zum ABGB, 4th edn. Manz, Wien Schauer M (1995) Das österreichsiche Versicherungsvertragsrecht, 3rd edn. Service-Fachverlag an der Wirtschaftsuniversität Wien, Wien Schauer M (2005), Die Informationspflichten im neuen Versicherungsvermittlerrecht, VR:158 seqq Schauer M (2010) Insurance business law between business law an consumer protection. In: Verschraegen B (ed) Austrian Law – an international perspective. Jan Sramek, Wien, pp 189–207 Schimikowski P (2007) VVG-Reform: Die vorvertragliche Informationspflicht des Versicherers und das Rechtszeitigkeitserfordernis. r+s:133–137 Stagl JF (2006) Geltung und Transparenz Allgemeiner Geschäfts- und Versicherungsbedingungen (nach österreichischem Recht). Verlag für Versicherungswirtschaft, Karlsruhe Wandt M (2012) Transparenz als allgemeines Prinzip des Versicherungsrechts. In: Beckmann RM, Mansel H-P, Matusche-Beckmann A (eds) Weitsicht in Versicherung und Wirtschaft, Gedenkschrift für Ulrich Hübner. C.F. Müller, Heidelberg, pp 341–353 Wiebe A (2015) Art 861. In: Kletečka A, Schauer M (eds) ABGB-ON - Kommentar zum Allgemeinen bürgerlichen Gesetzbuch. Manz, Wien

Transparency in the Insurance Contract Law of Croatia Loris Belanić and Dionis Jurić

1 Introduction: Legal Sources of the Insurance Law in Croatian Law Insurance law in Croatia is fully codified (regulated by law), but the provisions are found in several acts of legislation that are not in mutual subordination. In other words, the codification of Croatian insurance law was conducted by the method of a separate instead of a single codification in a single act.

1.1

Civil Obligations Act

The Civil Obligations Act1 (in force since January 1, 2006) is the principal legal source of civil law in the Republic of Croatia and is consequently the most important legal source of the Insurance Contract Law. The insurance contract is governed by section 27 of the Civil Obligations Act, Articles 921–989. The section on the insurance contract is divided into three parts. The first part (Arts. 931–947) contains common provisions on the insurance of property and insurance of people. The second part (Arts. 948–965) contains specific provisions concerning property insurance, and the third part (Arts. 966–989) contains provisions relating to the insurance of people. Given that individual insurance contracts have the character of long duration (especially the life insurance contract), the provisions of the old Civil

1

Official Gazette, n. 35/2005, 41/2008, 125/2011, 78/2015, 29/18.

L. Belanić (*) · D. Jurić Faculty of Law, University of Rijeka, Rijeka, Croatia e-mail: [email protected]; [email protected] © Springer Nature Switzerland AG 2019 P. Marano, K. Noussia (eds.), Transparency in Insurance Contract Law, AIDA Europe Research Series on Insurance Law and Regulation 2, https://doi.org/10.1007/978-3-030-31198-8_2

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Obligations Act of 1978,2 which was applied and will continue to be applied to insurance contracts that were concluded before January 1, 2006, will remain in force since the current Civil Obligations Act has been in effect since that date. Of course, in addition to the special provisions of the Civil Obligations Act, which regulate the insurance contract (section 27 of the Civil Obligations Act), other provisions of the Civil Obligations Act apply to the insurance contract, which also apply to other contracts, in particular the provisions of the general part of the Civil Obligations Act, such as the provisions on the conclusion of contracts, representation, interpretation of contracts, validity of contracts, statute of limitations, calculation of deadlines, etc. The Civil Obligations Act is a general act that applies to the insurance contract (lex generalis), and its provisions apply to the largest number of types of insurance contracts. However, there are some specific types of insurance contracts that are based on different principles of insurance; therefore, the provisions of section 27 of the Civil Obligations Act on the insurance contract are not applicable. Special regulations (lex specialis) are applied to such specific insurance contracts. The types of insurance that arise on the basis of these specific insurance contracts are defined by Article 923 of the Civil Obligations Act, which defines the so-called scope of application of the Civil Obligations Act regarding insurance contracts. According to this provision, the provisions of the Civil Obligations Act in the insurance contract shall not apply to (a) maritime insurance,3 (b) other insurance to which the rules on maritime insurance apply (insurance in inland, i.e., river navigation), (c) air transport insurance,4 (d) insurance of goods in land transport,5 (e) insurance of collaterals,6 (f) reinsurance relationships,7 (g) insurances regulated by a separate act.8

2 Official Gazette of the SFRY, n. 29/1978, Official Gazette, n. 53/1991, 73/1991, 111/1993, 2/1994, 7/1996, 112/1999 and 88/2001. 3 Maritime insurance is regulated by the Maritime Code (Official Gazette, br. 181/2004, 76/2007, 14/2008, 61/2011, 56/2013, 26/2015, 17/2019) and the provisions relating to the contract of maritime insurance (Art. 684-747d of the Maritime Code). 4 With regard to insurance contracts in air transport, provisions of the Act on Obligatory and Proprietary Rights in Air Transport are applied (Official Gazette no. 132/2008, 63/2008, 134/2009, 94/2013). This then excludes the application of the Civil Obligations Act provisions. Article 126 of the Act provides that the provisions of the Maritime Code are applied to the insurance contract in air transport for those insurance questions that are not specially regulated by this Act. 5 Rules of maritime security, therefore the rules of the Maritime Code (Art. 923 par. 3 of the Civil Obligations Act), are appropriately used in the insurance of goods in land transport. 6 Claims insurance in Croatia is not regulated by special regulations. This insurance is, by its legal nature, similar to bank guarantees; therefore, banking rules apply to such insurances. 7 Re-insurance is based on principles different from those underlying other types of insurance, while the content and form of re-insurance contracts is primarily developed in business practices between insurers and re-insurers. For these reasons, the Civil Obligations Act excludes the application of its provisions to the insurance contract in relations arising from re-insurance. 8 In accordance with the principle of lex specialis derogat legis generalis, if a special law regulates some questions with an obligations character with regard to insurance contracts, then the advantage in the application understandably lies with the provisions of the special law in relation to the Civil

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1.2

35

Insurance Act

The Insurance Act9 (applicable in its entirety as January 1, 2016) is the most important status-organizational legal regulation in the Croatian insurance law. This Act fully regulates the status of legal entities engaged in insurance business as their economic activity, in line with acquis communitaire, in particular with regard to the Solvency II Directive.10 This Insurance Act regulates the status position of the insurer (joint stock company for insurance and mutual insurance company), the conditions and manner of conducting insurance business in insurance companies (license to conduct transactions, appointed actuaries, transfer of insurance portfolio, transfer of selected tasks to a third party, performing work outside the country, free insurance work by companies in Croatia that are seated in the EU, risk management, business books and reports, audit and supervision of insurance companies), liquidation of insurance companies, insolvency of insurance companies, representation and intermediation in insurance, consumer protection in insurance, status of associations of insurance companies, insurance pools and the Croatian Insurance Bureau, as well as collision norms of the competent law applicable to the insurance contract. The Insurance Act, in addition to its status-organizational provisions, contains several provisions that are directly related to the insurance contract. These are Articles 380–382, referring to information that the insurer (insurance company) has the duty to communicate/deliver to the policyholder prior to the conclusion of an insurance contract or during the conclusion of an insurance contract. So the duty of the insurer to inform the policyholder (precontractual information or information for the duration of the insurance contract) is governed by the Insurance Act and not the Civil Obligations Act (the Civil Obligations Act stipulates only the (precontractual) obligation of the policyholder to declare to the insurer all circumstances relevant for risk assessment, as well as those circumstances that were applied throughout the duration of the insurance contract).

Obligations Act, which is expressly recognized in the Civil Obligations Act in Art. 923, sec. 3. For example, as a special regulation that would have the advantage in the application in relation to the Civil Obligations Act is the Act on Compulsory Insurance within the Transport Sector (Official Gazette no. 151/2005, 36/2009, 75/2009, 76/2013, 152/2014) regarding questions about the insurance contract against a third party that are regulated by this Act. 9 Official Gazette, n. 30/2015, 112/2018. 10 Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) (Text with EEA relevance), OJ L 335, 17.12.2009, pp. 1–155.

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Consumer Protection Act

The Consumer Protection Act11 regulates the fundamental rights of consumers in the purchase and acquisition of goods and services on the market,12 and as many as seven EU directives relating to consumer protection in Croatian legislation (listed in Art. 3 of this Act) have been implemented with it. In view of the legal position of consumers, the Consumer Protection Act operates as lex specialis in relation to the Civil Obligations Act.13 The Consumer Protection Act specifically regulates the matter of conclusion of distance contracts for the sale of financial services (Arts. 80–94), which includes the insurance contract.14 Thus, the Consumer Protection Act applies to the insurance contract only if such a contract is concluded as a distance contract. The Consumer Protection Act does not regulate a specific type of insurance for which the provisions of this Act would have an advantage in the application in relation to the Civil Obligations Act. These are provisions that in part regulate the matter of insurance contracts (like the Civil Obligations Act) provided that the said provisions supplement or even change some provisions of the Civil Obligations Act regarding the insurance contract. For example, the consumer’s right to unilateral termination of the insurance contract, which was concluded with the means of distance communication,15 is not regulated by the Civil Obligations Act (or by the Insurance Act), so in that sense the given provision represents a supplement of Article 946 of the Civil Obligations Act, which generally refers to the duration and termination of the insurance contract.

1.4

Other Regulations

In addition to the above regulations, there are a number of regulations that also regulate the market and relationships in the insurance industry. This certainly incudes the Companies Act16 as the fundamental legislation governing the establishment and operation of companies and whose provisions also apply to the establishment and operation of insurance companies that can be founded as joint stock companies, European companies, or mutual insurance companies.17 Furthermore, the source of insurance law is also the Act on Licensing of Trades,18 which, as 11

Official Gazette, n. 41/2014, 110/2015, 14/2019. Art. 1 of the Consumer Protection Act. 13 Mišćenić (2014), p. 279. 14 Art. 80, sec. 2 of the Consumer Protection Act. 15 Art. 87 of the Consumer Protection Act. 16 Official Gazette, n. 111/1993, 34/1999, 121/1999, 52/2000, 118/2003, 107/2007, 146/2008, 137/2009, 125/2011, 152/2011, 111/2012, 68/2013, 110/2015. 17 Art. 19, sec. 1 of the Insurance Act. 18 Official Gazette, n. 143/2013. 12

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the basic regulation, governs the content, manner, and conditions for conducting business and is alternatively applied to the operation of the insurance agent who may perform his activity as a licensed trade for insurance representation.19 A special place among the insurance sources in Croatia occupies the Act on the Croatian Agency for Supervision of Financial Services (HANFA).20 This Act is not an immediate source of insurance law but is important for the supervision of insurance undertakings, and that includes the right of control over the fulfillment of obligations under the insurance contract.21 The HANFA adheres to the supervision of insurance companies, pension companies, as well as agents and insurance intermediaries. In performing delegated powers of control, it provides various implementing regulations of the Insurance Act, as well as a variety of decisions, issuing or revocation of licenses, permits and approvals, issuing opinions, keeping the register and other activities within its competence.22

2 Transparency Pursuant to the Regulation of the Insurance Contract in Croatia 2.1

Definition of Transparency in the Croatian Insurance Contract Law

The Croatian legislation does not expressly define the concept of transparency in insurance contract law. Transparency in insurance contracts in Croatian law is implemented through the statutory duty of contracting parties (insurer and policyholder) to notify (inform) about various circumstances (discussed in continuation of the text). Some information that must be provided to the other contracting party is prescribed by law, while for some information (circumstances), there is, in principle, a legal requirement for their provision, but the fulfillment of specific obligations depends on the knowledge of individual contracting parties (usually the policyholder) about specific information (circumstances). Precisely, transparency in the insurance contract has the effect of enabling the preservation of balance between the contracting parties, to protect their rights, as well as the true will of the parties themselves, the preservation of legal certainty and equality of the legal status of contracting parties, and the principle of good faith in dealing.23

19

Art. 402 of the Insurance Act. Act on the Croatian Agency for Supervision of Financial Services, Official Gazette, n. 140/2005, 154/2011, 12/2012. 21 Keglević (2016), p. 314. 22 Art. 15 of the Act on the Croatian Agency for Supervision of Financial Services. 23 Keglević (2016), p. 335. 20

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The Insurer’s Duty to Inform

The duty of the insurer (insurance company) to provide the policyholder and the insured party with information is, in the Croatian law, regulated by the Civil Obligations Act, the Insurance Act, and the Consumer Protection Act. A distinction is made between liability insurers to provide notification before the conclusion of insurance contracts, as well as for the duration of the insurance contract (from its conclusion to its termination). Generally speaking, the content of the insurer’s duty to inform the policyholder can be classified into three main groups: – providing information on contracting parties (including information on the legal personality and legal status of the insurer); – providing information on individual elements of the insurance contract (e.g., the duration of the contract, the amount of the premium, conditions of insurance, etc.); – providing information on the right to file complaints and available remedies with information on how to resolve disputes between the insurer and the policyholder/ insured.24

2.2.1

Precontractual Information Duty

The purpose of the insurer’s duty to provide precontractual information to policyholders is that the future policyholder is enabled with easy reference to and comparison of various insurance products in order to choose that insurance product that suits him best. It is thereby not necessary that the insurer provides direct information to the potential insured person, but he can obtain them through other sales channels (brokers, insurance agents) for the information duty to be considered fulfilled.25 Furthermore, the purpose of this duty is also to inform future policy holders on the terms of insurance because they will be binding to the future policyholder only if they were known or should have been known to him at the time of the conclusion of the insurance contract (i.e., before the contract was concluded).26 According to the Civil Obligations Act, the insurer is obliged to inform the policyholder that the general and/or special conditions of insurance are an integral part of the contract and hand him their text, if these conditions are not already printed on the insurance policy.27 This obligation can be fulfilled only in the way that the insurer familiarizes the policyholder with the insurance conditions before the conclusion of the insurance contract. It is not explicitly required that the policyholder

24

Keglević (2016), p. 341. Ćurković (2005), p. 30; Matijević (2006), p. 89. 26 Art. 295, sec. 5 of the Civil Obligations Act. 27 Art. 926, sec. 3 of the Civil Obligations Act. 25

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actually meets the conditions of insurance but that he is given the opportunity to be familiarized with them. The policyholder who is not familiar with the conditions of insurance but was given the opportunity for this cannot invoke his lack of familiarity. On the other hand, if the insurer violates the information duty toward the policyholders with regard to the insurance conditions, this has as a consequence the inability of calling on the conditions of insurance.28 In addition to the Civil Obligations Act, the Insurance Act also stipulates which information the insurance company shall submit prior to the conclusion of any insurance contract (whether it is a life or nonlife insurance). The insurance company shall submit regulated information to the policyholder in writing by way of (ordinary) post or e-mail. According to Article 380 par. 1 of the Insurance Act, the insurer is required to provide a list of information and data.29

Nonlife Insurance If the insurance company provides nonlife insurance, then it must provide the policyholder in the notification with some additional information. In this case, in addition to the information that the insurance company is obliged to specify when entering into any contract of insurance, according to Article 380 par. 2 of the Insurance Act, it must provide which governing law is applicable to the insurance contract when the policyholder is a natural person and the contracting parties do not have the freedom of choice of law. If the parties have the freedom of choice and the contractor is a natural person, then it must also state which law the insurance company proposes as relevant. When the nonlife insurance is offered under the right of establishment or freedom to provide services, the policyholder, before assuming any obligation, shall be informed in all documents issued to him on the Member State in which the head office is located or, if necessary, the branch office through which the contract will be

28

Belanić (2014), pp. 1455, 1490. In particular, (1) the company name and the registered office of the insurance company entering into a contract of insurance; (2) when the insurance contract is concluded through a branch office of the insurance company, in addition to the data from the previous point, it is necessary to state the company name and the registered branch office of the insurance company through which a contract of insurance is concluded; (3) the insurance requirements applicable to the insurance contract which is intended to be concluded; (4) the deadline within which the offer obliges the offeror, the right to recall an offer to conclude an insurance contract, and the right to cancellation of the insurance contract; (5) the conditions of termination and breach of contract; (6) the duration of the insurance contract; (7) the amount of the insurance premium, the means of payment of insurance premiums, amount of contributions, taxes and other costs and fees that will be charged in addition to the insurance premium and the total amount of payments; (8) the information on the procedure for resolving complaints regarding contracts, including the address to which complaints are received, and the competent body for resolving complaints; (9) the body responsible for overseeing of the insurance company. 29

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concluded, provided that this does not apply to large risks.30 In this case, the insurance company is obliged to specify in the information the name and address of the representative of the insurance company. If all this information to be provided the policyholder is contained in the conditions of insurance that the insurer had given to the policyholder before concluding the insurance contract, then it is considered that the insurer has fulfilled his obligation to inform the policyholder.31

Life Insurance If the insurance company provides life insurance services, then the policyholder shall be provided with required additional information in addition to information that otherwise should be provided at the conclusion of each insurance contract.32 In the contract of life insurance where the policyholder bears the investment risk (in investment funds), then, in addition to the aforementioned data, the insurer is obliged to provide precontract information about the following33: 1. In the case of insurance related to the share value of the UCITS fund, he should inform the policyholder of the data from the prospectus and the rules of the UCITS fund as defined by the law governing the establishment and operation of open-end investment funds with a public offering. 2. In the case of insurance related to the value of assets or shares of the internal fund, he should inform the policyholder of the data contained in the rules of internal funds (the investment policy fund, the method of calculating the net value of property of internal funds, the method of calculating the value of the share of domestic funds, the manner and time of publishing the value of the share of domestic funds, premium costs, the costs charged to the assets of the internal fund, the costs incurred in the event of termination of the insurance contract). 30

Art. 380, sec. 3 of the Insurance Act. Art. 380, sec. 7 of the Insurance Act. 32 According to Art. 380, sec. 5 of the Insurance Act, these additional information are: (1) the exact instruction where the policyholder can find the report on the solvency and financial condition of the insurance company, which provides the policyholder with easy access to this information; (2) the determination of every benefit and each option; (3) the base, criteria, and conditions for participation in the profits and the right to payment of accrued gain in all cases payments; (4) the tables of redemption value and tables of capitalized sums per insurance years; (5) the information that the policyholder may cancel the contract of life insurance no later than 30 days from the receipt of notification of the insusrance company, whereby the policyholder does not bear the obligations arising out of that contract; (6) other specific information needed to make the policyholder properly understand the risks underlying the contract and obligations of the parties; (7) the information on agreements for the application of the standstill period containing the conditions and consequences of entering into these agreements, where applicable; (8) the relevant law applicable to the insurance contract, when the parties do not have the freedom of choice of law; (9) the freedom of choice of applicable law and the law which the insurance company proposes to select as applicable. 33 Art. 380, sec. 6 of the Insurance Act. 31

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3. In the event of insurance-related equity index or other benchmark, the policyholder should be notified of the data relating to the core assets of the equity index, stock index, or other benchmark. As with nonlife insurance, in life insurance, the rule is that if all these data, which must be submitted to the policyholder, are contained in the conditions of insurance that the insurer gave to the policyholder before concluding the insurance contract, then it is considered that the insurer has fulfilled its obligation on informing the policyholder.34

Consumer Insurance Distance Contract Special provisions about the duty of the insurer to provide so-called prior notification to the consumer (the policyholder, the insured, the insurance beneficiary) when concluding an insurance contract by means of distance communication (Internet, e-mail, phone, etc.) are contained in the Consumer Protection Act (Arts. 80–94), which are the result of adopting the Directive 2002/65/EC on the sale of financial services.35 The insurer is required, prior to entering into an insurance contract, to deliver prior notice to the consumer by means of distance communication, which must include four categories of information to be transferred to potential contractors (the insured): (1) information about the supplier (insurer), (2) information about the financial service (i.e., insurance contract), (3) specific information on contract details, (4) information on the method of dispute resolution (Art. 81 par. 1 of the Consumer Protection Act). Supplier information is related to the type of legal entity, organization, registration (identification mark), the address of the headquarters, and data on the supplier representative if there is one in the Member State of the policyholder (Art. 82 of the Consumer Protection Act). Information on the financial service must clearly explain the main features of the financial service and the total price that includes taxes and other charges, specify additional costs and risks, and introduce a system of payment and the manner of execution and financial services.36 The specific information on the details of the contract has to include the minimum duration of the contract if the financial services are provided permanently and repeatedly; an indication of whether there is a right to unilateral termination of the contract; the deadline and the presumption establishing that right, indicating the amount that the consumer shall pay in the event of termination; the provisions of the applicable law; etc. (Art. 84 of the consumer protection). With regard to the information on the manner of resolving disputes, information should be provided on whether there is a mechanism of out-of-court settlement, the assumptions under 34

Art. 380. sec. 7 of the Insurance Act. Directive 2002/65/EC of the European Parliament and of the Council of 23 September 2002 concerning the distance marketing of consumer financial services and amending Council Directive 90/619/EEC and Directives 97/7/EC and 98/27/EC OJ L 271, 9 October 2002, pp. 16–24. 36 Art. 83 of the Consumer Protection Act. 35

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which the consumer can use this mechanism, and the information on the existence of guarantee funds or other means to compensate the consumer.37 However, the Insurance Act also specifically states that in the case of concluding an insurance contract through the Internet, all information that the insurer is obliged to provide the policyholders with before concluding an insurance contract (information relating to all insurance contracts, as well as information relating to nonlife and life insurance) must be available on the website and must be accepted prior to the conclusion of the insurance contract (Art. 380 par. 8 of the Insurance Act).

2.2.2

Contractual Information Duty During the Insurance Contract Period

The duty of the insurer to inform the policyholder exists for the duration of the insurance contract, i.e., after its conclusion until its termination. In this period, which lasts for a particular longer period of time (possibly even for several years, especially in life insurance), it is possible that there is a change in certain circumstances, of which the insurer had informed the policyholder prior to the conclusion of insurance contracts (precontract). The meaning of the contractual duty of notification (informing) of the policyholder is to maintain the contract in force, with the simultaneous possibility of change or adjustment to the new circumstance of the contract, or breach of contract if the parties do not want to be further bound by such a contract.38 Precisely due to the notification about data change over the term of the insurance contract, the policyholder (the insured) can ask the questions to the insurer about his rights, can inform the insurer about the changes in the risk and about the occurrence of the insured event, and can make the claims (against the insurer) for the exercise of his rights.39

Nonlife Insurance With regard to nonlife insurance, according to Article 381 paragraph 1 of the Insurance Act, the insurer is obliged to notify the insurer in writing of the change of data referred to in Article 380 paragraph 1 of the Insurance Act, i.e., those data relating to all types of insurance (irrespective of whether it is life insurance or nonlife insurance). Therefore, the insurer will be obliged to notify the policyholder if changes have occurred in these data: details about the company and the head office of the insurance company or subsidiaries; insurance terms applicable to the insurance contract; deadline in which the offer is binding to the recall of the bid; right to cancel the contract; terms of termination and breach of contract; duration of the

37

Art. 85 of the Consumer Protection Act. Keglević (2016), pp. 343, 345. 39 Keglević (2016), p. 345. 38

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insurance contract, premium amount, method of payment of premiums, and amount of contributions, taxes, and other charges payable except for premiums; procedure for resolving a complaint; and details on the competent insurance supervisory body. There shall be no obligation of the insurer to notify the policyholder if there has been a change in the application of the relevant insurance contract law.

Life Insurance In terms of life assurance, the insurer is also obliged to notify the policyholder of changes in the data that, during the term of the insurance contract, refer to all types of insurance contracts (i.e., the same data as those relating to nonlife insurance). In addition to informing the policyholder of the change in these data, the life insurance insurer has the obligation to provide additional information to the policyholder for the duration of the insurance contract. This is due to the fact that life insurance contracts generally last longer than nonlife insurance contracts, and consequently there is a greater likelihood of changes in circumstances affecting the contract during its lifetime.40 Thus, in Article 381 paragraph 2 of the Insurance Act, it is stated that, with regard to an offer to conclude or conclusion of a life insurance contract, the insurance company shall provide information on the amounts of potential payments above and beyond agreed payments and the insurance company shall provide the policyholder with an example of the calculation of possible payment after the expiry of the insurance, applying the basis for calculating the premium with three different interest rates. The above does not apply to life insurance contracts in the event of death. The insurance company is obliged to inform the policyholder, in a clear and comprehensive manner, that the example is merely an assumption-based calculation model and that the contractor cannot make any contractual claims based on the calculation example. If the matter at hand is a life insurance policy, with profit participation, the insurer is obliged to inform the policyholder, once a year in writing, about the state of the total insured cover, including profit participation, during the insurance contract. Furthermore, when the insurance company has provided information on the prospective future development of profit participation, the insurance company shall inform the policyholder of the difference between the actual participation in the profits and the data given at the conclusion of the contract.41 In the event of insurance where the policyholder bears the risk of investment, the insurer is obliged to inform the policyholder of the value of the property by the insurance policy once a year.42

40

Keglević (2016), p. 344. Art. 381, sec. 3. of the Insurance Act. 42 Art. 381, sec. 4 of the Insurance Act. 41

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Policyholder’s Duty of Disclosure

Transparency in insurance is a two-sided process between the insurer on the one hand and the policyholder on the other. This means that the policyholder has the obligations to provide to the insurer certain information both before and after the conclusion of the insurance contract. Unlike the insurer, the policyholder’s obligations to report various circumstances to the insurer are regulated only by the Civil Obligations Act and not by other regulations.

2.3.1

Precontractual Disclosure Duty

The insurer’s precontractual disclosure duty is the duty or obligation of the insurer to report to the insurer all the circumstances relevant to risk assessment.43 The purpose of reporting a significant risk assessment circumstance is that the insured can make a proper decision whether or not he will conclude an insurance contract and under which conditions. The amount of premium or scope of the insurance cover is often dependent on certain circumstances (e.g., the insured’s age, his work, new purchase value of the motor vehicle, the power of the motor vehicle, the material from which the building was built, etc.), while at other times such circumstances exist that would make certain risks unacceptable to the insurer (e.g., the insured suffering from certain illnesses, extreme sports, a motor vehicle journey to a particular country). In other words, the insurer may reject the policyholder’s offer to conclude an insurance contract if such a contract would not be concluded under the circumstances provided by the policyholder. For this reason, the statutory norm stipulates the obligation of the policyholder to inform the insurer of the circumstances that were known to him, that is, that could not remain unknown to him when concluding the insurance contract, and that are significant for the risk assessment or the decision to conclude an insurance contract.44

Significant Circumstances Relevant for Risk Assessment The Civil Obligations Act states by general rule that the policyholder is obliged to report all circumstances relevant to risk assessment (Art. 931), i.e., to make a decision on the conclusion of the insurance contract. The Civil Obligations Act does not, however, specify what exactly this circumstance is. This means, in principle, that if the policyholder knew that a particular circumstance is significant for risk assessment, he is obliged to notify the insurer (the so-called active duty of reporting). However, it is a realistic fact that the policyholder (as he is not a security professional) cannot know which circumstances are important for the insurer to 43 44

Art. 931 of the Civil Obligaitons Act. Belanić (2014), p. 1501.

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assess the risk and decide whether to conclude the insurance coverage. Therefore, it may be considered that the policyholder has fulfilled his duty to report if he fully and accurately responded to all questions raised by the insurer (or his agent) when concluding the insurance contract (the so-called passive duty of reporting). However, in view of the generally established reporting duty, the insurer might argue that a particular circumstance, which the policyholder knew about or ought to have known about, caused the consequences to arise due to failure to report the circumstances (consequences of a deliberate incorrect application under Article 932 of the Civil Obligations Act, i.e., the consequence of unintentional inaccuracies or incompleteness of the application under Article 933 of the Civil Obligations Act) because the insurer failed to ask relevant questions for risk assessment and decision making on concluding the insurance contract. However, such a legal solution can be reasonably criticized because it allows the risk of a poor appraisal of the importance of some fact for the insurance contract, which affects the policyholder himself (so-called subjective principle of assessment of relevant circumstances), even though the insurer is professionally engaged in risk insurance. The objective principle of the assessment of circumstances in accordance with the existing provision on filing duties in Article 931 of the Civil Obligations Act would be possible if the insurer performed a review of the item that would be the subject of insurance (i.e., medical examination of the person who intended to be insured in the case of life insurance)45 so in that case he could not invoke that some circumstances were not reported if he could have established the same circumstances during the examination.46

Duty to Inform the Insurer About the Age When Concluding a Life Insurance Contract The insured person’s age is under the law considered to be a significant circumstance for assessing risks in a life insurance contract because it is apparent from actuarial laws that the older the person is the greater is the risk (e.g., there is a greater likelihood of death in elder than younger persons).47 Therefore, it is stipulated that the life insurance policy (apart from other elements that each insurance policy must contain)48 must state the name and surname, as well as the exact date of birth of the

Ćurković (2009), p. 100. Belanić (2014), p. 1502. 47 Belanić (2014), p. 1585. 48 The content of any kind of insurance policy, according to Article 926, paragraph 1 of the Civil Obligations Act, includes: contracting parties, the insured person, i.e. the insured event or other subject of insurance, risk covered by the insurance, duration of the insurance and duration of the coverage, amount of the insurance or unlimited insurance amount, premium or contribution (deposit), date of policy issuance, and signature of the contracting parties. 45 46

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insured person,49 i.e., special consequences must be stipulated in case of an incorrect age of the insured person,50 which will be discussed later (infra 2.6.2.1). In addition to the exact age of the insured person, general rules on the application of other circumstances relevant for risk assessment also apply to the life insurance contract.51 This is because the insurer’s decision whether to conclude a life insurance contract for a particular person and the decision on the premium amount depend on the application and such circumstances, in addition to the age of the insured person. This still means that general rules of Article 931 of the Civil Obligations Act still apply in the case of other significant circumstances in the life insurance contract; however, special rules of Article 968 of the Civil Obligations Act apply only regarding the application of age of the insured person.

2.3.2

The Contractual Disclosure Duty During the Insurance Contract Period

The insurance contract is concluded with respect to the circumstances that existed at the time of its conclusion. However, during its lifetime, it is possible that these circumstances changed, especially with regard to the circumstances for assessment. It is possible that an increase in the risk, its reduction, or even the complete termination of the insured risk may occur, which may affect the increase or decrease of the premium or the premature termination of the insurance contract. Therefore, the Civil Obligations Act prescribes the general obligation of the policyholder to notify the insurer of changes affecting risk assessment (Arts 938–940), except for precontractual arrangements and the period of the duration of the insurance contract. By imposing such a commitment, an attempt is made to adapt the insurance contract to new circumstances (clausula rebus sic stantibus), i.e., that the balance between the assumed risk and the paid premium is maintained throughout the duration of the insurance contract, if possible.52

Reporting the Risk Increase During the Insurance Contract Period During the term of the insurance contract, the policyholder has a statutory duty to notify the insurer of the changed circumstances after the conclusion of the insurance contract when such circumstances have an impact on the risk increase53 (increase in the possibility of an insured event, higher intensity of the damaging consequences of the insured event, etc.). In addition to the policyholder, such a duty exists on the side

49

Art. 967, sec. 1 of the Civil Obligations Act. Art. 968 of the Civil Obligations Act. 51 Art. 931 of the Civil Obligations Act. 52 Keglević (2016), p. 351. 53 Art. 938, sec. 1 of the Civil Obligations Act. 50

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of the insured person, as well as the insurance beneficiary, if such a change is known. This is because the insurer could lodge complaints against the insured and the insurance beneficiary, as well as against the insurer.54 The Civil Obligations Act also mentions circumstances relevant to the assessment of risks, i.e., for which there is a duty to notify if they are changed after the conclusion of the insurance contract. There is a difference between the insurance contract for property and the insurance contract for persons (which also includes the life insurance contract). In the case of an insurance contract for property, the circumstances relevant for risk assessment are those that, had they existed at the time of the conclusion of the contract, would have prevented the insurer from concluding the contract or would have led to the conclusion of a contract with a higher premium.55 In the case of an insurance contract for persons (life insurance contract), the policyholder is obliged to report an increase in the risk if the risk is increased only because the insured has changed his occupation.56 If the change of profession does not affect the risk increase, there is no obligation to report such a change. But there is also no duty to report any other circumstance (which does not relate to a change in occupation) that has led to an increased risk (e.g., health deterioration). The Act specifically regulates deadlines for reporting changed circumstances that affect the risk increase. There is a difference in whether the risk increase was caused by the policyholder’s (the insured’s) procedures or the risk was increased without the policyholder’s (the insured’s) participation. If there is an increase in the risk for the policyholder (the insured), he is obliged to notify the insurer immediately (as soon as the increase occurs). If the increase occurred without the policyholder’s (insured’s) participation, he is obliged to notify the insurer within 14 days of learning about the circumstances of the increased risk or potentially finding out about such circumstances. There are four possible consequences of increased risk after the conclusion of the insurance contract: (1) termination of the insurance contract, (2) maintenance of the insurance contract in force under the changed circumstances (increased risk) with payment of increased premium, (3) termination of the contract under the law, and (4) continuation (maintenance in effect) of the insurance contract irrespective of the changed circumstances. If the risk increase is such that the insurer would not have concluded the contract had such a condition existed at the time of its conclusion, the insurer may (or may not) terminate the contract by a unilateral statement.57 But if the risk increase is such that the insurer would have concluded a contract with a higher premium had such a condition existed at the time of the conclusion of the contract, then he may (or may not) propose to the policyholder a new (increased) premium

54

Belanić (2014), p. 1519. Art. 938, sec. 3 and 4. of the Civil Obligations Act. 56 Art. 938, sec. 1 of the Civil Obligations Act. 57 Art. 938, sec. 4 of the Civil Obligations Act. 55

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rate.58 In the latter case, the insurance contract will remain in effect if the premium increase is accepted by the policyholder. The policyholder must expressly accept the new (increased) premium rate (verbally, in writing, or through concluding actions, e.g., by paying a premium at a new rate). In the event that the policyholder fails to make a declaration within 14 days of the receipt of the proposal for a new premium rate, as well as in the event that he explicitly removes the possibility of giving consent to the proposed new premium rate, the insurance contract shall be terminated by law.59 In other words, a proposal for a new premium rate, if it has been made, binds the insurer to 14 days since it was received by the policyholder.60 It is primarily up to the will of the insurer whether he will terminate the insurance contract with a one-sided declaration (he is not obliged to leave any cancelation period) or whether he will increase the premium to the policyholder. However, in the case of a termination, he must return a part of the premium that is collected until the end of the insurance period. However, the insurer is not required to use any of these powers if he wishes to maintain the contract in force. Therefore, the law stipulates a preclusive one-month deadline in which the insurer must use his powers to unilaterally terminate or propose an increase in premium; otherwise, they cease to exist.61 The term is counted from the day he learned in any way about the risk increase. In addition to the expiration of the expiration date, the insurance contract remains in force even if the insurer has demonstrated, before the expiry of that period, that he agrees to extend the contract, which he may also make through various concluding actions (if he receives a premium, he pays for an insured event that occurred after the increase, etc.). The aforementioned is related to the situation where the insurer has been informed about changed circumstances (risk increase) after the insurance contract had been concluded but before the insured event has occurred. However, the Civil Obligations Act also prescribes the situation where an insurer has been informed about the changed circumstances (risk increase) after the insured event has occurred.62 Here the Act predicts two possibilities: (1) an insured event had occurred before the insurer was informed of the risk increase, (2) the insured event occurred after the insurer had been informed of the risk increase but before he could use the statutory power to terminate the contract (e.g., because the 14-day deadline has not yet expired in which the policyholder has the right to decide on the insurer’s proposal of a new premium rate referred to in Article 938 paragraph 5 of the Civil Obligations Act). In both possibilities, the insured event was the result of the realization of the risk for which a higher premium would have to be charged than the actually paid premium; i.e., the insurer’s high risk and the premium are disproportionate. The legal consequences of both situations are the same—reduction of

58

Art. 938, sec. 4 of the Civil Obligations Act. Art. 938, sec. 5 of the Civil Obligations Act. 60 Belanić (2014), p. 1520. 61 Art. 938, sec. 6 of the Civil Obligations Act. 62 Art. 939 of the Civil Obligations Act. 59

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insurance proportionally between the paid premiums and the premiums to be paid at an increased risk.63 No difference is made if the insured event occurred as a result of the realized risk due to which there was no increase in its weight or if the insured event occurred merely as a result of the increased risk in its weight. Regardless of the risk (the one that changed the circumstances or the one that did not change the circumstances), the same consequences will always be the result of a proportional reduction in the risk. This is due to the fact that insurance coverage is viewed as a whole, and the question of the risks to be achieved, or the risk due to which the increase will occur, falls under coincidence, which cannot and should not be affected.

Reporting the Risk Decrease During the Insurance Contract Period Since risk increases may occur as a result of changed circumstances, which arose after the insurance contract was concluded, there may be a reduction (improvement) of the insured risk. Reduction of risk is reflected in the fact that following the conclusion of the insurance contract, there is a decreased degree of probability of achieving the insured risk (occurrence of the insured event), a reduction of the intensity of damaging consequences of the insured event, partial inability of the occurred insured event, etc. The consequences of risk reduction after the conclusion of the insurance contract are reflected in the fact that the policyholder is entitled to require a corresponding reduction in the insurance premium.64 The premium is reduced relatively to risk improvement. Reduction in premium would be calculated from the moment the insurance contractor informed the insurer of the reduction and not from the moment when the risk improvement actually took place. Of course, in order for the premium for risk improvement to be reduced, the insurer must agree with the policyholder’s request. The insurer is not obligated to agree to or accept the reduction in premium. Thereby, the reason for refusing to agree to a reduction in premium is not of importance (this may be the insurer’s position that there was no risk reduction, that risk reduction was not significant, or something else). If, for any reason, the insurer has not agreed to a reduction in premium, the policyholder (who can be replaced by the insured) may terminate the insurance contract by a unilateral declaration.65 In the event of termination, the insurer is required to return part of the premium to the policyholder covering the portion of the insurance contract that has not yet expired. We believe that risk reduction should be significant. If this is a minimal or insignificant risk reduction, the said risk reduction provisions could not be applied, i.e., the policyholder could not require a reduction in premium and then unilaterally

63

Belanić (2014), p. 1521. Art. 940, sec. 1 of the Civil Obligations Act. 65 Art. 940, sec. 2 of the Civil Obligations Act. 64

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terminate the insurance contract if the insurer refused to agree to a reduction in the premium.66

Disclosure Duty on the Occurrence of an Insured Event Disclosure of the occurrence of an insured event certainly affects the transparency of the relationship between the contracting parties. Namely, it is in the insurer’s interest to find out as soon as possible about the occurrence of the insured event; to ascertain as soon as possible the factual situation regarding the cause, scope, and extent of the damage; and to take measures to reduce the damage. Therefore, the Act expressly stipulates that after the insured event has occurred, it is the insured person’s duty to notify the insurer of the occurrence of the insured event within a maximum of three days after knowledge of the occurrence of the insured event,67 but the contractual party may agree on a longer term (not shorter than the stipulated term). In addition to the insured person, the insurer may also notify the policyholder and the insurance beneficiary of the occurrence of the insured event, although this is not expressly stipulated. An application for an insured event is filed directly with the insurer, but the obligation is also met when the application is filed with the insurer’s agent.68 The form and content of the application are not legally prescribed, meaning that the occurrence of an insured event can be filed both verbally and by telephone, and the modern means of electronic communication are not excluded. However, for a greater legal certainty, insurers use the so-called forms for damages claims, which are completed by the insured person.69 Information that must be disclosed may be subject to the terms of the insurance, but most often these data are provided in the application forms of the insured event. In addition to the requested information, the insured person must submit (if required) evidence that the insured event has occurred and evidence of the amount of damage (if this is available to him).

2.4

The Form and Mode of Providing the Information

One of the important questions in the transparency of the insurance contract is in what form and in what way the notifications should be issued, which the contracting parties are obliged to exchange regardless of whether or not these are information or notifications before the conclusion of the contract or throughout the duration of the insurance contract.

66

Belanić (2014), p. 1522. Art. 941, sec. 1 of the Civil Obligations Act. 68 Art. 930 of the Civil Obligations Act. 69 Pavić (2009), p. 224. 67

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The Insurance Act contains several special rules on the form and manner of providing information that the insurer (the insurance company) has to report to the policyholder. If the information is insured by the insurer prior to the conclusion of the insurance contract (these are information from Article 380 of the Insurance Act, supra 2.2.1), then the insurer has an obligation to provide the policyholder (the insured) before the conclusion of the insurance contract with a notice (in writing), which contains all legally prescribed information and data: (1) in person or (2) delivered by mail or (3) delivered by electronic mail.70 Unless otherwise stated, in the case of information that the insurer needs to provide the policyholder with throughout the duration of the insurance contract,71 then the insurer must inform the policyholder (the insured) in writing on the changes in prescribed data.72 When the insurance contract is concluded by means of distance communication, then the insurer is obliged to provide the policyholder (i.e. the insured personconsumer) with a prior notice and other prescribed information in writing or by means of another permanent medium.73 Permanent media is any instrument that allows a consumer to store personal information so that it is later available for use as long as it is necessary with respect to the purpose of the information, which allows unchanged data reproduction, such as chapter, electronic mail, CD-ROM, memory card, and hard disk drive.74 When it comes to information that the policyholder (the insured) has to provide the insurer with, the Civil Obligations Act does not contain any specific rules on the form and manner of providing such information. Although the Civil Obligations Act does not stipulate it, in practice, however, the written form is usually prevalent in which the required information is provided to the insurer prior to the conclusion of the insurance contract, as well as throughout its duration.75 These are written forms (the content of which is not prescribed, but each insurer uses his own form with relevant questions) that the policyholder fills out before or after the conclusion of the contract and submits to the insurer. If the fulfillment of such forms can safely determine the content and identity of the provider of such statement, i.e., the policyholder, then the general rule of law of obligations considers that the requirement for a written form has been fulfilled.76 The content of the information with which the insurer provides legally prescribed data to the policyholder or the insured person must be written in a clear and comprehensible manner.77 It is a very important provision taken from Article 185 paragraph 6 of the Solvency II Directive, the purpose of which is to enable

70

Art. 380, sec. 1 of the Insurance Act. This is information from Article 381 of the Insurance Act. 72 Art. 381, sec. 1 of the Insurance Act. 73 Art. 86, sec. 1 of the Consumer Protection Act. 74 Art. 5, sec. 1, par. 25 of the Consumer Protection Act. 75 Keglević (2016), 353. 76 Art. 292, sec. 4 of the Civil Obligations Act. 77 Art. 382, sec. 1 of the Insurance Act. 71

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the insurer/insured person to understand the contents of the information given in the notice. Thus, it is a provision that serves the protection of the insured person as a consumer. In theory, it is stated that information is provided in an expansive manner if it is clear and does not bring the insured into suspicion or ambiguity. The information is given in an insightful manner and if this prevents overloading the insured person with different information. On the other hand, information is given in an understandable way so that the average insured person can understand and comprehend it.78 Information provided under Articles 380 and 381 of the Insurance Act, which the insurer has to report to the policyholder/insured party, must be in the Croatian language.79 This is the language in which the insurance contract is concluded, and it is the language of the insurer/insured person; therefore, the requirement that the documents be in the Croatian language is a prerequisite of transparency between the contracting parties. Exceptionally, the text and content of the information that the insurer provides to the policyholder/insured may be written in another language if the insurer requests it or if the policyholder has the freedom to choose the applicable law.80 This provision is the result of alignment with Article 185 paragraph 6 of the Solvency II Directive and allows communication and exchange of documents in a comprehensible language between parties whose mother tongue is not Croatian.

2.5

The Moment to Fulfil the Duty to Inform and the Duty of Disclosure

The moment to fulfill the duty to inform depends on whether it is a duty to inform prior to the conclusion of the insurance contract, i.e., precontractual duty to inform, or a duty to provide information after the conclusion of the insurance contract, i.e., throughout its duration—so-called contractual obligation to notify. The main question that arises in this case is: when is it considered that the insurance contract has been concluded? The general rule is that the insurance contract is concluded when the insurance offer has been accepted.81 The insurer is obliged to submit without delay a duly formulated and signed insurance policy or other insurance document (cover sheet, etc.) on the concluded insurance contract.82 However, in order to evaluate whether the contract has been concluded, it is not important to submit the insurance policy (or some other insurance document) but rather that the offer has been accepted, whereby the offer can be made by any of the

78

Keglević (2016), p. 355. Art. 382, sec. 1 of the Insurance Act. 80 Art. 382, sec. 2 of the Insurance Act. 81 Art. 925, sec. 1 of the Civil Obligations Act. 82 Art. 925, sec. 2. of the Civil Obligations Act. 79

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contracting parties (not necessarily only the insurer or only the future policyholder/ insurer). There is an exception to the abovementioned rule regarding the insurance contract for persons (life insurance contract, accident insurance contract, etc.). An insurance contract for persons is concluded when the party signs the insurance policy.83 It follows that the mutual precontractual duties to inform and provide information to each other must be fulfilled prior to the contract’s conclusion,84 i.e., prior to the expressed willingness to conclude the contract, i.e., before the contractual party signs the insurance policy (in insurance contracts for persons). This is understandable because the contracting parties can agree to the conclusion of the insurance contract only if they have been informed beforehand about the circumstances relevant to the risk assessment and about other elements of the contract that are relevant for deciding whether a specific contract is in accordance with their needs. A further question is the deadline of the contracting parties’ obligation to inform each other about the various circumstances concerning the contract. The answer is throughout the duration of the insurance contract.85 This means that such a duty exists throughout the duration of the contract and terminates upon the termination of the insurance contract.86 The termination of the contract is a fact that is assessed according to the circumstances of a particular case (it depends on the type of insurance contract, whether the contract was concluded for a definite or indefinite period, whether an insured event occurred, whether there was a breach of the contractual obligation resulting in the right of the injured party to cancel an insurance contract, etc.).

2.6

Legal Consequences of the Breach of the Duty of Disclosure

Legal consequences of the breach of the duty of disclosure in Croatian insurance law can be divided according to several criteria: (1) with respect to subjects (whether the duty to notify has been violated by the insurer or the insured), (2) considering the phase in which the breach occurred (prior to the conclusion of the contract or after its conclusion), (3) considering the content of the sanction for the committed breach, (4) with respect to the legal source of the sanction.87

83

Art. 925, sec. 3 of the Civil Obligations Act. Art. 380, sec. 1 of the Insurance Act. 85 Art. 381, sec. 1 of the Insurance Act. 86 Keglević (2016), p. 359. 87 Keglević (2016), p. 359. 84

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Legal Consequences of the Breach of the Duty to Inform and the Duty of Disclosure

The Breach of the Insurer’s Duty to Inform Should the insurer violate his duty to provide precontractual information, the policyholder/insured could first use the means provided by the Insurance Act. This means that the policyholder/insured person could cancel the offer for the conclusion of the insurance contract (if he was the one who made an offer to the insurer); i.e., if the contract has been concluded, he has the right to withdraw from such contract.88 In this case, the policyholder/insured person is not required to state the reasons for the withdrawal from or cancelation of the contract,89 but the breach of the precontractual duty to provide information would certainly be a justified reason. There are also no deadlines for the cancelation or termination of the contract. An exemption applies to a life insurance contract where the deadline for the termination of the contract is 30 days from the date of receipt of the insurer’s notification of the conclusion of the contract.90 At this point, it should be highlighted that in the Croatian law of obligations, there is no concept or a legal institute of “contract withdrawal,” but there is an institute of unilateral termination of contract, which would content-wise be the closest to the concept of “contract withdrawal.” A special case is the breach of the precontractual obligation to notify with the distance insurance contract. In this case, as stated earlier, the Consumer Protection Act applies to the policyholder, i.e., it acknowledges the insured’s (the consumer’s) right to unilaterally terminate the contract.91 The consumer can legitimately use the unilateral termination of the contract without having to state in particular the reason for doing so; however, the breach of the duty to provide precontractual information or the duty to provide prior notice is certainly a justified reason for the unilateral termination of the distance contract. There is also a deadline for unilateral termination—14 working days from the conclusion of the contract, i.e., 30 working days in the case of a life insurance contract or voluntary pension insurance, with the latter being counted from the date on which the consumer was informed that the contract has been concluded.92 The main consequence of the unilateral termination of the contract is that each party has to return to the other party what it has received on the basis of such a contract within 30 days (the insurer the paid premium and the insured the insured amount if he had received it or a price of some other service provided to him, e.g., treatment costs in a voluntary health insurance contract). The insured (the consumer) is not responsible for any damages that the insurer has suffered as an

88

Art. 380, sec. 1, par. 4 of the Insurance Act. Keglević (2016), p. 361. 90 Art. 380, sec. 5, par. 5 of the Insurance Act. 91 Art. 87, sec. 1 of the Consumer Protection Act. 92 Art. 87, sec. 2 of the Consumer Protection Act. 89

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outcome of the unilateral termination of the contract, nor is he liable to pay any penalty or compensation for the termination of the contract.93 In addition to the withdrawal of the contract and the right to unilaterally terminate the contract, the insured also has the right to terminate the contract due to a lack of will in accordance with the Civil Obligations Act.94 Due to incomplete or inaccurate precontractual information, the policyholder may conclude an insurance contract on the basis of a misconception of some important circumstance (misstatement)95; i.e.; he may conclude a contract because the insurer misled him due to incorrect and incomplete infromation provided prior to the conclusion of the contract or he kept him misinformed with the intention of leading him on to conclude a contract (fraud).96 The policyholder has the right to rescind within one year from discovering the reason (subjective deadline) or within three years from the conclusion of the insurance contract (objective deadline).97 The consequence of the cancelation of the insurance contract is the return to the previous state; i.e., each party must return what it has received on the basis of such a contract (the insurer would be obliged to return paid premiums to the policyholder) and damage compensation. In theory, it is pointed out that,98 in the event of the breach to provide precontractual information, the policyholder could also claim damages for the conduct of negotiations contrary to the principle of conscientiousness and honesty (so-called contingent liability for damages—culpa in contrahendo).99 Finally, the Insurance Act prescribes misdemeanor fines for breach of obligations of forward notification, but such fines do not have an effect on the legal consequences of the insurance contract.

The Breach of the Insured’s Duty of Disclosure It has previously been stated that one of the obligations of the insurer after the conclusion of the insurance contract during his term is to inform the policyholder about all the circumstances stipulated by law and data changes.100 The Insurance Act does not contain special provisions on legal consequences if the insurer obstructs or fails to fulfill its obligation in whole or in part. Therefore, the general provisions of the mandatory law, i.e., the Obligations Act, on the consequences of nonfulfillment or partial fulfillment of obligations are applied. According to these rules, in compulsory contracts, when one party fails to fulfill its obligation, the other party may

93

Art. 90 of the Consumer Protection Act. Keglević (2016), p. 366. 95 Art. 280 of the Civil Obligations Act. 96 Art. 284 of the Civil Obligations Act. 97 Art. 335 of the Civil Obligations Act. 98 Keglević (2016), p. 366. 99 Art. 366 of the Civil Obligations Act. 100 Art. 381 of the Insurance Act. 94

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require the fulfillment of the obligation or, under statutory prescriptions, unilaterally terminate the contract (if the termination does not come under the law) and in any case is entitled to compensation.101 It follows that the policyholder has the right to terminate the contract due to the failure to comply with the legal obligation to notify the insurer under Article 381 of the Insurance Act. The consequence of termination of the contract is termination of contractual obligations, reimbursement of the prior state, and compensation of damages.102 This means that the insurer has longer time to return to the contractor the insurance of all paid premiums from the time the contract is concluded and to compensate the insurance contractor if it has been incurred. In addition to the unilateral termination of the insurance contract, the policyholder would also be entitled to compensation for damages due to breach of the contractual obligation to notify the prescribed information. Here it is: (1) responsibility for damage due to failure to notify103 and (2) contractual liability for damage due to failure to fulfill or delay in the fulfillment of the obligation.104 In the first case, the contracting party (in this case the insurer) who is obliged to notify the other party (insurance contractor) of facts affecting their mutual relationship (and also the information provided in Article 381 of the Insurance Act) is liable for the damage he has caused to the other party for failing to notify in proper time. In the second case, when the debtor (insurer) fails to fulfill his duty (to notify) or is late with his fulfillment, the creditor (the policyholder) has the right to demand not only the fulfillment of the duty but also the compensation of the damage he has suffered due to the failure of notification. The Insurance Act prescribes misdemeanor fines for the insurer for the breach of the notification duty and the breach of the contractual obligation to provide notification. However, they do not impact the legal effects and the survival of the contract.

2.6.2

Legal Consequences of the Breach of the Insured’s Duty

Legal Consequences of the Breach of Duty to Provide Precontratual Information It has already been stated that the policyholder, prior to the conclusion of the insurance contract, must fully and accurately report all circumstances relevant to the risk assessment. The Civil Obligations Act pays special attention to the legal consequences in the event that the policyholder breaches the duty of full and accurate precontractual contractual information of the insurer. The situation is different if the policyholder has intentionally violated such duty or has done so unintentionally.

101

Art. 360 of the Civil Obligations Act. Art. 380 of the Civil Obligations Act. 103 Art. 348 of the Civil Obligations Act. 104 Art. 342, sec. 2 of the Civil Obligations Act. 102

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If the policyholder has intentionally made an incorrect application or has intentionally withheld a circumstance of such a nature that the insurer would not have concluded a contract had he been aware of the true state of affairs, the insurer may call for a termination of the contract.105 The insurer’s right to request a termination of contract is limited by a preclusive deadline, and it is terminated if the insurer does not inform the policyholder of his intention to use that right within 3 months from the date when he found out about the inaccuracy or if he does not inform the policyholder about the intention of using such right as the result of witholding information.106 The termination of the insurance contract is understood here as being voidable, meaning that the court does not annul the contract ex officio but only based on the request or objection of the party. However, in terms of legal consequences, it differs from a voidable contract because the insurer has the right to retain and charge premiums for the period until the day of filing a request for termination of the contract.107 Therefore, there is no obligation to return what has been received. However, in accordance with the same provision, if an insured event occurs until the day of filing a request for the termination of the contract, the insurer shall be obliged to pay the dividends. This legal provision is openly criticized for enabling a legal fraud of the insurer.108 The policyholder is often not an insurance professional, so he cannot always estimate the circumstances relevant to risk assessment. Therefore, it is possible that due to his ignorance (i.e., not with the intent of deceiving the insurer), he incorrectly reports or fails to report some of the circumstances that would be relevant to risk assessment. If the policyholder did not deliberately make an incorrect application or did not deliberately omit some information (i.e., if the incorrect application or omission has been made as an act of negligence), the insurer may, at his option, (1) declare within one month from finding out about the inaccuracy or incompleteness of the application that he is terminating the contract or (2) propose a premium increase proportionate to the higher risk.109 If the insurer has declared the termination, the contract terminates within 14 days from the date on which the insurer notified the policyholder about his declaration of termination. If the policyholder has proposed an increase in the premium, the policyholder may reject or accept the proposal. If he does not accept the proposal within 14 days, the contract is terminated by law.110 In the event of termination, the insurer is obliged to return part of the premium for the period until the end of insurance. If the insured event occurred prior to the termination of the contract, i.e., prior to reaching an agreement on the premium increase, the insurer has an obligation to pay the insurance, but the fee is reduced to

105

Art. 93, sec. 1 of the Civil Obligations Act. Art. 932, sec. 3 of the Civil Obligations Act. 107 Art. 932, sec. 2 of the Civil Obligations Act. 108 Ćurković (2005), p. 35; Pavić (2009), p. 203. 109 Art. 933, sec. 1 of the Civil Obligations Act. 110 Art. 933, sec. 2 of the Civil Obligations Act. 106

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the extent of the premium paid and the premium rate that should be paid due to the real risk111 (prema stvarnom riziku). The insurer’s right to choose between the termination of the contract and the proposal to increase the premium would be acceptable for the situation if the incorrect or incomplete notification about the circumstances was deliberately made and the insurer would nevertheless decide on the conclusion of the contract but under different conditions. The Civil Obligations Act does not contain special provisions on this.112 In the life insurance contract, in addition to the general rules on the duty to report significant circumstances for risk assessment, special rules apply to inaccurate reporting about the age of the insured person.113 The age of the insured person is considered under the law to be a significant circumstance for risk assessment in the life insurance contract because it can be concluded from actuarial laws that the older the person is, the greater is the risk (e.g., the likelihood of death is higher in the elderly than in a younger person). The Civil Obligations Act provides possible situations of incorrect application of the insured person’s age: (1) if the insured person is reported to be younger and his/her age exceeds the limit prescribed by the conditions and the insurance tariffs, then the insurance contract is null and void; the insured is obliged to return all premiums, but he does not have the obligation to pay the insured amount; (2) if the insured person is reported to be youner and his/her actual age does not exceed the limit prescribed by the conditions and the insurance tariffs, then the life insurance contract is valid but the insured amount is proportionally reduced; (3) if the insured person is reported to be older than what he actualy is, then the contract continues and the insurance premium is reduced to the appropriate amount; the insurer is obliged to return the difference between the received premiums and the premiums to which he is entitled (it would not be forbidden to conclude an increase in the amount of insurance instead of reducing the premium).114 The aforementioned legal consequences of the incorrect application of the age of the insured in the life insurance contract occur regardless of the degree of the policyholder’s guilt, i.e., regardless of whether he made the mistake deliberately or unintentionally.

Legal Consequences of Breach of the Insured’s Obligation to Contractual Notification The main obligations of the policyholder/insured party throughout the duration of the insurance contract arising from the need for transparency in contractual relationships are a statement of circumstances that affect the change (more accurately the

111

Art. 933, sec. 3 and 4 of the Civil Obligations Act. Ćurković (2005), p. 33. 113 Art. 968 of the Civil Obligations Act. 114 Pavić (2009), pp. 343–344. 112

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increase) of the risk and the notification of the occurence of the insured event (supra 2.3.2.2 and 2.3.2.3). Therefore, the question logically arises concerning the consequences of failure to fulfill the abovementioned duty to notify the policyholder/ insured party. The Civil Obligations Act has no special provisions on the consequences of the policyholder’s/insured’s failure to notify the insurer (without delay or within 14 days)115 about the changes in circumstances throughout the duration of the insurance contract affecting the risk increase.116 If the insurer is not informed of any change in the aforementioned circumstances, the insurance contract shall remain in force under the same conditions. However, if the insurer finds out in any way117 (so not necessarily from the policyholder) about the change in the circumstances that affect the risk increase, then in accordance with the provisions of Article 938 paragraphs 3, 4, and 5 of the Civil Obligations Act (which have already been described in greater detail), then he is entitled to termination of the contract, i.e. to propose a new premium rate. In any case, the insurer is entitled to compensation for damages under the general rules of law of obligations: (1) for failure to fulfill or a delay in the fulfillment of the contractual notification obligation118 or (2) for failure to notify.119 On the other hand, the Civil Obligations Act explicitly states that a policyholder is obliged to compensate the damage to the insurer if he has failed to report the occurrence of the insured event within the prescribed deadline.120 The insurer may suffer the damage due to, for example, failure to take timely measures to reduce the damage, or due to reduced effects of property salvage etc. The insured person would not lose the right to the insured amount because of the missed application deadline and any such contractual provision would be void121 but the insurer may claim compensation for the late application of the insured event through the breach of the insured’s claim to the insured amount. The statutory three-day deadline for the application of the occured insured event does not apply to life insurance. This is due to the fact that in life insurance contracts, the insurer cannot suffer any damage due to delays in notification since the payment of insurance does not have the character of damage compensation; therefore, timely protection and rescue measures would not reduce the insurer’s obligation.122

115

Art. 938, sec. 2 of the Civil Obligations Act. Keglević (2016), p. 381. 117 Art. 938, sec. 6 of the Civil Obligations Act. 118 Art. 342, sec. 2 of the Civil Obligations Act. 119 Art. 348 of the Civil Obligations Act. 120 Art. 941. sec. 2 of the Civil Obligations Act. 121 Art. 942 of the Civil Obligations Act. 122 Pavić (2009), p. 225. 116

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3 Conclusion In Croatian insurance contract law, transparency is achieved through three regulations: the Civil Obligations Act, the Insurance Act, and the Consumer Protection Act. The Civil Obligations Act is the fundamental law on obligations in the Republic of Croatia, which, in addition to the provisions on various types of contracts, also regulates insurance contracts. Transparency under the Civil Obligations Act is, as a rule, one way. It refers to the obligations of the policyholder to notify on the circumstances regarding risk assessment (i.e., the probabilities of its occurrence), as well as the duty to report the occurrence of the insured event. A special exception to such one-way communication (policyholder ! insurer) is the insurer’s obligation to notify the policyholder that the insurance terms are an integral part of the contract and to provide him with them. Any additional duty of the insurer, such as providing additional clarification on the terms of the contract and giving advice to the policyholder or the insured, is not prescribed by the Civil Obligations Act. It should be assumed that the policyholder and the insured person, who as a rule are not professionals, cannot fully understand all the terms of the insurance provision and would certainly benefit from assistance with regard to additional clarification. Perhaps, de lege ferenda, the insurer’s obligation to provide certain additional information (or even advice) regarding the terms of insurance to the policyholder or insured person should be regulated. Furthermore, in the Civil Obligations Act, the policy should be changed under which the policyholder is obliged to report to the insurer all circumstances relevant to the risk assessment prior to the conclusion of the contract. It has already been stated, and here it is further emphasized, that the policyholder, since he is not a professional, often cannot know which circumstances are important for risk assessment. Rather than giving the policyholder information on essential circumstances, a solution should be applied according to which the insurer is the one who asks the policyholder about the circumstances considered relevant to risk assessment. In his practice, the insurer has a similar solution; i.e., he sends questionnaires to the policyholder, who, before signing the insurance contract, is required to complete it in writing or in electronic form. Unlike in the Civil Obligations Act, transparency in the Insurance Act and the Consumer Protection Act occurs in the opposite direction, i.e., the insurer ! the policyholder/consumer. The consequence of this is the adoption of EU legislation into Croatian law. The Insurance Act has taken into account the legal order of the Solvency II Directive, which stipulates, inter alia, the information that the insurer has the duty to provide to the policyholder before the conclusion of the insurance contract, as well as the duration of the insurance contract and the right to terminate the contract (Arts. 183–186). The Consumer Protection Act is applied to the insurance contract that is concluded by means of distance communication. This Act incorporated into the Croatian legal system Directive 2002/65/EC on the advertising and sale of consumer financial services, which contains, inter alia, provisions on the information that the financial service provider-insurer has to provide to the

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policyholder when concluding a contract by means of distance communication (Arts. 3–5). The adoption of these directives has alligned the Croatian insurance law with the EU legislation regarding transparency in insurance contracts and at the same time partly modernized the Croatian contractual insurance law (at least with regard to the obligation to notify counterparties in the insurance contract). However, it is necessary to consider whether the average legal insurer/insured person’s legal information list, which the insurer is obliged to provide, is too long. In other words, which amount of information that the insurer is obliged to provide is useful in deciding whether or not a particular product is appropriate for his needs? The totality of all aforementioned information can cause uncertainty and doubt in the insurer/insured person concerning the existence of certain rights and obligations of the policyholder/insured person, and these may often be incomprehensible. In that sense, the described overload of information can also lead to the negation of transparency in the insurance contract.

References Belanić L (2014) Ugovor o osiguranju. In: Gorenc V (ed) Komentar Zakona o obveznim odnosima. Narodne novine, Zagreb, pp 1439–1615. [Belanić L (2014) Insurance contract. In: Gorenc V (ed) Commentary in the civil obligations act. Narodne novine, Zagreb, pp 1439–1615] Ćurković M (2005) Obveze stranaka iz ugovora o osiguranju. In: Ugovor o osiguranju prema novom ZOO. Inženjerski biro, Zagreb, pp 29–44. [Ćurković M (2005) Obligations of the parties in the insurance contract. In: Insurance contract according to the new civil obligations act, group of authors. Inženjerski biro, Zagreb, pp 29–44] Ćurković M (2009) Ugovor o osiguranju osoba, život-nezgoda-zdravstveno. Inženjerski biro, Zagreb [Ćurković M (2009) Insurance contract for persons, life-accident-health insurance. Inženjerski biro, Zagreb] Keglević A (2016) Ugovorno pravo osiguranja – obveza obavještavanja i zaštita potrošača u domaćem, europskom i poredbenom pravu. Školska knjiga, Zagreb [Keglević A (2016) Insurance contract law - duty to inform and consumers protection in the domestic, European, and comparative law. Školska knjiga, Zagreb] Matijević B (2006) Obveza informiranja ugovaratelja osiguranja i zaštita potrošača. In: Novi propisi iz osiguranja – Zakon o osiguranju i Zakon o obveznim osiguranjima u prometu (group of authors). Inženjerski biro, Zagreb, pp 79–110 [Matijević B (2006) Duty to inform the policyholder and consumer protection. In: New insurance regulations - Insurance Act and Act on Obligatory Insurance in Transport (group of authors). Inženjerski biro, Zagreb, pp 79–110] Mišćenić E (2014) Consumer protection law. In: Josipović T (ed) Introduction to the law of Croatia. Kluwer Law International, Alphen aan den Rijn, pp 279–290 Pavić D (2009) Ugovorno pravo osiguranja, komentar zakonskih odredaba. Tectus, Zagreb [Pavić D (2009) Insurance contract law, commentary on legal provisions. Tectus, Zagreb]

Legal Sources Act on Compulsory Insurance within the Transport Sector, Official Gazette no. 151/2005, 36/2009, 75/2009, 76/2013, 152/2014

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Act on Licensing of Trades, Official Gazette, n. 143/2013 Act on Obligatory and Proprietary Rights in Air Transport, Official Gazette no. 132/2008, 63/2008, 134/2009, 94/2013 Act on the Croatian Agency for Supervision of Financial Services, Official Gazette, n. 140/2005, 154/2011, 12/2012 Civil Obligations Act, Official Gazette, n. 35/2005, 41/2008, 125/2011, 78/2015, 29/18 Companies Act, Official Gazette, n. 111/1993, 34/1999, 121/1999, 52/2000, 118/2003, 107/2007, 146/2008, 137/2009, 125/2011, 152/2011, 111/2012, 68/2013, 110/2015 Consumer Protection Act, Official Gazette, n. 41/2014, 110/2015, 14/2019 Directive 2002/65/EC of the European Parliament and of the Council of 23 September 2002 concerning the distance marketing of consumer financial services and amending Council Directive 90/619/EEC and Directives 97/7/EC and 98/27/EC OJ L 271, 9 October 2002, pp 16–24 Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) (Text with EEA relevance), OJ L 335, 17.12.2009, pp 1–155 Insurance Act, Official Gazette, n. 30/2015, 112/2018 Maritime Code, Official Gazette, br. 181/2004, 76/2007, 14/2008, 61/2011, 56/2013, 26/2015, 18/2019 Obligations Act of 1978, Official Gazette of the SFRY, n. 29/1978, Official Gazette, n. 53/1991, 73/1991, 111/1993, 2/1994, 7/1996, 112/1999 and 88/2001

Transparency in the Insurance Contract Law of Germany Manfred Wandt

1 Introduction Transparency constitutes a well-recognised element in contract law. However, with regard to insurance contract law, transparency is even more important and may not be overestimated. This is due to the fact that insurance is a so-called legal product.1 The legal initial situation is, therefore, evidently different compared to contracts for the exchange of goods. Characterised by sold goods, the latter can usually be seen, touched, felt or perceived by other means. Insurance contracts, however, do not entail dealings with ‘visible’ goods. Solely after the occurrence of an insured event, the insured risk materialises and becomes ‘visible’. Hence, insurance contracts are not characterised by an exchange of physical goods for money but by the exchange of a promise of performance for financial compensation.2 In the absence of any physical manifestation of a mere promise, a visual inspection is not possible at all— but this fact is not rendering the insurance product non-transparent per se. Namely, the (linguistic) manifestation is not limited to common language but is rather based on legal language and technical terminology. Furthermore, insurance may only be perceived as a rather complex and complicated legal product. Even most common specific differentiations of this product, prescribed by primary risk

I would like to express my gratitude to research assistant Dr Kevin Bork for his valuable support. This analysis is based on Wandt (2012) and on Wandt (2017). In addition, I would like to thank Prof Dr Jens Gal for his consent to partly base this analysis on Wandt and Gal (2014). 1 2

Cf. in detail particularly Dreher (1991). Wandt (2012), p. 343.

M. Wandt (*) Goethe-University Frankfurt, Frankfurt, Germany e-mail: [email protected] © Springer Nature Switzerland AG 2019 P. Marano, K. Noussia (eds.), Transparency in Insurance Contract Law, AIDA Europe Research Series on Insurance Law and Regulation 2, https://doi.org/10.1007/978-3-030-31198-8_3

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description, secondary risk exclusion and tertiary risk re-inclusion, will impose their difficulties of comprehension on the average policyholder. Additionally, insurance constitutes a promise extending over a longer period; in the case of life assurance, this promise will often be bound to remain valid over decades. For this reason, e.g., one needs to provide a rule concerning the policyholder’s handling of the insured risk. In life assurance, to give another example for the complexity and intricacy of the product, one needs to provide for a rule if and how the policyholder is to participate in the surplus of the insurance undertaking. Hence, we are dealing with the transparency of highly complex legal regimes. The nature of insurance as a complex and complicated legal product will make it difficult, if not impossible, for the buyer of insurance, i.e. the policyholder, to reach a full and comprehensive level of understanding of all the properties of the prospective contract in question before the conclusion of the said contract. Without extensive expert advice (regarding insurance technique, financial and legal questions), a nonprofessional may never be able to fully comprehend the insurance product. This situation is, however, not entirely different from a vast variety of contracts for the exchange of goods. The buyer of an automobile will usually have no profound knowledge of the precise manner of functioning (e.g. engine operations, mechanical and electronic coherencies). Furthermore, he will be unaware of how the car manufacturer calculates its distribution costs, i.e. the buyer is unaware to what extent his purchase price will serve to cover the manufacturer’s overall expenses of distribution. Following this, the need for transparency of insurance contracts is evidently high. In this respect, statutory law and contractual conditions themselves attain definitional sovereignty—while contractual conditions are primarily comprised of the General Conditions of Insurance, so-called GCI (Allgemeine Versicherungsbedingungen— AVB). The following analysis is guided by the following structure: the overall legal framework concerning contract transparency (Sect. 2), the development of German insurance contract law (Sect. 3), transparency in the context of GCI (Sect. 4), transparency in the context of statutory insurance contract law (Sect. 5) and a conclusion (Sect. 6).

2 The Overall Legal Framework Concerning Contract Transparency Contract transparency may be achieved through a variety of different legal instruments. Among them are the most important contract law instruments: the pre-contractual duties of the insurer and of intermediaries to provide information and to advise; requirements for the design of written information and of GCI; requirements for the inclusion of GCI into the contract, in particular with regard to the issuing of GCI; the methods of interpreting GCI in order to avoid or eliminate

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lack of transparency, such as the principle of narrow interpretation applied to exclusion clauses or the well-known contra proferentem rule; transparency requirements for the content of GCI. Regarding transparency after the conclusion of the contract and during the contractual period: duties to inform about the content of the contract and about specific provisions of contract law; duties of the insurer to advise if there is discernible need. In general, it should be mentioned that the exact qualification of each particular instrument is of importance as each of these instruments may lead to different legal results. For instance, if the parties fail to meet the prerequisites for an effective inclusion of GCI, this may have the consequence that GCI will not become part of the contract. The content of the contract must then be typically determined by statutory regulations and, if necessary, modified or completed by supplementary interpretation of the contract. Nevertheless, if the insurer does not comply with its information duty with respect to GCI, the policyholder may be entitled to terminate the contract—either for the future or retroactively. Unfortunately, national laws do not always strictly separate these legal categories. National legislators sometimes even knowingly link insurance contract law with insurance supervisory law, which, in most cases, is detrimental to the aim of legal transparency.3

3 The Development of German Insurance Contract Law With regard to statutory law, transparency was a key element from the beginning of statutory insurance law. However, at first, it was introduced to German insurance supervisory law and not to German insurance contract law. Within the German Insurance Supervisory Act (Versicherungsaufsichtsgesetz—VAG), the policyholder’s clear comprehension of his insurance cover was already an important objective at the time of its coming into force in 1901. According to this Act, the insurer was obliged to submit for pre-approval to the supervisory authority the GCI it intended to use in its insurance contracts (sec. 4 subsec. 2 VAG 1901). The purpose of this provision is clarified by the explanatory memorandum to the VAG. It stated that the supervisory authority was under a duty to particularly assess whether or not the GCI made the policyholder’s rights and duties sufficiently clear.4 Certainly, this supervisory rule had indirect impact on the insurance contracts since all GCI needed approval before being used. In the course of EU deregulation in 1994,5 the German legislator abolished the pre-approval of the GCI by the supervisory authority and

3

With regard to the structural mix-up in Germany, see Sect. 3. Motive zum VAG, reprint, Berlin 1963, p. 32. 5 Until that time, insurers were exempted from meeting the prerequisites for the inclusion of general terms and conditions set by sec. 2 Unfair Terms and Conditions Act old version, due to the fact that their GCI were the object of preapproval by the supervisory authority (cf. sec. 23 subsec. 3 Unfair Terms and Conditions Act old version). 4

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oriented GCI legislation towards contractual instruments of control, nowadays incorporated in sec. 305 ff. of the German Civil Code (Bürgerliches Gesetzbuch— BGB6). On the contrary, the original Insurance Contract Act (Versicherungsvertragsgesetz—VVG7), dating from 1908, did not recognise clarity of insurance conditions as a matter of regulation. The German legislator was of the opinion that all relationships between policyholders and insurers were, in any way, primarily governed by GCI. An additional or substitutional extensive legislative framework was considered not to be necessary. The main purpose of the Act was, therefore, mainly to balance the insurance relationship by adjusting unfair insurance conditions. In technical terms, this was done by way of mandatory and semimandatory provisions applicable to all insurance contracts. In summary, GCI served a quasi-legislative function (pre-conditioned by the pre-approval of the GCI by the supervisory authority). After 1994, a general pre-approval by the supervisory authority was abandoned, and the focus of the supervisory authority changed evidently—currently targeting business operations and the solvency of the insurer. Surprisingly, the habitat of some provisions aiming for transparency still remained within the confines of German insurance supervisory law. Most importantly, sec. 10a VAG 1994 required the insurer to transmit to the policyholder a set of written consumer information (Verbraucherinformation) before the contract was concluded. This consumer information particularly included all GCI applicable to the insurance relationship in question. Any breach of this supervisory duty was contractually sanctioned pursuant to sec. 5a VVG 1994. This meant that the power of revocation granted to the policyholder did not extinguish until 14 days after the complete transmission of all information materials. This discrepancy between the location of the duty and the legal consequence of its breach is astonishing, in particular when keeping in mind that provisions are generally intended to create clarity. It certainly is questionable if such a synergy between the two main codices was expectable or comprehensible in a sense that an average policyholder could understand the mutual effects. This cataclysmic combination of insurance supervisory law and insurance contract law as well caused considerable scientific controversy. Germany has long been familiar with the formal and material control of GCI. Germany was one of the first countries to develop legal rules applicable to general terms and conditions, though these rules remained for some decades to be exclusively drafted by the courts. In the 1970s, these rules were transposed by the legislator into the Unfair Terms and Conditions Act (Gesetz zur Regelung des Rechts der Allgemeinen Geschäftsbedingungen—AGBG), which was subsequently altered, in particular, to meet the requirements of Council Directive 93/13/EEC of April 1993 on Unfair Terms in Consumer Contracts, the transposition of which it subsequently served. In 2002, the AGBG was abrogated, and its provisions were included into the

6 7

Translation available at http://www.gesetze-im-internet.de/englisch_bgb/. Translation available at http://www.gesetze-im-internet.de/englisch_vvg/index.html.

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BGB. In sec. 305 ff. BGB, the principle of transparency is given a central role in regulating the fairness of GCI. Section 305 ff. BGB set a two-pronged test of transparency: firstly, a GCI clause shall be invalid if it causes a significant imbalance between the parties’ rights and duties contrary to the requirement of good faith (sec. 307 subsec. 1 sentence 1 BGB, hitherto sec. 9 AGBG). On the other hand, pursuant to sec. 307 subsec. 1 sentence 2 BGB, a general term or condition may be regarded as unfair for the mere fact that it is not drafted in a clear and comprehensible manner. When the provisions of the Unfair Terms and Conditions Act were transferred into the BGB in 2002, the principle of transparency in the realm of general terms and conditions was made explicit by including this new provision. Before that, the German Supreme Court (Bundesgerichtshof—BGH) contended that the material control of GCI included a control of transparency of all clauses8—even though this was disputed by many. The BGH’s position, however, was affirmed by the Directive on Unfair Terms in Consumer Contracts (Art. 5 sentence 1).9 Within the EU, the requirement of ex ante approval of GCI has been abolished since the deregulation of the insurance sector in 1994.10 Accordingly, the deregulation of 1994 implemented a change to an ex post control of GCI. This alteration also meant that (contractual) transparency now became a primary subject for the civil courts. Almost all of the (up to now) approximately more than 130 decisions rendered by the chamber for insurance matters of the Federal Court of Justice dealing with transparency are dated 1994 or later. Nevertheless, civil courts were well equipped to deal with these questions since many of them had been raised in connection with unfair terms and conditions in (other) consumer contracts. After what may only be called a reform wave regarding other insurance contract acts in a variety of European countries, the German legislator decided to submit the German Insurance Contract Act to an extensive reform in 2008. The insurer’s duties to inform were substantially enlarged and broadened.11 In particular, it broadened duties to inform, as they have hitherto specifically existed for distance selling contracts,12 to cover all contracts regardless of their mode of conclusion since the German legislator favoured the application of a uniform law to all contracts.13 These

8

Cf., e.g., BGH, Entscheidungen in Zivilsachen (BGHZ) 104:92 with further references. Directive 93/13/EEC of 5 April 1993 on Unfair Terms in Consumer Contracts. 10 Art. 181 sec. 1 Directive 2009/138/EEC of 25 November 2009 on the Commencement and Pursuit of Insurance and Reinsurance Business (Solvency II). However, Member States may impose a duty on the insurer to submit general policy conditions for health insurance and compulsory insurances to the supervisory authority before using them. 11 Also cf. Verordnung über Informationspflichten bei Versicherungsverträgen (VVG-InfoV) of 18 December 2007, BGBl. I 2007, p. 3004. 12 Gesetz zur Änderung der Vorschriften über Fernabsatzverträge bei Finanzdienstleistungen of 2 December 2004 (BGBl. I 2004, p. 3102; cf. thereto BT-Drucks. 15/2946); implementing Directive 2002/65/EC of 23 September 2002 with respect to the Distance Marketing of Consumer Financial Services. 13 Küster (2010), pp. 730 ff. 9

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duties to inform were accompanied by duties to advise and duties to document, the breach of which would subject the insurer (or the insurance intermediary) to a claim for damages. The inclusion of these duties was to mirror the Insurance Intermediary Directive in order to level the insurance undertaking and insurance intermediary by applying the same standards. Yet further detail on sec. 9 VVG will not be given in the following—from the perspective of legal transparency, the provision is not convincing, demonstrated by both unclear demands of the Directive itself and the unreasonable tendency of the German legislator to draft intricately.14 However, in summary, the legislator managed the pursued transparency adequately when reforming general parts of the VVG. A good example may be seen in the redrafting of the increase of risk—forming one of the key elements of the reform.15 With respect to the VVG old version, doctrine was of the unanimous opinion that the old VVG was inadequate regarding legal systematics and was hardly comprehensible.16 On the contrary, the reformed VVG clearly separates the different criteria of the increase of risk and different legal consequences such as termination (Kündigung), contractual adjustment (Vertragsanpassung) and release from the duty to indemnify (Leistungsfreiheit). In doing so, the German legislator severely increased legal transparency.17

4 Transparency in the Context of GCI 4.1

Introductory Remarks

‘Terms which have not been individually negotiated’ are the legal heart of an insurance contract within a business-to-consumer (b2c) transaction. Disputes arising under the contract, in most cases, do not concern the effectiveness of individually negotiated agreements but mostly relate to the effectiveness of GCI. It should be noted that GCI are of significantly greater importance than those of the contracts for the supply of goods. This stems from the fact that GCI define the main subject matter of the contract by describing the insured event and by limiting the extent of coverage by means of exclusion clauses.18 The effectiveness of GCI is of crucial importance to the insurer as well. Only effective GCI guarantee the intended economic success since GCI constitute the main basis for the insurer’s premium calculation. Beyond any legal effectiveness of

Bruns (2015), § 9 para. 40 considers the drafting of the provision on the right to revoke and its legal consequence to be inadequate. 15 The reform of pre-contractual disclosure of the policyholder is not comparable in its technical dexterity. 16 Cf. Weyers and Wandt (2003), para. 264. 17 RegE BT-Drucks. 16/3945, p. 67. 18 See at a glance Koch (2018, pp. 92 ff., 97 ff.) and Wandt (2017), pp. 419 ff. 14

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GCI, insurers—given their widespread negative public perception—should have a strong interest in product transparency for their customers. Given the importance of transparency of contracts, in particular regarding GCI, it becomes evident that increasing transparency in said contracts is a crucial aspect in the process of increasing consumer protection. This has certainly been the case for Europe since the 1990s.19 Furthermore, it is quite a commonplace to say that in the EU, the standard of transparency has been continuously enlarged in the course of the evolution of consumer protection.20

4.2 4.2.1

GCI as Part of the Contract Inclusion of GCI According to Sec. 305 Subsec. 2 No. 2 BGB

A first manifestation of contract transparency within the system of controlling GCI can be seen when reflecting upon the requirements as to the inclusion of GCI. Apart from any content-wise control of GCI, formal requirements with regard to the conclusion of the contract are intended to promote transparency of contract. From the point of view of transparency, it is indispensable that written GCI are available to the prospective policyholder before being contractually bound, at the latest. This prerequisite aims to give the prospective policyholder the reasonable possibility of taking note and is provided by sec. 305 subsec. 2 no. 2 BGB.21 In the light of this, it would be even more adequate if the policyholder already gained knowledge of the GCI in good time before submitting his contractual statement. In the case of an oral agreement (e.g. by telephone) or preliminary cover, it is permitted that GCI will be submitted immediately after the conclusion of the contract; sec. 7 subsec. 1 sentence 3 VVG. In addition, it is generally permitted to waive pre-contractual information, but solely under strict formal conditions. However, it is controversial in German law whether such a waiver of pre-contractual information without any explicit clarification is at the same time a waiver of the issuing of GCI as a condition for their inclusion in the contract.

19

Along with the harmonisation of insurance law by EU directives; since the early 1980s numerous national insurance contract acts of EU Member States have been reformed to strengthen consumer protection: Sweden and Spain (1980), Belgium (1992), Germany, Austria, Finland (1994), Luxembourg and Greece (1997), Denmark (2004), Bulgaria (2005), Sweden and the Netherlands (2006), Germany and Portugal (2008), Finland (2010), Great Britain (2012) and Hungary (2013). 20 See at a glance Wandt (2012), pp. 340–353. 21 Schmidt (2019), § 307 para. 43.

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Prohibition of Unexpected Terms According to Sec. 305c Subsec. 1 BGB

A special feature of the general rule that the policyholder shall be aware of the content of GCI is the particular rule that a surprising (unexpected) clause does not become part of the contract. This rule is provided by sec. 305c subsec. 1 BGB and states that provisions in GCI do not become part of the contract if they are unexpected from the point of view of a reasonable contractual partner, taking into account the individual circumstances, in particular, with respect to the outward appearance of the contract. Therefore, such clauses are being denoted as ‘hidden’ clauses. The unexpectedness of a particular clause may also result from its placement within the contract or from the limitation of a right formerly provided by another GCI clause. However, the BGH has held that superfluous confusions in the wording of a clause are not harmful if the content of the clause can be developed with due care.22

4.3 4.3.1

Interpretation of GCI Method of Interpretation

From a global perspective, contractual interpretation is generally based on the intentions of the contracting parties. However, the starting points differ. In most common-law jurisdictions, contractual interpretation starts from an objective point of view. In contrast, (EU) continental laws follow a subjective standard of interpretation. However, it is rightly stated that the results are regularly identical.23 Concerning the interpretation of a consumer contract, the principle prevails that GCI are construed from the viewpoint of an average policyholder without any legal knowledge. In line with this principle, German courts refer to an average policyholder, who carefully reads and assesses the GCI, and considers the apparent contextual meaning of a particular term.24 Therefore, the policyholder is not spared from at least thinking about the GCI. The policyholder, hence, is expected to make observations with regard to the economic purposes of a clause.25 To substantiate the expression of the average customer, the jurisdiction has to take into account the understanding of EU law. The European Court of Justice considers a generally reasonable acting, attentive customer who is capable of selfdefining. Concerning GCI applicable to certain contract types, however, German courts have exhibited a rather strict understanding of what the average customer

22

BGH, Neue Juristische Wochenschrift Rechtsprechungs-Report Zivilrecht (NJW-RR) 1995:749. Brand (2011), p. 97. 24 BGH, Versicherungsrecht (VersR) 2003:236; BGH, Entscheidungen in Zivilsachen (BGHZ) 153:182. 25 BGH, Versicherungsrecht (VersR) 2005:639. 23

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knows and understands, thus, in some instances, applying a more consumer-friendly interpretation than what would be required by the European Court of Justice.

4.3.2

Contra Proferentem Rule

Pursuant to sec. 305c subsec. 2 BGB, any doubts as to the interpretation of standard business terms are resolved against the user. This doctrine is generally known as the contra proferentem rule and serves as a tool to interpret ambiguous general terms and conditions. It contains the rule to construe any unclarity in a general term or condition against the party that proposed its inclusion into the contract. It is in dispute whether the requirement of sec. 305c subsec. 2 BGB applies where a contractual clause is non-transparent in the sense of sec. 307 subsec. 1 sentence 2 BGB. The prevailing view is that these requirements must be equally applied.26

4.4

Scope of Judicial Review Within the EU

GCI—being an integral part of the contract—are subject to judicial review. Traditionally, the judicial review of GCI relates to the substantive validity of the content. A particular term is ineffective if it causes a significant imbalance in the parties’ rights and duties arising under the contract (contrary to the requirement of good faith), to the detriment of the consumer.27 Only in the last decades, transparency has developed into a separate independent standard of judicial review.28 The EU has followed this trend of various national legal systems by implementing the EC Directive on Unfair Terms in Consumer Contracts in 199329 (hereinafter the Directive). Nevertheless, there are still significant differences within the European Union since the Directive only requires a minimum harmonisation (Art. 8 of the Directive). According to Art. 4 (2) of the Directive, the assessment of the unfair nature of the terms shall relate neither to the definition of the main subject matter of the contract nor to the adequacy of the price and remuneration, on one hand, as against the services or goods supplied in exchange, on the other hand, insofar as these terms are in plain intelligible language. Rixecker (2019), § 1 para. 89; Höra (2017), § 1 para. 65. Art. 3 sec. 1 Council Directive 93/13/EEC of 5 April 1993 on Unfair Terms in Consumer Contracts. Most legal systems consider unfair clauses as utterly ineffective. As a further consequence, the clause either ceases without replacement, or (must) be replaced by mandatory legislative provisions or supplementary interpretation will apply. Under the Directive, a national court is prohibited from reducing an unfair term to its legally permissible core (geltungserhaltende Reduktion); BGH, Neue Juristische Wochenschrift (NJW) 2013:991 (p. 993, paras. 33 f.). 28 According to Pilz (2010a), p. 164, this development was initiated by German jurisprudence. 29 Council Directive 93/13/EEC of 5 April 1993 on Unfair Terms in Consumer Contracts. 26 27

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Regardless of Directive 93/13/EEC, there are significant differences within the EU Member States. According to the Final Report of the Commission Expert Group on European Insurance Contract Law, published by the European Commission in 2014,30 some Member States, e.g. Belgium, Denmark, Finland, Luxembourg, Portugal and Spain, submit GCI to a fairness test even if they relate directly to the main subject matter.31 On the contrary, English law seems to exempt any descriptions of the insured event and exclusion clauses from judicial review. It seems that German law stands out in exempting only those core elements of the contract from judicial review, without which the contract could not have been performed.32 However, it should not be ignored that the control of transparency of insurance contracts is intended to protect the policyholder. Therefore, this control should not lead to the result that the policyholder ends up without insurance coverage at all as a consequence of the core terms of the contract being ineffective. A recent decision of the BGH may serve as a suitable illustration: the court has declined to control the transparency of a clause concerning the definition of the insured event of a liability insurance because the invalidity of the clause referring to essentialia negotii of the contract would lead to the invalidity of the whole contract due to the absence of a legal substitute provision.33 In this respect, it is to be underlined that referring to several laws, the lack of transparency of GCI does not necessarily result in the ineffectiveness of the clause. So far, German law provides courts with discretion.34

4.5

Requirements on the Drafting of GCI According to Sec. 307 Subsec. 1 Sentence 2 BGB

In Germany, different criteria have been established in order to structure cases of non-transparency in a suitable manner. Hence, concerning the transparency doctrine as to substance, German law differentiates between comprehensibility (Verständlichkeitsgebot), certainty (Bestimmtheitsgebot) and completeness (Vollständigkeitsgebot).

30

https://www.uibk.ac.at/zivilrecht/forschung/evip/restatement/final_report.pdf. This may also be the approach of Turkish law, Art. 6 Regulation on Unfair Terms in Consumer Contracts. 32 BGH, Versicherungsrecht (VersR) 1994:1049. 33 BGH, Versicherungsrecht (VersR) 2014:625. However, the argument that there is no legal provision, which could substitute the term, appears doubtful because a supplementary contract interpretation is possible and also be based on legal provisions. Koch (2014), p. 1281 ff. 34 Sec. 307 BGB; cf. Langheid (2015), pp. 1071 ff. 31

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Comprehensibility

Comprehensibility means that a legal rule is framed in a way that it is understandable for its addressee. The problem in determining the level of comprehensibility lies in the determination of the person of reference. In insurance contract law, this will usually mean that a legal rule must be comprehensible for the policyholder, i.e. the average policyholder. The question of what constitutes an average policyholder may not be assessed empirically since the term refers to a legal fiction comparable to that of the reasonable person under common law, which is considered as a normative standard (normativer Maßstab).35 One aspect of comprehensibility is intelligibility. Hence, consumer contracts are to be written in plain and intelligible language. Yet it is generally permitted to use technical terms as long as these terms are customarily applicable in a way that an average policyholder is able to understand them.36 In order to maintain comprehensibility, the insurer is allowed to place lists etc. at disposal to explain technical terms provided they are referred to by the GCI (in a transparent manner as well). In cases where reference is made to laws and acts, these materials need not to be attached since extensive materials would render the GCI too complex and, therefore, incomprehensible.37

4.5.2

Certainty

With respect to certainty, GCI have to feature a high degree of concretisation. The conditions of a clause and its legal consequences are, hence, to be described in such detail not granting inadequate margin of discretion to the insurer. An average policyholder has to be set in a position in which he is able to identify his rights as clear and simple as possible and without external help.38 In abstract words, the clause shall not embody an excessive width of definition or be without contours. To the extent that the sanctions of a standard term are more disadvantageous, GCI must be drafted in richer detail.39 Certainty is at stake where undefined legal terms are being used. On one hand, GCI have to display sufficiently detailed rules (suitable for unexpected scenarios) in order to be assessable from an objective point of view. On the other hand, utmost 35 Insofar, the national concept and understanding of the term ‘average policyholder’ may differ from the legal fiction under EU law. See for the CJEU’s concept of average consumer ECJ 6 July 1995, Case C-470/93, Neue Juristische Wochenschrift (NJW) 1995:3243 (p. 3244); ECJ 16.7.1998, Case C 210/96, Neue Juristische Wochenschrift (NJW) 1998:3183 (p. 3184). Cf. also Clarke (2005), p. 145. 36 Präve (2000), p. 140. 37 BGH, Versicherungsrecht (VersR) 2008:337, para. 11; BGH, Neue Juristische Wochenschrift (NJW) 2014:924 (securities business); Rixecker (2019), § 1, para. 92. 38 Stadler (2018), § 307 para. 8. 39 Wolf and Ungeheuer (1995), p. 180.

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complexity shall be prevented, and undefined legal terms may not be prevented in total.40 In particular, adjustment clauses are deemed problematic in this respect. In order to fulfil the requirement of certainty, the criteria of the contractual adjustment have to be at least sufficiently determinable.41 In certain circumstances, comprehensibility and certainty may contradict each other. Certainty could require the insurer to describe the conditions and legal consequences in sufficient detail, possibly rendering a GCI clause to a state of utmost complexity. In cases where complexity reaches an extraordinary degree, clauses might no longer be comprehensible by overloading GCI with information overstraining the prospective policyholder. Having these cases in mind, the BGH grants certainty priority over comprehensibility as the policyholder will, thereby, not be hindered from asserting a right but only from understanding the clause.42 It might be argued that—in both cases—the policyholder will be hindered de facto. However, a lack of comprehensibility might be overcome by consulting an expert. A lack of certainty, to the contrary, cannot be overcome.43 In any way, comprehensibility as a whole insinuates a wishful Utopia, considering that an insurance product is necessarily based on technical terms and undefined legal terms.

4.5.3

Completeness

A particular standard term is to be considered unambiguous (resp. complete) when and if the framing of said rule (this includes mandatory statutory elements of the provision and its legal consequences) does not allow several possible interpretations. In this sense, unambiguity has to be understood as the absence of any reasonable doubt concerning the interpretation of a particular term. Concerning judicial review, a standard term is not deemed to be ambiguous insofar as the ambiguity is cleared by interpreting the term according to the contra proferentem rule. The contra proferentem rule, however, is insufficient when it comes to adverse regulations with respect to the content for the policyholder. In that case, the contra proferentem rule must be supplemented by an independent control of transparency. This means that a rule that is unambiguous may, nevertheless, be considered unclear and vice versa. According to the well-established case law of the German Federal Court of Justice, it is not sufficient that a contract term is clear and understandable from the point of view of the ordinary and reasonable policyholder. The term has also to be

Reiff (2018), § 40 para. 38 f. Armbrüster (2012b), para. 1016. 42 BGH, Versicherungsrecht (VersR) 1995:77 (p. 79). 43 Wandt (2016), para. 201. 40 41

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complete with respect to economic disadvantages and burdens as far as it may be required by individual circumstances.44

4.5.4

Veiled Duties (Verhüllte Obliegenheiten)

In addition to the aforementioned abstract principles, due regard must be given to so-called veiled duties (verhüllte Obliegenheiten).45 These are GCI, veiled by their wording, miming to constitute a risk limitation but instead constituting a duty of the policyholder. In detail, any differentiation between these two options of classifying the clause focusses on content and the rationale of the clause.46 Hence, when interpreting the clause, it is decisive whether it contains any individualising determination (constituting a risk limitation) or if it demands any significant conduct of the policyholder, causing insurance coverage or non-coverage (constituting a duty). These GCI are, generally speaking, capable of endangering GCI transparency as they are not always recognised as constituting a duty. Therefore, it is argued that such a clause is non-transparent and void according to sec. 307 subsec. 1 sentence 2 BGB.47

5 Transparency in the Context of Statutory Insurance Contract Law 5.1

Overview

In German general contract law, some types of contracts are equipped with specific provisions on transparency. This particularly applies to contracts between the seller/ supplier, on one side, and the consumer, on the other side, since the latter is regarded as particularly in need of protection. In order to grant such protection (and to transform certain European directives),48 e.g., the German legislator has established exclusive rules applicable to so-called consumer contracts and, even more distinct, applicable to specific consumer contracts, such as distance selling contracts (besides the controlling of GCI, as analysed previously).49 In respect of aforementioned 44 BGH, Versicherungsrecht (VersR) 2013:1397; BGH, Entscheidungen in Zivilsachen (BGHZ) 194:208 (para. 45). 45 Unlike an enforceable duty (echte Rechtspflicht) an Obliegenheit does not confer an enforceable claim for neither performance nor damages. Instead a breach of an Obliegenheit leads to other specific legal consequences determined by law. 46 BGH, Neue Juristische Wochenschrift (NJW) 2014: 449. 47 Differentiated Wandt (2015, pp. 265 ff.); cf. OLG Naumburg, Versicherungsrecht (VersR) 2015:102. 48 See above Sect. 4. 49 See for the fundamental structure of private consumer protection laws in the light of distance selling contracts Bülow and Arzt (2000), pp. 2049 ff.; with reference to the application of the

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contracts, German law subjects the seller/supplier to a duty to inform the consumer about certain facts and requires such information to be clear and comprehensible (cf., e.g., sec. 312c subsec. 1 BGB in conjunction with Art. 246 secc. 1 and 2 of the Introductory Act of the German Civil Code (Einführungsgesetz zum Bürgerlichen Gesetzbuch—EGBGB) and sec. 360 subsecc. 1 and 2 BGB). Another example for the principle of transparency applicable to specific consumer contracts would be the duties of information applicable to travel businesses. Pursuant to sec. 4 of the BGB-Information Duty Regulation (BGB-Informationspflichtenverordnung—BGBInfoV), a prospectus provided by a travel operator must contain definite and decisive information. This information must be ‘legible, clear and precise’ (sec. 4 BGB-InfoV). Yet the absence of a specific standard of transparency for a specific type of contract, however, does not mean that the transparency test would not apply for different scenarios. In such cases, jurisprudence applies the general standard of transparency—e.g. as part of the method of interpreting contractual clauses—by adopting this standard to the necessities of the type of contract in question. Notwithstanding the aforementioned, it has to be taken into account that insurance as a ‘legal product’—which (greatly simplified) only exists on paper and within the framework that the law sets for the contract50—is highly complex.51 This is why it is rather common to assume that the average policyholder is not able to fully and accurately understand the content of an insurance clause even where the insurer were to use its best efforts to draft such provision as comprehensible as possible.52 So far, the shortcomings of the required level of transparency, when drafting the contract, is in some way compensated by the requirements of transparency when distributing the contract. Hence, it is the duty of the insurer (respectively of the insurance intermediary) to inform and to advise the policyholder before concluding the contract (secc. 6, 7 and 60–62 VVG).53 Each of these provisions explicitly asks for the realisation of transparency. The insurer has the duty to inform the policyholder about the insurance company itself; about various details of the contract, including information; and about the premium and expectable costs, taxes, etc. in writing. This requirement is applicable to all insurance contracts (sec. 7 subsec. 1 VVG, combined with the provisions of the Regulation on Duties to Inform in Insurance Contracts (Verordnung über Informationspflichten bei Versicherungsverträgen—VVG-InfoV)). The insurer has to

Consumer Directive as the onset for interpreting sec. 312 subsec. 1 BGB see von Loewenich (2016, pp. 2011 ff.). 50 See above Sect. 2. 51 Wandt (2012), p. 343. 52 In further addition to the forgoing remarks on the perspective of the average policyholder, see Pilz (2010b), pp. 1289 ff., in due consideration of the average policyholder’s situation when dealing with non-accessible material for the interpretation of GCI. 53 However, building on previous jurisprudence about the insurer’s duty to inform, statutory requirements must be seen in the light of all individual circumstances, see Rudy (2018), § 6 para. 3; Reiff (2016), § 68 para. 8 ff.

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inform the policyholder about rights and duties arising from the contract, including GCI, in due time prior to the conclusion of the contract, to provide him with specific information concerning the object and characteristics of insurance coverage, as well as the policyholder’s statutory duties. With sec. 6 subsec. 1 VVG, the German Insurance Contract Act provides a rule that obliges the insurer to survey the policyholder’s desires and needs and to advise him as well as to justify its recommendation for a specific insurance. While a specific duty to inform has already existed under the old law (sec. 5a VVG 1994 and— concerning the distance marketing of consumer insurance contracts—sec. 48b VVG 2004 with annex), the duty to advise is a genuinely innovative feature of the new reformed VVG from 2008.54 Under the old VVG, there was the general assumption that it was the policyholder’s personal responsibility to gather all information necessary and to evaluate if a product in question fits his particular needs. Insofar, it was general court law that a duty to advise could only attach to circumstances that distinguished the case at hand from ordinary cases of the same kind. There was rather a duty not to give wrong advice than a duty to give advice. It should be remarked that the legislator seemed to regard this situation, which is the standard for the vast majority of all other contracts, as unacceptable for insurance contracts and even, when talking about the need for reform of the old VVG, mentioned the duty to advise as the very first field that needed thorough reform. The need for reform was generated by the Insurance Mediation Directive, which obliged the German legislator to implement a duty to advise for all insurance intermediaries and insurance consultants into national law. The German legislator regarded it as nonsensical to burden the insurance intermediary with a personal duty to advise while not letting a comparable duty fall upon the insurer itself, particularly taking into consideration that it is not the insurance intermediary (this is not completely true for the insurance broker) but the insurer that is the contractual party of the policyholder. In this respect, the legislator decided to implement the Directive in such a way as to endow separate claims to the policyholder against the insurance intermediary and the insurer alike while trying to form the insurer’s duty to advise as closely as possible after the duty of the insurance intermediary, which the Directive required to be implemented. This goal of the reform was achieved by including a broad duty to query, to advise and to document on the insurer (sec. 6 VVG) and on insurance intermediaries respectively insurance consultants (secc. 60 ff., 68 VVG).

Cf. further Armbrüster (2016), Vorbemerkung zu §§ 6, 7 VVG; Koch (2018), pp. 130 ff.; Schwintowski (2015), § 18; Rixecker (2015), § 18a; RegE BT-Drucks. 16/3945, pp. 59 ff.; Cf. also Reformkommission, Abschlussbericht, pp. 10 ff. and pp. 294 ff. On the insurer’s and insurance intermediary’s (i.e. insurance agent’s) duty to inform under the VVG old version see Römer (1998), pp. 1313 ff. 54

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The Duty to Advise (Secc. 6, 60–62, 68 VVG) Statutory Setting of the Duty to Advise

The insurer’s duty to advise, as provided for by sec. 6 VVG, is manifold: pre-contractually, the insurer has to query the applicant about his wishes and needs; if and to the extent that the occasion calls for it, it has to, where deemed appropriate, give objective advice, to motivate its advice and to provide the policyholder with a sufficient documentation of query, advice and motivation. In general, the insurer will aim to fulfil these duties through its insurance agents. So far, the insurer is responsible for fault on the part of its agent, according to sec. 278 BGB. According to sec. 6 subsec. 6 first half-sentence VVG, insurance contracts covering a large risk in the sense of sec. 210 VVG do not entail a duty to advise. The duties provided by sec. 6 subsec. 1 sentences 1 and 2 VVG, furthermore, do not oblige an insurer if the contract is negotiated with the policyholder by an insurance broker.

5.2.2

Precontractual Duty to Advise

The Necessity of Questioning: The Duty to Query In a first step, this is a truly innovative feature of the new law: the insurer is held to uncover a possible need for advice by questioning the applicant. This duty, however, does only exist if and to the extent that the complexity of a proposed insurance product or the person of the policyholder or his personal situation gives reason to. How these indefinite terms have to be interpreted exactly remains rather unclear.55 The legislator confined itself to stating only that sec. 6 VVG was not meant to implement a duty of extensive enquiry and investigation but was meant to safeguard a proper giving of advice by obligating the insurer to focus on and react to the (initial) information provided by the policyholder.56 This means that the insurer, usually acting through its insurance agents, is not held to ‘snoop’ around and ‘dig into’ the affairs of the policyholder but is solely required to take into account what the policyholder tells it/him and to ask questions where such seem necessary and appropriate. All in all, the insurer will be held to base its assessment for the need of questioning on an overall view. While the legislator believes that the insurer, through its agents, will in practice always question its customers in a way to establish the information necessary for an appropriate advice, there still remains some uncertainty on how inquisitive the insurer will be ‘forced’ to be in order to fulfil the duty to query

55

Wandt (2016), para. 299. Cf. for a more detailed perspective of the legislators rationale for the individual data-oriented duty to advice RegE BT-Drucks. 16/1935, p. 24.

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under sec. 6 subsec. 1 sentence 1 VVG. In particular, it is open for discussion what circumstances will necessitate a query, if such circumstances are deemed recognizable for the insurer (question of the level of diligence expected), and what extent of questions certain circumstances entail. The necessity of a question may be indicated by circumstances relating to the three factors enumerated by sec. 6 subsec. 1 sentence 1 VVG, i.e. the difficulty to understand the product in its complexity, the person of the policyholder and his situation. Enumerated Factors Indicating Necessity Firstly, this means that the duty to query will increase the more complex the offered insurance product gets. If the product is simple and easy to understand, such as a dog liability insurance, the insurer will, in many cases, not be obliged to ask any questions at all. It might be quite different where the interest to be insured can be covered by various types of complicated products. Such is, e.g., the case where the applicant tells the insurer that he wishes to conclude a ‘life insurance’. Already the multiple variables and options that are applicable to such a product—one may conclude a term (life) insurance, a universal life insurance, a unit-linked life insurance, a complementary occupational disability insurance, etc.—make it seem indispensable for the insurer to query about the motivation for such a product and the needs of the policyholder and base its advice on that information. Circumstances in the Person of the Policyholder Indicating Necessity Secondly, circumstances lying in the person of the policyholder may indicate questions. It is, hence, of importance to what extent the applicant is willing and able to formulate his wishes. If he articulates a clear and narrow desire to cover a certain risk, the query and advice may be limited to a minimum. Again, one must take into consideration the targeted insurance product. If one looks at a very complicated insurance contract, such as life insurance contracts, even the most refined and eloquent applicant will usually leave some questions open, which need to be addressed.57 Situation of the Policyholder Indicating Necessity Thirdly, the insurer must take into consideration the concrete situation of the policyholder in order to establish if questions are indicated. This may imply, e.g., that a certain situation may deem it necessary to limit the insurer’s questions to a minimum, even though in other situations further questions would have been indicated. For example, if an applicant is late for his flight and wants to conclude a

57 BGH, Entscheidungen in Zivilsachen (BGHZ) 194:39; differing Römer (2016, § 7 para. 18); also see BGH, Entscheidungen in Zivilsachen (BGHZ) 203:174.

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traveler’s baggage insurance at the airport, the insurer would be held to give consideration to time constraints of the traveler. In most cases, however, the criterion of the relevant situation will rather be important to indicate additional questions. If, e.g., the insurance agent is on the premises of an applicant who wants to conclude a personal liability insurance and notices a dog accompanying the applicant, it may ask if the applicant already has a policy to cover claims for dog owner’s liability (cf. sec. 833 subsec. 1 BGB) and, if none, to advise that the sought-after personal liability insurance does not cover such claims and that an independent cover might be advisable.

The Necessity of Advice: The Duty to Advise (in a Narrow Sense) In a second step, the insurer has to offer the applicant advice on options, on possible gaps of coverage, etc. by basing itself on the information gathered by the query. Such advice is not to be given bare-boned but must be motivated, i.e. the insurer has to tell the applicant what it regards as possible options or maybe the most advisable option and why such is, in its opinion, the case. As for the duty to query, the duty to advise solely exists if (and to the extent) the complexity of a proposed insurance product or the person of the policyholder or his personal situation gives reason to proceed further. So far, the aforementioned elements of the duty to query apply mutatis mutandis to the duty to advice. In a nutshell, it may be stated that the insurer has to advise on all circumstances of certain importance to the applicant in question as far as the questions relate to the targeted insurance product and provided that this is recognizable and that advice can reasonably be expected.58 Section 6 subsec. 1 sentence 1 VVG specifies that advice has to be given, ‘while taking into consideration an appropriate relation between the expenditure from advising and the premiums to be paid by the policyholder’. So far, the duty to advise is limited by an economic factor. Regularly, an insurance contract with a low premium will be a less complex product, which does not require an intricate advice. Furthermore, it would seem disproportionate to require the insurer to give lengthy advice on an insurance product that produces an annual premium of less than € 100. On the other hand, even a low-premium product may require a more thorough advice if all the other factors pre-dominantly point towards its necessity. Regarding the legislative intent of sec. 6 VVG—to safeguard appropriate advice—one should probably understand the requirement of economic proportionality in a way that in dubio advice should always be given if it is otherwise indicated but that such advice

58 Cf. for an exemplary presentation of jurisdiction strictly requiring and interpreting a mere objective cause, BGH, Versicherungsrecht (VersR) 2014:861 and OLG Karlsruhe, Versicherungsrecht (VersR) 2013:885 (p. 886); furthermore, OLG Saarbrücken, Versicherungsrecht (VersR) 2011:1556 (under the old VVG).

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may be limited to a proportionate level, thus concentrating on the essential elements of the product in question. Furthermore, even though this is not explicitly mentioned in sec. 6 VVG, one has to limit the duty to advise by the factor of reasonability. If one considers the sphere of interests of the applicant and of the insurer, both having in several instances interests that are rather diametrically opposed, it cannot be expected of the insurer to give a completely objective advice towards an applicant as would be expected of an insurance broker or consultant. So far, the insurer is not held to point out that a comparable insurance product would be obtainable from another insurer at a lower price or that other insurance undertakings offer policies that are better suited to fit the applicant’s needs.

The Necessity of Documentation: The Duty to Document In a third step, it is incumbent upon the insurer, usually represented by its agents, to document the query (pertaining to the wishes and needs) and the advice, as well as the reasons for having given it. While the query and advice are not subject to any form requirements, and will for the most part be operated orally, the documentation must be performed in writing (Textform).59 Pursuant to sec. 6 subsec. 2 sentence 1 VVG, the insurer is held to transmit this documentation to the applicant prior to the conclusion of the contract. However, the information shall be provided without undue delay after the conclusion of the contract if the policyholder wishes to be advised verbally or concerning provisional cover. Equally, it does not have to send the documentation even after the conclusion of the contract, pursuant to sec. 6 subsec. 2 sentence 3 second half-sentence VVG, if the contract is not concluded subsequently or if the contract for provisional cover relates to an obligatory insurance (in the sense of secc. 113 ff. VVG). For the most part, the documentation will be established by the insurer, represented by its insurance agent, during the sales talk. In many cases, a print-out will be handed over to the applicant immediately following the sales talk. It is to be expected, and it already is a widespread practice, that the insurance agents will use a standard transcript form devised by the insurance undertaking (for all products or different forms for different products). By using such standard forms, which will only be filled out by the agent, the insurer seeks to meet the requirement that the documentation has to be given in a ‘clear and coherent way’.60 The duty to document does only exist to the extent (meaning that it usually is not the ‘if’ but only the ‘whether’ that is in question) that the complexity of a proposed insurance product gives reason to document. In practice, this invokes insurers to

59

Cf. on the exceptions to the requirement of the written form, concisely Wandt (2016), para. 302. Regarding other branch-specific standardised information duties according to the VVG in general, cf. Loacker (2015), p. 200.

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establish different standard transcript forms corresponding to different insurance products (as to their complexity) rather than applying a ‘one-fits-all’ form.

Point in Time of Fulfilment of the Duties Section 6 subsec. 2 sentence 1 VVG provides that the documentation has to be transmitted before the conclusion of the contract. Although it is not explicitly said, the duty to query and to advise must be fulfilled not only before the conclusion of the contract but also before the policyholder’s contractual declaration. This could be argued by raising the fact that sec. 7 VVG (duty to inform) in contrast explicitly provides that the information has to be received before the policyholder’s contractual declaration. However, the goal of the duty to advise would be countered if the advice could be given only after the policyholder has already made his choice. It would not be convincing to focus on the conclusion of the contract and exclusively refer the policyholder to his right to revoke, which is not always provided (see the limited applicability of sec. 8 VVG). There also remains an ambiguity as to the point in time at which the duty to document must be fulfilled.61 While it is clear that the documentation material must (only) be transmitted to the policyholder prior to the contract conclusion—nota bene not before the policyholder’s contractual declaration—sec. 6 subsec. 2 VVG leaves open the question at what time the documentation must be established. Considering the fact that the law does not address this problem, it seems reasonable to assume that the legislator wanted to give the insurer (and the insurance intermediaries) the choice to establish a ‘live’ transcript or a transcript from memory.62

Waiver of the Policyholder (Sec. 6 Subsec. 3 VVG) According to sec. 6 subsec. 3 VVG, the policyholder may waive the right to be advised and the right to documentation by a separate written declaration in which the insurer explicitly indicates that such waiving may have an unfavourable effect on his option for asserting a claim for damages against the insurer. While this exception of sec. 6 subsec. 3 VVG has been widely criticised for endangering legislative intent, it must be regarded as a needful and self-evident rule of law.63 This waiver must be a separate written document, which then is to be signed by the applicant (yet not 61

On the temporal sequence of documentation, see Wandt (2016), paras. 303 f. By the same token Armbrüster (2016), § 6 para. 136 f.; insurers will regularly compile documentation during the customer call, cf. RegE BT-Drucks. 16/1935, p. 25; the insurer’s documentation serves, inter alia, the policyholder’s visualisation and, therefore, the comprehension of the insurance product, see BGH, Entscheidungen in Zivilsachen (BGHZ) 203:174 and Reiff (2006), p. 1709. 63 Critically on the policyholder’s option to waive his right to advice and documentation, Niederleithinger (2010), pp. 437 ff.; see also Römer (2007a), pp. 94 ff. discussing a possible threat to consumer protection. 62

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necessarily by the insurer). So far, it is remarkable that the refusal to respond to the insurer’s query (or to a single question in it), in the sense of sec. 6 subsec. 1 sentence 1 VVG, may not be presumed as a waiver in the sense of sec. 6 subsec. 3 VVG. The only result of such a refusal is that to the extent of this refusal, a need for advice (and, thus, a duty to advise) does not exist. Again, it should be mentioned that the possibility to waive one’s right to be advised is meant to be an exception of the general rule that all policyholders are to be advised. If insurers were to use such waivers across the board, they would most likely run the risk that the waivers might be ruled null and void, thus opening a floodgate to claims for damages, or that the German Federal Financial Supervisory Authority, (Bundesanstalt für Finanzdienstleistungsaufsicht—BaFin—inter alia supervising insurers), would intervene.64

5.2.3

Advice During the Contract Term

Section 6 subsec. 4 sentence 1 VVG, furthermore, obliges the insurer to query and advise ‘its’ policyholders throughout the term of their insurance relationship. Again, such a duty only exists under the condition that there is a recognizable necessity for advice.65 Other than for the pre-contractual duty to query and advise, sec. 6 subsec. 4 VVG does not (exclusively) enumerate the circumstances originating a duty to advise. It rather states that a duty exists ‘as far as it becomes recognizable to the insurer that there is reason to query and advise the policyholder’. This means that the reason must not necessarily lie within the insurance product, the policyholder or his situation but may also lie within other factual or legal circumstances, such as a change of the legal regime applicable to the held policy. Other than the pre-contractual duty, advice does not have to be documented as sec. 6 subsec. 4 sentence 1 VVG only states that the duties of sec. 6 subsec. 1 sentence 1 VVG are applicable throughout the contractual term. It does not refer to the duties of sec. 6 subsec. 1 sentence 2 and subsec. 2 VVG. Most importantly, the policyholder may only waive his contractual right to be advised throughout the term on a case-by-case basis. This means that no general waiver is possible neither in the general conditions nor in a separate document, by which a policyholder abstractly waives his right to be informed for the future. The policyholder may only waive his right individually. This waiver must be in writing.

64

Also, the German Federal Constitutional Court (Bundesverfassungsgericht—BVerfG) raised doubts with respect to transparency in general in this regard, in Versicherungsrecht (VersR) 2005:1109; also Römer (2007a), pp. 94 ff. 65 Wandt (2016), para. 310.

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Claim for Damages and Burden of Proof

Section 6 subsec. 5 VVG and sec. 63 VVG each grants the applicant an individual claim for damages if the duty to advise was breached by the insurer and/or the insurance intermediary. Being jointly and separately liable is of concern to the insurer and the insurance agent. As the duty to advise is a case of a statutory pre-contractual duty in the sense of sec. 311 subsec. 2 no. 1 BGB, the claim for damages exists whether or not a contract was concluded later on.66 According to the general principles of civil procedure, the policyholder bears the burden of proof concerning the breach of duty, the damage and their causality. Pursuant to sec. 6 subsec. 6 sentence 2 (insurer) and sec. 63 sentence 2 VVG (intermediary), there is a rebuttable presumption of fault so that it is up to the insurer/intermediary to prove that it/he acted diligently. In addition, the BGH held that non-compliance with the duty to document may result in a less onerous burden of proof of the policyholder. Moreover, the court held that an inversion of the burden of proof takes place where necessary advice is of evident importance and still not even rudimentarily documented.67 Furthermore, courts give preference to the policyholder by granting a rebuttable presumption with respect to causation if the breach of the duty to document is certain.68

5.3 5.3.1

The Insurer’s Duty to Inform (Sec. 7 VVG in Connection with the VVG-InfoV) Overview

With the enactment of the German Insurance Contract Act in 2008, the insurer’s duty to inform was substantially enlarged and broadened. This duty is accompanied by the duty to advise and to document (secc. 6, 7 VVG). Further substantiation on pre-contractual information was set out in 2007 by the VVG-InfoV.69 It comprises a comprehensive catalogue of basic information relevant to all insurance contracts, as well as additional requirements for life insurance, accident and occupational disability or substitutive insurance contracts. For instance, cost transparency is utterly important for life insurance contracts because of their peculiarity as long-term capital accumulation instrument. It is vital

66

Niederleithinger (2010), pp. 437 ff. BGH, Versicherungsrecht (VersR) 2015:107. 68 BGH, Versicherungsrecht (VersR) 2013:628; Reiff (2016, § 63 para. 51). 69 In addition, see on the integration into civil law Präve (2008), pp. 151 ff. 67

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to inform the policyholder to what extent his premium will be used to cover the insurer’s overhead and for this reason will not be available to accumulate capital. Section 7 VVG (in connection with the VVG-InfoV) contains a substantial regulation of the matter and affords the policyholder a personal claim against the insurer to be informed. In this way, it, arguably, differs from sec. 10a old VAG (in connection with Annex D to the VAG), the rule it replaces, which was regarded by some as a purely supervisory rule not granting any private claims to the policyholder. The new sec. 7 VVG has changed the old system of providing information in several other aspects.70 This information duty applies to all insurance contracts irrespective of the policyholder being a consumer or not. If the essential content of a contract of insurance—except for distance contracts—refers to the insurer granting preliminary cover, the parties may agree that the insurer shall only send to the policyholder GCI and the information in accordance with sec. 7 subsec. 1 VVG in connection with the VVG-InfoV upon request or with the insurance policy at the latest (sec. 49 subsec. 1 VVG). Section 7 subsec. 1 to 4 VVG do not apply to insurance contracts covering large risks in the meaning of sec. 210 subsec. 2 VVG. However, if the policyholder is a natural person, the insurer has to inform him of the applicable law and the competent supervisory authority in writing pre-contractually, sec. 7 subsec. 5 VVG. For a brief overview of the required information71: Sec. 1 VVG-InfoV requires the insurer to inform the policyholder about its own person (e.g. its name, its address), about its performance under the pre-visioned contract (e.g. general conditions of insurance, the nature, extent and due date of its performance, and the price and total costs of insurance), about the modalities of contract (e.g. its mode of conclusion, its term and possibility of termination, the possibility of revocation) and about possible legal remedies (in particular the possible access of the policyholder to an extrajudicial complaint and grievance procedure). For a life insurance contract, sec. 2 in connection with sec. 2 subsec. 3 VVG-InfoV, additionally requires information, in particular, on the share in surplus, e.g. the mode of calculation of the benefits of the contract, the way acquisition and distributions costs are debited from the premium (i.e. explanation of the Zillmer method) and the surrender value. If the insurer includes a model calculation pursuant to sec. 154 VVG, it has to meet specific requirements.72 It should be mentioned in this context, according to sec. 155 VVG, that in the case of insurances with surplus sharing, the insurer shall inform the policyholder annually in writing of the development of his claims, including surplus sharing. Further, the insurer, if it has provided figures regarding the possible future progression of the surplus sharing, must indicate to the policyholder how the actual development

70

Cf. in relation to sec. 7 subsec. 2 VVG on duties to inform, formerly stipulated by insurance supervisory law, RegE BT-Drucks. 16/3945, p. 121. 71 See in further detail Wandt and Bork (2018), pp. 261–292; See also Koch (2018), pp. 133 ff. 72 The same applies to an occupational disability insurance or an accident insurance with premium redemption (sec. 2 subsecc. 4 f. VVG-InfoV).

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deviates from the figures quoted initially. The duties of sec. 3 pertaining to the insurer of a health insurance are quite comparable to those of sec. 2. Section 4 VVG-InfoV provides for specific information modalities for consumers73 who now have to be provided with a product information sheet. It was feared by jurisprudence that a large number of insurers would be induced by the new law to fulfil their duty to inform in a very formalistic manner by handing over voluminous information materials, with the intent of covering against any kind of liability rather than with the goal of informing the policyholder as effectively as possible. To avert such negative effect of the comprehensive duty to inform and to protect the consumer against a possible hypertrophy of information, the legislator, thus, chose to oblige the insurer to hand over a product information sheet highlighting the essential elements of insurance. The product information sheet bears this name in its title and precedes all other information given to the applicant (sec. 4 subsec. 5 sentence 1 VVG-InfoV), i.e. the product information sheet must never be ‘hidden’ among the other information material but must lie on the top of the heap. In it, the necessary information, as non-exclusively enumerated by sec. 4 subsec. 2 VVG-InfoV, shall be presented in a concise, clearly arranged and coherent manner while pointing out to the policyholder that the information is non-conclusive, sec. 4 subsec. 5 VVG-InfoV. The VVG-InfoV also provides for the type of information an insurer has to disclose when it contacts the policyholder via telephone (sec. 5) and which information it generally has to transmit to the policyholder during the term (sec. 6).

5.3.2

Providing Information Timely

An important question concerning the duty to inform is what exactly is to be understood when requiring the information to be turned over in a timely manner before the policyholder’s contractual declaration. This requirement excludes the application of the model of policy (as hitherto exercised by German insurers, i.e. turning over all necessary information only at the moment at which the insurer accepts the offer made by the policyholder); it nevertheless remains unclear how far in advance the information has to be transmitted in order to be considered timely in the sense of sec. 7 subsec. 1 sentence 1 VVG. In interpreting the indefinite term ‘in a timely manner’, it is only certain that the latest possible moment must be that at which the policyholder communicates its contractual declaration, i.e. an acceptance or, more typically, an offer. It may, however, in several cases be preferable to assume an earlier moment for the information to be timely. Considering the wording of the legal rule, it seems to be preferable to interpret the prerequisite of timeliness on a case-to-case basis, taking into account the group of persons that the policyholder

73

The provision solely applies to consumers. In principal, the VVG 2008 treats every policyholder equally—except for contracts covering large risks. The VVG, thereby, refrains from providing exclusive rules on insurance contracts for consumers.

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belongs to and the nature of the product offered.74 This certainly precludes any dogmatic approach requiring, e.g., a three-day period to be observed in all cases. Rather, one should give regard to the following factors: the appropriate amount of protection needed by the policyholder against undue pressure to decide without having the necessary information, the concrete circumstances of the conclusion of the contract conclusion and the type, scope and importance of the deal. Furthermore, in all cases where the timeliness of the information might be controversial, one should apply the principle one could baptise as ‘in dubio pro consumer protection’ and tend to interpret ‘in a timely manner’ to the disadvantage of the person being obliged to inform. There are, however, some exceptions to the requirement of information before the policyholder’s declaration. Firstly, pursuant to sec. 7 subsec. 1 sentence 3 first halfsentence VVG, the information material must be transmitted without undue delay after the contract conclusion if the contract on demand of the policyholder is concluded via telephone or another means of communication that does not allow for written information to be transmitted to the policyholder prior to contract conclusion. Secondly, the same applies pursuant to sec. 7 subsec. 1 sentence 3 second half-sentence VVG where the policyholder by a separate written declaration explicitly waives his right to be informed prior to his contractual declaration.

5.3.3

Sanctions

In particular, considering its aim to abolish the model of policy (i.e. the prior practice of insurers to deliver the information material with the policy only at the moment of their contract acceptance), the legislator in particular could have provided for insurance contracts to solely be concluded after all information has been transmitted. Such an approach, however, would not have served best the interests of the policyholder, which in many cases will have a legitimate interest to have an effective insurance contract, notwithstanding any belated information. The legislator, hence, chose to sanction a violation of the duty to inform in a twofold manner: firstly sec. 8 subsec. 2 no. 1 VVG provides that the revocation period for the policyholder shall only start at the moment at which all information has been received by the policyholder. By effect of this rule, the insurer is sanctioned for its breach of duty to inform by a prolonged right to revoke upon exercise of which the policyholder can terminate the contract until the insurer fulfils its duty. Secondly, a violation of the duty to inform may result in a claim for damages. It is, so far, conceivable that the policyholder claims for damages for a breach of a (pre-) contractual duty under secc. 280 subsec. 1 and 311 subsec. 2 no. 1 BGB.75

74

Wandt (2016), para. 317. A particular problem which comes up in connection with the general possibility to claim damages consists in the question if premiums that have been paid—for insurance cover that has been provided—may also be claimed (at least in part) as damages. Insofar there are strong arguments

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With respect to legal certainty, the tremendous widening of differentiated and detailed information duties and their connection with the beginning of the revocation period provided by sec. 8 VVG seems doubtful.76 These doubts are reasoned by the danger of developing practices concerning specific information duties, which will be held illegitimate by the BGH as late as years have passed. As a worst-case scenario, this can stipulate, provided that the insurer does not fulfil its duty at any moment, that the policyholder has an eternal right to revoke (ewiges Widerrufsrecht).77 These transparency constraints are lacking interest, both from a legal and a socio-political perspective. Therefore, I could be recommendable to amend the beginning of the revocation period in sec. 8 subsec. 2 no. 1 VVG de lege ferenda, solely requiring the receipt of the regular product information sheet (Produktinformationsblatt) and proper granting of specific information with regard to personal insurance.

5.4

Additional Duties of the Insurer to Indicate and to Instruct

In accordance with the principle of transparency, the VVG obliges the insurer to highlight important explanations and indications by use of a separate notification in text form (Textform) or by use of a conspicuous indication within the insurance certificate (Versicherungsschein), sec. 37 subsec. 2 sentence 2 and secc. 51, 52 VVG. Moreover, VVG 2008 puts particular importance to the instruction of the policyholder with respect to the possible legal consequences of breaches of duties.78 Pursuant to sec. 19 subsec. 5 and sec. 28 subsec. 4 VVG, the insurer is not entitled to rights resulting from such breach of duty if the instruction was incorrect or even missing.79 Courts laid down strict but plausible rules for providing instructions on the legal consequences of breaches of duties (in the sense of Obliegenheiten): in order to avoid the instruction being overlooked, a typographical accentuation is necessary if

that sec. 9 VVG precludes claims for damages on paid premiums in those cases in which it applies (i.e. where the cover was incepted with the policyholder’s accordance before the expiration of the limitation period for revocation; the policyholder was instructed about the power of revocation, the legal effects of a revocation and the payable amount of money by way of an instruction notice). 76 Cf. also Brand (2012), p. 81, who argues, with regard to issues outside the scope of directives, in favour of a de lege ferenda removal of a mandatory right to revoke. 77 BVerfG, Recht und Schaden (r+s) 2014:6; cf. Armbrüster (2012a, pp. 517 ff.) on the insured’s disloyal behaviour hindering the eternal right to revoke, which must be construed restrictively under the aspect of an abuse of law. 78 In the sense of not conferring an enforceable claim for neither performance nor damages, see above Sect. 4. V. 4. 79 Cf. with regard to the uniformity of the formal requirements in both provisions, Tschersich (2012, pp. 56, 60).

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the instruction is given in a textual context with other explanations.80 Moreover, the textual context with the occasion of the instruction must be maintained, i.e. with inquiries addressing risks or with indications as to duties (Obligenheiten) which are to be fulfilled during the contract term.81 Likewise, the insurer has to adequately point out to the policyholder the connection with the policyholder’s answering to the insurer’s inquiries if the instruction is given on an extra sheet (which is, generally, permitted).82

6 Conclusion Considering the above and from a legal perspective, the principle of transparency may only require making transparent such properties of the product that are essential to the purchase decision. Understood in such a way, the main purpose of the principle of transparency in the context of a contract for the exchange of performances is to put the buyer in a position, in which he is not forced to buy ‘a pig in a poke’ but may ascertain if the product meets his reasonable expectations. Concerning insurance, this intrinsic need is quite obvious since the insurance cover will always serve an existential need. Transparency in insurance gains even more weight considering the natural invisibility of insurance being a legal product.83 It is, so far, reasonable to abstractly demand utmost contractual transparency and to make the insurance product visible to the customer. The legislator, however, also faces another difficulty: it needs to decide which rights and duties are essential, which are the precise conditions of transparency that the contractual fixation of these rights and duties has to meet and by which means outside the policy and GCI transparency may be increased for the policyholder. In particular, concerning such requisites of transparency that do not regard the transparent wording and fixation of the contractual text, the legislator needs to assess if and to what extent such information or advice is suitable to increase the policyholder’s understanding of the product.84 In assessing the appropriateness of such means, one needs to take into consideration if the (average) policyholder is typically willing to make use of and/or demand such information and advice. One needs to, furthermore, pay attention to the expenses caused for preparing additional information materials and advice. In addition, legislators have to keep in mind that

80

OLG Hamm, Versicherungsrecht (VersR) 2016:103. OLG Karlsruhe, Versicherungsrecht (VersR) 2016:105; OLG Karlsruhe, Versicherungsrecht (VersR) 2016:445; concerning the exceptional case of a doubled instruction OLG München, Recht und Schaden (r+s) 2016:68. 82 OLG Saarbrücken, Versicherungsrecht (VersR) 2015:91. 83 Cf. Dreher (1991), pp. 145 ff. 84 See also Schneider (2015), pp. 477 ff. on the stress ratio between the insured’s (informational) self-determination and the insurer’s imperative to guide and care. 81

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too much information can sometimes create incomprehensibility—or in other words, less (or reduced) information might in certain circumstances be more. These potential disadvantages need to be seen in relation to the (economic) importance of the specific insurance product. Apart from the deplorable aspect of the eternal right to revoke triggered by a breach of the insurer of any of its information duties, the legal scholars can only evaluate with reservation whether the specific concept of information duties stands the practice test. This reservation grounds on the lack of evidenced empirical data with regard to the efficiency of the attainment of information duties.85 One should always be reminded that information duties pursue different aims. Firstly, they aim to provide the policyholder with substantial information necessary for his contractual decision. Secondly—and this purpose is often disregarded—these duties of the insurer aim to supply the policyholder with an immediate source of information in respect of the substantial content of the contract after the contract is concluded.86 In order to achieve these goals to their full extent, the legislator must limit information duties to a substantial core and secure that these pieces of information are made comprehensible to a maximum number of policyholders. In light of this, considerable doubts as to the current version of the VVG arise even without evidenced empirical data. Aiming at efficient transparency before the conclusion of the contract, handing over GCI should solely be accompanied by the product information sheet—as originally proposed by the former judge of the BGH and first ombudsman (Ombudsmann) Römer87—and the proper granting of specific information with regard to personal insurance. Admittedly, the freedom of the German legislator was limited within the scope of the EU Directive concerning the Distance Marketing of Consumer Financial Services.88 The second goal of information duties (supplying the policyholder with an immediate source of substantial information after the contract is concluded) is not achieved best by additional information duties but by a statutory regulated optimisation of the contractual drafting. Insurance contracts and insurance business subsist on legal certainty and transparency. Not only the contractual parties but also the legislator is, therefore, called upon to create clear, unambiguous, complete and valid provisions. Hence, scholars are legitimately demanding to preserve legal transparency by erasing provisions that are contradictory to EU directives and by forming legal statutes out of interpretations of national law that are in accordance with the directives.89

85

Loacker (2015, pp. 275 f.). See with regard to GCI, Rixecker (2019, § 1 para. 82). 87 Römer (2007b, pp. 619 ff.). 88 Directive 2002/65/EC of the European Parliament and of the Council of 23 September 2002. 89 E.g. Franck (2014, p. 18). 86

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Through the implementation90 of the Insurance Distribution Directive (IDD),91 the legal environment for insurance distribution has changed as of 23 February 2018.92 In its chapter V,93 the IDD stipulates requirements for information and rules for the conduct of business applying to all insurance distributors, i.e. any insurance intermediary, ancillary insurance intermediary or insurance undertaking.94 In implementing the Directive, the German legislator’s task was to refrain from blindly creating new or more detailed information duties but to strive for efficiency in transparency.95 The effects of the IDD on the practice of insurance distribution are not yet predictable in total.96

References Armbrüster C (2012a) “Ewige” Widerrufsrechte und ihre Rechtsfolgen. Versicherungsrecht (VersR) 2012:513–523 Armbrüster C (2012b) Examinatorium Privatversicherungsrecht. Springer, Berlin and Heidelberg Armbrüster C (2016) In: Langheid T, Wandt M (eds) Münchener Kommentar zum Versicherungsvertragsgesetz, vol 1, 2nd edn. C.H. Beck, Munich Beenken M (2017) Beratungspflichten nach der IDD und ihre Umsetzung ins deutsche Recht. Recht und Schaden (r+s) 2017:617–621 Bork K, Wandt M (2019) Transparency in German insurance supervisory law. In: Marano P, Noussia K (eds) Transparency in insurance law and regulation, vol 2. Springer, Berlin and Heidelberg. (in print) Brand O (2011) Contract terms: judicial approaches to the interpretation of insurance contracts. In: Burling J, Lazarus K (eds) Research handbook on international insurance law and regulation. Edward Elgar Publishing, Cheltenham and Northampton, pp 93–119 Brand O (2012) Verbraucherschutz im Versicherungsrecht. In: Lorenz E (ed) Karlsruher Forum 2011: Verbraucherschutz – Entwicklungen und Grenzen. VVW, Karlsruhe, pp 55–94 Bruns A (2015) Textbook Privatversicherungsrecht. C.H. Beck, München Bülow P, Arzt M (2000) Fernabsatzverträge und Strukturen eines Verbraucherprivatrechts im BGB. Neue Juristische Wochenschrift (NJW) 2000:2049–2056 Clarke M (2005) Policies and perceptions of insurance law in the twenty-first century. Clarendon Law Series, Oxford Dreher M (1991) Die Versicherung als Rechtsprodukt. Mohr Siebeck, Tubingen

90 Act implementing Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on Insurance Distribution and amending other Acts of 20 July 2017, (BGBl. I 2017, pp. 2789 ff.). 91 Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on Insurance Distribution, OJ L26/19. 92 However, authors argue that the legislator partly fell short with respect to the implementation of the IDD in the Insurance Contract Act (Versicherungsvertragsgesetz—VVG), see Beenken (2017, pp. 617 ff.). 93 Artt. 17 ff. IDD. 94 Definition provided by Art. 2 sec. 1 subsec. 8 IDD. 95 See in further detail Wandt and Bork (2018). 96 Bork and Wandt (2019; in print).

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Franck G (2014) Richtlinienkonforme Auslegung der Vorschriften über die vorsätzliche Herbeiführung des Versicherungsfalls in der Kfz-Pflichtversicherung. Versicherungsrecht (VersR) 2014:13–18 Höra K (2017) In: Höra K (ed) Münchener Anwaltshandbuch Versicherungsrecht, 4th edn. C.H. Beck, Munich Koch R (2014) Kontrollfähigkeit/-freiheit formularmäßiger Haftpflichtversicherungsfalldefinitionen? Versicherungsrecht (VersR) 2014:1277–1283 Koch R (2018) Insurance law in Germany. Kluwer Law International BV, The Netherlands Küster P (2010) Die vorvertragliche Beratungspflicht des Versicherers nach § 6 Abs. 1 und 2 VVG. Versicherungsrecht (VersR) 2010:730–735 Langheid T (2015) Missbrauchskontrolle von Leistungsbeschreibungen nur bei Intransparenz. Versicherungsrecht (VersR) 2015:1071–1075 Loacker L (2015) Informed insurance choice. Edward Elgar Publishing, Cheltenham and Northampton Niederleithinger E (2010) Auf dem Weg zu einer VVG-Reform. Versicherungsrecht (VersR) 2006:437–447 Pilz K (2010a) Missverständliche AGB. VVW, Karlsruhe Pilz K (2010b) Zur Berücksichtigung des einem durchschnittlichen Versicherungsnehmer nicht zugänglichen Auslegungsmaterials bei der Auslegung von AVB. Versicherungsrecht (VersR) 2010:1289–1295 Präve P (2000) Versicherungsbedingungen und Transparenzgebot. Versicherungsrecht (VersR) 2000:138–144 Präve P (2008) Die VVG-Informationspflichtenverordnung. Versicherungsrecht (VersR) 2008:151–157 Reiff P (2006) Die Auswirkungen der Versicherungsvermittlungsrichtlinie auf die Kreditwirtschaft. Wertpapier-Mitteilungen (WM) 2006:1701–1709 Reiff P (2016) In: Langheid T, Wandt M (eds) Münchener Kommentar zum Versicherungsvertragsgesetz, vol 1, 2nd edn. C.H. Beck, Munich Reiff P (2018) In: Prölss E, Martin A (eds) Versicherungsvertragsgesetz, 30th edn. C.H. Beck, Munich Rixecker R (2015) In: Beckmann RM, Matusche-Beckmann A (eds) VersicherungsrechtsHandbuch, 3rd edn. C.H. Beck, Munich Rixecker R (2019) In: Langheid T, Rixecker R (eds) Versicherungsvertragsgesetz, 6th edn. C.H. Beck, Munich Römer W (1998) Zu den Informationspflichten der Versicherer und ihrer Vermittler. Versicherungsrecht (VersR) 1998:1313–1322 Römer W (2007a) Beratung nötig – Verzicht möglich. Zur Kunst der Gesetzgebung. Verbraucher und Recht (VuR) 2007:94–96 Römer W (2007b) Zu den Informationspflichten nach dem neuen VVG. Versicherungsrecht (VersR) 2007:618–620 Römer W (2016) In: Langheid T, Rixecker R (eds) Versicherungsvertragsgesetz, 5th edn. C.H. Beck, Munich Rudy M (2018) In: Prölss E, Martin A (eds) Versicherungsvertragsgesetz, 30th edn. C.H. Beck, Munich Schmidt H (2019) In: Bamberger HG, Roth H, Hau W, Pauseck R (eds) Kommentar zum Bürgerlichen Gesetzbuch, 49th edn. C.H. Beck, Munich Schneider W-T (2015) Zwischen Selbstbestimmung und Fürsorge: Information, Beratung und Belehrung im Versicherungsvertragsrecht. Recht und Schaden (r+s) 2015:477–489 Schwintowski H-P (2015) In: Beckmann RM, Matusche-Beckmann A (eds) VersicherungsrechtsHandbuch, 3rd edn. C.H. Beck, Munich Stadler A (2018) In: Jauernig O (founder), Stürner R (ed) Bürgerliches Gesetzbuch, 17th edn. C.H. Beck, Munich

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Tschersich H (2012) Rechtsfragen der vorvertraglichen Anzeigepflichtverletzung und der vertraglichen Obliegenheiten. Recht und Schaden (r+s) 2012:53–61 von Loewenich A (2016) Zum Anwendungsbereich der Verbraucherrechte-Richtlinie als Hintergrund der Auslegung des § 312 Abs. 1 BGB. Zeitschrift für Wirtschafts- und Bankrecht (WM) 2016:2011–2016 Wandt M (2012) Transparenz als allgemeines Prinzip des Versicherungsrechts. In: Mansel H-P, Beckmann RM, Matusche-Beckmann A (eds) Weitsicht in Versicherung und Wirtschaft – Gedächtnisschrift für Ulrich Hübner. C.F. Müller, Heidelberg, pp 340–353 Wandt M (2015) Zur dogmatisch gebotenen Enthüllung von “verhüllten” Obliegenheiten. Versicherungsrecht (VersR) 2015:265–269 Wandt M (2016) Textbook Versicherungsrecht, 6th edn. Vahlen, Munich Wandt M (2017) Transparency of insurance contract terms. In: Lambros Kotsiris L, Noussia K (eds) Liber Amicorum in Honour of Ioannis K. Rokas. Nomiki Bibliothiki, Athens, pp 419–432 Wandt M, Bork K (2018) Pre-contractual information duties under the German insurance law. In: Han YQ, Pynt G (eds) Carter v Boehm and pre-contractual duties in insurance law. Hart Publishing, Oxford, pp 261–292 Wandt M, Gal J (2014) German report to the questionnaire on transparency of insurance contract terms and conditions and pre-contractual information by the AIDA German Chapter. Available via http://www.dvfvw.de of subordinate document. Accessed 30 Apr 2019 Weyers HL, Wandt M (2003) Textbook Versicherungsvertragsrecht, 3rd edn. Vahlen, Munich Wolf C, Ungeheuer M (1995) Zum Recht der allgemeinen Geschäftsbedingungen – Teil 2. JuristenZeitung (JZ) 1995:176–188

Transparency in the Insurance Contract Law of Greece Christos S. Chrissanthis

1 Introduction 1.1

The Greek Insurance Market1

The macro-economic condition in Greece has been one continuing financial (public debt) crisis since 2008, which has also adversely affected the private sector of the economy and most particularly credit institutions. The average GDP per capita has substantially decreased by about 14% since 2007; it was about US$32,000 in 2007 and had fallen to about US$28,580 in 2018. This is reflected in the insurance market as well, as the total revenue from premiums and the average insurance premium per capita are steadily decreasing during the past years. The Greek insurance market is rather concentrated in terms of life insurance but dispersed in terms of non-life insurance. In the field of life insurance, the five leading firms possess a collective market share of 75.6%, while in non-life insurance the five leading firms collectively possess 39.1% of the market. The total number of insurance enterprises is 51. The vast majority (32 insurers) offers non-life policies, and most of them are actually active only in the field of motor vehicle liability insurance. There are five insurers offering life policies. Finally, there are 14 insurance enterprises that still offer both life and non-life policies as they were licensed to operate before the introduction of the principle of separation of life and non-life risks. From the 51 insurers, 33 have the legal form of a Greek limited liability insurance company by shares (societe anonyme). These are 1

The information provided in this chapter is derived from the Annual Report for 2018 of the Hellenic Association of Insurance Companies. C. S. Chrissanthis (*) University of Athens, Athens, Greece e-mail: [email protected] © Springer Nature Switzerland AG 2019 P. Marano, K. Noussia (eds.), Transparency in Insurance Contract Law, AIDA Europe Research Series on Insurance Law and Regulation 2, https://doi.org/10.1007/978-3-030-31198-8_4

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controlled by either Greek or foreign shareholders. There are also 15 branches of foreign insurers and three mutual cooperative societies. About 54% of the total revenue of the market derives from non-life policies and 46% derives from life policies. There are two firms offering ‘online’ insurance, basically motor vehicle third-party liability coverage. The basic financial figures for the market are as follows: the total revenue from premiums in 2018 was €4 billion about €2.1 billion (52.4%) was derived from non-life policies and about €1.9 billion (47.6%) derived from life policies. The total volume of insurance compensation paid in 2015 under life policies was €1.2 billion and under non-life policies in the same year was €676 million. Even though the macro-economic prospects are disappointing, it seems that there are still strong prospects for growth in the insurance sector, particularly in the field of life policies (i.e. pension schemes), as well as in accident and hospital insurance. Professional liability coverage is another steadily growing sector. From the point of view of marketing, there is still a lot to be done in terms of ‘customer centricity’2 and the online marketing. Obtaining an insurance policy in Greece is a process that is far from being a satisfactory experience for the insured. This is mainly due to the lack of transparency of the policy terms and operational inefficiencies in distribution networks. Particularly, younger policyholders (i.e. aged 35–45) usually seek for more personalised and customised insurance services that comprise aspects of investment, savings and health care under a single product. Online insurance currently responds only to the need for motor vehicle policies and does not seem to effectively comprise other types of insurance. Market confidence has been seriously injured by the failure of two rather popular life insurers in 2009, which was a major financial scandal at that time.

1.2

The Greek Private Insurance Contract Law3

Greek insurance contract law is strongly oriented towards transparency. This is basically because in the context of the contract conclusion process, it obliges the insurer to provide the prospective policyholder ‘contract specific’ pre-contractual information, as well as guidance as to their legal rights. The deficiency, though, is that such ‘contract specific’ information is provided at a late stage in the contract conclusion process, that is, at a time when the applicant has spent a great deal of time and effort to cause the conclusion of the contract and has committed to it, at least emotionally. It is highly improbable that a policyholder will be willing to cancel a

2 For a discussion of the impact of customer centricity and transparency in the Dutch healthcare insurance market see Looijenga (2016) (available at http://edepot.wur.nl/395221). 3 For a concise description of Greek Insurance Law, see Chrissanthis and Chardalia (2017) (available online at: https://iclg.com/practice-areas/insurance-and-reinsurance/insurance-and-reinsur ance-2017/greece).

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policy after having spent considerable time and effort to obtain a policy from the insurer. The law on the insurance contract is codified in Law 2496/1997. This is supplemented by Law 4364/2016, which implemented the Solvency II Directive 2009/138 EC. Although Law 4364/2016 basically addresses insurance regulation, however, some of its provisions have an impact on private insurance law as well. The law on insurance intermediaries consists of Law 1569/1985 and Presidential Decree 190/2006 (the later implementing Directive 2002/92 EC). Directive 2016/97 EU on insurance distribution has been implemented into Greek law by virtue of Greek Law 4583/2018. The Central Bank of Greece (the regulator for the insurance market) has also issued secondary regulation for intermediaries. This secondary regulation is taking into account the provisions of Directive 2016/97 EU. The Greek legislation on the supervision and regulation of insurance enterprises consists of Law 4364/2016, which implemented Solvency II Directive 2009/138 EC. This law repealed Legislative Decree 400/1970, which comprised the Greek law on insurance regulation until 31 December 2015. Secondary regulation has also been issued by the Bank of Greece under the Solvency II Directive, thus introducing into Greek law many of the EIOPA and CEIOPS guidelines. The basic characteristics of Greek private insurance contract law are as follows.

1.2.1

Freedom of Contract and the Distinction Between ‘Large Risks’ and ‘Other Risks’

Since the introduction of Law 2496/1997, Greek law has adopted a distinction between ‘large risks’ and ‘other risks’. Freedom of contract prevails with respect to ‘large risks’, but the law is mandatory to the benefit of policyholders with respect to ‘other risks’. ‘Other risks’ are not deduced to consumer insurances only. Many business insurances fall within the spectrum of other risks. So the distinction between ‘large risks’ and ‘other risks’ is more favourable to policyholders than the distinction between ‘consumer policies’ and ‘business policies’. As a result of this distinction, many business insurances are subject to mandatory provisions of Law 2496/1997. In ‘large risks’, freedom of contract is restricted only by the Greek public policy. This is mainly deduced to the indemnity principle. So a non-life policy should only provide compensation for the loss suffered and should not render the insured richer. Freedom of contract in ‘large risks’ also includes the freedom to choose the law applicable to the policy, as per Article 7(1) of Regulation 593/2008 EC. In connection to risks other than ‘large risks’, the Greek law is mandatory and cannot be derogated by contract, save that clauses that are more favourable to the policyholder can validly be agreed upon. Hence, the parties cannot validly reduce the level of protection already granted to the insured by the provisions of Greek private insurance contract law (Law 2496/1997). This level of protection mainly relates to the following: (1) a relaxed duty of pre-contractual disclosure, which is established under Greek law; (2) proportionate remedies in case of breach of this duty; (3) certain

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pre-contractual information that the policyholder is entitled to receive prior to the conclusion of the contract and (4) the policyholder’s right to object to any policy terms that do not correspond to the type of cover applied for, in case such pre-contractual information was not made available to them. Finally, in case of risks other than ‘large risks’, the parties are not free to choose the law applicable to the policy and must abide to the criteria set by Article 7(3) of Regulation 593/2008 EC. Until the introduction of Law 4364/2016, which came into force on 01 January 2016, the definition of ‘large risks’ was provided by sec. 33(1) of Greek Law 2496/ 1997. According to this definition, ‘large risks’ included only four risks, namely goods in transit, marine risks, aviation risks and credit and suretyship risks. However, sec. 13(27) of Directive 2009/138 EC (which is now implemented into Greek law by virtue of Law 4364/2016) provides a different and broader definition for ‘large risks’. Under the Directive, ‘large risks’ may include, in addition to goods in transit, marine, aviation, and credit and suretyship risks, additional risks, such as fire, damage to property and general liability, provided that the policyholder is a large company, as per the criteria set by sec. 13(27)(c) of Directive 2009/138 EC. The different legislative definition of ‘large risks’ in Directive 2009/138 EC and Law 2496/1997 gives rise to the issue whether the Directive has actually amended the definition of ‘large risks’ provided in Law 2496/1997 or whether each legislative instrument adopts its own definition of ‘large risks’, which is addressed to its own needs and its own purposes. It is true that the Directive, according to the letter of its provisions, uses the concept of ‘large risks’ only as a tool to determine the law applicable to the insurance contract (sec. 178, which refers to Regulation 593/2008 EC) and as a prerequisite for an exception from the obligation of the insurer to provide certain information to the policyholder (secs. 184 and 190). The Directive does not use the concept of ‘large risks’ to differentiate insurance policies in terms of freedom of contract as Law 2496/1997 actually does. It does not refer to ‘large risks’ in order to draw a line between insurance policies where strong policyholder protection by way of mandatory law is favoured and insurance policies where freedom of contract prevails. So the concept of ‘large risks’ has a different role to play in the Directive and Law 2496/1997 as it serves a different purpose in each legislative instrument. From a policy point of view, the market in Greece should welcome strong policyholder protection by way of mandatory law for various reasons. On the one hand, market confidence was always at stake because of widespread unfair terms and financial failures of insurance enterprises. On the other hand, competition among insurers was never strong enough, and the level of service that policyholders enjoyed was always low in many respects. So in a market with a low level of both confidence and competition, the protection of the policyholders by way of mandatory law should be valued more than freedom of contract because under such circumstance, mandatory law is for the benefit of the market as a whole. Indeed, what has happened in Greece in the past decades is that a few underperforming and imprudent insurers have destroyed the market to the detriment of both policyholders and other insurers.

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It is noteworthy that the narrow definition of ‘large risks’ under sec. 33(1) of Law 2496/1997 may have received judicial criticism. Indeed, Judgment Nos. 18 and 19/2015 of the Supreme (Cassation) Court (Areios Pagos) have reasoned that the provisions of Law 2496/1997 are mandatory only in connection to consumer insurances, that is, only in connection to policies where the policyholder would qualify as a consumer. The judgment does not provide any express justification for its reasoning and does not explain how a court judgment could possibly amend or deviate from an express and clear provision of the law. Some commentators argue that this judgment is simply wrong and does not carry any impact as to the interpretation of the law in the future. It is true that the facts and the proceedings in the lower courts in these two cases were rather exceptional, and this has possibly led to such exceptional judgments issued by the Cassation Court. So it seems that these cases are decided on their own facts/merits and will not necessarily introduce a new interpretation of the law.

1.2.2

Consumer Insurances

Freedom of contract is further restricted in consumer insurances by way of legislation on unfair general terms and conditions. The Greek legislative instrument with respect to unfair contract terms is sec. 2 of Law 2251/1994. This law implements Directive 1993/13 EC and applies to all contracts with consumers, including consumer insurances. General terms that are not individually negotiated are deemed to be unfair and, hence, void, if they cause a significant imbalance in the parties’ rights and obligations, resulting to the detriment of the policyholder. Greek courts usually adopt a broad approach as to the concept of ‘consumer’. So micro and small businesses, as well as professionals (i.e. accountants, surveyors, doctors, barristers, etc.) have been found to qualify as consumers by many Greek court judgments.

1.2.3

Pre-contractual information

The distinction between ‘large risks’ and ‘other risks’ is decisive in connection to pre-contractual information and contract conclusion as well. With respect to risks other than ‘large risks’ (including consumer insurances), the process of contract conclusion is expressly dealt with in sec. 2 of Law 2496/1997. The insurer is obliged to provide certain information and guidance to the insured before the conclusion of the policy. If this obligation is breached, the insured is granted the right to withdraw from the policy (by way of rescission) within 14 days as from the delivery of the policy to policyholder. Further, the insurer is obliged to issue a policy on terms corresponding to the specifications of the proposal form and the type of insurance cover described and sought by the applicant in the proposal form. If the policy deviates from the proposal form, the insurer is obliged to notify accordingly the insured and advise him that he has a right to withdraw from the policy within 1 month as from the day of the

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delivery of the policy. In case this obligation is breached, any deviation of the policy from the proposal form is inoperative, and the policy is deemed to correspond to the terms described in the proposal form.

1.2.4

Duty of Disclosure and Utmost Good Faith on the Part of the Policyholder

Since the introduction of Law 2496/1997, Greek law has practically abandoned the strict duty of utmost good faith, at least with respect to risks other than ‘large risks’. With respect to ‘large risks’, freedom of contract prevails and the parties may contractually adopt a positive and strict duty of disclosure (i.e. an utmost good faith duty). However, with respect to risks other than ‘large risks’ and consumer insurances, if the insurer has used a questionnaire (which is almost always the case), then – anything not covered in the questionnaire is deemed to be immaterial in terms of disclosure; – if certain questions were not answered and the insurer has issued the policy, he cannot invoke the unanswered questions at a later stage as a breach of the disclosure duty; – the insurer cannot invoke the insufficiency of the answers if the respective questions were not adequately specific and precise, unless there is fraud on the part of the policyholder; and – if an answer is unclear, the insurer has a duty to revert and investigate further and cannot at a later stage invoke such insufficiency, unless there is fraud on the part of the policyholder. So although in theory a duty of disclosure still remains, in practice it has been abandoned.

1.2.5

Proportionate Remedies

Greek insurance law has moved towards proportionate remedies in case of misrepresentation or insufficient disclosure to the insurer since 1997, when Law 2496/1997 was introduced. The distinction between ‘large risks’ and ‘other risks’ is again decisive. In ‘large risks’, freedom of contract prevails and the parties may arrange remedies contractually. In risks other than ‘large risks’ and consumer insurances, the remedies for insufficient disclosure are proportionate, depending on the type of fault on the part of the policyholder (i.e. whether misrepresentation or non-disclosure is innocent, negligent or fraudulent). Proportionate remedies are arranged as follows: – In case of innocent misrepresentation or non-disclosure, the insurer is entitled to terminate the policy (subject to a 15-day prior notice) or request its amendment. Claims already paid in the past cannot be recovered.

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– In case of negligent misrepresentation or non-disclosure, the insurer has the same rights, as in the case of innocent misrepresentation. However, if the risk occurs before termination comes into force, or before the policy is amended, the insurer is entitled to pay compensation reduced on a proportional basis, i.e. according to the volume of premium that would have been charged otherwise. – In case of fraudulent misrepresentation or non-disclosure, the insurer is entitled to terminate the policy with immediate effect. Moreover, the insurer is relieved from liability, even if the loss has occurred before termination, so an insurer who was able to detect the fraud only after the risk has occurred is not prejudiced and is also relieved from liability. – By way of exception to the aforementioned, life policies and accident and health policies can be terminated only in case of fraudulent misrepresentation or non-disclosure. – The right of termination is waived if it is not exercised within 1 month as from the date when the insurer became aware of the misrepresentation or non-disclosure. If the risk occurs within the running 1-month period, the insurer is relieved from the obligation to pay compensation. – The insurer is entitled to insurance premiums until termination becomes effective. – No remedies arise if the insurer had actual, accurate and correct knowledge of the facts that were misrepresented or non-disclosed; however, ostensible knowledge does not suffice. – Remedies for misrepresentation and non-disclosure arise irrespective of causation; that is, it is immaterial whether the fact, which was misrepresentation or not disclosed, actually contributed to the occurrence of the loss. – Warranties are fully valid and enforceable only in connection to policies relating to ‘large risks’. In connection to all other risks, warranties are in principle valid, but they are enforceable only if (a) they are proportionate (that is, the remedy provided for, i.e. exemption of the insurer from liability, is proportionate to the violation of the clause, meaning that the issue of materiality of the warranty is also examined) and (b) causation can be established between the violation of the warranty and the occurrence of the loss and, further, (c) violation of the warranty is due to negligence or fraud on the part of the insured. In case of an unenforceable warranty, insurers usually argue that they are still operative as contractual exemptions from cover, but the issue is highly controversial and unsettled in court jurisprudence. The “basis of contract clause” is treated as a warranty in both ‘large risks’ and other risks. The involvement of intermediaries in the disclosure process raises the issue on whether their fault and/or the knowledge is attributed to the insured or the insurer. In principle, brokers are considered to be agents of the insured, while insurance agents are deemed to be agents of the insurer. This approach is greatly supported by specific provisions of Greek Law 1569/1985, holding that brokers act on behalf of the insured, while agents act on behalf of the insurer. Agency, however, is not a matter of law but a matter of fact. So in each case, it must be determined on the basis of the

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facts, whether the broker or agent represented the insured or the insurer. This means that the crucial issue is whether there is actual, ostensible or apparent authority. Tied agents are deemed to be agents of the insurer. Directive 2016/97 EU on insurance distribution obliges intermediaries to inform the client for whom they are acting. So this is likely to raise the uncertainty as to whom agents and brokers are representing.

1.2.6

Compulsory Insurance

In compulsory insurance, there is no freedom of contract because the legislation specifically provides the terms that insurance policies must incorporate. So in compulsory insurance, the law is mandatory. In Greece, this is basically the case of motor vehicle liability insurance. Solvency II Directive 2009/138 EC enables member states to introduce and retain mandatory law with respect to compulsory insurance.

1.2.7

Contract Construction

Insurance policies are usually interpreted according to the contra preferentem principle, which greatly favours the insured.

1.3

The Greek Law on Insurance Regulation

Since 01 January 2016, Greece has implemented Solvency II Directive 2009/138 EC4 by way of Law 4364/2016.5 Insurance is a regulated business and requires prior licence, being granted by the Central Bank of Greece, which supervises insurance enterprises and credit and financial institutions as well. Although the Central Bank of Greece is a single body supervising both insurers and bankers, the supervision is carried out through different departments within the Central Bank of Greece. Investment companies are regulated by a different body, namely the Capital Markets Committee. However, investment activities of insures and credit institutions are regulated by the Central Bank of Greece. Hence, in connection with insurers, the Central Bank of Greece is responsible for supervising both prudential regulation and financial conduct (i.e. conduct of 4

Guidance relating to the transparency provisions of the Directive can be found in CEIOPS (Committee of European Insurance and Occupational Pensions Supervisors) Consultation Paper No. 34, Transparency and Accountability, (CEIOPS-CP-34/09), 26.03.2009. 5 For a concise discussion of the Solvency II Directive 2009/138 EU see Smith (2010), p. 357. For a comparison of how solvency requirements are applied in the US and the EU see Siegel (2013), pp. 308–331 (www.genevaassociation.org).

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business). It can carry on investigations, impose administrative fines, grant and revoke operating licences and issue secondary regulation. The Central Bank of Greece certifies and supervises insurance intermediaries as well. What the Central Bank of Greece does not deal with is consumer protection, unfair contract terms and anti-trust issues. Unlike other countries, Greece does not have an efficient Ombudsman Service. Although there is such a service, its impact in practice is rather negligible because its decisions are not enforceable. In most cases, a complaint to the Ombudsman does not result to any remedy for the insured; filing a legal action with the courts and becoming involved in a long litigation process is usually necessary. There is a Consumer Protection Department with the Ministry of Economic Development, which is responsible for consumer protection in general, including consumer insurances. In the past, it has issued secondary legislation relating to unfair contract terms in insurance policies. It can also examine complaints submitted by insurers and impose administrative fines. There is also one major and rather active Consumers’ Association in Greece, which in the past has extensively dealt with insurance policies, particularly life and hospital policies, focusing on the fairness of contractual terms. Its main strategy of reaction is by filing class actions against insurance companies. The Central Bank of Greece, the Ombudsman Service and the Consumer Protection Department adopt a restrictive approach as to the concept of ‘consumer’. So micro and small businesses and professionals do not qualify as consumers. Greek courts, however, have adopted a different and broader approach in many occasions.

2 Transparency Theory6 During the past decades, micro-economic theory has highly emphasised on the impact of information on economic decision-making and optimal allocation of assets. The term ‘information economics’ is usually employed to describe the economic theory that gives special importance to information. Dissemination of information is now considered to be critical for the efficient operation of the markets. Economic theory has inspired legislators, and many of its findings and conclusions have been transformed to concrete and specific legislative measures. Legislation now provides for extensive disclosures on many occasions to deal with asymmetries of information and to facilitate optimal decision-making. Thus, information economics have resulted to a legal theory about transparency.7 In legal literature, 6

Guidance relating to the transparency provisions of Directive 2009/138 can be found in CEIOPS (Committee of European Insurance and Occupational Pensions Supervisors) Consultation Paper No. 34, Transparency and Accountability, (CEIOPS-CP-34/09), 26.03.2009. For a discussion of transparency theory in the context of insurance see Schwarcz (2014), pp. 394 and 400 (also available at http://scholarship.law.umn.edu/faculty_articles/572). 7 Carnell et al. (2008).

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transparency is considered to be a decisive factor in terms of contract construction, unfair contract terms, consumer protection (particularly in connection to off premises and distance selling), etc. Insurance is one of the fields of law in which transparency is vital in the contract conclusion process as the insurer is required to provide information to the policyholder during the pre-contractual stage. In addition, regulation makes it obligatory on many occasions to provide information to a contractual counter-party, as in the case of insurance intermediaries, which are obliged to disclose their associations with certain insurance companies, etc. Finally, recent empirical research seems to suggest that enhanced transparency leads to greater demand, even during a financial crisis period.8 Moreover, at the microeconomic level, insurance companies, providing greater transparency to their customers, seem to achieve better sales than their competitors.9

2.1

Why Is Transparency Necessary?

Transparency is a common characteristic and common target in all regulated businesses, like insurance, banking and investment. The reason why insurance, banking and investment are regulated and supervised by the state is to protect policyholders, depositors and investors and also to enhance market confidence. Lack of confidence would result to market destruction, that is, to unwillingness on the part of consumers to transact with firms and, hence, to no transactions at all. No one would be willing to transact with an insurer, a banker or an investment company whom they would not trust. Moreover, a potential policyholder would be overly cautious (or even reluctant) to obtain insurance if he was aware that the insurer possesses more information about the contract and its prospects than himself. Transparency is destined to counterbalance asymmetries of information. Therefore, market confidence and transparency are essential pre-requisites for the existence of the market. Transparency and disclosure of information enhance market confidence. They give policyholders the opportunity to make better decisions and informed decisions. Information economics have made it amply clear how much important information for economic decisions is. Information (and disclosures and transparency relating to such information) may also be price sensitive; that is, it may be material to measure the value of a policy and whether it is worth the premium. It is also material to set a proper premium.10 Transparency can also enhance comparability of the products offered in the market and can, hence, reinforce efficient competition among insurers and make it

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Dong (2014) (available at: https://www.econstor.eu/handle/10419/100664). Lin and Yang (2013), pp. 2184–2187. 10 Nat’l Sci. & Tech. Council, Smart disclosure and consumer decision making: Report of the Task Force on Smart Disclosure, 2013 (7), available at www.whitehouse.gov/sies/default/files/ microsites/ostp/report_of_the_task_force_on_smart_disclosure.pdf. 9

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possible for those insurers who are more efficient than others to attract more clients and increase their market share. It is submitted that transparency makes policyholders responsible for themselves and allows them to make their own judgment; instead of having policyholders relying exclusively on regulatory authorities, it places policyholders in a position to protect themselves. Well-informed policyholders can police the market themselves and can act in parallel with regulators through private enforcement. Hence, transparency is a supplement of (or even a substitute for) state supervision and reinforces market discipline.11 From a policymaking point of view, transparency and disclosure provisions can be more efficient than statutory regulation for several reasons. They motivate customers themselves to be more responsible and to take their own action. They result to an ex ante protection of customers, while other regulatory provisions usually result to an ex post protection only. Markets that rely more on transparency, disclosures, private enforcement and self-regulation are more efficient than markets relying solely on state supervision and statutory regulation.12 Transparency provisions can enhance private enforcement, particularly if breach of the transparency obligations entitles the policyholder to file a legal action against the insurer.13 Legislative provisions on transparency are more efficient if they provide for specific remedies in case they are breached. For example, in case a disclosure obligation has not been honored, the law may provide that this amounts to a breach of statutory duty, enabling customers to file a legal action. It is a matter of legal interpretation whether a breach of transparency provision grants specific rights and remedies to customers. This interpretation depends on the wording and phrasing of each legislative instrument and may differ from one jurisdiction to another. One argument that is usually employed is that the purpose of regulatory provisions is to protect the market overall but not to protect individual interests of customers as such. Under this approach, breach of regulatory provisions may result to administrative fines, but it does not by itself alone entitle customers to file a legal action, unless other provisions of civil law are also triggered. The counterargument to this approach is that regulation (and regulatory disclosure in particular) is actually destined by its very own nature to protect individual interests of customers, and hence if regulatory disclosure provisions are breached, customers are entitled to file a legal action against the non-disciplined company.14 Of course, one of the great difficulties in such cases is the quantification of the loss suffered by a customer due to insufficient disclosure and the determination of the volume of damages to be 11

For a similar assessment in the securities market see La Port et al. (1999), pp. 471 seqq.; La Port et al. (2003). 12 Schwarcz (2010), p. 1707. 13 Schwarcz (2014), pp. 394 and 414 (also available at http://scholarship.law.umn.edu/faculty_ articles/572). 14 This approach seems to be supported by the Solvency II Directive 2009/138. For example Recitals 14 and 16, 17, 43, 60, 68 specifically mention that the purpose of regulation is to protect the contractual counter-party. Moreover, Art. 27 of the Directive explicitly provides that the purpose of regulation is the protection of the contractual counter-parties and the insureds.

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claimed. Another difficulty relates to establishing causation between the insufficient disclosure on the one hand and the loss suffered on the other; how can one prove that the loss actually suffered by a customer is attributed to insufficient disclosure? One way to overcome this difficulty is to reverse the burden of proof as to causation. This, however, requires the implementation of specific legislative provisions reversing the burden of proof.

2.2

Types of Transparency

Transparency can be of two different types: (a) ‘contract/product specific’ or (b) ‘full disclosure’. ‘Contract/product specific’ transparency relates to dissemination of information, relating to the features of a specific contract or product. Information provided to the policyholder prior to contract conclusion, regarding the policy cover and other features of the policy, is an example of contract/product specific transparency. ‘Full disclosure’ transparency relates to dissemination of a broader set of information, which usually relates to the contractual counter-party offering the product or the service. Information disclosed by listed companies is the most characteristic example of full disclosure.

2.2.1

‘Contract/Product Specific’ Transparency

‘Contract/product specific’ transparency is destined to increase the level of awareness in connection to a specific contract that is about to be concluded or a specific product or service that is about to be purchased. The efficiency of this type of disclosure depends on whether the information disclosed is relevant to the product in question and decisive to the decision-making process of the respective purchaser.15 It is up to the legislator to take all necessary precautions so that the information to be disclosed be carefully selected and determined so that it will be relevant to the product and comprehensive. Usually, policyholders or other consumers are unable to process much information or lengthy and complicated information. Moreover, the time when such information is provided must be carefully determined so that it comes before the prospective purchaser is contractually or emotionally committed to the purchase, that is, before he has spent a substantial amount of time and effort to become aware of and familiar with the respective product. Sometimes, regulators indicate that such information is provided according to a standardised uniform disclosure template and design, making it easier to be followed and processed by all policyholders. Still, the problem with the efficiency of

15

For a discussion of the adverse effects of inadequate product transparency in the Italian insurance market see Galli (2005), pp. 443–450 (available at www.palgrave-journals.com/gpp).

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this type of disclosure is that consumers may have limited background knowledge and may be practically unable to use and evaluate the information provided.16 Another type of ‘product specific’ disclosure is that of ‘structured products’, that is, products comprising features that are determined by the legislator and standardised. Standardisation of contractual terms is the most striking characteristic of ‘structured products’. For example, in many jurisdictions, including Greece, some types of compulsory insurance come in terms and conditions, which are set in advance by the legislator by way of mandatory provisions. So the type of cover, the exceptions and all other material features of the policy are determined by the law, and the only thing that the prospective policyholder has to do is to compare the premium offered by various insurers. In Greece, this is the case of motor vehicle liability insurance, which is a ‘structured policy’. This type of transparency minimises search costs. Article 179 of Solvency II Directive 2009/138 EC allows member states to enact that compulsory insurance will be traded as a ‘structured product’. In particular, this article provides that member states may provide that the insurance for some types of risks is compulsory; furthermore, when member states provide for compulsory insurance, they can also determine the particular terms according to which such insurance shall be offered, as well as the terms according to which termination of such policies shall affect third parties that have suffered a loss and can claim compensation against the insurer. In addition, Article 181(2), by way of exception to Articles 154 and 181, provides that member states may oblige insurers offering compulsory insurances to notify the general terms and conditions of such policies to the public authority regulating insurance enterprises before they commence using such terms in the market. Article 206 of the Directive contains similar provisions that are applicable to ‘sickness policies’, which substitute for social insurance. So when insurance policies are used to replace social insurance, member states are allowed to provide that such policies will be traded as ‘structured products’. The 2016/97 EU on insurance distribution greatly enhances ‘product specific’ disclosure and transparency.

2.2.2

‘Full Disclosure’ Transparency

‘Full disclosure’ is mainly used in the case of listed companies to compensate for asymmetries of information.17 However, this type of transparency can also be helpful with respect to insurance enterprises. In addition to financial information, insurance enterprises could possibly disclose information regarding the total volume of compensation paid per cover, the average time for processing and settling claims, the number and volume of claims that have been rejected, etc. In ‘full disclosure’ transparency, the information becomes publicly available online. Such information

16 17

Kennedy et al. (2012), p. 1141. Healy and Palepu (2001), pp. 405–440.

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is used primarily by intermediaries, which distribute products of the disclosers.18 ‘Full disclosure’ increases the level of market discipline and may assist regulators to identify early enough market problems that require action on their part.19 The literature suggests that on a statistical basis, companies with concentrated ownership make substantially less disclosure than companies with dispersed ownership, as well as that European companies are rather more concentrated than companies in common law countries.20 The Solvency and Financial Condition Report21 Indeed, one of the major innovations of Solvency II Directive 2009/138 EC22 is that it introduces a ‘full disclosure’ requirement for insurance enterprises. According to Articles 51–54 of the Directive, insurance companies are required to make publicly available a Solvency and Financial Condition Report.23 This report shall be issued annually and shall be updated in case of any major developments. The report shall discuss the solvency and financial condition at both entity and group level. It will contain both quantitative and qualitative information. According to Article 51, the report must cover aspects such as financial performance, system of corporate governance of the company, an assessment of the risks to which the company is exposed in terms of concentration, mitigation and sensitivity, valuation methods for assets, technical provisions and liabilities, management of capital resources and capital adequacy requirements, and compliance with capital adequacy and solvency capital requirements. The aim of the Directive is that the technique that this information shall be disclosed has to be standardised so as to achieve comparability, harmonisation and so as to enhance competition among insurance undertakings. The European Insurance and Occupational Pensions Authority (EIOPA) has proposed this report to be audited.24 It greatly depends on the management of each insurance enterprise to determine how much information needs to be disclosed. This discretion must be exercised on the basis of materiality and proportionality. According to

18

Lang and Lundholm (1996), pp. 467–492. Fung et al. (2008). 20 Vander Bauwhede and Willekens (2008), pp. 101–115. 21 Guidance relating to the transparency provisions of the Directive can be found in CEIOPS (Committee of European Insurance and Occupational Pensions Supervisors) Consultation Paper No. 34, Transparency and Accountability, (CEIOPS-CP-34/09), 26.03.2009. 22 The Directive has been supplemented by secondary EU legislation, in particular Regulation 2015/ 35 EU. 23 The European Insurance and Occupational Pensions Authority (EIOPA) has issued secondary regulation with specific standards that the Solvency and Financial Condition Repost must meet (EIOPA-BoS-15-109/14.09.2015); this EIOPA regulation has been implemented into Greek law by virtue of a Regulatory Act of the Executive Committee of the Central Bank of Greece, No. 77/12.02.2016. 24 CEIOPS Consultation Paper 58. 19

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CEIOPS consultation paper 58, ‘the level and depth of information to be publicly disclosed shall be based on the principle that a knowledgeable person can get a reasonably good understanding of the design and operational details of the internal model as well as the reliability of the internal model’25 of each insurance undertaking. Above all, this information must be disclosed in a legible and comprehensible form and must be easily accessible. Greek Law 4364/2016 has implemented the provisions of the Directive on the Solvency and Financial Condition Report in its Articles 38–42. Under Greek law, any misstatement or inaccuracy in such a public disclosure may result to civil liability of the insurance undertaking towards the policyholders. However, such civil enforcement is likely to encounter great practical difficulties, particularly in connection to establishing causation for a claim in damages, as well as in connection to the quantification of the loss suffered. The experience from similar difficulties in cases in the financial service sector is that it is necessary to introduce specific legislative provisions reversing the burden of proof as to causation, as well as to set specific rules for the quantification of damages.

3 Transparency in Insurance Law26 One can identify at least three major transparency targets in insurance law: (a) clarity of policy terms, particularly as to the scope of cover and the exceptions from cover; (b) transparency as to the claims’ process, that is, whether the treatment of claims on the part of the insurer is fair and timely; and (c) transparency relating to the intermediaries, that is, basically transparency as to their objectivity and their interests, which may raise conflicts with the interests of the applicant.

3.1

Transparency as to Policy Terms and Scope of Cover

It is not difficult to explain why transparency of policy terms is an imperative necessity. Insurance policies are indeed well known for the complexity of their terms. Most probably, they are the most characteristic example of obscure and incomprehensible contracts.27 When it comes to the scope of the cover and the relevant exceptions, the matter becomes even more problematic. The reason why the

25

CEIOPS Consultation Paper 58, par. 3.243. Guidance relating to the transparency provisions of the Directive can be found in CEIOPS (Committee of European Insurance and Occupational Pensions Supervisors) Consultation Paper No. 34, Transparency and Accountability, (CEIOPS-CP-34/09), 26.03.2009. 27 For the peculiarities of the insurance industry to the average consumer see Lualdi (2005), pp. 467–476 (available at www.palgrave-journals.com/gpp). 26

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clauses of insurance policies are so complex may be because of the rules and practices on the basis of which insurers operate. The insurance market has always been a very sophisticated one. The calculation of the premium is based on complex rules relating to probabilities, mathematics and actuary principles. In many cases, general economic factors (like the annual general level of increase of hospitalisation expenses) are taken into account to fix the premium. All such parameters are far from being common knowledge. So the necessity for increased transparency as to policy terms, and particularly those terms relating to the scope of cover, is self-evident. In this context, it must be reminded that exception clauses represent a tool for the pricing of a policy; that is, instead of fixing a higher premium, the insurer may insert an exception clause. So exception clauses are integral to the pricing of the policy. Due to this fact, it is legally doubtful whether exception clauses can be successfully challenged on the basis of the unfair contract terms doctrine. The unfair contract terms doctrine cannot be used to review the core contractual arrangement, which is the pricing of a contract. In insurance policies, providing for an exception clause is equivalent to providing for an increased premium.28 It is worth noting, however, that this principle has been recently substantially relaxed by the CJEU, which held that even a term relating to the essential subject matter of a contract, like an exception clause in an insurance policy, can be reviewed under the unfair contract terms doctrine if it is literally intelligible or if it does not in practice allow the policyholder to assess their economic consequences for the policy as a whole.29 In many jurisdictions, mainly in some US states, the courts have developed an alternative doctrine to deal with excessive and undue exceptions from cover; they developed the doctrine of reasonable expectations. An insurer cannot rely on an exception clause when the surrounding circumstances that led to the conclusion of a policy indicate that the policyholder reasonably expected to be covered against the risk that is excluded. The reasonable expectation doctrine is not upheld in all jurisdictions. Indeed, it is difficult to hold that an exception clause should be inoperative because it contradicts the reasonable expectations of the policyholder when the letter of the contract is clear and unambiguous that a specific risk is not covered. Under Greek law, it would be difficult to employ the reasonable expectations doctrine when an exception clause is clearly drafted. However, if the phrasing of a clause is obscure, then of course it is interpreted on the basis of what a reasonable counter-party would understand and not on the basis of what the party that drafted the clause intended to mean. A final note must be made regarding the absence of any regulatory prior approval of policies. In

28 The Recitals of Directive 93/13 EEC on unfair terms in consumer contracts provide: “Whereas, for the purposes of this Directive, 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 the main subject matter of the contract and the price/quality ratio may nevertheless be taken into account in assessing the fairness of other terms; 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”. 29 CJEU, 23.04.2015, C-96/14, Van Hove v. CNP Assurances.

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the past, policy terms were submitted to the public authority supervising insurance enterprises and were approved. This was supposed to provide some comfort in connection to the fairness of the terms. However, such a prior approval of terms is no longer in practice. Indeed, Articles 154, 181 and 182 of Directive 2009/138 EC provide that member states shall not require the notification to the regulating authority of policy terms, at least not on a systematic and regular basis. There are, however, exceptions provided under Article 181(2) and Article 206, whereby insurers may be obliged to notify the terms of policies, relating to compulsory insurances, and ‘sickness’ policies, replacing social insurance. In an attempt to deal with the problem of complexity of policy terms, most jurisdictions provide for ‘contract specific’ disclosure on the part of the insurer. Under Greek law, this ‘contract specific’ disclosure comes in summary terms (Art. 2 (4) of Law 2496/1997). A summary of the basic terms of the policy must be provided to the policyholder. The policy that is delivered to the policyholder must be preceded by a ‘table’, providing in summary the basic terms of the policy. However, the efficiency of this type of disclosure is doubtful due to several reasons. On the one hand, this ‘summary disclosure’ can be quite long in practice. In some cases, the ‘table’, which is supposed to be a summary, can be as long as 20 pages or more. The fact that it is a summary table does not necessarily mean that it is drafted in a clear and unambiguous language. On the contrary, the language of a summary is usually in short-form phrasing and, hence, deficient and incomplete. Moreover, it is doubtful whether this summary disclosure comes during the pre-contractual stage or after the conclusion of the contract. Under Greek law, the contract conclusion occurs when the policyholder receives the policy from the insurer. Although, from a legal perspective, the policyholder enjoys a right to withdraw and a right to object to any deviations of the policy from the proposal form, this summary disclosure is usually received only after the insurance contract has been concluded. In any case, this summary disclosure comes at a very later stage because it is received at a time when the policyholder has already spent a great deal of time and effort to proceed with contract conclusion and has been at least emotionally committed to the conclusion of the contract. From a policy point of view, this ‘contract specific’ summary disclosure is inefficient in practice. A proposal to rectify this situation would be that basic policy terms should be available online so that they can be reached by the applicant before the submission of a proposal form. Ideally, the applicant should have available both the full policy terms and a summary before submitting a proposal form.

3.1.1

Transparency in the Context of Contract Construction

Under Greek private insurance contract law, transparency of policy clauses is an express legislative obligation of the insurer. Article 2(8) of Greek Law 2496/1997 provides that the policy terms must take into account the reasonable interests of the policyholder and the beneficiary, must be legible and must be clearly phrased. It also provides that a waiver of the right to request the avoidance of the contract because of

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error is invalid.30 So under Greek law, transparency of policy clauses is an express obligation of the insurer. Article 2 of Law 2496/1997 imposes some additional obligations to insurers, which may have a rigorous impact on the construction of policy terms, although they do not deal with this issue directly. Article 2(4) provides that if the contract includes both general terms and specific terms, the insurer must make a reference of this in the part of the policy that contains the elements of the contract that are particular to the policy in question. This provision has the effect of imposing upon the insurer the obligation to provide a ‘contract specific’ summary disclosure of the policy. Article 2 (5), (6) obliges the insurer to provide certain pre-contractual information to the policyholder and to advise them in case the policy issued deviates from the proposal form (particularly if there are deviations from the type of cover requested in the proposal form). If the insurer breaches this obligation, the policyholder is granted a right to rescind the contract and withdraw from the policy, and any deviations of the policy from the proposal form may be inoperative. Again, the effect of these provisions is that the insurer has to provide ‘contract specific’ summary information about the policy. These provisions have an effect on the contract construction of insurance policies as well. Hence, the Greek insurance contract law is, in some respects, more rigorous than the law on consumer protection in terms of securing the interests of policyholders. In other words, a policyholder may enjoy in some respects greater protection under Law 2496/1997 than he enjoys as a consumer under the law on consumer protection (i.e. Greek Law 2251/1994). In consumer insurances, the law on consumer protection (Greek Law 2251/1994, as amended and currently in force31) also applies. Article 2 of this law deals with unfair contract terms. Article 2(2) provides that general terms and conditions must be drafted in Greek and must be clear and unambiguous, specific (precise), intelligible and legible. This provision expressly states that the way general terms and conditions are drafted must enable consumers to fully understand their meaning. Article 2 (3) provides that clauses that were specifically discussed and agreed between the parties prevail over the general terms. Article 2(4) provides that in interpreting general terms and conditions, the interests of consumers must be taken into account and that the contra preferentem principle applies. Finally, Article 2(6) provides that a contractual term that has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance to the parties’ rights and obligations arising under the contract, leading to the detriment of the consumer.

30 Art. 2(8) of Law 2496/1997 was recently discussed in the Judgments 18 and 19/2015 of the Greek Supreme (Cassation) Court (Areios Pagos) in Plenary Session. 31 The last amendment of Law 2251/1994 was by Law 3587/2007. This law deals with several aspects of consumer protection such as unfair contract terms, distance sales, sales outside business premises, product liability, unfair business practices, such as unfair or deceptive advertising, etc. and implements the respective EU Directives on all these matters. Law 2251/1994 also implements into Greek law Directive 1993/13 EEC on unfair contract terms.

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According to the general principles of Greek law on contract construction, contractual clauses are interpreted on an objective basis.32 This means that what matters is what an average man would understand by reading the clause if he were in the position of the contracting party. What is decisive is not what the party that drafted the clause intended the clause to mean but what its counter-party was able to understand on an objective basis. To make this assessment, the letter of the clause is taken into account. The prevailing view on court jurisprudence is that a clause that is adequately clear and unambiguous is not subject to interpretation. It is only ambiguous clauses that require an interpretation by the courts; this interpretation is based on good faith and good business customs. So, in principle, courts cannot intervene to amend or avoid a clause that is clear and unambiguous, even if it leads to disproportionate results or seems to be contrary to business common sense. However, the way this principle is actually applied is not always consistent. In the majority of cases, Greek courts are not reluctant to intervene in the parties’ contractual arrangements and rigorously interpret contractual clauses to secure fairness and business common sense. Since policy terms are drafted by the insurer, the contra preferentem principle applies, and if a clause may be interpreted in various different ways, courts abide to the interpretation that is more favourable to the policyholder. It is to be mentioned, however, that this principle may lead to a different result if it can be established on the basis of evidence that the policy terms were drafted by a broker who was representing the policyholder.33 A good example of how transparency affects contract construction is the clauses on the annual increase of insurance premiums, particularly in life policies. The Greek courts have reasoned, in many occasions, that clauses providing for annual increases in insurance premiums are valid only if they provide for clear and unambiguous factors on the basis of which such increases are calculated. The courts have further explained that such factors are clear enough only if they enable the policyholder to calculate in advance by themselves how much premiums will increase in the future.34 For example, a basis like the annual inflation index, or some other macroeconomic indexes, like GDP, is regarded to be clear enough; however, other factors, like the number of losses or the total volume of losses covered by a particular insurer in the last year, fail to be clear and unambiguous, according to the standards set by the courts. The industry has complained that this jurisprudence is very restrictive

32 The legal provisions of Greek law on contract construction are Articles 177, 200 of the Greek Civil Code. These provisions apply to the interpretation of insurance policies as well. 33 On the construction of insurance policy terms see the Judgments of the Greek Supreme (Cassation) Court (Areios Pagos) 1285/1987, reported in Digest of Greek Lawyers (Efimeris Ellinon Nomikon) 1988, p. 677 and 211/2012, reported in Legal Herald (Nomiko Vima) 2012, p. 1954. 34 Judgment 1030/2001 of the Greek Supreme (Cassation) Court (Areios Pagos), reported in Commercial Law Review (Epitheorisi Emporikou Dikaiou) 2001, p. 740. Judgment 1407/2002 of the Appeal Court of Athens, reported in Commercial Law Review (Epitheorisi Emporikou Dikaiou) 2004, p. 553. See also Rokas (2013), p. 517.

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because it is a customary practice that premium increases are calculated on the basis of factors that sometimes are not known in advance even to insurers themselves. Courts have also considered invalid (due to lack of clarity) clauses exempting from cover losses due to lightning in a fire policy35 or exempting from flood cover losses due to rupture and crashes in plumping piping36 or accidents during non-regular and charter flights in a life and accident policy.37 In addition, in a fire policy case, an Appeal Court considered invalid a clause exempting from cover losses due to fire transmitted from a forest on the ground that the policyholder was not properly notified about this exception.38 Similarly, an insurer who received a proposal form requesting cover against both death and hospital expenses but issued a policy providing cover only for the latter (hospital expenses) was obliged to pay compensation for death because he had failed to properly notify the policyholder that he declined to accept the risk of death.39 In another case, the insurer received a proposal form requesting cover under a professional liability policy for both the company involved (a stock exchange broker) and its directors and officers; the insurer issued a policy providing cover only to the company, but not to its directors and officers, but had failed to properly notify this deviation of the policy from the stage of the proposal form. The courts found that the insurer was liable under a director and officer cover, although such a cover did not exist at all in the policy.40 On the contrary, courts have considered the following terms to be transparent and enforceable: a clause in a professional liability policy stating that the insured amount represented a maximum cap covering both capital and interest for any claims raised against the insured,41 a clause in a fire policy exempting from cover merchandise that was stored in the outside yard of a commercial warehouse and not within the

35

Supreme (Cassation) Court (Areios Pagos), Judgment 11/2006, reported in Commercial Law Review (Epitheorisi Emporikou Dikaiou) 2006, p. 380. It is worth noting that Art. 19(1) of Greek Law 2496/1997 expressly provides that a fire policy provides cover against risks due to fire and lightning. 36 Supreme (Cassation) Court (Areios Pagos), Judgment 1597/2011, unreported. 37 Athens Court of Appeals, Judgment 2386/2006, reported in Greek Justice (Elliniki Dikaiosini) 2006, p. 1461. This case related to an accident during a flight with an aircraft of the Greek Military Air Force for non-military purposes. An aircraft of the Greek Military Air Force was crashed while it was used for the transportation of governmental officers and other person with non-governmental position in an official ceremony. The issue for the court to decide was whether the accident was covered under a life and accidents policy. 38 Appeal Court of Athens, Judgment 6120/2003, reported in Commercial & Company Law Review (Dikaio Epicheiriseon kai Etairion) 2004, p. 682. 39 Supreme (Cassation) Court (Areios Pagos), Judgment 1308/2007, reported in Commercial & Company Law Review (Dikaio Epicheiriseon kai Etairion) 2008, p. 71. 40 Supreme (Cassation) Court (Areios Pagos), Judgment 846/2003, reported in Commercial Law Review (Epitheorisi Emporikou Dikaiou) 2003, p. 839. 41 Supreme (Cassation) Court (Areios Pagos), Judgment 1987/2006, reported in Commercial Law Review (Epitheorisi Emporikou Dikaiou) 2008, p. 105.

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warehouse building42 or a clause in a group policy against life risks exempting from cover accidents and death occurring within a distance of up to 35 kilometers from the place of residence of the insured.43 In two recent judgments,44 which have received much criticism and seem to be rather controversial, the Greek Supreme (Cassation) Court (Areios Pagos) reasoned that a ‘claims made’ professional liability policy should be construed to include an exemption clause. That is, the court viewed the ‘claims made’ clause not as a clause defining the scope of the cover but as an exception clause, that is, a clause exempting from cover claims that were not raised against the insured and notified by the latter to the insurer during the policy period. This approach can be criticised because an exception clause is one establishing an exception from a preceding clause that is contained in the policy and describes what is covered. A ‘claims made’ clause is the basic clause describing the scope of the cover, and in this respect it is not preceded by any other clause in the policy. In a claim-made policy, you do not find a general clause providing cover against all claims raised against the insured and then a second clause exempting from cover those claims that are not raised and notified within the policy period of the cover. So the ‘claims made’ clause is the clause describing the type of the cover and not one establishing an exception. The court, following its above-mentioned controversial approach, noted that the insurer had not properly notified the policyholder about the exception that the ‘claims made’ clause introduced to the policy, but it also argued that the insurer was not obliged to do so because this was a policy covering professional risks and not consumer risks.45 So, at the end, the court upheld the validity of the ‘claims made’ clause, although on the basis of a wrong reasoning.

3.1.2

Transparency by Way of Pre-contractual Information

The EU Directives on life and non-life insurances always obliged insurers to provide pre-contractual information to prospective policyholders. In this sense, EU law always provided for certain ‘contract specific’ and ‘summary’ disclosure before contract conclusion. However, in connection to non-life insurances, the volume of such disclosure was limited and, hence, inefficient. The same obligations for pre-contractual information remain more or less the same under Solvency II Directive 2009/138 EC. Articles 183 and 184 refer to pre-contractual information in connection to non-life policies, while Article 42 Athens Court of Appeals, Judgment 2894/2008, reported in Commercial Law Review (Epitheorisi Emporikou Dikaiou) 2009, p. 831. 43 Supreme (Cassation) Court (Areios Pagos), Judgment 1679/2008, reported in Legal Herald (Nomiko Vima) 2009, p. 388. The court was influenced by the fact that the premium was evidently very small. On this ground the court reasoned that the purpose of the policy was not to ordinary cover risks occurring during the usual and daily transportation of the insured persons. However, this is a judgment that received criticism and may be regarded controversial. 44 Supreme (Cassation) Court (Areios Pagos), in Plenary Session, Judgments 18 and 19/2015. 45 This reasoning of the court is (with respect) again mistaken, as discussed earlier above.

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185 refers to life policies. These articles have been implemented into Greek law by way of Law 4364/2016; Articles 150 and 151 refer to non-life policies, while Article 152 refers to life policies.

Non-life Policies In non-life policies, pre-contractual information is extremely limited and contains only information as to the law applicable to the contract and the complaints’ process. If the contract is concluded by an insurer operating under the freedom of establishment or the freedom of service regime, pre-contractual information also includes details about the identity of the insurer and the insurer’s branch office and representative (i.e., name, corporate purpose, legal type, registered office and address, etc.), but such information is not obligatory if the risk covered is a large risk. From a policy point of view, this information is inadequate to enable the prospective policyholder to fully understand the subject matter of the policy. Pre-contractual information does not refer to the scope of the cover, the exceptions from the cover or other material clauses of the policy, such as warranties. So in non-life policies, the policyholder will only be able to fully perceive what he is purchasing only after he has received the policy and has spent time to carefully peruse its terms. Moreover, the Directive provides that such pre-contractual information relating to the applicable law and the complaints’ process is obligatory only if the policyholder is an individual. Greek Law 4364/2016 has also implemented this restriction of the obligation to provide pre-contractual information. It is worth mentioning, though, that before the introduction of Law 4364/2016, the Greek law obliged insurers to provide pre-contractual information to legal entities as well. So the implementation of the Solvency II Directive has resulted to an important limitation and restriction of the pre-contractual information in non-life policies. After Law 4364/2016, insurers in Greece are no longer obliged to provide the above-mentioned pre-contractual information to policyholders that are legal entities. It must be mentioned, though, that the above provisions of Directive 2009/138 EC must be read in parallel with the provision of Article 20 paras. (4)–(8) of Directive 2016/97 EU. This latter provision provides for an Insurance Product Information Document, which contains ‘product specific’ summary information and which must be made available to the policyholder before contract conclusion.

Life Policies In life policies, the volume of pre-contractual information required is substantially greater. In addition to information about the identity of the insurer, its branch office and its representative, the complaints’ process and the law applicable to the policy, insurers are obliged to provide ‘contract specific’, ‘summary’ information about the subject matter of the policy, that is, about the insurance product purchased. Such

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information relates to the benefits of the policy, the type of investment that is associated to the policy (if it is an investment policy), the premiums and how they are calculated, the surrender and paid-up values of the policy and whether they are guaranteed, the duration of the policy, the termination of the contract, the cooling-off period and the cancellation of the policy. It is worth mentioning that in case of investment policies, Regulation 1286/2014 EU also applies. This Regulation deals with key information documents for packaged retail and insurance-based investment products (PRIIPs). Under the Regulation, the volume of information required for investment policies is more detailed and sophisticated and follows the lines and principles required in other investment activities. The Directive has brought some substantive innovations in connection to the type of pre-contractual information required in life policies. Such information must also include a specific reference to the solvency and financial condition report of Article 51 of the Directive. The insurer is also required to make this report easily available to the applicant. This report is a ‘full disclosure’ report about the insurer. As a result, each time an insurer proposes a life policy, he is required to make such a ‘full disclosure’ about his solvency and financial condition to each and every prospective policyholder. This is expected to increase the level of awareness of policyholders and to enable them to make better and more informed decisions. Another innovation of the Directive is that the insurer is also required to provide to the prospective policyholder specific information to enable him to properly understand the risks underlying the contract that are assumed by him (i.e. the policyholder). So the insurer is obliged to provide information additional to that specifically mentioned in the Directive, and he is required to make a responsible decision about what sort of additional information is objectively required in this respect. Finally, the Directive requires insurers to update the more important items of the pre-contractual information required throughout the term of the contract, that is, to update policyholders on any changes. Greek Law 4364/2016 has implemented all of the above.

Legal Issues as a Result of the Implementation of the Directive into Greek Law The implementation of the Directive is likely to give rise to certain issues of legal interpretation in connection to some provisions of Greek insurance contract law, particularly of Law 2496/1997 on the insurance contract. Greek law provides for a more rigorous obligation in relation to pre-contractual information, and it is an issue whether these provisions of Greek law survive the implementation of the Directive by way of Law 4364/2016. Article 2(4) of this law provides that the insurer is obliged to deliver to the policyholder a summary of the more important policy terms. This obligation applies to both life and non-life policies. This summary must be delivered together with the policy. The purpose of this summary is to make it easier to the policyholder to peruse the terms of the policy and fully understand

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it. Furthermore, Article 2(6) provides that if the insurer fails to provide this summary, the policyholder has a right to object to the policy within a period of 14 days, commencing when the policy was delivered. If the policyholder exercises this right to object, the result is that the contract is not concluded. Moreover, the insurer is required to advise the policyholder about this right to object, and if he fails to do so, then the period of 14 days does not start to count. The right to object, due to failure to provide a summary of the policy, is waived after the lapse of 10 months as from the payment of the premium or its first installment. In addition, Article 2(5) of Law 2496/1997 obliges the insurer to advise the policyholder about any deviations of the policy from the application (proposal) for insurance that the policyholder submitted. If the insurer fails to do so, then any such deviations are inoperative and the insurance contract is deemed to have been concluded on the basis of the proposal form. If the insurer complies with this obligation to advise the policyholder on any such deviations, then the latter has a right to object to any such deviations and rescind the policy within a period of 1 month as from the date the policy is delivered. It seems that these provisions of Greek law survive the implementation of the Directive. Article 185(7) of the Directive enables member states to oblige insurers to provide additional pre-contractual information in connection to life policies if this is necessary to enable policyholders to properly understand the policy. Moreover, Greek law provides for specific remedies associated to the failure of the insurer to comply with the obligation to provide the information required. This does not seem to be contrary to the Directive.

3.2

No Transparency as to the Claims’ Process

There are plenty of reasons for justifying the necessity of increased transparency in connection to the claims’ process. Although the policyholder pays premiums on a regular basis, the insurer is only exceptionally called to pay insurance compensation if and when the risk materialises. The policyholder is unable to trace the behavior and the practices of the insurer in connection to claim’s handling. The law seems to provide inefficient remedies to the insured in case of late payment of claims, and therefore it seems that insurers are motivated by the current state of the law to delay payment of insurance compensation. Delaying payment of compensation may be used as a method to make pressure on the insured to accept an unfair settlement, particularly if the insured needs to be urgently funded to recommence operation and catch up with the market. Such unfair delays may involve bad faith on the part of the insurer. Finally, as already explained, the issue whether a risk is covered or not can be a matter of genuine and true dispute and dissenting opinions between the insurer

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and the policyholder, so delays in the claims’ process are, in principle, likely to arise.46 Therefore, insurers should be obliged to publicly disclose information regarding the claim process. Such disclosure should refer to statistical data regarding the number of claims received each year, the number of claims settled out of court, the number of claims litigated and the average time until payment of the claim takes place. A counterargument usually submitted by insurers is that such information qualifies as a trade secret and that, accordingly, its confidentiality should be preserved. The reason trade secrets are protected is to avoid unfair competition. It would be unfair if an insurer could compete against another while they possess confidential information regarding the business of the latter. However, this is not the case if a general system of obligatory disclosure applies to all insurers in the same way. Confidentiality does not seem to be a valid argument towards applicants and policyholders; that is, there may be some concern to preserve confidentiality against other insurers, but there seems to be no valid ground to preserve confidentiality towards applicants and policyholders themselves. Applicants and policyholders are adequately justified and legitimised to receive information regarding the claims’ process and the respective practices applied by insurers. Alternatively, the information to be disclosed can relate only to complaints that have been filed against insurers and have been examined by public authorities, the Ombudsman service and the courts in connection to the claim-handling practices applied by insurers. The Greek law does not currently provide for any such disclosures relating to the claim process. Solvency II Directive 2009/138 EC and Directive 2016/97 EU on distribution of insurance do not seem to provide for any such transparency either. It is unfortunate that the EU law, which has made remarkable progress in terms of transparency with the two recent Directives already mentioned, has omitted to establish any specific disclosure obligations in connection to the claim process.

3.3

Transparency and Intermediaries47

The insurance industry is possibly the only field where sales are effected not through insurance companies themselves but primarily through intermediaries. Unlike banks, which have extensive and nationwide networks of luxurious branch offices, insurance companies only rarely have their own branch offices to accept clients. Instead, insurance companies rely on networks of intermediaries, like agents, brokers, tied agents and banks. So insurance is undertaken by insurers, but, in practice, it is traded through intermediaries. The applicant and the policyholder communicate with an intermediary and only rarely with the insurers themselves. 46 Schwarcz (2014), pp. 394 and 414 (available at: http://scholarship.law.umn.edu/faculty_articles/ 572). 47 In connection to legal issues relating to the role of intermediaries in insurance see Marano (2010), p. 23; Cerini (2010), p. 159; Chrissanthis (2010a), p. 49; Chrissanthis (2010b), p. 9.

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The need for transparency in connection to the operations of intermediaries can be justified on various and multiple grounds. On the one hand, transparency on the part of insurers would be in vain, in the absence of transparency on the part of intermediaries as well. On the other hand, the existence of intermediaries gives rise to the well-known agency problems; intermediaries have their own interests, which might conflict with the interests of the party whom they represent. Transparency is a method to compensate and remedy such agency problems and conflicts of interests. Another renowned practical difficulty, making transparency compelling in the case of intermediaries, is that in many cases it is not clear for whom intermediaries are acting and whom they represent; that is, it is unclear whether they represent the policyholder or the insurer. To make things more complex, intermediaries often represent both parties in the context of a situation, which is called ‘dual agency’; dual agency is rare in all other types of trade and industries, but it is common in insurance. Transparency is possibly the easiest and most efficient method to clarify for whom intermediaries are acting.

3.3.1

The 1st Insurance Mediation Directive 2002/92 EC

The considerations mentioned explain why a great volume of the transparency efforts of the legislator of the European Union relate to insurance intermediaries. Indeed, EU legislation on transparency in relation to insurance intermediaries (i.e. the 1st EU Insurance Mediation Directive 2002/92 EC) preceded the legislation on transparency in relation to insurance undertakings themselves (i.e. Solvency II Directive 2009/138 EC). The Directive has been implemented into Greek law by way of Presidential Decree 190/2006. The Directive and the respective Greek Presidential Decree provide for a public registry of intermediaries. The existence of a public registry is a first step towards transparency since it allows both policyholders and insurance undertakings to confirm whether a person or an undertaking is licensed as an insurance intermediary. In addition, Article 12 of the 1st Insurance Mediation Directive 2002/92 EC obliges intermediaries to disclose before the conclusion of a contract certain information, including (a) their identity and personal status as a licensed intermediary; (b) any cross-shareholding participation with insurance companies exceeding 10% of the voting rights, i.e. participation of insurers in the intermediary’s share capital and vice versa; (c) whether the intermediary is acting independently and provides an objective analysis of the market or cooperates with one or more insurance companies; (d) the complaints’ process, which is available to customers. Such disclosure is not required if the intermediary is acting in connection to ‘large risks’ or in connection to reinsurance.48 According to the express letter of the Directive, member states are allowed to impose stricter provisions regarding information to customers. Greece has not implemented any stricter provisions. Article 13 requires that the

48

Directive 2002/92 EC, Art. 12 par. 1 and 4.

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information must be provided in written or other durable form and that it must be clear, precise and intelligible. These transparency obligations have been implemented into Greek law by way of Article 11 of Presidential Decree 190/2006. Moreover, the Central Bank of Greece has issued secondary regulation,49 setting more specific and precise standards in connection to the information and disclosure obligations of insurance intermediaries. This regulation was last amended by the Central Bank on April 2016. Since the last amendment occurred after Directive 2016/97 EU on distribution of insurance products came into force, it took into account the provisions of the latter. So the secondary regulation established by the Bank of Greece in connection to intermediaries is taking into account the obligations set by Directive 2016/97 EU on distribution of insurance products. Such secondary regulation provides the following: (a) intermediaries that offer investment type policies need to have an additional certification, which is specific to investment policies; (b) intermediaries need to make available to clients printed materials with the information and disclosure of Article 12 of Directive 2002/92 EC; such printed materials must have been prepared by the intermediaries themselves and are additional to any similar materials, which are prepared and made available by insurers; (c) before the conclusion of any policy, intermediaries are obliged to record the client’s characteristics and needs in a document specifically designed for this purpose and need to query the client in this respect; this is an implementation of the obligation of Article 12(3) of Directive 2002/92 EC; (d) intermediaries are obliged to submit to the client a written and adequately justified and substantiated opinion about the type of cover they propose; (e) intermediaries are obliged to make available to clients any written guidance and printed materials of the insurers, explaining the type of cover and the characteristics of each policy and must collect from the client a written confirmation that they have actually made available such literature to the client; (f) intermediaries are obliged to advise clients on the basic terms of each policy and the respective rights and obligations arising therefrom, with emphasis on the consequences of early termination and the importance of timely payment of premiums. They are also obliged to advise clients on their rights to object to any deviations of the policy from the proposal form and their right to rescind the policy. The regulation of the Central Bank of Greece further provides that intermediaries must adopt and apply measures destined to avoid conflicts of interests; in particular, they are obliged to adopt a written corporate policy on this matter and to take any additional precaution that is reasonably necessary to preserve the independence of their judgment. Intermediaries are also responsible to provide quality information in due time and to apply measures that secure that clients will enjoy timely and comprehensible information through trained employees. They are also obliged to keep detailed records regarding the information exchanged with clients and to preserve such records for a reasonable time. 49

Regulatory Act No. 86/05.04.2016 of the Executive Committee of the Central Bank of Greece. The Act is titled “Code of Conduct of (Re)Insurance Intermediaries”, but it establishes statutory duties.

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Finally, the Bank of Greece has already implemented into Greek law the guidelines of EIOPA in connection to the obligation of Article 25 of Directive 2016/97 EU. This article obliges both insurers and intermediaries who create insurance products to adopt internal procedures for the evaluation and approval of such products, so that they fit the needs and the characteristics of the customers to whom they are addressed to. Under Greek law, all these obligations represent statutory duties, which the intermediaries bear to the customers. Breach of such duties can cause both administrative fines and private enforcement. So breach of such duties may result to liability of intermediaries under civil law, although this involves difficulties as to the quantification of damages. It is worth mentioning that the regulation of the Central Bank makes liable each and every member of the management of the intermediary on a personal, joint and several basis with the intermediary enterprise.50 The Hellenic Association of Insurance Brokers has issued its own Code of Conduct. This Code applies only to the conduct and relationship of brokers with insurance companies; the conduct of brokers towards applicants is outside the scope of the Code. The Code is not of a statutory nature. It does not amount to legislation or regulation. However, it is legally binding on a contractual basis between the intermediaries and insurance undertakings that have adhered to it. It is not ‘soft law’ only. Its provisions are ancillary, additional and supplementary to the above-mentioned regulation of the Central Bank of Greece, which applies to all intermediaries. What is of interest in connection to this Code is that it provides that the brokers, who approach insurers to obtain a quotation, must act on the basis of written instructions from the applicant and that they must submit a copy of such written instructions to the insurer. Compliance with this process can in practice solve many of the uncertainties that usually arise as to the issue on whether the broker is acting for the policyholder or the insurer. If the broker has indeed obtained written instructions from the applicant and has in fact submitted such instructions to the insurer, then there will be express authority, and it is highly unlikely that any uncertainty will arise, at least in connection to those issues and matters relating to the conclusion of the contract.

3.3.2

Insurance Distribution Directive 2016/97 EU51

Directive 2016/97 EU on insurance distribution has refined, extended and reinforced the disclosure obligations of intermediaries, and it provides for disclosure obligations for insurers also. The impact of the new Directive on transparency is

50 Art. 31(4) of Directive 2016/97 EU on insurance distribution contains a provision to the same effect. 51 The Financial Conduct Authority of the UK has issued useful practical guidance on the implementation and the interpretation of Directive 2016/97 in its Consultation Paper I (No. 17/7). This guidance is of international interest and is not unique to UK only.

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substantial, and its disclosure provisions are rigorous. The new Directive contains a set of 14 articles on information requirements and conduct of business (Arts. 17–30). The Directive is one for minimum harmonisation, thus allowing member states to retain or introduce more stringent provisions for the protection of the interests of customers and potential customers.52 The Directive has been implemented into Greek law by virtue of Law 4583/201853 (Arts. 27–40); Articles 27–40 are implementing Articles 17–30 of the Directive. In addition, secondary Greek regulation on intermediaries issued by the Central Bank of Greece is also taking into account the obligations set by the Directive.54 The Greek legislator has implemented the Directive without retaining or introducing stringent provisions. So in implementing the Directive, Greek law has greatly retained its structure and the sequence of the provisions as they appear in it. It is also worth mentioning that Law 4583/2018 has abolished previous local legislation on insurance intermediaries, such as Law 1569/1985 and Presidential Decree 190/2006. Law 4583/2018 was published on the National Gazette on 18 December 2018 and came into force on that date. However, Directive 2016/97 provided that member states should have implemented it by 01 July 2018. So Greece was late in implementing the Directive. It is worth noting, though, that most of the provisions of the Directive have a direct effect on local law as from 30 September 2018, even in the absence of formal implementation by way of national legislative measures. The disclosure provisions of the previous Directive on insurance intermediaries, that is, Directive 2002/92 EC, are retained. Additional disclosure obligations have been imposed also. Article 17 of the Directive (Art. 27 of Greek Law 4583/2018) sets general principles to which intermediaries must abide. Intermediaries must always act to the best interest of the client; in particular, they must act honestly, fairly and professionally. Their communications to clients must be clear, fair and not misleading, including the requirement that any advertising or marketing materials must be clearly identified as such. Remuneration and performance measurement policies for both intermediaries and their staff must not promote mis-selling and must not conflict the duty to act to the best interest of clients. Such general principles are supplemented by some very important and overarching obligations of intermediaries. On the one hand, under Article 20(1), intermediaries must obtain a clear picture of the client’s needs and must only propose products corresponding to such needs. On the other hand, under Article 25, intermediaries must ensure that the products they propose have passed an internal evaluation and assessment test; 52

See recital 3 of Directive 2016/97. The implementation of Directive 2016/97 EU received little attention in Greek legal literature; see Rokas (2019a); Rokas (2019b), p. 3; Varouchaki (2016), p. 1; Karamanakou (2017), p. 772. 54 In particular the more important regulatory provisions are contained in Regulatory Act No. 86/05.04.2016 of the Executive Committee of the Central Bank of Greece. The Act is titled “Code of Conduct of (Re)Insurance Intermediaries” and establishes statutory duties for intermediaries. The provisions of the Act are based on Directive 2016/97, although the Act itself came into force before law 4583/2018 which implemented the Directive. 53

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they also must ensure that they fit the characteristics and the needs of the particular market segment to which they are offered and that they are not offered to another type of customers for whom they do not fit, particularly if they entail risks that those customers are not appropriate to bear. According to Article 18 of the Directive (Art. 28 of Greek Law 4583/2018), intermediaries are obliged to disclose to clients (in addition to their identity, their registered office, their capacity as intermediaries and not insurers, the complaints’ processes available and any cross-shareholding participations with insurers) whether they provide advice about the insurance products sold (advised sales), as well as whether they are acting for the customer or the insurance company. According to Article 20(1) of the Directive (Art. 30(1) of the implementing Greek law), an intermediary that claims to provide advice as to the insurance products sold is obliged to provide—prior to contract conclusion—a personalised recommendation explaining why a particular product would best meet the customer’s demands and needs. Furthermore, by making the intermediary responsible to inform the client whom they are representing, the Directive makes an attempt to overcome the uncertainties and difficulties that usually arise in connection to the representative powers of the intermediary and the imputation of his knowledge and fault. Indeed, in many cases, such disclosure shall be sufficient to prevent this type of ambiguity and similar litigation to arise. Moreover, under Article 19(1)(e), 19(2) and 19(3), which are implemented by Article 29 of Greek Law 4583/2018, intermediaries have a rigorous obligation to inform customers about several aspects of the remuneration received, such as the volume, the nature and the source of the remuneration; how it is calculated; whether it is paid by the applicant or the insurer; etc. Article 17 of Directive 2016/97 EU and Article 27 of Greek Law 4583/2018 also deal with the issue of intermediaries’ remuneration.55 Forms of remuneration, including aggressive bonuses to incentivise sales, or aggressive contingent commissions, may result to mis-selling, by bringing intermediaries in a situation of conflict of interest towards customers. Such aggressive incentives may lead intermediaries to propose products that do not fit customers’ needs, instead of other more suitable products, which are, though, remunerated less favourably. Article 17 does not expressly prohibit specific types of remuneration or bonuses, but it creates an obligation for both insurers and intermediaries to review remuneration policies and ensure that they do not employ incentives, which are likely to enhance mis-selling. This obligation is a rigorous one. Private enforcement is likely to discipline the market as insurers and intermediaries are exposed to potential liability to customers if they do not abide with prudent remuneration methods. Remuneration policies providing for excessively high bonuses or bonuses that are disproportionate to the total volume of remuneration are likely to result to mis-selling. For example, sales targets that trigger a higher than

55

Useful guidance in relation to the risks associated with types of remuneration and incentive schemes can be found in the document issued by the UK Financial Services Authority titled Final Guidance, Risks to customers from financial services, January 2013.

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normal increase to the level of remuneration or sales targets that retrospectively increase the rate of bonuses for all sales over a period rather than just those sales that exceed the target or an incentive scheme that provides a high bonus for the first ten members of the sales staff who will reach a sales target or other similar arrangements that are aggressive in seeking only to enhance sales, without taking into account the interests of the customers, are likely to infringe Article 17 of the Directive and may no longer represent a legitimate practice.56 Still, there is one problem relating to remuneration, which is not dealt with by Article 17. In particular, representing many insurers is a means to secure the objectivity of intermediaries, but this target is cancelled if each insurer offers a different level of commission (which is usually the case) or if some insurers provide remuneration in the form of contingent commissions based on gross sales. In any case, the attempt of the new Directive to closely discipline intermediaries’ remuneration is justified. In addition, under Article 20 paras. (4)–(8), which are implemented by Article 30 of Greek Law 4583/2018, intermediaries are obliged to provide to clients, before the conclusion of the contract, ‘product specific’ information in summary form.57 This includes information about the type of cover, the exceptions from cover, the duration of the cover and its termination, and any obligations that the insured must meet on the commencement of the cover or during the period of the contract or when a claim is raised. Such information must be provided in the form of a standardised document, which is called ‘Insurance Product Information Document’ (IPID). EIOPA has carried out research to come up with a standard format document and has issued its final report and its recommendations on this subject in July 2016.58 In August 2016, EIOPA has also issued a Consultation Paper regarding IPID.59 Such a standardised IPID is likely to not only increase the level of awareness of policyholders but also enable them to efficiently compare products proposed by different insurers and hence to enhance competition. Articles 26–30 of the Directive (Arts. 36–40 of Greek Law 4583/2018) provide for additional disclosure requirements in connection to investment-type insurance policies, where the disclosure obligations are similar to those of investment brokers under the financial service regulation. However, member states are allowed to provide an exemption from such requirements when the client is a professional. It is worth mentioning that Article 29(1) of Directive 2016/97 EU allows member states to require that the information provided to customers by both intermediaries and insurers should be in a standardised form; Article 39 of Greek Law 4583/2018, which implemented the above Directive, has not made use of this option and, hence, In 2012 in the US the Dodd – Frank Act prohibited similar arrangements in connection to intermediaries’ remuneration in the mortgage lending market. 57 The requirements of Art. 20 of the Directive regarding product specific information in summary form have been further refined by the Implementing Regulation 2017/1467 EU on the standardized presentation format for the insurance product information document. 58 EIOPA, IPID Consumer testing and design work, Final Report, EIOPA/OP/153/2015, July 2016. 59 EIOPA Consultation Paper on the proposal for implementing technical standards on a standardized presentation format of the IPID, EIOPA-CP-16/007, 01.08.2016. 56

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does not provide for information in standardised form in connection to investmenttype insurance policies. In addition, Article 29(3) of the Directive allows member states to introduce stringent requirements on the information provided to customers in connection to investment-type policies, but the Greek law has not made use of this option and has not introduced any such stricter obligations. The Directive imposes disclosure obligations to insurers as well. Insurers are obliged to provide information relating to their identity and registered office, the complaint process, as well as whether they are providing advice as to the insurance products sold (advised and non-advised sales). Insurers are also responsible for providing ‘product specific’ summary information relating to the policy in question in the form of a standardised IPID. By making both insurers and intermediaries responsible in connection to the IPID, the Directive fills a gap in the flow of information that could arise, in case that the intermediary failed to fulfil his obligations. Another important innovation of the Insurance Distribution Directive is Article 25 (Art. 35 of Greek Law 4583/2018), obliging insurers to adopt specific procedures for the evaluation and approval of the insurance products that they offer to customers. This means that insurers must identify the particular market segment to which each product is addressed; to take into consideration the particular needs of this type of customers, as well as the risks associated with them; to ensure that the product shall be designed to fit such needs and risks; to secure that the product shall not be distributed to other customers for whom it does not fit; to review all those and adapt products to market changes; and to educate distributors on the peculiarities of each insurance product. Intermediaries bear the same responsibilities in case they are creating insurance products themselves. Moreover, intermediaries that distribute products created by insurers have a responsibility to obtain from insurers the information regarding the characteristics of each insurance product, the market segment to which it is addressed and the approval process that has been followed for this product. EIOPA has issued specific guidelines for the implementation of Article 25.60 The requirement of Article 25 of the Directive has been further refined by Delegated Regulation 2017/2358 EU on product oversight and governance requirements for insurance undertakings and insurance distributors. The impact of the provisions of Directive 2016/97 EU and the implementing Law 4583/2018 on private insurance contract law is the same as the impact of the 1st Insurance Mediation Directive 2002/92 EC. Both Directives establish statutory duties under civil law. Breach of such duties may result to the liability of both insurers and intermediaries towards customers and prospective (potential) customers. The existence of specific statutory duties as to disclosure makes it unnecessary to examine whether the intermediary acted on behalf of the insurer or the customer and whether the intermediary’s fault is attributed to the former or the latter. However, even when there is breach of a statutory duty, difficulties as to establishing

60 EIOPA, Preparatory guidelines on product oversight and governance arrangements, 18.03.2016, EIOPA-BoS-16-071.

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causation and quantification of damages may still arise. Moreover, the existence of specific statutory duties may give rise to administrative fines and other administrative disciplinary measures.

4 Conclusion: The Impact of Insurance Regulation on Transparency on Private Insurance Law Disclosure and transparency provisions establish statutory duties for insurers and intermediaries. It is an issue of legal interpretation whether breach of such statutory duties entitles policyholders to a legal action for damages or not. It is up to the national courts of the member states to determine whether private enforcement is possible or not. It is true that if national courts adopt different interpretations on this matter, the way EU law is enforced may differ dramatically from one EU country to another. Under Greek law, private enforcement is likely to be possible for the majority of the provisions of Directives 2009/138 EC and 2016/97 EU. What is decisive for determining whether a legal action for damages is possible or not is whether it was the purpose of the legislator to grant this type of protection to policyholders or whether the only enforcement that the legislator intended to establish was by way of administrative fines. Civil courts will be required to determine whether the disclosure and transparency provisions actually intended to protect individual interests of policyholders or not. There should be no reservation that provisions on pre-contractual disclosure are indeed destined to protect individual interests of policyholders and hence entitle the latter to a legal action for damages if they are breached. Such provisions directly deal with the contractual relationship of the parties, and consequently they are destined to establish individual rights and obligations. Additionally, Article 27 of Directive 2009/138 EC expressly provides that the purpose of supervision is the protection of policyholders and beneficiaries. On the basis of such a provision, one may conclude that regulatory provisions aim to protect not only market stability but also individual interests of policyholders and beneficiaries. Inaccuracies in the Solvency and Financial Condition Report should also be actionable. This report is one that is made publicly available, so insurers can reasonably predict that it will induce potential clients. Moreover, this report is additional to other regulatory filings that remain private as they are addressed to the supervising authority only. Efficient private enforcement will, still, need to overcome difficulties relating to establishing causation and quantification of the loss suffered. In a similar context, the EU Commission has issued a Communication61 on quantifying harm for damages based on breaches of EU competition law, as well as a practical guide on quantifying 61

EU Commission, 2013/C 167/07, C 167, 13.06.2013, 19.

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harm.62 A similar approach and initiative from the Commission would be welcome in relation to quantification of damages in case of breach of statutory duties as to disclosure and transparency. Damages may not always be an adequate remedy to policyholders. Article 186 of Directive 2009/138 EC provides for a cooling-off (cancellation) period in favour of policyholders only in case of life policies. Under Greek law, non-life policyholders already enjoy similar rights. Beneficiaries are usually mistreated in relation to how claims are handled by insurers. The new EU legislation has failed to provide any disclosure and transparency obligations in connection to the claims’ process and the respective practices applied by insurers, although this is an important aspect that usually causes much concern and leads to litigation. Finally, enhanced transparency is likely to lead to less litigation. This is of vital importance because in case of litigation, insurers are usually better placed than the insured parties. Insurance law usually gives rise to difficulties as to the burden of proof and access to evidence, while insurers have easier access to more sophisticated and expert legal advice and services. Acknowledgements The author wishes to thank Miss Xenia Chardalia, LL.B., LL.M., LL.M. for her valuable legal insight and ideas in discussing the issues raised in this chapter.

References Carnell RS, Macey JR, Miller GP (2008) The law of banking and financial institutions, 4th edn. Wolters Kluwer CEIOPS (Committee of European Insurance and Occupational Pensions Supervisors) Consultation Paper No. 34, Transparency and Accountability, (CEIOPS-CP-34/09), 26.03.2009 Cerini D (2010) The information duties of insurance intermediaries. In: Rokas IK (ed) Insurance intermediaries, AIDA Distribution of Insurance Products Working Party 2010. Sakkoulas, Bruylant, p 159 Chrissanthis C (2010a) Representative power of insurance intermediaries (agents and brokers) and imputation of their knowledge and fault. In: Rokas IK (ed) Insurance intermediaries, AIDA Distribution of Insurance Products Working Party 2010. Sakkoulas, Bruylant, p 49 Chrissanthis C (2010b) Tied insurance intermediaries. In: Rokas IK (ed) Insurance intermediaries, AIDA Distribution of Insurance Products Working Party, 2010. Sakkoulas, Bruylant, p 9 Chrissanthis C, Chardalia X (2017) Insurance and reinsurance law in Greece. In: The international comparative legal guide to insurance & reinsurance 2017. Global Legal Group, London Dong MI (2014) Market reaction to transparency: an empirical study on life insurance demand in Europe. ICIR Working Paper Series, No. 17 EIOPA. Preparatory guidelines on product oversight and governance arrangements, 18.03.2016, EIOPA-BoS-16-071 Fung A, Graham M, Weil D (2008) Full disclosure: the perils and promise of transparency. Cambridge University Press

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EU Commission, SWD (2013) 205, 11.06.2013, C 2013, 3440.

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Galli G (2005) Towards a good governance in financial and insurance services: transparency in the life insurance industry in Italy. Geneva Papers 30:443–450 Healy PM, Palepu KG (2001) Information asymmetry, corporate disclosure and the capital market: a review of the empirical disclosure literature. J Account Econ 31:405–440 Hellenic Association of Insurance Companies, Annual Report for 2018 Karamanakou E (2017) Tied insurance intermediaries and ancillary insurance intermediaries in European Union law and bank assurance. Commercial Law Rev, 772 [in Greek] Kennedy LJ et al (2012) The consumer financial protection bureau: financial regulation for the twenty first century. Cornel Law Rev 97:1141 La Port R, de Silanes Florencio L, Shleifer A (1999) Corporate ownership around the world. J Finance 54:471 seqq. La Port R, de Silanes Florencio L, Shleifer A (2003) What works in securities laws? NBER 2003, Working Paper 9882, July, JEL No. G15, G18, G3, G22, P5 Lang MH, Lundholm RJ (1996) Corporate disclosure policy and analyst behavior. Account Rev 71:467–492 Lin S-L, Yang C-C (2013) Relationships between information transparency, corporate governance and D&O insurance. Int J Soc Behav Educ Econ Bus Ind Eng 7:2184–2187 Looijenga M (2016) Customer centricity and transparency in the healthcare insurance sector. Wageningen University Lualdi M (2005) Investor needs for transparency and good governance, and insurance reactions. Geneva Papers 30:467–476 Marano P (2010) Which regulation for the reinsurance intermediaries? The present and future of the EU Directive 2002/92 EC. In: Rokas IK (ed) Insurance intermediaries, AIDA Distribution of Insurance Products Working Party, 2010. Sakkoulas, Bruylant, p 23 Nat’l Sci. & Tech. Council, Smart disclosure and consumer decision making: Report of the Task Force on Smart Disclosure, 2013 (7) Rokas IK (2013) Freedom to fix premiums, adequacy of premiums for regulatory purposes and transparency of general terms and conditions relating to premium increases. Commercial Law Rev (Epitheorisi Emporikou Dikaiou), p 517 Rokas I (2019a) Insurance intermediation. A commentary on law 4583/2018. Sakkoulas Publications [in Greek] Rokas I (2019b) Law 4583/2018 on the implementation of Directive 2016/97 EU on insurance distribution. Nomiko Vima (a Greek Law Review issued by the Athens Bar), p 3 [in Greek] Schwarcz D (2010) Regulating insurance sales, or selling insurance regulation? Against regulatory competition in insurance. Minn Law Rev 94:1707 Schwarcz D (2014) Transparently opaque: understanding lack of transparency in insurance consumer protection. UCLA Law Rev 61:394 Siegel C (2013) Solvency assessment for insurance groups in the United States and Europe: a comparison of regulatory frameworks. Geneva Papers 38:308–331 Smith MJ-H (2010) Solvency II: The ambitious modernization of the prudential regulation of insurers and reinsurers across the European Union. Connecticut Insur Law J 16(2):357 Vander Bauwhede H, Willekens M (2008) Disclosure on corporate governance in the European Union. Corp Gov 16:101–115 Varouchaki E (2016) Directive 2016/97 EU on distribution of insurance products and the obligations arising therefrom for insurance enterprises. Rev Private Insur Law, p 1 [in Greek]

Transparency in the Insurance Contract Law of Italy Sara Landini

1 Introduction This chapter deals with transparency in insurance contracts under Italian law. The theme is framed in Italian legislation and in the complex relationship between the Civil Code, the Consumer Code (Legislative Decree 206/2005, Cons. Cod), the Insurance Code (Legislative Decree 209/2005, Ins. Code, recently modified by Legislative Decree 68/2018), IVASS (Italian Insurance Market Authority), TUF (Legislative Decree 58/1998) and Consob (the Italian public authority responsible for regulating the Italian financial markets) regulation. The term transparency is used in different ways: duty to inform and to advise; fiduciary duties and suitability rule in insurance contracts distribution; comprehensibility, certainty, completeness of contractual content; and fairness of contractual terms and unfair commercial practices. This last issue could be related to the recent Italian case law evolution on judicial worthiness control in case of B2B contracts. We will consider also the issue from the point of view of the case law evolution that is of particular interest in Italian law. Italian judges have a large margin of discretion in interpreting the law in view of the general clauses and the general principles contained in the rules. Alongside Italian case law, much emphasis will be given to the Community case law, which strongly influenced Italian courts by linking the issue of transparency to that of fairness of contractual terms and pre-contractual information, hence the importance of the concept of clarity and comprehension of the text and its connection to the topic of information and advice during the pre-contractual phase. Finally, attention is paid to the consequences of breaching the rules of conduct imposed on insurers and insurance intermediaries. S. Landini (*) Department of Legal Sciences, University of Florence, Florence, Italy e-mail: sara.landini@unifi.it © Springer Nature Switzerland AG 2019 P. Marano, K. Noussia (eds.), Transparency in Insurance Contract Law, AIDA Europe Research Series on Insurance Law and Regulation 2, https://doi.org/10.1007/978-3-030-31198-8_5

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2 Legal Framework of Italian Insurance law In Italy, the first discipline of the insurance contract was contained in the Commercial Code of 1882, in which insurance was regulated. The Civil Code of 1865 merely mentioned the insurance contract between aleatory contracts. The 1882 Commercial Code and the 1865 Civil Code were unified in the 1942 Civil Code (CC) regulating insurance contracts in Articles 1882–1932.1 The rules governing the insurance company were contained in special laws, which were then unified in the ‘Testo Unico’ of 1959 (now abolished by the Ins. Code). Despite the various attempts to unify the discipline of insurance contracts and of insurance undertakings,2 the division still remains today. Lastly, such an idea has been repeated with the issuance of the Private Insurance Code; in its final drafting, it saw the maintenance of the systematic split between the contract (disciplined by Artt. 1882–1932 cc) and the enterprise (mostly governed by Artt. 11–106 Ins. Code). We must say that at present time, the most significant part of the insurance contract discipline is contained in the Civil Code, although there are some provisions in the Insurance Code relevant to insurance contracts; in particular, Article 165 ff. Ins. Code is contained in Title XII, ‘Rules on Insurance Contracts’. Article 165 regulates the connection between the Insurance Code and the Civil Code, Article 166 contains rules on the drafting of insurance contracts, Article 167 provides for the nullity of the insurance contract concluded with an unauthorised undertaking, Article 168 is about the effects of portfolio transfer, Article 172 is on the right of withdrawal in case of tariff variations, Article 173 discusses legal protection, Article 176 provides rules on the withdrawal of proposal in life insurance, Article 177 is about the ius poenitendi in case of life insurance, and Articles 180–181 are about the applicable law in the case of international contracts. The presence of contractual provisions in the Insurance Code seems to emphasise the osmotic process between the insurance enterprise and insurance contracts.3 Finally, the Consumer Code (Legislative Decree no. 206/2005, Cons. Code) assumes relevance with regard to insurance contracts when the contractor, the insured or the beneficiary is a consumer, with particular regard to the discipline of unfair terms, unfair commercial practices and distance contracts.4 This is a condition that sometimes poses problems of coordination in the application of law. For instance, unfair commercial practices are regulated by the Consumer Code (Art. 18 ff.), the Insurance Code (Art. 182 on ‘the Law on Advertising and Marketing of Insurance Products’) and the Insurance Market Authority’s regulations (see IVASS Regulation 40 and 41 2018). 1

Volpe Putzolu (1987), p. 77. Asquini (1934), p. 5. 3 Vivante (1886), p. 4 ss. According to art. 1883 c.c. the insurance activity can be exercise only by an insurance undertaking. 4 Corrias (2007), p. 1750. 2

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Lastly, maritime insurance continues to find its own rules prevailing in the Navigation Code, where provisions both on maritime insurance (articles 514–547) and air insurance (articles 1001–1021) are laid down. According to Article 25 bis TUF, introduced by Act 262/2005 and modified by Legislative Decree 303/2006, Article 21 TUF on pre-contractual information and rules of conducts and Article 23 TUF on mandatory form and content of contract are applicable also to linked policies and capitalisation contracts.

3 Legal Framework on Transparency in Italian Law The fundamental norms on transparency are contained in the Civil Code: Article 1366 CC on interpretation in good faith and Article 1337 on fairness in the pre-contractual phase. Beyond the sectoral rules on transparency in insurance contracts, these two rules represent the pivot of the whole system, which, on the basis of these, must be interpreted. In Italy, pre-contractual liability is ruled by a statutory provision that requires parties to act in good faith during the negotiation and formation of the contract (Art. 1337 Civil Code). Since the entry into force in Italy of the current 1942 Civil Code, Article 1337 has been consistently given a narrow interpretation. From this narrow perspective, pre-contractual liability applies only in two cases: (1) when a party terminates negotiations without a valid reason or (2) when a party, aware of the existence of grounds for the invalidity of the contract or of other circumstances relevant to the contract, fails to communicate these to the other party.5 According to Article 1366, ‘the contract must be interpreted in good faith’. According to Italian case law, this norm means that in ascertaining the intention of the parties, good faith requires that the parties’ declarations should be interpreted as coming from reasonable people. Courts generally apply the principle of interpretation in good faith to fill gaps left by contractual provisions or to interpret them in an ‘equitable’ way.6 The most important primary norm on transparency in insurance contracts is contained in Article 183 Ins. Code, affirming that before the conclusion and during the term of the contract, undertakings and intermediaries shall  behave with diligence, fairness and transparency towards policyholders and insured persons;  acquire from policyholders the information necessary to evaluate their insurance or pension needs and act in such a manner that they are always appropriately informed;

5

Febbraio (2016), p. 291; Perlingieri (2012), p. 1301; D’Amico (2006), p. 983; Benatti (1991), p. 7; Alpa (1981), p. 535. 6 Bigliazzi (1991), p. 182.

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 make arrangements so as to identify and prevent—where reasonably possible— conflicts of interest and, in case of conflict, make policyholders aware of the possible adverse effects, and anyhow manage conflicts of interest so as to exclude any detrimental consequences for policyholders;  achieve an independent, sound and prudent financial management and take adequate measures to safeguard the rights of policyholders and of insured persons. IVASS shall, by its own regulation, adopt specific provisions on the drawing up of the rules of conduct to be observed in the relations with policyholders so that the activity is carried out correctly and taking account of each individual’s specific needs. In its regulation, IVASS shall take account of policyholders’ and insured persons’ different needs for protection, as well as of the nature of the risks and commitments covered by the undertaking; it shall establish the categories of subjects that do not need, in whole or in part, the protection envisaged for retail customers and shall establish the terms, limits and conditions of application of these provisions before the conclusion and during the term of non-life insurance contracts, taking account of the particular features of the various types of risk. The secondary sources of law on transparency are some IVASS regulations:  ISVAP (now IVASS) Regulation no. 34 of 19 March 2010 on the promotion and distance marketing of insurance contracts;  IVASS Regulation no. 41/2018, which modifies the previous Regulation 35/2010 on the information obligations and the advertising of insurance products;  IVASS Regulation no. 40/2018, which modifies the previous Regulation no. 5 of 16 October 2006, laying down provisions on insurance and reinsurance mediation.

4 The Protection of the Weak Party of the Contract in Italy with Particular Regard to Information Asymmetry National laws usually provide special dispositions aimed at consumer protection that have a specific impact on insurance contract law (i.e. unfair terms, unfair commercial practices). A study conducted by the Office of Fair Trading (OFT) with regard to UK consumers, published on February 2011,7 found that consumers rarely read contracts in full before entering them. Thus, they are usually unaware of some of the terms to which they are agreeing. Consumers can also make mistakes in interpreting terms and conditions that they are aware of. Moreover, we have to consider other factors related to the contract:

7

http://www.oft.gov.uk/shared_oft/marketstudies/consumercontracts/oft1312.pdf.

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 Lengthy boilerplate terms are often in fine print and written in a technical and complicated legal language.  Access to the full terms may be difficult or impossible before acceptance. Often the document being signed is not the full contract.  There may be social pressure to sign. For instance, the salesperson may imply that the customer is being unreasonable if he reads the terms. If the purchaser is at the front of a queue, there could be additional pressure to sign quickly. Sometimes suppliers give to customers a gift (also small), which socially obliges the customer to be co-operative and to conclude the transaction.  Information asymmetry could be another disadvantage for consumers. Firms usually know the distribution of interests and price across consumers. At the same time, individual consumers are unaware of this distribution. In the market with such information asymmetry, a firm is able to maximise its profits by setting the price to attract consumers that would give the product a high rating.8 Many consumer purchases are problematic, whether or not written or in complex oral terms and when conditions are involved. Also, personal and social conditions play a relevant role. Young people are especially likely to have problems with their contracts, while older consumers use prior experience and knowledge as a source of understanding. Consumers with higher incomes, those in higher social classes and those who have a higher education level have reported more problems, and this could be perhaps because they are accustomed to driving a hard bargain.9 Moreover, the purchase method is significant as a transaction can be conducted face to face, over the phone or via the Internet. The purchase method can influence consumers’ understanding of terms and conditions. This may depend on the different nature and degree of interaction between the parties of the contract, the accessibility and presentation of terms and conditions, the timing of when information is presented and the time available to assess information and make a decision. According to the results achieved by OFT, the most common problems were related to goods and services not meeting expectations. Sometimes there could be a

Becher (2008), p. 730: ‘Consumer policy increasingly places emphasis on the role of information in allowing consumers to protect themselves and promoting a competitive economy. Increasing the information available to consumers is undoubtedly beneficial, but this article cautions that the limitations of consumer protection though information also have to be recognized. In particular, emphasis is placed on the insights provided by behavioural economics which suggests that consumers may not always respond to information provided as rationally as traditional economic models sometimes assume. One implication of this is that the way information rules are framed needs to be revisited. Other consumer policy approaches (altering the default rules, using bans and regulations, and risk sharing) need to be considered alongside a strategy of information provision. To analyse which approach should be adopted or to find the appropriate balance between different approaches requires policy makers to engage more fully with the legal and consumer policy research community’: Howells (2005), p. 349; See also Grundmann et al. (2001); Weatherhill (1994), p. 49; Whitford (1973), p. 400; Sunstein and Thaler (2003), p. 1159. 9 Viscusi (1996), p. 661; Bainbridge (2000), p. 102; Hanson and Kysar (1999), p. 630. 8

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contract problem: 78% of consumers stated that terms were in dispute between the consumer and the trader, and in over half of these cases consumers felt that the trader had interpreted terms to their own advantage. Other contract-specific problems included unexpected terms and conditions (34%), cancellation problems (28%) and unreasonable charges and penalties (27%). Usually consumer contracts are standard contracts (sometimes known as adhesion or boilerplate contracts): these are contracts between two parties where the terms and conditions of the contract are set by one of the parties, and the other party has little or no ability to negotiate terms. It is commonly said also that the other party is placed in a ‘take it or leave it’ position.10 There is a debate whether, and to what extent, courts should enforce standard form contracts. On the one hand, they undeniably have an important role of promoting economic efficiency since they reduce transaction costs. On the other hand, unjust terms could be accepted by signatories in these contracts. For instance, terms might be considered unjust if they allow the seller to avoid all liability or unilaterally modify terms or terminate the contract. Such terms are not only unjust from a juridical point of view, but they also might be economically inefficient if they place the risk of a negative outcome on a consumer that is not in the best position to take precautions. Moreover, standard form contracts are usually drafted by lawyers who are instructed to minimise the firm’s liability and not necessarily draft to implement managers’ competitive decisions. There are a number of reasons why such terms might be accepted: standard form contracts are rarely read; standard form contracts may exploit unequal power relations and may have not enough information about the product purchased. Some contend that in a competitive market (11), consumers have the ability to shop around for the supplier that would offer them the most favourable terms. However, in case of oligopolies, consumers may still have access to form contracts only with similar predetermined terms and no opportunity for negotiation. Moreover, also in a competitive market, there could be no real opportunity for negotiation. Many people do not read or understand the terms, so there might be very little incentive for a company to offer favourable conditions. As we have said, in many countries, there are laws protecting consumers from unfair terms. In American law, the protection comes mainly from common law. In European Union countries, specific rules have been adopted by national legislators according to European Directive 93/13/CEE on unfair clauses in consumer contracts. Also, Asian countries have specific rules for B2C contracts, e.g. the Japanese Consumer Contract Act enacted in 2000 and amended in 2006. According to Directive 93/13, a contractual term that has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer. A term shall always be regarded as not

10 11

Rackoff (1988), p. 1174. Waterson (2003), p. 129.

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individually negotiated where it has been drafted in advance and the consumer has therefore not been able to influence the substance of the term, particularly in the context of a pre-formulated standard contract. Unfair terms are considered to be void and without effect. Article 3 of Directive 93/13 contains an indicative and non-exhaustive list of the terms that may be regarded as unfair. Among them, also in regard to hospitality industry, we can cite clauses  excluding or limiting the legal liability of a seller or supplier in the event of the death of a consumer or personal injury to the latter resulting from an act or omission of that seller or supplier;  inappropriately excluding or limiting the legal rights of the consumer vis-à-vis the seller or supplier or another party in the event of total or partial non-performance or inadequate performance by the seller or supplier of any of the contractual obligations, including the option of offsetting a debt owed to the seller or supplier against any claim which the consumer may have against him;  making an agreement binding on the consumer whereas provision of services by the seller or supplier is subject to a condition whose realization depends on his own will alone;  permitting the seller or supplier to retain sums paid by the consumer where the latter decides not to conclude or perform the contract, without providing for the consumer to receive compensation of an equivalent amount from the seller or supplier where the latter is the party cancelling the contract;  requiring any consumer who fails to fulfil his obligation to pay a disproportionately high sum in compensation;  authorizing the seller or supplier to dissolve the contract on a discretionary basis where the same facility is not granted to the consumer, or permitting the seller or supplier to retain the sums paid for services not yet supplied by him where it is the seller or supplier himself who dissolves the contract;  enabling the seller or supplier to terminate a contract of indeterminate duration without reasonable notice except where there are serious grounds for doing so;  automatically extending a contract of fixed duration where the consumer does not indicate otherwise, when the deadline fixed for the consumer to express this desire not to extend the contract is unreasonably early;  irrevocably binding the consumer to terms with which he had no real opportunity of becoming acquainted before the conclusion of the contract;  enabling the seller or supplier to alter the terms of the contract unilaterally without a valid reason which is specified in the contract;  enabling the seller or supplier to alter unilaterally without a valid reason any characteristics of the product or service to be provided;  providing for the price of goods to be determined at the time of delivery or allowing a seller of goods or supplier of services to increase their price without in both cases giving the consumer the corresponding right to cancel the contract if the final price is too high in relation to the price agreed when the contract was concluded;

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 giving the seller or supplier the right to determine whether the goods or services supplied are in conformity with the contract, or giving him the exclusive right to interpret any term of the contract;  limiting the seller’s or supplier’s obligation to respect commitments undertaken by his agents or making his commitments subject to compliance with a particular formality;  obliging the consumer to fulfil all his obligations where the seller or supplier does not perform his;  giving the seller or supplier the possibility of transferring his rights and obligations under the contract, where this may serve to reduce the guarantees for the consumer, without the latter’s agreement;  excluding or hindering the consumer’s right to take legal action or exercise any other legal remedy, particularly by requiring the consumer to take disputes exclusively to arbitration not covered by legal provisions, unduly restricting the evidence available to him or imposing on him a burden of proof which, according to the applicable law, should lie with another party to the contract. In regard to consumer protection remedies, we can remember a famous distinction: preventive measures, restitution and punishment.12 The promulgation of codes of conduct inspired by customers’ satisfaction principles could be considered a preventive measure. Moreover, many existing norms of consumer legislation are based on the presumption that consumers should have the necessary information in order to compare products in the marketplace. This kind of measure can be considered a preventative measure. Restitution is usually defined as reparations made by providing an equivalent product or compensation for loss or injury caused or restoration of property rights previously taken away. We can consider, as regards restitution, invalidity of contracts in violation of imperative norms or rescission of contracts in case of misrepresentation (a false statement of fact made by one party to another party), invalidity or violability of contracts in case of mistake (it is an erroneous belief, at contracting, that certain facts are) and consequently refunds of payments. Consumers can also claim damages in case of violation of their rights. With regard to insurance contracts, the Ins. Code considers the insured party, the policyholder and the beneficiary of the policy to be weak, regardless of their qualification in terms of consumer. This implies, as already mentioned, a somewhat different subjective area of application of the legal framework for the protection of the weak part of the insurance contract and in particular as regards the discipline on transparency and disclosure obligations, compared with the consumers law.

12

Cohen (1975), p. 24 ff.

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5 Transparency and Duty to Inform and to Advise: Fiduciary Duties and Suitability Rule in Insurance Contract Distribution According to the above-mentioned information asymmetry, the special duties of information and advice are addressed to insurers and intermediaries.13 The obligations arising from the fiduciary relationship between the intermediary and/or the insurer and the client in the distribution of insurance products is enriched by the obligations to inform and to advise the customer in order to support his or her consent and to offer to him or her a product that meets his or her interests. Detailed provisions on the duties to inform and to advice are contained in Regulations issued by IVASS (former ISVAP), which are a secondary source of law.14 ISVAP Regulation no. 34/2010 on the promotion and distance marketing of insurance contracts shall apply to the promotion and placement by means of distance communication, by insurance undertakings, of both life assurance contracts intended

13

Information is in written form. So Italian literature speaks about a new formalism. See Pagliantini (2015), p. 114. 14 Italian private legal system fixes a hierarchy of norms taking into account the peculiar source of law from which the norms derive. The principle of normative hierarchy states the relationships and the order between normative dispositions and the level of different authorities. Art. 1 of Italian civil code Preliminary dispositions and the Constitution seem to draw the following order: Community law, Constitution, Ordinary law, Regulations (the administrative rulings), customary law. Ordinary Law takes the first place in normative hierarchy according to article 1 of ‘Preliminary dispositions to the civil code’, but, as we have just said, it has to be considered also the Constitution—enacted in 1948—and the 1957 European Treaties. Under the term of ‘ordinary law’ we shall include: Act of Parliament, and some acts of the Government: ‘Decreti legge’ and ‘Decreti legislativi’. As well known, the legislative function is exercised by both Houses (Camera and Senato). Legislation can be introduced by the Government, by a Member of Parliament and by those entities and bodies so empowered by constitutional amendment law. The Government, in case of necessity and urgency, adopts under its own responsibility a temporary measure called Decreto legge (Law Decredd). Such a measure loses its effect from the beginning if it is not transposed into ordinary law by Parliament within sixty days of its publication. The exercise of the legislative function can be delegated to the Government according to principles and criteria established by the Parliament with a ‘Legge Delega’ and then only for a limited period of time and for specified purposes. Such Act of Government are called ‘Decreti legislativi’ (Legislative Decredd). They have a very important place in Private law system. The consumer code is a ‘Decreto legislativo’. The Civil Code is a ‘Decreto legislativo’. The Insurance code is a legislative decree too. Government and public Authorities adopt regulations that are second class sources of law. So they have to conform to law. Italy is divided in Regions. According to art. 117 C. every Region has legislative power in some residual matters. In other cases (such as urbanistic law, health, sports, transports, energy, etc.) it is provided a concurrent competence of State and Regions. In matters of national interest (such as immigration, public order, military force, justice etc.) only the State has legislative power. Regulations of public authorities (such as Isvap, that controls insurance market, and Consob, that controls banking market) play a relevant role in private law system. For instance on 26 May 2010 ISVAP published Regulation number 35 on the disclosure duties of insurance undertakings (with particular regard to pre-contractual information to the insured parties) and the advertisement of insurance products.; Iudica-Zatti (2003).

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for policyholders having their habitual domicile or—if legal persons—their head office in the territory of the Italian Republic and non-life insurance contracts covering risks situated in the territory of the Italian Republic.15 Regulation 34/2010 provides duties of information. According to Article 4, before the policyholder is bound by any distance insurance proposal or contract, undertakings shall provide him/her with the information about  his/her right to choose to receive and send the documents referred to under article 10 (1) of the Regulation 34/2010 on paper or on another durable medium;  his/her right, in the case referred to under letter a), to change the arrangements for notification, with the indication of any costs relating to the printing and sending of documents in paper format;  the fact that the undertaking will ask the policyholder to underwrite and send back the policy, unless it has been created as an electronic file;  his/her right to be put in contact with the person responsible for coordination and supervision of the promotion and distance marketing of insurance contracts by the call centre, by indicating his/her name and function. However the observance of information duties is necessary but not enough. The insurer must also sell suitable products. Thus, according to Article 9 of Regulation 34/2010, before the policyholder is bound by a distance insurance contract, the undertaking shall acquire from him/her any information useful to evaluate how the contractual proposal fits the policyholder’s insurance and pension needs and, where appropriate in relation to the type of contract, his/her risk propensity. Regulation no. 35/2010 of ISVAP, which deals with the information obligations and the advertising of insurance products, applies to insurance undertakings and determines the contents of both the Information Dossier and the Model Summary Profile and Information Note. However, IVASS has adapted Regulation 35/2010 to the new rules contained in Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution (IDD). Thus, Regulation 41/2018 replaced Regulation 35/2010, and, accordingly with IDD, with reference to pre-contractual information – exceeds the text and the structure of Regulation no. 35, which distinguished between life products, class III and V products and non-life products; – introduces the same product breakdown provided for by the CAP and taking into account European standardised documents IPID and KID;

15

Regulation 34/2010 shall not apply to the promotion and sale through the internet of insurance contracts by insurance undertakings when (1) the website contains a specific warning that its contents are intended only for policyholders having their habitual domicile or—if legal person— their head office in a State other than Italy, as regards life assurance policies, and for the purposes of covering risks situated outside Italy, as regards non-life insurance policies; (2) the website has operational procedures in place to refuse proposals or acceptances from policyholders having their habitual domicile or—if legal person—their head office in Italy as regards life assurance policies, or proposals or acceptances regarding risks situated in Italy, as regards non-life assurance policies.

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– prepares the additional standardised models to replace the current information notes. In order to allow IPID, which is called DIP under Italian law, to adapt to the varied types of products on the market, a standardised structure is provided, but the notions of ‘main’ information and ‘supplementary’ information have been not specified. IVASS has paid attention to the simplification of additional DIP. In the case of particularly complex or modular products, it is possible that the additional DIP have a longer length. To increase the comparability of products and to underline the integrative nature of the model, it is established the obligation to report in the additional DIP all the sections and columns, even if one or more of them are destined to remain empty for lack of additional information compared to those already reported in the homologous sections of the basic model. Regulation 5/2006 contained rules of conducts addressed to intermediaries. According to Article 49, intermediaries had put up on their premises, in a location visible to members of the public, a document printed in bold characters and conforming to the model envisaged in the former Annex no. 7A, illustrating the main behavioural obligations imposed on intermediaries in accordance with the decree and this Regulation. Before policyholders sign a proposal, intermediaries had to deliver or send to the client a copy of a statement, which should conform to the model envisaged in Annex no. 7B, reporting the essential information on the intermediary and his/her activity. In case the proposal is being offered away from business premises or in case the pre-contractual steps are accomplished via distance communication techniques the intermediaries had to deliber or send to the client a document in line with Annex no. 7A. The intermediary shall keep a statement signed by the client or the proof of the correct sending of documents to the e-mail address indicated by the client affirming that all the above obligations have been executed by intermediaries. Before a proposal or, when not envisaged, an insurance contract is underwritten, intermediaries shall provide policyholders with information adequate to enable them to make informed choices corresponding to their needs. To that end, based on the complexity of the contract being proposed, they shall explain to the policyholder the characteristics, duration, costs and limits of the cover, as well as any financial risks connected to the underwriting of the contract and any other element useful to provide complete and correct information. A duty of advice was also provided. According to Article 52, undertakings had to impart instructions to the intermediaries whose services they use so that in the pre-contractual phase, they would acquire from policyholders any information useful to evaluate the adequacy of the contractual proposal with regard to the latter’s insurance and pension needs and, where appropriate, in relation to the type of contract and to their risk propensity.16 ‘In the field of financial intermediation, the client must be provided with specific and detailed information on the financial product being traded. Thus it is not sufficient for this purpose . . . a

16

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As said, Regulation 40/2018 replaced Regulation 5/2006. The new norms regulate the presentation and behaviour to be observed in the exercise of the distribution activity, integrating the provisions of ISVAP Regulation no. 5/2006 with the adjustments deriving from the new primary legislation. In particular, the regimes of incompatibility with others positions are regulated (Art. 53) and the general rules of conduct (Art. 54) are based on equity, honesty, fairness, transparency and professionalism and on the principle of best interest of the contractors and policyholders, with particular focus on the obligation to provide them with the necessary information on the products offered and to make advertising communications in a way that is correct, clear, not misleading, impartial and complete. With regard to pre-contractual information, the following shall remain in force: – the obligation to deliver the ‘Information notice on the obligations of conduct to which intermediaries are required towards the contractors’, referred to in Annex 3 (former Annex 7A)—limited only to intermediaries; – the obligation to deliver the ‘Information to be returned to the contractor prior to signing the proposal; or if not foreseen, of the contract’ in Annex 4 (former Annex 7B)—obligation extended to all distributors; – the obligation to deliver the pre-contractual and contractual information documentation required from the current provisions. Attachment 3, which was previously requested to be posted on the premises, can today be made available to the public in the intermediary’s premises, including through technological equipment. In this regard, the Regulation confirms the exclusion of the application of the provision to distributors operating in the large risk market. The pre-contractual information contained in Annex 4 has been extended to the fee received by intermediaries in relation to the contract distributed. In order to give centrality to the interests and needs of the customer, the consultant role of the distributor has been enhanced. In fact, the distributor is called upon to propose a product that is appropriate and consistent with the customer’s insurance and social security needs. During the pre-contractual phase, the distributor is called to verify the needs and requests of the customer in order to identify the product that is most consistent with his/her needs and provide him/her with all the information on the product, useful to allow him/her to make an informed decision. To this end, companies are required to give instructions aimed at facilitating its distribution network in the acquisition of useful information and relevant in relation to the type of contract offered (Art. 58). The consulting phase in a strict sense is successive and only possible and consists in the possibility for the distributor to offer a personalised recommendation to the contractor.

generic and standardized communication’ (Cass. Civ. 07/04/2017, n. 9066). In the same sense, it was considered that ‘it can not be considered a sufficient information for the customer the subscribtion of the declaration> ’ (Cass. civ. 31/03/ 2017, n. 8314).

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6 Transparency and Comprehensibility, Certainty, Completeness of Contractual Content with Particular Regard to the Clause on Risk Exclusion Clarity and comprehensibility are an essential moment of the communicative act as they allow the recipient of the message to know the content, to understand the message and to establish a dialogue. In EC law, the concept of clarity and comprehensibility has also been found in Directive 93/13 on consumer contracts, generally stipulated by adhesion, which was then transposed by the Italian legislator in Article 1469 bis ff. of the Civil Code then transposed into the Consumer Code in Articles 33 ff. In particular, Article 34, paragraph 2, Cons. Cod. excludes the unfairness of a clause relating to the determination of the object or the adequacy of the consideration provided that such elements are clearly and comprehensively identified. Some authors have seen in this expression an attempt by the legislator to distinguish the issue of transparency of consumer contracts from the problem of ambiguity of the contractual content. Only in the case of lack of transparency would the clause be abusive. The ambiguity would find a solution in interpretation against the party that writes the contract of adhesion (referred to in Art. 35 Cons. Cod.).17 Some authors have seen in the lack of clarity mentioned in Articles 34 and 35 Cons. Code a hypothesis of nullity for dissent created by the misunderstanding that the text, as it has been formulated, is able to determine. Lack of transparency as imbalance would then be a hypothesis of injury to the freedom of choice in the substantial sense. Thus, for instance, in case of a clause containing a risk exclusion written in a not understandable way, it is not possible to evaluate the fairness of content of the clause according to Article 34 Cons. Code because such clause determines the object of the contract, but the consequence of lack of transparency should be the immediate declaration of nullity of the limiting clauses because the lack of clarity would in itself be the cause of unfairness.18 Regarding the delimitation of duties of transparency, it is important to consider that Italian case law, in accordance with the guidelines of the Court of Justice of European Union, tends to link the assessment of the unfairness of contractual terms with the rules of conduct on the duties to inform and to advise the customer about the product. In the CJCE judgment of 23 April 2015, Jean-Claude Van Hove v CNP Assurances SA, the Court affirmed that in case of a judgment on unfairness of contractual

17

Masucci (1996), p. 170. Before the entrance in force of Dir. 93/13/CE see Bellelli (1992), pp. 106–110. 18 See Rizzo (1997a), p. 96 ff.; Rizzo (1997b), p. 1189 ff. The Italian authors follows the German Transparenzgebot theorie. See Heinrichs (1995), p. 174 ff.

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terms, the obscurity of the delimitative risk clause in an insurance contract needs to be considered together with the lack of information. The Curia has been able to point out that the obligation of transparency of contractual clauses cannot be limited to formal and grammatical understanding. The CJCE affirms that ‘Article 4(2) of Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts, must be interpreted as meaning that a term of an insurance contract intended to ensure that loan repayments payable to the lender will be covered in the event of the borrower’s total incapacity for work falls within the exception set out in that provision only where the referring court finds: – first, that, having regard to the having regard to the nature, general scheme and the stipulations of the contractual framework of which it forms part, and to its legal and factual context, that term lays down an essential component of that contractual framework, and, as such, characterises it, and, – secondly, that that term is drafted in plain, intelligible language, that is to say that it is not only grammatically intelligible to the consumer, but also that the contract sets out transparently the specific functioning of the arrangements to which the relevant term refers and the relationship between those arrangements and the arrangements laid down in respect of other contractual terms, so that that consumer is in a position to evaluate, on the basis of precise, intelligible criteria, the economic consequences for him which derive from it.’19 Consistently with the CJCE case, the Italian case law tends, in particular in the case of complex content of contracts, like in the case of financial market contracts, to link the disclosure requirements to those of transparency of the contractual text, e.g. Article 35 Cons. Cod. It is a duty of distributors of financial products, both in the pre-contractual phase and in the contractual phase, to act in good faith and with diligence to clearly define the content and inform the contractor of the related risks.20

19

In the same term see CJCE 21 December 2016, in Joined Cases C154/15, C307/15 and C308/15, Francisco Gutiérrez Naranjo v Cajasur Banco SAU (C154/15), Ana María Palacios Martínez v Banco Bilbao Vizcaya Argentaria SA (BBVA) (C307/15), Banco Popular Español, SA v Emilio Irles López Teresa Torres Andreu (C308/15). The CJCE affirms that ‘However, relying inter alia upon the principles laid down by the Court of Justice in its judgment of 21 March 2013, RWE Vertrieb (C92/11, EU:C:2013:180), that court held that the requirement of transparency, laid down in Article 4(2) of Directive 93/13, must be construed as involving not only formal but also substantive compliance, that requirement having the same scope as the requirement referred to in Article 5 of that directive, and relating to the adequacy of the information given to consumers at the time the contract is concluded as to the legal and financial consequences for them of the application of the terms relating, in particular, to the main subject-matter of the contract.’ 20 See Trib. Viterbo 3 April 2015, in DeJure Online and in the same sense, Trib. Prato 20 September 2011, no. 970, in DeJure Online.

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7 Transparency, Unfairness of Contractual Terms and Unfair Commercial Practices National law combats unfair commercial practices, including unfair advertising, which directly harm consumers’ economic interests and thereby indirectly harm the economic interests of legitimate competitors with regard to B2C contracts. A commercial practice is commonly considered unfair in B2C relationship when directly ordered to mislead consumers’ transactional decisions in relation to products. As we have seen previously, all commercial communications can influence consumers’ behaviour, but according to the principle of proportionality, they cannot be considered unfair. As the European Commission noted in 2005, the laws of the Member States relating to unfair commercial practices showed differences that can generate mechanisms of distortions of competition and obstacles to the smooth functioning of the internal market. In the field of advertising, Council Directive 84/450/EEC of 10 September 1984 concerning misleading and comparative advertising established minimum criteria for harmonising legislation on misleading advertising, but in any case such directive does not prevent the Member States from retaining or adopting measures that provide more extensive protection for consumers. For those reasons, the European Parliament and the European Council adopted Directive 2005/29/EC on 11 May 2005 concerning unfair business-to-consumer commercial practices in the internal market and amending Council Directive 84/450/EEC, Directives 97/7/EC, 98/27/EC and 2002/65/EC of the European Parliament and of the Council and Regulation (EC) No 2006/2004 of the European Parliament and of the Council. This Directive establishes a single general prohibition of those unfair commercial practices distorting consumers’ economic behaviour. It also sets rules on aggressive commercial practices. According to Article 5, ‘A commercial practice shall be unfair if: (a) it is contrary to the requirements of professional diligence, and (b) it materially distorts or is likely to materially distort the economic behavior with regard to the product of the average consumer whom it reaches or to whom it is addressed, or of the average member of the group when a commercial practice is directed to a particular group of consumers’. Unfair omissions are characterised by a lack of information that consumers need in order to make an efficient transactional decision (such as the main characteristics of the product; the geographical address and identity of the trader; the price, inclusive of taxes; the arrangements for payment, delivery and performance; and the complaint-handling policy). According to Article 6, a commercial practice shall be considered misleading ‘if it contains false information and is therefore untruthful or in any way, including overall presentation, deceives or is likely to deceive the average consumer, even if the information is factually correct, in relation to one or more of the elements, and particularly: (a) the existence or nature of the product; (b) the main characteristics of

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the product; (c) the extent of the trader’s commitments; (d) the price or the manner in which the price is calculated, or the existence of a specific price advantage.’ A commercial practice shall also be regarded as misleading if, taking into account its factual context, all its features and circumstances, it causes or is likely to cause the average consumer to take a transactional decision that he would not have taken otherwise. According to this directive, national provisions on aggressive commercial practices should cover those practices that significantly impair the consumer’s freedom of choice. Those are practices using harassment; coercion, including the use of physical force; and undue influence. According to Article 9, ‘in determining whether a commercial practice uses harassment, coercion, including the use of physical force, or undue influence, account shall be taken of: (a) its timing, location, nature or persistence; (b) the use of threatening or abusive language or behavior; (c) the exploitation by the trader of any specific misfortune or circumstance of such gravity as to impair the consumer’s judgment, of which the trader is aware, to influence the consumer’s decision with regard to the product; (d) any onerous or disproportionate non-contractual barriers imposed by the trader where a consumer wishes to exercise rights under the contract, including rights to terminate a contract or to switch to another product or another trader; (e) any threat to take any action that cannot legally be taken’. In Italy, the discipline on unfair commercial practice is contained in Article 18 ff. Cons. Cod. With regard to insurance contracts, we have to remember that according to Article 182 Ins. Code, applicable also in case of B2B contracts, ‘advertising of insurance undertakings’ products shall be carried out in compliance with the principles of fairness of information and with the content of the information note and contractual terms of the relevant products. These principles shall also be respected when advertising is carried out by intermediaries autonomously’. At the level of secondary source of law, we have IVASS Regulation 41/2018 Article 30 ff. on advertising. According to such regulation, insurance products shall be advertised by taking into account the principles of clarity, fairness and compliance with the contents of the Information Dossier to which products refer. The advertising message shall be so designed as not to be misleading with respect to the characteristics, nature, guarantees and risks of the product offered. Clear forms of expression shall be used, along with clearly visible and readable types. Advertising shall immediately be able to be recognised and readily distinguishable with respect to any other form of communication. In these norms, the strict relationship between unfair practices and transparency is evident. Commonly, scholars distinguish the legislation and the phenomenon of unfair commercial practice from the legislation and the phenomenon of unfair terms. The latter concerns the contractual phase, particularly contracts containing terms that directly or indirectly limit (or attempt to limit) the rights of the counterparty (such as a consumer) protected under contract law, establishing a significant imbalance, to the

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consumer’s detriment, between the rights and obligations of the contracting parties in opposition to the principle of good faith. These terms are considered unfair and thus not binding. Unfair commercial practice concerns a different moment of relationship between parties; it involves the pre-contractual phase during which the trader tries to persuade the consumer in doing a certain transactional choice. On the contrary, it has been noted, with regard to European Union Law, that the Unfair Term Directive not only contains provisions relevant to contract law, but it also introduces provisions relevant to unfair commercial practice law.21 If one takes the norm contained in Article 7 of Directive 93/13/CE on unfair terms, according to which Member States were required to adopt adequate and effective means to prevent the ‘use’ or ‘continued use’ of unfair contractual terms by traders, it is evident that the conduct of using unfair terms is an unfair commercial practice, according to the definition provided by Directive 2005/29/CE on unfair commercial practice. In fact, Article 5 of this Directive says that ‘A commercial practice shall be unfair if it is contrary to the requirements of professional diligence. . .’, and according to Article 2, ‘professional diligence means the standard of special skill and care which a trader may reasonably be expected to exercise towards consumers, commensurate with honest market practice and/or the general principle of good faith in the trader’s field of activity’. Another case of intersection between unfair terms and unfair practice could be the use of unfair, and thus invalid, terms. In fact, the average consumer will not consider whether a clause is binding or not, and he/she could hold as part of the contract also those terms that are invalid because of their unfairness. So the use of invalid clauses may distort consumers’ awareness of their contractual rights or duties and thus their economic behaviour. Moreover, according to Directive 93/13/CE, terms that are not drafted in plain and intelligible language (non-transparent terms) shall be held as unfair. According to Article 5, ‘In the case of contracts where all or certain terms offered to the consumer are in writing, these terms must always be drafted in plain, intelligible language. Where there is doubt about the meaning of a term, the interpretation most favourable to the consumer shall prevail.’

21

Orlando (2011), p. 30: The use of invalid terms should also be deemed capable of materially distorting the economic behaviour of the average consumer during the performance of the contract (second element). In this respect, it seems correct to observe that the average consumer, faced with contractual forms drafted by the trader, which do not precisely reflect the legally binding clauses (since they contain some non-binding clauses), would usually be unclear about the parties’ rights and obligations arising under the contract, and would normally believe himself to be bound by all clauses. For the same reason, the trader would in practice be able to enforce the rights and powers literally provided in his favour by the unfair contract terms, even if such terms are legally non-binding and in principle unenforceable, thus profiting from the ignorance of the average consumer about the precise legal value (i.e. the non-binding character) of those terms. The use of invalid terms is therefore capable in the above circumstances of materially distorting the economic behaviour of the average consumer in relation to the exercise of his ‘contractual rights’.

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The use of terms defining the services or goods or the price or remuneration under the contract not drafted in plain and intelligible language should also be considered an unfair commercial practice, particularly a misleading omission pursuant to Article 7 of 2005/29/CE Directive. As a result of the above considerations, we can say that there is no strict distinction between rules governing the contractual phase and rules governing the pre-contractual phase of private relationships. Moreover, it could be misleading to lose the sight of the common purpose of consumer protection laws: consumer awareness and freedom of transactional choices. A physical person or organisation having a legitimate interest in the matter must have legal remedies for initiating proceedings against unfair commercial practices, either before a court or before an administrative authority that is competent to decide upon complaints or to initiate appropriate legal proceedings. The rules of conduct governing trade practices and the rules of validity that govern the fairness of contractual terms are approaching. Even a misconduct in the pre-contractual phase, such as not making it possible to disclose a clause, may be capable of distorting the behaviour of a market operator, which could be induced to enter into a contract that otherwise would not have been entered into, and may be qualified as a misconduct on the side.22 The Italian AGCM (General Authority for the competion and the market), which is the authority competent in case of unfair commercial practices, together with Act 25421/2015, condemned a website’s comparison of price regarding motor insurance contracts because providing information on prices without considering other information on the economic terms of a contract can distort consumers’ economic behaviour.

8 Transparency and Judicial Worthiness Control According to Article 1322 CC The Italian Supreme Court has ruled on the worthiness control of clauses in insurance contracts, particularly of claims-made clauses contained in insurance policies against professional liability. Examining the conclusions of the Court, it is possible to propose some considerations about the issue of the adequacy of the insurance products and correct information in respect to the needs of policyholders. The Supreme Court of Cassation in composition ‘united sections’23 has decided on the validity of claims-made clauses in liability insurance contracts.24

22

Landini (2011), p. 177. Cases brought to the Italian Supreme Court are normally heard by a panel of five judges. In more complex cases, especially those concerning compounded matters of interpretation, an extended panel of nine judges (‘united sections’ of the supreme court) decides the case. 24 Cass. civ., sez. un., 6 May 2016, n. 9140, in Riv. nel diritto, 2016, 844, with the comment of E. Cosconati,; in Foro it, 2016, I, 2026 ss. with the comment of R. Pardolesi, Palmieri and 23

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As known, in civil liability insurance, there are essentially two pricing models: the covered event could be the verification of the damaging event (loss occurrence formula) or the covered event could be the claim of the victim (claims-made formula). In the case of policies with a claims made clause, the insurance coverage includes all claims that occurred during the duration of the policy; in the case of policies with a loss occurrence clause, the coverage includes all the claims for compensation of the damages that occurred during the duration of the policy. These two models are based on different liability insurance needs: if there could be a significant lapse of time between the occurrence of the damaging event and the claim (as in case of medical malpractice), it will be preferable to conclude an insurance policy with the claim made formula; otherwise (as in cases of general liability insurance), the loss occurrence formula will be preferable. The two models are not so clearly distinct as it is possible to have so-called impure claims-made clauses: pure claims-made clauses provide for compensation of all damage claims received during the duration of the contract, regardless of the time of verification of the damaging event. Impure claims-made clauses provide for compensation of all damage claims received during the duration of the contract, if the time of verification of the damaging event is in some earlier period respect to the conclusion of the insurance contract.25 The Court affirms that Article 1917 Civil Code on liability insurance recognises the loss occurrence formula, which is the legal formula. Article 1917 provides: ‘In insurance of civil liability the insurer is obliged to indemnify the insured for the

B. Tassone. On the worthiness of claims made clauses, taking in to account the concrete interest of the insured party, Volpe Putzolu (2016); On the validity of claims made clauses see also Gazzara (2016), p. 88; Gaggero (2013), p. 401; Monticelli (2013), p. 701; The principle affirmed by UU.SS. Cass. has been applied by Tribunale di Milano 17 June 2016, in Redazione Giuffré 2016. A judgment after the Cassation Court 2016 on claims made has been held by Trib. Bologna 18 August 2016, in Foro it. Merito extra, 1605.1, affirming that the clause is valid. The discipline on unfair condition in consumers contract is not applicable because the actor is a professional; the clause doesn’t derogate to an imperative norm nor to the principle of good faith. This judgement seems to follow past judgements of the Supreme Court: Cass. 10 November 2015, n. 22891, in Resp. civ. prev., 2016, 2, 528; Cass. 17 February 2014, n. 3622, in Giust. Civ. mass., 2014; Cass. 22 March 2013, n. 7273, in Guida al diritto 2013, 22, 57 (s.m). Moreover, the Tribunal of Bologna affirms that the nullity profiles are not attached and proved, especially in the light of the amount of the premium, in relation to the insurance coverage limit (€ 517,000) and to the coverage including also events occurred before the stipulation. 25 Claims made clauses are well diffused not only in case of professional liability insurance but also in other cases, like in hypothesis of coverage of environmental liability. In such case generally along the length of time between the occurrence of the cause of the damage and the occurrence of its consequences, the coverage is technically possible only with the claims made formula. Cfr. Well (1998), p. 199 ff.; Clarke (1997), p. 429 ff. Even in Germany the introduction of such clauses, and then the Festellungsprinzip regarding identification of covered claims during the period of operation of the insurance coverage, is proposed with particular reference to Umwelthaftpflichtversicherung. See in particular Schimikowski (1998), pp. 231–234.

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incidents during the insurance period he has to pay to a third party, depending on the responsibilities deduced in the contract.’ Following such principle, the Cassation Court affirms: 1. The pure claims made clauses, covering damage claims received in the period of effectiveness of the guarantee, regardless of when the tort was committed, introduce a new model of insurance contract different from the one in art. 1917 c.c. on liability insurance. The new model could be called insurance for ‘claimed responsibility’. 2. The impure claims made clauses provide insurance coverage with a backdating of the guarantee. They do not affect the cause of the contract, but they are subject to the judgment of worthiness according art. 1322.26 This verification will be conducted by the lower courts (Judge of peace, Tribunal, Court of Appeal). If the clause results not worthy, then the judge can replace the claims made clause with a loss occurrence that in the opinion of the court would respond to the legal model outlined by Article 1917. The United Sections Supreme Court seems to focus on the existence of a legal model of liability insurance contract based on the loss occurrence formula. Moreover, the Court recognises the integration power of the judge ordered to cover the gap arising from the declaration of the nullity of the contract. In case of lack of worthiness, the application of the statutory scheme of the insurance contract liabilities will take place and a loss occurrence formula will

26 The word ‘meritevole’ (worthy in English) comes from the Latin ‘mereri’ which means ‘to make himself worthy of something’. Control of ‘worthiness’ in Italian law is found in various regulatory assumptions. Recall the art. 1322 which provides that ‘The parties may also enter into contracts that do not belong to the types having a particular discipline, provided they are intended to achieve the interests worthy of protection under the law’, and the art. 2645 ter entitled ‘Transcription of acts of destination for the realization of interests worthy of protection related to people with disabilities, to public authorities, or to other organizations or individuals’. The assessment of legal acts in Italy is subject both to the judgment of legality and to the judgment of worthiness of protection. This is accomplished on the basis of the fundamental principles of and values that characterize the legal system (Perlingieri and Femia 2014, p. 74). It means that a lawful act may be invalid as not worthy of protection. According to art. 1322 the parties are free to conclude contracts belonging to different types from those indicated by the law, provided they are in pursuit of interest that deserve protection. A past interpretation of the norm assumed that the control of worthiness take place only in case of atypical contracts (see Sacco 2010, p. 783). On contrary, on the basis of an interpretation that seems to be followed also by the present United Section Cassation Court, worthiness control is a way to assess the social value of the content of the contract in concrete (La Rosa 2014, p. 74; Costanza 2008, p. 423; Perlingieri 2003, p. 395; EAd. 1984, p. 235; Nuzzo 1974, p. 105). The question of the worthiness and proportionality of the contractual settlement lies on a different plane from the control of legality and regards the inclusion of the all private provisions included the Constitutional norms. See Scoditti (2015), p. 417; Irti (2014), p. 43; Irti (2015), p. 11 ff.; Pagliantini (2015), p. 38; Barcellona (2014), p. 571 ff.; De Nova (1993a), p. 236; Barcellona (1965), p. 56 ff.; Scognamiglio (1954), p. 335 ff. After the introduction of art. 2645 ter the discussion on ‘worthiness’ has been huge. This norm provides the registration of acts of destination for the realization of interest worthy of protection according to art. 1322. See particularly Perlingieri and Femia (2014), p. 11; Guizzi (2011), p. 350; Bianca (2011), p. 789.

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substitute the claims-made formula. According to the Court’s opinion, Article 1419 CC and Article 2 of the Constitution allow the courts to ‘intervene also in amending or integrative way on negotiating status when this is necessary to ensure fair balance between the interests of the parties’. Perhaps at this point, also with regard to Italian law, the existence of a legal model is doubtful since the term ‘fact’ can be interpreted both as the harmful act and the claim. The protection of the insured party is more likely in terms of information and the obligation to provide appropriate products by insurance intermediaries and by insurers. It is a problem of product governance.27 The concept of product governance was introduced by MiFID 2 in the financial market and can be described in terms of an organisational structure and rules of conduct relating to the creation, supply and distribution of financial products in the interests of investors. Speaking of policyholders’ protection in terms of the government of the products, it is important to consider the value of the insurance contract respect to the interest of the insured parties, from its creation to its distribution. This solution is now part of insurance intermediation after IDD that is focusing on the ‘best interest of the customer.’ Article 20 says that ‘Prior to the conclusion of an insurance contract, the insurance distributor shall specify, on the basis of information obtained from the customer, the demands and the needs of that customer and shall provide the customer with objective information about the insurance product in a comprehensible form to allow that customer to make an informed decision. Any contract proposed shall be consistent with the customer’s insurance demands and needs.’ The concept of adequacy was, in some ways, present also in the Italian Insurance Code (D. Lgs. 209/2005, hereinafter Ins. Code) in its Article 183, which says that ‘in the offer and performance of contracts companies and intermediaries must: a) act diligently, fairly and transparently towards policyholders and insured persons; b) acquire from contracting parties the information necessary to assess the insurance companies or pension needs and operate so that they are always adequately informed’. But according to Article 183, the distributor of insurance policies has to acquire information on the needs of the insured only to determine the information and the counselling that he or she needs.28

See Natoli (2012), p. 87 ss.; Generally speaking with regard to information in financial markets and information asymmetry; Amorosino (2014), p. 3; Cherubini (2005), p. 43; Rossi Carleo (2004), p. 363; Gentili (2004), p. 578; Alpa (2005), p. 475; Grundmann (2001), pp. 257 ss.; Nazzaro (2000), p. 193; Valentino (1999), p. 9 ss. e 67 ss.; ID., Obblighi di informazione e vendite a distanza, in Rass. dir. civ., 1998, 394; De Nova (1993b), p. 705 et seq. 28 The concept of insurance counselling raises from French Jurisprudence interpreting art. L. 112-4 insurance code. The intermediary must be “un guide sû r et un conseiller expérimenté”: Cour Cass., 10 November 1964, in Rev. gen ass. terr., 1965, p. 176. 27

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With the transposition of IDD, a stronger protection for policyholders will be provided in term of adequacy.29 In any case in this regard, Article 120, paragraph 3, Ins. Code requires insurers and intermediaries to propose or recommend to customers products that are ‘suited to (their) needs’, taking into account the risk inclination of the concerned person (Art. 52 IVASS Regulation 5/2006).30 Moreover, it is possible to consider such duty as an expression of the general duty of good faith in pre-contractual relationships according to Article 1337 CC. An insurance contract for professional liability sold to a professional with a formula claims made and a very short retroactivity, moreover providing a general declaration of the insured party saying that ‘for the effect of art. 1892, I declare to be

29

See Cass. 22 November 2000 n. 15101, in Contratti, 2001, 785, contrary to the direct horizontal application of EU Directive also in lack of timely transposition. 30 Art. 120 (Pre-contractual information and rules of conduct) 1. Insurance intermediaries recorded in the register referred to in article 109 (2) and those under article 116 shall furnish policyholders with the information laid down by ISVAP’s regulation 190, before concluding the contract and in case of subsequent significant changes or renewal, in compliance with the provisions of this article. 2. In relation to the contract offered insurance intermediaries shall declare to the policyholder: (a) whether they give their advice on the basis of a fair analysis—in that case they are obliged to give that advice on the basis of an analysis of a sufficiently large number of contracts available on the market, so that they recommend an adequate product to meet the policyholder’s needs; (b) whether they offer certain products under a contractual obligation with one or more insurance undertakings—in that case they shall provide the names of those undertakings; (c) whether they offer certain products under no contractual obligation with any insurance undertakings—in that case they shall, at the customer’s request, provide the names of the insurance undertakings with which they do or may conduct business, without prejudice to the obligation to inform policyholders of their right to request such information. 190 ISVAP Regulation n. 5 of 16 October 2006, in particular Part III. 3. In any case prior to the conclusion of the contract the insurance intermediary referred to in paragraph 1 shall offer or recommend a product which is adequate to meet the policyholder’s needs, in particular on the basis of information provided by the latter, and shall previously illustrate the main features of the contract as well as the benefits that the insurance undertaking is obliged to provide. 4. On account of the different policyholders’ protection needs, of the different types of risks, as well as of the knowledge and ability of the staff involved in mediation ISVAP shall, by its own regulation 191, lay down: (a) the rules on the way intermediaries shall introduce themselves and behave in relation to policyholders, with regard to the information requirements relating to intermediaries themselves and their relations, also of corporate nature, with the insurance undertaking, and to the features of the contract offered in relation to the advice they could possibly give on the basis of a fair analysis or to the existence of an obligation, involving promotion and mediation, with one or more insurance undertakings. (b) the way how information shall be provided to policyholders, and envisage the cases in which it may be provided upon request, it being understood that the need for protection usually calls for the use of the Italian language and the communication on a durable and accessible medium, soon after the contract has been concluded at the latest; (c) how records shall be kept of the business activity; (d) the violations for which the disciplinary sanctions envisaged by article 329 shall apply 192. 5. Insurance intermediaries dealing with large risks and reinsurance intermediaries shall be exempted from information requirements.

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not aware of facts that could cause my responsibility’, is not adequate, taking into account that, thanks to such declaration, in any case the insurer can refuse to pay indemnification (also when the claims occurred during the insurance period regarding a fact that occurred outside of the coverage period), assuming that the insured must be aware of the harmful fact causing the claim. As said by the German Court, the problem is to identify not the abstract legal model in case of liability insurance but the appropriate product for the insured party in the concrete case. It’s a problem of adequacy. An important question to solve, following such conclusions, is how to identify the juridical consequences in case of distribution of an inadequate insurance product. Of course administrative sanctions of IVASS will take place. But what about the contract and the private relationship between the insurer and insured? In the interest of policyholders, the solution could be civil liability and obligation to pay damage (including indemnification for loss) to be charged to the distributor (insurers, banks, agents, brokers).31 Another solution could be the nullification of the contract concluded in violation of mandatory conduct rules, like those contained in the law of insurance product distribution (see Artt. 120, 182 et seq. Ins. Code and IVASS Regulations 5/2006 and 35/2010). But such a solution could be contrary to the interest of the party to be covered. A void contract doesn’t produce any effect.32 It is possible to propose to the nullification of the single clause, which makes the contract inadequate with respect to the interest showed by the insured party. According to Article 183 Insurance Code, undertakings and intermediaries shall have the right to obtain information about policyholders in order to evaluate their insurance risk. Article 120, paragraph 3, Ins. Code requires insurers and intermediaries to propose or recommend to customers products that are ‘suited to (their) needs’. These are imperative norms but should take into account the terminology used by the legislator and the general interest of policyholders. Thus, insertion of a clause contrary to the expressed insurance needs of the policyholders could be considered void because it’s contrary to imperative norms, as stated in Article 1418 CC. In this way, we substitute a worthiness control with an adequacy control, which means that the judge has to take into account the interests of the policyholder based on the answer given to the insurer or the intermediaries on the condition that the judge will also be able to integrate the contract.

31 See Cass. S.U., 19 December 2007, nn. 26724, 26725, in Rep. Foro it., 2007, sub voce Intermediazione finanziaria [3655], n. 147, now in Foro it., 2008, I, with comment by Scoditti, La violazione delle regole di comportamento dell’intermediario finanziario e le sezioni unite. Cass., 17.2.2009, n. 3778, in Danno e resp., 2009, 503; Cass., 19.10.2012, n. 18039, in Mass. Foro it., 2012; Cass. SS.UU. 24.09.2018, n. 22437, http://www.altalex.com/documents/news/2018/09/25/ polizze-claims-made. 32 Cfr. Scoditti (2006), p. 119; Amadio (2005), p. 299 ff; Navarretta (2005), p. 521; Putti (2003), p. 603; D’Amico (1996), p. 99 ff.; D’Amico (2002), p. 39; Busnelli (1991), p. 556; Vettori (1983), p. 83.

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It is obvious that, in the case of total violation of 183 (i.e. the insurer and the intermediary do not acquire the necessary information from the policyholder), the control of adequacy is not possible. The signature of a general declaration of the policyholder, affirming that he or she does not want to give information to the intermediary or to the insurer, determines the total impossibility to sell adequate insurance contracts. We think that in this case, especially according to the new rules contained in the above-mentioned IDD2 Directive, the insurer and the intermediaries shall refuse the stipulation of any contract. Adequacy is not only a matter of correct information and counselling; it is also a matter of selling the product that meets the interest of the client. The norms protecting policyholders do not contain the distinction between consumers and professionals.33 The above-mentioned Articles 120 and 182 ff. Ins. Code refer to policyholders in general.34 In judgment 9140/2016 on claims-made clauses, the Court underlines that in case of professional liability insurance, it is evident that ‘the existence of a context of strong asymmetry of the parties power and where the policyholder, even though in theory qualified as “professional”, is, in fact, more often unprotected by comprehensive information in order to understand the complex legal mechanisms that govern the system of civil liability insurance’. It is a matter of fact that professionals, and not only consumers, need information and counsels ordered to the offer of an insurance product of their interest. The question of the weakness of the contracting parties must be addressed by distinguishing a socio-economic weakness, from a contractual weakness mainly linked to the profile of information symmetry that can also find in professional parties. With regard to professional contracts, it is also necessary to distinguish acts of the profession from acts relating to the profession. The first ones concern contracts concluded for the exercise of the profession with their clients, for example. The latter ones are related to all contracts entered into in connection with the performance of a profession, such as contracts for the purchase of goods or services in order to facilitate one’s profession or that are required for its operation, such as policies covering professional liability.35 Moreover, we cannot forget the basic norm of our Constitution in financial market matters: Article 43 says: ‘For the purposes of the common good, the law may establish that an enterprise or a category thereof be, through a pre-emptive decision or compulsory purchase authority with provision of compensation, reserved to the Government, a public agency, a workers’ or users’ association, provided that such

33

About the problem of the application of consumers protection discipline in case of contracts between professionals see Pardolesi (1994), p. 137; Patroni Griffi (1995), p. 356; Busnelli (1997), p. 759; Gatt (1997), p. 832. 34 About the problem of coordination of consumers code and sectorial codes see Rossi Carleo (2010), pp. 670, 688; Corrias (2007), p. 1750. 35 For those distinctions, see Gabrielli (2006), p. 227.

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enterprise operates in the field of essential public services, energy sources or monopolies and are of general public interest.’36 This norm recognises the rights of users in the financial market, not only of the consumers covered by Article 3 of the Italian Consumer Code (D. Lgs. 206/2005), who are physical persons purchasing goods and service for personal use. Also at community level (we must remember that Italian norms on consumer protection are derived from an EU directive), the notion of ‘consumer’ is a key concept delimiting the application of consumer-protection rules. In any case, there is no consistent and uniform definition in EU law, and there are also divergences among the Member States.37

9 Juridical Consequences of the Violation of the Transparency Rules of Conducts: Administrative Sanctions and Private Enforcement In the event of a breach of the rules of conduct regarding information and advisory duties aimed at contractual transparency, administrative sanctions are foreseen for both companies and intermediaries.38

36

Perlingieri (2004), p. 20; Corrias (2015), p. 617. Manko (2013). 38 Art. 318 (Advertising of insurance products) 37

1. Non compliance with the provisions of article 182 (1 and 3) or with the relevant implementing provisions shall be punished with a pecuniary administrative sanction varying from two thousand to twenty thousand euros. 2. Advertising which is in breach of the protective and prohibitive measures adopted under article 182 (4 and 5) shall be punished with a pecuniary administrative sanction varying from five thousand to fifty thousand euros, applicable to anyone making advertisements in breach of the prohibitive measures adopted under article 182 (4 and 5). Art. 319 (Rules of conduct) 1. Non compliance with the provisions of article 183 or with the relevant implementing provisions when the products marketed are those under article 2 (1), except for class VI, or article 2 (3), shall be punished with a pecuniary administrative sanction varying from two thousand to twenty thousand euros. 2. The breach of the protective and prohibitive measures adopted under articles 182 (6) and 184 (1), shall be punished with a pecuniary administrative sanction varying from ten thousand to one hundred thousand euros. Art. 320 (Information note) 1. Anyone failing to deliver the information note referred to in article 185 before the conclusion of the contract shall be punished with a pecuniary administrative sanction varying from two thousand five hundred to twenty five thousand euros.

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This means that administrative sanctions could be imposed by the national control authorities. The Italian law does not regulate the civil law consequences of the infringement of transparency conduct rules. The following solutions prevail: precontractual liability (Art. 1337 CC) and nullity for violation of an imperative norm (Art. 1418 CC). Consumers can then take actions to claim compensation for damages caused by such practices. The actions of consumers can represent a way of private enforcement. Case law in matters of financial intermediation law, providing conduct rules and information duties, affirms that in the case of omission of information on the inadequacy of the operations carried out by the intermediary institution, the contract is valid but the intermediary is liable for damages caused to the customer. The same conclusion could be applied in case of lack of information or advice during the distribution of insurance contracts.39

10

Trends

Finally, it is important to consider a new trend at Community level by questioning what may be new to Italian legislation. According to Articles 20 and 7 of IDD, the insurance product information document shall be a short and stand-alone document, be presented in a way that is clear and easy to read and be accurate and not misleading. Moreover, according to Regulation 2017/1469 Article 7, the insurance product information document shall be drafted in plain language and shall focus on ‘key information’ that the customer needs in order to make a correctly informed decision. Information is intended to facilitate the customers’ understanding of the content of the document. Consequently, the information in order to be comprehensible needs to be reduced to the ones strictly necessary. The norms take into account a recent problem of contemporary life—the so-called information overload. The term describes the difficulty of understanding an issue and effectively making decisions and choices when one has too much information about that issue. Psychologists recognise that humans have a limited capacity to store current information in their memory. People can process only a few information at a time. In case of information overload conditions, people become confused and are likely to make confused decisions based on the information they have received and not to make informed ones.

39

See Cass 16 May 2016, n. 9981, in Redazione Giuffré. The Italian case law tends to apply art. 1337 on precontractual liability. See Trib. Torino, 21.3.2005, in Giur.it., 2005, p. 1862; Trib. Trani, 10.10.2006, in Banca, borsa ecc., 2007, II, 621, Cass. 29.1.2005, n. 19024, in Foro it., 2006.

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Information overload is an increasing problem in life in general. The phenomenon is a typical product of ICT society, wherein people receive too many e-mails, reports and incoming messages to deal with all of them effectively. The first use of the terms ‘information overload’ has been attributed to Alvin Toffler in 1970. He predicted that the rapidly increasing amounts of information being produced would eventually cause problems to humans. The origin of the problem is that, although computer processing and memory is increasing, the people who should use the information are not getting any faster. Among the solution to the problems, we can include focusing on the quality of information rather than the quantity, learning how to create better information (this is the task of the so-called infogineering) and keeping the mind focused on one issue at a time.40 The regulation has been enacted according to Articles 20 and 9 IDD, providing that EIOPA, after consulting national authorities and after consumer testing, shall develop draft implementing technical standards regarding a standardised presentation format of the insurance product information document specifying the details of the presentation of the information. EIOPA shall submit those draft implementing technical standards to the Commission. EIOPA’s document, named EIOPA-17/056 7 February 2017 ‘Draft Implementing Technical Standards concerning a standardised presentation format for the Insurance Product Information Document of the Insurance Distribution Directive’, affirms that ‘The Insurance Product Information Document (IPID) is a significant project within the overall work of EIOPA on the Insurance Distribution Directive1 (IDD). Its objective is to ensure that the customer has the relevant information about a non-life insurance product to allow him to easily compare between different product offers and to make an informed decision about whether or not to purchase the product. This also closely reflects one of EIOPA’s own strategic objectives in its policy work on consumer protection, namely “to assist consumers of insurance products with making informed choices based on their rights and obligations”.’ Standardisation is, however, necessary in order to make the content of information comparable so that customers can make choices based on a comparison of information content and not just on the basis of the amount of the premium as they often do. There is a new dimension to the transparency that IVASS has sought to seize in the still unavailable 3/2017 document, which has just completed the consultation phase. It is likely that the authority will decide to supplement the information provided in the EU Regulation with information seeking to combine simplification and completeness.

40

See Rogers et al. (2013).

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Conclusion

Transparency has different meanings: information before the conclusion of the contract and during its life, comprehensibility of contractual texts and the possibility for policyholders to compare different proposals, and obligation of high professional assistance. Insurance companies and intermediaries must behave with diligence, correctness and transparency towards policyholders. Perhaps nowhere are there examples of a complex and technical language as the way standard provisions of traditional insurance contracts are written. This fact is clear to anyone who has ever tried to interpret, understand or enforce an insurance contract. The intrinsic complexity and technicality of the insurance product makes it difficult for the average consumer to understand it. So intermediaries are, also, required to explain to the policyholder, in a clear and easy-to-understand language, the characteristics of the proposed contract. Moreover, in case of financial insurance products, they must illustrate any financial risks connected to the execution of the contract. Different factors affect people’s perception and comprehension of information about the risks related to investments. Insurance companies and intermediaries must assess their clients, with specific regard to non-professional client, using suitability criteria (their knowledge about, and experience with, financial products and their financial situation) and considering their actual investment objectives. Due to information asymmetry, to the disadvantage of the consumer, special duties of information and of advice are addressed to insurers and intermediaries. The obligations arising from the fiduciary relationship between the intermediary and the insurer, on one side, and the client, on the other, during the distribution of insurance products is enriched by the obligations to inform and to advise the customer in order to support his or her consent and to offer to him or her a product that meets his or her interests. The rule governing such duties are contained both in Act of the Italian legislator (and generally in Insurance code), usually moving from European Directive, and in regulations of IVASS. These duties are closely linked to the discipline of unfairness of contractual content in consumer contracts. Lack of transparency is in fact considered by lawmakers and courts as a form “contractual unfairness”. Still the use of unfair commercial practices, i.e. practices that are capable of distorting customer behaviour, can be identified in transparency flaws that can be qualified in terms of ambiguity and deceptiveness of the promotional message. All the special rules contained in the Insurance Code and in the Consumer Code should not be separate from the general rule of good faith both in the contractual phase and in the pre-contractual phase. The insurance contract even if is particular and characterised by strong technicality must be framed in the general principles of contract law in general. The Italian legislature did not regulate the civil consequences of the violation of the rules of transparency. Courts tend to find the solution in the general rules contained in the Civil Code: the rules on nullity for breach of imperative rule and

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the rule on liability. In various countries, we find a plurality of strategies, remedies and forms of government intervention in case of lack of transparency. Moreover, in order to create a regulatory framework for transparency, we have to consider also the administrative sanctions provided by the Insurance Market Authority.41 The violation of the rules of conduct ordered to the transparency of the contractual text, contained in Article 182 ss. of the insurance code, gives rise to a burst of administrative and civil consequences. There is a clear complementarity between civil consequences (invalidity and liability) and administrative sanctions in case of violation of the transparency rules. Moreover, the administrative measure ends up having some relevance in fact on the decision of the civil courts. Civil courts, in deciding on transparency, move within the general framework set by the rules of the Civil Code, in particular the principle of good faith and the ‘contra proferentem rule’, which states that any ambiguous term should be interpreted against the interest of the party that wrote the contract. This rule can be considered as a kind of punishment for a party that introduces intentionally vague or ambiguous language into the contract. The courts use the rules contained in the Civil Code also to evaluate the content of the contract, assessing if there is a significant imbalance of the parties’ rights and obligations. Such control is permitted under the Consumer Code, in case of B2C contracts, but Italian courts extend it to B2B contracts, though the control of worthiness of the contract is found in Article 1322. At the legislative level, there is a tendency to approach the law of insurance, the banking law and the financial market law, which share fundamental principles also in terms of transparency. There is a tendency to standardize the sectoral legislation of the three areas of financial market: banking law, insurance law, financial intermediation law. Hence, it is important to consider transparency in the insurance market not as a sectoral part but as a general part of the systems of civil law and financial market law.42

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Transparency in the Insurance Contract Law in the Netherlands Joasia Luzak

1 Definition of Transparency in Insurance Contract Law Transparency in insurance contract law raises a lot of questions in Dutch law concerning the role of transparency in the interpretation of contracts. The Dutch Civil Code (Burgerlijk Wetboek) does not contain specific rules on the interpretation of contractual provisions. It seems, therefore, that the Dutch legislator has left it to the Dutch courts to develop rules of interpretation and to determine what should occur in case a contractual provision was unclear.1 As a result, there is no specific definition of transparency in Dutch (insurance) contract law. Still, with the development of consumer law, the principle of transparency in Dutch (insurance) contract law gained in importance. Especially, the implementation of the European regulation of unfair standard contract terms to Dutch law demanded a new approach to the assessment of transparency and its consequences. Moreover, the notion of transparency has been perceived as an instrument to help determine the scope of the insurer’s duties to inform and of his duties of care, and their amount has increased due to the development of European consumer law.2 In the area of standard insurance contract terms, the notion of transparency plays a specific role as insurance contract terms are often copious, difficult to read and

1 2

Hendrikse (2010), p. 54. Rinkes (2010), pp. 30–31.

J. Luzak (*) Centre for European Legal Studies, University of Exeter, Exeter, UK Centre for the Study of European Contract Law, University of Amsterdam, Amsterdam, The Netherlands e-mail: [email protected] © Springer Nature Switzerland AG 2019 P. Marano, K. Noussia (eds.), Transparency in Insurance Contract Law, AIDA Europe Research Series on Insurance Law and Regulation 2, https://doi.org/10.1007/978-3-030-31198-8_6

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presented in an unattractive way.3 To determine whether the insurance contract terms are transparent, attention has to be given not only to their layout and font size but also to the content of the text. Therefore, transparency is nowadays understood as both legibility (leesbaarheid) and comprehensibility (begrijpelijkheid), even though traditionally more attention was given to the conditions of legibility.4 Legibility requires the insurer to draw the insured’s attention to the terms and conditions of the contract. This does not occur if, e.g., the font size of the disclosure is tiny and the provided information could only be read under the magnifying glass.5 The Dutch Supreme Court has recognised, even before the introduction of the new Dutch Civil Code, that a contractual clause may only be invoked if it could have reasonably be known to the parties concluding the contract.6 Illegible and hence non-transparent provisions may, therefore, be perceived as not known by the parties, which would not allow them to rely on them. Comprehensibility requires that contractual provisions are logically structured and unambiguous. Furthermore, contractual provisions may be incomprehensible if they contain professional terminology, with which only one of the contractual parties is familiar. Lack of transparency may also result from a contractual provision referring in its text to standard terms and conditions or legal provisions. Such a reference would not immediately allow the insured to fully understand the meaning and the consequences of this provision as he or she would need to consult the other terms and conditions or legal provisions. Therefore, inclusion in contractual provisions of any general terms, such as ‘as long as permitted by legal provisions’, without explaining the scope of such a reference could further confuse the insured as to his or her full rights and obligations.7 In the following paragraphs, first, briefly some issues of the regulation of insurance contracts under the previous regime will be presented (Sect. 2.1). However, considering that the perception of transparency in insurance contracts has not undergone many developments in Dutch law, the main issues thereof will be discussed in Sect. 2.2, under the current regime, especially since most rules applicable to the principle of transparency in Dutch contract law and the rules on interpretation of contractual provisions have been developed by Dutch courts and could not be seen as depending on a particular regime. The first paragraphs describe the place that the regulation of insurance contracts has in the current system of Dutch civil law (Sect. 2.2.1). Subsequently, the attention is given to the standards of contractual interpretation (Sect. 2.2.2). Considering the disputes surrounding non-transparent contractual provisions, it is important to establish what rules of interpretation are used by the Dutch courts to determine the content of a clause,

3

Vriesendorp-van Seumeren (2002), p. 20. Vriesendorp-van Seumeren (2002), p. 21. 5 Vriesendorp-van Seumeren (2002), p. 22; HR 21 November 1986, NJ 1987/946 (Tolbeck/ Swindak). 6 HR 19 May 1967, NJ 1967/261 (Saladin/HBU). 7 HR 19 May 1967, NJ 1967/261 (Saladin/HBU). 4

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which is being contested as non-transparent. Since most insurance contracts are nowadays concluded with the use of standard terms and conditions, Sect. 2.2.3 introduces specific issues of transparency that are applicable to such standardised contracts. Dutch law may treat differently standard terms and conditions that are unclear (Sect. 2.2.3.1) from those that are ambiguous (Sect. 2.2.3.2), with a special regime having been devised for core terms (Sect. 2.2.3.3). The special role that the principle of good faith and the duty to warn of the insurer may play in ensuring transparency of standard terms and conditions are discussed in Sect. 2.2.3.4. Section 2.2.4 looks into how the requirement of transparency influences the scope of the pre-contractual duty that the insured has to notify the insurer about any circumstances that could influence the insurer in deciding whether and under what conditions to issue an insurance contract. Finally, Sect. 2.2.5 considers the importance for the insurer of describing the insured object in a transparent and detailed manner, with an aim that the insurer could then avoid an aggravated risk. These are the main issues that should be brought up in the discussion of the principle of transparency in Dutch insurance law.

2 The Issue of Transparency in Insurance As per Dutch Law 2.1

Previous Regime

The regulation of the insurance contract as a separate type of contract in the Dutch Civil Code is relatively new as it has only been in effect as of 1 January 2006. Previously, contractual provisions pertaining to insurance matters have often been included in other types of contracts. The Dutch regulator was predominately interested in preventing insurance fraud.8 Therefore, the Code of Commercial Transactions (Wetboek van Koophandel) contained only a few provisions on insurance law, as of 1838, which mainly protected the insurer from fraud that could be committed by the insured. Interestingly, throughout the years, despite the insurance contracts gaining in importance and scale, the provisions of this Code of Commercial Transactions have been barely revised. If the parties included in their contracts any provisions related to insurance law, then the general provisions of the law of obligations would have applied to it. The Code of Commercial Transactions specified general rules of insurance contracts in its Book I Title 9. Book I Title 10 regulated insurance against loss by fire, crop insurance and life insurance. Book II Title 9 dealt with the sea insurance. Book II Title 10 contained provisions on insurance for transport by land and inland waterways. Some additional insurance-related provisions could be found in other parts of the Code. Many of these provisions became, with time, inadequate to fulfil their role 8

Vloermans (2015), pp. 1–2.

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of protecting the interest of the insured parties, especially since in practice the insurer often deviated from them by drafting his insurance contracts differently.9 Prior to the implementation of the new insurance law and the Europeanisation of consumer protection, the position of the insured faced with an ambiguous, and therefore non-transparent, contractual provision was not favourable. If the non-transparent clause could be interpreted in more than one way, Dutch courts would regularly choose for the interpretation of an ambiguous term compliant with the meaning given to it by the insurer rather than the insured.10 Only with the adoption of the contra proferentem rule, following from the need to implement the Unfair Contract Terms Directive11 in Dutch law, has this approach shifted.12 Interestingly, the legibility of the insurance contract terms has been possibly more favourably assessed under the previous regime, as Dutch courts tended to consider subjective elements in this test. For example, if a particular insured person required glasses to read, the court would be more likely to determine if terms, which have been drafted in a small font, were intelligible to that insured.13 Under the current regime, the court, which is conducting the assessment of transparency, is more likely to apply the benchmark of the average consumer to evaluate the legibility of contractual provisions. Consequently, the objective yardsticks are more likely to be used. It needs to be noticed here that it has never been contested in Dutch law that the insured has a duty to read the contractual provisions, including the standard contract terms and conditions. Therefore, even if the small font does not make the reading attractive, it does not excuse the insured from not reading contractual provisions.14 However, if the small font would make these provisions illegible, then even a best attempt at reading them would not be able to properly inform the insured of his or her rights and obligations. From the above analysis, it seems, therefore, that the comprehensibility of the insurance contract terms used to be less relevant than their legibility. However, the lack of attention on the terms’ comprehensibility may be linked to the fact that, originally, insurance contracts were simpler and it was easier to determine their core terms: the insured object and risks. The main disputes as to the qualification of contractual provisions as core terms surrounded provisions either on the payments of premium or on the duration of the insurance contract.15 With the changing times and

9

Clausing (1994), p. 14. See for an overview of the old case law: Hendrikse (2002), pp. 12–16. 11 Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts. 12 The implementation of the contra proferentem rule was late in Dutch law, instead of as of January 1995 this rule started binding only as of the end of 1999. However, Dutch courts have previously given preference to this interpretation rule of their own motion, e.g. see: HR 24 September 1993, NJ 1993, 760 (Brackel/Atlantische Unie van Verzekeringen); HR 21 January 1996, NJ 1996, 683 (Kroymans/Sun Alliance). 13 Ktg. Haarlem 22 August 1975, Prg. 1975/1067; Ktg. Arnhem 30 January 1989, TvC 1989/93. 14 Rechtbank Zwolle 20 September 1939, NJ 1940/577. 15 Leerink (2009), pp. 176–187. 10

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the increased complexity of both insured objects and risks, the need for legislative intervention became clearer. The need for the revision and further regulation of the insurance contract as a separate type of contract has only started to be discussed in the 1950s. This led to the adoption in 1986 of the first draft of the new law. Due to the lack of political interest in the proposal and certain difficulties in delineating insurance law and the law of succession, the new Dutch insurance law has only been adopted in 2005.16

2.2 2.2.1

Current Regime Title 7.17 of the Dutch Civil Code

As of 2006, the insurance contract has been given a separate position, as a special type of contract (bijzondere overeenkomst), in Book 7 of the Dutch Civil Code. Due to the system of the Dutch Civil Code, the general rules of contract law that are included in Books 3, 5 and 6 of the Dutch Civil Code are also applicable to insurance contracts. These general rules of contract law apply to any special types of contract. This means that the conclusion of the insurance contract, its validity and the conditions of its performance are all subject to general Dutch contract law. This may change only if there are specific provisions regulating the above-mentioned issues included in Part 17 of Book 7 of the Dutch Civil Code, which is devoted to insurance contracts, specifically.17 None of the provisions added to the Dutch Civil Code on insurance contracts in 2006 introduce the principle of transparency or in any manner prescribe provisions of insurance contracts to be transparent. Therefore, it will be the general rules on pre-contractual obligations, such as good faith enshrined in Article 6:248 para 2 of the Dutch Civil Code, that will place such a requirement on insurers drafting their contracts. The lack of transparency will be established on the basis of the general standards of interpretation, which have been developed by Dutch courts years prior to the introduction of this legislative change.

2.2.2

Standards of Interpretation in Dutch Law

A clause in insurance contracts may be differently interpreted by the insurer and by the insured. In such cases, it is important to determine whether the clause was transparently drafted. If the clause is clear, it may still lead to varied interpretations if it is ambiguous, that is to say, when there is more than one interpretation thereof feasible. The lack of transparency may, therefore, be related to the lack of clarity or

16 17

Leerink (2009), p. 3. Leerink (2009), pp. 3–4.

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the existence of ambiguity. Either or both can lead to problems in establishing the precise meaning of a given contractual provision. In this assessment, Dutch interpretation rules require national courts to consider not only the intention of the parties in drafting the agreement but also the nature of the contract and all circumstances surrounding its conclusion, which may influence the interpretation of this provision.18 The main interpretation rule stems from an old case of the Dutch Supreme Court (Hoge Raad), the Haviltex case,19 which demands looking beyond the pure literal meaning of the words used in the contractual clause. Additionally, Dutch judges need to also consider reasonable reliance and expectations of the parties as to what has been agreed upon (so-called Haviltex norm).20 In the determination of the reasonable expectations of the parties, it might be relevant to account for their social position and their (legal) expertise.21 Therefore, if the contract is concluded between professional parties, the Dutch court would likely sooner rely on the literal meaning of the words used in the clause.22 The Dutch court should first try to establish the subjective meaning of the contractual term. Only if this fails should the objective meaning be examined, accounting for all the circumstances surrounding the contract’s conclusion.23 This order of assessment will not, generally, be reversed in cases where a contract was concluded by professional parties or where parties had been assisted in the contract’s conclusion by (legal) experts.24 However, it has been argued in legal scholarship that specifically in the area of insurance contracts, the expertise of the insured could impact the process of interpretation of contested terms. Namely, if the insured is a professional party and the term used in a contract is a technical term commonly used in the area of his or her expertise, that technical meaning of this term should lead the interpretation of the Dutch courts.25 However, this has not always been the position taken by the Dutch courts. In a case of the District Court of Rotterdam,26 the contested term of the insurance contract invoked ‘participation in the air traffic’ (deelnemen aan het luchtverkeer) as an exclusionary ground for compensation. When a KLM pilot died during a paragliding accident, his widow was denied compensation based on the fact that paragliding has been listed as an activity of air traffic in the Dutch law on air traffic (Wet luchtverkeer). In consideration of the fact that the insured was a pilot and therefore a professional party in the air traffic, it could be claimed that the Dutch court should use the technical meaning of ‘air traffic’, which would encompass 18

Loos (2013), p. 174. HR 13 March 1981, NJ 1981/635, ECLI:NL:HR:1981:AG4158 (Haviltex). 20 Hendrikse et al. (2015), p. 27. 21 HR 13 March 1981, NJ 1981/635, ECLI:NL:HR:1981:AG4158. 22 HR 5 April 2013, ECLI:NL:HR:2013:BY8101. 23 Hendrikse et al. (2015), p. 27. 24 HR 7 February 2014, ECLI:NL:HR:2014:260. 25 Hendrikse et al. (2015), pp. 28–29. 26 Rb. Rotterdam 15 February 2006, NJF 2006/339. 19

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paragliding. However, the court could use the dictionary definition of ‘air traffic’, which would provide a more insured-friendly interpretation as it could exclude paragliding from the scope of air traffic activities. The court decided to interpret the term in the insured-friendly way. Interestingly, if the insured is assisted during the contract’s conclusion by an independent advisor, this may again influence how the non-transparent term will be interpreted. In a case of the Court of Appeals of The Hague,27 the court suggested that under such circumstances, the meaning of the contested term preferred by the insurer would sooner be accepted.28 However, this would require a truly independent advice and a possibility for the parties to negotiate the terms of the insurance contract.29 A related question arises as to who should the term be transparent to—the insured or the third party that will receive the compensation from the insurance? The answer to this question is a subject of debate in the scholarship. Some authors30 claim that the third party should assume the terms of the insurance contract in their meaning as understood and accepted by the insured, while others argue that this should depend on the relationship between the insured and the third party.31 We could, for example, expect from a married couple to discuss the terms of the insurance contract and their understanding thereof. Other authors still may claim that when the insurance contract benefits a third party, the objective method of interpretation should be exclusively used.32 Dutch contract law carries a separate method of interpretation for situations when the insurance contract has not been individually negotiated and its provisions are meant to apply to many contracts. Therefore, in cases where standard terms and conditions are used by the insurer, the objective interpretation should be given priority (cao-norm).33 However, the lack of transparency of a standard contract term might have a different effect on a contract concluded by an insured consumer, which will be further discussed in the following paragraph.

2.2.3

Transparency of Standard Terms and Conditions: Book 6 of the Dutch Civil Code

Considering that many insurance contracts are nowadays concluded on the basis of standard terms and conditions of the insurer, especially in consumer insurance

27

Hof Den Haag 12 September 2006, NJF 2006/546. Hendrikse et al. (2015), p. 33. 29 Hof Amsterdam 30 September 2008, ECLI:NL:GHAMS:2008:BG2017; Hof Leeuwaarden 3 August 2010, ECLI:NL:GHLL:2010:BN3280. See also Hendrikse et al. (2015), p. 37. 30 Londonck Sluijck (2007), p. 255. 31 Hendrikse et al. (2015), p. 29. 32 Asser et al. (2012), p. 363. 33 HR 20 February 2004, NJ 2005/493 (DSM-Fox). 28

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contracts, there is often a possibility for the insured to invoke their lack of transparency and potential unfairness. The provisions regulating the assessment of the unfairness of standard terms and conditions and demanding their transparency are to be found in Book 6 of the Dutch Civil Code. The general prohibition of the use of unfair terms in standard terms and conditions applies to any insurance contract concluded on their basis, except when the insured is a big legal person as determined in Article 6:235 of the Dutch Civil Code.34 Despite the unfairness test having a wide scope of application, consumers specifically have been granted an easier manner to claim unfairness of standard terms and conditions. This has been facilitated, e.g., by the addition of black and grey lists of unfair terms, which respectively prohibit and presume as unfair clauses mentioned on them. Moreover, Article 6:238 of the Dutch Civil Code introduces the transparency principle (in its first sentence) and the contra-proferentem interpretation rule (in its second sentence) explicitly only for consumer (insurance) contracts. However, also these last provisions may apply to insurance contracts concluded with non-consumers on the basis of the so-called reflexwerking. This last notion allows Dutch courts to consider the similarity of the position of a non-consumer to that of a consumer and apply consumer protection against unfairness as appropriate.35 Consequently, the smaller the trader who is concluding an insurance contract, the more his contractual position will be comparable to that of a consumer and the more protection he may expect. Generally, there is no clarity in Dutch law when a person could classify as a consumer. Specifically, it is the mixed purpose (insurance) contract, concluded partially for personal reasons and partially in relation to the professional activity of the insured, that makes the notion of a consumer non-transparent. The insured could likely remain a consumer if his or her professional activity covered by the insurance contract would be negligible.36 Some authors suggest that negligible should not amount to more than 25% of the activity of the insured37; others narrow this limit down to 10%.38 Standard terms and conditions may be non-transparent to the insured as they are formulated in an abstract, non-personalised way, allowing them to apply to many different parties and situations. This means that the insured may not realise what

34

Loos (2013), p. 30. Article 6:235 para 1 of the Dutch Civil Code excludes from its scope of application ‘a legal persons as meant in Article 2:360 of the Civil Code, who at the time of conclusion of the contract has made his last annual account public or to whom prior to that time Article 2:403, paragraph 1, of the Civil Code has been applied’ as well as ‘a party to whom the provisions under point (a) do not apply, if from a registration pursuant to the Commercial Register Act shows that he has fifty or more employees in service at the before-mentioned time of the conclusion of the contract.’ Its para 3 excludes an insured who is also using standard terms and conditions in his or her own dealings, and uses similar terms and conditions. 35 Loos (2013), pp. 257–268, 174–177. 36 Following the CJEU’s judgment in case C-464/01 of 20 January 2005 (Gruber) NJ 2006/278. 37 Loos (2005). 38 Hendrikse et al. (2015), p. 47.

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impact any given standard terms and conditions may have in his or her case.39 To combat this lack of transparency, the insurer could add explanations to such abstract standard contractual terms or provide examples of circumstances under which these terms would be applicable.40 If a specific standard term lacks transparency, this could mean that either it is completely unclear what the term means or that this term could be interpreted in more than one way. In the first case, as a consequence of the lack of transparency, the term may need to be removed from the contract, and the impact thereof on the contract’s performance needs to be established (further discussed in Sect. 2.2.3.1 below). In the second case, it needs to be decided whether the term should be removed from the contract in its entirety or interpreted in one of the possible ways (further discussed in Sect. 2.2.3.2 below). Moreover, it is necessary to consider what terms could qualify as core terms (further discussed in Sect. 2.2.3.3 below) as the lack of transparency of core terms may lead to the review of their fairness. At the end, this part will briefly introduce the general pre-contractual principle of good faith and the duty to warn in Dutch law, which may demand certain transparency of insurance contracts as well (further discussed in Sect. 2.2.3.4 below).

Unclear Terms When the meaning of the term is completely unclear, the Dutch scholarship argues for the removal of such an unclear standard contract term from the (insurance) contract on the basis of Article 6:233 point a of the Dutch Civil Code. This is a consequence of the term being then contrary to the transparency principle of Article 6:238 para 2 first sentence of the Dutch Civil Code.41 Dutch scholars assign this consequence not only when the non-transparent standard term is a core term but also with respect to all standard terms and conditions that lack transparency.42 As it has been mentioned in the previous paragraphs, generally Article 6:238 para 2 first sentence of the Dutch Civil Code should apply only to consumer insurance contracts. Therefore, professional insured parties may not explicitly rely on the protection offered in the above-mentioned provision. However, they could also invoke it through the use of reflexwerking, relying on the presumption of unfairness of a non-transparent term in their own case. They would then need to prove that their contractual situation is comparable to that of an insured consumer. If the court recognises the lack of transparency and the uneven contractual position between the insurer and, e.g., a professional insured party, then it is likely that the unclear term would be removed from the contract.43

39

Vriesendorp-van Seumeren (2002), p. 21. Vriesendorp-van Seumeren (2002), p. 21. 41 Hijma (2010), p. 34. 42 Hendrikse et al. (2015), p. 54. 43 Hendrikse et al. (2015), pp. 55–56. 40

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However, Article 6:233 point a of the Dutch Civil Code does not apply to big professional insured parties or to such insured parties who have drafted themselves similar standard terms and conditions, pursuant to Article 6:235 of the Dutch Civil Code. Such insured parties may not invoke the protection offered in the abovementioned provisions, also not through reflexwerking. Therefore, they need to rely on other measures to contest the lack of transparency. Their claim could be based on the fact that the insurer should not be able to rely on the unclear term that he has himself introduced in the contract on the basis of Article 6:248 para 2 of the Dutch Civil Code, which requires parties to respect the principle of good faith (further discussed in Sect. 2.2.3.4 below).44

Ambiguous Terms When there is more than one meaning that may be given to the contested term in a consumer insurance contract, the contra proferentem rule should be applied. The contra proferentem rule requires that an ambiguous clause is interpreted in the way most favourable to the consumer, pursuant to Article 6:238 para 2 second sentence of the Dutch Civil Code.45 For example, if the insurance contract specifies that it terminates when the insured car is ‘ordinarily’ kept abroad, the contra proferentem interpretation of this clause would not lead to the termination of the insurance contract when the car owner was abroad with his car for a long time, looking to move there, but was still officially living in the Netherlands and his car was registered and insured there.46 This interpretation rule has been introduced to motivate traders to pay closer attention to the way they draft their standard terms and conditions and to encourage them to employ non-ambiguous, transparent terms.47 However, it is also applicable in case the insurer would use standard terms and conditions drafted by third parties. Furthermore, as it has been mentioned in the previous paragraphs, through the use of reflexwerking, also professional insured parties could potentially invoke this rule. Interestingly, it has been argued in the Dutch scholarship that the introduction of this interpretation rule may undermine consumer protection in practice. This could occur if traders began to draft their standard terms and conditions in a manner even more complex than previously.48 The reason for using a complex sentence structure and detailed disclosures would be the trader’s attempt to not leave any gaps left open for interpretation.

44

Hendrikse et al. (2015), p. 56. Which provision implements the rule from Article 5 of the Unfair Contract Terms Directive. 46 Rb. Rotterdam 1 June 2005, ECLI:NL:RBROT:2005:AT8539 (Soldano/Erasmus Verzekeringen BV). 47 Loos (2013), p. 174–177. 48 Vriesendorp-van Seumeren (2002), p. 22. 45

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Dutch courts mostly use the contra proferentem rule when the insured is a consumer, looking to interpret the ambiguous term in the manner most favourable to consumers.49 There is a dispute in the Dutch legal scholarship as to what is the most favourable to consumers’ interpretation of a particular contract term. Some authors argue that if the term is ambiguous and one of its meanings could lead to the assessment that the term is unfair, followed by the removal of this term from the contract, the court should choose this meaning. After all, it may not benefit consumers if the court chooses instead the other meaning of the term that would allow to ‘save’ the term in the contract.50 Other authors argue, however, that the unfairness test serves a different purpose than that of the contra proferentem rule.51 Considering the lack of guidance in the Unfair Contract Terms Directive on any further consequences of the lack of transparency beyond the application of the contra proferentem rule, this ambiguity regarding the impact of the lack of transparency on the unfairness assessment is unsurprising. However, it may lead to different interpretation of ambiguous terms of insurance contracts, depending on whether a given court assigns the meaning to a contested term in consideration of its impact on the unfairness test. With regard to B2B insurance contracts, Dutch courts take a point of view that the contra proferentem method of interpretation is not a rule but should be given preference, as long as the insured has no expertise in the area of insurance.52 This means that most small traders taking out insurance may expect Dutch courts to interpret ambiguous insurance contract terms in a favourable-to-them meaning, relying on the form of reflexwerking.53

Core Terms It is crucial to determine what terms in an insurance contract could be perceived as core terms, considering that the consequence of their lack of transparency is their submission to the unfairness review. The Court of Appeals in Amsterdam54 determined that a term in an insurance contract that directly influences the scope of the insurance cover should be considered as a core term of the insurance contract, as long as this term is transparent.

49

See e.g. Rb. Rotterdam 20 February 2008, ECLI:NL:RBROT:2008:BC6349; Rb. Arnhem 15 December 2010, ECLI:NL:RBARN:2010:BO9558; Hof Amsterdam 11 January 2011, ECLI: NL:GHAMS:2011:BP1172. See to the contrary Ktr. (Cantonal judge) Rotterdam 4 December 2001, Prg. 2002/5807. 50 Loos (2013), p. 180. 51 Hijma (1999), pp. 115–116; Hendrikse et al. (2015), p. 45. 52 HR 28 April 1989, NJ 1990/583 (Liszkay II). 53 Hendrikse et al. (2015), p. 48. 54 Hof Amsterdam 30 September 2008, ECLI:NL:GHAMS:2008:BG2107, para 4.9.

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Importantly, the Dutch Supreme Court insisted on a narrow interpretation of the notion of core terms in judgments that examined other standard terms and conditions than those of insurance contracts.55 This led to doubts about whether terms that described the scope of the insurance cover could be classified as core terms.56 Generally, however, the scholarship indicates as core terms of the insurance contracts terms defining their premium payments, cover scope, as well as exclusions from the cover scope.57 It needs to be mentioned here that predominately the scholarship and case law do not recognise as core terms such terms that determine the circumstances under which the scope of the insurance cover could be adjusted and when the insured could lose his right to claim the insurance.58 This seems consistent with the Court of Appeals’ point of view. After all, such terms do not directly determine the scope of the cover as, in general, a certain risk remains within the cover, and only under the circumstances mentioned in the term would it be excluded.59 However, the above-mentioned description of core terms may lead to uncertainty in practice. Insurers could manipulate the drafting of an insurance contract with an objective to exclude a certain term from being classified as a core term. An example given in the scholarship mentions an insurance policy, which could either state that ‘the insured object remains insured as long as it is provided with 20 fire-extinguishers’ or ‘in case the insured object is no longer provided with 20 fire-extinguishers, the right to compensation is lost’.60 Only in the first case would the term be perceived as a core term, despite these terms having the same effect in practice. As a result, it would not be the content and context of the specific term that would determine its status as a core term but rather the manner in which it has been drafted. Alternatively, in order to determine whether a term describing the scope of the cover is a core term, it could be examined whether it specifies the circumstances under which the insurer is obliged to pay compensation. With the application of this last test, the content of the term would be decisive.61 Another delineation of core terms in the Dutch scholarship follows the insurer’s obligation to bear certain risks and the corresponding obligation of the insured to pay premiums, as well as to take care of the insured object or person.62 The core terms concerning the insurer’s obligation encompass any description of the insured interest, the basis for compensation of damage, the validity period of the cover and the insured risks, including any exclusions and limitations of such risks. As far as the obligations of the insured are concerned, the core terms include the description of the

55

HR 19 September 1997, NJ 1998/6 (Lottospel); HR 21 February 2003, NJ 2004/567. Claiming that such terms should not be seen as core terms, see: Frenk (2000), p. 129. To the contrary see: Hendrikse et al. (2015), p. 61. 57 Tolman (2010), pp. 23–25; Jongeneel (2010), p. 103. 58 Doorhout Mees (1996), p. 43. 59 Hendrikse et al. (2015), p. 62. 60 Hendrikse et al. (2015), p. 63. 61 Hendrikse et al. (2015), p. 64. 62 Tolman (2010), pp. 23–25. 56

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care that the insured needs to exhibit towards the insured interest and payments of premiums and their calculation. Terms on the duty of care of the insured may oblige him to take certain preventive measures. But they may also just inform him of the contributory negligence rules applicable under the insurance contract. Aside the terms listed above, it would be unlikely that other terms of the insurance contract could be classified as core terms.63 However, the above-described classification may also lead to uncertainties in practice. As an example, certain duties of care of the insured could easily qualify as either core terms or other standard terms and conditions.64 Interestingly, some authors have argued that even terms explicitly regulating the scope of the insurance cover should not be treated as core terms if the insured had not expected their presence in the insurance contract.65 Such unexpected terms could be excluded from the core terms’ classification not only if their content was surprising to the insured but also if the surprise pertained to their form, e.g. their positioning on the insurance policy.66 In consumer contracts, the argument continues that the principle of transparency of Article 6:238 para 1 first sentence of the Dutch Civil Code requires not only the provision of grammatically correct and clear terms, but it also aims at informing the consumer of his or her legal position. Considering that it should be relatively easy for the insurers to draw the attention of the insured to the core terms of the insurance policy, unexpected terms should not be perceived as core terms.67 In consumer insurance contracts, unexpected terms could be annulled on the basis of Article 6:237 point b in combination with Article 6:233 point a of the Dutch Civil Code. In other insurance contracts, they could be contested under Article 6:233 point a of the Dutch Civil Code. Insured parties excluded from the scope of application of the unfairness test pursuant to Article 6:235 of the Dutch Civil Code could try to find recourse through the application of the good faith principle, as discussed in the following paragraph. If a term in an insurance contract qualifies as a core term, then it may only be tested for unfairness if it is non-transparent. Lack of transparency of such terms would thus result not only in the application of the interpretation rule contra proferentem, if more than one meaning could be given to them. The further reaching consequence of the lack of transparency of core terms could be the possibility of their annulment, which could even result in the termination of the whole insurance contract.68 After all, without its core terms, the insurance contract may not be possible to be saved.

63

See also: Hendrikse et al. (2015), p. 63. Hendrikse et al. (2015), p. 67. 65 Vriesendorp-van Seumeren (2010), pp. 275–276. 66 Hendrikse et al. (2015), p. 68. 67 Hendrikse et al. (2015), p. 69. 68 Hendrikse et al. (2015), p. 69. 64

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Good Faith and the Insurer’s Duty to Warn Core terms determine the primary cover of the insurance policy and, therefore, could be perceived as the most important terms of the insurance contract. With respect to core terms, Dutch law requires the insurer to make them explicitly transparent to the insured, which usually means that they should be mentioned on the front page of the insurance policy.69 The insurer has a clear duty to warn the insured about the scope of the primary cover and any limitations thereof. The sanction for the breach of this obligation is not being able to invoke any such limitations against the insured, pursuant to Article 6:248 para 2 of the Dutch Civil Code. Article 6:248 para 2 of the Dutch Civil Code applies to any insurance contract, whether it was concluded by a consumer or a professional insured party. This provision requires the parties to act in good faith and, therefore, prevents insurers from invoking any limitations to the primary cover that have not been transparently announced to the insured. The lack of transparency in the provision of information to the insured may, therefore, have serious consequences. For example, in the case of the Court of Appeals of ‘s-Hertogenbosch,70 the concluded travel insurance contract has not clearly specified that the insurance policy would only be valid if it encompassed the whole duration of the travel. The insured only wanted to insure the onwards part of his travel. The court determined that since the insured has previously concluded such limited travel insurance contracts with the same company and since the limitation was not included in the policy cover but rather only mentioned in the standard terms and conditions thereof, the insurer should have explicitly drawn the attention of the insured to this limitation. Since this has not occurred, the limitations of the insurance policy were non-transparent to the insured and the insurer could not invoke them in good faith, pursuant to Article 6:248 para 2 of the Dutch Civil Code.71 The duty of the insurer to warn about unexpected or less transparently drafted terms of the insurance policy and consequences of the termination of the insurance policy binds him also if the insured is assisted by a professional advisor. In the case of the District Court Utrecht,72 the insured notified her advisor of her wish to terminate her insurance against incapacity for work on the day of 1 January 2006. The insurer notified the insured directly, and not her advisor, that one of her insurance policies could only be terminated on 1 January 2010. This insurance contract contained a clause 3.4.1. that states that the compensation would not be paid out after the insurance contract expires. When the insured found out that she had breast cancer in 2007, she tried unsuccessfully to revoke the termination of her insurance contract. However, when the insurer stopped paying her compensation as

69

Hendrikse et al. (2015), p. 81. Hof ’s-Hertogenbosch 12 June 2009, ECLI:NL:GHSHE:2009:BI7715. 71 Similarly, in B2B insurance contracts see: Hof ‘s-Gravenhage 6 March 2012, ECLI:NL: GHSGR:2012:BV8730. 72 Rb. Utrecht 18 July 2012, ECLI:NL:RBUTR:2012:BX2398. 70

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of 1 January 2010, the court considered that the insurer could not in good faith invoke clause 3.4.1. Its meaning could have been non-transparent to the insured, and therefore the insurer should have explicitly warned about its grave consequences for the insured. The court believed that an average insured party would have understood the above-mentioned clause as definitely not covering any incapacity for work that would have occurred after the insurance contract had expired. However, it was not as obvious that any compensation for the incapacity for work that had manifested itself earlier, during the validity of the insurance contract, would have ceased as well. Since the insurer was in direct contract with the insured, he could not trust that the insurance advisor would provide such a warning to the insured instead.73

2.2.4

Transparency and Pre-contractual Duty of the Insured to Notify

Before an insurance contract is signed by the parties, the insured has a duty to notify the insurer about any issues that may influence the risks of providing him or her with an insurance policy, pursuant to Article 7:928 of the Dutch Civil Code.74 This provision specifies that any information that the insured has or should have that he or she knows or should know could influence the decision of the insurer whether and on what conditions to provide the insured with an insurance policy needs to be provided before the contract’s conclusion. In part, the pre-contractual duty of the insured to notify will, therefore, depend on his or her knowledge of the relevance of the given information to the insurer (so-called kenbaarheidsvereiste).75 Consequently, in order for this duty to notify of the insured to arise, the insurer should be transparent in communicating to the insured what information he requires for the assessment of the insurance risks. If the insurer uses a questionnaire in the pre-contractual phase to inquire about certain facts, there is a presumption that the questionnaire asks about information that is relevant to the insurer, this provided that the questionnaire is transparent.76 If the question asked by the insurer is unclear or ambiguous, the Dutch Supreme Court has decided77 that the understanding thereof by the insured prevails over the interpretation given to it by the insurer, this provided that the interpretation by the insured is reasonable and that it is possible to understand this question in more than one manner. The insurer has the burden of proof that the relevance of certain information has been made clear to the insured. This may be difficult to prove if no questionnaire was used by the insurer. Additionally, there may be difficulties with meeting this burden of proof if the insurer expected to acquire certain relevant

73

Hendrikse et al. (2015), p. 84. Hendrikse and Rinkes (2015a), p. 201. 75 Hendrikse and Rinkes (2015a), p. 233. 76 Hendrikse and Rinkes (2015a), p. 234. 77 HR 20 December 1996, NJ 1997/638. 74

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information by asking a general question at the end of the questionnaire.78 Such a general question may not indicate to the insured clearly enough what information is relevant to the insurer. The insurer may generally assume that the answers provided by the insured are correct.79 This implies that he does not need to check whether the insured answered all questions correctly and fully.80 However, the insured has no obligation to provide information to the insurer that is generally well known. For example, in the case of the Court of Appeal of The Hague,81 during the conclusion of the insurance contract for a ship, the insured did not need to notify the insurer that in the area where the ship was stationed there was a heavy storm ongoing. At the time of the conclusion of the insurance contract, this fact was well known in Rotterdam and the insurer could have known this from reading local newspapers. The insurer has, therefore, also a certain duty to obtain relevant information himself.82 For example, in a case where the insurer provided a policy for the goods of the insured but did not inquire as to the nature of these goods, he could not later claim that had he known that the goods were condoms he would have raised the premium payments.83 Moreover, while the insurer does not need to check the correctness of the information provided in the questionnaire, he should draw the attention of the insured to any non-answered questions on the form and may not infer any facts from the lack of answers.84 Therefore, if the insurer normally uses a questionnaire to obtain information about the insured, on which basis the contract would be concluded, and in a given case such a questionnaire would not be completed, any risks associated with the non-revealed information would rest with the insurer. This occurred in the case Huls/NLP,85 where the insurance policy of an airplane was provided without the standard questionnaire having been filled by the insurer. Had this questionnaire been completed, it would have revealed that Huls had no pilot’s license—a necessary condition for providing this insurance. After the accident, when NLP refused to pay out compensation, the Dutch Supreme Court decided that Huls indeed should have provided this information. However, NLP would have known about the missing license if they followed their standard procedure and ensured the completion of the questionnaire. Therefore, the insurer should bear the risk of not having the insured complete the questionnaire. If the insured completes the questionnaire inconsistently, the insurer should also inquire further as to the correct state of the matter.86 This means that the insurer

78

Hendrikse and Rinkes (2015a), pp. 234–235, 239. HR 15 November 1957, NJ 1958/67 (Baris-Riezenkamp). 80 Hendrikse and Rinkes (2015a), p. 237. 81 Hof Den Haag 21 November 1919, W. 10617. 82 Hendrikse and Rinkes (2015a), p. 238. 83 HR 22 February 1924, NJ 1924/488 (Gummiwaren). 84 Hendrikse and Rinkes (2015a), p. 239. 85 HR 18 April 2003, NJ 2004/634 (Huls/NLP). 86 Rb. Noord-Holland 30 January 2013, ECLI:NL:RBNHO:2013:BZ2272. 79

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should thoroughly examine the answers of the insured and inquire as to any inconsistencies between them.87 When the insurer discovers that the insured did not provide all the necessary information in the pre-contractual phase, he should notify the insured of this fact and of the likely consequences, pursuant to Article 7:929 of the Dutch Civil Code. The literal wording of this provision only requires the insurer to warn the insured that there is missing information without the need to indicate what information is missing. Legal scholarship argues, however, that this duty of the insurer to warn only then makes sense if the warning also informs the insured as to the content of the missing information.88 This would then allow the insured to either decide to terminate the insurance contract or to negotiate its change with the insurer.

2.2.5

Transparency and Aggravated Risk

Transparency of the description of the insured object may play a significant role in the determination whether the insurer agreed to pay out compensation in case the circumstances surrounding the insured object have changed, thus aggravating the insured risks. Dutch law does not provide a specific protection to the insurer against any aggravation of the insured risk during the performance of the insurance contract. The insurers are, therefore, forced to regulate such matters in their own contract terms.89 This could be done, e.g., by including a very detailed description of the insured object in the insurance contract, which description would determine the scope of the insurance cover. Alternatively, the insurer could place a duty to notify on the insured of any circumstances that might have aggravated the insured risks during the performance of the insurance contract. The sanction for the breach of this obligation would be the loss of the right to compensation. Another solution would be to incorporate certain preventive guarantee clauses in the insurance contract, under the sanction that if their conditions were not fulfilled, the right to compensation would be lost.90 With regard to the detailed description of the insured object, the judgment91 of the Dutch Supreme Court in the case Wimpy-bar is relevant. The insurance policy against loss by fire described the object as a building made of stone with a hard cover, in which building a Wimpy-bar was located. At the time the fire started, the Wimpy-bar was located only at the ground floor of the building, with the first floor being occupied by a Pakistani restaurant and with the second floor and the attic devoted to residential housing. The Dutch Supreme Court decided in this case that if the intention of the insurer in providing a detailed description of the insured object

87

Hendrikse and Rinkes (2015a), p. 239. Hendrikse and Rinkes (2015a), p. 250. 89 Hendrikse and Rinkes (2015b), p. 521. 90 Hendrikse and Rinkes (2015b), p. 521. 91 HR 15 May 1992, NJ 1993/263. 88

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was to cover risks to that object only as long as it remained unchanged, then the insurer should not be obliged to pay out compensation when the object has changed. However, providing a detailed description of the insured object without relating to it the insurance cover and its scope may be perceived by the national courts rather as a description of the state of the matter at the time of the contract’s conclusion than a delineation of the scope of the cover.92 Some authors argue that if the insurer provides a detailed description of the insured object instead of a more neutral one, this suggests that the details influenced his decision to provide an insurance cover. If the latter view prevailed, the courts should honour the intention of the insurer, which would lead to the loss of the insurance cover, when the insured object changes.93

3 Conclusions The scope of the application of the principle of transparency has increased, and its consequences became more significant with the development of European consumer law and its implementation in the Netherlands. Importantly, rules on consumer insurance contracts may be applicable to other insurance contracts, with certain limitations, through the use of the doctrine of reflexwerking in Dutch law. While the principle of transparency demands insurance contract terms to be provided in a comprehensible and legible manner to the insured, in practice the sanctions for the lack of transparency differ between unclear and ambiguous terms. Lack of clarity or ambiguity may both result from either incomprehensibility of illegibility of the term. In case the terms are unclear, they may be assessed as unfair and removed from the insurance contract. Ambiguous terms should be interpreted in the manner most favourable to the insured, pursuant to the contra proferentem interpretation rule. It is disputed in the Dutch scholarship whether the most favourable to the insured meaning could be the one leading to the finding of unfairness of the term or whether these tests should remain separate. The fairness of core terms of the insurance contract would only be assessed if these terms are non-transparent. Different ways of determining which term should be perceived as a core term have been suggested in the Dutch scholarship. Despite Dutch insurance contract law lacking a provision on the principle of transparency, the general contract rules on interpretation, unfair contract terms, as well as duty to act in good faith, have been efficiently filling this gap. Therefore, there is only some discussion in the Dutch scholarship as to the particularities of the consequences of providing the insured with non-transparent contract terms.

92 93

Hof Den Haag 29 May 2007, ECLI:NL:GHSGR:2007:BA6424. Hendrikse and Rinkes (2015b), p. 523.

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References Asser C, Wansink JH, van Tiggele N, Salomons FR (2012) 7-IX* Bijzondere overeenkomsten (Verzekering), 3rd edn. Kluwer, Deventer Clausing P (1994) Inleiding verzekeringsrecht, 3rd edn. SHD Tjeenk Willink, Alphen aan den Rijn Doorhout Mees TJ (1996) De CAR-verzekering. WEJ Tjeenk Willink, Deventer Frenk N (2000) De gewijzigde opzetclausule in aanspraeklijkheidsverzekeringen, Nieuwsbrief Burgerlijk Wetboek, pp 86–93 Hendrikse ML (2002) Eigenschuld, bereddingsplicht en medewerkingsplicht in het schadeverzekeringsrecht. WEJ Tjeenk Willink, Deventer, pp 5–39 Hendrikse ML (2010) Uitleg van verzekeringsvoorwaarden: wie draagt het nadeel bij (vermeende) onduidelijkheden en onbegrijpelijkheden in verzekeringsvoorwaarden: de verzekeraar of de (consument-)verzekerde? In: Hendrikse ML, Rinkes JGJ (eds) Consument en verzekering. Uitgeverij Paris, Zutphen, pp 53–73 Hendrikse ML, Rinkes JGJ (2015a) De mededelingsplicht bij het aangaan van verzekeringen. In: Hendrikse ML, van Huizen HJG, Rinkes JGJ (eds) Verzekeringsrecht, 4th edn. Kluwer, Deventer, pp 201–272 Hendrikse ML, Rinkes JGJ (2015b) Risicoverzwaring en risicovermindering in het verzekeringsrecht. In: Hendrikse ML, van Huizen HJG, Rinkes JGJ (eds) Verzekeringsrecht, 4th edn. Kluwer, Deventer, pp 499–547 Hendrikse ML, Rinkes JGJ, Pluymen MH (2015) Verzekeringsrecht en algemene voorwaarden. In: Hendrikse ML, van Huizen HJG, Rinkes JGJ (eds) Verzekeringsrecht, 4th edn. Kluwer, Deventer, pp 25–109 Hijma J (1999) Consumentonvriendelijke interpretatie, Weekblad voor Privaatrecht, Notariaat en Registratie 6345, pp 115–116 Hijma J (2010) Algemene voorwaarden. Kluwer, Deventer Jongeneel RHC (2010) Werkingssfeer afdeling 6.5.3. In: Wessels B, Jongeneel RHC, Hendrikse ML (eds) Algemene voorwaarden, 5th edn. Kluwer, Deventer Leerink PM (2009) Premie betalen en risico dekken. Nederlands Tijdschrift voor Handelsrecht 4:176–187 Londonck Sluijck JB (2007) Kronik polisbepalingen. Aansprakelijkheid Verzekering en Schade 5:129–134 Loos MBM (2005) Het begrip ‘consument’ in het Europese en Nederlandse privaatrecht, Weekblad voor Privaatrecht, Notariaat en Registratie 6638, pp 771–772 Loos MBM (2013) Algemene voorwaarden. Boom Juridische Uitgevers, Den Haag Rinkes JGJ (2010) Het begrip ‘consument’ in het verzekeringsrecht: nationale en Europese perspectieven. In: Hendrikse ML, Rinkes JGJ (eds) Consument en verzekering. Uitgeverij Paris, Zutphen, pp 11–51 Tolman MJ (2010) Contractsvrijheid en kernbedingen: dode hoek in het contractenrecht. In: Tiggele-van der Velde N, Wansink JH (eds) Contractsvrijheid in het verzekeringsrecht. Kluwer, Deventer Vloermans N (2015) Inleiding. De overeenkomst van verzekering. In: Hendrikse ML, van Huizen HJG, Rinkes JGJ (eds) Verzekeringsrecht, 4th edn. Kluwer, Deventer, pp 1–24 Vriesendorp-van Seumeren RM (2002) Algemene voorwaarden en verzekeringsrecht. WEJ Tjeenk Willink, Deventer Vriesendorp-van Seumeren RM (2010) Case note to Rb. Amsterdam 3 February 2010. Tijdschrift voor Consumentenrecht 6:276–280

Transparency in the Insurance Contract Law of Poland Katarzyna Malinowska and Anna Tarasiuk

1 Definition of Transparency in the Polish Insurance Contract Law As a starting point to our analysis, it should be made clear that Polish law does not provide any definition of transparency. In everyday language (transparentny1 or przejrzysty2), it refers to an easy way of recognising or foreseeing, as well as meaning; public; revealed; not dubious; unambiguous; clear; without any doubts or suspicions as to the real meaning; full disclosure; comprehensibility; etc. In such a context, ‘transparency’ is used in legal texts, as well as in court judgements and opinions of the doctrine. Seemingly, the Polish understanding of transparency does not differ from its universal, international meaning.3 It is also, without a doubt, recognised as one of the foundations of the efficiency of free trade.4

1 Please see for reference: Polish Language Dictionary: https://sjp.pwn.pl/szukaj/transparentny. html. 2 Please see for reference: Polish Language Dictionary: https://sjp.pwn.pl/szukaj/przejrzysty.html. 3 Please see as an example: Ulusoy (2012), s. 39. 4 Available at: http://www.investopedia.com/terms/t/transparency.asp#ixzz3eOfkpk65

K. Malinowska Kozminski University, Warsaw, Poland e-mail: [email protected] A. Tarasiuk (*) Kozminski University, Warsaw, Poland Lyszkiewicz Tarasiuk Kancelaria Radcow Prawnych Sp.p., Warsaw, Poland e-mail: [email protected] © Springer Nature Switzerland AG 2019 P. Marano, K. Noussia (eds.), Transparency in Insurance Contract Law, AIDA Europe Research Series on Insurance Law and Regulation 2, https://doi.org/10.1007/978-3-030-31198-8_7

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It seems that the European and the Polish laws apply the notion of transparency in a double meaning: first, as a general principle of functioning of the insurance industry and, second, as a manner in which the information duties of the parties to the insurance contract should be performed.5 In the latter context, the emphasis is put on the pre-contractual information duties towards the consumer by the insurer, the aim of which is balancing the information deficit and enabling the consumer to take a conscious decision as to whether to conclude the insurance contract. In terms of the transparency duties on the policyholders, they are mainly understood as an obligation to reveal the risk to be insured at the contracting stage. The idea of transparency in the Polish legal system was developed primarily under the general consumer law in relation to the wording of the general terms of the contract. Subsequently, it also appeared in insurance law—in a broader sense than in the general consumer law6 (provisions of the law on insurance activity with respect to insurers and all types of policyholders or insured irrespective of whether they are consumers). It has also been developed in the insurance case law. The idea of transparency concerns mostly the information duties of the parties in the contractual relations, although such obligations result mostly from public law and not private law, followed by the in case they are breached.7 The most common example of the latter can be observed in the manner of preparing the general terms of insurance contracts. There can be no doubt that it is the European Union that vastly contributed to the understanding of transparency as it is commonly applied in current Polish legislation. It is well known that among approximately 100,000 directives, the notion of transparency mainly appears in the context of consumer protection, which in financial services has attained the most sophisticated level.8 This tendency has been implemented in full in the Polish legal system. Thus, the notion of transparency is 5 This concept has been analysed in depth in insurance context by Professor Wandt (2014). Definition of transparency in insurance contract includes three main prerequisites, i.e.: compherensive, clear, unambigious; See also the context analysed by Maśniak (2014). 6 Please see, for example, the Polish Supreme Court verdicts dated 16.09.2016 (IV CSK 711/15), Legalis no. 1716875 (on the interpretation of the unclear contractual provisions); dated 06.02.2015 (II CSK 295/14), Legalis no. 1187394 (on the interpretation of the contractual provisions). 7 It can also be understood in a broader sense, such as information obligations of the insurers regarding capital requirements and risk management, including information reports provided to the Polish Financial Supervisory Authority, please see: E. Kalińska, Wypełnianie nowych formularzy do sprawozdań może być kłopotliwe, http://www.gu.com.pl/in-dex.php?option¼com_content& da-moe-byview¼article&id¼53575:wypenianie-nowych-formularzy-do-sprawozkopotliwe&catid¼129:rynek-ubezpieczeniowy&Itemid¼151; Ostrowska, (2014). 8 For example the so called „Transparency Directive” regulating the procedure on providing information in relation to the information society; Directive 98/34/EC of the European Parliament and of the Council of 22 June 1998 laying down a procedure for the provision of information in the field of technical standards and regulations (O.J. EU L 204 dated 21.07.1998, s. 37. See as well Working Paper: Online services, including e-commerce, in the Single Market; Commission Staff Working Document Online Services, Including E-Commerce, In The Single Market Accompanying The Document Communication From The Commission To The European Parliament, The Council, The European Economic And Social Committee And The Committee Of The Regions A coherent framework to boost confidence in the Digital Single Market of e-commerce And other online

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commonly used by the Polish legal doctrine for the description of the insurers’ duties towards the policyholders9 and towards the insured. As will be shown in the analysis carried out below, transparency mainly refers to the parties’ information duties and is compliant with the general concept as developed for the consumer protection, namely the right to be given clear and unambiguous information. In the insurance area, its scope of application is, however, much broader and encompasses not only the consumers but all the policyholders, regardless of their status. This is due to the fact that information and competence deficit on the policyholder’s side is much greater than in other branches of industries. Although most of the Polish legal regulations concerning transparency in insurance contracts can be derived from the European legislation, nevertheless, some of its aspects were developed in a specific manner by Polish law. For instance, alpine insurance culture, which is characteristic of continental systems, is much more protective for the policyholder than marine insurance culture, which exists in common law.10 Although transparency is naturally associated with the obligations of the insurer, it cannot be ignored that the proper balance of the parties’ rights and obligations is one of the fundamental contractual principles, and as such it is also binding in insurance contractual relationships. That is why the policyholder’s information duties at the contracting stage, which are so crucial for proper risk assessment, also seem to form a part of the transparency regime of the insurance contract. The analysis carried out in this chapter will thus encompass the legal aspects of the risk declaration duties regulated by the Polish Civil Code11 (the PCC). The following analysis will concern various sources of law. Most of the analysis will be devoted to transparency as regulated in the PCC, as well as in the Act on Insurance and Reinsurance Activity12 (the AIRA), in the aspects that regulate insurance contracts. Besides, the provisions on unfair business practices and the general provisions on consumer protection will be explained in the context of insurance contracts. An explanation on recent regulations on the distribution of insurance products, namely the Act on Insurance Distribution13 (the AID), will also be given.

services {COM(2011) 942 final} {SEC(2011) 1640 final, http://ec.europa.eu/internal_market/ecommerce/docs/communication2012/SEC2011_1641_en.pdf. 9 For example: E. Kiziewicz, Zasada transparentności a ogólne warunki ubezpieczeń, dostęp: http:// www.rzu.gov.pl/publikacje/artykuly-pracownikow-i-wspolpracownikow/Ewa_Kiziewicz_-_ Zasada_transparentnosc_a_ogolne_warunki_ubezpieczen__132; M. Łuczyński, Rekomendacja dobrych praktyk informacyjnych dotyczących ubezpieczeń na życie związanych z ubezpieczeniowymi funduszami kapitałowymi – element budowy nowoczesnego rynku ubezpieczeń na życie, Wiadomości Ubezpieczeniowe, numer specjalny 3/2013. 10 Herman Cousy (2002), pp. 111–128; Malinowska (2008), s. 62 11 Act dated 23 April 1964 the Civil Code (uniform text: O.J. 2018 item 1025, as amended). 12 Act dated 11 September 2015 on Insurance and Reinsurance Activity (uniform text: O.J. 2018, item 999). 13 Act dated 15 December 2017 on Insurance Distribution (O.J. 2018, item 2210, as amended).

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2 The Issue of Transparency in the Insurance Field Under Polish Law 2.1

Previous Regime: Evolution

The Polish legal transparency regime applicable to insurance contracts has a pretty short history. It was introduced primarily by the first regulation of insurance contracts in the provisions of the newly drafted PCC in 1964. Since then, until the beginning of the XXI century, no significant changes in respect of transparency were introduced in the PCC. By way of consequence, the information regime existed mainly in the context of the risk declaration duty that was solely imposed on the policyholder at the stage of the conclusion of the insurance contract. It remained regulated by Article 815 of the PCC. According to the said Article 815 of the PCC, the policyholder is obliged to disclose to the insurer all the circumstances known to it about which the insurer has enquired in the offer form or in other letters before the contract execution. If the insurer executes the insurance contract despite receiving no reply to particular enquiries, the omitted circumstances are deemed insignificant. As a result, the transparency regime, as set by Polish law, is based on the system of questionnaire, which is much more convenient for policyholders than is spontaneous risk declaration. This rule has not changed since the beginning, and it applies both to consumers and to professional policyholders. An important evolution can be observed, however, in respect to the consequences of the breach of the declaration duties. While at the beginning the insurer was entitled to reject the claim in case the misrepresentation or concealment affected the general probability of the event insured, since the significant changes introduced in 2007,14 the insurer must prove that such misrepresentation had a real influence on a given event insured and not only on its general probability ratio. According to Article 815 § 3 of the PCC, the insurer is not liable for the effects of circumstances about which he was not informed contrary to the risk declaration duty. The situation of the policyholder is worse in case of a wilful misconduct, as if the risk declaration duty is breached due to wilful misconduct, in case of doubt, it is assumed that an event provided for in the contract and its consequences result from the above circumstances. It is important to note that the information duties attached to policyholders only concern their actual knowledge,15 although it is claimed by the doctrine that possessing an average knowledge of the subject to be insured should be perceived as one of the policyholder’s contractual duties. The duty of information also applies to the representative of the policyholder (for example the broker) and the insured16 (if different from the policyholder) and also includes the circumstances known by such persons. 14 Act dated 13 April 2007 on the amendments to the Civil Code and some other acts (O.J. No 82, item 557). 15 Article 815 § 1 of the PCC. 16 Article 815 § 2 of the PCC; see more in Malinowska (2015).

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The policyholders’ transparency duty as for the features of the risk may be prolonged and apply during the entire life of the insurance contract on the basis of contractual provisions (it does not exist ex lege) as the PCC provides that the insurance contract may provide for an obligation of the policyholder to report any change in the above circumstances during the contract term, immediately on learning of them. The above obligation does not concern life insurance17 due to its long-term character, which naturally encompasses changes in the health and life status of the insured. Although during the years the above-mentioned provisions have evolved in a way favourable to the policyholders, nevertheless, they constituted an unbalanced transparency regime, where information duties were mainly the policyholders’ burden. The insurers’ information duties focused on their obligation to show the difference between the policy wording and the content of the insurance terms or application form as filed by the policyholder.18 This situation has begun to change with the dawn of the twenty-first century and the attempt to adjust the Polish legal system to the European standards. The first Insurance Activity Act19 enacted in 1990 (the ‘1990 Act’), just after the political system changes, introduced compulsory elements of general insurance terms and conditions (GTC), according to which they should describe in particular the subject and scope of coverage, the manner of executing the insurance contract, the time of coverage, the rights and duties of the parties, as well as the manner of settling the amount of damage and paying the claim.20 In 1995, the obligation for the insurer to deliver the GTC to the policyholder at the moment of the conclusion of the insurance contract was introduced for the first time in the insurance regulations. Thus, at first, the transparency regime as for the insurers’ duties mainly included their obligations regarding the wording of the GTC and only related to other aspects of contracting in insurance to a very limited extent. The next stage of the evolution of the transparency regime took place with the enactment of the subsequent Act on Insurance Activity dated 22 May 200321 (the ‘2003 Act’), the purpose of which was the transposition of the third-generation insurance directives and Poland’s accession to the EU. It included much more

Article 815 § 2 of the PCC in fine. According to the current wording of the article 811 § 1 of the PCC, if in response to an offer which has been made, the insurer delivers to the insuring party an insurance document containing provisions which differ to the latter’s disadvantage from the content of the offer made by him, the insurer shall be obliged to draw the insuring party’s attention to it in writing at the delivery of that document, setting him a period of at least seven days to raise an objection. In the case of failure to comply with this duty, the changes made to the insuring party’s disadvantage shall not be effective and the contract has been concluded according to the offer's conditions. According to its § 2, in the absence of any objection, the contract shall be effective in accordance with the content of the insurance document on the following day after the lapse of the time limit set to file the objection. 19 Act on Insurance Activity dated 28 July 1990, compelled on 1 January 2004, where a new Act on Insurance Activity, implementing the third generation of the insurance directive entered into force. 20 Article 6 of the 1990 Act. 21 Act on Insurance Activity dated 22 May 2003 (O.J. 2003, No 124, item 1151, as amended). 17 18

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developed regulations within the scope of the transparency regime. Article 12 of the 2003 Act introduced the obligation to formulate the general insurance terms and insurance contract in an unambiguous and comprehensible manner, for the first time. All the provisions that were ambiguous were to be interpreted in favour of the policyholder, the insured, the beneficiary or other parties entitled to a claim. Apart from this, the provisions concerning the content of the general insurance terms were significantly enlarged22 in such a way that they should have provided additionally for terms for changing the sum insured, specific terms for calculating the sum insured (if different from the general rules), terms for calculating and paying the insurance premium, the method of premium indexation (if applicable) and terms for changing the insurance contract or its termination. In addition to the proper formulation of the insurance general terms, the insurer was charged with other pre-contractual duties, such as information on the law applicable to the insurance contract, in case the parties were not free to choose the law, or the applicable law as suggested by the insurer in case of a free choice, as well as the manner of resolving the complaints lodged by the policyholder and the body authorised for handling the complaints. The above, however, solely applied whenever the policyholder was a natural person, regardless of whether or not they were entrepreneurs at the same time.23 Following the life insurance directive, the 2003 Act also introduced extensive information duties imposed on the insurers in case of life insurance contracts and specifically for unit-linked products.24 These duties did no longer lie on the insurer during the execution of the insurance contract but were extended to the whole life of the contract. The 2003 Act, for the first time, regulated the duties of the insurer as for the adjustment of losses after the occurrence of the event insured. These rules should also form a part of the transparency regime during its performance stage, in the sense that they include extensive information duties making the adjustment of losses a transparent procedure. In that context, the 2003 Act included the obligation of the insurer to inform the policyholder about the loss adjustment procedure and documents necessary for its completion. The transparency regime also comprised the insurers’ obligation to inform the policyholder about the delay in settling the claim and reasons thereof, as well as the reasons for not satisfying the claim in full or in part, along with the information on the possibility of filing a suit with the court. The majority of the above rules have been transposed by the AIRA, which is the Act replacing the 2003 Act in 2015, as a part of the legislation incorporating the Solvency II Directive regime into the Polish legal system.

22

Article 12a of the 2003 Act. The above rules have been repeated in Article 25 of the AIRA, the act that replaced the 2003 Act. 24 Article 13 of 2003 Act. 23

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Current Regime Civil Code: Applying General Transparency Requirements to the Insurance Contracts (Article 384 of the PCC and SBSQ): Other Regulatory Guidelines

The previously mentioned PCC, similarly to the AIRA, set transparency rules in relation to the manner of concluding the insurance contract, as well as its conclusion itself. In terms of the manner of concluding the contract, the PCC does not differentiate between insurance and non-insurance contracts, simply providing for the possibility of concluding the insurance contract by way of an offer and its acceptance, tender, auction or negotiation. Mass insurance contracts are usually concluded by way of an offer and its acceptance. The offer can be made by a potential client by way of providing the application of insurance, but obviously the offer can also be made by an insurer. Regardless of the party making the offer, Article 66 § 1 of the PCC clearly indicates that a declaration made to another party about its intent to conclude a contract shall be deemed to be an offer if it determines the essential provisions of the contract. In terms of concluding the insurance contract itself, the most important provision seems to be Article 384 of the PCC. This is still true despite the fact that most of the information to be provided by the insurer to the policyholder/insured has been regulated by the AIRA. The rule introduced by the PCC concerns the other aspects of the above, i.e. ensuring that the required information reaches the addressee and— at the same time—ensuring the proper application of the principle of transparency. Article 384 § 1 of the PCC is strictly related to the previous developments. In effect, it provides for the basic principles that have to be followed when drafting a model contract set up by one of the parties, in particular the general conditions of contracts or standard forms of contracts. The provisions of the model form shall be binding upon another party if they have been delivered to the said party prior to the conclusion of the contract. As it refers to the model contracts, which are the basis for most mass insurance contracts, it plays an extremely important role in the creation of the insurance contractual documentation, as well as in the performance of the insurance contract from the point of view of its transparency. The general rule of Article 384 § 1 of the PCC, as quoted above, provides for very different rules when the policyholder/insured is a consumer. First, it differentiates between contracts commonly made in petty current matters of quotidian life and other contracts. The general obligation to deliver a standard form of a contract to a consumer in any contractual relation can be waived only in case of contracts commonly made in petty current matters of quotidian life, if the other party might have easily learned about its content. As it is very difficult to include insurance contracts in such a contractual group, the standard terms need to be systematically delivered to the consumer in order to be binding.

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The consumer–non-consumer division is also clearly visible in further provisions of the PCC. For example, it is directly connected with additional differentiation criteria applied by the PCC, namely the manner of concluding a contract (traditional manner versus electronic means of communication). According to Article 66 (1) of the PCC, an entrepreneur (that is, the insurer) that submits an offer electronically is obliged, before executing the contract, to inform the other party (policyholder) unambiguously and clearly of (i) the technical actions constituting the contract execution procedure; (ii) the legal effects of the other party confirming receipt of the offer; (iii) the principles and methods by which an entrepreneur records, secures and makes the content of the contract available to the other party; (iv) the technical methods and means for detecting and correcting errors in introduced data that it is obliged to make available to the other party; (v) the languages in which the contract may be executed; (vi) the ethical codes applied and their availability in electronic form. This provision applies accordingly in case of negotiations between the parties or executing the contract in any other way. It does not apply, however, to the execution of contracts by electronic mail or similar means of individual communication at a distance and does not apply either in relations between entrepreneurs if the parties so agree. It is clear then that the amount of information, as well as the form of providing such information, differs depending on whether the policyholder is a consumer or not. A transparency rule here is again repeated as an obligation imposed on the insurer: the information above must be provided in an unambiguous and clear way. The consumer status in insurance contracts became a difficult issue after the changes to the PCC, which entered into force in 2007.25 Although the definition of the consumer as set by Article 22 (1) of the PCC applies to all insurance contracts,26 there is a big difference when it comes to abusive clauses. According to Article 805 § 4 of the PCC, the provisions of Articles 3851 to 3853 of the PCC, which regulate abusive clauses, shall apply accordingly if a policyholder is a natural person entering into a contract directly related to its business or professional activity. Regulations regarding abusive clauses constitute a transposition of Council Directive 93/13/EEC on unfair terms in consumer contracts27 (93/13/EEC Directive) and have been defined in Article 3851 of the PCC, which reads as follows: Provisions of a contract concluded with a consumer, which have not been individually agreed with him, shall not be binding thereupon, if his rights and duties have been stipulated in conflict with good customs and in flagrant violation of his interest (wrongful contractual provisions). This shall not relate to the provisions which specify basic performances of the parties, including the price and remuneration if determined explicitly. The Article 805 § 4 in wording of the Act dated 13 April 2007 on amending the PCC (J.O. No 82, item 557). 26 According to article 22 (1) of the PCC: A consumer shall be deemed to be any natural person who performs acts in law with an entrepreneur, said acts not being directly connected with his economic or professional activity. 27 Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts, OJ L 95, 21.4.1993. 25

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remaining part of the article repeats the wording of the 93/13/EEC Directive by providing that ‘The provisions not agreed upon individually shall be such provisions of the contract over which the consumer had no actual influence. It shall concern, in particular, the provisions of the contract taken over from the model contract offered to a consumer by a contracting party.’28 The provisions of the 93/13/EEC Directive were transposed into the Polish legal system quite early29 and were aimed at ensuring more transparency.30 The amendments to the PCC introduced the notion of ‘abusive clauses’ (unfair contractual terms) and provided for rules as to how the information should be disclosed to the consumer. The most important regulation from the point of view of transparency added by the said amendment to the PCC is still binding Article 385 § 2 of the PCC, according to which the model form of contract must render its content unambiguous and comprehensible. Ambiguous provisions must be interpreted in favour of the consumer. According to Article 3852 of the PCC, the conformity of a given provision with good customs shall be examined in reference to the state of affairs on the date of conclusion of a contract and taking into account its contents, the circumstances of its conclusion and any other contracts in connection with the contract, which includes the provision being subject to such examination. The PCC, copying the relevant provisions of 93/13/EEC Directive, provided an open catalogue of abusive clauses indicating that in case of doubt, the unfair contractual provisions shall be those, in particular, that have been indicated in Article 3851 of the PCC. In 2005, the Polish Insurance Supervisory Authority (Komisja Nadzoru Ubezpieczeń i Funduszy Emerytalnych—Comission for Supervision of Insurance and Pension Funds31) (the PFSA) reviewed the situation of the standard insurance contract terms on the Polish market and issued its first report on the analysis. In the conclusions of the report, it indicated that, assessing the clarity of the GTC, the performed analysis authorizes to conclude that, as a rule, the GTC are documents difficult to be understood. The weak points are: illegible outline, lack of clarity enabling the easy information search, incomprehensible language and ambiguous terms.32 The PFSA’s research was made on the basis of examination of several GTC offered by some Polish insurers. The research resulted in many comments concerning the status and shape of the GTC’s availability on the market. In particular, the PFSA complained about the lack of clarity of the wording, in particular its

Article 3851 § 3 of the PCC. Act dated 2 March 2000 on protection of some rights of the consumers and product liability, (O.J. 2000, No 22, item 271 as amended). 30 For further information please also see for example: Tarasiuk-Flodrowska (2014), s. 31–40. 31 Currently: Commission for Financial Supervision. 32 Office of the Commission on Supervision of Insurance and Pension Funds, Irregularities in the General Insurance Terms and Conditions, Department of the Communication and European Integration, Warsaw, 2005, p. 4. 28 29

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readability, the precision of the terms used, as well as the uniformity of terminology used. The PFSA also noted the abuse of the use of generic clauses reducing the transparency of products: in life insurance, the use of formulas such as ‘the amount determined by the [insurance] company’, ‘the management [of the insurer] will determine’, ‘fee charged periodically, creating for the needs of the GTC definitions deviating from those used in the generally applicable laws, as well as failure to comply with the information obligations under Art. 13 of the Act on Insurance Activity, in particular ordering in Section I insurance the determination of the rules for determining benefits due under the contract and determining the costs and other charges charged by the insurance company for the payment of benefits, lack of other information, including the manner of establishment of the premium, payment of the premiums or return of payments made’.33 In terms of the legislation technique, the PFSA noted that the reviewed contractual standard forms included concepts deviating from concepts used in common law and common language. There have been cases in which the GTC did not follow the regulations, such as the Civil Code, on terms used, but used terms that were colloquial, far from the precision and clarity requirements. By way of example, the definition of property as set in the general terms was different from the one set in the Civil Code. The Report also complained about the legislation’s irresponsibility related to inadequate grouping of particular issues or their placement in different places of a contractual pattern. The introduction of concepts that are essential for the amount of benefit did not correspond to the inclusion of a glossary in which the meaning of the terms used for clarity of the terms and conditions would be clarified in a clear and unequivocal manner. Sometimes, for example, the terms mathematical reserve, technical interest rate, which are important for the intelligibility of the GTC, are not defined at all. The lack of clarity was also not conducive to the scattering of concepts and their definition in different places, rather than placing them in one chapter.34 A summary of the situation on the Polish insurance market in relation to the contractual standard forms was presented by the PFSA as dangerously bad.35 As a result of the indicated report, 68 clauses were regarded as potentially abusive, some of them related to the pure transparency of the information provided. One of the reasons for the above overall summary was the lack of transparency in the wording of the GTC, as a result of which the insurers tend to arrogate the right to themselves to unilaterally interpret the provisions of the insurance contract. These

33

Office of the Commission on Supervision of Insurance General Insurance Terms and Conditions, Department Integration, Warsaw, 2005, p. 9. 34 Office of the Commission on Supervision of Insurance General Insurance Terms and Conditions, Department Integration, Warsaw, 2005, p. 12 f. 35 Office of the Commission on Supervision of Insurance General Insurance Terms and Conditions, Department Integration, Warsaw, 2005, p. 23.

and Pension Funds, Irregularities in the of the Communication and European and Pension Funds, Irregularities in the of the Communication and European and Pension Funds, Irregularities in the of the Communication and European

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findings were, later on, reflected by further researches and reports of the Office for Consumer and Competition Protection (UOKiK). The UOKiK issued two reports on the insurance GTCs on the Polish market— one in 200636 (the ‘2006 Report’) and the second in 201037 (the ‘2010 Report’). In both of them, UOKiK confirmed the previous findings on the extreme deficiencies in transparency of the GTC wording. However, it indicated that a change in this respect was also visible. As the review of the GTC in 2006 covered only nine of the insurers (life and non-life) and 13 insurers in 2010, it is difficult to state that the findings could be treated as representative of all of the insurers at that time.38 However, the deficiencies presented in the 2006 Report and 2010 Report could—more or less— indicate the most common irregularities on the Polish insurance market. Indeed, the UOKiK indicated that the analysis of the general insurance terms and conditions in life insurance indicated that almost all insurers being examined used the contractual clauses that can be regarded as forbidden in contracts with consumers.39 It also repeated again the general recommendation by which the transparency and comprehension of the GTC are absolutely necessary, and the level of knowledge of the policyholder and use of the wording that enables the correct understanding of the relevant clauses should be an important tool in preparing the standard contractual terms. Otherwise, the payment of the insurance benefit from insurance contracts would not depend on the client’s assessment of the factual status as basis for claiming the payment but on a unilateral judgement of the insurer that is made on the basis of definitions of the GTC that it construed itself. Irrespective of the reports, the transparency issue in insurance contracts became an important matter for judgement in individual cases considered by UOKiK. The direct background of some of the decisions of this authority referred to the unilateral interpretation of the provisions of the GTC by the insurers. The criticism related not only to the factual unilateral interpretation but also to the direct provisions included in the GTC, such as the following: “the right of interpretation of these by-laws is exclusive to the organizer’.40 Transparency was also the subject of many court decisions, including Supreme Court decisions. In one of its rulings,41 the Supreme Court indicated: When assessing whether the contractual standard in the insurance contract is formulated unequivocally and comprehensibly, the subjective judgment should be limited and based on how the average recipient, being in the same position and concluding the 36

Office for Consumer and Competition Protection, Consumer Politics Department; Report of the control of the general terms applied by the insurers; Warsaw, September 2006. 37 Office for Consumer and Competition Protection, Consumer Politics Department; Report of the control of the general terms applied in life insurance; Warsaw, January 2010. 38 There were 65 insurers and 1 main branch in Poland as of the end of 2009. 39 Office for Consumer and Competition Protection, Consumer Politics Department; Report of the control of the general terms applied in life insurance; Warsaw, January 2010, p. 10. 40 Decision of SOKiK dated 23 January 2012 (XVII AmC 977/11), http://orzeczenia.warszawa.so. gov.pl/details/$N/154505000005127_XVII_AmC_000977_2011_Uz_2012-01-23_001. 41 Decision of the Supreme Court—Civil Chamber dated 28 March 2007 r. (II CNP 124/06).

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contract with the insurance company on the terms and conditions, would understand it. It is only if the clause of the contract in question appears ambiguous and unclear, it is entitled to its interpretation by contra proferentem. In one of its later decisions, the Supreme Court42 indicated that while interpreting the will of the parties to an auto-casco insurance contract, it cannot be disregarded that the common understanding of such a contract relates to a broad insurance coverage, so, in principle, all the events referred to as eg. theft should be included in it. Therefore, any exclusions of such liability should be clearly and explicitly defined in the GTC as well as in the insurance contract so that policyholders at the time of concluding the contract clearly know what events are not covered by the insurance. The Supreme Court further indicated that the use of unclear formulas or ambiguous formulation of responsibilities or exclusions is not acceptable. The same should apply to references to the legal acts or regulations not included in the insurance contract. There is no doubt that in case of any misconduct in this respect, the contractual term should be construed in favour of the policyholder. One of the most significant decisions of the Supreme Court that had an impact on the understanding of the importance of the transparency rule was taken in 2011.43 In that decision, the Supreme Court shared the standpoint that also according to Polish law, and not only in the relations with customers (Article 385 § 2 of the PCC), any doubts should be translated to the detriment of the party who has drawn up the contract. The risk of doubt arising from the unclear provisions of the contract, which can not be interpreted, should be borne by the party who has drawn up the contract.44 Having regard to the complexity of the contractual documentation and in order to ensure inter alia the compliance with the transparency rule in insurance, the PFSA issued several documents that were to supplement the general legislation regime in Poland by way of semi-binding provisions, such as guidelines and good practices.45 The most important matter from the point of view of transparency in Recommendation U was not only the necessity to avoid abusive clauses or provide for relevant information in a clear and unambiguous way but also the necessity to obtain the relevant insurance product data and its conditions in order to counteract misselling

42

Decision of the Supreme Court—Civil Chamber dated 12 January 2007 r. (IV CSK 307/06). Decision of the Supreme Court—Civil Division, dated 2 December 2011 r.; III CSK 55/11. 44 This was further confirmed by the decision of the Supreme Court, Civil Division, dated 10 February 2016, I CSK 1/15; Please also see: Decision of the Court of Appeal in Warsaw, I Civil Division dated 24 October 2013 r., I ACa 535/13 or Decision of the Supreme Court—Civil Division, dated 15 February 2013 r., I CSK 313/12. 45 Recommendation U regarding good practices in respect of bancassurance, issued for banks in June 2014 by the Commission for Financial Supervision http://www.knf.gov.pl/Images/ Rekomendacja_U_tcm75-38338.pdf (access on: 2 March 2016) and Guidelines for insurance companies regarding distribution of insurance, issued in June 2014 by the Commission for Financial Supervision. http://www.knf.gov.pl/Images/Wytyczne_dystrybucja_ubezpieczen_24-06-14_tcm75-38337. pdf 43

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and lack of transparency, which, as far as the payment of protection insurance products is concerned, also in Poland became a serious issue.46 In 2014, following Recommendation U addressed to banks, the PFSA issued Guidelines for insurance companies regarding the distribution of insurance.47 KNF decided that it is the insurer’s duty to care for the provisions of the insurance contract. In guideline no. 11 addressed to the insurers, the PFSA indicated: If an illicit contractual clause (abusive clause) is found in the contract, the insurance company should make the appropriate changes before the conclusion of the contract, or—if the abusive nature of the clause has arisen after the conclusion of the insurance contract—take steps to remove such provisions. In insurance contracts on account of a third party, the insurance company should strive to make appropriate changes in the content of the contract before joining the next persons to the insurance contract.48 It also obliged the insurers, by virtue of guideline no. 9, to provide information in relation to the insurance contract on account of a third party, including the obligation to provide adequate and complete information regarding the insurance contract. In guideline no. 9.3, the insurers became obliged to undertake efforts to provide information to clients in a clear and unambiguous way and to make sure that relevant information is exposed to the client, in particular those that are important to such client (including exclusions from the cover or amount of fees49). The activity of the PFSA (even though this area is not its primary goal of functioning) and of the UOKiK proved their raising interest in the transparency matter. In 2014, the PFSA expressed its concern about the increase in the number of entries in the register of prohibited contract terms whose application was found in contracts concluded by financial institutions subject to the supervision of the PFSA.50 It mentioned the necessity of keeping the standards with a particular attention to the transparency and uniqueness of the standard contractual terms in consumer relations. The PFSA requested that the financial institutions, including insurers, undertake internal legal control regarding the standard contractual terms with consumers, including confronting the contractual provisions with the registry maintained by the UOKiK.

See: A. Tarasiuk – Flodrowska, Bancassurance on the EU market – specificalities of the Polish Law, Evropska Revija za Pravo Osiguranje/European Insurance Law Review 4/2011, pp. 6–12, M. Więcko-Tułowiecka, Challenges of the Payment Protection Insurance Market – Analysis of European Tendencies in the Context of the Need for Legal Actions in Poland, Prawo Asekuracyjne, 1/2017, pp. 61–72. 47 Commission for Financial Supervision, Guidelines for insurance companies regarding distribution of insurance, 24 June 2014. 48 Guideline 11.1. 49 Guideline 9.5. 50 http://www.lex.pl/czytaj/-/artykul/knf-nie-za-duzo-tych-klauzul-niedozwolonych 46

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Insurance Activity Provisions

The AIRA was enacted in Poland on 11 September 2015 and replaced the 2003 Act. The new law was based on the Solvency II Directive,51 with the aim of transposing its provisions into Polish law. The AIRA also includes many other provisions, traditionally addressed to the insurers, notably their transparency obligation. Despite being included in the AIRA, many of the insurers’ duties form in fact a part of the contractual regime, or belong to both—public and private legal regimes. One of the examples of such rules are the provisions regulating the content of the general terms of insurance contracts and the insurance policy, the manner of delivering the insurance terms, as well as the rules of interpreting thereof. Under the current regime, the list of information to be included in the GTC52 is regulated in Article 16 of the AIRA, which, in principle, repeats the wording of the 2003 Act in this respect. The provisions of the AIRA also introduced a new concept related to the content of the GTC, which aims to improve their transparency. In accordance with Article 17 of the AIRA,53 the insurer needs to include in the standard contractual documentation, in particular in the GTC, a separate section in order to inform the policyholder about which provisions of the documentation regulate the most important elements of the insurance contract, including the payment of the insurance benefit or costs or charges.54 Not only the references but also the manner of presenting information has been strictly regulated:55 they need to be presented before the wording of the standard contractual terms, in A5 format or bigger after printing,

51

Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) (Text with EEA relevance), OJ L 335, 17.12.2009, pp. 1–155. 52 The following should be included: (1) type of insurance and subject thereof; (2) terms of amending the sum insured or guarantee sum, if applicable; (3) rights and obligations of the parties to insurance contract; (4) scope of insurer’s coverage; (5) manner of calculating the amount of claim—in non-life insurance; (6) manner of calculating the sum to be paid—if insurance terms provide for a difference from general rules; (7) method of calculating and payment of the insurance premium; (8) method of indexing the insurance premium if applicable; (9) conditions of changing the insurance contract concluded for indefinite period of time; (10) prerequisites, manner and time for termination the insurance contract if applicable as well as resignation from the group insurance by the insured; (11) terms and manner of withdrawing from the insurance contract. 53 For further reference please see for example: M. Orlicki, Znaczenie prawne informacji o istotnych elementach wzorca umowy w świetle art. 17 ustawy o działalności ubezpieczeniowej i reasekuracyjnej, Prawo Asekuracyjne, 1/2017, pp. 3–12. 54 References to the following provisions need to be presented (1) the prerequisites of payment of compensation and other benefits or surrender values of insurance; (2) the limitations and exclusions of liability of the insurance company allowing for refusal to pay the compensation and other benefits or their reduction; (3) costs and any other charges being deducted from insurance premiums, from the assets of the insurance capital funds or through redemption of units of insurance capital funds; (4) the surrender value of the insurance in particular periods of the insurance cover as well as the period in which a claim for payment of the surrender value is not possible. 55 Regulation dated 16 December 2015 of the Minister or Finance regarding information provided in the general contractual terms used by insurance companies (O.J. 2015, item 2189).

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on a white background, using font Times New Roman, Arial or Tahoma, black and size 12 or bigger. It should also have a fixed line spacing using the spacing of at least 1 line, and the text of information shall be prepared in a uniform size. The principle by which insurance contracts have to be construed in accordance with the transparency regime has been repeated after the 2003 Act. According to Article 15 of the AIRA, ‘(. . .) 3. The insurance contract, general insurance terms and conditions and other standard contracts should be clear and comprehensible. (. . .) 5. The provisions of the insurance contract, the general insurance terms and conditions and other standard contracts worded ambiguously should be interpreted in favour of the policyholder, the insured or the beneficiary of the insurance contract.’ Although the method of delivery of the general insurance terms remained regulated by the PCC (please see sec. 2.2.1.), the AIRA imposed an additional obligation on the insurers: they have to post their GTC on their websites. The way by which this obligation has to be fulfilled was also explained by the PFSA.56 Although more and more regulations aim at providing a lot of information to the policyholders and the insured, it is interesting to note that there are almost no general provisions57 in Polish law regulating the compulsory content of an insurance policy or another document confirming the conclusion of the insurance contract. The general rules concern merely the accountancy aspect, according to which the insurance policy, for accountancy purposes, must include specific data.58 From a contractual point of view, under Polish law, the insurance policy is not decisive for the binding force of the insurance, but due to its probative value, it usually (as a matter of custom) includes the main data concerning the insurance coverage, insurance period and premium. Regulations of the content of the insurance policy do, however, exist in relation to the insurance contracts executed by foreign insurers having their registered office in the EEA and performing an insurance activity in Poland on the basis of the FoS or FoE. Article 215 of the AIRA provides for the minimum content59 of a

56

Please see letter of the President of the Polish Financial Supervisory Authority dated 04.04.2017 regarding presentation of the general insurance terms and conditions on the websites of the insurers; https://www.knf.gov.pl/knf/pl/komponenty/img/stanowisko_UKNF_publikacja_OWU_przez_ ZU_4_04_2017_50687.pdf. 57 Except for the detailed regulations regarding the compulsory insurances as provided in the Regulation of the Minister of Finance dated 13 June 2012 on the manner and scope of the document confirming the conclusion of the compulsory insurance contract (O.J. 2012, item 838); please also see another exception referred to in Article 215 of the AIRA. 58 Please see Act dated 29 September 1994 on Accountancy (uniform text O.J. 2018, item 395, as amended), Article 21. 59 The minimum content includes: (1) the address of the foreign insurer (in case of a branch—the address of the branch); (2) the place of concluding the insurance contract, (3) the court competent to resolve the disputes between the insurer and the policyholder, (4) the date of concluding the insurance contract and the insurance period, (5) the subject of the insurance contract and the terms of its performance, (6) the parties to the insurance contract (the policyholder and the insurer), (7) the amount of the insurance premium, (8) details of the insurance terms on the basis of which the insurance contract has been concluded, and confirmation of delivery thereof to the policyholder, (9) the name and address of the representative of the insurer dealing with the claims.

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document confirming the conclusion of the insurance contract by a foreign insurer with its main office in an EU country other than Poland, conducting insurance activity in Poland through a branch or on the basis of the freedom of services. It is difficult to find a reason that would justify differentiation between domestic and foreign insurers in Poland other than the obligation imposed by the Solvency II Directive on the latter. It is also possible that the Polish legislator did not want to interfere in the customs adopted on the Polish market in terms of insurance policies. Regardless of its general limited application, it should also be noted that the minimum requirements as to the policy content referred to in Article 215 of the AIRA do not apply to the insurance of large risks.60 Having in mind the abovementioned regulations regarding insurance policies, it seems that the insurers’ obligations related thereto should be treated as part of the transparency contractual regime, regardless of the fact that they are located in the AIRA and not in the PCC. An extensive transparency regime has been introduced with respect to life insurances. All the previous requirements have been repeated in the AIRA, making them more and more detailed and precise. For example, Article 20 of the AIRA provides for the obligatory content of the life insurance contract, which must include the definition of all benefits; the amount of premium related to the particular benefits (basic or additional); the manner of calculating the payments due, in particular the manner of calculating the bonuses, discounts, profit share and the actuarial interest rate; an indication of surrender and paid-up values and the extent to which they are guaranteed; as well as the indication of costs or other charges, taxation and financial status of the insurer. Even more advanced information is to be provided in unitlinked products and insurance based on index or other values.61 In addition to the above, information duties concern each prospective change of the insurance contract or change of the law applicable to the contract, together with the impact that such changes may have on the benefits due to the insured. Additional requirements also concern the periodical information (at least annually) regarding the scope of benefits due from the life insurance contract. Comparing the amount of information duties imposed on the insurer in life and non-life insurers, it turns obvious that the more complicated is type of insurance, the more transparent it should be. The new protection regime developed under AIRA introduced several new obligations that aim at strengthening transparency not only between the insurer

60 According to Article 3 point 6) of the AIRA, the large risks are the risks referred to in II Division of the Attachment to the AIRA, namely: (a) groups 4–7, 11 and 12, (b) groups 14 and 15—in case the policyholder is an entrepreneur or a freelancer and the risk is connected with such activity, (c) in groups 3, 8, 9, 10, 13 and 16—if the policyholder exceeds at least two of the following thresholds in the financial year: the sum of assets in the balance sheet in PLN equal to 6.2 mln euro, total net income from sale of goods and services as well as financial operations in PLN equal to 12.8 mln euro, average annual employment in full-time equivalents amounts to 250 people. 61 Please see Article 21–22 of the AIRA; also, from the point of view of the EU regulations please also see: Regulation (EU) No 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs) (O.J. L 352/1).

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and the policyholder but also extending its basic rules to the insured persons, not being the policyholders (it concerns especially group insurances). The need of effective implementation of transparency in insurance on account of a third party required the policyholder to be involved. Thus, in case of an insurance contract executed on account of a third party, in particular in a group insurance contract, certain information obligations towards the insured have been imposed on the policyholder directly or on the insurer to be provided through the policyholder.62

2.2.3

Act on Consumer’s Rights

On 30 May 2014, the Act on Consumer’s Rights63 was enacted as a result of the process of implementation of Directive 2011/83/UE on Consumers’ Rights (Directive 2011/83/UE). It became an important regulation with regard to the contractual relations with ‘consumers’64 in relation to contracts that can be concluded at a distance. Although Directive 2011/83/UE does not apply to financial services, its minimal harmonisation character allows the EU Member States to extend its application to other domains not included in the Directive. This relates in particular to types of contracts that have not been included in the scope of application of Directive 2011/ 83/UE. Such was the decision of the Polish legislator: insurance contracts concluded at a distance have been included in the scope of application of the provisions enacted as a transposition of the said Directive. Although similar provisions existed previously in other legal acts, the current provisions resulting from the implementation of Directive 2011/83/UE are more precise. The impact of the provisions of the Act on Consumer Rights may be seen from different perspectives: as regards the entities on which the obligations are imposed (not only insurers but also insurance intermediaries), as well as from the perspective of the scope of the information, the moment of providing such information to the consumer, the impact on the insurance contract and finally the inclusion of the notion of consumer in the protection regime. Similarly to other discussed legal acts, the nature of the duties imposed on the insurer by the Act on Consumer Rights aims mostly at ensuring the transparency of the contract. By and large, we could say that even the right of withdrawal serves this purpose, though this matter will not be developed on further.65 There is no doubt that

62

Please see as an example Article 17 sec. 2 and 18 sec. 4 of the AIRA. Act dated 30 May 2014 on Consumer Rights (uniform text: O.J. 2017 item 683). 64 According to Article 221 of the PCC, the consumer shall be deemed to be any natural person who performs acts in law with an entrepreneur, the said acts not being directly connected with his economic or professional activity. 65 In accordance with the Article 40 of the Act, the consumer has the right of withdrawing for any reason from the financial services contract concluded at a distance within 14 days as from its conclusion, or from receiving the information on this right. In case of insurance contract, the right of withdrawal can be executed within 30 days from the day of receiving information on concluding the contract or informing the consumer on the right of withdrawal. These provisions co-exist with the provisions of the PCC, Article 812 § 4, which applies to all policyholders, regardless their consumer 63

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the conclusion of a contract at a distance notably aims to reduce the time and increase convenience in terms of distribution of a certain product or service. However, the above-mentioned aim should not precede the information duty towards the customer. Therefore, the legislator provided for a separate number of obligations in relation to financial service contracts, including insurances. In the latter case, the insurers were required to meet additional information requirements provided for in Chapter 5 of the Act on Consumer Rights. According to Article 39 of the Act on Consumer Rights, the entrepreneur (including the insurer) is required to provide information to the consumer in a clear and comprehensible way, no later than at the moment the consumer expresses the will to be bound by a contract. It should take effect in a way suitable for the means of distance communication used. The scope of information that needs to be provided is mostly compliant with Article 6 of Directive 2011/83/UE. Also, this information should be provided before the contract is concluded, on paper or on any other durable means accessible for the consumer. Precisely, as mentioned, it should take place when the consumer expresses the will to be bound by the contract, at the latest. In the insurance industry, it should be thus meant as a moment of submitting the insurance application to the insurer. Where the contract is concluded at the consumer’s request via means of distant communication by which that information cannot be provided, the insurer is obliged to provide that information promptly at the time the contract is being concluded. During the performance of a contract, the consumer shall be entitled to demand confirmation of the content of the contract in writing. The consumer also has the right to request a change of the means of distance communication, unless the contract does not provide for the use of such a means of communication or the means are not suited to the nature of the service provided. The information duties shall not apply to one-off services provided via means of distant communication where an invoice is issued for such services and that entrepreneur makes available, as an element of its business enterprise, one or more means of distance communication. However, the two latter issues do not seem to concern insurance as the risk coverage is durable in time.

2.2.4

Act on Counteracting Unfair Practices

Transparency rules applicable to insurance contracts also result from Act dated 23 August 2007 on counteracting unfair market practices66 (the ‘Act on unfair practices’). The Act on unfair practices is the implementation of Directive 2005/

status, if only the insurance contract has been concluded for the period exceeding 6 months and the only division concerning the deadline for executing the withdrawal, where entrepreneurs should effect it within 7 days and the natural persons within 30 days from the moment of concluding the contract. That is why, it seems that the regulation of the Act on consumer rights has a limited impact on insurance contracts and mostly is used to the short-term travel and similar insurance. 66 Act dated 23 August 2007 on counteracting unfair market practices (uniform text: O.J. 2017, item 2070).

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29/CE dated 11 May 2005 concerning unfair business-to-consumer commercial practices in the internal market (Directive 2005/29/CE).67 The Act on unfair practices benefits partially also from the goals of Directive 2005/29/CE, which, as the European Commission has stressed, aimed at boosting consumer confidence and making it easier for businesses, especially small and medium sized (SMEs), to carry out cross-border trading. Most significant unfair practices that can be used in the insurance industry were recognised at that stage, i.e. practices such as providing untruthful information to consumers or using aggressive marketing techniques to influence their choices. From the wide range of types of unfair practices recognised in Directive 2005/29/CE and subsequently by the Polish law, counteracting the provision of misleading information by the insurers seems to be one of the important elements of the legislation. Seemingly, it forms part of the transparency regime and is directly related to contracting in the insurance field. Thus, particular attention from the transparency point of view in insurance should be put on those practices that are misleading in such a way that the information provided by the insurer may affect the decision of the consumer in terms of concluding the contract, which may take place in particular if it contains false information and is therefore untruthful or in any way, including overall presentation, deceives or is likely to deceive the average consumer, even if the information is factually correct, in relation to one or more of the following elements, and in either case causes or is likely to cause the consumer to take a transactional decision that he would not have taken otherwise. Even if the information is not false but does not include important data necessary for taking up the decision on concluding the contract, it can be treated as misleading and thus unfair practice.68 The above regulation co-exists with other laws that regulate particular branches of industries, for example when the important information is not self-regulated in the Act on unfair practices but refers to other provisions of law that enact the obligation to provide the consumer with certain pieces of information. In the case of insurance contracts, such information is that included in the GTC and other pre-contractual documentation. Some of the courts’ verdicts confirm that the lack of proper information concerning the content of the insurance terms (for example concerning the unilateral right of terminating the insurance contract and the right of changing the insurance premium) should be treated as an unfair business practice.69

67 Directive 2005/29/EC Of The European Parliament And Of The Council of 11 May 2005 concerning unfair business-to-consumer commercial practices in the internal market and amending Council Directive 84/450/EEC, Directives 97/7/EC, 98/27/EC and 2002/65/EC of the European Parliament and of the Council and Regulation (EC) No 2006/2004 of the European Parliament and of the Council (‘Unfair Commercial Practices Directive’), O.J. no L 149/22. 68 Article 6 of the Act on unfair practices. 69 Please see for example decisions of the District Court in Warsaw dated 22 January 2015 (XXV C 430/12), Decision of the District Court in Warsaw dated 28 June 2012 (XVII AmA 58/11), Decision of the District Court in Warsaw dated 29 December 2014 (XXIV C 828/13), Decision of the Supreme Court dated 28 September 2018 (I CSK 179/18).

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Act on Protection of Competition and Customers

The Polish legal system allows the consumers to exercise their individual right to be well informed in several ways, including a contractual level (in direct relation to the insurer), amicable dispute resolution and in-court proceedings (an incidental control). Apart from the above, there is also a possibility to claim and determine by the relevant public authority as to whether a particular clause should be regarded as abusive (an abstract control). Consumers can exercise their right for the in-court proceedings by way of an incidental control. This tool can be used when a contract concluded includes an abusive clause (and there is no possibility to find an amicable solution with the insurer). In this case, the consumer may turn to the particular district court and initiate civil law proceedings in order to claim his or her rights settled with the argumentation that the relevant provision of the contract is not binding as it is abusive. The abstract control, in turn, relates to the possibility to notify the relevant authority about the suspected use of abusive clauses in contracts with consumers. The abstract control was recently subject to changes—in April 2016, an amendment to the Act on protection of competition and consumers70 came into force, and on its basis the President of the UOKiK has been granted the power to decide on the unlawful character of contractual clauses (abusive clauses). Previously, the Court of Competition and Consumer Protection (SOKiK) had such power. The contractual clauses recognised by the legally valid judgment of the SOKiK as abusive were entered in the register, and from that moment it was forbidden to use them in contracts concluded with consumers. Currently, once the claim to the President of UOKiK is submitted, a consumer can be admitted (as a concerned person) to participate in the proceedings regarding the recognition of the contractual provisions of the contract as unlawful. The claimant is authorised to file and explain the circumstances of the case and review its files. The consumer’s notice addressed to the President of the UOKiK shall indicate whether the consumer has contacted the entrepreneur in order to remove the challenged provision from the contract and what the standpoint of this entrepreneur was. A contract template, including the disputed provision and a short justification of the reasons why it is a violation of good customs or a gross breach of the consumer’s rights, has to be attached to the said standpoint. The initiated procedure ends with an administrative decision of the President of the UOKiK, which determines whether or not a given clause is abusive and forbidden in further use. The President of the UOKiK may also set out measures to remove the ongoing effects of unlawful practice and impose on the entrepreneur a fine. This issued decision takes effects only against the entrepreneur applying such abusive clause and due to all consumers that have entered into the contract with this entrepreneur under provisions indicated in the decision. The relevant decisions of the President of the UOKiK are published on the UOKIK’s website.

70 Act dated 16 February 2007 on Competition and Consumer Protection, (uniform text: O.J. 2018, item 798).

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Regardless of the above possibility to decide on contractual terms as a result of a claim, UOKiK often conducts regular checks on contract templates used by entrepreneurs in consumer contracts, including insurance contracts. Such verifications are often a result of notices addressed to the UOKiK by consumers, the consumer ombudsman, the Financial Ombudsman or consumer organisations. As a consequence, the UOKiK can initiate administrative proceedings for the recognition of the abusive nature of some provisions of the standard contract. In the course of such controls, it examines the application of the transparency rule.

2.2.6

The Act on Insurance Distribution

The recent developments of the EU regulations in terms of distribution of insurance products, namely Directive (EU) 2016/97 of the European Parliament and of the Council on insurance distribution71 (the IDD), provided for additional regulations on requirements as for transparency in the insurance distribution area. They had a great impact on the scope of information provided to the policyholders and the insured, as well as on their presentation, which was required to be simple and clear. In terms of the extension of the scope of information required by the IDD, it seems that transparency regarding the remuneration72 of the insurance distributors73 and the management of conflict of interest74 is the most important. IDD required that the customers be provided in advance with clear information about the status of the persons who sell insurance products and about the type of remuneration they receive. Such information should be given to the customer at the pre-contractual stage.75 The same obligation was also imposed on employees of the insurer who conduct distribution activity.76 Further, the IDD required the Member States to ensure transparency in relation not only to the fact that the remuneration on account of distribution activity is paid but also to the manner and basis of its calculation in order to avoid situations in which it can impair the ability of the insurance distributors to act in accordance with the best interest of the customers or prevent them from making suitable recommendations or presenting information in a form that is fair, clear and not misleading.77 In order to meet the above aims, Member States need to ensure that insurance distributors are not remunerated or 71

Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution, OJ L 26/19, pp. 19–59. 72 Please see Article 17 of the IDD. 73 According to Article 2 sec. 1 point (8) of the IDD, an insurance distributor means any insurance intermediary, ancillary insurance intermediary or insurance undertaking. According to Article 2 sec. 1 point (3) of the IDD, an insurance intermediary means any natural or legal person, other than an insurance or reinsurance undertaking or their employees and other than an ancillary insurance intermediary, who, takes up or pursues the activity of insurance distribution in exchange of a remuneration. 74 Please see Article 19 of the IDD. 75 Please see recital 40 of the IDD. 76 Please see recital 41 of the IDD. 77 Please see recital 46 of the IDD.

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do not remunerate or assess the performance of their employees in a way that conflicts with their duty to act in accordance with the best interests of their customers. In particular, the insurance distributor shall not make any arrangement by way of remuneration, sales’ targets or otherwise that could provide an incentive to itself or its employees to recommend a particular insurance product to a customer when the insurance distributor could offer a different insurance product that would better meet the customer’s needs.78 In terms of information duties, the insurance distributors have the obligation to provide the customer with information regarding the amount of the fee if the fee is directly payable by such customer or, where that is not possible, with information regarding the method of computation of the fee.79 Member States have been obliged to ensure that, before the conclusion of an insurance contract, an insurer communicates to its customer in a timely manner the nature of the remuneration received by its employees in relation to the insurance contract. Article 19 of the IDD, which refers to conflict of interest and transparency, requires the Member States to ensure that before the conclusion of an insurance contract, an insurance intermediary, except for the above-mentioned information regarding remuneration, provides the customer in a timely manner with information regarding the ownership structure between the intermediary and the insurer, the status of the intermediary, including whether it provides the advice or not.80

78

Please see Article 17 sec. 3 of the IDD. Please see Article 19 sec. 2–5 of the IDD. 80 Such information must include: 79

(a) whether it has a holding, direct or indirect, representing 10% or more of the voting rights or of the capital in a given insurance undertaking; (b) whether a given insurance undertaking or parent undertaking of a given insurance undertaking has a holding, direct or indirect, representing 10% or more of the voting rights or of the capital in the insurance intermediary; (c) in relation to the contracts proposed or advised upon, whether: i. it gives advice on the basis of a fair and personal analysis; ii. it is under a contractual obligation to conduct insurance distribution business exclusively with one or more insurance undertakings, in which case it is to provide the names of those insurance undertakings; or iii. it is not under a contractual obligation to conduct insurance distribution business exclusively with one or more insurance undertakings and does not give advice on the basis of a fair and personal analysis, in which case it is to provide the names of the insurance undertakings with which it may and does conduct business; (d) the nature of the remuneration received in relation to the insurance contract; (e) whether in relation to the insurance contract, it works; i. on the basis of a fee, that is the remuneration paid directly by the customer; ii. on the basis of a commission of any kind, that is the remuneration included in the insurance premium; iii. on the basis of any other type of remuneration, including an economic benefit of any kind offered or given in connection with the insurance contract; or iv. on the basis of a combination of any type of remuneration set out at points (i), (ii) and (iii).

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The Polish Act on Insurance Distribution (the AID) implemented the IDD in full. Certain issues regarding transparency have been developed in greater detail, such as transparency in the division of brokers81 and agents,82 as well as their roles, while some others remained as adopted in the IDD (conflict of interests and the remuneration of the insurance distributors, which are strictly connected).83 In this respect, Polish regulations provide a surprisingly high level of protection to policyholders. First of all, it is claimed that the strict division of intermediaries into brokers and agents seems to well serve the purpose of maintaining transparency (and especially managing conflicts of interest) as Polish law leaves little room for doubt on whose behalf an intermediary acts on and whose interests are represented in the insurance distribution process. A properly shaped information policy supports understanding of the role of the insurance intermediary even if the insurer pays the broker’s remuneration. Though the above belongs rather to the market structure rules, it seems also to affect the contractual relations between the policyholder and the intermediaries, mostly in respect of disclosing the information on remuneration.84 Further obligations in relation to the scope and manner of disclosure of information towards the insurance customers have been imposed on the insurance distributors by delegated acts issued on the basis of the IDD.85 One of the most important is the obligation to present information regarding insurance products in a simple, standardised form, similarly to previously implemented solution for investments products—KID.86 The obligation to present the information in standardised format is related to the pre-contractual stage, and its aim is to provide the customer with the 81

Understood as acting in the name and for the client. Understood as acting in the name and for the insurer. 83 Please see for example: Maśniak (2014); Consultation document on the Review of the Insurance Mediation Directive (IMD) Commission Staff Working Paper, s. 9, Bruno Geiringer, IMD2: the review of the Insurance mediation Directive, http://www.out-law.com/page-11652, s. 3; D. Maśniak, K. Malinowska, Czynności dystrybucyjne w nowym reżimie zawierania umów ubezpieczenia – wybrane aspekty implementacji dyrektywy nr 2016/97 w sprawie dystrybucji ubezpieczeń, Prawo Asekuracyjne 2/2017. 84 The Polish AID implemented the IDD in its minimum form, i.e. by introducing the requirement to reveal character of the remuneration, but not its amount. No ban on broker’s commission has been even discussed; Please see: Malinowska (2016), pp. 89–101. 85 See: Commission Delegated Regulation (EU) 2017/2359 of 21 September 2017 on information requirements and conduct of business rules applicable to the distribution of insurance-based investment products conduct requirements (IBIPs) (O.J. L 341/8), Commission Delegated Regulation (EU) 2017/2358 of 21 September 2017 supplementing Directive (EU) 2016/97 of the European Parliament and of the Council with regard to product oversight and governance requirements for insurance undertakings and insurance distributors (O.J. L 341/8), Commission Implementing Regulation (EU) 2017/1469 of 11 August 2017 laying down a standardised presentation format for the insurance product information document (O.J. L 209, 12.8.2017, pp. 19–23). For background information please also see: Technical Advice on possible delegated acts concerning the Insurance Distribution Directive, EIOPA-17/048, 1 February 2017. 86 Commission Delegated Regulation (EU) 2017/653 of 8 March 2017 supplementing Regulation (EU) No 1286/2014 of the European Parliament and of the Council on key information documents for packaged retail and insurance-based investment products (PRIIPs) by laying down regulatory technical standards with regard to the presentation, content, review and revision of key information documents and the conditions for fulfilling the requirement to provide such documents, C/2017/1473, OJ L 100, 12.4.2017, pp. 1–52. 82

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possibility to compare the insurance products and, only on this basis, take a decision on whether to conclude an insurance contract. Polish regulations did not provide specific developments in this respect. As the above constitute purely EU generally binding regulations—they do not have their equivalents in Polish law and will not be discussed further.

3 Conclusions On the basis of the analysis here above, although no definition of transparency appears in Polish law, ‘transparency’ seems to be recognised in Poland in a similar way as in other EU Member States and does not differ from its universal meaning. Also, as in other countries, it is treated at least as a dual obligation: a general principle of functioning of the insurance industry that relies on the good faith rule, as well as a principle of providing information. The second pillar of transparency can also be divided into two aspects: the amount of information that should be provided and the manner in which it should be provided. Further, divisions can be made in relation to the moment at which such information is provided, but there is no doubt that, as in other EU members, Poland is not the exception and all the relevant information related to the insurance contract as such should be provided before the insurance contract is concluded. The Polish legislator provided for principles for making the rule of transparency effective. It introduced the duties to inform the policyholder/,insured as well as directions on the manner in which such information should be provided in the generally binding legal acts, such as the PCC, the AIRA and others. Although the PCC, being a general civil law regulation, does impose such obligation without providing for any sanctions in case of breach, the AIRA refers in general to conducting insurance activity in violation of the legal provisions. Any violation of any legal obligation aiming at ensuring transparency is then sanctioned. New provisions of AID certainly strengthen the concept of transparency in contractual relations on the Polish insurance market, not only in insurance contracts but also in the process of distributing insurance products. Where the legal provisions seemed unclear or—in some cases—unnecessary, the PFSA provided for its guidelines or good practices. Although they do not constitute legal provisions and are not generally binding, having a general status of ‘comply or explain’ rules, they force the insurers to follow the suggestions of the PFSA in a way that should enable the transparency rule to be followed. It is quite clear from the above analysis that the idea of transparency in the Polish legal system is connected directly to consumer law, and the protection of the policyholder/insured is much wider in terms of transparency in the context of abusive clauses than in any other contractual relationship under Polish law. One may hope that any examination of the GTC in the future, either by the PFSA or UOKiK, will show different conclusions from those found in the discussed reports, namely no deficit of information, and confirm that the decision of the

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policyholder in an insurance contract has been made on the basis of clear and unambiguous information presented in an understandable manner. One additional issue, however, should be noted. There is no doubt that transparency in insurance contracts is absolutely necessary and that the Polish legislator should ensure that relevant legal instruments are in place to enable the transparency rule to make it work. However, the actions of the supervisory authorities or the aim of the rule should not alter the rule of transparency as a rule ‘at all costs’. It should be clear to the policyholder that the rule of transparency is for its benefit, but it should not substitute itself to his/her decision. Decision should always be made solely by the customer after he or she benefits from the relevant information.

References Cousy H (2002) La fin de l’assurance? Considérations sur le domaine propre de l’assurance privée et ses frontières. In: Droit et économie de l’assurance et de la santé. Mélanges en l’honneur de Yvonne Lambert-Faivre et Denis-Clair Lambert. Dalloz, Paris, pp 111–128 Geiringer B, IMD2: the review of the insurance mediation directive, p 3. http://www.out-law.com/ page-11652 Kalińska E (2014) Wypełnianie nowych formularzy do sprawozdań może być kłopotliwe. http:// www.gu.com.pl/index.php?option¼com_content&view¼article&id¼53575:wypenianienowych-formularzy-do-sprawoz-da-moe-by-kopotliwe&catid¼129:rynek-ubezpieczeniowy& Itemid¼151 Kiziewicz E (2004) Zasada transparentności a ogólne warunki ubezpieczeń. http://www.rzu.gov.pl/ publikacje/artykuly-pracownikow-i-wspolpracownikow/Ewa_Kiziewicz_-_Zasada_ transparentnosc_a_ogolne_warunki_ubezpieczen__132 Łuczyński M, Rekomendacja dobrych praktyk informacyjnych dotyczących ubezpieczeń na życie związanych z ubezpieczeniowymi funduszami kapitałowymi – element budowy nowoczesnego rynku ubezpieczeń na życie, Wiadomości Ubezpieczeniowe, numer specjalny 3/2013 Malinowska K (2015) Transparentność w umowie ubezpieczenia - przemiana zasady najwyższego zaufania w prawo do informacji. In: Gnela B (ed) Informacja w prawie ubezpieczeń gospodarczych, Warszawa Malinowska K (2008) Umowa ubezpieczenia w Europie bez granic, Bydgoszcz, p 62 Malinowska K (2016) Insurance transparency and protection regime under the insurance distribution directive. Insurance Review/Wiadomosci Ubezpieczeniowe 4(2):89–101 Maśniak D (2014) Wynagrodzenie pośrednika w ubezpieczeniach morskich i jego transparentność w świetle projektowanych zmian dyrektywy o pośrednictwie ubezpieczeniowym (IMD2), Gdańskie Studia Prawnicze, Tom XXXII Maśniak D, Malinowska K, Czynności dystrybucyjne w nowym reżimie zawierania umów ubezpieczenia – wybrane aspekty implementacji dyrektywy nr 2016/97 w sprawie dystrybucji ubezpieczeń, Prawo Asekuracyjne 2/2017 Orlicki M (2017) Znaczenie prawne informacji o istotnych elementach wzorca umowy w świetle art. 17 ustawy o działalności ubezpieczeniowej i reasekuracyjnej. Prawo Asekuracyjne 1:3–12 Ostrowska M (2014) Wdrażanie dyrektywy Solvency II i jej rola w integracji europejskiego rynku ubezpieczeniowego, Warsaw University Law review, nr 1/2015 Tarasiuk-Flodrowska A (2014) Abusive clauses in consumer and insurance contracts – recent developments in Europe. Evropska Revija za Pravo Osiguranja/European Insurance Law Review 1:31–40 Tarasiuk-Flodrowska A (2011) Bancassurance on the EU market – specificities of the Polish Law. Evropska Revija za Pravo Osiguranje/European Insurance Law Review 4:6–12

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Ulusoy S (2012) Transparency concerning on-line insurance. In: Transparency in insurance law. AIDA Seminar, Istanbul, p 39 Wandt M (2014) Transparency as a general principle of insurance law. In: World congress of AIDA, Rome Więcko-Tułowiecka M (2017) Challenges of the payment protection insurance market – analysis of European tendencies in the context of the need for legal actions in Poland. Prawo Asekuracyjne 1:61–72

Legal Acts Act dated 23 April 1964 - The Civil Code (uniform text: O.J. 2018 item 1025, as amended) Act dated 29 September 1994 on Accountancy (uniform text: O.J. 2018, item 395, as amended) Act dated 2 March 2000 on the protection of the consumers rights and product liability, (O.J. 2000, No 22, item 271 as amended) Act dated 22 May 2003 on Insurance Activity (O.J. 2003, No 124, item 1151, as amended) Act dated 13 April 2007 amending the PCC (O.J. No 82, item 557) Act dated 13 April 2007 on the amendments to the Civil Code and some other acts (O.J. No 82, item 557) Act dated 16 February 2007 on Competition and Consumer Protection, (uniform text: O.J. 2018, item 798) Act dated 30 May 2014 on Consumer Rights (uniform text: O.J. 2017, item 683) Act dated 23 August 2007 on Counteracting unfair market practices (uniform text: O.J. 2017, item 2070) Act dated 11 September 2015 on Insurance and Reinsurance Activity (uniform text: O.J. 2018, item 999) Act dated 15 December 2017 on Insurance Distribution (O.J. 2018, item 2210, as amended) Regulation of the Minister of Finance dated 13 June 2012 on the manner to prepare and the scope of the document confirming the conclusion of compulsory insurance contracts (O.J. 2012, item 838) Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts, (O.J. L 95, 21.4.1993.) Directive 98/34/EC of the European Parliament and of the Council of 22 June 1998 laying down a procedure for the provision of information in the field of technical standards and regulations (O.J. EU L 204 dated 21.07.1998), p. 37 Directive 2005/29/EC of the European Parliament and of the Council of 11 May 2005 concerning unfair business-to-consumer commercial practices in the internal market and amending Council Directive 84/450/EEC Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) (Text with EEA relevance), (OJ L 335, 17.12.2009), pp. 1–155 Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution (OJ L 26/19), pp. 19–59 Regulation (EU) No 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs) (O.J. L 352/1). Regulation dated 16 December 2015 of the Minister or Finance regarding information provided in the general contractual terms used by insurance companies (O.J. 2015, item 2189) Commission Implementing Regulation (EU) 2017/1469 of 11 August 2017 laying down a standardised presentation format for the insurance product information document (O.J. L 209), 12.8.2017, pp. 19–23.

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Commission Delegated Regulation (EU) 2017/2359 of 21 September 2017 on information requirements and conduct of business rules applicable to the distribution of insurance-based investment products conduct requirements (IBIPs) (O.J. L 341/8) Commission Delegated Regulation (EU) 2017/2358 of 21 September 2017 supplementing Directive (EU) 2016/97 of the European Parliament and of the Council with regard to product oversight and governance requirements for insurance undertakings and insurance distributors (O.J. L 341/8)

Administrative Decisions Decision of SOKiK dated 23 January 2012 (XVII AmC 977/11), http://orzeczenia.warszawa.so. gov.pl/details/$N/154505000005127_XVII_AmC_000977_2011_Uz_2012-01-23_001. Accessed 1 Jan 2018

Case Law Decision of the Supreme Court – Civil Chamber dated 28 March 2007 (II CNP 124/06) Decision of the Supreme Court – Civil Chamber dated 12 January 2007 (IV CSK 307/06) Decision of the Supreme Court – Civil Division, dated 2 December 2011 (III CSK 55/11) Decision of the Supreme Court – Civil Division, dated 10 February 2016, (I CSK 1/15); Please also see: Decision of the Court of Appeal in Warsaw – Civil Division, dated 24 October 2013, (I ACA 535/13) or Decision of the Supreme Court – Civil Division, dated 15 February 2013, (I CSK 313/12) Decision of the District Court in Warsaw dated 22 January 2015 (XXV C 430/12) Decision of the District Court in Warsaw dated 28 June 2012 (XVII AmA 58/11) Decision of the District Court in Warsaw dated 29 December 2014 (XXIV C 828/13) Decision of the Supreme Court dated 28 September 2018 (I CSK 179/18) The Polish Supreme Court decisions dated 16.09.2016 (IV CSK 711/15), Legalis no. 1716875 (on the interpretation of unclear contractual provisions); dated 06.02.2015 (II CSK 295/14)

Other Sources Letter of the President of the Polish Financial Supervisory Authority dated 04.04.2017 regarding the presentation of the general insurance terms and conditions on insurers’ websites. https://www. knf.gov.pl/knf/pl/komponenty/img/stanowisko_UKNF_publikacja_OWU_przez_ZU_4_04_ 2017_50687.pdf Office of Competition and Consumer Protection, Consumer Politics Department (2010) Report on the control of the general terms applied in life insurances, Warsaw Office of the Commission on Supervision of Insurance and Pension Funds (2005) Irregularities in the general insurance terms and conditions. Department of the Communication and European Integration, Warsaw, p 4 Office for Consumer and Competition Protection, Consumer Politics Department; Report on the control of the general terms applied by insurers, September 2006, Warsaw.

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Recommendation U regarding good practices in respect of bancassurance, Commission for Financial Supervision, June 2014. http://www.knf.gov.pl/Images/Rekomendacja_U_tcm75-38338. pdf. Accessed 2 Mar 2016 Guidelines for insurance companies regarding the distribution of insurance, Commission for Financial Supervision, 24 June 2014a, Guidelines for insurance companies regarding the distribution of insurance, Commission for Financial Supervision, June 2014b., http://www.knf.gov.pl/Images/Wytyczne_dystrybucja_ ubezpieczen_24-06-14_tcm75-38337.pdf. Accessed 1 Mar 2016 Working Paper: Online services, including e-commerce, in the Single Market; Commission Staff Working Document Online Services, Including E-Commerce, In The Single Market Accompanying The Document Communication From The Commission To The European Parliament, The Council, The European Economic And Social Committee And The Committee Of The Regions; A coherent framework to boost confidence in the Digital Single Market of e-commerce And other online services {COM(2011) 942 final} {SEC(2011) 1640 final Technical Advice on possible delegated acts concerning the Insurance Distribution Directive, EIOPA, 1 February 2017, EIOPA-17/048 Commission Delegated Regulation (EU) 2017/653 of 8 March 2017 supplementing Regulation (EU) No 1286/2014 of the European Parliament and of the Council on key information documents for packaged retail and insurance-based investment products (PRIIPs) by laying down regulatory technical standards with regard to the presentation, content, review and revision of key information documents and the conditions for fulfilling the requirement to provide such documents, C/2017/1473, (OJ L 100), 12.4.2017, pp. 1–52 Consultation document on the Review of the Insurance Mediation Directive (IMD) Commission Staff Working Paper, p 9 http://www.investopedia.com/terms/t/transparency.asp#ixzz3eOfkpk65 Polish Language Dictionary. https://sjp.pwn.pl/szukaj/transparentny.html Polish Language Dictionary. https://sjp.pwn.pl/szukaj/przejrzysty.html

Transparency in the Insurance Contract Law of Portugal Margarida Lima Rego

1 Brief Overview of Insurance Contract Law in Portugal In Portugal, the most relevant source of insurance contract law is Decree-Law 72/2008 of 16 April 2008, which came into force on 1 January 2009. This statute, whose main purpose was to approve the new insurance contract legal framework appended thereto, has since been amended once, by Law 147/2015 of 9 September 2015. I shall refer to it hereinafter simply as PICA (Portuguese Insurance Contract Act). PICA was long overdue. It was the first successful attempt, in close to two centuries, to update, complete and consolidate the rules applicable to insurance contracts in general and the main rules applicable to some of the most relevant classes of insurance contracts in Portugal.1 Previously, insurance contracts had been governed by a fragmentary legal framework scattered over an assortment of some long-standing and some comparatively more recent statutes.2 There were inconsistencies within the framework, and some relevant issues were either entirely overlooked or only partially addressed. In addition, there was a widely shared perception that the existing regulation should be amended so as to more faithfully reflect current values, consumer protection not having been high up in the scale of

1 A remarkably thorough regulation of the insurance contract had been included in the Commercial Code of 1833, subsequently replaced, not as successfully when it came to the insurance contract, by the Commercial Code of 1888. 2 For an overview of the history of insurance law in Portugal, see Cordeiro (2013), pp. 75–100. For a more thorough account of the insurance business over the last 45 years, see Carvalho (2016).

M. L. Rego (*) NOVA School of Law, Lisbon, Portugal e-mail: [email protected] © Springer Nature Switzerland AG 2019 P. Marano, K. Noussia (eds.), Transparency in Insurance Contract Law, AIDA Europe Research Series on Insurance Law and Regulation 2, https://doi.org/10.1007/978-3-030-31198-8_8

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legislative concerns at the time some of our most comprehensive statutes had been enacted: the Commercial Code of 1888 and Decree of 21 October 1907.3 PICA comprises a total of 217 provisions, distributed by three main titles: Title I (Articles 1 to 122) includes the most general framework, purporting to regulate the main issues affecting all insurance contracts alike. Title II of PICA (Articles 123 to 174) regulates indemnity insurance. After a relatively small number of provisions devoted to all classes of indemnity insurance, a few chapters specifically regulate liability insurance (Articles 137 to 148), fire insurance (Articles 149 to 151), crop and livestock insurance (Articles 152 to 154), goods in transit insurance (Articles 155 to 160), credit and suretyship insurance (Articles 161 to 166), legal expenses insurance (Articles 167 to 172) and assistance insurance (Articles 173 and 174). Title III (Articles 175 to 217) is concerned with personal insurance. It includes chapters on life assurance (Articles 183 to 209), as well as on accident and health insurance (Articles 210 to 217). PICA applies to all classes of insurance, including those for which more tailored regulation was already in place at the time it came into force or has since been enacted. However, those types of insurance that were or have since been the object of special regulation will continue to be primarily regulated thereby. PICA applies to those classes of insurance only insofar as its rules are compatible with the relevant special regulation. So, for instance, maritime insurance is still primarily regulated by Articles 595 to 615 of the Commercial Code of 1888.4 There are well over 100 instances of compulsory insurance in Portugal.5 Statutes regulate them with varying degrees of comprehensiveness. All such regulation prevails over the comparatively more general rules contained in PICA. Portuguese insurance contract law is also partly made up of rules that originate in a multitude of statutes containing non-insurance-specific regulation, such as those that set forth the legal frameworks on standard terms, on distance selling, on electronic commerce, on consumer protection.6 To some extent, the rules governing the taking up and pursuit of insurance and reinsurance activities in Portugal—the Portuguese Insurance Supervision Act approved by Law 147/2015 of 9 September 2015, as amended by Law 7/2019 of 16 January 2019, implementing Directive 2009/138/EC of the European Parliament

3

Various announcements had been made the past that more systematic and in-depth legislation was in the making. The first of them was a brief reference at the beginning of the preamble of a statute approved as early as 1929. See Vasques (2005), pp. 21–22; Martinez (2006), pp. 34–39 (the latter chaired the committee in charge of drafting what would eventually become PICA). Almeida (1971), pp. 431–459, had included a draft of his own as an appendix to his monograph on the insurance contract, deeming the preparation of a new insurance contract law a ‘necessity’ (p. 423). Other authors would follow suit. In addition to the above, see Cordeiro (2003), pp. 17–23, (passim). 4 See Articles 2 and 155(2) of PICA. See Martinez et al. (2011), pp. 41–42 (annotation by Martinez PR). 5 There is a list of all compulsory insurance requirements on the regulator’s website: www.asf.com. pt. The regulator is the Portuguese Insurance and Pension Funds Supervisory Authority (ASF). 6 See Cordeiro (2013), pp. 553–555.

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and of the Council of 25 November 2009 on the taking-up and pursuit of the business of insurance and reinsurance, known as the Solvency II Directive—also have a palpable impact on insurance contract law. I shall refer to this act, hereinafter, simply as PISA. The same is true for those regulating insurance distribution—the Portuguese Insurance Distribution Act approved by Law 7/2019 of 16 January 2019, which has implemented Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution, known as the Insurance Distribution Directive. I shall refer to this act, hereinafter, simply as PIDA. For instance, the single most relevant criterion used in PICA to distinguish between rules that are absolutely or relatively mandatory to contracting parties from those that only apply by default depends on whether the contract should be qualified as mass insurance or as large-risk insurance, a distinction that stems from a set of directives on the taking up and pursuit of insurance and reinsurance activities in the European Union. PICA mostly applies by default to large-risk insurance, the parties being free to diverge from its rules, save in a very small number of cases.7 As regards mass insurance, however, there is a long list of provisions that may not be contractually derogated from or which may only be derogated from to the benefit of the policyholder, the insured and/or the beneficiary of the insurance. The distinction is currently set forth in Article 5(2) to (4) of PISA. As a Member State of the European Union, much of Portugal’s insurance contract law directly or indirectly originates in EU law, although this phenomenon is more pervasive in the regulation of the taking up and pursuit of insurance and insurancerelated activities than in the rules governing the insurance contract, which, although also partially predisposed by EU law, especially in what concerns the protection of the mass insurance consumer, were in fact more heavily influenced by recent national statutes of a few EU Member States, perhaps most prominently the Belgian Insurance Contract Act of 25 June 1992.

2 Definition of Transparency in Portuguese Insurance Contract Law ‘Transparency’ as a term meant to denote a special concern with the protection of the mass insurance consumer was firstly used in a Portuguese statute in 1994.8 That statute was Decree-Law 102/94 of 20 April 1994, which implemented thirdgeneration Council Directives 92/49/EEC of 18 June 1992 (non-life insurance) and 92/96/EEC of 10 November 1992 (life assurance).

7

Hence, in most instances the transparency requirements that will be discussed in the sections ahead should also be interpreted in this light, when it comes to large risks insurance. No further mention to this distinction will be made in this chapter. See Martinez et al. (2011), pp. 68–71 (annotations by Martinez PR and Oliveira AC). 8 See Oliveira (1995), p. 76.

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Although for the most part Decree-Law 102/94 established a new set of rules regulating the taking up and pursuit of the business of direct insurance and its supervision by the local regulator, Title IV contained a number of provisions directly regulating the insurance contract, amongst which were Articles 168 to 173, which listed the information that insurers must communicate to policyholders before non-life insurance contracts and life assurance contracts were concluded and, as regards the latter, also throughout the duration of contracts. Such provisions implemented Articles 31 and 43 of the third Non-Life Directive and Article 31 and Annex II of the third Life Assurance Directive. Given that there were more provisions in need of implementation on life assurance than on non-life insurance, the chapter where such implementation was accomplished was subdivided into sections, the first of which was entitled ‘Transparency’. There were no other references to transparency in this chapter and no references thereto in the chapter devoted to non-life insurance. The one reference to transparency in insurance contained in this statute was thus in the title of a section within the chapter devoted to life assurance. More than a year would pass before the approval of Decree-Law 176/95 of 26 July 1995, which came into force on 25 October 1995. I shall refer to it hereinafter simply as TIA (Transparency in Insurance Act). TIA’s preamble contextualises the establishment of a new legal framework on transparency in insurance as a much-needed reaction to the inception of the single European market in the insurance sector, which in this country had been accomplished by Decree-Law 102/94. Its entry into force had opened up a new area for competition, potentially giving rise to a greater and much more complex supply of insurance products, so the preamble said. Although there was no specific mention thereto, the abandonment of the prior system of supervisory preapproval of standard terms by the regulator was also an important factor behind the increased variety and complexity of insurance products available on the market.9 This increased variety of products came at the expense of a decline in product transparency and resulting added difficulties in product comparability. To make up for these perceived negative side effects of the single European market in the insurance sector, the third-generation directives ‘increased and broadened the minimal requirements for transparency of individual contractual contents’.10 This approach was ‘in line with the EU’s general approach of consumer protection by implementing a model of information’.11 Hence, the diversity of coverage, exclusions and other contract terms made available on the market, with variable degrees of explicitness, would call for the introduction of minimum transparency requirements in pre and post-contractual relations.

9

See Wandt (2012), pp. 9–22, p. 14. Wandt (2012), pp. 9–22, p. 14. 11 Wandt (2012), pp. 9–22, p. 14. 10

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Such transparency was an ideal to be sought after. In order to achieve that ideal, new information duties were created, setting out the data that insurers and insurance intermediaries should disclose to policyholders prior to, at the time of and after concluding an insurance contract and the manner in which such data should be conveyed to policyholders. Such was the purpose of Articles 168 to 173 of DecreeLaw 102/94 and, shortly afterwards, the main purpose of the Transparency in Insurance Act.12 ‘Transparency’, as used in TIA, is, first and foremost, a reference to the plainness and intelligibility of contract terms, as well as to their exhaustiveness. Strictly speaking, it transcends contract terms, also applying to any accounts of a predominantly descriptive or explanatory nature provided orally and/or in writing at or around the time of contracting and even to the contents of advertisements of insurance products. However, such other accounts might ultimately also be deemed to integrate the contract terms if they are found to be sufficiently concrete and objective so as to allow the interpreter to construe them as such.13 This meaning of the term is consistent with the understanding of the Court of Justice of the European Union that the requirement of transparency of contractual terms, as set forth in Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts, must be interpreted broadly to mean that terms that form part of the main subject matter of the contractual framework must be drafted ‘in plain, intelligible language’.14 Whilst being presented as an end in itself, transparency is ultimately also a means to an implicit end: making accessible to insurance customers all the data that they need to take in and process in order to make an informed decision when choosing to enter into an insurance contract.

3 The Issue of Transparency in Portuguese Insurance Contract Law 3.1

The Principle of Good Faith in Portuguese Insurance Contract Law

Although the term itself plays no part in traditional contract law, transparency is generally regarded as a key value in pre-contractual negotiations, both parties having a duty to negotiate in good faith (Article 227 of the Portuguese Civil Code). Once the contract has been concluded, the parties continue to be subject to the principle of good faith throughout the contract’s duration as they must act in accordance with this

12

See Cordeiro (2013), p. 552. This rule would eventually be set forth in Article 33 of PICA. 14 On the topic of insurance contracts, see Jean Claude Van Hove v CNP Assurances SA. 13

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principle both in fulfilling their obligations and in enforcing their contract rights (Article 762(2) of the Portuguese Civil Code).15 Good faith subjects contracting parties to ancillary duties aimed at protecting their respective counterparties and demanding loyal treatment of one another. Such protection and loyalty duties include duties of disclosure.16 Hence, even before transparency in insurance contracts had been the object of special regulation, to some extent insurers were already bound by such non-insurance-specific information duties, as could be drawn from the above-mentioned provisions on the principle of good faith in general contract law. Also a by-product of the principle of good faith is the regulation contained in Decree-Law 446/85 of 25 October 1985, as amended by Decree-Law 220/95 of 31 January 1995. I shall refer to it hereinafter simply as STA (Standard Terms Act). This Act, which in 1995 incorporated the implementation of Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts, applies to all contracts that consist of, or purport to include, standard terms drafted by one of the parties without any prior individual negotiation. In addition to prohibiting the use of any contract terms that offend the principle of good faith, rendering them null and void (Articles 12 and 15), the STA sets forth specific disclosure requirements that contracting parties must meet if they wish to include their standard terms in the contracts they enter into (Articles 4 to 9). All such standard terms must be fully and adequately communicated to the other party reasonably in advance of the contract’s conclusion. They must be thoroughly explained to the other party whenever such explanation is needed. Non-compliance with any one of these duties—of communication and explanation—results in the exclusion of such terms from the contract. Any ambiguities are resolved through the application of the contra proferentem doctrine, which determines that any doubt as to the meaning of a term will result in the term bearing the meaning most favourable to the adhering party (Article 11). Finally, mention should be made to Law 24/96 of 31 July 1996, as amended from time to time, which approved the Consumer Protection Act (hereinafter, the CPA). This Act reflects the need to protect the weaker contracting party and is applicable to contracts concluded between a professional and a consumer. The professional, in its capacity as supplier of goods or services, has a duty to inform the consumer about the goods or services provided in an objective, adequate and clear way. Consumers must be thoroughly informed about their product’s characteristics, the applicable price, the consequences of default, the contract’s duration, after-sales assistance and/or

15

The main reference on the principle of good faith in Portuguese contract law is Cordeiro (1997). On culpa in contrahendo and the duty to negotiate in good faith, see pp. 527–585. Good faith throughout the duration of a contract is dealt with on pp. 586–660. 16 See Cordeiro (1997), pp. 586–625. Although the author treats duties of disclosure as a third type of ancillary duties, in addition to the protection and loyalty duties, I believe that in all instances they should also be qualified as protection duties and/or as loyalty duties, which appears to deny their autonomy. Information is never an end in itself, but rather a means of protecting or being loyal to one’s contracting parties.

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time of delivery, when relevant. If this duty to inform is not complied with, consumers have a right to terminate the contract (Articles 8 and 9). Such is the wider legal context of any insurance-specific transparency regulation.

3.2

Transparency Regulation: The Previous Regime (TIA)

On 25 October 1995, when the Transparency in Insurance Act (Decree-Law 176/95 of 26 July 1995) came into force, most of that wider legal context was already in place. TIA had its predecessors, some of which were mentioned above. At that time, the legal framework governing insurance contracts in general was mostly still contained in Articles 425 to 462 of the Commercial Code of 1888. These would only be revoked on 1 January 2009, by Decree-Law 72/2008 of 16 April 2008, which replaced them by PICA. Understandably, before this came about, the most relevant sources of duties of disclosure lay elsewhere. Decree-Law 102/94 of 20 April 1994 was eventually replaced by Decree-Law 94-B/98 of 17 April 1998 and the latter by Law 147/2015 of 9 September 2015 (PISA), implementing the Solvency II Directive. As mentioned above, TIA’s preamble identifies the inception of the single European market in the insurance sector as the main driving force behind the growing need for the setting up of minimum transparency requirements in pre- and post-contractual relations. TIA was meant to set out the information that insurers must provide to their client policyholders so as to clarify their respective rights and obligations and thereby reduce the potential for conflict between contracting parties in insurance contracts. It only applied to individual insurance contracts entered into with natural persons, so its rules coexisted with rather than replaced its predecessors in its entirety.17 The drafting of a statute thoroughly regulating all insurance contracts had been publicly referred to a number of times in the past. It had been an apparently on-andoff pet project of different governments, which would not bear any fruits until 2008. In TIA’s preamble, the intention to make it happen was specifically referred to. Notwithstanding that more ambitious project, the need for dispensing adequate levels of consumer protection would recommend that the insurance contract law rules more closely related to the provision of information would come into force sooner rather than later. Such was the reason provided for their (provisional) inclusion in TIA. TIA’s Chapter I contained a number of so-called general provisions. Following a list of defined terms, Articles 2 to 7 of TIA were devoted to the establishment of pre-contractual information duties. Such duties were built upon those previously set forth in Articles 168 to 173 of Decree-Law 102/94 of 20 April 1994. In the first place, there were those duties generally applicable to life assurance contracts (Article

17

See Vasques (1999), pp. 191–192 and 201.

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2) and non-life insurance contracts (Article 3). Then there were duties specifically concerned with group insurance contracts (Article 4) and with insurance contracts that required the insured’s prior taking of a medical exam (Article 5).18 In 2004, Article 5-A was added, on structured savings collection instruments (unit-linked life assurance). Finally, there were some rules on public disclosure of pricing conditions (Article 6) and on the advertising of insurance products (Article 7). TIA’s Chapter II began with a section suggestively entitled ‘Transparency’. It contained two very short provisions. Article 8 set forth the rule that an insurance contract’s general and special terms must be ‘drafted in a clear and perfectly intelligible manner’.19 Article 9 determined that an insurance contract’s special and particular terms could not modify the nature of the risks covered in accordance with the applicable general and special terms, respectively, taking into consideration the legally prescribed risk classification (at that time Articles 114 and 115 of DecreeLaw 102/94). Given that insurance products were not—and are still not—subject to the principle of numerus clausus, the only concern behind this legal restriction seemed to be that of preventing the misselling of insurance products by prohibiting insurers from distributing any insurance products that may appear to belong to a class of insurance whilst actually belonging to a different class of insurance.20 Then there came a section on life assurance (Articles 10 to 12) and another section on non-life insurance (Articles 13 to 16). Both set forth the minimum contents of the contracts’ general and special terms. Chapter II included a fourth and final section, which contained a number of rules on the formation and duration of insurance contracts (Articles 17 to 25). A comparison of TIA and PICA allows us to confirm that whilst the wording of the relevant provisions has suffered significant amendments, the bulk of TIA’s provisions has found its way into PICA. Although Articles 5-A to 7 are still in force today, we may safely conclude that TIA was almost entirely replaced by PICA. We may also confirm the reasonableness of the decision not to wait until the enactment of PICA, which paved the way for the setting forth of the main rules on transparency in TIA, given that over a decade would pass before PICA’s entry into force, on 1 January 2009.

18

See Vasques (1999), pp. 214–215. See Vasques (1999), p. 350. The author believes that the actual wording came from Article 3(b) of the Spanish Ley 50/1980 of 8 October. 20 See Rego (2010), p. 283. 19

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Transparency Regulation: The Current Regime (PICA) Transparency in the Formation of an Insurance Contract

PICA is currently the most relevant source of transparency requirements in the formation of an insurance contract. One may safely conclude that information plays a very important role in PICA, there being numerous provisions specifically setting forth or referring to information duties of various kinds and scope.21 PICA’s Title I regulates the formation, vicissitudes and cessation of all insurance contracts in general. As to formation, first and foremost one should mention the prohibition of discriminatory practices, which deepens the concept of what is considered a discriminatory practice22 and sets forth a procedure to settle disputes arising from an insurer’s refusal to enter into an insurance contract with a prospective policyholder or the former’s acceptance to enter into such a contract only on more onerous terms than might otherwise have been granted to that prospective policyholder, such as a higher premium and/or the stipulation of extra exclusion clauses. This procedure includes a specific duty to provide the prospective policyholder with information on the objective data upon which the insurer grounds its decision to refuse the client or to condition its acceptance of the client to those unfavourable terms (Article 15 of PICA).23 This appears to be the new law’s first transparency requirement, although the term has not been employed in this context. When refusing a contract or when accepting to conclude it only under what appear to be discriminatory terms, the insurer must be able to justify the different treatment, but it must also be transparent as to the reasons behind that stance. Silence is no longer an option. By making insurers accountable to whomever reaches out to them in search of an insurance contract, this requirement reinforces the prohibition of discriminatory practices: not only are insurers banned from treating their clients differently unless their reasons to do so are legally acceptable, but this information right puts any one of them in a position to check them. The insurer’s duties to inform the policyholder and keep it up to speed on the contents of the insurance product that it supplies both before and after the contract is concluded are also very thoroughly laid down, with an emphasis on the insurer’s pre-contractual information duties (Articles 18–23 of PICA). The policyholder’s and the insured’s information duties on the insured risk are also comprehensively regulated, with emphasis on the initial declaration of the risk and the policyholder’s or the insured’s wilful or negligent misrepresentations respectively giving rise to the

21

See Articles 15, 18-26, 29, 78-79, 87-88, 91-94, 100, 133, 135, 140, 170, 178, 180, 185-187, 205-206, 208 and 201 of PICA. See Teles (2012) (passim); Cordeiro (2013), pp. 564–586. In English, see Rego (2017), pp. 565–567. 22 On discrimination in insurance, see Rego (2015a), pp. 119–134; See Rego (2015b), pp. 377–392. On Article 15 of PICA, see Rego (2014), pp. 869–888; Rego (2016), pp. 703–729. 23 Both in its original version and as amended by Law 147/2015.

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insurer’s right to avoid the contract and to its right to terminate or amend the contract (Articles 24–26 of PICA). Given that, as seen above, transparency as a concept used in this jurisdiction is meant to refer to information requirements placed upon the insurer, rather than to those placed upon the policyholder or the insured, the former will be analysed herein in greater detail than the latter.24 Article 18 of the PICA lays down the data that every insurer must disclose to a prospective policyholder as part of its pre-contractual duties.25 Although the provision includes a long list of topics that must be covered when rendering such information to the client, that list is non-exhaustive in nature. In sum, the insurer must convey to its client no less than the full contents of the envisaged insurance contract.26 This information must be conveyed to the client clearly and in writing. It must be written in Portuguese. The document must be delivered to the client prior to the contracting stage so that the client may process the information contained in that document before entering into the insurance contract (Article 21 of PICA).27 Except for the language requirement, even without such provisions we could reach a similar conclusion just by taking into consideration Article 232 of the Portuguese Civil Code and Articles 4 and 5 of the Standard Terms Act. Nonetheless, prior to the entry into force of PICA, it was fairly common practice for insurers to provide their clients at the contracting stage with a short summary of the contract terms, only conveying to them the full contents of the contract after its conclusion. Therefore, although legally unnecessary, the introduction of this requirement played in fact an important role in the dissemination, throughout the industry, of the notion that this practice is legally untenable.28 The following is the list of topics that are non-exhaustively set forth in these provisions—topics that an insurer must cover in its written communication with clients so as to fulfil its pre-contractual information duties towards them: (a) the insurer’s name and legal form; (b) the scope of the insurance coverage; (c) cover exclusions and limitations; (d) the premium amount or its calculation method, as well as the payment method and the consequences of default; (e) applicable bonusmalus rules and their calculation method; (f) minimum insured capital in compulsory insurance; (g) claim limits per insurance period; (h) the contract’s duration and the rules governing its renovation and cessation; (i) the rules on assignment; (j) how to

24

On the Portuguese rules on the initial declaration of the risk and on the consequences attached to the policyholder’s or the insured’s wilful or negligent misrepresentations, see the monograph by Poças (2013) (passim). See also Gomes (2011), pp. 388–445 (passim); Martinez et al. (2011), pp. 131–178 (annotations by Oliveira AC and Martinez PR); Teles (2012), pp. 249–273; Cordeiro (2013), pp. 573–586. 25 See Martinez et al. (2011), pp. 101–105 (annotation by Ribeiro E); Teles (2012), pp. 216–230; Cordeiro (2013), pp. 564–567. 26 Rego (2012a), pp. 22–23. 27 In some respects this requirement is closely reminiscent of § 7 of the German Insurance Contract Act. 28 Something similar to what had happened in Germany. See Gaul (2007), pp. 21–26; Stockmeier (2008), pp. 717–724; Römer (2008), pp. 1520–1523.

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lodge complaints, the applicable protection mechanisms and the supervision authority; (k) the applicable law, if different from that of Portugal (Article 18 of PICA); and (l) the Member State in which the head office is situated and the branch concluding the contract, where appropriate, and their respective addresses (Article 20 of PICA). Article 185 of PICA adds to the above-mentioned topics a few additional topics that insurers should also include in their pre-contractual communications with life assurance clients: (a) the attribution and calculation method of any profit participation rights; (b) the scope of each cover option; (c) an indication of surrender and paid-up values, as well as the nature of the coverage and penalties in case of surrender, reduction or assignment of the contract; (d) the premiums corresponding to each benefit and option; (e) the minimum guaranteed benefits, including information on the applicable interest rate and on the duration of the guarantee; (f) the reference values used in contracts with a variable insured capital, as well as the number of existing units; (h) the nature of the assets underlying the contracts with variable insured capital; (i) general information on the applicable tax arrangements; (j) in contracts that contain a capitalisation component, indication of the quantification of the charges and respective incidence and moment of liquidation; (k) indication of the right of access by the insured person to medical data resulting from any medical examinations performed on the insured person.29 Article 206 of PICA, on unit-linked products, adds the following to the abovementioned topics: (a) the reference value, (b) the policyholder’s rights in the event of liquidation of the investment fund or elimination of an account unit before the end of the contract; (c) the methods and regularity of the provision of information on the evolution of the reference value; (d) the terms applicable to the liquidation of the surrender value and of the insured sums; and (e) the regularity of the provision of information on the evolution of the investment portfolio.30 A special duty to explain the functioning of the insurance contract has also been set forth. The intensity of this duty mostly depends on the complexity of the contract and on the amounts involved, as well as on the medium used for the conclusion of the contract. This duty’s main focus is on the scope of the insurance coverage. This duty includes a requirement that the insurer identifies which insurance product, out of the various ones in its own portfolio, is most suitable to each client’s needs (Article 22).31 Pinpointing the true nature of these information duties is somewhat challenging. We should begin by distinguishing between the act of rendering information on the contents of a future contract or that is somehow relevant to that contract and the act of producing the statements that will form that same contract. When we utter an informative statement, that statement may be classified as being either true or false.

29

See Martinez et al. (2011), pp. 539–540 (annotation by Torres LC). See Martinez et al. (2011), pp. 588–597 (annotation by Ribeiro E). 31 See Martinez et al. (2011), pp. 119–126 (annotation by Oliveira AC and Ribeiro E); Teles (2012), pp. 237–240; Cordeiro (2013), pp. 569–570. 30

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When we conclude a contract, our statements are performative in nature: they are speech acts that create something new—the contract.32 This pre-contractual communication between contracting parties fulfils these two different functions at once: by informing their clients of the contents of the future contract, insurers are also taking steps that will later allow them to claim that a contract has in fact been entered into with those contents, to the extent that the information provided is contractual. Whilst most of the above-mentioned topics will correspond to actual contract terms, others are purely informational: for instance, the identification of the insurer’s registered address and office location is purely informational, and so is the information on the applicable tax arrangements. They are not part of the lex contractus.33 Strictly speaking, such information is not binding upon the insurer, although the insurer might be held liable if it renders information that is false, incomplete or misleading in any way. Indeed, non-compliance with the insurer’s pre-contractual information duties generally renders the insurer liable for any harm caused to the policyholder or the insured. In cases where the insurer is sued, where the client is claiming damages on the ground of the former’s liability for non-compliance with its pre-contractual information duties, the criteria applicable for the identification and quantification of the losses or injuries to be compensated for are the general criteria applicable to pre-contractual civil liability (Article 227 of the Portuguese Civil Code). In the case of pre-contractual information duties, it could be argued that if a policyholder does not obtain the most suitable coverage due to defective information and as a result suffers loss that ends up being uninsured, such policyholder/insured could claim compensation in the amount corresponding to the difference between their actual situation and that which they would have been in had adequate insurance been in place. Generally, it should be said that an injured party must be compensated for loss that is a direct consequence of the insurer’s omission.34 Breach of such duties also enables the policyholder to terminate the contract within 30 days of their receipt of the insurance policy, but only when the terms stipulated therein and the ones submitted as pre-contractual information differ and those differences represent crucial elements of the contract that influenced the policyholder’s decision to enter into the insurance contract (Article 23 of PICA).35 When the data that the insurer has failed to convey to its client, or that it has conveyed in a deficient fashion, would correspond to a contract term, in addition to that line of defence, the client is also entitled to argue that the term in question should be deemed to have been excluded from the contract due to its non-existent or

32

Speech acts in the meaning attributed to the expression by Austin (1962) and further developed by Searle (1969). 33 See Rego (2012a), p. 22. 34 Pinto (2008), pp. 1143–1144, 1379–1389 and 1412–1447. 35 See Martinez et al. (2011), pp. 126–130 (annotation by Oliveira AC and Ribeiro E); Teles (2012), pp. 241–248; Cordeiro (2013), pp. 570–572.

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inadequate communication, pursuant to Article 232 of the Portuguese Civil Code and Article 8 of STA. Non-compliance with information duties is also sanctioned with regulatory measures, it being classified as a serious misdemeanour by Article 370(z) of PISA. Such non-compliance is punishable with a fine of up to € 1,500,000. PISA contains several other provisions regulating market conduct requirements, many of which concern transparency in insurance. Such requirements will be analysed elsewhere. It is also important to note that, pursuant to Article 33 of PICA, specific and objective messages contained in insurance advertisements are deemed to be part of the insurance contract, those terms that contradict them being deemed as excluded from the contract, except to the extent that they are more favourable to the policyholder, the insured or the beneficiary.36 PICA has also provided some much-needed clarification that an insurance contract’s validity does not depend on the existence of a written contract, but where a contract has not been made in writing, the insurer is under a duty to put it into writing by producing a policy that it must deliver to the policyholder (Articles 32 to 37 of PICA).37 The policy may be supplied in any durable medium. The burden of proof of such delivery falls upon the insurer. Once delivered, the insurer may not invoke any clauses not included in the policy. However, the policyholder is given a 30-day period within which to check conformity of the policy terms with its prior agreement. Once such period has lapsed, only a claim of non-conformity that is sustained by written evidence will be accepted (Article 35 of PICA).38 In many cases, compliance with the above-mentioned transparency requirements entails the delivery, to each policyholder, of two sets of almost identical documents: a first set of documents containing the full contents of the future insurance contract at the pre-contractual stage and a second set of documents consisting of the insurance policy that is delivered to the same policyholder after the contract has been concluded. Nonetheless, the requirements that apply to both sets of documents are only partially the same. Whilst the pre-contractual document must be written clearly and in Portuguese (Article 21 of PICA),39 its post-contractual replica must be drafted in a concise, rigorous and understandable fashion, in legible font, using common words and expressions whenever the use of legal or technical terminology is not indispensable, also in Portuguese (unless the policyholder specifically requests information in a different language) (Article 36 of PICA).40

36

See Martinez et al. (2011), pp. 219–220 (annotation by Vasques J). See Rego (2012a), pp. 25–27. 38 See Rego (2012a), pp. 36–37. 39 See Martinez et al. (2011), pp. 115–119 (annotation by Ribeiro E); Teles (2012), pp. 230–236; Cordeiro (2013), pp. 567–569. 40 See Martinez et al. (2011), pp. 225–226 (annotation by Vasques J). 37

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A list of topics that should be included in an insurance policy is set forth, this time in Article 37 of PICA.41 Once again, the list only partially coincides with that relating to the pre-contractual document, contained in Articles 18 and 20 of PICA. Understandably, the first difference is in the name of this second document, which must bear the name ‘policy’ (apólice). Interestingly, this requirement is followed by the determination that all policy documents should be properly identified as such. This requirement appears to have been aimed at doing away with one of the most frustrating difficulties previously faced by an insurance lawyer in Portugal: that of gathering a complete set of all the documents that might contain the contract terms applicable to any given case, in the midst of what sometimes amounted to a real chaos of existing general, special and particular conditions, the former usually in various editions, of the many forms and questionnaires filled out by the policyholder and the insured and sometimes of a long succession of policy endorsements.42 Another very pragmatic requirement addresses an equally relevant concern: that of correctly identifying the policyholder, the insured and the beneficiary, with names, addresses and tax numbers, as well as the insurer’s claim representative. All other requirements relate to normative aspects of an insurance contract and should more properly be construed as being the mandatory minimum contents of an insurance agreement: they are the topics that the parties must agree upon when negotiating an insurance contract: (a) the nature of the insurance; (b) the insured risks; (c) the insurance period and the insured territory; (d) the rights and obligations of the parties, the insured and the beneficiary; (e) the insured capital or its calculation method; (f) the premium amount or its calculation method; (g) the date and time of the insurance’s inception and its duration; (h) what the insurer shall provide if the insured event occurs or its determination method; and (i) the governing law of the contract and any arbitration clause. Article 37 of PICA also establishes that certain contract terms must be written in a font style and size that is larger and bolder than that which is used in the remaining contract terms. This applies to terms relating to the contract’s ineffectiveness, prorogation, suspension or cessation by either party; terms that outline the coverage outlines, exclusions and limitations; and terms that establish deadlines for the policyholder or the beneficiary to take any action. Without prejudice to any liability derived therefrom, once again a breach of the duty to deliver the insurance policy also gives rise to the policyholder’s right to terminate the insurance contract within 30 days of their receipt of the insurance policy or, alternatively, to demand a correction of the policy terms when the terms contained therein differ from the ones agreed to by the parties and those differences represent crucial elements of the contract that influenced the policyholder’s decision to enter into the insurance contract (Article 37, which refers back to Article 23 of PICA).

41 42

See Martinez et al. (2011), pp. 226–233 (annotations by Vasques J and Oliveira AC). See Rego (2012a), p. 29.

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PICA also clarifies who owes what to whom in group insurance, in situations where there had previously been many doubts as to who should be the bearer and the recipient of the relevant information (Articles 78 and 79). In such insurance arrangements, the policyholder plays the role of a go-between, disseminating in the insured group the relevant information provided by the insurer. In arrangements where the insured bears the cost of the premium, or a part thereof, they are entitled to receive the same information that is owed to a policyholder in an individual insurance arrangement (Article 87). These are the information duties set forth in PICA (with the exclusion of a few additional ones that only apply to particular classes of insurance). However, these information duties are then supplemented by additional information duties set forth in legislation aimed at regulating specific distribution channels or specific types of contractual arrangements. As to the former, the regulation on the distance marketing of financial services contains some provisions that set forth further information duties,43 and so does the regulation on insurance contracts concluded via an insurance intermediary.44 As to the latter, unit-linked policies and other complex financial products are also subject to the requirements applicable to similar non-insurance-related financial products and have recently been the object of Regulation (EU) No. 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs),45 which has also been applied thereto since 31 December 2016.46 The new PRIIPs Regulation imposes new pre-contractual information duties for the benefit of retail investors in insurance-based products. The distribution of PRIIPs entails the drawing up of a so-called key information document (known as KID).47 A similar approach has been adopted involving both the life and non-life insurance sectors upon the implementation of the Insurance Distribution Directive (IDD). In Portugal, this came about with the entry into force of PIDA.48 IDD placed additional requirements on the sale of complex insurance-based investment products

43 See Articles 11 and following of Decree-Law 95/2006 of 29 May 2006 (as amended), which implemented Directive 2002/65/EC the European Parliament and of the Council of 23 September 2002. 44 See Article 29 of PICA and Articles 31 and 32 of PIDA. 45 Prior to its entry into force, see also Decree-Law 211-A/2008 of 3 November 2008 (as amended) and Regulation 2/2012 of the Portuguese Market and Security Commission (CMVM). 46 Article 34 of Regulation (EU) No. 1286/2014. 47 See EBA’s EIOPA’s and ESMA’s Final Draft Regulatory Technical Standards with regard to Presentation, Content, Review and Provision of the Key Information Document, including the Methodologies Underpinning the Risk, Reward and Costs Information in accordance with Regulation (EU) No 1286/2014 of the European Parliament and of the Council, of 31 March 2016. 48 See EIOPA’s Final Report on Public Consultation on Preparatory Guidelines on product oversight and governance arrangements by insurance undertakings and insurance distributors, of 6 April 2016, and its Final Report on Consultation Paper no. 16/006 on Technical Advice on possible delegated acts concerning the Insurance Distribution Directive, of 1 February 2017, pp. 29–60.

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(IBIPs), requiring insurers to provide information on the costs of the distribution service in addition to the information that they are already bound to provide on the product itself under the PRIIPs Regulation.49 For the first time, non-life insurers will also be required to produce an ‘insurance product information document’ (known as IPID) and provide it to their customers prior to their entering into their insurance contracts.50 According to EIOPA, the IPID is ‘a pre-contractual document and does not replace policy terms and conditions, which will be provided to customers in addition to the IPID’.51

3.3.2

Transparency Throughout the Duration of an Insurance Contract

As mentioned above, both the insurer’s duty to inform the policyholder and keep it up to speed on the contents of the insurance product it supplies and the policyholder’s and/or the insured’s duty (or burden) to disclose information on the insured risk are very thoroughly regulated in PICA. Information duties arise for both contracting parties both before and after the contract is concluded. However, the main principle behind the establishment of postcontractual information duties is that the data that should have been conveyed to the other party, had it existed or been known at the time of contracting, is exactly the same as that which must be conveyed to the other party in case it comes into existence or awareness during the life of the insurance contract. These post-contractual information duties are set forth in Articles 91 to 94 of PICA. Articles 92 to 94 of PICA regulate the consequences of changes in the data relating to the policyholder’s or the insured’s initial declaration of risk.52 Only Article 91 of PICA contains general rules applicable to both contracting parties. Specifically in what concerns the insurer’s information duties, as a result of the above-mentioned principle, the insurer must inform the policyholder of any changes in the information initially provided to the policyholder in compliance with the pre-contractual and contractual information duties (Article 91(1) of PICA). Of course, insofar as the data in question concern the normative contents of the insurance contract, the insurer is generally not entitled unilaterally to change it, according to the general principle of pacta sunt servanda (Article 406 of the Portuguese Civil Code). But some of the data in question are of a purely informational nature. For instance, a change in the insurer’s name or legal form would 49

See Article 40(1)(b) of PIDA and Article 30 of the IDD. See Article 33 of PIDA, Article 20 of the IDD and EIOPA’s Final Report on Consultation Paper no. 16/007 on Draft Implementing Technical Standards Concerning a Standardised Presentation Format for the Insurance Product Information Document of the Insurance Distribution Directive, of 7 February 2017. 51 EIOPA’s Final Report on Consultation Paper no. 16/007 on Draft Implementing Technical Standards Concerning a Standardised Presentation Format for the Insurance Product Information Document of the Insurance Distribution Directive, of 7 February 2017, p. 4. 52 As to which, see Rego (2012b). 50

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trigger the insurer’s duty to inform the policyholder because that information was included in the pre-contractual information to be provided to the policyholder pursuant to Article 18 of PICA. The insurer must also inform all irrevocable beneficiaries, as well as any other third parties whose rights have been specifically acknowledged in the insurance contract, of any contract amendments that might injure their interests, unless such disclosure would be contrary to the nature of the insurance or of the amendment (Article 91(2) of PICA). The most common irrevocable beneficiaries are financial lenders, the benefit of life assurance being typically irrevocably offered as collateral by their client borrowers. In property insurance, when the insured property has been pledged or otherwise offered as collateral, the beneficiaries of such guarantee fall in the category of third parties whose rights have been specifically acknowledged in the insurance contract. But this category is wide enough to include any third parties whose rights may somehow be directly or indirectly affected by an insurance contract, provided that such rights have been specifically acknowledged by the parties to the insurance contract. The parties may eliminate this information duty towards some or any third parties by stipulating the amendment’s confidentiality (Article 91(3) of PICA). However, this stipulation will not always prevail against legal protection afforded to some third-party rights. For instance, Article 146(1) of PICA sets forth an injured third party’s direct claim as against the liability insurer in all compulsory liability insurance. Even in voluntary liability insurance, the injured third party has a privilege over the insured’s indemnity claim as against the insurer (Article 741 of the Portuguese Civil Code). In cases such as these, the third party’s right to know must prevail over any confidentiality clause (Article 573 of the Portuguese Civil Code).

4 Discussion 4.1

The Role of Informed Consent in Traditional Contract Formation and in Today’s World

A contract is formed when all parties so declare, which happens, e.g., when a party makes an offer that is then accepted by the other party or parties or when two or more parties simultaneously express their acceptance of the same previously negotiated terms. In either case, the parties are meant to agree on all essential terms, that is to say, on all terms over which their agreement has been deemed a necessity by either one of them. Whenever the parties fail to agree on any essential terms, no contract is

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formed. Should they fail to agree on any non-essential terms, the contract is concluded without the inclusion of such non-essential terms.53 Information plays a central role in traditional contract formation models: contracting parties are meant to acquaint themselves with all the terms of the contracts that they contemplate entering into so as to make an informed decision as to whether or not to make a commitment thereto. Thus, according to Article 232 of the Portuguese Civil Code: The contract is not concluded until the parties have agreed on all clauses over which an agreement has been deemed necessary by either of them.54

If we forgot all our contract law bearings and interpreted this wording literally, we might be inclined to believe that it would be acceptable for a potential policyholder to ask its broker or financial advisor for an executive summary of the contract terms and simply let the professionals take care of the details. But that is not how this provision is traditionally construed. The question is: why not? I do not question that consent still has a role to play in contract formation. Neither do I wish to go over the primeval debate on contract formation as to the relative importance of the will of the parties, of their subjective intentions, as opposed to their more objectively observable outward utterances. I merely question the importance of a thoroughly informed consent: the requirement that contracting parties must acquaint themselves with the entire content of the contract that they are about to enter into before doing so. In fairness, I should say that contracting parties are not actually barred from entering into a contract when insufficiently informed. The problem is that such conduct is negatively valued.55 Take the preposterous Article 21(5) of PICA, which sets forth the rule that an insurance offer must include a statement, signed by the potential policyholder, confirming that the insurer has provided all legally required information.56 It does not ask potential policyholders to confirm that they have read and understood such information. However, if they fail to read it, they are to bear the consequences: they will be deemed to have accepted the contract terms they have failed to read or assimilate. A similar result is reached after the conclusion of the contract, when policyholders are given a 30-day period within which to read the policy so as to check that it is faithful to the parties’ agreement, as set forth in Article 35 of PICA.

53

See Vasconcelos (2008), pp. 486–490. See § 154(2) of the BGB. § 155 of the BGB is even clearer (on the effects of partial hidden dissent: the contract is deemed concluded without the part over which the parties have disagreed, if it is to be assumed that the contract would have been entered into without it). 55 See Cordeiro (2013), pp. 561–563 and 567, in defence of a policyholder’s right to be kept in ignorance of the intricacies of insurance contracts, that is to say, of their right to trust the insurer and the laws of the State. 56 Fortunately in contracts entered into with consumers this absurdity is cancelled out by Article 21 (e) of the STA, which prevails, pursuant to Article 3 of the PICA. 54

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That not paying attention is bad for you and should be frowned upon has been confirmed on numerous occasions by the Portuguese Supreme Court of Justice: [G]iven that the contractual freedom of one of the contracting parties is limited in practice to the freedom of accepting or rejecting the imposed contract terms and the conclusion of the contract, that contracting party must at least have the actual and effective knowledge of such terms, so that it may decide whether or not to accept them, the duty to communicate such terms appropriately and with the necessary advance being aimed at combatting the risk of his/her unawareness of significant aspects of the contract. It is intended to facilitate the adhering party’s complete and effective knowledge of the contract terms, also requiring the latter’s adoption of diligent behaviour, oriented towards an actual and effective knowledge of the contract terms.57

In today’s world, especially but not only in the financial world, contracts are becoming more and more complex, so much so that some of them are virtually incomprehensible to most of us. So why even bother? Why make the sometimes extraordinary effort that would be required so as to read them from cover to cover and really understand them? In today’s world, time is precious—so precious that it should not be deemed unreasonable for someone to decide, after weighing all the pros and cons, to enter into a contract, be it simple or complex, without first having carefully studied all its terms for as long as needed in order for such terms to be thoroughly understood and agreed to. Bearing in mind the dramatic increase in transparency requirements during the course of the last 20 years, and without questioning transparency’s role in making accessible to insurance customers all the data that they need to take in and process in case they wish to make an informed decision when choosing to enter into an insurance contract, I believe that another question is begging to be asked: does it make sense to put all one’s eggs in the basket of information? In particular, should transparency as an ideal be allowed completely to replace trust in contractual relations? If I know everything in advance, there is no need for trust. Transparency is a state in which all not-knowing is eliminated. When transparency prevails, no room for trust exists. Instead of affirming that ‘transparency creates trust’, one should instead say, ‘transparency dismantles trust’.58

4.2

The Insurer’s and the Intermediary’s Ever-Increasing Pre-contractual Information Duties

As we have seen, over the last 20 years, a number of statutes have been enacted, in Portugal and in other EU Member States, mostly as a result of implementation

57 58

Ac. STJ of 24.03.2011. Han (2015), pp. 47–48.

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requirements of EU directives, which have dramatically increased the insurer’s and insurance intermediaries’ pre-contractual and contractual information duties towards policyholders and relevant third parties in insurance contracts. Such duties, which epitomise the legislator’s efforts to keep up with the growing complexity of financial products, are in line with one of the main goals of EU legislation in this field: that of enhancing transparency in insurance transactions so as to protect insurance customers. This proliferation of information duties has increased the amount of paperwork being produced by insurers and provided to insurance customers, but this has not made a significant impact on the clarity of insurance contracts, which admittedly remain as opaque as ever. Furthermore, this system has a downside: whilst it penalises insurers that fail to comply with their information duties, whenever they do comply and information is properly made available, customers may be deemed negligent for choosing not to take it in. I take issue with this outcome. When so many of us make this choice on a daily basis, myself included, are we not being too demanding on customers by concluding that they should have read all the paperwork and made sure to understand and agree with it before choosing to enter into the contract? As an insurance customer, I have often entered into insurance contracts—and in fact many other contracts—without bothering to read the fine print. It happens on a daily basis that I find myself having to choose between taking the time to read all the paperwork that comes before me and being able to devote my time to so many other more interesting things that are going on in my life. And I am in a somewhat privileged position when it comes to insurance: at least if I were to choose to read all the paperwork, I could hope to grasp the essence of it fairly quickly, which may not be said of the greater part of our population. So why place what seems like such an unfair burden on insurance customers? For ordinary people today, at least in developed countries, many more of the needs and wants of daily life are acquired through contracts than ever before. As the reliance on contracts has been increasing, the delivery of textual content purporting to be contractual has resulted in an immense proliferation of such texts.59

It is widely known and accepted, at least in the field of medical law, that too much information that the patient is unable to understand and assimilate properly may hinder rather than facilitate the patient’s informed consent.60 This rings true in many other fields, especially those where the most relevant players have a marked 59 Radin (2017), p. 505. The author argues that very common procedures such as that of asking customers to click ‘I agree’ next to a line that states they have read any given set of terms and agreed thereto ‘has made liars of us all’ (p. 519). ‘How could we? There is so much of it. And why should we? We cannot change it, and we are not likely to understand it’ (p. 520). For empirical evidence on the (extremely reduced and thus virtually negligible) number of people who actually read such terms from top to bottom, see Bakos et al. (2014), pp. 1–35. 60 See Barendrecht et al. (2007), pp. 837–838; Han (2015). Jean Claude Van Hove v CNP Assurances SA (ECLI:EU:C:2015:262), p. 8: ‘More information, or more communication, does not eliminate the fundamental absence of clarity of the whole. If anything, it heightens it.’

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predisposition to resort to extremely technical, virtually opaque language and impervious drafting techniques, such as is the case of the insurance industry. Why pretend that the entire population is ready and able to understand the basics of an insurance contract just by reading it, even if aided by the insurer’s attempts at clarifying any aspects in need of clarification? Article 10(2) of the European Convention for the Protection of Human Rights and Dignity of the Human Being with regard to the Application of Biology and Medicine, known as the European Convention on Human Rights and Biomedicine, reads as follows: Everyone is entitled to know any information collected about his or her health. However, the wishes of individuals not to be so informed shall be observed.61

In fairness, there is not that much room for analogy between the right not to know one’s genetic code and the right not to bother reading the fine print in an insurance contract. However, such as in the field of medical law, it is submitted that in the field of contract law in general we should recognise a person’s right not to know, which is to say, a right to place one’s trust on the good judgment of a third-party intermediary or even of the insurer, our expert counterparty,62 a right that does not entail a waiver of the right to sue if later on it turns out that one’s demands and needs, as made clear to the insurer directly or through the intermediary, were not duly attended to.

4.3

The Insurance Distribution Directive: A New and Complementary Approach: The Demands-and-Needs Test, Product Oversight and Governance Arrangements

Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution, known as the Insurance Distribution Directive (IDD), has paved the way for a much-needed change of perspective. The IDD is the successor of the Insurance Mediation Directive.63 However, unlike its predecessor, it applies to all distribution channels, including insurance undertakings selling their own products directly, in order to guarantee that the same level of protection applies throughout the marketplace and that insurance customers can benefit from comparable standards.

61 Article 10(2) of the European Convention for the Protection of Human Rights and Dignity of the Human Being with regard to the Application of Biology and Medicine, known as the European Convention on Human Rights and Biomedicine (Oviedo, 1997). 62 See Cordeiro (2013), pp. 561–563 and 567. 63 Directive 2002/92/EC of the European Parliament and of the Council of 9 December 2002 on insurance mediation (IMD).

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Equality of treatment in the disclosure of information remains a concern of particular importance in this Directive.64 The purpose of providing customers with the data that will allow them to make an informed decision as to whether or not to enter into the contract is still present. I do not take issue with its lingering pervasiveness. No one in their right mind would argue that insurance customers should be kept in the dark. Such is the traditional flow of information: insurer to insurance customer (I ! C). However, before that flow even begins, distributors are now meant to apply a demands-and-needs test to their (potential and actual) customers, which means we also find evidence of a new and reverse flow of information: insurance customer to insurer (C ! I). The IDD appears to strike a balance between both flows of information (especially but not exclusively in Articles 20 and 25 of the IDD). The new requirements are meant to tackle the very relevant problem of insurance misselling (Article 20 of the IDD). In order for the new requirements to be complied with, insurers must maintain, operate and review product oversight and governance arrangements aimed at identifying each product’s target market and ensuring that the product is and remains consistent with the needs of that target market throughout its lifetime and that it is distributed to that target market (Article 25 of the IDD).65 Hence, even before a product is commercialised, target groups must be identified and their typical demands and needs assessed so that the product’s design matches such typical demands and needs.66 Then there is a second round of attention that insurers must pay, this time to the individual demands and needs of their actual customers. Rather than flood their customers with information, insurers must begin by paying attention to their demands and needs, it being their job to find the product that best suits them. This includes the prior collection of information about their customers’ circumstances and concerns (Article 20 of the IDD).67 Implementation of this requirement should have entailed further development of the rule already set forth in Article 22 of PICA, according to which it is for the insurer to select, out of the various insurance products already present in its own 64

Recital 6 of the IDD. See also articles 1 and 2 (1) to (3) of the IDD. This requirement is not entirely new, but is a reinforcement of the principles which had previously been more succinctly set forth in Articles 153 and 154 of PISA. Article 153 of PISA was amended by Law 7/2019 of 16 January 2019 so as more thoroughly to reflect Article 25 of the IDD. See also Article 5 of ASF Regulation 10/2009-R of 25 June 2009, as amended, on the general principles to be followed by insurance undertakings in their dealings with policyholders, the insured, beneficiaries and injured third-parties. 66 See also Recital 55 of the IDD, and also EIOPA’s Final Report on Public Consultation on Preparatory Guidelines on product oversight and governance arrangements by insurance undertakings and insurance distributors, of 6 April 2016, and its Final Report on Consultation Paper no. 16/006 on Technical Advice on possible delegated acts concerning the Insurance Distribution Directive, of 1 February 2017, pp. 29–60. 67 See also Article 31 of PIDA and Recitals 44 and 45 of the IDD. There was but a hint of this requirement of an insurance intermediary to collect information from its clients and advise them accordingly in Article 12(3) of the IMD. 65

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portfolio, the one that most suits each customer’s particular needs68—all of this, of course, in order ‘to prevent or mitigate customer detriment’.69 However, the Portuguese legislator chose to include the relevant transposing rules in a provision directly addressed only to intermediaries, elsewhere determining, by mere cross-reference, that the same rules would also apply to insurers ‘as duly adjusted’ (with no further clarification of what such adjustments might be).70 The traditional flow of information is still present in the requirement that insurers ‘provide the customer with objective information about the insurance product in a comprehensible form to allow that customer to make an informed decision’ (also in Article 20 of the IDD). Of course the provision of information is still very relevant in today’s world because insurance customers must be allowed to confirm their insurer’s advice by reading through all the paperwork should they be so inclined. For those of us who are not, should we not be allowed simply to trust our insurer’s advice? Why must a burden be placed upon us thoroughly to check all contract terms before choosing to enter into the contract? Let us consider the case of an insurer that sold product liability insurance to cork manufacturers that worried about the risk of defective corks ruining the wine of their client wineries. This example is based on a real-life trend that I have personally come across whilst working as a legal practitioner some years ago in Portugal. The product was useless to these customers because product liability is meant to deal with damages caused by defective products to consumers.71 No one detected the inconsistency at the contracting stage; hence, no extension covering the damage caused to their non-consumer direct customers was negotiated. It is submitted that this episode of insurance misselling could have been dealt with quite adequately under Article 22 of PICA. It is also an example of the importance of complementing transparency requirements with a different set of requirements, such as the ones set forth in Articles 20 and 25 of the IDD. The incident could have been prevented if the target market for this product had been correctly identified. Even without the prior identification of a target market, the incident could have been prevented by placing upon the insurer the burden to check that the product it offers to its customers is consistent with their actual insurance demands and needs.

68 According to Cordeiro (2013), p. 570, this duty is most important in its negative form, that is to say, as an insurer’s duty to warn a potential policyholders against purchasing insurance products which are ill-suited to their particular circumstances and/or which fail to meet their needs. 69 EIOPA’s Final Report on Consultation Paper no. 16/006 on Technical Advice on possible delegated acts concerning the Insurance Distribution Directive, of 1 February 2017, p. 34. 70 See Articles 31(4)(6)(7) and (8) and 37(3) of PIDA. 71 See Directive 85/374/EEC of 25 July 1985 on liability for defective products.

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Financial Contracts As Products: Inconsistency with the Customer’s Demands and Needs As Grounds for Remedial Action

Consumers can enter the market to buy physical products confident that they won’t be tricked into buying exploding toasters and other unreasonably dangerous products. They can concentrate their shopping efforts in other directions, helping to drive a competitive market that keeps costs low and encourages innovation in convenience, durability, and style. Consumers entering the market to buy financial products should enjoy the same protection. (. . .) How did financial products get so dangerous? Part of the problem is that disclosure has become a way to obfuscate rather than to inform.72

Elizabeth Warren, former Harvard Law School Professor of Law and current US Senator for the State of Massachusetts, when she wrote these words in 2007, was advocating an increase in financial market regulation and the creation of a new Consumer Financial Protection Bureau. This Bureau was created in 2010. As a contract lawyer, I look at what is essentially the same problem that Elizabeth Warren so aptly identified, but from a different perspective, in search of a different answer to a different question. And my question is: has consent as we know it reached its expiration date as the cornerstone of contract law? Some law and economics authors are moving along this line of reasoning, their idea being that customers of such massively distributed boilerplate contracts are actually purchasing a composite of item plus terms rather than just the item itself, the implication being that when some of such terms are inappropriate, we might classify them as defective and move to apply the rules on the sale of defective products.73 Some emphasise that whilst such massively distributed terms might be part of the product, they can hardly be classified as contractual terms proper, given that informed consent is truly neither sought nor provided.74 Whilst not disposing entirely of consent, I do believe that the protection of insurance customers can best be achieved if one complements the informational approach with a different approach consisting of treating financial products much like any other products.75 If a customer chooses to buy an electrical appliance, that customer will enter into a contract of sale in order to obtain the desired appliance. The contract is merely an aid, a legal means of providing customers with their chosen goods: in this example, the appliance. Financial contracts in general, on the other hand, often do not play such a merely instrumental role. Oftentimes financial products are the products. That is certainly the case of insurance contracts.76 So why not treat them as such?

72

Warren (2007). See Baird (2006), pp. 933–952; Radin (2017), pp. 529–531. 74 Radin (2017), pp. 531–533. 75 See Grigoleit (2012), pp. 25–64 (also on the limits of the traditional informational approach, albeit from a different perspective). 76 See Dreher (1991). 73

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Financial contracts such as those of insurance are intangible, as assets go. But they are nonetheless assets. They are a product that is supplied or distributed by their manufacturers—such is the language of the IDD. And such, it is submitted, is also the reality of financial contracts. In the case of the sale of goods, the contract is just a legal device conceived so as to transfer the goods. In the case of many financial products, the contract is the object of the distribution. The providers of financial services distribute a particular type of product that is purely legal in nature: they distribute contracts. It is submitted that just as customers are not required to read through an electrical appliance’s technical specifications and user’s manual before choosing to acquire it, they should also not be required to read through a financial contract from cover to cover before deciding to enter into that contract because it seems to me that this is exactly what most contemporary financial contract terms resemble: a product’s technical specifications and/or user’s manual. When I purchase a toaster, no one really cares whether I thoroughly understand the science behind it. I do not need to know why it can turn a bread slice into a toast. I only need to know that somehow it will make it happen once I plug it in, insert my bread slice in the proper opening and press the on button. Why should an insurance contract work out any differently? Consumers of financial products should not be required to spend any more time checking whether the products they acquire are toxic than consumers of household appliances are required to spend checking that their toasters are not going to explode in their kitchens. Neither should they worry whether the products they require are fit for their purpose, unless their own intention in acquiring the product is somehow unusual or unexpected. Someone else should be doing that for them. Elizabeth Warren’s answer was the creation of a new regulator, whose role would be to check the safety and adequacy of financial products. As a private lawyer, I look at the problem differently. I do not advocate a solution that drastically limits freedom of contract. By all means, insurers should remain free to design products as they see fit. Whilst they should be prevented from distributing toxic products to the wider public, for the most part I believe that this problem could best be handled through the shifting of some contractual and pre-contractual burdens. If insurers are legally required to pay attention to their customers’ demands and needs and provide products that match them, then they should be made liable in case they fail to fulfil this duty and provide a product that is inconsistent with their customers’ demands and needs, insofar as they conform to those of a typical consumer or, if they do not, to the extent that they were actually expressed by their customers prior to their entering into the contract. Will this new attitude solve all our difficulties as insurance consumers? I dare say it will not. But it is submitted that provided that the new approach is seen as a complement, rather than as an alternative to the more traditional informational approach, an important step forward will be taken when we come to accept that choosing not to read the contract terms from cover to cover should not always be frowned upon and seen as negligent behaviour but should rather be taken as an acceptance of some measure of risk that the future might bring forth a few unpleasant surprises, that is to say, up to a certain, reasonable extent.

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I shall bring forward one last example. When I buy a sofa, I usually order a special treatment designed to make the fabric more durable and stain resistant. Companies that render this service also offer something akin to insurance: a 10-year extended warranty whereby they commit to come to our homes and clean our sofa whenever a stain should make its appearance. This offer naturally comes with a list of the substances whose stains are covered—a list that I have naturally never bothered to read until the first stain came up. Only then did I read through the list so as to find out whether my stain fell within or without this coverage. I stand by the reasonableness of my behaviour. If knowing this in advance had been essential to my decision to seek out this coverage, I would have read it. I chose not to, and that is perfectly acceptable behaviour. So now, whenever a stain comes up that is outside the list, if I forget about it and call my service provider, they will respectfully tell me that I will have to pay for their cleaning services if I wish to benefit therefrom, just as a supplier of electrical appliances will inform me that if I had wished my toaster made fluffy toasts, in addition to the more regular ones, I should have bought a different, more expensive model or at least an optional extra device to place on top of my regular toaster because the one I bought did not come with that function. And that is fine. This is a risk I accept, as a consumer, when I choose not to read the fine print. The situation would be very different if my toaster had simply been incapable of toasting bread. Then I would have a valid claim, regardless of what I chose to read or abstain from reading. Going back to my list of stainable substances, regardless of what I chose to read at the time of contracting, I would have a valid claim if the list set forth in the contract terms is unreasonable, bearing in mind the typical consumer’s demands and needs, or my own concerns and needs, as expressed at the time of contracting. That will be the case, for instance, if the list is limited to a small number of substances that are not normally present in ordinary households, with the exclusion of food or beverages and of all forms of human waste. The same reasoning should apply to insurance and other financial products. After all, financial contracts, like any other products, should be fit for purpose.

5 Conclusions In Portugal, the most relevant source of insurance contract law is the Portuguese Insurance Contract Act of 2008 (PICA). PICA is currently also the most relevant source of transparency requirements in the formation and throughout the duration of an insurance contract. Information plays a very important role in PICA, there being numerous provisions specifically setting forth or referring to information duties of various kinds and scope, mostly as a direct or indirect result of implementation requirements of EU directives. It was very relevantly preceded by the Transparency in Insurance Act of 1995, which identified the inception of the single European market in the insurance sector as the main driving force behind the growing need for the setting up of minimum transparency requirements in pre- and post-contractual relations.

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Moreover, although the term itself plays no part in traditional contract law, transparency is generally regarded as a key value in pre-contractual negotiations, both parties having a duty to negotiate in good faith and continuing to be subject to the principle of good faith throughout the contract’s duration, being bound to act in accordance with this principle both in fulfilling their obligations and in enforcing their contract rights. ‘Transparency’ in this context is, first and foremost, a reference to the plainness and intelligibility of contract terms, as well as to their exhaustiveness. Strictly speaking, it transcends contract terms, also applying to any accounts of a predominantly descriptive or explanatory nature provided orally and/or in writing at or around the time of contracting. It also applies after the contract is concluded, the main principle behind the establishment of post-contractual information duties being that the data that should have been conveyed to the other party, had it existed or been known at the time of contracting, are exactly the same as that which must be conveyed to the other party in case they come into existence or awareness during the life of the insurance contract. Whilst being presented as an end in itself, transparency is ultimately also a means to an implicit end: making accessible to insurance customers all the data that they need to take in and process in order to make an informed decision when choosing to enter into an insurance contract or when faced with any relevant issue that may arise during the life of the contract. Bearing in mind the dramatic increase in information duties and related transparency requirements during the course of the last 20 years, I have argued against putting all one’s eggs in the basket of information, and I have questioned whether transparency as an ideal should be allowed completely to replace trust in contractual relations. Information plays a central role in traditional contract formation models: contracting parties are meant to acquaint themselves with all the terms of the contracts they contemplate entering into so as to make an informed decision on whether or not to make a commitment thereto. I have argued that the protection of insurance customers can best be achieved if one complements the informational approach with a different approach consisting of treating financial products much like any other products, placing upon the insurer the burden to check that the products it offers to its customers are consistent with their demands and needs. This view is consistent with the Insurance Distribution Directive (IDD)’s requirements that insurers must maintain, operate and review product oversight and governance arrangements aimed at identifying each product’s target market and ensuring that the product is and remains consistent with the needs of that target market throughout its lifetime, that it is distributed to that target market and that their actual customers are offered the product that best suits their individual demands and needs because insurance contracts, like any other products, should be fit for purpose.

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References Ac. STJ of 24.03.2011, Proc. 1582/07.1TBAMT-B.P1.S1 (Granja da Fonseca). (available at www. dgsi.pt) Almeida JCM (1971) O contrato de seguro no Direito português e comparado. Livraria Sá da Costa Editora, Lisboa Austin JL (1962) How to do things with words. Harvard University Press, Cambridge Baird DG (2006) The boilerplate puzzle. Mich Law Rev 104:933–952 Bakos Y, Marotta-Wurgler F, Trossen DR (2014) Does anyone read the fine print? Consumer attention to standard-form contracts. J Legal Stud 43:1–35 Barendrecht JM, Jansen CEC, Loos MBM, Pinna AP, Cascao RM, van Gulijk S (2007) Principles of European law. Service contracts. Oxford University Press, Oxford Carvalho R (2016) O seguro em Portugal. Factos e histórias. 1974-2007. INCM, Lisbon Cordeiro AM (1997) Da boa fé no direito civil. Almedina, Coimbra Cordeiro AM (2003) Da reforma do direito dos seguros. In: Moreira A, Martins MC (eds) III Congresso Nacional de Direito dos Seguros. Almedina, Coimbra, pp 17–23 Cordeiro AM (2013) Direito dos seguros. Almedina, Coimbra Dreher M (1991) Die Versicherung als Rechtpsrodukt: die Privatversicherung und ihre rechtliche Gestaltung. Mohr Siebeck, Tübingen EBA’s EIOPA’s and ESMA’s Final Draft Regulatory Technical Standards with regard to Presentation, Content, Review and Provision of the Key Information Document, including the Methodologies Underpinning the Risk, Reward and Costs Information in accordance with Regulation (EU) No 1286/2014 of the European Parliament and of the Council, of 31 March 2016 (JC 2016 21) EIOPA’s Final Report on Consultation Paper no. 16/006 on Technical Advice on possible delegated acts concerning the Insurance Distribution Directive, of 1 February 2017 (EIOPA-17/049) EIOPA’s Final Report on Consultation Paper no. 16/007 on Draft Implementing Technical Standards Concerning a Standardised Presentation Format for the Insurance Product Information Document of the Insurance Distribution Directive, of 7 February 2017 (EIOPA-BoS-17/055) EIOPA’s Final Report on Public Consultation on Preparatory Guidelines on product oversight and governance arrangements by insurance undertakings and insurance distributors, of 6 April 2016 (EIOPA-BoS-16-071) Gaul RE (2007) Zum Abschluss des Versicherungsvertrags – Alternativen zum Antragsmodell? VersR 58:21–26 Gomes J (2011) O dever de informação do (candidato a) tomador do seguro na fase pré-contratual, à luz do decreto-lei n.○ 72/2008, de 16 de abril. In: Freitas JL, Duarte RP, Cristas A, Neves VP, Almeida MT (eds) Estudos em homenagem ao Professor Doutor Carlos Ferreira de Almeida, II. Almedina, Coimbra, pp 388–445 Grigoleit HC (2012) Grenzen des Informationsmodells. Das Spread-Ladder-Swap Urteil des BGH im System der zivilrechtlichen Informationshaftung. In: Anlegerschutz im Wertpapiergeschäft. Verantwortlichkeit der Organmitglieder von Kreditinstituten. Schriftenreihe der Bankrechtlichen Vereinigung 34. De Gruyter, Berlin, pp 25–64 Han B-C (2015) The transparency society. Stanford University Press, Redwood City Jean Claude Van Hove v CNP Assurances SA (ECLI:EU:C:2015:262) Martinez PR (2006) Direito dos seguros. Apontamentos. Principia, Cascais Martinez PR, Torres LC, Oliveira AC, Ribeiro ME, Morgado JP, Vasques J, Brito JA (2011) Lei do Contrato de Seguro anotada, 2nd edn. Almedina, Coimbra Oliveira AC (1995) Contratos de seguro face ao regime das cláusulas contratuais gerais. Boletim do Ministério da Justiça 448:69–85 Pinto PM (2008) Interesse contratual negative e interesse contratual positivo. Coimbra, Coimbra Poças L (2013) O dever de declaração inicial do risco no contrato de seguro. Almedina, Coimbra Radin MJ (2017) The deformation of contract in the information society. Oxf J Legal Stud 37:505–533

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Rego MR (2010) Contrato de seguro e terceiros. Estudo de direito civil. Coimbra Editora, Coimbra Rego ML (2012a) O contrato e a apólice de seguro (The insurance contract and the insurance policy). In: Rego ML (ed) Temas de direito dos seguros. A propósito da nova lei do contrato de seguro. Almedina, Coimbra, pp 15–37 Rego ML (2012b) O risco e suas vicissitudes (Risk and its fluctuations). In: Rego ML (ed) Temas de direito dos seguros. A propósito da nova lei do contrato de seguro. Almedina, Coimbra, pp 275–297 Rego ML (2014) Da inconstitucionalidade das normas permissivas de ‘discriminação racional’ (The unconstitutionality of rules permissive of ‘rational discrimination’). In: Antunes MJ (ed) Estudos em memória do Conselheiro Artur Maurício. Coimbra, Coimbra, pp 869–888 Rego ML (2015a) Statistics as a basis for discrimination in the insurance business. Law Probab Risk 14(2):119–134. https://doi.org/10.1093/lpr/mgu017. First published online: October 15, 2014 Rego ML (2015b) Insurance segmentation as unfair discrimination: what to expect next in the wake of Test-Achats. In: Proceedings of the 16th Annual Conference of the Insurance Law Association of Serbia. Insurance law, governance and transparency: basics of the legal certainty, AIDA Serbia/German Foundation for International Legal Co-Operation (IRZ), pp 377–392 Rego ML (2016) A segmentação do mercado para avaliação dos riscos seguros: que futuro? (Market segmentation for insurance risk assessment: is there a future?). In: Estudos em Homenagem ao Prof. Doutor Carlos Pamplona Côrte-Real. Almedina, Coimbra, pp 703–729 Rego ML (2017) Chapter 41: Portugal. In: Center for International Legal Studies (ed) International insurance law and regulation. Thomson Reuters Westlaw, Eagan, pp 553–591 Römer W (2008) La reforma del derecho del contrato de seguro en la República Federal de Alemania. Revista de Derecho Mercantil 270:1515–1539 Searle J (1969) Speech acts. Cambridge University Press, Cambridge Stockmeier H (2008) Das Vertragsabschlussverfahren nach neuem VVG. VersR 59:717–724 Teles JG (2012) Os deveres de informação das partes. In: Rego ML (ed) Temas de direito dos seguros. A propósito da nova lei do contrato de seguro. Almedina, Coimbra, pp 213–273 Vasconcelos PP (2008) Teoria geral do direito civil, 5th edn. Almedina, Coimbra Vasques J (1999) Contrato de seguro. Coimbra Editora, Coimbra Vasques J (2005) Direito dos seguros, Regime jurídico da atividade seguradora. Coimbra Editora, Coimbra Wandt M (2012) Transparency as a general principle of insurance law. In: Wandt M, Ünan S (eds) Transparency in insurance law. ASSOCIATION INTERNATIONALE DE DROIT DES ASSURANCES, İstanbul, pp 9–22 Warren E (2007) Unsafe at any rate. If it’s good enough for microwaves, it’s good enough for mortgages. Why we need a Financial Product Safety Commission. Democracy: a journal of ideas, Summer 2007, no. 5 (available at http://democracyjournal.org/magazine/5/unsafe-at-anyrate/)

Transparency in the Insurance Contract Law of Spain Rafael Lara

1 Definition of Transparency in Insurance Contract Law The demand for “transparency” is experiencing a boom and varied fields of political, social, legal and economic reality, as it is a common feature of the markets and systems of contracting in both private law and public law.1 In particular, in private contract law, the obligations of transparency experienced an important strengthening over the last decades, thanks in no small measure to the appearance and subsequent development of protective regulations for consumers and users. As is well known, in order to deal with the aim of confronting the information imbalance in consumer relations it imposes pre-contractual obligations of information on employers and relevant professionals to allow consumers to take out contracts while being fully informed which has come to be known as informed consent.2 According to the Dictionary of the Spanish Language, “transparency3” is “quality of transparent,” and “transparent4” is defined in its fourth meaning as “clear, evident, understood without doubt or ambiguity.” For transparency, we must therefore understand “clarity” and fully apply it to, in our case, the content of the “insurance operation.” And here we use this expression of “insurance operation,” broader than that of “insurance contract,” because transparency will be demanded both in

1

Morillas Jarillo (2016), pp. 11–14. Miranda Serrano (2016), pp. 21–22. 3 http://dle.rae.es/?id¼aMOr1xH. 4 http://dle.rae.es/?id¼aMQJNiA. 2

R. Lara (*) Public University of Navarra, Pamplona, Spain e-mail: [email protected] © Springer Nature Switzerland AG 2019 P. Marano, K. Noussia (eds.), Transparency in Insurance Contract Law, AIDA Europe Research Series on Insurance Law and Regulation 2, https://doi.org/10.1007/978-3-030-31198-8_9

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advertising, as in the pre-contractual and contractual stage, and during the very development of the contract.5 The purpose of transparency is thus the adequate knowledge of the rights and obligations that are derived or will be derived from a particular contractual position. The rules of transparency should focus on the information that, in our case, the insurer should similarly provide regarding the time and form and the context of the contract.6 In addition, the term “transparency” can be used not only in relation to a particular clause but also in relation to the entire contract. A clause with clear, simple, and easily understood wording is transparent. But an excessively long contract, with abundant clauses that can in themselves be considered transparent but perhaps unnecessary, requires a full and detailed reading of the entire contract, which, as a whole, can no longer be considered as “transparent.” Even the physical format of the contract itself or the type and size of the letter can lead to the same consideration of the contract. If insurance contracts, given their general condition as adhesion contracts, are usually drawn up unilaterally by insurance companies and imposed on clients—who are not offered any possibility of participation in the drafting of the contractual content—it should be considered logical that, within the legislative policy objectives inherent in insurance legislation, it is particularly important to ensure that contractual contents are “clear” and “unambiguous” on the part of the adherent-insured.7 This being so, it isn’t surprising that, at the same time, one of the main criteria used in recent years by the First Chamber of the Supreme Court in matters of insurance is precisely transparency, ensuring that the protection of the insured party is the basic principle of all insurance regulations.8 The law of insurance has to promote the “possibility of knowledge” of the contractual content by the insured party. Unless they are clauses relating to constituent ends of the main object or economic structure of the contract, in which case it must go further, guaranteeing “knowledge itself.” That is to say, the transparency related to the essential elements and economic aspects of the contract which allowed the adherent to freely decide on the contract with the full knowledge of the economic burden that the contract entails and the benefit to be obtained from the counterparty. Therefore, where, due to lack of transparency, a stipulation relating to the essential elements or economic part of the contract had not been known and valued by the adherent prior to the signing of the contract, there is a problem of “lack of consent”

5

Nieto Carol (2016), pp. 63–66. Cámara Lapuente (2015), pp. 549–644, who points out that there is now no single clear notion of transparency. 7 Calzada Conde (2014), pp. 107–151. 8 See, for all, the recent judgment of the Supreme Court of March 2, 2017. http://www.poderjudicial. es/search/contenidos.action?action¼contentpdf&databasematch¼TS&reference¼7956162& links¼%22transparencia%22%20Y%20%22contrato%20de%20seguro%22& optimize¼20170310&publicinterface¼true. 6

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or “vitiated consent” since no one can consent to what they have not been fully informed of by the person whose obligation it is to do so: the proposer.9 The clauses that constitute the main purpose of an insurance contract should therefore be drafted in a clear and comprehensible way so that they not only are grammatically intelligible to the consumer but also clearly outline the specific working of the insurance mechanism. The contractual framework in which they are inserted must be taken into account so that the consumer in question is in a position to assess, on the basis of precise and intelligible criteria, the economic consequences arising from such clauses. If this is not the case, the national court may assess whether the clause in question is abusive.10 Clearly, “transparency,” as it provides a greater degree of information to the other contracting party, serves to protect the weaker contractual party, who, in an insurance relationship, generally has a lower degree of training and legal-financial information than those who act on behalf of insurance entities. Not only does “information asymmetry” occur, but there is also a “training asymmetry,” which is a euphemistic way of recognizing the absolute imbalance between the insurer and the insured. There is no doubt that the more widespread and affordable the information available to the insurance applicant is, the lower the transaction costs of the contract are. Therefore, there will be a greater efficiency in the allocation of resources guaranteeing the free decision of the future insured party. As has been said, what guarantees consumers’ free choice is not negotiation but “a choice between alternative and transparent options.” But “transparency” not only benefits the other contracting party; it also benefits the entire insurance market since it also makes it more efficient. In short, when we speak of “transparency” in the context of the insurance contract, we refer to the possibility of being able to know and understand, to allow the weakest party to have easy access to the content of the contract, which, in our case, is usually the insurance client.11

9

Miranda Serrano (2016), p. 23. Pertíñez Vílchez (2004), passim. 11 Particularly relevant in the Spanish legal system is the Judgment of the Supreme Court of May 9, 2013. It establishes that mortgage floors included in mortgage contracts are abusive, not for not including an interest cap clause in that same mortgage contract, but for a lack of disclosure and information transparency that may result in an unexpected change in the contract price. This judgment is a leading case in Spanish law with respect to the legal analysis of contract clauses affecting the main object of a contract. Vid. Pertíñez Vílchez (2004), passim. http://www.indret. com/pdf/995.pdf. 10

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2 The Issue of Transparency in Insurance as per the Spanish Law 2.1

Previous Regime

Until the enactment of Act 50/198012 of Insurance Contract (hereinafter LCS), the regulation of the insurance contract was included in articles 380 to 438 of the Commercial Code of 188513 without addressing all the peculiar elements of the different types of insurance and without taking into account the traditional classification of the same between insurance against damage and personal insurance. The Code of Commerce was limited to collecting a set of generic principles of the policies, but from the point of view of the parties as traders on an equal footing, and not with the approach that one party, the policyholder, is usually in fact a weaker party that adheres to the contract, in short, a consumer. The doctrine had already revealed, at the time of the study of contracting, the overcoming of radical liberalism from which the Codes departed and the need to carry out a review of the traditional dogma on which the subject of negotiation had been drawn up, given the crisis of the traditional and classic concept of the contract. In this sense, since the beginning of the last century, it had become evident that in certain commercial contracts—in particular insurance contracts—the parties were not discussing their conditions in each specific case, but to a large extent the conditions were imposed by one of them and the other was limited to merely adhering to such conditions. But such general conditions which in the field of insurance contract were subject to control by the public administration from the Act of May 14, 1908 (developed by its regulation approved by Royal Decree of February 2, 1912) lacked a specific regulation from a substantive perspective.14 With the coming into force of the LCS, there was a radical change in many orders of insurance regulation, among them, the advance in consumption, being defined since then defined as a pioneering right in the defense of the rights and interests of consumers. Thus, the Spanish LCS is a precursor of the legislation, not only nationally, but in the European Community, where the insurance contract is treated from the viewpoint of a specially protected field; the position of the insured as a consumer.15 In fact, today, in the field of micro insurance, where the insurance industry plays out to a large extent its future in terms of economic and social image, economic operators in this business model, have not lost sight of the insured as a consumer. 12

http://www.boe.es/buscar/pdf/1980/BOE-A-1980-22501-consolidado.pdf. With the exception of maritime insurance, which remained in force in the Commercial Code, specifically articles 737 to 805, until 2014 with the entry into force of Act 14/2014, Maritime Navigation. https://www.boe.es/buscar/pdf/2014/BOE-A-2014-7877-consolidado.pdf. 14 Duque Santamaría (2006), pp. 139–151. http://www.revistasice.com/CachePDF/ICE_833_139151__B8EF35DF8B93A1DF4C231B615DCF3E61.pdf. 15 Caballero Sánchez (1997), passim. 13

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Transparency, in this way, is closely linked to information.16 Consequently, it tends to facilitate the knowledge of the general conditions of the contract, to the policyholder (or potential policyholder). The modern Acts of consumer protection and general conditions try to protect consumers and users increasing availability of information on the general conditions,17 to which they are going to adhere and this view is supported by the LCS.18 Transparency in the wording of the clauses thus fulfills a remit of pre-contractual information in which it should not be forgotten all negotiation has disappeared, so that the paper or electronic availability of the clauses becomes, together with advertising, the basic source of information on the contract available to the insured.

2.2 2.2.1

Current Regime Introduction: The Complex Regulatory Group

When dealing with the issue of transparency in insurance contracts, we should not confine ourselves exclusively to the LCS since the regulatory profile of Spanish law in this area is complex. In response to the constitutional principle of protection of consumers and users (articles 51.1 and 2 and 53.3 of the Constitution19), Act 26/1984, General Act for the Defense of Consumers and Users (hereinafter LGDCU or TRLGDCU), was promulgated in Spain—a standard that is currently included in Royal Legislative Decree 1/2007, approving the Consolidated Text of the General Act of Defense of Consumers and Users20—and that undoubtedly completes the LCS regime. Subsequently, Act 7/1998, on General Contracting Conditions21 (hereinafter LCGC), which implemented the Spanish legal order of Council Directive 93/13 EEC of 5 April, on unfair terms in contracts concluded with consumers and users. It should be noted that this Act applies only in part to the general conditions of insurance contracts. Article 4 of the same, with some imprecision, indicates that the general conditions “that are specifically regulated by a general legal or administrative provision and that are of obligatory application for the contracting parts” (art. 4.2 LCGC). It is therefore understood that the LCGC applies to the general conditions of

16

Veiga Copo AB (eds), La protección del cliente en el mercado asegurador. Civitas, Cizur Menor, pp. 107–151, 1208–1213. 17 Alfaro Águila-Real (1991), passim. 18 Gómez Santos (2015) (electronic publishing www.uclm.es/centro/cesco). 19 http://www.boe.es/buscar/pdf/1978/BOE-A-1978-31229-consolidado.pdf. 20 http://www.boe.es/buscar/pdf/2007/BOE-A-2007-20555-consolidado.pdf. 21 http://www.boe.es/buscar/pdf/1998/BOE-A-1998-8789-consolidado.pdf.

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insurance contracts only in those aspects that are not regulated by the LCS through a peremptory norm.22 Despite the not always simple integration of the provisions of the LCS into the regulatory framework of the LCGC and the LGDCU, the doctrine recognizes the importance of providing a fundamental basis for jurisprudential interpretation, even if it has not always been uniform in nature.23

2.2.2

Control of Transparency in Insurance Contract

In order to compensate for the fact the insurer has a position of superiority in the contracting phase, particular control mechanisms known as “control of abuses” and “transparency” are inserted that require the so-called “inclusion.” The first control, is to avoid that there is an imbalance in the rights and obligations of the parties. The second, transparency control, to facilitate easy understanding of the clauses, in terms of their legal and economic burden, requiring the conditions are included in the contract. If in Spanish insurance law there has been a question that has presented an eventful history that is the one, without doubt, connected to the general conditions. In fact, one of the first articles of the LCS—the third—is directly concerned with this matter. The importance of the general conditions for the purpose of regulating the legal insurance relationship is notorious, since the legal regulations become a reality by way of those conditions that constitute the “conventional” discipline of the contract and to a large extent the “living law” which regulates this legal relationship. Hence, both insurers and insured and the public administration itself are aware of this relevance and sensitive to the rules concerning the general conditions in a contract usually carried out wholesale.24 Article 3 of the LCS is concerned with the incorporation of general conditions into the insurance contract so that the insured (or more properly the policyholder) would know the general conditions even before the conclusion of the contract, which refers to the moment when the insurer makes a proposal of the insurance contract. The insured’s information on the insurer also appears not only in the aforementioned article 3 but also in other precepts of the LCS itself (articles 5, 6, 8, 10, etc.). However, it is necessary to emphasize that article 3 of the LCS refers, together with the general conditions also to “individuals”. Article 3 LCS states that “the general and individual conditions shall be drafted in a clear and precise manner,” and the LCGC, on the same line, indicates in its article

22 It should be noted that in Spanish Law the different modalities of the insurance contract, in the absence of a specific Law that is applicable to them, will be governed by the LCS, whose precepts are imperative, unless otherwise provided in them. However, contractual clauses that are most beneficial to the insured shall be considered valid (ex article 2 LCS). 23 Peñas Moyano (1999), passim; Muñoz Pérez (2015), p. 1594. 24 Sánchez Calero (2010b), pp. 105–147.

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5.5 that the wording of the general conditions “shall conform to the criteria of transparency, clarity, concreteness and simplicity,” to which must also be added that article 80.1 a) of the TRLGDCU establishes that in contracts with consumers and users using clauses that are not individually negotiated, these clauses will require “concreteness, clarity and simplicity in the wording, with possibility of direct understanding, without references to texts or documents that are not provided prior to or simultaneously to the conclusion of the contract, and to which, in any case, should be expressly referred to in the contractual document.” In order to understand the scope of article 3 of the LCS, it is important to bear in mind that one of the purposes of these regulations is precisely to obtain clarity in the wording of the general conditions of the contract. It appears as a general objective to reach optimal transparency in the general conditions of the contract by imposing a duty or obligation on the insurer to draft the general conditions “clearly or precisely” so that the insured has the ability to understand them easily. Simplicity of policies is sought, and various measures have been suggested to achieve this objective, such as, for example, this criterion of “simplification.” Obtaining this simplicity and simplification in the general conditions of the contract aids the insured and, especially in their understanding of the forecasts that come from the events that occur during the length of the contract. Transparency is necessary because it is for the protection of the insured not only at the time of signing the contract but also throughout the life of the contract and, especially, in case of an accident or loss. In fact, when potential risk becomes an actual loss, the true protection of the insured is tested (or, where appropriate, the third beneficiary). The need for the general policy conditions in the different branches of insurance, in order to specify the risk covered by the insurers and the desire to clarify and simplify these conditions, have led to a categorising of the different types of the insurance contract. Insurance, which in some sectors has favored the trend towards uniformity of the general policy conditions used by different insurers, which has sometimes been seen as a limitation of competition and the question has been raised as to whether such uniform conditions were compatible with antitrust legislation and contrary to its restrictive practices. However, in the face of this rule, there are reasons that justify, in defense of one’s own competence and provided that they remain within certain limits, a tendency towards the determination to consider as lawful a certain normalization of the general conditions, which is aided by the idea of the transparency of the insurance market. Thus, the clarity of the offer of the different types of insurance contracts favors the insured, whether they have already concluded the contract or are in the process of concluding. By arriving at standard formulas, the differences in the offers of different insurers will have to be focused on the individual conditions that help to adapt the general conditions to each exact case, that is, to the needs of the insured. Either these differences will focus on the commercial premium or the special care shown by insurer to the insured, particularly at the time of the occurrence of the accident or loss. The clarity sought in the general conditions of the insurance contract tends precisely to its easy understanding and consultation on the part of the policyholder.

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Moreover, article 3 states that the general conditions must be known by the policyholder prior to the execution of the contract, that is, at the time of deliberation, which may not even conclude in a contractual agreement. This article tells us that the general conditions must be included by the insurer in the insurance proposal, if any, and necessarily in the policy or in a supplementary document, which will be signed by the policyholder, who receives a copy of the same. The need for clarity and precision of the general and individual conditions, imposed by article 3 LCS, sets out guidelines for control or supervision by the authorities (in Spain it is the Directorate General of Insurance25) to be able to exercise power as the invigilating body for all insurance activity. However, in regard to the specific content of this first volume, article 3 requires that the conditions be drafted in a clear and precise manner, imposes an obligation on the insurer, which demands, on the one hand, an active role in the drafting of clauses and, on the other, the removal of those that are not understandable to the insured. In relation to the legal consequence that comes from the non-observance of this legal requirement of transparency, it is rightly stressed that there are two possible ways to react: one is the interpretation of the clause against proferentem or against stipulatorem and in favor of the adherent (article 6.2 of the LCGC and article 1288 Civil Code), and the other is the declaration of non-incorporation of the clause and its consequent nullity (see article 8.1 of the LCGC). These two pathways could possibly be applied in the less serious cases (which give rise to a simple confusion of the clause) the ruling against the predisposed and in the most serious (giving rise to incomprehensible clauses) nullity of the clause. But this grading of the consequences of the lack of clarity of the clauses has to be adopted, in my opinion, with special care seeing what are the practical consequences of applying the rule of interpretation of the clause against the insurer and which come from applying the criterion of nullity of the clause, because for the counterparty—that is to say, for the insured—it is frequently more beneficial if the clause is considered valid, but is interpreted against who has predisposed it (that is, against the insurer) and not to be declared null, since then the supplementary rule would apply. On the other hand, the Spanish legal system prohibits general conditions that are detrimental to the insured. Indeed, article 3 of the LCS, apparently purely incidental, states that the general conditions “in no case may be detrimental to the insured.” The statement—made in a clear manner—whose reach is not easy to specify, especially considering that article 3 itself admits—with some caution—the limiting clauses and that, in addition, article 2 of the same legal text, indirectly refers to invalid clauses as being contrary to mandatory rules.26 At this point, article 3 shows us something important: the law wanted to distinguish between detrimental and limiting clauses. The difference is significant insofar as the latter are valid, even if they are not favorable to the insured, when the insured (as a “weaker” contracting party) consents, especially when making a statement of 25 26

http://www.dgsfp.mineco.es/. Sánchez Calero (2010a), pp. 64–104.

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his knowledge, while detrimental clauses are always invalid. The concept of a “detrimental” condition is therefore understood to be stricter than a limiting clause since there are valid limiting clauses. The detrimental clauses referred to in article 3 must have a special burden on the insured since the law itself admits the lawfulness of clauses that limit their rights. The prohibition of detrimental clauses is, therefore, a form of complementary protection offered by law to the insured, in the sense that it goes beyond its mandatory discipline. It is a further brake on the power of the autonomy of the will by means of the general conditions. But note that while article 3 extends the regime of clauses restricting both the general and individual conditions, in relation to the detrimental it only refers to the “general conditions.” This means that it is not valid to simply apply that prohibition when we are faced with an individual condition, at least when it has been the subject of a special negotiation between the policyholder and the insurer since article 3 prohibits detrimental general conditions thinking especially about those clauses that have been predisposed by the insurer. This is also the criterion that has been followed by the LCGC when article 1.2 seems to imply that the presence of clauses that have been individually negotiated— as is often the case with the individual conditions—does not prevent the application of the law on general conditions “to the rest of the contract if the overall assessment leads to the conclusion that it is an adhesion contract.” Thus arise two regimes: predisposed clauses, whose incorporation into the contract is attributable exclusively to one of the parties, and clauses that have been negotiated individually.27 The effects of the labeling of a contractual clause as detrimental (or, as the case may be, abusive) are substantially the same whether or not we apply the LCS, as well as consumer protection regulations, in that they are contrary to law: such clauses should be considered null and therefore should be understood as not set. We will therefore be faced with a case of partial nullity, so that the contract produces its effects but disregarding the existence of this clause. Thus, article 83 of the TRLGDCU expressly establishes that the declaration of nullity of unfair terms will not affect the validity of the entire contract if it can survive even without such clauses.28 Lastly, it is necessary to bring to light an especially relevant issue in this context—whether the contractual clauses limiting the insured risk are to be considered as clauses “limiting” the rights of the insured. It is interesting to note that in article 1 of the LCS the insurer’s obligation exists “within the agreed limits”; an idea that is repeated by the LCS throughout the articles that define the different modalities of the insurance contract by repeating the phrase that the insurer is bound “within the limits established in the Law and in the contract” (articles 45, 50, 54, 63, etc.). It seems clear that the insurer’s provision—in relation to both the guarantee of the insured risk and the payment of benefit once the loss occurs—depends precisely on

27 28

Pagador López (1999), passim. González Pacanowska (2015), pp. 753–768.

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the delimitation of the risk, which in turn, is the basis for calculating the consideration paid by the insured, in other words, the premium. However, this distinction is obscured if it is thought that the clauses that delimit the risk effectively constitute a limitation of the rights of the insured. The discipline on clauses restricting the rights of the insured—as has been stated in the LCS—is characterized by its special form of incorporation, aimed both to facilitate the knowledge of these clauses and to project consent on them, so that they form part of the regulation of the insurance contract. This discipline affects the declaration of will of the contracting part (the policyholder) when accepting the insurance proposal or offer of the insurer (see article 6 LCS). Article 3 of the LCS itself requires that the general condition “as the case may be” be included in the insurance proposal. But with respect to clauses limiting the rights of the insured that can be expected from each contractual type (whether general or individual), the law wants a qualified acceptance of these clauses by the policyholder, whose normal acceptance of the general conditions of a contract is manifested by a simple “adhesion” to them. In the case of limiting clauses, Article 3 of the LCS requires them to be highlighted in a special way (by another type of letter, by underlining or by a similar procedure) when incorporated into the contract and, in addition, that the policyholder specifically accept them in writing. This means that for the incorporation of the limiting clauses, the general approval of all contractual clauses is not sufficient, but the policyholder must declare, in writing, also that he specifically accepts the limiting clauses so that the limitation clause that has not been accepted or signed by the policyholder cannot logically be considered as binding since it is not part of the contract. In short, Article 3 LCS establishes two controls of formal transparency: one of a general nature, inasmuch as it addresses all the general and individual conditions of insurance contracts, and another one of a special character that implies a degree of greater transparency than the first and deserves to be called special and not general because it does not meet all the general and individual conditions, but only the limits of the rights of the insured. Both controls are also accompanied by a third party directly connected with the prohibitive rule of clauses damaging the rights of the insured ex article 3 LCS. This is a control of material transparency, for which the surprise clauses are considered detrimental and, therefore, illegal. Particularly illustrative in this matter is the recent Judgment of the Supreme Court of March 2, 2017, which notes that jurisprudence has determined, in a practical way, the concept of a limitation clause, referring to the natural content of the contract, derived from, among other elements, the clauses identified by their defining nature, of the individual clauses of the contract and of the typical or usual scope that corresponds to its object in accordance with the provisions of law or insurance practice (as well as the Judgment of the Supreme Court of April 22, 201629). Thus,

29 http://www.poderjudicial.es/search/contenidos.action?action¼contentpdf&databasematch¼TS& reference¼7653902&links¼%22con%20arreglo%20a%20lo%20dispuesto%20en%20la%20ley%

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the principle of transparency, which is the basis of the special system of limiting clauses, operates with special emphasis on introductory clauses or particular clauses.30

2.2.3

Other Manifestations of the Right of Information in Insurance Contract

We have seen that article 3 of the LCS is a key precept in in terms of information and, therefore, transparency, is not, but it is not only article in which the LCS expresses the right to information. Article 8 LCS, in its final section, establishes partial compliance with the information duty when it provides that if the content of the policy differs from the insurance proposal or the clauses agreed upon, the policyholder may demand that the insurer, within the period of one month from the date of delivery of the policy, remedy the existing discrepancies, and if they do not make a claim within that period they are considered to be in compliance with the policy. This provision, however, also in my opinion, runs counter to the fundamental consumer principle of obliging the policyholder to read the policy and declare their conformity with the views expressed or proposed in the contract.31 Another duty of information is the content in the final paragraph of article 76 LCS, which establishes the duty to display the insurance policy in order to allow the injured party to take direct action, which is one of the preliminary proceedings, expressly foreseen by the procedural legislator in article 265.1 5 of the Law of Civil Procedure.32 It should be noted that in order for the exhibition to be complete, it is also necessary to prove that the liability insurance was in force through the copy of the received insurance premium, where the existence of coverage is established. In this respect, it should be remembered that both the insurer and the insurance broker, who mediates over the contract, must keep a record of policies to verify the fundamental data of the insurance. Unfortunately, this duty to inform the injured party that is included in the broad notion of consumer, lacks consequences in case of non-compliance at a fundamental level, since it hinders the exercise of direct action, but does reveal non-compliance by the insurer and his lack of good faith. It is also in the area of liability insurance where the insurer is required to provide information on the existence of a conflict of interest (article 74 LCS), when the insured party wishes to be granted legal defense or when their insurer is also that of the opposing party or that of the injured party. In case of non-compliance this

20o%20en%20la%20pr%C3%A1ctica%20aseguradora%22&optimize¼20160429& publicinterface¼true. 30 Martorell Zulueta (2014), pp. 236–268. 31 Tirado Suárez (2014), pp. 204–208. 32 www.boe.es/buscar/pdf/2000/BOE-A-2000-323-consolidado.pdf.

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obligation of full disclosure also does not have a specific sanction at legal level, not even in administrative way, since the use of analogy is expressly prohibited. Article 94 of the LCS envisages life insurance policy will regulate the rights of rescue and reduction of the insured sum, so that the insured can know at any time the corresponding value of rescue or reduction. And article 104 LCS establishes in the matter of accident insurance the duty to notify the insured in writing the amount of the compensation that owed to him according to the degree of invalidity taken from the medical certificate and the scales set out in the policy. All of them are examples of transparency in insurance contracts.

2.3

Planned Regime

The inclusion of the insurance contract in the framework of a new commercial code together with the incorporation of the general principles of the contracting of the fourth book of the Commercial Code and current general regime of civil contracts requires a review of the framework of relations of these regulations, some deliberately incomplete, given that the State claims the sole purview. Alongside this factor, the new technological constraints, as well as the mechanisms of remote contracting by telemetric, electronic, telephone or similar means,33 and the legal influence received from integration in the context of Community Law and of European Comparative Law.34 The difficulties of a regulatory fit arise from the continual redrafts of the general conditions of the insurance contracts in the Project of Mercantile Code published in 201335 and later the most recent version in Preliminary project finally presented in 2014.36 The doctrine proposes to revise the precepts of the insurance contract to eliminate these special rules on the basis of bringing the scheme back to the law that regulates in a general way the general conditions, included also in the draft, and to the special provisions of the LCGC for the regulation of all contracts subject to a general contractual condition in consumer protection. In fact, at present, we do not have in Spanish law any rule that establishes a link between article 3 LCS, the LCGC and the provisions on general conditions and clauses found in the TRLDCU (articles 80 and following). On the other hand, it does contain a provision of this nature in the Preliminary Draft Commercial Code of 2014, article 581-3 of which establishes in its paragraph 2 that “the rules contained in the legislation on general contracting conditions shall apply to the general conditions of the insurance contract.”

33

Illescas Ortíz (2015), pp. 49–58. Fuentes Gómez (2014), pp. 561–578. 35 http://nuevocodigomercantil.es/pdf/Propuesta_codigo_mercantil.pdf. 36 http://nuevocodigomercantil.es/pdf/Anteproyecto_LEY_CMer.pdf. 34

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This rule confirms the relationship model between the general rules governing contracts concluded under general conditions and the special rules applicable to the general conditions of the insurance contract. In accordance with the well-known principle of lex specialis derogat generalis, the general conditions of insurance contracts are governed by the rules contained in its own legislation and, in addition to those not specifically regulated by the former, the rules contained in its own rules of the general conditions (LCGC). However, explicit reference to the applicability of a specific legislation (article 80 et seq. TRLGDCU) on clauses in consumer contracts is missing. But it is clear that this provision also applies when the adherent-insured acts as a consumer. This is inferred in article 59 TRLGDCU and by common sense.

2.4

Guides to Good Practice and Transparency

The Spanish Insurance Business Association (Unespa), an organization that brings together insurance companies, has developed a series of guides to good practice, which should be described as codes of conduct or self-regulation system. Thus, insurance companies have made significant progress in recent years in various selfregulatory initiatives to facilitate a better understanding of insurance products to their clients, especially in relation to prehiring information to make it more and more clear, understandable and transparent. For this reason, among other initiatives, Unespa has promoted the Good Practices Guidelines to transparency in the prior insurance, which most commonly affects families, such as multi-risk insurance, health, automobiles, payments or unit linked, practices that are being mostly followed by the sector. As a complement to these, a Guide to Good Practices of Transparency in Insurance Marketing has also been developed, which addresses the general principles that should govern the marketing of insurance by insurance companies in any form of sale, as well as in other insurance aspects.37

3 Conclusions The concept of transparency, of which clarity, concreteness and simplicity not only expressions but requirements in its wording, presupposing a contractual situation in which there is an informational asymmetry between the parties, typical of all other contracts of adhesion. One of the functions of transparency, it could not be otherwise, is to provide the client with necessary and sufficient information in the pre-contractual stage so that he can make a sound and rational decision whether to

37 www.unespa.es/frontend/unespa/AUTORREGULACION%2D%2DEn-Beneficio-De-NuestrosClientes%2D%2DEl-Seguro-Va-Mas-Alla-De-Lo-Que-Marcan-Las-Leyes-vn2818-vst226.

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take out the insurance or not so that the client can select from and assess rationally between the different offers on the market. It is not in vain that the discussion or doctrinal debate on the reach of the obligation of transparency has revolved around its relation with the control of substantial balance. When clarity is advocated as a manifestation of transparency, we are undoubtedly referring, among other things, to visual clarity. The text or form must be legible and must be in a position to be easily readable; otherwise, it would be the same as failure to deliver the copy of the contract. However, the rule of transparency in the wording of the clauses contained in an insurance contract cannot be limited to a formal requirement to comply with the conditions of understanding of the clauses provided, and clarity also implies that it must veto all pretenses of hiding the content of a stipulation, so there must be correlation between the size of the letter and transcendence of the clause. It seeks the direct or easy understanding that refers to the intellectual clarity of the conditions of the insurance contract and also to the understanding understood as material and formal clarity of the printed characters in which all clauses are written. And a good parameter to determine whether or not conditions are understandable is to go to the pattern of the “average adherent” figure. With the very purpose of clarity, it is easy to employ the very defects we are trying to avoid, since in outlining general conditions with all the relevant explanations can cause greater difficulties of understanding in that they can lengthen excessively the clauses of the contract. Moreover, unfortunately, the road to incomprehensibility is too often open, especially when the general conditions as a whole are collected without a logical, classified or systematic order. But it is not even strange to consider clauses in which the clauses themselves contradict one another or also assumptions in which the same text is used for different types of insurance contracts and is not adapted to the actual contract actually being concluded. Likewise, a specific clause may be incomprehensible when it is susceptible of being interpreted in multiple senses or, on the contrary, when it is practically impossible for a diligent policyholder to get a coherent and clear idea of his rights and obligations, or because the clause refers to legal provisions that of course are not attached to the clause. In short, a dynamic and non-static transparency obligation prevails, so that the applicant receives relevant information that will determine whether or not to accept the contractual offer after reading clearly explained paperwork and a clear wording of the clauses that contain and carry information. The clarity, or rather, the more clarity and precision that transparency requires, not only means that easy-to-understand words are all for every parties, but also a correct grammatical construction is evident. Short sentences, simple, legible, and well-punctuated, allow the content of the insurance contract to be easily understood. In Spanish law, the control of material transparency applies exclusively to clauses defining the main object of the contract when the adherent is a consumer (Supreme Court judgment of January 20, 2017). Therefore, and in accordance with the LCGC, the general conditions in insurance contracts between businessmen are subject to the general rules of the Civil and Commercial Codes and to the fulfillment of the requirements of incorporation under articles 5 and 7 LCGC, which basically demand

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that the “existence” and content of the clauses be made known to the adherent. If the clauses are unclear, they will be interpreted against proferentem, and if they are illegible or absolutely incomprehensible, it will be understood that they do not fulfill the requirements of incorporation. The control of material or qualified transparency is more demanding than a lack of consent, that is, that the requirements to appreciate the lack of transparency are less demanding than those established by the doctrine to assess the existence of a mistake by the consumer. It is the use of predisposed clauses that raises the burden of transparency and the duties of information on the part of the predisponent in relation to the consumer, duties that are not presupposed in the legal regulation of lack of consent, where the principle caveat emptor and self-protection of contractors on equal terms is central to explaining legal regulation. In any case, it is not an easy task to specify the level of transparency and resolve the dilemma that arises between the language accessible to anyone and the economic and legal complexity of the contractual content that naturally presents an insurance contract. But when a clause affects the determination of the main benefits of the insurance, it should not be enough for the insurer to provide the policyholder with his expertise, but also requires special clarity in his wording and a paperwork that is easily understandable. This is the case in insurance contracts of clauses delimiting the risks and limiting the rights of the insured. There is no doubt that the lack of transparency clauses that affect the determination of the main benefits of the insurance contract will be the cause of a substantial imbalance for the insured consumer, which may lead to an alteration of the cost of the legal relationship and therefore, the impossibility of choosing the most suitable option among the different alternatives that the market actually presents.

References Alfaro Águila-Real J (1991) Las condiciones generales de la contratación. Civitas, Madrid Caballero Sánchez E (1997) El consumidor de seguros: protección y defensa. Mapfre, Madrid Calzada Conde MA (2014) La protección del asegurado en la Ley de Contrato de Seguro. In: Bataller Grau J, Veiga Copo AB (eds) La protección del cliente en el mercado asegurador. Civitas, Cizur Menor, pp 107–151 Cámara Lapuente S (2015) Transparencias, desequilibrios e ineficacias en el régimen de las cláusulas abusivas. Anales de la Academia Matritense del Notariado (AAMN) 55:549–644 Duque Santamaría LP (2006) Evolución de la supervisión de la documentación contractual y técnica de los productos de seguro en España. El sector asegurador y de los planes y fondos de pensiones (SAPFP) 883:139–151 Fuentes Gómez JC (2014) La regulación de los contratos de seguro en el Anteproyecto de Ley del Código Mercantil. In: Bercovitz Rodríguez-Cano A (ed) Hacia un Nuevo Código Mercantil. Aranzadi, Cizur Menor, pp 561–578 Gómez Santos M (2015) La protección del asegurado como consumidor. Cesco: 1–20. https:// previa.uclm.es/centro/cesco/pdf/trabajos/34/113.pdf González Pacanowska I (2015) Artículo 83 Nulidad de las cláusulas abusivas y subsistencia del contrato. In: Bercovitz Rodríguez-Cano R (ed) Comentario del Texto Refundido de la Ley

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General para la Defensa de los Consumidores y Usuarios y otras Leyes Complementarias, 2nd edn. Aranzadi, Cizur Menor, pp 1145–1173 Illescas Ortíz R (2015) El contrato de seguro en el futuro Código Mercantil. In: Bataller Grau J, Quintáns Eiras MR, Veiga Copo AB (eds) La reforma del Derecho del Seguro. Aranzadi, Cizur Menor, pp 49–58 Martorell Zulueta P (2014) La protección del asegurado desde la perspectiva jurisdiccional. In: Bataller Grau J, Veiga Copo AB (eds) La protección del cliente en el mercado asegurador. Civitas, Cizur Menor, pp 235–268 Miquel González JM (2011) Artículo 83 Nulidad de las cláusulas abusivas y subsistencia del contrato. In: Cámara Lapuente S (ed) Comentarios a las Normas de Protección de los Consumidores. Colex, Madrid, pp 753–768 Miranda Serrano LM (2016) Control de transparencia de las condiciones del contrato de seguro: más allá de los clásicos requisitos de inclusión. In: Bataller Grau J, Peñas Moyano MJ (eds) III Congreso Nacional de Ordenación, Solvencia y Supervisión en Seguros Privados y II Congreso Internacional de Derecho de Seguros. Lowcostbooks, Valencia, pp 17–75 Morillas Jarillo MJ (2016) La información previa en la contratación de los seguros de personas: transparencia, cuestionarios y modelos predictivos. Marcial Pons, Madrid Muñoz Pérez AF (2015) Las condiciones generales en el contrato de seguro en el futuro Código Mercantil. In: Morillas Jarillo MJ, Perales Viscasillas P, Porfirio Carpio LJ (eds) Estudios sobre el futuro Código Mercantil: libro homenaje al profesor Rafael Illescas Ortíz. Universidad Carlos III, Madrid, pp 1591–1612 Nieto Carol U (2016) Transparencia y protección de la clientela bancaria. Aranzadi, Cizur Menor Pagador López J (1999) Condiciones generales y cláusulas contractuales predispuestas. Marcial Pons, Madrid Pagador López J (2011) Condiciones generales y cláusulas abusivas. In: Rebolo Puig M, Izquierdo Carrasco M (eds) La defensa de los consumidores y usuarios. Iustel, Madrid, pp 1307–1442 Peñas Moyano MJ (1999) La protección del asegurado (Análisis de la problemática derivada de la pluralidad de normas aplicables). McGraw-Hill, Madrid Peñas Moyano MJ (2018) Resolución alternativa de conflictos de seguros con consumidores. Revista Española de Seguros 174:179–2013 Pertíñez Vílchez F (2004) Las cláusulas abusivas por un defecto de transparencia. Aranzadi, Cizur Menor Pertíñez Vílchez F (2013) Falta de transparencia y carácter abusivo de la cláusula suelo en los contratos de préstamo hipotecario. Revista para el Análisis del Derecho (Indret) 3:1–28. http:// www.indret.com/pdf/995.pdf Quintáns Eiras MR (2018) Información como motor de la protección del asegurado en la comercialización de seguros. Revista Española de Seguros 175:373–420 Sánchez Calero F (2010a) Artículo 2 Aplicación de la Ley. In: Sánchez Calero F (ed) Ley de Contrato de Seguro: comentarios a la Ley 50/1980, de 8 de octubre, y a sus modificaciones, 4th edn. Aranzadi, Cizur Menor, pp 64–104 Sánchez Calero F (2010b) Artículo 3 Condiciones generales. In: Sánchez Calero F (ed) Ley de Contrato de Seguro: comentarios a la Ley 50/1980, de 8 de octubre, y a sus modificaciones, 4th edn. Aranzadi, Cizur Menor, pp 105–147 Tirado Suárez FJ (2014) La aplicación de la Ley General de Protección de Consumidores y Usuarios al Contrato de Seguro. In: Bataller Grau J, Veiga Copo AB (eds) La protección del cliente en el mercado asegurador. Civitas, Cizur Menor, pp 187–233 Veiga Copo AB (2016) Tratado del Contrato de Seguro, 4th edn. Civitas, Cizur Menor Veiga Copo AB (2018) El seguro. Hacia una reconfiguración del contrato. Aranzadi, Cizur Menor

Transparency in the Insurance Contract Law of Sweden Jessika van der Sluijs

1 Introduction The issue of transparency is a fascinating and huge topic that deserves further in-depth research. Transparency is relevant in many different perspectives, and this chapter will only encompass some of them. First, transparency is an essential element of the relationship between the insurer and the intermediaries on one hand and their customers on the other hand. Transparency is relevant in both ways: the customer needs information about the insurance, the insurer and the intermediary, and the insurer and the intermediary need information from the customer in order to provide the right product and to be able to calculate the risk. Further, transparency is an essential element of the relationships between the insurance undertakings and intermediaries on one hand and the supervisory authorities on the other hand. Even in this respect, transparency works two ways. The supervisory authority needs access to full information from insurers and intermediaries in order to provide authorisation and to conduct supervision. The issue of transparency in this sense includes, among other things, data management, reporting systems, supervisory routines, etc. The insurers and intermediaries, on the other hand, need information and guidance about the regulatory framework of conducting business. The market needs stability and predictable supervision. This chapter encompasses only transparency issues in the relationship between the insurance/intermediary and the customer. Further, focus in this chapter is only the insurers’ and intermediaries’ duties to provide information to the customers. The customers’ duties of disclosure to the insurer are not included in this chapter. The area of rules and regulations ensuring that information is provided to the customers is complex. There are different information rules for life insurance and J. van der Sluijs (*) Stockholm University, Stockholm, Sweden e-mail: [email protected] © Springer Nature Switzerland AG 2019 P. Marano, K. Noussia (eds.), Transparency in Insurance Contract Law, AIDA Europe Research Series on Insurance Law and Regulation 2, https://doi.org/10.1007/978-3-030-31198-8_10

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non-life insurance, different rules for life insurance with investment elements and without investment elements and different rules for individual insurance and collective insurance (where there is a group representative in the picture). Further, there are different rules for insurance based on collective labour market agreements, where the employers are imposed a duty to insure the employees, and other occupational pension insurance. The transparency rules differ between a non-profit insurance undertaking (a mutual insurance undertaking where the profit goes to the persons insured) and a profit-based insurance undertaking (where the profit goes to the owners). The rules work in many layers. Therefore, this chapter provides only a comprehensive overview of the rules. The life insurance industry, and especially individual and collective health and pension insurance, is closely related to the public health and pension compensation systems. Within the systems, there is a need for transparency towards the person entitled to compensation. However, public insurance systems are not encompassed in this chapter. When describing the legal instruments regulating transparency in Swedish insurance law, it is inadequate to consider only traditional legislation, preparatory works and case law. To achieve a comprehensive understanding on how transparency is ensured to the customers in Swedish insurance law, it is necessary to pay attention also to non-binding guidelines and recommendations issued by private and public actors. Further, activities conducted by the insurance industry are of interest. Some would argue that these ‘norms’ and activities are irrelevant for a study whose purpose is to analyse the legal perspectives of a topic. However, Sweden has a long history of regulating insurance both through traditional legislation and through soft law. One explanation on the great impact of soft law is that all of the Swedish insurance companies that have operated on the Swedish market, since the beginning of the twentieth century, have intimately cooperated with each other regarding premiums, statistics, insurance terms, et cetera. Insurance distribution, for instance, has since the beginning of the twentieth century been regulated alternately in hard law and soft law. This practice ended in the 1980s, when competition regulations were introduced, but the tradition of cooperation regarding questions of common interest has deep roots in the Swedish insurance industry. Many legal insurance issues are in practice regulated by recommendations, guidelines, codes of conduct and ‘statements’ issued by private and public actors. There are many examples in Swedish law history where the legislator has refrained from legislation on a specific issue because the insurance industry already self-regulated the very same issue. There are also many cases where the government has identified a problem but has decided for the time being to refrain from legislation, on the condition that the industry makes its own adequate soft law arrangements or conducts other activities. The ‘deal’ is on as long as the industry acts responsibly—if not, legislation is to be expected. Further, it is quite common that the government, an authority or an authority is the driving force behind an initiative for a soft-law norm-making process or an industry activity. There are several Swedish examples where the government has appointed a private organisation to issue norms in a certain context. Therefore, in this chapter, I will not only consider ‘traditional’ legal sources and activities

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conducted by official authorities. Instead, I will try to provide a comprehensive understanding on how transparency is dealt with in Swedish insurance law, by also taking the various soft-law schemes and industry activities into consideration.

2 The Notion of Transparency Neither the Swedish Insurance Contract Act of 2005 (2005:104) (ICA) nor the preparatory works contain a definition of the term ‘transparency’. Instead, the transparency principle is stated in the Insurance Business Act (IBA), a public law regulating the insurance business. The principle means that information to policyholders and to persons offered insurance must be adapted according to the nature of the insurance and must clearly show the insurance terms and the development of the value of the insurance. In general, ‘transparency’ means insight into something or access to the full information about something. In the insurance law field, transparency has a different primary meaning. Insurance is complicated. In order to achieve an in-depth understanding of insurance, it is necessary to take into consideration various aspects, such as economical, legal and actuarial aspects. However, too much information about insurance hardly helps the average insurance customer to understand insurance or to make the best choices about insurance. Instead, the main goal of ensuring transparency in the Swedish insurance law field is to make insurance understandable to the insurance customer. Thus, in the Swedish insurance law field, the principle of transparency aims at the clarification of the insurance contract or at simplification of information about the insurance contract. In Swedish insurance law, there are several regulations aiming to ensure that the customers have access to adequate and easily understandable information in order to make well-balanced decisions about their insurance. Another measure of increasing transparency in order to help the customers to understand insurance, to make the right choices and to compare different insurances is to standardize information. The word transparency is in this notion used firstly in the field of insurance supervision law, but there are also regulations and industry activities that aim to standardise information provided to customers in order to make insurance comparable and more transparent.

3 Legal Instruments Regulating Transparency into the Insurance Contract A characteristic feature of Swedish rules and regulations addressing ‘information duties’ is that they at the same time are of both public law character (providing information to customers is required by public law, and the duty is under supervision) and private law character (providing information to customers is required by

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private law, and if insufficient information is provided, the insurance contract is affected). Thus, the information rules in the Insurance Contracts Act are of both private law and public law character; non-compliance of the rules might be followed by contractual effects and by market sanctions or regulatory sanctions. The Swedish Financial Supervisory Authority’s (SFSA’s) regulations are of public law character, and yet they clarify the requirements of the information duties in the ICA, which in turn might affect the contract. For the purpose of this chapter, I have attempted to separate the private law side and the public law side of the topic. The chapter in volume I focuses on rules and regulations ensuring transparency into the insurance contract, and the chapter in volume II focuses on the transparency of the insurance intermediaries and the supervisory authorities’ and the industry’s activities in order to supervise those duties. As described above, the Swedish transparency principle is stated in the Insurance Business Act. The essence of the transparency principle is to impose information duties on the insurance companies and ensure that the insurers’ information activities are under the supervision of the SFSA.1 The insurer must maintain adequate information routines but does not have to ensure that the information actually reaches the customer or that the customer understands.2 The information must be adjusted depending on the nature of the insurance. There are different requirements on information about life insurance and non-life insurance, individual insurance and collective insurance. Further, the insurers must adjust the information depending on the category of the insured persons. There are different requirements on information to consumers and to commercial entities. The insurer must provide information also to third parties that have a right to insurance compensation. The transparency rule does not cover reinsurance. The reinsurance companies typically have the knowledge to safeguard their own interests.3 The motivation for the principle is the information asymmetry that typically exists between the insurer and the insured or someone seeking insurance. Therefore, it is not enough to impose information duties on the insurers in an insurance contract act; the information activity must be subject to supervision.4 In 2006, special rules concerning occupational pension insurance were added in the IBA. According to additional rules, the insurer shall inform the insured about its identity and about the underlying (labour market) agreements of the insurance. The rule implements Directive 2003/41/EC of the European Parliament and of the Council of 3 June 2003 on the activities and supervision of institutions for occupational retirement provision. In practice, often the labour organisations provide the information, but the rule imposes a duty on the insurers to inform the insured persons.5 The rule corresponds with the information duties stated in chapter 20 of the ICA of 2005. If

1

Prop. 1998/99:87 p. 176. Prop. 1998/99:87 p. 390. 3 Prop. 1998/99:87 p. 176. 4 Prop. 1998/99:87 p. 176. 5 Prop. 2004/05:165 s. 219. 2

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the insurer does not comply with the rules, sanctions issued by the SFSA may follow. Insurance contracts are regulated by the ICA of 2005.6 The first part of the act contains general rules, the second part of the act contains rules on individual non-life insurance, the third part contains rules on individual life and personal damage insurance and the fourth part contains rules on collective insurance. The act covers both consumer insurance and commercial insurance. Systematically, the act is mainly a consumer protection act, with mandatory rules in favour of the consumer. Chapter 8 contains rules on commercial insurance. Several of these rules are mandatory in favour of the costumer, which means that the Insurance Contracts Act more accurately can be described as a customer protection regulation. Chapter 2 of the ICA regulates the insurer’s duty to provide information to the customer. The chapter regulates only individual non-life consumer insurance, but the same rules are applicable to individual life and personal insurance,7 commercial insurance8 (unless the customer declares that no information is required) and collective insurance.9 In chapter 20, there are special information rules applicable to insurance based on collective labour market agreements. The Act on Investment Advice to Consumers (2003:862) was enacted in 2004. It is a consumer protection regulation with both public law elements and private law elements. The background of the Act was the rapidly changing financial market, which increased the consumers’ need for information in order to make well-balanced decisions when entering onto the financial market. According to the Act, the advisor must document every advising activity. Hence, one aim of the Act is to increase the transparency of investment advice to consumers. The SFSA’s Rules and General Recommendations on Information concerning insurance and occupational retirement pension (FFFS 2011:39) is applicable to the insurers’ information duties before entering into the contract (pre-purchase information), during the validity of the contract and during the payment period. Although the regulation is of public law character (in case of non-compliance, the SFSA may issue sanctions), the rules aim at ensuring that the customer receives adequate information about the insurer and the insurance contract. The regulation is applicable to both consumer insurance and commercial insurance. The rules consist of five chapters with general rules and recommendations, followed by four separate appendixes. Three of the appendixes are applicable to insurance; appendix 2 provides the rules on

6 The Insurance Contracts Act of 1927 (1927:77) lacked rules that imposed information duties on the insurer. Information duties were introduced in 1980, when the Consumers Insurance Contracts Act (1980:38) (CICA) was enacted. The CICA contains rules that imposed duties to provide information to the consumers. The insurer who failed to comply with the information duties were to be brought before the market court and the sanctions available were the market law sanctions, such as fines. 7 ICA 10:2. 8 ICA 8:1. 9 ICA 17:5.

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information about life insurance and occupational pension insurance, appendix 3 the rules on fact sheets and appendix 4 the rules on certain calculations. The most important soft-law issuer in Sweden in this field is the insurance industry organisation Insurance Sweden.10 Most of the insurance undertakings operating in Sweden are members of the organisation. Membership does not affect a company’s formal possibilities to conduct insurance business in Sweden. Insurance Sweden issues a large number of recommendations and guidelines with the insurance industry as the addressee. Insurance Sweden has adopted several recommendations on the insurers’ duties to provide information to customers. In March 2013, Insurance Sweden adopted a Recommendation on Fact Sheets for life-insurance based investment products.11 The Recommendation complements SFSA’s rules and general recommendations on information concerning insurance and occupational retirement pension (FFFA 2011:39), which states that certain information to customers shall be provided in fact sheets. The Recommendation contains detailed instructions on how to draft the fact sheets. In October 2014, Insurance Sweden adopted a Recommendation on pre-purchase information.12 The Recommendation replaced an earlier version from 2012. The Recommendation aims at complementing and concretising the laws and regulations on pre-purchase information. Further, it aims at ‘codifying’ good practice on pre-purchase information. In January 2016, Insurance Sweden adopted a Recommendation on information related to the transfer of the value of a pension insurance.13 The Recommendation replaced an earlier version from 2015. The Recommendation complements FFFS 2011:39 and contains rules on information in the specific situation when a value of a pension insurance is transferred from one insurer to another. Insurance Sweden is a private organisation, and the recommendations are not binding. Thus, the recommendations are soft law. In practice, however, the Swedish insurance industry follows the recommendations. There are several explanations. Almost all of the insurance undertakings that operate in Sweden are members of Insurance Sweden. Even though the membership does not explicitly entail a duty to comply with the norms created by Insurance Sweden, the membership has such a function. The norms are created by representatives from the business and thus have internal legitimacy. Further, the recommendations are not always entirely private products. The first two recommendations (from 2013 and 2014) are the results of private initiatives, but the third recommendation (from 2016) is based on a public initiative. In June 2014, the Swedish government gave the SFSA the assignment to initiate ‘understanding’ within the life and pension insurance business in order to increase transparency related to the transfer of the value of pension insurance. The

10

Insurance Sweden (2019). http://www.insurancesweden.se. Rekommendation – Faktablad för livförsäkringsprodukter av sparandetyp. 12 Rekommendation om förköpsinformation. 13 Rekommendation – Informationsgivning i samband med flytt av pensionsförsäkrings värde. 11

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government also gave SFSA the assignment to elaborate a ‘comparison tool’ in order for customers to be able to more easily compare different insurances.14 In turn, the SFSA forwarded the assignment to elaborate business understanding regarding the transfer of pension insurance value to Insurance Sweden.15 (The SFSA forwarded the assignment to elaborate the comparison tool to the Swedish Consumers’ Insurance Bureau; more about that below in Sect. 4.1.5.). Today, it is too early to assess the impact of the recommendation on the industry. However, even though the norms are only non-binding recommendations, the involvement by the government and the SFSA makes it highly legitimate, and the insurance industry will most likely comply with them.

4 Transparency in Swedish Insurance Contract Law In this section, I will, in general terms describe the rules, regulations and activities that aim at increasing the transparency of insurance contracts for the insurance customer. The aims of the norms and activities are to increase the customer’s understanding of insurance, to make it easier for the customer to compare insurance and to make better choices about his or her insurance. As described above, the area of regulation of information duties is very perplex. A common feature in the regulation is that the rules are structured according to the different phases of the duration of an insurance contract. Therefore, this chapter is structured mainly in the same way.16 There are four stages in the duration period of an insurance contract where the customer has a special need for information about insurance and where transparency in the sense that the customer needs simplified information is especially important: before entering into the contract, when entering into the contract, during the validity of the contract and in case of claim adjustments and disputes.

4.1

Pre-purchase Information

Before entering into the insurance contract, the customer needs to decide what kind of insurance he or she needs. He or she also needs to select an insurance company. Further, a customer about to buy insurance needs to know if there already is an insurance covering the risk. For instance, it is common that consumers are offered insurance in connection with a purchase of goods. Often the very same risk is already covered by the standard home insurance (which most people have). For consumers,

14

FI Dnr 14-8233. FI Dnr 14-8233. 16 Standards and Insurance based on collective labour market activities are treated separately in this paper. 15

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it can be difficult to assess whether the extra insurance is needed or not. In the ICA, there are several rules that impose upon the insurer a duty to provide information before the contract is entered into, the so-called pre-purchase information. The rules in ICA are complemented by regulations issued by the SFSA, which in turn are complemented by recommendations issued by Insurance Sweden. Further, the Swedish Consumers’ Insurance Bureau has developed a comparison tool in order to make it easier for consumers to compare insurance between different insurance companies.

4.1.1

Insurance Contracts Act of 2005

According to ICA 2:2-2:3, the insurer has a duty to provide pre-purchase information. The purpose of the information is to make it easier for the consumer to evaluate if he or she needs insurance and, if so, what kind of insurance. The information shall describe the general contents of the insurance terms in order for the consumer to evaluate the scope and the cost of the insurance. Important limits of the coverage, and whether the insurer’s liability depends on the payment of the premium, must be clear. The insurer also has a duty to inform the consumer of the renewal of insurance. The rule corresponds to the transparency principle stated in the IBA.17 Thus, the information duty does not encompass information on everything about the insurance. The insurer is not obliged to send the customer the full insurance terms. Instead, the insurer’s duty is to provide selected and simplified information about the insurance. In the preparatory works, it is made clear that the aim of the rules is not to ensure that the insured person receives full information. To require that the insurers provide full information about all the limitations of the contract would be going too far. Moreover, the insured will have difficulties absorbing all the contents of the information.18 The aim of the rule, instead, is to make it easier for the customer to make well-balanced decisions about the insurance, to choose between different insurances and to compare the premium costs. The insurer shall, if possible, provide the information in a readable and durable form that is accessible to the addressee.19 It may be provided electronically. The information shall be clear and written in Swedish, but it may be provided in another language if requested by the addressee.20 The insurer can be exempted from the duty of providing pre-purchase information if the customer renounces it or if it is not possible to give such information, for instance when the customer enters into a directly binding insurance contract over phone.21

17

Prop. 2004/05:150 p. 145. Prop. 2004/05:150 p. 153. 19 ICA 2:1. 20 ICA 2:1 and 10:1. 21 ICA 2:3. 18

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There are no sanctions stated in the ICA in case of the insurer’s omission to provide pre-purchase information. However, based on common contractual law principles, negligence of the duty to provide information, or providing inferior information, may affect the interpretation of the insurance contract. Regarding consumer insurance, there are provisions in the Consumer Contracts Act (1994:1512) requiring that unclear contract terms be interpreted in favour of the consumer. If the pre-purchase information is of inferior quality, thus causing the insurance terms to appear unclear, the Act may be applied. The provisions imposing information duties on the insurer in the ICA are applicable also on commercial insurance. In the legislation process, it was highly debated whether the insurance companies should have the same information duties to non-consumers. It was on one hand argued that many commercial actors are in the same need for information as consumers. On the other hand, it was argued that commercial entities typically are better suited to gain the relevant information on their own. Further, it was held that it would be problematic to have the same rules covering all commercial insurance since commercial insurance ranges from small commercial entities, which have the same information needs as a consumer, to multinational large-scale commercial entities, which do not have the same need. In accordance with the third non-life insurance directive,22 the insurers have, since 1995, had a duty to (also to non-consumers) provide information about the identity of the insurer, about dispute resolution possibilities and about the applicable law of the contract.23 If an insurance product is distributed through intermediation, the intermediary has the same duties as the insurer to provide pre-purchase information. This is stated in the Insurance Distribution Act (2018:1219) (IDA).24 There is a Supreme Court case where an insurance contract was considered valid because the insurance intermediary possessed certain information even though the information was not forwarded to the insured (NJA 1992 s. 782).

4.1.2

The SFSA’s Regulations and General Guidelines on Information (FFFS 2011:39)

The rules in the Insurance Contract Act are complemented by regulations of the SFSA. The SFSA’s regulations and general guidelines on information concerning insurance and occupational pension (FFFS 2011:39) contain detailed provisions on pre-purchase information, information during the validity of the contract and information related to claim adjustments and disputes.

22

Directive 92/49/EEC of 18 June 1992 on the coordination of laws, regulations and administrative provisions relating to direct insurance other than life insurance and amending Directives 73/239/ EEC and 88/357/EEC (Third non-life insurance Directive). 23 FFFS 1995:32. 24 IIA 6:5.

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According to the regulations, the insurer must provide complete information about its identity: its name, brand, legal form of business and national representatives, if the insurer is a foreign company. The regulation also more precisely determines the ‘design’ of the information. According to a general guideline, information related to (life) insurance-based investment products should be provided in the form of ‘fact sheets’. An appendix, containing very detailed rules on the content of these fact sheets in turn complements the guideline. Even if the regulation is a non-binding guideline, the entire Swedish life insurance business follows it. Insurance Sweden has adopted further recommendations that even more precisely and in detail regulate the contents of these fact sheets (see below). Chapter 5 and appendix 2 of the FFFS 2011:39 contain special rules for life insurance and occupational pension insurance. The rules are very detailed. Appendix 2 has 20 ‘bullets’ stating the contents of the insurer’s information duty. The information duty encompasses, for instance, the duration period of the insurance, how the insurance may be repurchased or how the value may be transferred to another insurer, principles for calculating value in the event of repurchase or transfer of value, conditions for changing the contract and related costs, the insured’s possibility to terminate the contract and so on. The rules mainly aim at ensuring that the consumer receive simplified information on complex issues, for instance on policies regarding reallocation.

4.1.3

Insurance Sweden’s Recommendation on Pre-purchase Information

In October 2014, Insurance Sweden adopted a Recommendation on pre-purchase information.25 The Recommendation replaced an earlier version from 2012. It complements and concretises the laws and regulations on pre-purchase information. Further, the Recommendation aims at codifying good practice regarding pre-purchase information. It is only targeting consumer insurance and not commercial insurance. I will not describe every rule in this Recommendation, but only a few, in order to provide an idea of its level of detail. Hence, according to the Recommendation, the insurers must provide pre-purchase information in a pedagogical and easily accessible way. The information must be presented in an easy every-day language and even attractive to obtain. Written information must be clear and well suited for the addressee. The information must not be too detailed and not too brief; information about all of the insurance terms is too much detail, and to simply refer to the insurance terms is too brief. The title of the information (if in writing) must be ‘Pre-purchase Information’. The information must not contain selling arguments, only facts, and it must be clarified that the information provided and the insurance terms are not the same thing. The consumer should be informed about the individual

25

Insurance Sweden (2019). http://www.insurance.sweden.

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choices within the insurance and to what extent he or she can influence the insurance contract (for example the level of self-deduction). There should also be information of the entities providing consumer aid, like the Swedish Consumer Agency26 or the Consumer Guidance.27 The information must contain a section titled ‘Important Limitations’. The information on the limitations of the insurance must be as clear as the information on the scope of the insurance. If the insurance is distributed under a different brand name than the insurer’s name, it must be clarified in the information. The Recommendation also contains rules on the form of information. If the information is provided electronically, it must be possible for the consumer to save it, for example by downloading a PDF file. The information must be easy to find and searchable on the insurer’s website. If the parties enter into the insurance contract over the Internet, the information must be provided to the consumer in an early stage of the process. The insurer must provide information on where to find the complete insurance terms (in cases when they are not sent to the consumer). The insurer always has a duty to, at the consumer’s request, send the insurance terms. The Recommendation aims at ensuring that the consumers receive simplified and easily accessible information. Further, the Recommendation aims at ensuring that the consumers receive standardised information since it also contains a link to standardised terms; see below.

4.1.4

Insurance Sweden’s Recommendation on Fact Sheets for LifeInsurance-Based Investment Products

In 2013, Insurance Sweden adopted a Recommendation on Fact Sheets for lifeinsurance-based investment products. The Recommendation complements the SFSA’s regulation FFFS 2011:39. It contains highly detailed instructions, or directions, on the elaboration of the fact sheets. The purpose is to ensure that the information is readable for consumers and to ensure comparability between different products.

4.1.5

The Swedish Consumers’ Insurance Bureaus’ Comparison Tool

The Swedish Consumers’ Insurance Bureau is an independent agency whose objective is to meet consumers’ need for information and advice regarding financial services and to provide support in dealings with finance companies. It is a private organisation that has public agencies behind it. The principals are the Swedish Consumer Agency, the Financial Supervisory Authority and Insurance Sweden. In 2014, the government gave the SFSA the assignment to develop a tool for comparing insurances. The assignment was in turn given to the Swedish Consumers’

26 27

Konsumentverket (2019). http://www.konsumentverket.se. Provided for by the municipalities.

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Insurance Bureau. The bureau has on its website a tool that can do comparisons of different insurances regarding, for instance, insurance sums, deductibles, returns on assets, costs, etc.

4.2

Entering Into the Contract

Insurance contracts are often entered into as a result of a financial advising activity, for instance by the insurance company or by an intermediary. Life insurance products, and especially insurance-based investment products, are complicated. Typically, the advisor possesses a lot of knowledge about the products, and the consumer possesses less knowledge about the products. Since investing in a life insurance can have a significant impact on the consumer’s personal financial situation, there is a need to ensure transparency of the situation when the insurance contract is entered into or when the decision of buying the insurance or making the investment is being made. What was the character of the advice? What was being said at the meeting? Did the consumer understand the advice? In the Act on Investment Advice to Consumers (2003:862) (AIAC), there are rules imposing a duty on the advisor to document the advising activity, to file it and to provide it to the consumer. The rules aim at securing evidence in case of a dispute but also aim at increasing transparency into the advising activity. The rules are complemented by regulations of the SFSA.

4.2.1

The Act on Investment Advice to Consumers

The Investment Advice to Consumers is a consumer protection act, and the background to the act is the rapidly changing financial market, which increased the consumers’ need for information in order to make well-balanced decisions when entering into the financial market.28 If the consumer lacks basic knowledge about the risks connected with the financial instruments in which he or she chooses to invest, a need for protection becomes evident. Considering the importance of investments on the investor’s private economy, it is important to ensure and meet the consumers’ need for knowledge and information. The act is applicable on financial investment advice by a commercial actor to a consumer, which covers retail investment and financial investments in lifeinsurance-based products. The act contains both market regulation and private regulation. The market regulation contains rules on supervision, rules on competence of the commercial actor and rules stating the advisors’ duty to comply with good advising practices. The private regulation contains rules on compensation in the event of negligent investment advice.

28

Prop. 2002/03:133 p. 7.

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For this chapter, the rules on documenting the investment advice are of interest.29 The rule contains a duty for the advisor to document the advice and to provide the documentation to the consumer. Financial advising usually transpires during a conversation between the advisor and the consumer. In order to, in hindsight, be able to evaluate the quality of the advice, the financial advice should be able to be reconstructed on the behalf of both parties. There are several aims of the rules on documentation duties. The advisor is presumed to be more careful when giving advice, and in case of dispute, it should be possible to prove what has been said and done. The rules also aim to increase transparency when giving advice.30

4.2.2

SFSA’s Regulations and General Guidelines (FFFS 2004:4) Regarding Financial Advice to Consumers

The regulation contains detailed (binding) rules and non-binding general guidelines on documenting financial advice to consumers. The documentation must contain information about the consumer: the identity of the consumer, the investment history of the consumer, the purpose of the investment, his family situation, his economic situation, his attitude towards risks and the investment strategy that the consumer and advisor has agreed upon. Further, the documentation must contain a description of the advice and information on whether the advisor advised against an investment. There are also rules on when the documentation shall be produced and by whom. The medium for the documentation is optional, as long as it is possible to identify the documentation for each advising activity and as long as it is easily searchable. The section on handing out the information to the consumer contains rules on when and how the documentation must be provided to the consumer. Finally, there are rules on the advisor’s duties on filing documentation.

4.2.3

New Rules?

In 2014, a commission of inquiry presented its proposal in a report on new consumer protection rules regarding financial advice to consumers.31 The report pointed out that the rules on documentation are too general and thus gave the advisor the discretion to decide on the contents of the documentation. Surveys have shown that some advisors fail to document the advising activity. In some cases, the documentation is handed to the consumer at the end of the meeting, and the consumer is asked to sign the documentation without having a chance to process the information. The connection between the consumer’s wishes and financial

AIAC § 4. Prop. 2002/03:133 p. 22. See further Consumer Protection in connection with the provision on financial advice, Summary, on regeringen, http://www.regeringen.se. 31 SOU 2014:4 Det måste gå att lita på konsumentskyddet. 29 30

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situation on one hand and the advice given on the other hand is rarely documented. Thus, the committee suggested more precise and concrete rules on the documentation duties of the advisor. For instance, according to the proposal, the advisor must document the reasons for each advice given to the consumer, describe explicitly the risks connected with a financial instrument and record the advising activity.32 Today the proposal has not yet led to legislation. When it comes to collective insurance, it is sometimes to a consumer somewhat unclear if he or she is covered by the insured or not. ICA contains rules about the insurer’s information duties to the collectively insured persons. Lately, it has been discovered that the possibilities of a collective insurance have been used by commercial actors who have insured, for instance, every client in their client register in exchange for a commission from the insurer. Often, the stock is large and the premiums are low. In some cases, entering into such an insurance contract is of an ‘opt-out’ character, which means that the clients (the insured consumers) often are unaware that they are insured at all. This clearly is a transparency problem. The phenomenon has been discussed in Sweden, and in 2013, the SFSA and the Swedish Consumer Agency together brought the government’s attention to the problem. In 2014, the government suggested a change in the ICA.33 According to the suggested rule, a collective insurance can be entered into only if the insured persons are members of an organisation.34 The aim with the suggested change is to ensure that there is a common interest between the insured persons and the group representative.35 The proposal has not yet led to legislation.

4.3

During the Validity of the Contract

Even during the validity period of the insurance contract, there are situations where the customer is in particular need of certain information. Right after signing the contract, the insured needs confirmation of the contract and access to information that was not provided before entering into the contract. Consumer non-life insurance is automatically renewed unless it has been cancelled. In case of renewal, the insurer is allowed to change the insurance terms. If that is the case, the consumer is in special need for clear information about the changes. In life insurance, which often is an insurance-based investment product, the consumer is in need of regular information about the development of the value of the insurance. During the validity of a pension insurance, the insured may transfer the value of the insurance from one insurer to another. In that case, the insured is in need of ‘prepurchase’ information, such as insurance terms, conditions, costs and offered

32

SOU 2014:4 pp. 23–26. Ds 2014:43 Grupp- och trafikförsäkringsfrågor. 34 See proposals for new 17:3 and 19:3 ICA. 35 Ds 2014:43 s. 23. 33

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investment instruments in the new insurance company. Further, the consumer needs information about the costs and other effects of the transfer itself.

4.3.1

Insurance Contracts Act 2005

After the signing of the contract, the insurer shall confirm the contract in writing. The insurer must inform the consumer about the full insurance terms, unexpected or important limits of the coverage, whether the insurer’s liability incurs only after payment of the premium and the consequences of the insured’s omission to report an increase of risk.36 Further, the insurer must inform the insured about the insured’s duty to follow safety regulations stated in the contract and the consequences of the insured’s omission to do so.37 During the legislative process, it was debated whether the duty to provide full insurance terms should be encompassed by the pre-purchase information duty. The legislator found that in many cases, a duty to provide the full insurance terms before entering into the contract might be rather unpractical. This was held to be the case when, for instance, the insurance contract is entered into over the phone or when the contract is entered into when the insured pays the premium.38 The purpose of the duty to provide information to the insured after the signing of the contract is not to provide full information about the insurance but instead to draw the insured’s attention to insurance terms and conditions that are of certain importance.39 If a consumer insurance is not cancelled, it is automatically renewed after the insurance period.40 In case of such renewal, the insurer may change the insurance terms. If there is such a change, the insurer has a duty to inform the insured.41 The duty encompasses only information that is necessary for the insured and not information about all of the changes. Especially important is to point out new limitations in the insurance coverage.42 Failure to provide information after entering into the contract is sanctioned by the ICA. According to ICA 2:8, if the insurer fails to provide the information listed in ICA 2:4 or 2:6, the insurer may not invoke the insurance terms. The sanctions were discussed in the legislative process. The government proposed a possibility for the insurance company to repair the damage by providing information afterwards, but the legal committee chose to dismiss the proposal. Thus, it is not possible to afterwards send the information and repair the omission.43

36

ICA 2:4, 2:5 and 17:3. ICA 2:4. 38 Prop 2003/04:150 p. 148. 39 Prop. 2003/04:150 p. 146. 40 ICA 3:4. 41 ICA 2:6. 42 Prop. 2003/04:150 p. 150. 43 Bengtsson (2009), p. 216. 37

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SFSA’s Regulations and General Guidelines on Information (FFFS 2011:39)

SFSA’s regulations have only a few rules concerning information duties during the validity of the contract. Firstly, if the insurer, during the validity of the contract, changes its name or brand or changes its legal form of business activity or the address to its main office or agency, the insured must be informed.44 Appendix 2 part C has special rules for life insurance and occupational pension insurance. The appendix contains 10 bullets that state the duty to, on a yearly basis, inform about, for instance, the current value of the insurance, investment returns, costs, premiums and taxes.

4.3.3

Insurance Sweden’s Recommendation on Information Related to the Transfer of the Value of a Pension Insurance

In June 2015, Insurance Sweden adopted a Recommendation on information related to the transfer of the value of a pension insurance.45 The Recommendation complements the FFFS 2011:39 and contains specified rules on transfer of the value of a pension insurance. The Recommendation is very detailed. It consists of six parts that stretch over 20 pages. Part 1 contains rules about the fact sheets. The fact sheets must, in excess of what must be included according to FFFS 2011:39, contain specific information about the possibility to transfer the value of a pension insurance from one insurer to another, the principles for calculating the value and the fees involved. Part 2 contains rules on information during the validity of the contract but before payment. The Recommendation provides a model for how to present information about fees. Parts 3 and 4 contain rules on the former and the receiving insurers’ duties to provide information related to the transfer. Parts 3 and 4 include rules on, for instance, how the information should be provided and on how to present transfer value and fees. The rules are very detailed. The Recommendation includes special form sheets and precise guidance on how to use them, as well as definitions on certain terminology. Part 5 contains rules on measures against administrative obstacles related to transfers. The Recommendation is applicable only to individual pension insurance.

4.4

Claim Handling and Complaints

Finally, the customer is in special need of simplified information in the case of claim handling and complaints. To be informed about the possibilities of dispute resolution

44 45

FFFS 2011:39 4:1. Rekommendation – Informationsgivning i samband med flytt av pensionsförsäkrings värde.

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is most important for the customer. For instance, some insurers, but not all, have internal complaint boards. Typically, the consumers are in need of information about where to seek advice in case of a dispute and about the dispute process in the National Board of Consumer Disputes or in court.

4.4.1

Insurance Contracts Act of 2005

In case of a claim adjustment, the insurer has to inform the insured about the possibilities of dispute resolution.46 The insurer also must inform the insured about the risk of limitation of the claim. The rules are applicable also on commercial insurance.47 The insurer’s duty to inform the insurer about the claim-handling process was clarified in a Supreme Court case from 1992 (NJA 1992 s. 845 I). In the case, an insured reported a burglary to the insurer. After an inquiry and some correspondence between the parties (and the insured’s lawyer), the insured sued the insurer. The insurer invoked limitation. The insured referred to a rule in the (former) Consumers Insurance Contracts Act of 1980, according to which the limitation period is 6 months from the time when the insurer has declared its final position in the matter. The Supreme Court emphasised the importance of ensuring that the information given by the insurer to the customer about the claim adjustment decision is very clear. Even though the letters from the insurer clearly stated the insurer’s final decision in the matter, the letter lacked information on the possibilities of dispute resolution and risk of limitation. Therefore, the insured’s right to bring the case before the court was not subject to limitation.48

4.4.2

The SFSA’s Regulations and General Guidelines on Information (FFFS 2011:39)

The SFSA’s regulation contains rules on information in this respect. According to FFFS 2011:39, the insurer must provide information on the handling of complaints.49 The information must include how the insurer is handling compensation decisions, disputes and other cases when the customer is dissatisfied. Further, the insurer must inform about their routines in case of a dispute, how claim decisions are reviewed, and references to relevant alternative dispute resolutions and to relevant advisory mechanisms (such as the Swedish Consumer Agency or the Consumer Guidance). The article is applicable only to consumer insurance.

46

ICA 2:7, 10:8. ICA 8:1. 48 The invoked rule in the now repealed CICA corresponds with the present rule in ICA 2005. 49 FFFA 2011:39 4:2. 47

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Standards and Definitions

There are several efforts within the Swedish insurance industry to increase the transparency of insurance by standardising insurance terms and definitions. The first chapter on the SFSA’s regulations and general guidelines on information (FFFS 2011:39) contains definitions on terms like ‘allocated returns’, ‘solvency quota’ or ‘occupational pension insurance’. The terms shall in its stated definitions be used in the information provided to consumers according to the regulation, but in practice, the definitions have a broader application. Addressee is not the customer, but the insured. The definitions have a transparency function. Due to Insurance Sweden’s initiative, the Swedish Standards Institute (SIS) has developed a word list with standardised terms in the field of pension insurance. SIS is a private organisation that undertakes the assignments to develop standards for the industry or for public bodies. The list, ‘Swedish Standard on Pension Terms’,50 is developed by, among others, representatives from Insurance Sweden, the Swedish Pension Authority and the Swedish Consumers’ Insurance Bureau. The purpose of the initiative is to harmonise the language in the field. Insurance Sweden recommends its members to use the SIS terms. The standard is complemented by a special SIS list directed to consumers (translated pension terms for consumers). The list is accessible on the SIS website.51

4.6

Insurance That Is Based on Collective Labour Market Agreements

Chapter 20 of the ICA is applicable to insurance that is based on collective labour market agreements. The information duties involve not only the insurer but also the labour market parties. If a labour market collective agreement imposes upon the employer a duty to insure its employees, the insurer and the labour market parties must provide information to the employer and employees affected by the agreement. The information shall encompass the employer’s duty to insure the employees, the insurance’s costs and coverage. After the contract is entered into, the insurer must inform the employees about their rights and duties following the insurance, as well as important limitations of the coverage. During the validity of the contract, the insurer and the labour market parties have a duty to inform the employer, the employees and others covered by the insurance.

50 51

Svensk Standard SS 40000:2014 Pensionstermer. Swedish Standard Institute (2019). http://www.sis.se.

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5 Conclusions In this chapter, I have tried to provide a somewhat comprehensive overview of the rules, regulations, recommendations and insurance industry activities that aim to increase transparency in insurance contracts. Insurance is very complicated, and the customers need to have knowledge of the products in order to make good choices. To provide simplified information can be contradictive related to provide accurate. Simplified and ‘edited’ information is in its nature inaccurate, and this is of course a dilemma. The insurance industry arranged a conference a few years ago on the topic of transparency. The theme was how to make insurance more understandable to consumers, and the dilemma was acknowledged: a person’s understanding of information on a topic that is as complex as insurance is not always 100% correct. The main goal of the transparency rules is to provide customers knowledge about insurance in order for them to make good insurance decisions. The questions are: are the aims of the regulation fulfilled? Is insurance transparent in a sense that the customers can make well-balanced choices about insurance? Well, for the very ambitious customer, it can be. However, it is not uncommon for a regular insurance customer to not make an effort to know in detail the pre-purchase information, afterpurchase information, insurance terms, yearly reports, fact sheets and so on. Rather, there might be a risk of ‘information overload’, leading to a situation where the customer does not want to know any information about the contract or knows very little information only. Paradoxically, insurance might have been more understandable to people in a period before the information rules were introduced in the Consumers Insurance Contracts Act of 1980. First, insurance products were not as complicated then as they are today. Further, from the end of the nineteenth century until the mid-1970s, ‘insurance tariff associations’ produced standard insurance terms. The insurance tariff associations included all of the insurance companies that operated on the Swedish market. The insurance companies committed themselves to adopting the standard into their individual insurance contracts, and only minor deviations from the standard were allowed. Thus, every insurance company that offered, for instance, fire insurance used the same terms in their insurance contracts. Of course, due to the emergence of competition regulations, the insurance business had to give this practice up. The insurance market started to become diversified, and with Sweden’s entry into the EU, the insurance market of today is very diversified. Today the customers are offered a great variety of insurance terms on the national and international market. From a competition law perspective, this is a good thing; the insurers compete with each other, producing better and cheaper products for the customers. From a transparency perspective, the diversity is more problematic. The pre-existing standardisation of the insurance contracts made ground for common knowledge, both among people working in the insurance industry and for the customers. The standardisation made the concept of insurance somewhat understandable and thus more transparent in that sense. Since the differences between different insurers were small, it was possible for the customers to make comparisons quite easily, if one

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compares with the situation of today. Because of the diversity of the insurance market today and the complex nature of insurance, it is very difficult for the average customer to fully comprehend insurance and to make adequate comparisons, even with the help of the insurers’ simplified information. The tendency is that Swedish legislation is not moving towards more information to the customers but moving towards information of higher quality, better documented advising situations and standardization of terms and language in order to facilitate comparisons. Since 1980, when the information duties were introduced, regulations have been added that specifies the duties. Since 2003, when the duty to document advising activities was imposed on advisors, further and more detailed legislation has been proposed. Since 2010, there have also been further attempts to harmonise the language of life insurance.

References Legislation Consumers Contracts Act (1994:1512) Act on Investment Advice to Consumers (2003:862) Insurance Contracts Act (2004:105) Insurance Business Act (2010:2043) Insurance Distribution Act (2018:1219)

Swedish Financial Supervisory Authority’s regulation FFFS 2004:4 FFFS 2011:39

Government Proposals Prop. 1998/99:87 Ändrade försäkringsrörelseregler Prop. 2002/03:133 Lag om finansiell rådgivning till konsumenter Prop. 2004/05:150 Ny försäkringsavtalslag Prop. 2004/05:165 Nya regler för tjänstepensionsinstitut SOU 2014:4 Det måste gå att lita på konsumentskyddet Ds 2014:43 Grupp- och trafikförsäkringsfrågor

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Supreme Court Cases NJA 1992 s. 782 NJA 1992 s. 845

Insurance Sweden’s recommendations Rekommendation om förköpsinformation Rekommendation – Informationsgivning i samband med flytt av pensionsförsäkrings värde

Articles Bengtsson B (2009) Departementen och lagrådet. Svensk Juristtidning

Websites Insurance Sweden, http://www.insurancesweden.se Konsumentverket, http://www.konsumentverket.se Regeringen, http://www.regeringen.se Swedish Standard Institute, http://www.sis.se

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Transparency in the Insurance Contract Law: A Comparative Analysis Between the Principles of European Insurance Contract Law (PEICL) and Selected European Legal Regimes Marta Ostrowska

1 Introduction The aim of this chapter is to analyse transparency measures applied within the Principles of European Insurance Contract Law (the PEICL) and to attempt to answer the question of whether the PEICL reflect (and, if so, to what extent) transparency standards of national insurance contract regulations. Transparency has been always considered an important element of insurance law. As a matter of fact, it has become even more essential since the European Union started to pay special attention to consumer protection issues and to implement enhanced protection instruments, in particular in the area of financial services, where information asymmetry (i.e. main reason to protect the customers) between the parties is considered to be one of the greatest. Nonetheless, in case of insurance law, not only does the significance of transparency result from the need to protect the weaker contractual party but also from the special nature of the insurance contract. Insurance relationship between the insurer and the policyholder is based on mutual trust, and therefore it is commonly characterised by the application of the utmost good faith principle (also known as uberrimae fidei),1 which definitely could be recognised as an early form or level of transparency. Nowadays, thanks to rapid development of the insurance market and the expansion of customer protection trend, transparency can be traced in almost every branch of insurance law, i.e. insurance contract, insurance mediation and insurance supervision.2 Years of

1 2

Malinowska (2008), p. 28. Wandt (2012), pp. 9–22.

M. Ostrowska (*) Warsaw University, Warsaw, Poland e-mail: [email protected] © Springer Nature Switzerland AG 2019 P. Marano, K. Noussia (eds.), Transparency in Insurance Contract Law, AIDA Europe Research Series on Insurance Law and Regulation 2, https://doi.org/10.1007/978-3-030-31198-8_11

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analysis and discussions over the policyholder’s protection and transparency within the insurance regulation leads to a lot of interesting conclusions among which transparency is argued to be a general principle of insurance law.3 As if this was not enough to demonstrate the importance of the issue, the scale of transparency phenomenon was interestingly reflected in one of the researches where the question whether the utmost good faith principle will be in the future replaced by a wide application of the principle of transparency was reasonably raised.4 As it seems, transparency rules the modern insurance regulation. However, the research on its efficacy demonstrates that the overall impact of transparency can be considered twofold. On the one hand, implementation of the transparency measures can ensure desirable level of consumer protection, but on the other hand, it is argued that excessive transparency may easily lead to the so-called information overload, which might be as harmful to the customer as the lack of transparency. The problem of transparency within the national insurance regulations has been already deeply analysed. Therefore, for the purposes of this chapter, only brief conclusions of these studies will be further presented. Instead, the main focus will be put on transparency within the PEICL. The PEICL constitute the result of work of the Project Group ‘Restatement of European Insurance Contract Law’.5 The Project Group, consisting of European experts in insurance law, was found in September 1999 and aimed at providing the European legislator with the instrument enabling to overcome the obstacles of the internal insurance market. Due to the rules on private international law of insurance contracts provided for in the Rome I Regulation (593/2008), products that are sold internationally, either by providing services cross-border or through foreign subsidiaries and branch offices, must be adapted to the mandatory rules of the Member State in which the insurance product is sold.6 Bearing in mind this regulation and the fact that the character of the national insurance contract laws is often mandatory, it is rather impossible to establish an internal market for the insurance products. In consequence, the Project Group proposed the creation of a European insurance contract law that would allow insurers to develop and sell insurance products throughout Europe based on the European regime of insurance contract law only. The PEICL are intended to serve as a draft Optional Instrument of European Insurance Contract Law being an alternative to national insurance contract law. Eventually, the PEICL are to be enacted as an EU regulation. Bearing in mind the objectives of the Project Group, the PEICL have been developed through comparative legal analysis of national contract laws,7 and

3

Wandt (2012), pp. 9–22. Wandt (2012), pp. 9–22. 5 Project Group ‘Restatement of European Insurance Contract Law’, established by Prof. Dr. Fritz Reichert - Facilides, LL.M., Innsbruck, Chairman: Prof. Dr. Helmut Heiss, LL.M., Zurich. Full version of PEICL available at: http://www.restatement.info or https://www.uibk.ac.at/zivilrecht/ forschung/evip/restatement/draft.html. Accessed 9 Apr 2019. 6 Heiss (2010), p. 7. 7 Basedow et al. (2009). 4

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its provisions are modelled taking into consideration the relevant national provisions. In order to pursue the aim of this chapter, first, an analysis of selected European insurance contract regulations was made.8 The said, analysis was thoroughly based on the studies on transparency within a particular insurance contract regulation provided by the researchers of different European jurisdictions. Subsequently, transparency provisions of the PEICL were identified and compared to those national described in the analysed studies. By way of explanation, it should be underlined that the analysis presented in this chapter should not be treated as complete or comprehensive. Due to the lack of definition for ‘transparency’ and common instructions of the analysis, the researchers not always present the insurance transparency from the same perspective. Also, depending on the approach they adopt, often their research focused only on the selected aspects of transparency. Nevertheless, the analysed material definitely allows us to provide at least a tentative answer to the question posed at the beginning of this chapter—do the PEICL reflect transparency standards of the national insurance contract laws?

2 Transparency in the Insurance Contract Within the EU Countries’ Legislation: A Landscape of Regulation The research on transparency within the insurance contract leads to the conclusion that none of the European insurance contract law provides for the legal definition of transparency.9 Nevertheless, the common linguistic meaning of this word is rather universal and similar; i.e., transparency is explained as comprehensibility supplemented by certainty, clarity and completeness. A helpful explanation of these terms has been given by the Austrian jurisprudence: a legal norm is comprehensible if it is understandable to the legal user with regard to its purpose and the legal consequences resulting from it. A legal norm is certain if it does not offer an unjustified margin of discretion and thus—although it is possible to prevent it by a more precise wording—would make it impossible to foresee (interpret) results from the policyholder’s point of view. A norm is sufficiently clear if it does not try to conceal the rights that the legal user derives from it or deceive his rights at all. Finally, completeness means that the effects of a legal norm must not be obscured by

8

The analysis includes the following jurisdictions: Spanish, Greek, Italian, Turkish, Austrian, Croatian, German, of Western Balkans (Serbia, Montenegro, Bosnia & Herzegovina), Portuguese, Dutch, Swedish and Polish. 9 However, it should be mentioned that Swedish Insurance Business Act attempts to define the principle of transparency and states that it means the information to policyholder and to persons offered insurance must be adapted according to the nature of insurance and clearly show the insurance terms and the development of the value of the insurance. For more details, see the Chapter by Van der Sluijs J, Transparency in Contract Law of Sweden.

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omitting certain parts.10 Taking these explanations into consideration, it is clear that in order to be transparent, not only does the clause need to be grammatically correct, but it should also clearly outline the insurance mechanism. Besides the general meaning of transparency, in terms of insurance, it is commonly understood twofold: as a general principle of insurance law and as a manner of providing information between the parties. The first understanding relates to the utmost good faith principle ruling the insurance contract, while the latter mainly refers to the language and form of the information provided. Viewed in this light, transparency is expected to enable the preservation of balance between the contracting parties, protect their rights and support the preservation of legal certainty and equality of the legal status of contracting parties and the principle of good faith in dealing. Thanks to the development of the European Union’s insurance legislation, the modern insurance law may be considered more or less harmonised. Hence, a significant portion of the national insurance regulations is alike. Predominantly, contract transparency is achieved by the Member States through similar legal instruments that refer either to the type of information to be provided (e.g. obligatory content of the general terms and conditions) or to the manner in which it should be provided (e.g. language and document drafting requirements, the methods of interpreting the general terms and conditions, such as the contra proferentem rule). The information obligations are divided into four stages within the duration period of the insurance contract: before entering into the contract, when entering into the contract, during the validity of the contract and in case of claim adjustments and disputes. These and other transparency obligations will be mentioned further in this chapter for the purposes of comparison.

3 Transparency Reflections in the PEICL Having presented the general overview of the national regulations in terms of the transparency of insurance contracts, some light should be now shed on the PEICL rules. In this paragraph, the PEICL provisions contributing to the improvement of transparency will be presented and briefly compared to the equivalent regulations of the analysed jurisdictions. For the purposes of clarity, the relevant PEICL provisions have been classified into five groups: (1) language, form and quality of the information; (2) pre-contractual information duties of an insurer; (3) pre-contractual information duties of an applicant; (4) post-contractual information duties of both the insurer and policyholder; (5) abusive clauses. Each of these groups addresses different aspects of transparency.

10

See Chapter 1 by Wöss S, Transparency in the Insurance Contract Law of Austria.

Transparency in the Insurance Contract Law: A Comparative Analysis. . .

3.1

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Language, Form and Quality of the Information

Article 1:203 of the PEICL lays down the requirements relating to the drafting and interpretation of insurance contracts, and according to the Project Group, it intends to promote the transparency of the documents.11 Firstly, in order to ensure transparency, it provides that all documents provided by the insurer shall be plain and intelligible and in the language in which the contract is negotiated.12 As the words ‘plain and intelligible’ are difficult to define, it is deemed that whether the document is drafted in a plain and intelligible way should be assessed from the perspective of a reasonable policyholder. Generally, the regulations of most European insurance contract laws are aligned with this rule. Clearly, national provisions are worded differently using less or more precise words. In Austria, even the additional prohibition of misleading is introduced, which is not mentioned in the PEICL. However, in the end, they all convey the same meaning—the content of the contract should be clear, understandable and unambiguous. To this extent, Article 1:203 of the PEICL reflects the national standards. It should be noted, though, that due to the analysed PEICL provision, the prescribed manner of drafting should be applied to all the documents provided by the insurer within the duration of the contract without specifying particular documents. In turn, some of the analysed national laws require the application of this rule specifically to the general terms and conditions of the insurance contract (model form) (e.g. Poland, Spain, Austria). Hence, in some cases, the scope of the PEICL provision would be wider than the national one and, consequently, indeed would provide more intensive protection of the policyholder. Secondly, as to the sanction for violations of the above requirements, Article 1:203 of the PEICL does not provide for one. However, it specifies that if the meaning of the wording of any document or information provided by the insurer is doubtful, the interpretation most favourable to the policyholder, insured or beneficiary, as appropriate, shall prevail. This in dubio contra stipulatorem rule is common for all the analysed national insurance contract laws. Also, it is necessary to underline that while the PEICL provision does not limit the applicability of this rule to insurance contracts concluded with the consumers, the Dutch and Turkish regulations do so—the contra stipulatorem interpretation rule applies here only with respect to consumer contracts. Again, it is another example proving that the PEICL provisions seem to be worded in a way that tries to encompass all the possible solutions existing in the national laws. 11

Basedow et al. (2009), Comment No 2 to the Article 1:203. Article 1:203 of the PEICL constitutes a general rule applying to the content of every document provided by the insurer to the policyholder. Nevertheless, it is worth to mention that the requirement to use clear language in the communication with the policyholder is separately mentioned in the Article 5:101 sec. 1 of the PEICL with respect to the information on the insurance premium where its payment is being made a condition of formation of the contract or of the beginning of cover. In the lack of explanation of such separate emphasis and assuming that the emphasis has been made on purpose, it can be presumed that the Project Group intended to underline the importance of this Article. None of the analysed papers referred to a similar regulation in the national laws. 12

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Apart from the rules on drafting and interpreting the insurance contracts, the PEICL provide for the provision regulating the situation where the terms of the insurance policy differ from those in the policyholder’s application or any prior agreement between the parties. According to Article 2:502 of the PEICL, such differences as have been highlighted in the policy shall be deemed to have been assented to by the policyholder unless he objects within one month of receipt of the policy. The insurer shall give the policyholder notice in bold print of the right to object to the differences highlighted in the policy. If the insurer fails to comply with these requirements, the contract shall be deemed to have been agreed on the terms in the policyholder’s application or the prior agreement of the parties, as the case may be. Although this rule has been barely mentioned by the researchers with respect to the transparency of insurance contracts (Spain), it is already known in most European jurisdictions,13 and it definitely contributes to the clarity of the contractual terms. This is because not only does the provision require highlighting the discrepancies for the convenience of the policyholder, but it also introduces special drafting rules regarding information on the right to object.

3.2

Pre-contractual Information Duties of an Insurer

As it was already mentioned, the transparency of insurance contracts is also ensured by certain information duties of both the insurer and the applicant. In this respect, the PEICL contain important regulations provided for in Articles 2:201 (provision of pre-contractual documents), 2:202 (duty to warn about inconsistencies in the cover), 2:203 (duty to warn about the commencement of cover) and 17:202 (insurer’s pre-contractual information duties regarding life insurance contract), among which Articles 2:201 and 17:202 are of particular importance. Hence, further in this paragraph, the focus will be put mainly on their content. Article 2:201 of the PEICL obliges the insurer to provide the applicant with a copy of the proposed contract terms and a document including a bunch of information of various nature before concluding the insurance contract. The information to be provided is as follows:  the name and address of the contracting parties, in particular of the head office and the legal form of the insurer and, where appropriate, of the branch concluding the contract or granting the cover;  the name and address of the insured and, in the case of life insurance, the beneficiary and the person at risk;  the name and address of the insurance agent;  the subject matter of the insurance and the risks covered;  the sum insured and any deductibles;

13

Basedow et al. (2009), Note No 1 and 4 to the Article 2:502.

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 the amount of the premium and the method of calculating it;  when the premium falls due as well as the place and mode of payment;  the contract period, including the method of terminating the contract, and the liability period;  the right to revoke the application or avoid the contract (. . .);  that the contract is subject to the PEICL;  the existence of an out-of-court complaint and redress mechanism for the applicant and the methods of having access to it;  the existence of guarantee funds or other compensation arrangements. As seen above, in order to render the legal relationship between the insurer and the policyholder transparent, the applicant should be first well informed about the insurer and intermediary (if one is involved). Further, the insurer should present the key material elements of the contract (subject matter of the insurance, sum insured, premium) and the most important mechanisms ruling the ‘life of the contract’ (premium payment, duration of the contract, termination, revocation and withdrawal of the contract). These are considered to be the information on the basis of which the applicant is able to reach an informed decision on whether or not to conclude the contract. This provision is modelled on Articles 183 to 189 of the Solvency II Directive (2009/138/EC),14 which should be implemented by all the Member States. Hence, all the European insurance contract laws include the concept of pre-contractual information duties of the insurer. Usually the analysed national provisions are formulated in a similar manner and require providing analogous information. In-depth analysis reveals, though, that sometimes the national regulations are more detailed and require to provide more information than the PEICL, e.g. competent supervisory authority, grievance procedure, price and total costs of insurance, taxes, modalities of the contract, mode of conclusion and possible legal remedies (e.g. Germany, Croatia, Poland). Speaking of the information on the insurance contract terms, the PEICL provide for the requirements regarding the content of the insurance policy. Article 2:501 of the PEICL stipulates that, in principle, the insurance policy should contain at least the information listed therein. These are very similar to the information indicated in Article 2:201 of the PEICL. In addition to the basic information relevant to all insurance contracts, both the PEICL and national regulations provide for a separate pre-contractual information duty dedicated to life insurance contracts. Article 17:202 of the PEICL specifies that where the life insurance contract is to be concluded, the insurer shall inform the applicant about whether he has a right to participate in profits and that the information and documents mentioned in Article 2:201 of the PEICL (described above) should be accompanied by the following additional information:  as regards the insurer: a specific reference to the compulsory publication of the annual report on its solvency and financial condition; 14

Basedow et al. (2009), Comment to the Article 2:201.

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 as regards the contractual commitments of the insurer: – an explanation of each benefit and each option, information about the proportion of the premium attributable to each benefit, both main benefits and supplementary benefits, where appropriate; – the methods of calculation and distribution of bonuses including a specification of the applicable supervisory law; – an indication of surrender and paid-up values and the extent to which they are guaranteed; – for unit-linked policies: an explanation of the units to which the benefits are linked, and an indication of the nature of the underlying assets; – general information on the tax arrangements applicable to the type of policy. Generally, equivalent national provisions set out the same rules, and the information listed therein is of a similar nature. However, the above-mentioned remark on the difference between the scope and details of information required under Article 2:201 of the PEICL and the national laws applies as well to Article 17:202 of the PEICL. For instance, the Member States additionally oblige the insurer to provide information about the tables of redemption value and the tables of capitalised sums per insurance years (Croatia), the surrender value and explanation of the Zillmer method (Germany). Besides the above, some analysed research papers mention the insurer’s duty to advise as an important element of the transparency of contracts (Germany, Portugal).15 The insurer has to provide the applicant with advice on all possible insurance options and what suits best his needs.16 Although the PEICL do not refer to such obligation,17 it is worth to shed some light on Article 2:202 of the PEICL, which seems to be related to the duty to advise. According to the said provision, when concluding the contract, the insurer shall warn the applicant of any inconsistencies between the cover offered and the applicant’s requirements of which the insurer is or ought to be aware, taking into consideration the circumstances and mode of

15 The analysis of the studies of transparency within Turkish insurance contract law leads to the conclusion that, contrary to the majority of European insurance laws, Turkish regulation does not oblige the insurer to warn the applicant in case there is an incompatibility between the cover offered and the applicant’s requirements. See Chapter 19 by A. Yesilova, Transparency in the Insurance Contract Law of Turkey. 16 Usually the duty to advise is associated with the pre-contractual phase but an interesting remark has been highlighted by Wandt M in the chapter Transparency in Contract Law of Germany. German insurance law specifies the duty to advise within the duration of the contract, i.e. the insurer is obliged to query and advise the policyholder throughout the term of their contract relationship only if there is a recognizable necessity for advice. 17 The duty to advice originates from the directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution (the IDD) which was transposed into the national laws by 23 February 2018 (Article 42 of the IDD). In turn, the current version of the PEICL is dated 1 November 2015. This ‘time difference’ is likely to be a reason why the PEICL do not include the provision specifying duty to advice. For additional explanation supporting this thesis see Basedow et al. (2009), Note No 1 to the Article 2:202.

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contracting and, in particular, whether the applicant was assisted by an independent intermediary. It seems that the goal of this provision is not merely informative. It gives the impression that it aims to establish a general pre-contractual duty on the part of the insurer to assist the applicant by providing information relevant to the applicant’s choice of cover and, consequently,18 help the applicant to choose the insurance that is adequate for his requirements. Duty to advice is driven by a similar purpose. Furthermore, in order to identify the inconsistencies or provide the applicant with advice, both regulations require the insurer, directly or indirectly, to obtain the relevant information on the applicant—in particular his ‘requirements’, which seem to be the equivalent of ‘needs’. In conclusion, clearly the PEICL do not provide for a standard insurer duty to advise, which is common for European insurance regulations. However, the above remarks on the insurer’s duty to warn the applicant of any inconsistencies between the cover offered and his requirements give reasonable grounds to state that the PEICL fulfil the purpose of the duty to advice at least partially. Consequently, it reflects transparency standards in this respect to the limited extent. As mentioned in the explanatory notes made by the Project Group, Article 2:202 of the PEICL has been modelled on the basis of the solutions provided by various EU directives and national laws, and it intended to constitute a compromise between the extremes existing therein. It seems, though, that since the national laws have been harmonised by the implementation of Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution, it would be desirable to adjust the PEICL to the new unified rules.

3.3

Pre-contractual Information Duties of an Applicant

The obligation to act transparently and render the insurance relation clear and understandable is also imposed on the policyholder and—in the pre-contractual phase—on the applicant. It is reflected in the obligation of the applicant to provide the information needed to properly assess the risk and decide whether or not to accept an application for insurance. Article 2:101 of the PEICL introduces the so-called duty to disclose when concluding the contract, the applicant shall inform the insurer of circumstances of which he is or ought to be aware, and which are the subject of clear and precise questions put to him by the insurer. Although the obligation is expressly imposed on the applicant, in fact it is partially transferred on the insurer. The PEICL limit the scope of the information that the applicant is obliged to disclose to information that the insurer asks for. This is a standard question method applied also in some of the Member States (e.g. Poland, Netherlands, Turkey). It is the opposite of the duty of spontaneous disclosure applied, e.g., in Croatia and Austria. It is believed that the question method is more appropriate and efficient as it is usually easier for insurers

18

Basedow et al. (2009), Comment No 1 to the Article 2:202.

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than for applicants to define which information is material to the risk.19 Interestingly, it is also claimed that the question method enhances the transparency of the insurer’s activity as the questions asked by the insurer reveals what information is required to assess the risk.20 Lastly, it is worth mentioning that, similarly to the insurer’s pre-contractual information duties, the PEICL also distinguish pre-contractual applicant disclosure duties in life and non-life insurance contracts, which correspond with each other (see Article 17:201 of the PEICL).

3.4

Post-contractual Information Duties of Both Insurer and Policyholder

The purpose of the pre-contractual information duties is mainly to allow the applicant to reach an informed decision and the insurer to accept the application for insurance. They are therefore necessary to establish the contractual terms acceptable for parties concluding the contract and commence the insurance relationship between the insurer and policyholder. On the face of it, it may seem that the moment of concluding the insurance contract is the most important in terms of information duties; however, as the insurance contract regards risk which by its nature may be changing, period of execution of the contract should be seen as equally important. The PEICL provide for several provisions on the information duties of both insurer and policyholder after the conclusion of the contract. Among them, Article 2:603 of the PEICL sets out the obligation of the insurer to send written notice of alteration to the policyholder no later than one month before the expiry of the current contract period in case of automatic prolongation of the contract, which may involve alteration of the premium or any other term or condition of the contract. Such regulation is generally aligned with most of the analysed national laws (e.g. Portugal, Croatia). Further, the insurer is also obliged to update information regarding the corporation. Article 2:701 of the PEICL stipulates that throughout the contract period the insurer shall provide the policyholder without undue delay with information in writing on any change concerning its name and address, its legal form, the address of its head office and of the agency or branch which concluded the contract. Similar regulations are included in the analysed studies about transparency in the national regulations (e.g. Sweden, Portugal). With regard to the post-contractual information duties of the policyholder, the PEICL introduced a provision regarding the duty to give notice in case of aggravation of risk (Article 4:202 of the PEICL). In fact, the PEICL do not provide for the obligation to notify the insurer in case of aggravation but specify the conditions of such notification. Consequently, it depends on the insurer whether or not to oblige the policyholder to give notice of aggravation. The duty to notify in case of 19 20

Basedow et al. (2009), Comment No 3 to the Article 2:101. See Chapter 6 by Luzak J., Transparency in the Insurance Contract Law of the Netherlands.

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aggravation of risk is commonly applied in national legal orders, though they exist in modified versions. Mainly they differ with respect to the notification deadline. Also, it is worth noticing that some Member States do not limit the duty to notify to cases of risk aggravation. Instead, they provide for the obligation to notify the insurer of any changes affecting risk assessment, i.e. cases of risk alleviation (Germany, Poland). A proper information exchange is also needed in case the insured event occurs. According to Article 6:101 of the PEICL, the occurrence of an insured event shall be notified to the insurer by the policyholder, the insured or the beneficiary, as appropriate, provided that the person obliged to give notice was or should have been aware of the existence of the insurance cover and of the occurrence of the insured event. Notice by another person shall be effective. As the notification of the insured event may be considered as a mechanism enabling the functioning of any insurance, the described rule applies to all national laws. Some light needs to be shed, though, on who should be obliged (or entitled) to notify. Among the analysed jurisdictions, some regulations do not impose the duty to notify exclusively on the policyholder (Poland, Germany, Austria, Netherlands); i.e., the notification is effective if made by the insured, beneficiary or even a third party. It seems reasonable since it is not difficult to imagine the circumstances in which neither of the interested persons is able to notify the insured event. The same solution has been implemented into the PEICL. Further to the duty to notify, under Article 6:102 of the PEICL, the policyholder, insured or beneficiary is obliged to respond to reasonable requests of the insurer; in particular, they should provide the insurer with information about the causes and effects of the insured event. Generally, the cooperation between the insurer and the policyholder in case of occurrence of the insured event is stipulated in the national laws in a similar way (e.g. Croatia, Turkey, Poland). However, it is worth highlighting that the PEICL are limited to the ‘reasonable requests of the insurer’, while the Member States’ regulations often refer to all the relevant information or documents asked by the insurer, which definitely creates a wider scope of information. The latter may seem to be more desirable with respect to transparency; however, it is not always favourable for the policyholder. Therefore, assuming that improvement of transparency in insurance contracts is for the benefit of both contractual parties, it seems reasonable to claim that Article 6:102 of the PEICL meets and even improves national standards. Besides the above-mentioned regulations, transparency in insurance contracts is also fostered by the following provisions of the PEICL: Article 2:702 (the insurer’s obligation to provide further information upon the policyholder’s request), Article 14:106 (the policyholder’s right to request at any time a statement relating to his claim record where the bonus-malus system is applied) and Article 17:301 (insurer’s post-contractual information duties relevant to life insurance). These, however, were not mentioned in the analysed papers.

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4 Abusive Clauses It can be considered that lack of transparency might sometimes cause a significant imbalance in the rights and obligations of the policyholder, which, in turn, may cause damage on the part of the policyholder. The PEICL define abusive clause as a term that has not been individually negotiated, and contrary to the requirements of good faith and fair dealing, it causes a significant imbalance in the rights and obligations of the policyholder, insured or beneficiary arising under the contract, to their detriment, taking into account the nature of the insurance contract, all the other terms of the contract and the circumstances at the time the contract was concluded (Article 2:304 sec. 1 of the PEICL). In principle, if such an unfair term is identified, it is not binding on the policyholder, insured or beneficiary. This provision, though, applies neither to the adequacy in value of the cover and the premium, nor to terms that state the essential description of the cover granted or the premium agreed, provided the terms are in plain and intelligible language. Furthermore, the described article stipulates a presumption that a term shall always be regarded as not individually negotiated when it has been drafted in advance (. . .). The fact that certain aspects of a term or one specific term have been individually negotiated shall not exclude the application of this Article to the rest of a contract if an overall assessment of the contract indicates that it is nevertheless a pre-formulated standard contract. Before analysing to what extent this provision is aligned with the national regulations, it should be mentioned that Article 2:304 of the PEICL is modelled on the Unfair Contract Terms Directive (93/13/EEC). Therefore, again, compliance can be expected. Indeed, definitions of the abusive clause are the same (e.g. Poland, Western Balkans, Italy). Similarly, the exclusion from application of the abusive clause sanction regards the same core terms of the contract. The analysis, though, does not give a clear answer to the question of whether or not the national regulations apply to insurance contracts concluded with both consumers and professionals as Article 2:304 of the PEICL does. This can be doubtful as the implementation of Article 3 para. 1 and Article 4 para. 1 of the Unfair Contract Terms Directive (93/13/EEC) was often made by the Member States into their consumer-related acts21 (Basedow et al. 2009, Comment No 3 to Article 2:304). Finally, noteworthy is the presumption that contractual term was not individually negotiated. In the Member States where a similar presumption is not provided (e.g. Poland, Italy), verification of the way in which the term has been negotiated is required in each case. Bearing in mind that this particular presumption, read separately, does not directly contribute to improving transparency, it is enough to mention that the PEICL solution definitely should be considered favourable for the policyholder, at least in terms of his protection. Speaking of abusive clauses, an interesting regulation of German law is worth mentioning. Because of sec. 305c subsec. 1 BGB, provisions in standard terms do not become part of the contract if they are unexpected from the point of view of a reasonable contractual partner, taking into account the individual circumstances, in 21

Basedow et al. (2009), Comment No 3 to the Article 2:304.

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particular with respect to the outward appearance of the contract. This is a prohibition of unexpected terms (also known as ‘hidden clauses’), where the unexpectedness of a particular clause may as well result from its placement within the contract or from the limitation of a right formerly provided by another general term and condition clause.22

5 Conclusions The aim of this chapter was to attempt to answer the question of whether the PEICL reflect transparency standards of European insurance contract laws. To this end, similarities and differences between the relevant provisions were briefly presented. The analysis gives the general impression that the PEICL rules constitute a compromise between various modifications of the same rules existing in the national laws. Moreover, particular provisions of the PEICL tend to be more general and less detailed in comparison with their equivalents in the European jurisdictions, which may be considered both positive and negative. Besides the remarks made in the main part of this chapter, it is worth mentioning that the PEICL omit the insurer’s duty to provide information regarding the existence of a conflict of interest and, contrary to national insurance contract laws, do not distinguish between consumer and non-consumer or make the application of its provisions dependent on such distinction. Taking into consideration the above remarks and bearing in mind the methodology and specifics of the analysis, the author believes that it is justified to say that the PEICL generally reproduce transparency measures common to national insurance contract laws, though it is hard to give a precise account of the extent. Consequently, it is safe to conclude that the level of protection of policyholders, ensured, i.a., by transparency measures, under the PEICL is high as compared to the level of protection offered by national laws of the Member States.23

References Basedow J, Birds J, Clarke M, Cousy H, Heiss H, Loacker L (2009) Principles of European Insurance Contract Law (PEICL). Sellier European Law Publishers GmbH, Köln Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts OJ L 95, 21.4.1993, pp 29–34 Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) (Text with EEA relevance) OJ L 335, 17.12.2009, pp 1–155

22 23

See Chapter 3 by Wandt M, Transparency in the Insurance Contract Law of Germany. Heiss (2010), p. 7.

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Heiss H (2010) The principles of European insurance contract law: an optional instrument? http:// www.europarl.europa.eu/document/activities/cont/201004/20100430ATT73919/ 20100430ATT73919EN.pdf. Accessed 9 Apr 2019, p 7 Malinowska K (2008) Umowa ubezpieczenia w Europie bez granic, Oficyna Wydawnicza Branta, Bydgoszcz – Warszawa, p 28 Project Group “Restatement of European Insurance Contract Law”, established by Prof. Dr. Fritz Reichert - Facilides, LL.M., Innsbruck, Chairman: Prof. Dr. Helmut Heiss, LL.M., Zurich. Full version of PEICL http://www.restatement.info or https://www.uibk.ac.at/zivilrecht/forschung/ evip/restatement/draft.html. Accessed 9 Apr 2019 Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I) OJ L 177, 4.7.2008, pp 6–16 Wandt M (2012) Transparency as a general principle of insurance law. In: Wandt M, Ünan S, Sigorta Hukuku Türk Derneği (eds) Transparency in insurance law, Seminar papers, Deutscher Verein für Versicherungswissenschaft, pp 9–22

Part II

Civil Law: Other Jurisdictions

Transparency in the Insurance Contract Law of Chile Roberto Ríos Ossa

1 Introduction In the last few years, the Chilean insurance contract law has undergone relevant modifications. For this reason, and prior to a detailed analysis of the transparency topic, it is necessary to consider that our Commerce Code comes from 1865, and in this context, in the insurance contract law free will predominates, which had the norms enacted by the Superintendency of Securities and Insurance (SVS)1 as the unique limit, and later the norms of the Consumer Protection Law number 19.496 of 1994 (LPC/1994). Nevertheless, in the latter case, the application of the protection norms was gradual. From Law number 20.555 of 2011, which modifies the LPC/1994, the Chilean legislator recognizes insurance as an adhesion and consumer contract.2 In this sense, our doctrine has stated that “[. . .] we believe that at this stage it is not possible to discuss the idea that we have created the principle of

1

The law number 21.000 of 2016, replaced the Superintendence of Securities and Insurance (supervisory agency) by the Financial Market Commission. The Article 1 of law number 21.000 defines the CMF as a decentralized public service, of a technical character, holding a legal personality and assets that relates with the President of the Republic through the Ministry of Treasury. Then, regarding the functions of the supervisory organ, the cited norm is decreed that the CMF has the objective to safeguard the correct functioning, development and stability of the financial market, facilitating the participation of market agents and promoting the care of public faith. For these, it has to maintain a general and systematic vision of the market considering the interests of the investors and the insured. Additionally, another objective of the CMF is to safeguard that supervised persons and entities, from the start until the end of their liquidation comply with the laws, regulations and statutes and others that govern them. See Morales (2018), pp. 75–175. 2 Contreras (2014), pp. 89–120. R. Ríos Ossa (*) Pontificia Universidad Católica de Chile, Santiago, Chile e-mail: [email protected] © Springer Nature Switzerland AG 2019 P. Marano, K. Noussia (eds.), Transparency in Insurance Contract Law, AIDA Europe Research Series on Insurance Law and Regulation 2, https://doi.org/10.1007/978-3-030-31198-8_12

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pro-consumer in the Chilean Law and is understood as an adhesion consumer contract where the importance of information and its defect, which is the asymmetry, causes a contractual imbalance.”3 In the aforementioned context, Law number 20.667, which came into force on December 1, 2013, completely substituted the Chilean insurance contract regulation in the Commerce Code. It is a substantial modification after 148 years of being in force. The legislative technique brought, as a result, unsystematic legal texts with some inaccuracies on legal terms,4 the reasons of which shall be analyzed in the following paragraphs. The modification introduced by Law number 20.667 has its origin in the first Bill of Law of 1990, which culminated into a parliamentary initiative, whose processing began in 2010.5 The final Bill had its principal justification in the distancing of the legal regulation of insurance contracts from the insurance business. In this sense, the parliamentary initiative indicates that “the contractual reality was distanced from the content of the Commerce Code, which converted in to insufficient, erroneous and decidedly inapplicable, in some cases.” Further, this initiative mentions that “accompanied by contract liberty that presides all the private law, the insurance contract filled these loop holes with contract terms up to a point where the insurance practice separated from the law.”6 The aim of the preparatory work to adjust the Law to the practice of the insurance industry, it converges with the criteria that were incorporated before and during the parliamentary procedure of Law 20.667 as of 2010 are, in our opinion, antagonistic to the 1990 Law project. In this sense, our legislator, on the basis of the Public Order of Protection,7 seeks to protect the insured as contractors that are weak or disadvantaged against the predisposing insurer.8 This substantial opposition between the 1990 project and the regulation that finally introduces Law 20,667, resulted in a lack of systematization and imprecision, sometimes, of the legal language, as we have indicated. Along with the above, and for consumers’ insurance cases, the LPC/1994 comes together, assuming that it has created a state of legal uncertainty in determining the legal framework applicable to this special contract. For us, the rules of Article 512 et seq. of our Commerce Code will govern first, and in its silence, the rules of the LPC/1994 will apply.9

3

Barrientos (2016), p. 108. See Ríos et al. (2015a), p. 14. 5 In this sense, see Law number 20.667’s history, p. 4 and following. 6 See Law number 20.667 history, p. 4. 7 On the public order of protection in Chilean law see Tapia (2008), p. 486. 8 About this protective tendency of the insured see the intervention of the Insurance Superintendent of the time, Osvaldo Macías and Osvaldo Contreras. See Report of the Commission of Economy, Development and Development of the Chamber of Deputies, corresponding to the processing of Law number 20,667, published in D.O. on May 9, 2013, on the insurance contract. 9 Cfr. Barrientos (2016), p. 167 y and following. 4

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It is also important to highlight that the protective purpose is based on the identification and subsequent recognition in the law of the division between mass insurance and consumers and insurance of large risks.10 In the case of the former, the asymmetry between the insurer and the insured causes an imbalance that upsets contractual justice.11 In this context, the rules on information and clarity allow a better and complete understanding of the contractual content, on the one hand, and manage to rebalance the contractual relationship between the insurer and the insured, on the other hand. For this reason, the reforms that introduce Law number 20.667 incorporate instruments of protection in favor of the assured as their main objective, considering that the assured is a consumer.12 In the case of insurance of large risks, the demands of guardianship are not justified, and it will be the parties that should seek information and clarity in order to achieve adequate understanding of the contract. What instruments are those collected by the Chilean legislator to meet the protection objective that was set? They are two, fundamentally: the imperativeness of the rules governing insurance contracts, in the terms of Article 542 of the Commercial Code, and the duties of information, which weigh on both the insurer and the insured.13 Considering the objective of this work, the question arises about the rules of transparency in the insurance contract. The term transparency in its legal dimension is not clearly and systematically contained in Chilean law; however, if the legislative process and foreign legal sources are reviewed, the transparency rules that underlie the law can be found. It is for this reason that we will analyze the so-called transparency in an all-encompassing sense that will include information duties—in particular those specific to the precontractual phase—and rules on clarity or understanding of contractual content. In addition to the reform introduced by Law 20.667 of 2013 to the Commercial Code, we can identify legal norms on transparency in both the intermediation activity and the supervision activity. In the first case, in the regulations that monitor access to the intermediation activity—they were introduced for the first time in Chile in the year 1989 in the modifications to DFL 251—we find certain information duties that fall on the intermediaries that aim to guarantee the insurance consumer access to the best coverage conditions and market price. For its part, in relation to the Supervisory Authority in 2017, it enacted Law number 21.000, which replaces the current Superintendence of Securities and Insurance by the Commission for the Financial Market; the aforementioned law contemplates transparency standards in the

10

See Contreras (2014), p. 121. Ríos (2014), p. 32 y and following. 12 See Contreras (2014), pp. 18–19. The legislative debate of law number 20.667 refers to the quality of the assured who contracts in terms of adhesion and in a system of general conditions. See the legislative debate of law number 20.667, pp. 469–470, in http://www.bcn.cl/historiadelaley/nc/ historia-de-la-ley/4463/. 13 Ríos (2015a), p. 12 and following. 11

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supervision activity. Both topics, intermediation and supervision, will be analyzed in the pertinent chapters of this work. The author will give a panoramic vision of the transparency issues: firstly, an analysis of the general topic about transparency; secondly, a review of the precontractual duties of information; thirdly, an analysis of the contracts’ content; and, finally, some conclusions.

2 Transparency in the Chilean Insurance Contract Law 2.1

Background

The topic of transparency in the context of an insurance contract implies analyses of the precontractual issues and the final result of the contained contract.14 Transparency “may be defined as comprehensibility, non-ambiguity and certainty.”15 The execution of the precontractual duties of the insurer and the assured permits a better certainty about the contract terms and the promise of fulfillment of obligations of the contract. There is a concept of autonomy yet interdependence between the precontractual duties and the essential contract elements. Without precontractual duties, transparency does not exist. Therefore, the transparency issues are not limited to the literal text of the contract. In Chile, the legislator does not use, in a clear and systematic sense, the terms transparency and precontractual duty. The term transparency used by the doctrine and the foreign law can be seen in various legal texts that regulate a comprehensible access of information to the assured-consumer. These texts are the following: Article 17 on the terms and language of contracts and Articles 17B to 17L of the Consumer Protection Law16 on clarity and comprehensibility of precontractual information. Nevertheless, the most relevant transparency rules refer to the precontractual duties of information. Due to the aforementioned, we need to interpret Articles 514, 524, 525, and 529 of the Commerce Code and the General Consumer Law.17 As seen previously, there is a legal normative dispersion and superposition in the insurance transparency topics upon convergence of the Commerce Code and Law

14 The control of the content of the contract and transparency control should not be confused. However, without transparency, there cannot be control of content. 15 Wandt (2012), p. 10. 16 Law number 19.496 and its previous modifications, specifically the changes that introduced law number 20.667 of 2012. On the principle of transparency in the Chilean Consumer Law, see Baraona (2014), pp. 386–387. 17 See Barrientos (2016), p. 11.

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number 19.496 (herein forth LPC). In the opinion of the author, Law number 19.496 complements in a supplemental manner the Commerce Code.18

2.2

Duties of Information

The Chilean legislator in 2013 took the requirements of the good faith present at the time of formation of the insurance contract, specifying information duties19 and incorporating new effects in the face of noncompliance. Therefore, in the current legal status quo is the duty of information of legal origin, the first under the insurer— and referred to the contractual content, in particular coverage and price—and the second, by the insurance contractor—referred to insurable risk.20 This modification, introduced by Law number 20.667 in the year 2013, has the following relevant changes: on the one hand, new rules about the form and content of the precontractual duties and, on the other, the new system of defect in the way consent (to a contract) centered on the contract conservation, and the nullity proceeds only in the cases of the bad faith. The precontractual duties of information of the insurer and the assured will be analyzed. In both cases, firstly, the form and content will be discussed, followed by the effect of breach. We will approach in a panoramic way the law regime before 2013, and then we will analyze in detail the current law.

2.2.1

Precontractual Information Duty of the Insurer

Previous Regime: General Comments As we have already pointed out, the insurance contract in Chile was regulated by the rules of the Commercial Code of 1865,21 which were not modified until 2013.22 On the other hand, both the doctrine and the jurisprudence initially excluded insurance

18

Cfr. Barrientos (2016), p. 65 y and following. On the genesis and subsequent evolution of pre-contractual information duties, see Asua (1989), p. 55 and following; Ríos (2014), pp. 14–15. 20 On pre-contractual duty of information in English law prior to the modifications of 2015, see Lowry (2011), p. 56 and following. For a general revision of the amendment to the English law in 2015, see Merkin and Gürses (2016), p. 11 and following. 21 See Achurra (2005), p. 24 and following; Contreras (2002), p. 20. 22 In this sense, Baraona argues that “Regarding the duties of information in the preliminary negotiations, there is no general principle in civil and commercial law that obliges those who negotiate a contract to be fully transparent, that is, to give full information about what is being negotiated, although over time they have been outlined reporting duties prior to the conclusion of the contract, based on the principle of contractual good faith, supported by Article 1546 of the Civil Code, subject that is in full dogmatic and jurisprudential development”. Baraona (2014), p. 384. 19

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from the LPC/1994.23 Therefore, it will be the principle of good faith in contrahendo (at the moment of contracting) that will serve to determine the existence of a duty to inform in favor of the insurance contractor. In this context, there is a substantial change in 2011 through Law 20.555, which modifies Law 19.496 and incorporates new rules that expressly recognize the insurance contract as one of adhesion, on the one hand,24 and the existence of information asymmetries, on the other.25 Specifically, and on the duty of information and transparency rules, the new Article 17 B of the aforementioned law provides that “the adhesion contracts for credit services, insurance and, in general, for any financial product, drawn up by banks and financial institutions or by companies that support their line of business, commercial establishments, insurance companies, compensation funds, savings and loan cooperatives, credit, and any natural or legal person providing these services or products, must specify at least, in order to promote its simplicity and transparency, the following [. . .].”26 The aforementioned article expressly recognizes certain duties of information regarding contractual content, which every insurer must follow in order to ensure transparency or, in other words, a better and complete understanding of the contract.27 This information refers to the prices (premium), amounts of commissions, clause of anticipated termination of the contract, duration of the contract, among other aspects.28 As a conclusion, the precontractual duty of information on the contractual content that falls on the insurer had its support in the good faith recognized as a general principle in Article 1546 of the Civil Code, on the one hand, and from the reform of the year 2011 to that good faith, we must consider the content of the aforementioned Article 17B of the LPC/1994.29

Regime in Force In the Chilean law, the precontractual duties of the insurer is regulated in the second paragraph of Article 514 and in Article 529 number 1, both of the Commerce Code, and Article 17B of the Consumer Law.30 The modifications introduced by Law number 20.667, in 2013, to the Commerce Code recognized good faith in the performance of the precontractual duties of information. For the first time, in

23

See Barrientos (2016), p. 49 and following. See Barrientos (2016), pp. 11–49 and following. 25 De la Maza et al. (2013), p. 385. 26 De la Maza, when addressing the subjective scope of the norms of the norm, delivers an omnicomprehensive concept that he terms as financial goods and services. De la Maza et al. (2013), p. 381 and following. 27 De la Maza et al. (2013), p. 385. 28 See Ríos et al. (2015b), p. 531. 29 See Ríos et al. (2015b), pp. 533–534. 30 See Ríos et al. (2013), p. 32. 24

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Chile, the insurer is subject to special legal demands of information in the rules that regulate insurance in a specific way. Part of the Chilean doctrine does not explicitly recognize a duty of information in contrahendo and identifies it, rather, with the proposal of holding the insurance or proposal informed in the words of Contreras.31 We move away from this thesis because prior to the proposal or offer to conclude the insurance contract, the insurer must comply with the duty to inform the other party of the content of the contract. It is this prior information that allows the subsequent formulation of the offer.32 Articles 514 and 529 number 1 regulate the form and content of the precontractual duty of information, but they do not regulate the effects of the breach of duty. In this sense, it is necessary to pinpoint the form and content of the duty to verify if it is a breach. This will be seen in the following paragraph.

Form and Content of the Precontractual Duty of the Insurer The second paragraph of Article 514 and Article 529 number 1 allow the determining of the form and content of the duty, and the texts are as follows: Art. 514. Proposal. The proposal to execute the insurance contract shall express the coverage, the background and the necessary circumstances to appreciate the extension of the risks. For these, the insurer shall give the policyholder, in writing, all the information relative to the content of the contract that shall be entered into agreement. This shall contain, at least, the contract type, the risks covered and the exclusions; the insurance amount, the manner to determine it and the deductibles; the prime or the method of calculation; the duration of the contract, and the explicit indication of the start and end date of the coverage. Art 529. Obligation of the insurer. Additional to the obligation of article 519, the insurer assumes the following obligation: 1) When the insurance is directly contracted, without an insurance broker: giving advice to the assured, offering the most convenient coverage to his needs and interests, illustrating the conditions of the contract, and providing assistance along the duration of the contract, modification and renewal of the contract, and the claim. When the insurance is contracted in this form, the insurer shall be liable of breach, mistakes and omissions committed and the damage caused to the assured.

31

Contreras (2014), p. 151 and following; Arellano (2013), p. 39. A critical analysis on article 514 of the Commerce Code in Barrientos et al. (2015), p. 190 and following.

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As we can see, the articles cited impose on the insurer the obligation to provide information on contract33 terms to the insured in writing.34 For better comprehensibility and certainty of the contract,35 the information must contain the type of insurance, the risk coverage and exclusions, the amount insured, the deductibles, the premium, the duration of the contract and other relevant topics.36 On the other hand, these demands of written information must be adjusted to Article 17 of the LPC, which states that “[. . .] Adhesion contracts referring to the activities regulated by the current law must be written in a clear and legible way, with a letter size not smaller than 2,5 millimeters and in Spanish, except those words in another language that has been incorporated into the vocabulary [. . .].” It seems that the content of the information is clear from the above provision compared to Commerce Code Article 529 number 1, where the content of the duty is more extensive.37 Indeed, Article 17 of the LPC establishes that the insurer must provide advice on the insurance contract and that the conditions of the coverage must be adjusted to the interests and needs of the assured. As a result, the limit of the content of the duty depends on good faith. The judge should perhaps determine the final content of the information.38 To close, the duty of information content of the insurer aims to protect the assured facing the issue of excess of information, which paradoxically provokes the adverse effect of misinforming. It deals with the problematic about the imperfect rationality, phenomenon that in our doctrine De La Maza identifies with the capacity or possibility of use and understanding of the information on the part of the consumer, beyond the mere possession of material data.39 It is a problem not resolved in our law.

33

It deals with the duty of information that attenuates the asymmetry that exists during the contract formation process. Barrientos (2015), p. 84. Contreras denominates it as “informed proposal”, that is defined as the offer to contract insurance which the policyholder sends to the insurer only when the policyholder receives complete information from the insurance contract in terms of the article 514 of the Commerce Code. See Contreras (2014), pp. 152–153. 34 The insurer, through any technological means, shall provide information to the assured to make sure that the contract has been received, Article 12ª of the Consumer Protection Law permits this. See Barrientos (2015), p. 339; Contreras (2014), p. 266. 35 See Contreras (2014), pp. 19–20. 36 See Barrientos et al. (2015), p. 194. In the English Common Law see Rodger (2015), p. The Court of Justice of the European Union has stated: An insurance contract must indicate in a transparent, precise and clear the functioning of the coverage mechanism of the insurance, in such a way that the consumer can value his/her economic consequences See: http://curia.europa.eu/jcms/upload/docs/ application/pdf/2015-04/cp150042es.pdf. 37 Barrientos et al. (2015), p. 338 and following. 38 Ríos et al. (2013), p. 36. 39 De la Maza (2010), p. 27.

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Effect of The Breach of The Duty of Information In the case of breach, the Chilean Commerce Code does not contain norms that regulate the effects of the breach. In this scenario, it is necessary to distinguish between insurance contracts of major risk and consumer insurance contracts. In the case of major risk, the solution is in the Civil Code, specifically in Article 1.462 ff., which regulate the problems of defect of consent (to a contract), and in Article 1.680 ff., which is about invalidity of contracts, where the only solution is nullity of the contract. In the case of consumer insurance contracts, the solution is different. The law, specifically in Article 17B of the Consumer Law, establishes the possibility of maintaining the validity contract through modification of the defective conditions.40

2.2.2

Precontractual Information Duty of the Assured

Previous Regime: General Comments Prior to the 2013 reform, the precontractual obligation to declare the insured risk was regulated in Articles 556 number 1 and 557 number 1, both of the Commercial Code. According to the Article 556 number 1, the insured or contractor of the insurance had to declare sincerely all the necessary circumstances to identify the thing insured and to appreciate the extent of the risks. Contrary to the generality of nineteenthcentury trade codes of French influence, the Chilean legislator chose to expressly recognize a duty of information that can be categorized as a duty of spontaneous declaration, on the one hand, and with the only limitation of good precontractual faith in the determination of its content.41 As Vivante said, Il codice impone all'assicurato due obblighi: 1○ di dire esattamente tutto quello che dice; 2○ di dire tutto quello che sa.42 The use of question forms will be considered as an indication of the relevant data that make up the content of this duty of declaration and constitutes one of the substantial changes of the 2013 reform, which follows the questionnaire declaration system, as we will see later. Regarding the effects derived from the breach of the precontractual duty of declaration of risk, Article 557 of the Commercial Code provided for nullity as the only remedy or effect.43

40

See Ríos et al. (2013), p. 32. Ríos (2014), p. 20 and following. 42 Vivante (1922), p. 176. 43 Ríos (2014), p. 150 and following. 41

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Regime in Force Regarding the precontractual information duty of the assured, which has an objective to provide information to the insurer about risk, the Chilean law contemplates rules that are substantially different from the valid norms before the modifications introduced in 2013, in the form, the content and the effects of the breach of the duty. Articles 524 number 1, 525, and 539 regulate the precontractual duty of the assured. The texts are as follows: Art. 524. Obligations of the insured. The insured shall be obligated to: 1○ Sincerely declare all circumstances that the insurer request in order to identify the object insured and to appreciate the extension of the risks Art 525. Statement on the state of risk. In order to provide a statement as to what number 1○ of the previous article refers to, it is sufficient that the contractor provides information in accordance to that which is requested by the insurer about the facts or circumstances that are known or can serve to identify the insured object and to appreciate the risk extension. Once the insurance contract is agreed upon and without the insurer requesting the statement on the risk state, he cannot complain about the errors, reticence or the inaccuracies of the contract holder and even those facts or circumstances that are not understood in such request. If the loss has not occurred and the contract holder had inexcusably incurred determining errors, reticence or inaccuracies of the assured’s risk in the information requested by the insurer in accordance with number 1○ of the previous article, the insurer can rescind the contract. If the errors, reticence or inaccuracies about the contract holder does not cover the said characteristics, the insurer can propose a modification to the contract terms in order to adjust the premium or the coverage conditions to the uninformed circumstances. If the policyholder rejects the proposal of the insurer or does not answer within a period of ten days from the date of sending the same, the latter can rescind the contract. In the final case, the rescission will happen at the expiry of the thirty-day period from the date of sending the same communication. If the loss has occurred, the insurer shall be exonerated of his obligation to pay the compensation if the loss comes from a risk that would have given place to a rescission of the contract in accordance to the previous paragraph and, on the contrary, shall have the right to reduce the compensation in proportion to the difference between the agreed upon premium and that which would have been agreed upon in the case of knowing the true risk state. These sanctions will not be applied if the insurer, prior to executing the contract, has known about the errors, reticence or inaccuracies of the statement or should have known them; or if upon the execution, it paves the way to rectification or they are accepted expressed or tacitly. Art 539. Other causes of the inefficacy of the contract. The insurance contract is null if the insured, knowing fully well, provides substantially false information to the insurer which is what is referred to in number 1○ of article 524 and is resolved if such conduct is incurred upon complaining for the compensation for a loss. In the cases of pronouncing of nullity or insurance resolution, the insurer shall retain the premium or demand the payment and cover the expenses that have been demanded to get accredited even though no risk has been run, without prejudice to a criminal action.

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Form and Content of the Precontractual Duty of the Assured: The Questionnaire Regarding the form of the duty of information, the Chilean law takes the use of the questionnaire, leaving the spontaneous system of declaration, by virtue of which the insurer could invoke the breach of the duty when he, in his judgment, deems that the policyholder infringes the demands of good faith by not giving the information that is known or that has to be known and relevant about the risk.44 The modern practice of insurance where the questionnaire or other means of the knowledge about the risk—especially technological45—are commonly used by the insurer have made the obligation obsolete from being exact and precise in what is declared or said, on the one hand, and on the other hand, to say or declare all that is known about the risk.46 On the contrary according to the Chilean law, it is sufficient that the assured responds the questionnaire that has been elaborated and given by the insurer. As a result, it deals with a duty to respond as has been categorized by Spanish doctrine.47 Article 524 number 1 states that the assured shall be obligated to sincerely declare all the circumstances that the insurer requests for the identification of goods insured and for the appreciation of the extent of the risks, on the one hand, and Article 525 states that [. . .] it is sufficient that the assured give the information required by the insurer [. . .], allows us to conclude that the Chilean Law adopts the questionnaire system.48 The parameters of transparency have a double perspective on the questionnaire system. The correlative duty of the insurer is to obtain information about the risk through the elaboration of a questionnaire and form with clear and precise questions that permit clear and accurate answer and to deliver it to the assured. The Chilean law, as seen previously, adopted a closed questionnaire system as the insurer has to give the form and the policyholder meets his duty to inform upon responding to the questions. In this sense, the second paragraph of Article 525 states that once agreed upon, without the insurer having requested the declaration about the state of risk, the insurer will not be able to complain about the errors, nondisclosure, inaccuracies of the policyholder, including those facts and circumstances that are not comprehended in the form. Notwithstanding the aforementioned, the rigidity of the regime of Articles 524 number 1 and 525 of the Commerce Code seems to be moderate in the case of major risks. In these types of insurance, the demand for good faith in contrahendo goes beyond that stated in the cited articles. The reason is that the assured, operating in a specific industry, is well informed or better informed about the risk.

44

Ríos (2014), p. 41 and following. They are instruments that permit the insurer to anticipate the knowledge of the information that integrates the risk. 46 See Vivante (1922), p. 176. 47 See Sánchez Calero (2010), p. 282. 48 See Ríos (2014), p. 44 ff. 45

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Special Rules on Questionnaires in the Case of Life Insurance Regarding life insurance, Articles 524 number 1, 525, and 539 of Commerce Code must be applied in accordance with Articles 590, 591, and 592 of the Commerce Code, which refer to health examinations, preexisting diseases and indisputability. Health examinations and preexistence have a direct relationship with the elaboration and use of the questionnaire, which may be insufficient as an instrument for knowledge of risk in the insurance of persons, particularly due to the ignorance of the insured of certain diseases.49 In addition, when it comes to insurances in which the agreed insured sum is high, the tendency is to demand a more detailed verification of the health status of the insured by the risk underwriting rules elaborated by the insurers.50 In this context, and for specific cases, verification of data obtained from the responses to the questionnaire may be required, through additional information from the attending physician or specific or general medical examinations as authorized by Article 590 of the Commerce Code when arranging the insurer may “[. . .] request the practice of medical examinations in accordance with the provisions of the law,51 exams whose results are integrated into the process of knowledge of insurable risk, or in other words, the acceptance to take exams by the insured is part of the duty of declaration.” This correlative duty of knowledge of the state of health of the insured that falls on the insurer causes a relevant influence if the effects derived from a declaration of the risk is treated. In accordance with what we have indicated and with the provisions of the final clause of Article 525 of Commerce Code, sanctions for breach of the precontractual obligation to declare risks “[. . .] shall not apply if the insurer, prior to the contract, has known the errors, reticences or inaccuracies of the declaration or should have known them [. . .].” Good faith that requires the policyholder to declare the information they have and know is violated when the insured does not say what they know about their state of health when asked. On the other hand, it must be relevant data, in such a way that the divergence between the declared and the reality provokes a contractual imbalance that justifies the application of the remedies contemplated in the law.52 On the other hand, Article 590 of the Commerce Code provides that “[. . .] The insurer may only request information relating to the health of a person in the manner established in Article 525, and may request the practice of medical examinations in accordance with the provisions in the Law; norm that has as limit the right to privacy of the insured, the reserve obligation that falls on the insurer53, and the requirements 49

In this sense, Tirado Suarez et al. (2010), p. 2386. Tirado Suarez et al. (2010), p. 2389. 51 Hoyl y Ruiz-Tagle (2014), p. 156. 52 See Morillas (2016), p. 55. 53 In the Chilean doctrine, Hoyl and Ruiz-Tagle point out that the right to privacy of the people enshrined in Article 19 No. 4 of the Political Constitution of the Republic “[. . .] helps to prevent the 50

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of the so-called informed consent, thus adjusting to what is prescribed in Law 20.584 on Duties and Rights of Patients, on the one hand, and on the other, to the duty of custody of the clinical records of the Heads of Service in Article 134 of the Health Code.” Finally, it is pertinent to refer Article 591 of the Commercial Code deals with the problems arising from the preexisting, by providing that [. . .] Only those illnesses, illnesses or health situations diagnosed or known by the insured or by whom he contracts in his favor may be considered preexisting. The norm contained in the aforementioned Article 591 of the Commercial Code coincides with the provisions of Article 33bis 6 of Law 18.93354 by providing that “[. . .] For the purposes of this law, it will be understood that pre-existing diseases, pathologies or health conditions are those that have been known by the member and medically diagnosed prior to the signing of the contract or the incorporation of the beneficiary, where appropriate [. . .].” As a result of what has been mentioned, the so-called preexistences—as data that make up the insurable risk—must meet two requirements: be diagnosed medically and that such diagnosis is known by the insured or contractor of the insurance, so that the insured seeks coverage on a health risk that exists and is known prior to the conclusion of the contract.55 In this way, the ignorance of the preexistence constitutes a limit to the duty of response of the policyholder.56

Effect of Breach of The Duty of Information of the Assured or Policyholder The effects of the breach of the duty to inform about the risk are regulated in Articles 525 and 539 of the Commerce Code. These legal texts consider two types of breach of the precontractual duty of the risk: erroneous, nondisclosing or inaccurate statement (Article 525) and the statement of bad faith or substantially false (Article 539).57 These types of defective statements are qualified as a basic unit of fact that allows for the falling back on the system of remedies. Only in the case of Article 525 of the

questions that are made to the policy holder from violating their personal dignity, and impose on the insurance company the duty of secrecy and confidentiality of the information provided. Hoyl and Ruiz-Tagle (2014), p. 155. En el derecho español ver Tirado Suarez et al. (2010), p. 2395 and following. 54 Law 18,933 creates the Superintendence of Pension Health Institutions, dictates rules for the granting of benefits by Isapres and repeals Decree with Force of Ney n ○ 3, of health, of 1981. 55 Hoyl and Ruiz-Tagle (2014), p. 155. 56 In this sense, Ruiz-Tagle (2011), p. 169. 57 See Ríos (2014), p. 100 and following.

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Commerce Code, it is important to identify a chronological factor—the occurrence or nonoccurrence of loss—and a negligence factor.58 Basic Unit of Fact: Erroneous, Nonerroneous, Nondisclosing or Inaccurate Statement (Article 525 of the Commerce Code) An erroneous statement is that which contains information not corresponding to actual facts. Nondisclosure is not providing true information. The two statements are similar. Thus, these statements are the same, separating them from the traditional system of consent defect that is obligatory to distinguish between essential, substantial or accidental error with the objective of determining the existence of nullity and further if such is relative or absolute.59 Regarding breach of duty, if loss has not occurred and the conduct of the assured is negligent, the insurer can rescind the contract. The rescission60 is a faculty of withdrawal of the contract. In cases where the assured does not act negligently, the contract remains in effect if and when the policyholder accepts changes to the contract regarding an increase in the amount of premium or changes in the conditions of the coverage. If the policyholder refuses, the insurer can rescind the contract.61 In case the loss did occur and the conduct of the assured is negligent, the insurer can rescind the contract. If the policyholder’s conduct is not negligent, he has the right to seek indemnification, although limited to the proportion between the actual risk and the premium agreed on.62 As we can see from the previous analysis, the noncompliance with the precontractual obligation to declare the identified risk with an erroneous, reluctant or inaccurate declaration can give rise to three remedies: the faculty of withdrawal of the contract by the insurer, a modification of the conditions of the contract or a reduction of the compensation. In the last two cases, the Chilean legislator includes the principle of maintenance of the contract ( favor contractus) privileging the satisfaction of the contractual interest over the term of the legal link between the insurer and the insured.

58

See Ríos (2014), p. 100 and following. See Morales Moreno (2011), p. 403; Basozabal Arrue (2012, p. 190). 59 See Ríos (2014), p. 131 and following. 60 The word rescission in the Chilean Law means to be without effect, and it does not always refer to nullity or resolution. 61 See Ríos (2014), p. 104 and following. 62 See Ríos (2014), p. 104 f.

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Basic Unit of Fact: Declaration of Bad Faith or Substantially False of Article 539 The substantially false declaration in Article 539 contemplates conducts of bad faith, which include guile. For this declaration, the law maintains the remedy of nullity, with the exception of the faculty of the insurer to retain the premium.63 Indisputability as a Limit to the Sanction of Nullity in Life Insurance Contracts The effects derived from an incomplete or defective risk declaration in the context of the basic assumption unit of Article 525 of the Commercial Code—erroneous, reticent or inaccurate statement—may be excluded due to the so-called indisputability or incontestability.64 It is a rule of conventional origin—born of the practice of reinsuring life insurance65—that prevents the insurer from invoking a breach of the precontractual obligation to declare the risk after a certain period of time since the conclusion of the contract,66 except in the case of fraudulent declarations. In this sense, Article 592 of the Commercial Code establishes the so-called indisputability by providing that [. . .] Two years after the initiation of the insurance, the insurer may not invoke the reluctance or inaccuracy of the statements that influence the estimation of the risk, except when they were intentional [. . .]. With regard to the term “fraudulent” of the aforementioned Article 592, it is our opinion it refers to the declarations of bad faith or substantially false of Article 539 of the Commercial Code. The legal text that we have quoted is linked not only to Article 525 of the Commercial Code but to the mandatory regime of Article 542 of the same Code. And it is relevant to highlight it since the immobility of the normative content of Article 592 of the aforementioned code prevents insurers from excluding from the contract the indisputability, on the one hand, and on the other, modifying the term of 2 years to the detriment of the insurance contractor or of the insured. Indeed this legal term could be abbreviated by agreement between the parties, when more beneficial conditions are established for the insured or beneficiary.

63

See Ríos (2014), p. 131. In this sense in Spanish law see Benito et al. (2015), p. 102. 65 Suarez states that “[. . .] with a mainly commercial purpose of providing legal certainty to the policyholder that the life insurance policy will not be challenged as a result of an inaccurate or erroneous declaration, the Anglo-Saxon insurance practice has propitiated the clauses of incontestability”. Tirado Suarez et al. (2010), p. 2406. See Visintini (1971), p. 432. 66 In this sense, the explanatory memorandum of Law 20.667 states that “Special mention must be made, as far as this section is concerned, that the institution of indisputability has been regulated, which means that after a certain period of time, the insurer cannot invoke the reluctance or inaccuracies about the health status of the insured person in this type of insurance”. See history of the law 20.667 p. 205. 64

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Transparency in the Insurance Policy

The Chilean law substituted a regime of the solemn insurance contract to a consensual one, according to that which is stated in Article 515 of C.com.67 This policy meets an objective of ad probationem,68 on the one hand, and a function of transparency, on the other. With regard to the regulation of the transparency of insurance contracts, the Commerce Code does not contain explicit norms.69 For this reason, it is necessary to refer to the Consumer Protection Law. In concrete terms, Article 17 of the mentioned law establishes that the adhesion contract relative to activities subject to this law shall be written in clearly legible way, with a letter size not inferior to 2.5 mm and in Spanish, except words of other languages that have been incorporated into the Spanish vocabulary. Moreover, Article 17C of the same law states that adhesion contracts of financial products and services have to contain, at the beginning, a sheet with a standardized summary of the main clauses, and the suppliers have to include this sheet in their quotations, to allow comparison by the consumers.70 The cited Article 71 allow for the verification of transparency control of the contract formation eliminating the lack of clarity of the agreement and the contract document or policy.72 In this way, the assured will be able to know and comprehend their rights and obligations under the insurance contract.73 In addition to the norms contained in the LPC/1994, the Chilean law contemplates norms that we can categorize as transparency of the policy norms, specifically

67

See Contreras (2014), pp. 114–115. Hoyl and Ruiz-Tagle (2014), p. 14. See Ríos et al. (2015b), p. 115. 69 In our view, its important considerer, that in the particular case of Chile, on 16 October 2017, the Financial Market Commission, in the exercise of the powers conferred by law, issued General Rule No. 420 (hereinafter NCG 420) on “Self-assessment of Market Conduct Principles for Insurance Companies and Insurance Brokers”. The supervisory agency considered this regulatory regime on market conduct as a supervisory mechanism with a preventive objective. It involves a change in the supervisory system from one based on rules to one based on risks or principles that would be represented—among other things—by so-called market conduct. This rule of regulatory rank— which we refer to as soft law—reformulates with a denomination different from the legal one, figures and demands that are contained a priori in our legal order and of legal rank. The text of NCG 420 contextualizes the term Market Conduct as “the good practices that should be considered by insurers, intermediaries and other insurance market agents in order to protect the rights of policyholders and the general public, taking into account aspects such as fair treatment and transparency in the marketing of insurance, the payment of compensation and other benefits associated with it, which make it possible to provide solutions to so-called market failures”. As indicated in section II of NCG 420, the basic principles of market conduct are: (i) fair treatment of customers; (ii) management of conflicts of interest; (iii) protection of customer information; and (iv) promotion of market development through transparency. 70 See Barrientos (2016), p. 91 and following. 71 See article 17 K of Law number 19.496. 72 See Contreras (2014), p. 157. 73 See Pizarro et al. (2013), p. 362; Fernández et al. (2013), p. 414. 68

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in Article 3 letter e) of DFL 251, which provides: It will be the responsibility of the companies that the insurance policies they hire, are written in a clear and understandable way, that are not inductive to error and that do not contain clauses that are contrary to the law. In case of doubt about the meaning of a provision in the model of general condition of policy or clause, the most favorable interpretation will prevail for the contractor, insured or beneficiary of the insurance, as the case may be. It is a legal norm that aims in two dimensions. On the one hand, it refers to the clarity and understanding of the contractual content and, on the other hand, to the rule of interpretation against proferentem that seeks to protect those who did not participate in the drafting of the contractual stipulations.74 It is, therefore, a legal standard that applies to insurance cases categorized as adhesion and with consumers. Big-risk insurances are excluded. Finally, in terms of clarity and understanding of the content of the contract under Chilean law, come together rules of the LPC/1994 that aim to certain formal requirements in order to ensure the clarity of the stipulations of the contract and, on the other hand, DFL 251 norms that give responsibility for the clarity of the adhesion insurance contract in the predisposing insurer.

2.4

Conclusions

Based on the previously discussed hereinabove, the conclusions to be drawn are as follows. Transparency as a mechanism for understanding contractual content is a principle that is not systematically and uniformly enshrined in Chilean law. The transparency rule in the insurance contract is contained in the Chilean Law in an explicit manner, in some cases—such as the precontractual duty of information regulated by the Commerce Code—and is implicit in the norms contained in the Consumer Protection Law and in DFL 251. The duty of information imposed on the parties in the process of the formation of the contract shall meet the parameters of clarity and comprehension, which have to be reiterated in the final content of the insurance contract. In this way, the assured contracts in an informed and free manner. Regarding the precontractual duty of information, the Chilean law contemplates a system of declaration via a questionnaire, and in the case of breach of duty, nullity may ensue if bad faith exists. On the other hand, the contract is maintained, or the insurer can legally make a repurchase. Regarding the contractual terms contained in the policies, both the LPC/1994 and the DFL 251 contain clear rules that reflect the principle of transparency in order to have adequate understanding of the contract.

74

See Contreras (2014), p. 202.

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Ríos R (2014) El deber precontractual de declaración del riesgo en el seguro de daños. ThomsonReuters, Santiago Ríos R et al (2013) Pre-contractual information duty of the insurer, en Unam, Samin (director) Insurer’s precontractual information duty. Turkish Chapter of AIDA, Istanbul Ríos R et al (2015a) El deber precontractual de información del asegurador en las modificaciones introducidas por la ley 20.667 al Título VIII Libro II del Código de Comercio Chileno, en Caballero, Guillermo, Lagos, Osvaldo (directores), Estudios de Derecho Comercial, Quintas Jornadas Chilenas de Derecho Comercial, 2014. Thomson Reuters, Santiago Ríos R et al (2015b) Artículo 515 p), en Ríos Roberto (director) El Contrato de seguro, Comentarios al Título VIII Libro II del Código de Comercio. Thomson Reuters, Santiago Rodger A (2015) In: Merkin R (ed) An Introduction to insurance and insurance law, of insurance law introduction. Routledge, London Ruiz-Tagle C (2011) La buena fe en el seguro de vida. Editorial Jurídica de Chile, Santiago Sánchez Calero F (2010) Artículo 10. Deber de declaración del riesgo, en Sánchez Calero (director), Ley de contrato de seguro, comentarios a la ley 50/1980 de 08 de octubre y sus modificaciones, 4ª edición. Thomson-Reuters Suarez T, Javier F et al (2010) Artículo 89, El riesgo en el seguro de vida, en Sánchez Calero (director), Ley de contrato de seguro, comentarios a la ley 50/1980 de 08 de octubre y sus modificaciones. Thomson-Reuters, Madrid Tapia M (2008) Orden público de protección en el Derecho chileno, en Estudios de Derecho Privado en homenaje a Christian Larroumet. Fundación Fueyo Visintini G (1971) La reticenza nel contratto di assicurazione, en Rivista di Diritto Civile, pp 423–458 Vivante C (1922) Del contratto di assicurazione. Unione Tipografico, Editrice-Torinese, Torino Wandt M (2012) Transparency as a General Principle of Insurance Law, en Transparency in Insurance Law, Association Internationale de Droit des Assurances, Turkish Chapter of AIDA & German Chapter of Aida

Transparency in the Insurance Contract Law of China Zhen Jing

1 Introduction In the modern world, insurance is a primary mechanism for the management of risks, by which the insured transfers the risks of some uncertain events to the insurer by paying premiums to the insurer, while the insurer promises that he will pay the insured for losses caused by the happening of the uncertain events insured against under an insurance contract. This nature of the insurance contract makes it absolutely necessary for the contract to be made transparent to the parties of the contract. Transparency in insurance contract law has different contents at different stages of the lifetime of an insurance contract, and it must be viewed and understood from different angles. At the pre-contract stage, as far as the insurer is concerned, the most important matter to him is whether or not the risk can be insured. The insurer’s selection of risk is based on the correct assessment of the risk, but the information about the risk lies more commonly in the knowledge of the insured.1 This information must be presented by the insured to the insurer as fairly and correctly as possible so as to enable the insurer to make an informed decision on whether to accept the risks and, if so, on what terms.2 The transparency of the information as to the risks can be achieved by the imposition on the insured of the pre-contract duty of disclosure and representation. So from the insurer’s point of view, it can be said that fair and correct disclosure and representation of information about the risks by the insured to

1 2

Carter v Boehm (1766) 3 Burr. 1905. The Insurance Law, art. 16.

Z. Jing (*) Bangor University, Bangor, UK e-mail: [email protected] © Springer Nature Switzerland AG 2019 P. Marano, K. Noussia (eds.), Transparency in Insurance Contract Law, AIDA Europe Research Series on Insurance Law and Regulation 2, https://doi.org/10.1007/978-3-030-31198-8_13

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the insurer before the conclusion of the contract are the primary components of the concept of transparency. As far as the insured is concerned, the most important matter to him is whether he can recover the loss when the risk occurs. As the recoverability of a loss is governed by the policy terms that were designed and drafted by the insurer,3 the insurer knows and understands everything about the policy, while the insured may not understand the complex terms included therein. Thus, what the insurer must do is to clearly, concisely and effectively provide policy information to the insured in a form that allows the insured to understand the cover and compare it with other products. The requirement of policy transparency imposes on the insurer a pre-contract duty of disclosure and representation of information about the insurance policy; this would enable the insured to acquire the knowledge and understanding of the policy terms and make an informed decision as to whether or not to place a risk with the insurer. Thus, from the insured’s viewpoint, the major component of the concept of transparency is clear and correct representation of information about the policy terms by the insurer to the insured prior to the conclusion of the contract.4 During the insurance period, the risks insured against may change. In the case of a material increase of the risk of the subject matter, the insured is obliged to inform the insurer of the increase of the risk so the insurer has an option to increase the premium or to rescind the contract, depending on the extent of the increase of the risk.5 Here, the major component of transparency is for the insured to notify the insurer of a material increase of risk during the insurance period. At the claim stage, when an insured event occurs and causes loss, the insured must make the information about the loss transparent to the insurer to enable the insurer to make a correct assessment of the loss.6 On the part of the insurer, he must handle the claim in a timely manner and follow a procedure transparent to the insured.7 It is submitted that transparency is an essential precondition to ensure that all contractual parties benefit from the insurance transaction. The concept of transparency penetrates throughout the lifetime of an insurance contract, from the stage of entering into the contract, the currency of the insurance period, to the stage of making and settling claims. This chapter considers the requirement of transparency from the formation of an insurance contract to the claim stage in the insurance contract law in China: (1) transparency at the stage of making an insurance contract, (2) transparency during the life of the insurance contract and (3) transparency at the stage of making and settling claims.

3 Recoverability may also be affected by the insurer’s solvency which is usually regulated by the governmental authorities. 4 The Insurance Law, art. 17. 5 The Insurance Law, art. 52. 6 The Insurance Law, arts. 21–22. 7 The Insurance Law, arts. 23–26.

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To begin with the analysis of Chinese law in respect of transparency, it is appropriate to give a brief overview of the insurance legislation in China.

2 An Overview of Insurance Legislation in China In China, the Insurance Law of the People’s Republic of China (hereinafter the Insurance Law),8 the Maritime Code of the People’s Republic of China (hereafter the Maritime Code),9 the Interpretations of the Supreme People’s Court (SPC) on Certain Issues Concerning the Application of the Insurance Law (hereinafter the SPC Interpretations), the relevant regulations of the State Council of China and the regulations enacted by China Banking and Insurance Regulatory Commission (CBIRC)10 constitute the legal framework governing the insurance activities, insurance market and insurance industry. There are two major pieces of legislation for insurance contracts, namely the Insurance Law, which was first enacted in 1995 and amended three times in 2002, 2009 and 2015 and governs non-marine insurance, and the Maritime Code, chapter 12 of which governs marine insurance contracts. In this chapter, the statutory rules relating to insurance contracts in respect of transparency are considered. China has a civil law system; the written law is the major source of law. However, pursuant to the Resolution of the National People’s Congress Standing Committee on Strengthening the Work of Law Interpretation,11 the SPC is authorised by the National People’s Congress to enact judicial interpretations in respect of all questions arising from court trials concerning the specific application of laws and decrees.12 The SPC’s judicial interpretations on written laws have legal force.13 The SPC has so far published four pieces of Interpretations on certain provisions of the Insurance Law in 2009, 2013, 2015 and 2018, respectively (hereinafter SPC

8

The Insurance Law the People’s Republic of China was adopted at the 14th Session of the Standing Committee of the 8th National People’s Congress on 30 June 1995 and became effective as of 1 Oct. 1995. The Law was amended three times in 2002, 2009 and 2015. 9 The Maritime Code of the People’s Republic of China was enacted in 1992 and became effective in 1993. 10 The statutory regulatory authority on insurance in China. 11 It was adopted at the 19th Meeting of the Standing Committee of the 5th National People’s Congress on 10 June 1981. 12 Ibid, art. 2. See http://www.npc.gov.cn/wxzl/gongbao/2000-12/06/content_5004401.htm (accessed in June 2018). 13 According to articles 5 and 6 of the Stipulation of the Supreme People’s Court on the Judicial Explanation (2007 No. 12), the Supreme People’s Court stipulation, judicial explanation or decision have legal force. This means that the Supreme People’s Court stipulations, judicial interpretations, decisions or replies are of the legal sources in China.

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Interpretations I, II, III and IV, respectively).14 These pieces of Interpretations give detailed interpretations on certain provisions of the Insurance Law. Moreover, some High People’s Courts (HPC) at provincial level have published guidelines in handling insurance disputes; the HPC rules are not binding the lower courts but guiding them in hearing insurance cases.15 This chapter also considers relevant rules by the SPC or the HPC, where appropriate and necessary. In China, insurance is currently regulated by the CBIRC, which was established on 17 March 2018. Before the establishment of the CBIRC, the China Insurance Regulatory Commission (CIRC) was the insurance regulatory authority in China. The relevant regulations published by the CIRC are considered in this chapter.

3 Transparency at the Stage of Making an Insurance Contract The question of how to make information transparent to each party prior to the formation of an insurance contract is equivalent to the question of how to perform the duty of disclosure and representation by the insured and the insurer. In fact, transparency at the stage of formation of an insurance contract is achieved by performing the duty of disclosure and representation by both parties. Article 16 of the Insurance Law deals with the insured’s duty of disclosure or representation, and article 17 is concerned with the insurer’s duty to explain the terms of the insurance contract to the insured. In the Maritime Code, articles 222, 223 and 224 are about the insured’s duty of disclosure or representation in marine insurance. SPC Interpretation II (arts. 5–8) and SPC Interpretation III (art. 5) provide interpretations on the provisions of the Insurance Law relating to the duty of disclosure and representation. This section of this chapter is concerned with the

14

The SPC Interpretation I was published on 14 Sept 2009 and came into force on 1 Oct 2009. The Interpretation I mainly concerns the circumstances where the 2002 version of the Insurance Law should be applied and where the 2009 version of the Insurance Law should be applied. The SPC Interpretation II was published on 6 May 2013 and came into force on 8 June 2013, for more, see Han (2013), p. 189. The SPC Interpretation III was published on 25 November 2015 and became effective on 1 December 2015. For more on the SPC Interpretation III, see Jing and Jiang (2016), pp. 76–105. The SPC Interpretation IV was published on 31 July 2018 and became effective on 1 September 2018. It consists of 21 articles, concerning matters on indemnity insurance in respect of issues relating to assignment of insured subject matter, increase of risk, subrogation and liability insurance. 15 For example, the Guidance of Beijing City High People’s Court Concerning Questions of How to Deal with Insurance Disputes 2005 (the Guidance of Beijing City HPC 2005); the Guidance of Guangdong Province High People’s Court Concerning Questions of How to Deal with Insurance Disputes 2011 (the Guidance of Guangdong Province HPC 2011); and the Guidance of Shandong Province High People’s Court Concerning Questions of How to Deal with Insurance Disputes 2011 (the Guidance of Shandong Province HPC 2011).

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insured’s duty, insurer’s duty and agent’s duty to make information transparent when concluding an insurance contract.

3.1

Insured’s Pre-contractual Duty to Make Information Transparent to the Insurer

This subsection is concerned with the insured’s pre-contract duty of disclosure and representation, namely the insured’s duty to make information transparent to the insurer before the contract is concluded. The current statutory position in respect of the insured’s pre-contract duty of disclosure and representation is provided in article 16 of the Insurance Law. Article 16(1) provides that ‘When concluding an insurance contract, the insurer may raise questions concerning relevant details of the insured subject matter or of the insured. The proposer16 shall truthfully disclose such details to the insurer’. This article emphasises two important aspects relating to the insured’s duty of transparency of information to the insurer. First, it indicates that the duty arises before or at the time when the contract is concluded. Second, the insured discloses information to the insurer by answering the questions raised by the insurer in the proposal form. That means that any information that the insurer wishes to know should be included in the proposal form. Usually, the important information is about the insured subject matter and the nature of the risk and the information of the insured.

3.1.1

The Way of Performing the Duty

Inquiry disclsure in Non-marine Insurance The Insurance Law adopts a system of inquiry disclosure, i.e. ‘asking and answering’ questions in proposal form.17 According to article 16(1) of the Insurance Law, the insured is required to disclose only the information asked by the insurer in the proposal form, while the insurer may not be allowed to rescind the contract on the ground that the insured did not disclose something material that is beyond the scope of the questions raised in the proposal form, even if it is material.18 The SPC Interpretation II made it clear that ‘The insured’s duty of disclosure is limited to the scope and content of the insurer’s inquiry; where the insurer and the insured dispute on the scope and content of the inquiry, the onus of proof rests upon

16

The person who makes an application for insurance is called the proposer. When the insurer has agreed to underwrite the risk, the proposer is now called the insured or the policyholder. 17 In contrast to the inquiry disclosure in non-marine insurance, voluntary disclosure is adopted for marine insurance. 18 See Jing (2006), p. 681.

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the insurer’.19 Accordingly, the insured is deemed to have performed the duty of disclosure if he has truthfully answered the questions in the proposal form. He has no duty to volunteer information to the insurer even if the information is material. The law does not require the proposer to disclose information voluntarily, but in practice it happens that the proposer discloses some information voluntarily without being inquired by the insurer. An issue may arise that if the information is untrue and misleading, whether it could be deemed as non-disclosure. Neither the Insurance Law nor the SPC Interpretation provides any rule for this situation. The HPC of Beijing City provided a guiding rule stating that if the proposer voluntarily tells some information without being inquired by the insurer and writes down the information on the proposal form, it is deemed that the insurer has made inquiry as to that information and the insured owes the duty to give that information truthfully and a false information can be deemed as a breach of the duty.20

Written Inquiry and Oral Inquiry The Insurance Law (art. 16) clearly requires the proposer to perform his duty of disclosure by truthfully answering the questions raised by the insurer. The law does not expressly stipulate whether or not the inquiry and answer must be made in writing on a proposal form. It is a usual practice that the proposer performs the duty of disclosure by answering the questions raised in the proposal form and completing it. By law, it is unclear whether the insurer may raise questions orally (by telephone or face to face). In some proposal forms, a clause is usually included that states that ‘Any information disclosed by the proposer must be in writing, oral disclosure is not effective’.21 The HPC of Guangdong Province expressed the view that ‘at the time of concluding or reinstating the insurance contract, the insured’s and life insured’s duty of disclosure is limited to the extent of the insurer’s written inquiry’.22 These documents indicate that it is sufficient for the proposer to correctly answer the questions put to him on the proposal form. It is beyond the proposer’s duty to tell the insurer any information outside the scope of the written questions. The advantage of adopting written inquiry is that it is easier for the insured to show proof of disclosure and for the insurer to show proof of inquiry. However, for motor insurance, it is a common practice to effect policy by telephone in China. The advantage of telephone sale is that it is quick and convenient, and the premium is lower. If written inquiry would still be required for this kind of business, it would be impractical. The disadvantage of telephone sale is that it is relatively more difficult to prove that the insurer has made inquiries and the insured has performed his duty of

19

The SPC Interpretation II, art. 6(1). The Guidance of Beijing City HPC 2005, art. 18. 21 See proposal forms of life insurance, personal accident insurance and child safety insurance, etc., of the Ping An Insurance Company of China. 22 The Guidance of Guangdong Province HPC 2011, art. 7. 20

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disclosure. Therefore, a record must be used to keep track of the conversation between the insurer and the insured. The burden of proof should rest on the insurer to show that it made queries for the insurance on phone. The HPC of Zhejiang Province stipulated that the content of inquiry is not limited to the content of inquiry raised in the proposal form, but the insurer must prove that he had made inquiries in addition to those raised in the proposal form.23

Questions Raised by the Insurer Specific and General Questions The Insurance Law does not provide rules on what questions should be asked by the insurer in the proposal form. In practice, in the proposal form, the insurer usually raises some specific questions, and the proposer needs to give a direct answer to the questions. Especially, in a life insurance proposal form, many specific questions about the insured’s health may be asked, such as ‘do you have diabetes?’ In addition to the specific questions, at the end of the proposal form, a general question (or a catch-all question) may be raised, namely ‘Is there any other information within your knowledge that is likely to affect our consideration of your application for the insurance?’ In essence, this kind of question places the proposer in the position of making a voluntary disclosure. Chinese courts have different views on such a general question. Some courts expressed the view that the proposer must comply with the duty of disclosure to truthfully answer a general question.24 But some other courts treat a general question as an invalid question.25 For instance, in Mr Li Huang v China Life Insurance Company,26 the proposal form listed a number of questions about the insured’s diseases in the last 10 years. The disease of kidney syndrome was not included in the list. There was a general question at the end of the list: ‘Have you had any other diseases in the last 10 years in addition to those mentioned above?’ The insured gave a negative answer to this question. When the life insured died, the insurer refused liability on the ground that the insured did not disclose the fact that he had a kidney syndrome before the contract was made. Evidence showed that the life insured had a kidney disease and was treated in the hospital, but the doctor (who 23

The Guidance of Zhejiang Province High People’s Court Concerning Questions of How to Deal with Property Insurance Disputes 2009 (the Guidance of Zhejiang Province HPC 2009), art. 5. 24 This can be explained in Mr Ying Bai v China Life Insurance Company Shanghai Branch. This case was decided by the Intermediate People’s Court, Shanghai City, Civil Court Judgement (2000) No 1722. In the proposal form a general questions asked “Besides the diseases listed here, do you have any other disease?” The Appeal Court held that the insured had duodenal ulcer for more than 20 years and took medicine for the disease for the years, but failed to inform the insurer of the disease by answering the general question, thus was in breach of the duty of disclosure. 25 The Guidance of Beijing City HPC 2005, art. 12; the Guidance of Shandong Province HPC 2011, art. 42. 26 This case was report in the book, Peoples Court Selected Cases, vol. 4, published by People’s Court Press, 2001.

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treated the life insured) said that the life insured’ kidney disease was not a kidney syndrome. The trial court held that there was no evidence that the life insured had a kidney syndrome, so the insured should not be said to fail to disclose the disease and that the general question was flawed and should not be valid. The appeal court upheld the trial court’s decision. The SPC enacted rules in relation to general questions. Article 6(2) of the SPC Interpretation II provides: ‘The People’s Courts will not uphold the insurer’s rescission of the contract on the ground that the insured was in breach of the duty of disclosure if he failed to reply to a general question in the proposal form, except that there are confines in the general question.’ By this provision, the SPC does not allow the insurer to use general questions without any limits. A question such as ‘Have you had any other diseases which are not asked in the above questions?’ should not be valid, but the SPC does allow the insurer to use general questions that are confined within reasonable limits; for example, the following question should be allowed: ‘Have you had other cardiovascular disease in the last 5 years?’27 The SPC’s approach on this issue is similar to English position. In English law,28 the leading authority in respect of general questions is Connecticut Mutual Life Insurance Co of Hartford v Moore.29 In this case, the relevant question, in a life policy, was ‘Have you had any other illness, local disease or personal injury?’ The life insured had replied in the negative, although some 12 years previously he had suffered a partial fracture of the skull. The Privity Council expressed the view that ‘the insurer could not reasonably expect a man of mature age to recollect and disclose every illness, however slight, or every personal injury . . . It is manifest that this question must be read with some limitation and qualification to render it reasonable. . .’ The courts have tended to construe general questions ejusdem generis with the preceding specific questions.30 The Questions Must Be Clear and Precise The questions raised by the insurer in the proposal form should be clear and precise and in plain language. Some scholars have the view that if the question is ambiguous and leads to an inaccurate representation or non-disclosure, it is deemed that the insurer had not made the inquiry and the insured was not responsible for his non-disclosure to that inquiry.31 In many other jurisdictions, the requirement that the questions raised by the insurer must be clear and precise is an express rule in statutory law. In English

27

See Xi (2014), p. 171. See Merkin (2016), para 7-073. 29 (1881) L.R. 6 App. Cas. 644. 30 Roberts v Plaisted [1989] 2 Lloyd’s Rep. 341; and State Insurance v Peake [1991] 2 N.Z.L.R. 287. 31 See Liu (2012), p. 163. 28

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law, under the Consumer Insurance (Disclosure and Representations) Act 2012 (CIDRA), when determining whether or not a consumer has taken reasonable care not to make a misrepresentation, all the relevant circumstances need to be taken into account, and one example of such circumstances is how clear and how specific the insurer’s questions were.32 In the Principles of European Insurance Contract Law (PEICL), the questions put to the insured by the insurer must be clear and precise.33 It is suggested that this rule should be inserted as an express provision into the Insurance Law. Incomplete or Unanswered Questions The insured is required to give truthful and complete answer to each question in the proposal form. But it happens that sometimes the proposer does not answer or gives an incomplete or irrelevant answer to a question. In China, there is no statutory provision governing this situation. In judicial practice, where the proposer gives an incomplete answer or leaves a blank to a question, if the insurer accepts the premium and issues a policy without further query about the question, it would be held by courts that the insurer waives its right for further information and cannot reject a claim later on the ground that the proposer breaches the duty of disclosure. In Mrs Lihong He v China Life Insurance Company Ltd Feshan Shunde Branch,34 a question was asked: ‘Have you applied for insurance or been insured by any other insurance company?’ The insured did not respond to this question. The court held that leaving a blank to a question amounted to an intentional breach of the duty of disclosure, but if the insurer issued the policy and accepted the premium without making further inquiry on the question, it should be deemed that the insurer waived disclosure in relation to the matter, so it was not allowed to take the defense of non-disclosure. Similarly, in Mrs Weili Zhang v China Life Insurance Company Ltd Zhumadian Branch,35 Mrs Zhang effected a life policy on her husband and gave a negative answer to the question: ‘Have you ever had any disease and treated in a hospital in the last five years?’ However, the life insured’s medical record showed that he suffered from coronary heart disease. Without making any further inquiry, the insurer issued the policy. The court held that the insurer waived his right of rescission of the contract. It is submitted that the rule employed in Chinese courts should be adopted in the Insurance Law as a statutory rule. Similar rules are adopted by statutes in other jurisdictions. Under the Australian Insurance Contracts Act 1984 (ICA), if the insured failed to answer or gave an

32

The CIDRA, s. 3. The PEICL, art. 2.101. 34 The Supreme People’s Court Bulletin, 2008 No. 8 (http://blog.sina.com.cn/s/blog_ a87dad3d01016qgd.html, accessed in June 2018). 35 This case was decided by the People’s Court, Yicheng District, Zhumadian City, Henan Province, Civil Court Judgement (2010) No 901, and the report of the judgement can be seen at (http://www. hlkdata.com/hw/?c¼news3&m¼view&id¼3284, accessed on in July 2018). 33

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obvious incomplete or irrelevant answer to a question included in a proposal form about a matter, the insurer shall be deemed to have waived compliance with the duty of disclosure in relation to the matter.36 An insured shall not be taken to have made a misrepresentation by reason only that he failed to answer a question included in a proposal form or gave an obvious incomplete or irrelevant answer to such a question.37 English law adopts a similar rule on this point. Under common law, if the insured leaves a blank to a question, which is accepted without inquiry by the insurer, this will normally be taken as a waiver by the insurer of any duty of disclosure in respect of the matters covered by the question.38 Under the Insurance Act 2015 (UK), the insured is deemed to perform his duty of disclosure if he gives the insurer sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing those material circumstances.39 This provision indicates that in case of failure to make further query on this question, the insurer will lose its defense of non-disclosure. Under the PEICL, remedies for breach of the duty of disclosure shall not be available to the insurer in respect of a question that was unanswered or information supplied that was obviously incomplete or incorrect.40

3.1.2

The Scope of the Insured’s Pre-contractual Duty of Disclosure

Transparency of Information by the Insured Within His Knowledge Due to the lack of express rule in the Insurance Law, it is unclear whether the proposer needs only to disclose information that he actually knows or whether he needs also to disclose what he ought to know. The SPC Interpretation II answers this question in article 5, which provides that ‘When entering into an insurance contract, circumstances about the subject matter of insurance or of the insured which are to be truthfully disclosed by the insured as required by art. 16(1) of the Insurance Law are those which the insured actually knows’.41 It is clear that information transparency is confined to the insured’s actual knowledge. Other jurisdictions have a different view on this point. German law is similar to the Chinese Insurance Law in respect of the insured’s knowledge. The insured is only obliged to disclose to the insurer what he knows, not what he ought to know.42

36

The ICA, s. 21. For more on this point, see Pynt (2015), para. 8.9. The ICA, s. 27. 38 Roberts v Avon Insurance Co [1956] 2 Lloyd’s Rep. 240. 39 The Insurance Act 2015, S. 3(4)(b). 40 The PEICL art. 2:103(a). 41 The SPC Interpretation II, art. 5. 42 S. 19(1) of the German Insurance Contract Act 2008 provides “The policyholder shall disclose to the insurer before the contract is concluded the risk factors known to him which are relevant to the 37

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By contrast, under English and Australian law, information known to an insured includes what he actually knows and what he would have known if he had not wilfully shut his eyes to the truth.43 This is also the approach adopted by the PEICL, which provides that ‘when concluding the contract, the applicant shall inform the insurer of circumstances of which he is or ought to be aware of’.44

Medical Examination Cannot Replace the Insured’s Duty of Disclosure This issue is specifically relevant to life insurance. To conclude a life insurance contract, the life insured is usually required to take medical examination. The issue here is whether or not the medical examination can replace the insured’s duty of disclosure of his/her health condition. The Insurance Law does not concern this question. This question was answered by article 5 of SPC Interpretation III: ‘When entering into an insurance contract, upon being requested by the insurer, a medical examination has been carried out on the life insured in a designated hospital, the people’s courts will not uphold the relevant party’s demand that the insured’s duty of disclosure can be exempted. However, where the insurer knew the result of the life insured’s medical examination and demands a rescission of the contract on the ground that the insured did not perform the duty of disclosure, the people’s courts will not uphold such a demand.’ This provision indicates that even if the life insured takes a medical examination, which may show his health problems (if any), the insured still owes the duty of disclosure, and the medical examination cannot replace the insured’s duty. The insured cannot argue that the medical examination report may tell the insurer the physical condition of the life insured so that it is not necessary for him to disclose the fact to the insurer about the health status of the life insured. However, if the insurer knew the fact that was revealed by the medical examination but still entered into the contract, the people’s courts shall not uphold his demand for rescission of the contract on the ground of the insured’s non-disclosure of the relevant fact.

Information That Does Not Need to Be Disclosed by the Insured The Insurance Law does not have provisions exempting the insured from his duty of disclosure. Article 222 of the Maritime Code 1992 provides: ‘The insured need not inform the insurer of the facts which the insurer has knowledge of or ought to have knowledge of in his ordinary business practice about which the insurer made no inquiry.’

insurer’s decision to conclude the contract with the agreed content and which the insurer has requested in writing. . .”. 43 Economides v Commercial Union Co plc [1998] Q.B. 587 at 601–2. 44 The PEICL, art. 2:101.

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The HPC of Beijing provides a guiding rule on this matter: ‘the insured is not required to disclose a circumstance if (1) it may diminish the probability of occurrence of the risk; (2) the insurer knows it or ought to know it; or (3) it is something as to which the insurer expressly waives information’.45 This rule is very similar to English law. Both the Marine Insurance Act 1906 (UK)46 and the Insurance Act 2015 (UK) have similar rules on this point. By virtue of s. 3(5) of the Insurance Act 2015, ‘In the absence of enquiry, subsection (4) does not require the insured to disclose a circumstance if (a) it diminishes the risk,47 (b) the insurer knows it,48 (c) the insurer ought to know it,49 (d) the insurer is presumed to know it, or it is something as to which the insurer waives information’. Similar approach is also adopted by Australian law.50

3.1.3

The Time When the Requirement of Pre-contract Information Transparency Ends

As mentioned above, by virtue of article 16 of the Insurance Law, the proposer performs his duty of disclosure by answering the questions raised by the insurer in the proposal form. After receiving the proposal form, the insurer needs time to examine it before making the decision. If the insurer accepts the risk, the contract is concluded. During the period from handing in the proposal form to the conclusion of the insurance contract, the risk may change. It is unclear whether or not the proposer is obliged to inform the insurer of the change of the risk (if any) without being required by the insurer. A positive answer should be implied by article 16(1) of 45 The Guidance of Beijing City HPC 2005, art. 14. Similarly, the HPC of Zhejiang Province also provide that “The insured is not deemed in breach of the duty of truthful disclosure where he did not provide an answer upon being inquired by the insurer in respect of the following matters: (1) the insurer knew; (2) according to common sense, in the ordinary course of its business the insurer should have known; and (3) the insurer declared that the insured did not need to disclose” (see art. 9 of the Guidance of Zhejiang Province HPC 2009). 46 S. 18(3) of the Marine Insurance Act 1906 provides: “In the absence of inquiry the following circumstances need not be disclosed, namely:

(a) Any circumstance which diminishes the risk; (b) Any circumstance which is known or presumed to be known to the insurer. the insure is presumed to know maters of common notoriety or knowledge, and matters which an insurer in the ordinary course of his business, as such, ought to know; (c) Any circumstance as to which information is waived by the insurer; (d) Any circumstance which it is superfluous to disclose by reason of any express or implied warranty.” 47

Inversiones Manria SA v Sphere Drake Insurance Co Plc (The Dora) [1989] 1 Lloyd’s Rep. 69. Kingscroft Insurance Co v Nissan Fire and Marine Insurance Co Ltd (No. 2) [1999] Lloyd’s Rep. I.R. 603. 49 For example, the insurer should be aware of matters of a commercial nature (Noble v Kennaway (1780) 2 Doug KB 510. 50 The ICA, s. 21(2). 48

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the Insurance Law, which requires the insured to disclose material information to the insurer when concluding an insurance contract. This implies that the insured should update information until the time of conclusion of the contract. However, in practice, once the proposer has submitted the proposal form to the insurer, the former is deemed to have performed his duty if the insurer does not make any further inquiry, and the insurer indeed rarely does so. The courts are usually reluctant to impose such a duty on the proposer.51 It is submitted that if the insurer wishes to know any change of risk during this period, he should require the proposer to do so. In other jurisdictions, the laws clearly require the insured to notify the insurer the change of risk during the period between the application and the conclusion of the contract. In German law, during the period from submitting the application form to the insurer’s acceptance of the contract, the insurer may ask questions relating to the insurance proposed, the insured is under the duty of disclosure as regards these questions.52 Under English common law, the time up to which full disclosure of facts material to the risk proposed must be made is the moment when a binding contract is concluded.53 The practical effect of this rule is that the insured is bound to disclose any material circumstances as to the insurance proposed that come to his notice while negotiations are proceeding and before the proposal is accepted.54 In consumer insurance, the current English position in respect of updating information previously given before the contract is entered into or amended is that failure by the consumer to comply with the insurer’s request to confirm or amend particulars previously given is tantamount to being a misrepresentation by virtue of s. 2(3) of the CIDRA. In Australia, the duty of disclosure continues until the contract has been accepted by the insurer and a policy is issued.55 That means that the insured and the life insured have a duty to update any disclosures made to the insurer if any change to the insured’s circumstances occurs in the period up until the insurer has issued the contract of insurance.56 The ICA also provides that the insured must comply with the

51

See Mrs Lihong Zhao v China Life Insurance Company Puyang Branch. This case was decided by the People’s Court, Hualong District, Puyang City, Henan Province, Civil Court Judgement (2009) No 2943; Mrs Zhanxian Xue v China Pacific Life Insurance Company Jiaozuo Branch, the People’s Court, Jiyuan City, Henan Province, Civil Court Judgement (2009) No 126; and Mrs Xuexian Ye v Kang Tai Life Insurance Company Heyuan Branch, the People’s Court, Ping County, Guangdong Province, Civil Court Judgement (2008) No 341. 52 The German Insurance Contract Act 2008, s. 19(1). 53 Ionides v Pacific Ins. Co. (1871) L.R. 6 Q.B. 674, 684; (1872) L.R. 7 Q.B. 517; Haydenfayer v British National Ins. Soc. Ltd [1984] 2 Lloyd’s Rep. 393, 398; Newbury Int. Ltd v Reliance National Ins. Co. (UK) Ltd [1994] 1 Lloyd’s Rep. 83, 85. For more, see Birds et al. (2012), para. 17-023. 54 Looker v law Union and Rock Insurance Co. Ltd [1928] 1 K.B. 554. 55 See the Application Form for Life Insurance by the MLC Insurance Company, see http://www. mlc.com.au/resources/MLC/Superannuation%20and%20Investments%20Product/Documents/ 60922_request_for_insurance_form.pdf, accessed in July 2018. 56 See the Macquarie Life Application form, see https://www.macquarie.com.au/dafiles/Internet/ mgl/au/docs/forms/macquarie-life-new-business-application.pdf, accessed in July 2018.

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duty of disclosure before the contract is renewed,57 extended, varied58 or reinstated.59 It could be suggested that the Insurance Law should add the rule that the proposer must inform the insurer (if the insurer so requires) where there is material change of risk between the time of submitting the proposal form and the time of concluding the contract. Failure by the proposer to comply with this request should be treated as failure to comply with the duty of disclosure.

3.1.4

Remedies for Breach of the Insured’s Pre-contractual Duty of Disclosure

By virtue of the Insurance Law, different remedies have been made available to the insurer for the insured’s breach of the duty of disclosure, depending on the type of the breach. Non-disclosure or misrepresentation can be made intentionally, by gross negligence or innocently. The remedies for these breaches vary. For intentional and grossly negligent breach, the insurer is entitled to rescind the contract.60 If the insurer wishes to rescind the contract, he must do so within 30 days after it came to learn of the insured’s breach of his duty or after 2 years from the conclusion of the contract.61 If the insurer rescinds the contract, it is not liable for the loss that occurred before the rescission of the contract and is entitled to retain the premium if the breach is intentional.62 For a breach made with gross negligence, if the undisclosed information materially contributed to the occurrence of an insured event, the insurer is not liable for the loss that occurred before the rescission, but it needs to return the premium to the insured.63 The Insurance Law does not provide any remedy in case of an innocent or mere negligent non-disclosure or misrepresentation. Its silence implies that there is no remedy available to the insurer for an innocent or mere negligent breach even if the undisclosed information is material. By virtue of Article 16 of the Insurance Law and the SPC Interpretation II, where the insurer exercises its right to rescind the contract on the ground of non-disclosure by the insured, a number of conditions must be met: (1) the insurer must have made inquiries about the relevant facts relating to the questions raised in the proposal form

57

Unless informed otherwise, an insurer is entitled to assume that the answers in the original proposal for insurance apply to the renewal (Mercantile Mutual Insurance (Australia) Ltd v Gibbs [2001] WASCA 271). 58 Any remedy for a breach of the duty of disclosure or for misrepresentation in relation to the variation is limited to the variation. It does not affect the original contract (Mercandian Continent [2001] EWCA Civ 1275; 2 Lloyd’s Rep 563). 59 The ICA, s. 21, 21A and s. 11(9). 60 The Insurance Law, art 16(2). 61 The Insurance Law, art 16(3). 62 The Insurance Law, art 16(4). 63 The Insurance Law, art 16(5).

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prior to the conclusion of the contract64; (2) the insured must actually know the relevant facts65; (3) the insured failed to perform the duty intentionally or by gross negligence66; (4) the undisclosed information must be material in that it sufficiently influences the insurer’s decision on whether or not it will accept the insurance or raise the premium rate67; (5) when concluding the contract, the insurer did not know that the insured had failed to provide truthful information68; (6) the insurer’s right of rescission of the contract must be exercised within 30 days after having learned of the insured’s breach of his duty or within 2 years from the date of the conclusion of the contract69; and (7) during the insurance period, if the insurer becomes aware of or should have known of the non-disclosure but still collected premium, his right of rescission will be lost.70

3.2

Insurer’s Pre-contractual Duty to Explain the Policy Terms to the Insured

The duty of disclosure is a reciprocal duty of both the insurer and the insured.71 Similarly, the requirement of transparency is imposed not only on the insured but also on the insurer. Under the Insurance Law (art. 17), where a standard form contract is used for concluding an insurance contract, the insurer has the duty to make the standard policy terms transparent to the insured, especially the terms excluding the insurer’ liability. In addition, article 116 of the Insurance Law requires the insurer not to conceal material information from the insured. Although these articles do not use the word ‘transparency’, they reflect the requirement of ‘transparency’. Transparency of insurance policy is very important so that the insured may be able to make an informed decision on whether or not he will take out insurance with the insurer for the said risk. Therefore, a number of requirements for the insurer to comply with are provided in articles 17 and 116 of the Insurance Law: firstly, the insurer shall attach a standard form contract to the proposal form72; secondly, the insurer shall explain to the insured the contents of the insurance contract73; thirdly,

64

The Insurance Law, art. 16(1), and the SPC Interpretation II, art. 6(1). The SPC Interpretation II, art. 5. 66 The Insurance Law, art. 16(2). 67 The Insurance Law, art. 16(2). 68 The Insurance Law, art. 16(6). 69 The Insurance Law, art 16(3). For more about the incontestability see Jing and Zhong (2016), pp. 253–288. 70 The SPC Interpretation II, art. 7. 71 The rule of reciprocal duty of good faith was derived from the English case of Carter v Boehm (1766) 3 Burrow 1905; The Marine Insurance Act 1906, s 17; the Insurance Law, arts. 16 and 17. 72 The Insurance Law, art. 17(1). 73 The Insurance Law, art. 17(1). 65

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the insurer shall make clear explanation to the insured of the clauses that exclude or limit the insurer’s liabilities74; and, fourthly, the insurer is prohibited from concealing from the insured material information relevant to the insurance contracts75; namely, the insurer must disclose material information to the insured before or at the time of contracting. Further discussions on these points are as follows.

3.2.1

Standard Form Contract Clauses Must Be Attached to the Proposal Form

By virtue of article 17(1) of the Insurance Law, when a standard form contract is used for concluding an insurance contract, the clauses of the contract must be attached to the proposal form in order that the insured may read them before completing the proposal form. The content of the insurance policy should be made transparent to the insured before the contract is concluded in order that the insured may familiarise himself with the contractual terms and clauses before he fills out the proposal form.

3.2.2

Insurer’s Duty to Explain the Terms of the Contract

Where a standard form contract is used for concluding an insurance contract, in addition to attaching the clauses of the standard contract to the proposal form, the Insurance Law (art. 17(1)) also requires the insurer to explain the content of the contract to the insured so as to enable the insured to understand the contract terms. However, the Insurance Law does not provide a remedy for the insurer’s breach of the duty to explain the contract terms. A number of possible remedies have been suggested by scholars.76 Firstly, if the insurer’s failure to explain the content of the contract leads to a fundamental misunderstanding of the content by the insured, the insured should request an amendment or withdrawal of the contract on the basis of fundamental misunderstanding of the content of the contract. Secondly, where the insurer’s failure to explain the content of the contract results in a different interpretation of the meaning of a term of the contract, the term will be interpreted by the doctrine of contra proferentem. Thirdly, the insured should be entitled to rescind the contract and request a refund of the premium paid where the insurer’s breach of the duty gives rise to a disagreement on the content of the contract and consequently the purpose of the contract cannot be achieved.

74

The Insurance Law, art. 17(2). The Insurance Law, art. 116. 76 Xi (2010), p. 107. 75

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Insurer’s Duty to Clearly Explain Clauses That Exempt or Limit the Insurer’s Liability

The rules of law in this regard merit a special consideration as in judicial practice, about one third of the insurance cases were concerned with the insurer’s duty of making a clear explanation of the exemption clauses.77 The Insurance Law (art. 17) requires the insurer to make prompt for the clauses which exempt the insurer of its liabilities on the proposal form, the insurance policy or other insurance certificate that are so conspicuous as to draw the insured’s attention and to make specific and clear explanations thereof to the insured orally or in writing; otherwise, such clauses shall have no effect.78 This provision requires the insurer to bring to the insured’s attention the exemption clauses by making these clauses conspicuous (in red colour or in bold) and to clearly explain the exemption clauses to the insured prior to concluding the contract.79 The key issues arising from this sub-article are the scope of exemption clauses defined in article 17(2) of the Insurance Law and how the duty will be performed by the insurer.

The Scope of Exemption Clauses Article 9(1) of SPC Interpretation II defines the scope of exemption clauses, stating that ‘the liability exemption clauses, deductibles, excess, proportion payment and other clauses exempting or reducing the insurer’s liability as set forth in the standard form contract as provided by the insurer can be determined as the ‘clauses exempting the insurer of its liabilities’ as provided in art. 17(2) of the Insurance Law’. This provision lists examples of exemption clauses, but the list is not exhaustive. There may be other kinds of clauses that exempt or limit the insurer’s liability. In a broad sense, an exemption clause in an insurance contract can be defined as a term of the contract that limits or excludes the insurer’s liability under the contract, which the insurer would bear but for the exemption.80 Exemption clauses can include five major types: (1) a clause that excludes certain risks from the coverage—the insurer is not liable to pay if the loss is caused by a risk that is not covered,81 (2) a clause that excludes the insurer’s liability in the case that the occurrence of the insured event is caused by certain specifically excluded causes,82 77

Xi (2014), p. 276. The Insurance Law, art. 17(2). 79 For more on this topic, see Jing (2017a), p. 291. 80 Professor Clarke defines exceptions as terms of the insurance contract that reduce the extent of cover which, but for the exception, would be provided, see Clarke (2009), para. 19.1A. 81 For example, in a building insurance, the risk of earthquake is usually excluded, thus the insurer is not liable to a loss caused by earthquake. 82 For example, in fire insurance, the risk covered is fire. The insurer is liable for a loss occasioned by fire. But the insurer’s liability can be qualified by some events which caused the fire, such as explosion, riot, hostilities etc. 78

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(3) a clause that excludes the insurer’s liability for certain kinds of loss caused by the insured risk,83 (4) a clause that excludes the insurer’s liability for a specified amount of loss (a deductible clause or an excess clause),84 (5) a clause that limits the insurer’s liability for a loss caused by the insured risk or by the insured cause of the risk. In other words, the risk or the cause of the risk is covered, but the amount payable under the policy is limited.85 Exemptions in an insurance policy can be either statutory exemptions or contractual exemptions. It is important to differentiate between these two kinds of exemption clauses as the extent of explanation required for these two kinds of exemption clauses differs. Statutory and regulatory exemptions refer to those circumstances under which the Insurance Law or insurance regulations clearly stipulate that the insurer is not (or may not be) liable for making insurance payment. It is an usual practice that the insurer incorporates some relevant provisions of the Insurance Law into the insurance policies. For example, a life policy has an exclusion clause that reads: ‘where the life insured commits suicide within two years after the contract is concluded or reinstated, the insurer is not liable for payment of insurance benefits’. This clause is exactly the same as the provision of article 44(1) of the Insurance Law. For this kind of exemption clauses, it is sufficient for the insurer, by virtue of SPC Interpretation II, to just bring it to the insured’s attention86; it is not necessary to give a clear explanation of the clause to the insured as an insured is expected to understand a legal provision copied and pasted by the insurer into the policy. Where the insurer performs his duty accordingly but the insured or the beneficiary still claims that the exemption clause is invalid on the ground that the insurer did not give a clear explanation of the clause, the people’s court shall not uphold such a claim.87

83

For example, an exclusion clause in the motor vehicle third party liability insurance policy of Ping An Insurance Company states that “the insurer is not liable to pay for any infringement of mental distress to the third party.” Here the insured risk is the third-party liability, if the third party is injured or killed by the road accident caused by the insured driver, the insurer will pay the third party under the policy. If the third party suffers mental distress as a result of the road accident, the insurer is not liable for paying the third party for that kind of loss. 84 The insurance deductible is the amount of money the insured will pay in an insurance claim before the insurance coverage starts paying the insured. An excess clause requires an insurer’s liability to a loss only after exhausting any other source of coverage. 85 For example, there is often a limitation clause in a motor vehicle insurance policy to reduce the amount of payment to 80% of the current market value in the case that the motor vehicle is stolen and cannot be found within 60 days. See clause 16(6), the PICC motor vehicle insurance policy (http://www.epicc.com/cn/hkfw/bzzx/bxfw/db_bxtkcx/201207/t20120713_1799.html, accessed in July 2018). 86 The SPC Interpretation II, art. 10. 87 The SPC Interpretation II, art. 10 provides that where the insurer takes the circumstances which are prohibited by laws or regulations as the cause of exemption in the exemption clauses of the insurance contract and makes note of such clauses to draw the insured’s attention to the clauses, the insured, the life insured or the beneficiary claims that such clauses are ineffective on the ground that

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In addition, according to SPC Interpretation II, a clause that entitles the insurer to rescind the contract where a proposer or an insured breaches his statutory or contractual obligations is beyond the category of an exemption clause as defined by article 17(2) of the Insurance Law.88 Therefore, the insurer is not required to clearly explain such a clause to the proposer. Contractual exemption clauses are those that are expressly stipulated by the insurer in the contract other than the statutory exemption clauses. According to articles 9(2) and 10 of SPC Interpretation II, contractual exemption clauses must be clearly explained by the insurer. If the insurer fails to do so, these clauses will be ineffective.89

The Way to Make a Clear Explanation of the Exemption Clauses Article 11(1) of SPC Interpretation II stipulates that where the insurer has used words, fonts, symbols or other conspicuous marks that are sufficient to bring the attention of the insured to the clauses that exempt the liability of the insurer on the application form or policy or other insurance certificates when concluding the insurance contract, the court shall hold that the insurer has performed the duty of making the exemption clauses known to the insured, as set forth in article 17(2) of the Insurance Law. In addition to making prompt on the exemption clauses, article 17(2) of the Insurance Law also requires the insurer to clearly explain such clauses in writing or orally to the insured. To an insured who is unable to read, the insurer must explain them orally. The insurers can also use other forms of explanation, such as email, online conversation, etc. For insurance contracts concluded through the Internet, telephone or other similar ways, where the insurer has made prompts and clearly explained the exemption clauses on its webpage or through audio or video or other similar ways, the insurer is deemed to have performed its duties.90 Article 11(2) of SPC Interpretation II provides that where the insurer makes explanation and statement to the insured on the concept, the content and the legal consequence of the clauses exempting the liability of the insurer in the insurance contract in writing or orally, which is understandable to an ordinary person, the court shall hold that the insurer has performed the explicit obligation of providing explanation, as provided for in article 17(2) of the Insurance Law. In summary, to determine whether the insurer has performed the duties set forth in article 17 of the Insurance Law, the following matters must be considered: (1) the insurer has supplied the insured with a copy of the standard terms of the contract,

the insurer has not performed the obligation of clear explanation of the clauses, the people’s court shall not uphold such claims. 88 The SPC Interpretation II, art. 9(2). 89 The Insurance Law, art. 17(2). 90 The SPC Interpretation II, art. 12.

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(2) the insurer has made prompts to the exemption clauses in the standard terms of the contract or other insurance documents to draw the attention of the insured and (3) the insurer has clearly explained to the insured the concept, the content and the legal consequences of the exemption clauses. If any of the three requirements is not met, the court shall hold that the insurer has failed to perform its duty.

The Onus of Proof According to article 13(1) of SPC Interpretation II, ‘the insurer shall bear the burden of proof for performance of the duty of clear explanation’. Generally, two forms of proof are often used by the insurers or insured persons, i.e. written proof and witness testimony. The insured’s signature for the declaration on the proposal form can be a valid written proof of the insurer’s performance of the duty of providing a clear explanation. This is contained in art. 13(2) of Interpretation II, which states: ‘where the insured confirms that the insurer has performed the duty of clear explanation as required in art. 11(2) of this Interpretation by means of signature or seal on relevant documents or by any other means, the insurer shall be deemed to have performed such a duty, unless there is evidence proving that the insurer has not performed the duty of clear explanation’. It is up to the insured to rebut the insurer’s proof. The duty imposed on the insurer to clearly explain the exemption clauses to the insured is a unique feature of the Insurance Law in comparison to other jurisdictions’ laws. The Insurance Law in this respect takes a bold step towards striking the balance of the traditional one-sided pre-contractual duty of good faith on the part of the insured.

3.2.4

The Insurer Must Not Conceal Material Information

In addition to the duty of explaining the terms of the policy, article 116(2) of the Insurance Law requires the insurer not to conceal from the proposers material information relevant to the insurance contracts. This sub-article provides for the application of the concept of transparency and indicates that the insurer should make material information relevant to the contract transparent to the proposer, insured and beneficiary and must not conceal any material information from them. Article 116 lists 13 kinds of insurer misconduct that are prohibited by law91; concealing material information is one type of such misconduct. Where an insurer commits a 91

Article 116 of the Insurance Law provides: An insurance company and its employees shall not have any of the following acts in the course of conducting business: (1) cheating the proposers, the insureds or the beneficiaries; (2) concealing from the proposers material information relevant to the insurance contracts; (3) preventing the proposers from fulfilling their obligation of making truthful disclosure provided under this Law or inducing them not to fulfil such an obligation; (4) giving or promising premium rebates or other benefits other than those provided for in the contracts to the proposers, the insureds or the beneficiaries;

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pre-contract misconduct, the insurer will be sanctioned by a fine, a restriction on the scope of business, and even a revocation of business license.92 However, these remedies are not particularly useful to the insured who suffered a loss as the Insurance Law does not provide any private right of action to a grieved insured in the case of a pre-contractual misconduct by the insurer. It is suggested that the law should grant a right of action to an insured who has suffered loss as a result of a violation of article 116 of the Insurance Law by an insurer.93

3.3

Transparency of Information by Insurance Intermediaries

In China, insurance intermediaries consist mainly of three types: insurance agencies, insurance brokers and loss adjusters. The Insurance Law sets out rules in relation to insurance agents and brokers in chapter 5, articles 117–132. According to the Insurance Law, an insurance agent refers to an entity or an individual who is entrusted by the insurer and charges commissions on an insurer to transact insurance business on behalf of the insurer within the scope of the delegated authority. Insurance agencies include professional agencies specialising in the insurance business and sideline insurance agencies that engage in insurance agency as a sideline business.94 An insurance broker means an entity that, based on the interests of the

(5) refusing to fulfil the obligation of paying indemnity or insurance benefits agreed upon in an insurance contract according to law; (6) deliberately fabricating insured events that have never occurred, making up insurance contracts or deliberately exaggerating insured events that have occurred to make false indemnities and defrauding the company of insurance benefits or seeking other illegitimate gains; (7) misappropriating, withholding or pilfering premiums; (8) entrusting agencies that have not obtained lawful qualifications to engage in activities of insurance sales; (9) seeking illegitimate gains for other organisations or individuals by taking advantage of the insurance business; (10) using insurance agencies, insurance brokers or insurance adjusting firms to engage in illegal activities such as siphoning off commission by making up insurance agency business or fabricating surrender of policies; (11) damaging the commercial reputation of its rivals by fabricating and disseminating false facts or other acts of unfair competition, disturbing the order of the insurance market by other acts of unfair competition; (12) divulging the business secrets of the proposers or the insured that they become known in their business activities; (13) other acts violating laws, administrative regulations and provisions of the insurance supervision and regulation authority of the State Council. 92

The Insurance Law, art. 161. New Mexico’s Insurance Code, S. 59A-16-30. 94 The Insurance Law, art. 117. 93

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proposers, provides intermediary services to facilitate insurance contracting between proposers and insurers and receives commissions according to law.95 In addition to the Insurance Law, the CIRC formulated three major regulations to govern the establishment and business activities of the insurance intermediaries: the CIRC Provisions on the Supervision and Administration of Professional Insurance Agencies (2015 Amendment),96 the CIRC Provisions on the Supervision and Administration of Insurance Brokerage Institutions (2018 Amendment)97 and the CIRC Provisions on the Supervision and Administration of Loss Adjusters (2018 Amendment).98 Insurance agents and brokers play a very important role in insurance transaction. Many insurance contracts are negotiated and concluded through insurance agents and brokers. Therefore, the concept of transparency applies to the agency business as well. The conduct of insurance agents or brokers is governed by the Insurance Law and CIRC regulations. As far as transparency is concerned, according to article 131 of the Insurance Law, the insurance agents or brokers are prohibited from conducting any of the following acts in the course of conducting business, inter alia; (1) cheating the insurers, the proposers, the insureds or the beneficiaries; (2) concealing from the proposers material information relevant to the insurance contracts; (3) preventing the proposers from fulfilling their obligation of making truthful disclosure provided under this Law or inducing them not to fulfil such an obligation; (4) . . . It is obvious that the requirement of transparency is also imposed on insurance agents and brokers. The CIRC set up similar rules governing activities of the agents

95

The Insurance Law, art. 118. The CIRC Provisions on the Supervision and Administration of Full-Time Insurance Agencies came into force on 1 October 2009, upon which the CIRC Provisions on the Administration of Insurance Agencies (Order No. 14 [2004], CIRC) issued by the CIRC on 1 December 2004, were repealed. The Provisions were amended twice on 27 April 2013 and on 19 October 2015 (http:// bxjg.circ.gov.cn/web/site0/tab5168/info4014260.htm, access on 30 June 2018). 97 The CIRC Provisions on the Supervision and Administration of Insurance Brokerage Institutions came into force on 1 October 2009, upon which the CIRC Provisions on the Administration of Insurance Brokerage Institutions (Order No. 15 [2004], CIRC) issued by the CIRC on 15 December 2004, were repealed. The Provisions were amended three times on 27 April 2013, 19 October 2015 and 1 February 2018. 98 The CIRC Provisions on the Supervision and Administration of Loss Adjusters came into force on 1 October 2009, upon which the CIRC Provisions on the Administration of Loss Adjusters (Order No. 3 [2001], CIRC) issued by the CIRC on 16 November 2001, were repealed. The Provisions were amended three times on 29 September 2013, 19 October 2015 and 1 February 2018. According to the CIRC Provisions on Loss Adjusters (art. 2), loss adjusters refer to institutions which specially engage in the assessment, survey, identification, and loss adjustment, among others, of the subject matters of insurance or the insured events as authorized by clients and receive remuneration as agreed on. 96

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and brokers. By virtue of the CIRC Provisions on the Supervision and Administration of Professional Insurance Agencies (2015 Amendment),99 a professional insurance agent and its practitioners may not deceive insurance applicants, the insured, beneficiaries or insurance companies by the following means: (1) Concealing or fabricating any important information relating to the insurance contract; (2) Conducting any misleading sale; (3) Forging or modifying without permission the insurance contract, selling false insurance documents, or providing false certifications to the parties to the insurance contract. (4) Obstructing an insurance applicant from performing or inducing any insurance applicant not to perform the obligation of telling the truth. (5) . . . These provisions can be understood to mean that the doctrine of disclosure and the concept of transparency must also be followed by the insurance agents in carrying out their insurance business.

4 The Requirement of Transparency During the Insurance Period The concept of transparency is also applied during the period of the insurance contract. In order for the insurer to effectively manage the post-contract risk, the Insurance Law requires the insured to notify the insurer where the risk is significantly increased during the period of the contract.100 The insurer will have different remedies for the increase of risk, depending on the degree of increase of risk. The insurer will not be liable if the subsequent change serves to bring the risk outside the scope of the insurance, and it also has the right to terminate the contract or to increase the premium.101 Articles 49 and 52 of the Insurance Law provide rules dealing with matters of increase of risk in property insurance.102 Article 49 concerns the assignment of the subject matter of insurance and the increase of risk caused by the assignment. It is stipulated that ‘Where the insured subject matter is assigned and the level of risk

99

See art. 43 of the CIRC Provisions on the Supervision and Administration of Professorial Insurance Agencies. The CIRC Provisions on the Supervision and Administration of Insurance Brokerage Institutions (2018 Amendment) has similar rules governing insurance brokers, see art. 43. 100 The Insurance Law, art. 52. 101 The Insurance Law, art. 52. 102 According to art. 95 of the Insurance Law, property insurance includes property loss or damage insurance, liability insurance, credit insurance and surety bonds insurance.

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increases substantially as a result, the insurer may increase the premiums in accordance with the contract or rescind the contract within 30 days of receipt of the notice provided in the preceding paragraph. . .’ Article 52 is the main provision on the increase of risk; it provides: ‘Where there is a significant increase of risk of the subject matter of insurance during the term of a contract, the insured shall notify the insurer in a timely manner in accordance with the contract and the insurer shall have the right to demand an increase in the premium or terminate the contract. . .’ A number of questions may arise from this article: what is a ‘significant increase of risk’? How should the phrase ‘in a timely manner’ be defined? How should the duty of notification be performed? What is the legal consequence of the breach of the duty of notification? All these will be considered below.

4.1

Significant Increase of Risk

Both articles 49 and 52 use the phrase ‘significant increase of risk’, but neither of them defines it. On 31 July 2018, the SPC published the Fourth SPC Interpretation on Certain Issues Concerning the Application of the Insurance Law of the People’s Republic of China.103 Article 4(2) of SPC Interpretation IV explains the meaning of the phrase ‘not a significant increase of risk’, which states: ‘. . .where the degree of risk of the subject matter insured increases, but the increased risk falls within the scope of the coverage of the insurance contract which was contemplated or should be contemplated by the insurer when the insurance contract was concluded, it does not constitute a significant increase of the degree of risk’. On the other hand, where the increased risk exceeds the scope of the coverage of the insurance contract foreseen or should be foreseen by the insurer when the insurance contract was concluded, it should constitute a significant increase of the degree of risk. Accordingly, not all kinds of increase of risk are significant, only those that would have caused the insurer to raise the premium or to terminate the contract.104 In addition, article 4 of SPC Interpretation IV lists certain situations in which the risk may be deemed significantly increased. It states that ‘When the people’s court determines whether the “degree of the insurance risk” referred to in art. 49 and art.

103

The SPC Interpretation IV on Certain Issues Concerning the Application of the Insurance Law of the People’s Republic of China was published on 31 July 2018 and came into force on 1 September 2018 (http://www.court.gov.cn/fabu-xiangqing-110571.html, access on 27 August 2018). 104 The author has a similar view with the SPC’s approach on the definition of “significant increase of risk”. See Jing (2013), p. 842 at p. 847, it was suggested that “With reference to the test of materiality for pre-contract information, the test of material increase of risk during the insurance period should be established as such: the risk is increased to such an extent that the insurer would not have accepted the insurance, or would have accepted the insurance at a higher rate of premium, if he had known about the increase of risk at the time the contract was entered into.”

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52 of the Insurance Law constitutes a significant increase, the following factors may be comprehensively considered: (i) (ii) (iii) (iv) (v) (vi) (vii)

Changes in the use of the subject-matter insured; Changes in the scope of the use of the subject-matter insured; Changes in the environment in which the subject matter of insurance is located; Changes in the subject matter of insurance due to refiting or any other reason; Changes in the owner, user or manager of the subject-matter insured; The duration in which the increase of risk lasts; Other factors that may lead to the significant increase of degree of risk.

To determine whether or not an increase of risk is a significant one, the above factors may be considered.105 For example, in the above situation (i), the insured changes the use of the insured car from private use to business use or a dwelling house is converted into a warehouse storing inflammable materials. This change can be regarded as a substantial increase of the risk, in which case the insured is required to notify the insurer of such change.

4.2

Remedies for the Significant Increase of Risk

By the Insurance Law, where there is a significant increase of risk, the insurer has the right either to raise the premium or to terminate the contract.106 If the insurer terminates the contract, he shall return the premium to the insured after deducting the amount between the time of commencement and the time of the termination of the contract.107 If the insurer accepts the increase of risk and raises the premium, the increased risk shall be covered under the policy.108 The increase of premium should be reasonable; if it is unreasonable, the insured is entitled to reject it and terminate the contract.109 Article 52 of the Insurance Law does not specify a period of time within which the insurer must make a decision to terminate the contract or increase the premium. But the time limit is provided in article 49 of the Insurance Law in the event of an

105

For more on determining the significant increase of risk during the currency of the policy, see Jing (2013), p. 842. 106 The Insurance Law, art. 52. 107 The Insurance Law, art. 52. 108 This is also the approach of German law provided in s. 25(1) of the German Insurance Contract Act 2008. 109 That is the approach of German Insurance Act 2008, s. 25(2) states: “If the insurance premium increases by more than 10 per cent in consequence of an aggravation of the risk insured or the insurer excludes insurance cover for the aggravated risk, the policyholder may terminate the contract without prior notice within one month of receipt of the communication from the insurer. The insurer must inform the policyholder of this right in this communication.”

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increase of risk upon the assignment of the subject matter of insurance. Where the subject matter of insurance is assigned, the insured or the assignee is required to notify the insurer of such assignment in a timely manner. If the degree of the risk of the subject matter of insurance materially increases upon assignment, the insurer should have the right to demand an increase of the premium or terminate the contract within 30 days of receiving the notification of such assignment.110 It is suggested that article 52 should require the insurer to make a decision within 30 days after receiving the notification of the increase of risk. The right of termination or the right to increase the premium shall lapse if it is not exercised within 30 days.

4.3

Way of Performing the Duty of Notification of Increase of Risk

There are lack of rules under the Insurance Law that would guide the insured in performing his duty of notification in the case of an increase of risk. The rules governing the insured’s pre-contractual duty of disclosure may be referred to here in order to find an appropriate way for the insured to perform his post-contract duty of notification of an increase of risk. For the pre-contract duty of disclosure, the Insurance Law adopts the method of inquiring disclosure (in contrast to voluntary disclosure).111 The proposer is only obliged to disclose information asked in the questions in the proposal form, and the insurer may not avoid a policy on the ground that the proposer did not disclose something material that is beyond the questions raised in the proposal form.112 With reference to the method of performing the pre-contract duty of disclosure, it may be suggested that in order to require the insured to notify the insurer of any material increase of risk, the insurer should provide a list of facts or circumstances in the policy that are likely to increase the risk of loss; the insured should only be obliged to notify the insurer of those increase of risk that fall into the list. For example, a notification clause in a private motor insurance policy should state: ‘you must give us a notice if any of the followings happens during the insurance period: (1) you modify your car; (2) you add another driver to your policy or amend the driving restriction; (3) you change the use of your car (e.g. change from private to business use); (4) you change the address where you normally keep your car’.113 This kind of clause should be written in bold or in a different colour so as to bring them to the insured’s attention.

110

The Insurance Law, art. 49. The Insurance Law, art. 16(1). The proposer performs his duty of disclosure by truthfully answering the questions raised by the insurer. 112 Jing (2006), p. 688. 113 This clause is modified from a clause in the Direct-line Car Insurance Policy. 111

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By virtue of article 52 of the Insurance Law, the insured is required to notify the insurer of the material increase of risk ‘in a timely manner’. The phrase ‘in a timely manner’ may give rise to a debate if there is no period provided within which notification must be served by the insured. It is submitted that a time limit (say, 10 days) should be set up.

4.4

Consequence for Breach of the Duty of Notification by the Insured

According to article 52(2) of the Insurance Law, ‘. . . . Where the insured fails to perform the duty of notification, the insurer shall not be liable for indemnity in the case of the occurrence of an insured event which is caused by the significant increase in risk’. The burden of proof is on the insurer, who needs to show evidence that the loss is caused by the significant increase of risk. If the loss is not caused by the increase of risk, the insurer is still liable.114 A causal connection needs to be established between the loss and the increased risk for the insurer to refuse the claim. It is submitted that two major issues may arise from article 52 and should be discussed here. Firstly, sometimes it is difficult to show a causal connection between the increase of risk and the loss. For instance, in Plastic Product Manufacturer Co v Insurance Co,115 the insured effected a comprehensive property policy in 2006. In the policy there was a notification clause.116 A fire occurred in a workshop and caused a loss. The workshop was a warehouse when the insurance contract was concluded; part of the warehouse was later changed to a workshop, but the insured did not notify the insurer of the change of use. Specialists from the fire brigade investigated the cause of the fire and found that there was a sign of burn in an electric wire in the workshop, but the cause of the fire was uncertain. The insurer denied liability, arguing that the insured changed the use of the warehouse, which resulted in an increase of risk, but failed to notify the insurer. The insured argued that the insurer did not explain the clause to him, so it should not be valid.117 It was difficult to prove that there was an obvious causal connection between the loss and the increase of risk. The court held

114

Some other jurisdictions have adopted this approach, such as the Principles of European Insurance Contract Law (art. 4:202); German Insurance Contract Act 2008 (s 26). 115 Xie (2012), p. 143. 116 Which stated “In the period of insurance coverage, the insured should notify the insurer in writing of any change of name or address of the insured, the change of use of the subject matter, the increase of risk or assignment of the subject matter. The insured should get approval of the insurer prior to any such change. The insurer is entitled to refuse payment if the insured fails to perform such duty”. 117 The Insurance Law (art. 17) requires the insurer to explain policy terms, particularly the exclusion clauses to the insured before the contract is entered into. Otherwise, the exclusion terms will be ineffective.

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that (1) the insured changed the use of the warehouse; the insured risk for the use as a workshop was higher than as a warehouse. The insured breached the contract by failing to notify the insurer of the change of use. (2) However, the insurer was not allowed to discharge its liability for the loss because he was unable to show that the loss was caused by the increase of risk. (3) Both parties have faults, so they should share the loss.118 The insurer was responsible for 70% of the loss and the insured for 30% in accordance with the principle of good faith and fair dealing. Another issue is the insured’s fault relating to the notification of the increase of risk. It is unclear whether the insured is required to notify the insurer of the increase of risk caused by himself and that which was caused by a third party or by other reasons but with the insured being aware of the increase of risk. By virtue of article 52 of the Insurance Law, it is irrelevant whether or not the insured’s failure to give notification of the increase of risk is intentional or whether he was negligent or innocent. The consequence for the breach is the same; namely, the insurer can refuse the claim if a causal connection can be established between the increase of risk and the loss. It is obviously unfair and unjustifiable to treat innocent non-notification in the same way as intentional non-notification. By contrast, the consequences for breach of the pre-contract duty of disclosure depend on the insured’s fault,119 in a ccordance with article 16 of the Insurance Law: for intentional non-disclosure, the insurer is free from liabilities for any loss that occurred prior to the termination of the contract, whether or not the loss is caused by the undisclosed facts120; for grossly negligent non-disclosure, the insurer is liable for pre-termination losses unless the insured’s non-disclosure ‘has a material bearing on the occurrence of an insured event’.121 As to the insurer’s right to rescind the contract because of pre-contract non-disclosure, the position of the current law is that the insurer shall have the right to rescind the contract where the non-disclosure is intentional or by gross negligence and the facts undisclosed sufficiently influence the insurer’s decision on whether it will accept the insurance or raise the premium rate.122 It is implied that for an innocent or mere negligent non-disclosure, the insurer is not entitled to rescind the contract even if the undisclosed fact is material. Upon comparison of the consequences for breach of the pre-contract duty of disclosure with those for breach of the post-contract duty of notification of increase of risk, a suggestion could be made that an innocent or mere negligent post-contract non-notification be treated differently from intentional or grossly negligent non-notification.

118

The Chinese Contract Law 1999, art. 42. For more on insured’s pre-contractual duty of disclosure and remedies for breach of such duty, see Jing (2017b), pp. 327–348. 120 The Insurance Law, art. 16(4). 121 The Insurance Law, art. 16(5). 122 The Insurance Law, art. 16(2). 119

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It is worthy to note that German law provides a solution to this issue. Under German Insurance Contract Act, the insured may not aggravate the risk insured or permit its aggravation by a third party without the consent of the insurer during the existence of the policy.123 Where the insured realises that he has breached his duty, this fact must be disclosed to the insurer without delay, as must any unintentional breach of which he becomes aware.124 What an insurer may respond to a breach of the duty not to aggravate the risk or to notify the insurer of such aggravation depends on the insured’s degree of fault. The insurer is not liable for losses occurring after an intentional breach of the duty by the insured. Where the insured has been grossly negligent, the insurer may reduce the amount to be paid on a claim commensurate to the insured’s fault. However, in either case, there must be a causal connection between the aggravation of risk and the loss. In other words, the insurer is still liable if the aggravation had not caused or contributed to the loss claimed.125 It is recommended that article 52 of the Insurance Law be amended to the effect that the consequence for the insured’s non-performance of the post-contract duty of notification should depend on the degree of the insured’s fault: (1) For an intentional126 breach of the duty by the insured, the insurer should not be liable for any loss occurring after the increase of risk. (2) For a grossly negligent127 breach of the duty by the insured: (a) the insurer should not be liable for any loss occurring after the increase of risk, where the insurer can show a causal connection between the increase of risk and the loss; (b) where there is no causal connection between the increase of risk and the loss, (i) where the insurer would have increased premium had he been notified by the insured of the material increase of risk, the insurer should be allowed to reduce its liability by the amount that fairly represents the extent to which his interests were prejudiced by the insured’s non-notification. In other words, the insurer may reduce the amount to be paid proportionately to the ratio of premium he received and the premium he should have received128; 123

The German Insurance Contract Act 2008, s. 23(1). The German Insurance Contract Act 2008, s. 23(2). 125 The German Insurance Contract Act 2008, s. 26. The author also compared some other jurisdictions’ approaches. See Jing (2013), p. 842. 126 The non-notification is intentional if the insured knew that the risk insured against has been materially increased or the change of facts or circumstances has materially increased the risk, but he did not notify the insurer. 127 The non-notification is grossly negligent if the insured did not care whether or not the change of facts or circumstances has materially increased the risk. 128 For example, in a hypothetical case, Mark paid £200 premium for the insured amount of £4000 of his car for private use. Later he changed the use of his car for business purpose, but did not notify the insurer. The insurer would have increased premium for extra £20 had he been notified by Mark. The car was damaged in a road accident while Mark took passengers for money, the insurer can then 124

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(ii) where the insurer would have terminated the contract had he been notified by the insured of the material increase of risk, the insurer should not be liable for any loss occurring after the increase of risk. (3) For an innocent129 or mere negligent130 breach of the duty of notification by the insured, the insurer should be liable for any loss, no matter whether or not the loss is caused by the increase of risk.

5 Transparency at the Claim Stage Transparency at claim stage is also very important. The Insurance Law imposes duties of exchange information on both the insured and the insurer for making claims and settling claims.131 In this section, the rules governing the insured’s claim and the rules governing the insurer’s settlement of the claim are discussed.

5.1

The Requirement of Transparency When Making a Claim by the Insured

Where the insured event occurs, the insured is entitled to make a claim against the insurer under the insurance policy. He needs to follow the procedure and the requirements provided by the Insurance Law and by the insurance contract. Two main duties are imposed on the insured when he makes a claim, i.e. the duty of notifying the insurer of the happening of an insured event and the duty of furnishing relevant evidence and information or the documents required.

refuse Mark’s claim for the loss because there is a causal connection between the loss and the increase of risk. If the car was stolen at night while it was parked in front of his garage, the insurer should be liable for the loss, as no causal connection can be established between the loss and the increase of risk. In this situation, the insurer received £200 premium and paid £4000 for the loss. Had Mark performed his duty of notification, the insurer would have received £220 premium and paid £4000 for the loss. By the rule recommended, the insurer should be allowed to reduce its liability by the amount that fairly represents the extent to which his interests were prejudiced. Instead of paying Mark £4000 for the loss, the insurer should be liable to pay £3636 (£4000 × £200 ÷ £220 ¼ £3636) for the loss which is proportionate to the ratio of the premium he received (£200) and that he should have received (£220). 129 The non-notification is innocent if the insured did not know honestly that the risk insured against has been materially increased or the change of facts or circumstances has materially increased the risk. 130 The non-notification is mere negligent if it is not intentional, grossly negligent or innocent. 131 For detailed discussion, see Jing (2017a), Chapter 14, The Making of a Claim.

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Duty of Notification of the Occurrence of the Insured Event

The insured is required by article 21 of the Insurance Law to give notice of the occurrence of the insured event to the insurer in a timely manner. Upon receiving the notification, the insurer may be placed in a position where it could make such measures as it may deem appropriate and necessary to investigate the loss before the evidence becomes stale or disappears. Furthermore, once the insurer is informed of the occurrence of the insured event, it may take, or instruct the insured to take, reasonable steps to mitigate the loss and protect its interests. Where notice is not given in a timely manner either intentionally or due to gross negligence and as a result the nature, the cause and the extent of the loss of the insured event are difficult to be ascertained, the insurer shall not be liable for giving indemnity or paying insurance benefits in respect of the portion that cannot be ascertained. The duty of notification can be excepted if the insurer has known in time or should have known in time the occurrence of the insured event through other channels.132

5.1.2

The Duty to Provide Evidence and Information Relating to the Claim

According to article 22(1) of the Insurance Law, ‘After the occurrence of the insured event, the proposer, the insured or the beneficiary, in making claims to the insurer for indemnity payments or insurance benefits, shall provide the insurer with evidence and information which is relevant in ascertaining the nature, cause and extent of loss of the insured event, and which he is able to provide’. All relevant evidence and information relating to the claim are necessary for the insurer in ascertaining the cause and the extent of the loss. The evidence and information to be furnished should be those that the insured is able to furnish, that is, those within his knowledge or within his ability to obtain in the normal process of handling the matters upon the happening of an insured event. To make a claim, the insured needs to complete a claim form provided by the insurer. The details of information asked for by the insurer in the form vary according to the nature and type of the insurance. When submitting the claim form, the insured must at the same time submit the relevant evidence and information in relation to the claim. Insurance policies usually contain a list of the documents to be submitted for making a claim.133

132

The Insurance Law, art. 21. For example, in the Household Property Insurance Policy of the Ping An Insurance Company of China, clause 23 lists the documents to be submitted when making a claim for insurance payment, including (1) the original copy of the insurance policy; (2) the claim form completed by the insured or his agent; (3) the list of the items of property which are lost or damaged, and the list of costs incurred to the insured in taking steps to mitigate the loss; (4) invoice or receipts (or other evidence) to prove the loss of items of property; (5) other relevant evidence and information for ascertaining the nature, cause and extent of the losses. See the website of Ping An Insurance Company (http:// insurance.pingan.com/baoxian/jiatingcaichanbaoxiantiaokuan.shtml, accessed in June 2018). 133

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The Consequence of Non-compliance of the Duties by the Insured

The effect of the insured’s failure to give notice to the insurer of the occurrence of the insured event in a timely manner is, as provided in article 21 of the Insurance Law, that the insurer shall not be liable for the portion of the loss that cannot be ascertained. However, article 22 of the Insurance Law does not specify the consequences of the insured’s failure to provide the insurer with evidence and information relevant for ascertaining the nature, cause and extent of the loss. Some insurance policies contain a clause to the effect that the insurer may rescind the contract or refuse to pay the insurance money if the insured fails to provide evidence and information relevant to the claim in the manner specified in the contract. It is suggested, to be fair to the insured, that the consequence of the insured’s failure to provide the insurer with relevant evidence and documents required by article 22 should be similar to that of article 21; that is, the insurer should not be liable for the portion of the loss that cannot be ascertained due to the insured’s failure to furnish the relevant documents in respect of the claim. Meanwhile, the insurer should be liable for the portion of the loss that can be ascertained by the evidence and documents available to the insurer.

5.2

The Insurer’s Obligation to Pay Valid Claims in a Timely Manner

Once the insured has submitted a claim, together with relevant evidence and documents, to the insurer, the insurer must then deal with the claim in the manner as required by the Insurance Law and the insurance contract.134 The Insurance Law requires the insurer to perform this obligation in a timely manner. The law sets out time limits for assessing a claim,135 for rejecting the claim,136 for paying the claim137 and for making a preliminary payment.138

5.2.1

Making a Decision Within 30 Days

The Insurance Law (art. 23(1)) requires the insurer, after receipt of a claim, to determine the matter in a timely manner; if the claim is complicated, the insurer is

134

For detailed discussion, see see Jing (2017a), Chapter 15, Settlement of Claims. The Insurance Law, art. 23. 136 The Insurance Law, art. 24. 137 The Insurance Law, art. 23. 138 The Insurance Law. art. 25. 135

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required to make a determination within 30 days139 unless otherwise agreed upon in the contract. By implication, the insurer must make a decision in less than 30 days for simple claims. The insurer shall inform the insured or the beneficiary of the result of the determination; where the claim is covered, the insurer must pay indemnity or insurance benefits within 10 days after reaching an agreement on the amount of indemnity payment or insurance benefits with the insured or the beneficiary. Where there are provisions in the insurance contract as to the period within which indemnity or the payment of the insurance benefits should be effected, the insurer shall fulfil its obligation accordingly. If the insurer needs further information or evidence for assessing the claim of the loss, the insurer should notify the insured, in one comprehensive list, of all the additional documents and evidence it needs to assess a claim, and the law does not allow the insurer to request information on a piecemeal basis.140 The insured should obtain such further information or evidence according to the insurer’s requirement.

5.2.2

Making a Preliminary Payment Within 60 Days

If the insurer cannot make a decision within 30 days or if the insurer needs more information and evidence to make the decision and the insured is taking a long time to collect these further information or evidence, the Insurance Law (art. 25) requires the insurer to make a preliminary payment on the basis of evidence and information available to him within 60 days of the receipt of the claim and the relevant evidence, and it shall pay the difference accordingly after receiving further information based on which the final amount of insurance payment is determined.141

5.2.3

The Rejection Notice Must Be Given Within 3 Days

If the loss is not covered under the policy, the insurer is obliged to send a rejection notice to the insured within 3 days after the determination of the claim, specifying

139

As to the date when the 30-day period should start to run, the Insurance Law is silent. Article 15 (1) of the SPC Interpretation II provides “the 30-day period for the assessment of a claim as stipulated in art. 23 of the Insurance Law starts to run from the date on which the insurer has for the first time received the claim and the relevant evidence and documents from the proposer, the insured, or the beneficiary”. 140 Article 22(2) of the Insurance Law provides “Where the insurer, based on the provisions of the insurance contract, considers the relevant evidence or information supplied by the insured incomplete, the insurer shall, in a timely manner, advise the proposer, the insured or the beneficiary, once and for all, to provide additional evidence or information.” 141 The PEICL also requires an insurer to make preliminary payment. Art. 6:104 (2) provides: “Even if the total value of a claim cannot yet be quantified but the claimant is entitled to at least a part of it, this part shall be paid or provided without undue delay.”

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reasons for the rejection.142 If the insurer does not send a rejection notice to the insured in 3 days, the insurer will lose his defense to the claim and shall be deemed to have accepted the liability for the loss. All these rules reflect the concept of transparency, which requires the insurer to make a decision for payment or reject a claim in a timely manner and inform the insured or the beneficiary of its determination in due course. The insured must provide relevant documents to assist the insurer to assess the loss.

5.2.4

Compensatory Damages for the Insurer’s Late Payment of Valid Claims

As discussed above, articles 23(1), 24 and 25 of the Insurance Law set up certain time limits for the insurer to meet when performing his duties for the payment of the insurance money.143 By virtue of article 23(2), if an insurer fails to handle claims or pay valid claims within the time limits, it breaches these statutory duties and is thus obligated to pay compensatory damages resulting from its late payment or unreasonable rejection of valid claims.144 In judicial practice, courts usually award two types of damages to the insured: loss of profit due to business interruption (consequential loss) and loss of interest. In People’s Insurance Company of China, Yaoping Branch v Chaozhou City Huafeng Petroleum Product Storing Company,145 the delayed payment of insurance proceeds resulted in the delay in rebuilding the dock and in repairing the storing facilities for petroleum products and, consequently, the loss of profit because of reduced storing capacity. The court recognised that the consequential loss as a result of the reduced storing capability should be recoverable but turned down the insured’s claim for the loss for lack of evidence.146 As to the loss of interest resulting from the insurer’s late payment of insurance money, in the absence of rules on this point in the Insurance Law, relevant provisions of the Chinese Contract Law can be referred to. By virtue of article 207 of the Chinese Contract Law, if a party owes an obligation to pay money, its delay of payment entitles the injured party to claim for damages of loss of interest in addition to the payment of the money.

142

The Insurance Law, art. 24. Article 23(1) of the Insurance Law requires the insurer to make decision for payment with 30 days and make payment within 10 days once decision is made; art. 24 requires insurer to give rejection notice to the insured if the loss is not covered; and art. 25 requires the insurer to make a preliminary payment within 60 days where the payment agreement has not been reached by the parties. 144 For more, see Jing (2015), pp. 37–67. 145 Guangdong Province High People’s Court, Civil Judgement (2004) No. 22. (http://www.110. com/panli_54667.html, accessed on 12 July 2018). 146 The court should at least award interest to the insured for the late payment of the amount of insurance proceeds. 143

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6 Conclusion The requirement of transparency goes through from the beginning to the end of an insurance contract. Perhaps the most important requirement of transparency is the pre-contract exchange of information between the insured and the insurer. Under the Chinese Insurance Law, a unique legal requirement to make the insurance policy transparent to the proposer is the imposition on the insurer of a pre-contract duty to clearly explain the terms of the contract and the exclusion clauses in the contract to the proposer147 and the duty not to misrepresent information about the contract so as to avoid misleading the proposer to purchase an unsuitable insurance policy.148 This is particularly important and necessary for the purpose of protecting the insurance consumers, who are usually unable to fully understand the complex and complicated terms of the contract without assistance from the insurers or insurance intermediaries. On the other hand, the insured must make the information about the risk to be insured transparent to the insurer prior to the conclusion of the contract so as to enable the insurer to make an informed decision on whether to accept the risk and, if so, on what terms.149 Although the Chinese Insurance Law has weakness and gaps in relation to the insured’s pre-contract duty of disclosure (art. 16) and the insurer’s pre-contract duty of explaining the terms of the contract (art. 17), the rules of the law meet, to a large extent, the requirement of transparency. In other words, implementation of the rules can more or less achieve the goal of transparency of an insurance contract. There seems no doubt that transparency is absolutely necessary in insurance transactions; however, the extent of the transparency is the difficult issue to address and must be balanced with the needs and costs of making an insurance contract transparent.

References Birds J, Lynch B, Milnes S (2012) Macgillivray on insurance law, 12th edn. Sweet & Maxwell, para. 17-023 Clarke M (2009) The law of insurance contracts, 6th edn. Informa, para. 19.1A Han WH (2013) Judicial Interpretations on Chinese Insurance Act 2009 from its highest court. J BILA 126:189 Jing Z (2006) Insured duty of disclosure and test of materiality in marine and non-marine insurance laws in China. J Bus Law, 681 and 688 Jing Z (2013) The insured’s post-contract duty of notification of increase of risk: a comparative perspective. J Bus Law, 842 and 847 Jing Z (2015) The insurer’s primary obligation to pay valid claims in a timely manner. J Bus Law, 37–67

147

The Insurance Law, art. 17. The Insurance Law, art. 116. 149 The Insurance Law, art. 16. 148

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Jing Z (2017a) Chinese insurance contracts: law and practice, 1st edn. Informa Law from Routledge, p 291 Jing Z (2017b) Remedies for breach of the pre-contract duty of disclosure in Chinese insurance law. Connecticut Insur Law J 22(2):327–348 Jing Z, Jiang TY (2016) The latest development of the insurance law in life insurance in China. J BILA 129:76–105 Jing Z, Zhong M (2016) Incontestability provisions in insurance law and policies. J Bus Law, 253–288 Liu ZY (2012) Life insurance law and practice. Law Press China, p 163 Merkin R (2016) Colinvaux’s law of insurance, 11th edn. Sweet & Maxwell, para 7-073 Pynt G (2015) Australian insurance law: a first reference, 3rd edn. LexisNexis Butterworths, para. 8.9 Xi XM (2010) Understanding and application of the provisions in relation to insurance contracts of the insurance law of the People’s Republic of China. China Legal Publishing House, p 107 Xi XM (2014) Understanding and application of the Supreme People’s Court second interpretation on certain questions concerning the application of the insurance law of the Peoples’ Republic of China. The People’s Court Press, China, pp 107, 171 and 276 Xie X (2012) A hundred insurance cases. Law Press, p 143

Transparency in the Insurance Contract Law of Colombia Rebeca Herrera Díaz

1 Introduction: Definition of Transparency in Insurance Contract Law In general terms, transparency in Insurance Contract Law can be defined as the fulfilment of the duty of good faith, which parties entering into an insurance contract have to comply with.1 The insurance company is a highly regulated party and thus, complinace of this duty has a rigorous set of rules to be applied in terms of the scheme the policy has to have, the content it needs to embrace, the information it has to maintain as publicly available and in its web page, the terms in which this information has to be delivered to the insured and the consequences of non-compliance. In terms of transparency, Law 1328 of 2009 establishes the specific duty of providing true, sufficient and timely information to the insurance services’ consumers. It means that companies must provide consumers this kind of information to allow them to identify their specific duties and rights under the insurance contract, the costs they have to assume and the kind of relationship they have with the insurance company. Accordingly, the insured is a non/regulated party but a protected party, Colombian Insurance Contract Law imposes on him a concrete obligation related to the duty of good faith and thus, behaving transparently: declare sincerely the status and the changes to the risk.

1

Lopez Blanco, Hernán Fabio. Comentarios al Contrato de Seguros. Dupré Editores Bogotá, 4ª Edición 2004. R. Herrera Díaz (*) Rebeca Herrera Abogados SAS, Bogotá, Colombia e-mail: [email protected] © Springer Nature Switzerland AG 2019 P. Marano, K. Noussia (eds.), Transparency in Insurance Contract Law, AIDA Europe Research Series on Insurance Law and Regulation 2, https://doi.org/10.1007/978-3-030-31198-8_14

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Due to the protection that the insured receives under the law, there are specific legal provisions and judicial precedents that reduce the strictness of such obligation. This is because an insurance contract is considered in Colombia as a contract of adherence to general conditions, which we are going to discuss later. According to the above mentioned, the Colombian legal regime on contract law is based on the principle of good faith. In fact, article 1603 of the Colombian Civil Code (CCC), enacted in 1887, provides: Contracts must be executed in good faith, and therefore are binding not only because of what is written in them, but because of all the things that arise precisely from the nature of the obligation, or that by law belong to it. (This is a free translation of article 1603 Colombian Civil Code (CCC).)

On the basis of this provision, the Colombian Commercial Code (C.Com.), which was enacted in 1971, inserted an identical article, 871, which states: Contracts shall be executed and performed in good faith and, consequently, they shall obligate not only on what is expressly agreed upon in them, but also on all that corresponds to their nature, according to the law, custom or natural equity. (This is a free translation of article 871 of the Colombian (C.Com.).)

The C.Com. is more demanding in terms of contractual good faith than the Civil Code provision because C.Com. is a statute of supplementary nature, that is, its provisions are applicable to contractual relations only in the absence of an express provision of the general law. Therefore, the parties to a commercial contract may negotiate against the provisions of the C.Com., except those expressly prohibited. For example, and as we will see afterwards, article 1162 of the C.Com., which is inserted in the chapter about insurance contracts, establishes the list of the articles of such chapter against which the parties to the insurance contract cannot agree. The C.Com. goes further and, in its article 863, provides that good faith in commercial contracts begins from the pre-contractual stage. In case of any breach of the duty of good faith during the pre-contractual stage, the party at fault is required to pay damages. But what exactly is good faith in relation to commercial contracts according to Colombian law? As I can define it in simple words, good faith in commercial contracts is the absence of knowledge of a specific condition or fact of the contract that may deter the counterpart’s interest. For example, when executing a commercial sale of goods contract, the seller acts in good faith when knowing that all the conditions of the sold good fit the buyer’s interest. However, the seller acts in bad faith if it knows that the goods sold have a specific defect that could affect the interest of the buyer but fails to disclose it. Non-disclosure of such defect, even when knowing them, may imply that the seller acted in bad faith, which thus exposes the contract to the possibility of being declared null and void and the seller to pay damages to the buyer.

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Now, let us assume that the buyer knew about the defects of the sold goods but did not say anything to the seller, who had no knowledge of the existence of such defects, and executed the contract anyway. Then the buyer goes to the seller to claim damages and ask for the contract to be declared void. Is this buyer acting in good faith? Maybe not. In this example, we are referring to a free discussion contract, wherein we can easily understand what good faith is about. But what is its relation to insurance contracts? An insurance contract is a complex contract. The insurer, the party that supports the other party’s risk, has no knowledge about the status of the risk; thus, it relies on the information that the insured provides about the risk. The insured, the party that transfers the risk, does not necessarily know about the technical and legal execution of the insurance contract, the application and construction of all its clauses and how exclusions are to be applied to its particular risk. That situation is precisely what economists call the asymmetry of information in insurance contracts.2 And this is why an intermediary is in most cases required. To reduce this asymmetric information, legislation around the world establishes the principle of utmost good faith to insurance contracts. Colombian law does not insert the exact text into the insurance contract chapter of the C.Com., but article 1058 of this Code establishes that in case a party to the contract breaches this principle, the contract can be declared null and void. Supreme3 and constitutional courts have established the principle of utmost good faith in insurance contracts as follows: Having established that the accountable insurance practice, supposes the multiplicity of contracts as a sine qua non condition so that, in the different lines of businesses, the actual loss ratio is close to the expected, it is logical that this accumulation of responsibilities implies the consequence that the insurer is not required to undertake a detailed examination of the constituent elements of all the risks that are to be ensured. In this context, the Commercial Code, although not prohibiting it, refrained from consecrating the risk inspection as an obligation on the insurer, since the insurer can’t be obliged to perform physically impossible tasks, with respect to the criterion that it is not legally right to go against the reality or to make disproportionate demands in relation to his role. As the insurer can’t be required to inspect all the mass of risks contractually assumed, it must be recognized that he contracts his obligations, in most cases, only based on the information provided by the policyholder. This particular situation, consisting of being at the mercy of the counterparty’s declaration and generally contracting, by virtue of its single word, is special and distinct from that given in other contractual types, and gives rise to one of the classic characteristics of the insurance contract: that of being a contract of utmost good faith. To assert that the contract of insurance is a uberrimae bona fidei contractus, means that it is not enough the simple diligence, decorum and honesty, commonly required in all contracts, but requires that these behaviours are manifested with the highest quality, that is, carried to the extreme. The

2

Spindler, Martin. Asymmetric Information in the Insurance Markets: Does this really exist? Insurance and Economics No. 64, July 2011, The Geneva Association.; Bardey, David. Asimetrias de información en los mercados de seguros: teoría y Evidencia. Revista Fasecolda. Pg. 14–18; Chiappori and Salanie (2000), pp. 56–78. 3 Trejos, Silvio Fernando. Exp. 9559. Civil Law Chamber. Colombian Supreme Court 24th October 2005. Bogotá, Colombia.

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need for the insurance contract to be celebrated with this qualified good faith, binds the policyholder and the insurer equally.4

Thus, Colombian courts provide a specific concept on what we should understand as transparency in the insurance contract, in a manner which is linked to the principle of utmost good faith. This is because Colombian courts, seek to differentiate the principles of transparency and utmost good faith in the insurance contract, from the specific regulations applicable to the insurance company to undertake specific actions to act transparently with the policyholder. This is so because in the pre-contractual stage of the insurance contract, the party holding more information on the risk to be accepted is the policyholder or future insured, however during the life of the contract and in the moment of the contract execution, heavy duties of transparency and information disclosure about the contract have to be complied by the insurance company towards the insured. Accordingly, the purpose of this article is to describe transparency obligation the parties entering into and insurance contract are required to, but making no specific reference to the specific regulation the insurance company has to comply in a daily basis in terms of the detailed information to be disclosed to the policyholder.

2 The Issue of Transparency in Insurance as per the Law 2.1

Brief Description of the Regulation of Insurance Contracts in Terms of Transparency

The Colombian Commercial Code contains a chapter on commercial contracts, which includes a section on insurance contracts. This is worth mentioning because it signifies that Colombia does not have a specific law for insurance (insurance contracts or insurance activities). According to that, general principles on Commercial Contracts are applicable to the insurance contract and general Civil Law provisions are applicable to Commercial Contracts, because, as mentioned before, the C.Com. is a supplementary group of norms that implies that in case of absence of parties’ agreement on a specific point or absence of a specific provision, Civil Code provisions are applicable. According to that, and to avoid an entire explanation of the content of the Colombian Civil Code on contracts, article 1624 of this Code establishes the Contra Preferentum rule of contract construction as the ultimate rule in case none of the main rule for contracts construction can be applied. This rule implies that in case a clause to a contract appears to be ambiguous, it has to be construed against the party who drafted it if the ambiguity comes from a necessary explanation that was to be provided by the drafting party:

4 Aanjo Mejia, Jorge. C- 232 of 1997. Colombian Constitutional Court. 15h of May, 1997. Bogotá, Colombia.

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If none of the foregoing rules of interpretation can be applied, the ambiguous clauses will be interpreted in favour of the debtor. But ambiguous clauses that have been extended or dictated by one of the parties, whether creditor or debtor, will be interpreted against it, provided that the ambiguity arises from the lack of an explanation that should have been given by it. (This is a free translation of article 1624 of the Colombian Civil Code.)

As mentioned above, the C.Com. also has a chapter on contracts, a book on contracts and a title on insurance contracts. The title on insurance contracts is divided into three main chapters.5 These provisions were created in 1970, when the C.Com. was enacted, and then more provisions were inserted into other pieces of laws, such as the Financial System Statute, Law-Decree 663 of 1993, the Consumer Protection Law (Law 1480 of 2011) and the Financial Reform Law 1328 of 2009. Apart from that, Colombian Insurance Contract Law does not insert a very detailed description of the different lines of business that insurance companies can offer in the Colombian territory, because concrete regulatory issues are inserted in the General Instructions issued by the Financial Superintendence of Colombia, when referring to the requirements to obtain authorization to undertake specific insurance lines of business and the regime of deposit of policies and tariffs. General principles of non-marine insurance, which are applicable to all kind of non-marine insurance contracts executed under Colombian law, include provisions requesting insurers to the deliver the policyholder, in its original, the document containing the insurance contract (the Policy), within the 15 days following the date of execution of the contract. Apart from that, the Commercial Code includes clear provisions on the minimum content of this document.6

5



General principles on non-marine insurance. Principles on non-life insurance: This Chapter is divided in the following sections: – – – – –



Common principles to non-life insurance Fire insurance. Transportation insurance. Liability insurance. Reinsurance.

Principles on Life Insurance: This Chapter is divided in the following sections: – Common principles to life insurance. – Life insurance.

6 ARTICLE 1046. PROOF OF THE INSURANCE CONTRACT - POLICY. The insurance contract will be probed in writing or by confession. For exclusive evidence purposes, the insurer is obliged to deliver in its original, to the policyholder, within fifteen days following the date of its conclusion the document containing the insurance contract, which is called a policy, which must be written in Spanish and signed by the insurer. The Financial Superintendence of Colombia will indicate the branches and the type of contracts that are written in a foreign language.

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The protection enacted in the Commercial Code to such party, implies that both, the policyholder and the insured have to comply with minimum duties concerning declaration of the state of the risk, to be entitled to such protection. If the policyholder makes a false or incomplete declaration of the state of the risk, incurs in reticence or inaccuracy of facts or circumstances, which lead to the relative nullity of the insurance contract.7 This means that the insurer will have the right to either PARAGRAPH. The insurer is also obliged to issue, on demand and at the expense of the policyholder, the insured or the beneficiary, duplicates or copies of the policy. ARTICLE 1047. CONDITIONS OF THE POLICY. The insurance policy must indicate, in addition to the general conditions of the contract: (1) The name or social denomination of the insurer; (2) The name of the Policy Holder; (3) The names of the insured and the beneficiary or how to identify them, if different from the policyholder; (4) The right in which the policyholder acts; (5) The precise identification of the thing or person with respect to which the insurance is contracted; (6) The duration of the contract, indicating the dates and times of initiation and expiration, or the way of determining one or the other; (7) The sum insured or how to determine it; (8) The premium or the way of calculating it and the form of its payment; (9) The risks that the insurer accepts: (10) The date on which it is extended and the signature of the insurer, and (11) Any other special conditions agreed by the parties. PARAGRAPH. In those cases, in which it is not expressly agreed upon, the conditions of the contract shall be those of the policy or annex that the insurer has deposited at the Financial Superintendence of Colombia for the same line of business, coverage, modality of contract and type of risk. ARTICLE 1048. ADDITIONAL DOCUMENTS THAT ARE PART OF THE POLICY. Are parts of the policy: (1) The insurance application form signed by the policyholder, and (2) The attachments that are issued to add, modify, suspend, renew or withdraw the policy. PARAGRAPH. The policyholder may at any time require that the insurer, at his expense, give him a duly authorized copy of the application form and its annexes, as well as the documents evidencing the risk inspection. 7 ARTICLE 1058. DECLARATION OF THE STATE OF RISK AND SANCTIONS BY INACCURACY OR RETICENCE. The policyholder is obliged to declare truthfully the facts or circumstances that determine the situation of the risk, according to the questionnaire that is proposed by the insurer. The reticence or inaccuracy of facts or circumstances, which if known by the insurer have caused the contract withdrawal, or induced to stipulate more onerous conditions, result in the relative nullity of the insurance contract. If the declaration is not made subject to a specific questionnaire, the reticence or inaccuracy produces the same effect if the policyholder has covered by fault, facts or circumstances that imply an objective aggravation of the state of the risk. If the inaccuracy or reticence comes from the faultless error of the policyholder, the contract will not be void, but the insurer will only be obliged, in case of loss, to pay a percentage of the insured benefit equivalent to the rate or premium stipulated in the Contract that represents the rate or premium appropriate to the true state of the risk, except as provided in article 1160.

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terminate the insurance contract, holding the premium as sanction in case of bad faith on the part of the policyholder, or maintain the contract, increasing the value of the premium or changing the conditions thereof.8 During the life of the contract, according to article 1060 of the Commercial Code, the insured has the duty to maintain the state of the risk. This that means he has the duty to inform the insurer any unforeseeable fact or circumstance that arises after the execution of the contract. This is why the duty of good faith on the part of the insured exists during the entire duration of the contract, starting from the duty to give a sincere and complete declaration of the risk during the pre-contractual stage and continues with the concrete duty of maintaining the information about the state of the risk during the performance of the contract. In the latter, the insured has 10 days from knowledge of the arising situation to inform the insurer. Accordingly, non-compliance of this duty gives the insurer the right to withdraw the contract, to change its conditions and, in case of bad faith on the part of the insured, to declare the contract void, keeping the premium as a sanction. The duty of maintaining the information about the state of the risk is linked to the duty to inform the insurer about the existence of other insurance policies covering the same risk. Article 1076 of the Commercial Code provides that if the insured fails to comply with this duty, it will lose the right to the insurance benefit. Finally, keeping this duty, when the loss arises, the insured and the beneficiary of the indemnity have to right to prove the occurrence of the loss and its amount, without fraud. This is contained in article 1077 of the Commercial Code, which states that in case of fraud, the insured and the beneficiary will lose any right to receive indemnity. As it is clearly seen, the basic governing rules of an insurance contract provide a large set of principles imposing the heavy burden on both parties of the insurance contract of providing transparency. Colombian courts have strengthened the principle of good faith and transparency, giving a softer construction to the rules imposing sanctions in case of inaccurate or reticent information, in favour, of course, of the policy holder and the insured. As we are going to analyse in the last section of this article, in some cases, courts have ruled that if the insurer does not make a specific question in the proposal form, then inaccuracy or reticence of these specific facts, may not cause the application of the sanction established in articles 1058 and 1059. In relation to the sanctions and principles established in the C.Com, article 184 of the Financial System Statute establishes the conditions that insurance policies must comply with, which will be analysed in the second volume of this article as part of the topic on transparency in insurance activities and further regulatory issues.

The penalties provided for in this article do not apply if the insurer, prior to the conclusion of the contract, has known or ought to have known the facts or circumstances that are related to the defects of the declaration, or if, after the conclusion of the contract, expressly or tacitly accepts them. 8 This is provided in article 1059 of the Commercial Code.

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Judicial decisions have broadened the scope of the principle of transparency in insurance contracts through the application of the theory of Adhesive Contracts, in addition to the series of laws referring directly to transparency. This theory implies that Parties entering into an insurance contract do not bear the same powers and thus, one of the parties lacks bargaining power towards the other Party. The former is the policy holder/insured, who is seen as the vulnerable party in the insurance contract. All of this means that the insurance contract is an adhesion contract as opposed to a traditional agreement in which the parties bear the same powers, specifically, in terms of their bargaining power. The theory of the Adhesion Contracts comes from a French natural theory created during the eighteenth and nineteenth centuries. In Colombia, before the Consumer Protection Law was enacted, courts applied the theory of ‘adhesion contract’, applying article 871 of the C.Com, mentioned above. So in absence of a specific rule on ‘adhesion contracts’, the Colombian Supreme Court states: What the judge can do against an abusive clause in such contracts is to resolve the case by applying the general theory, which invites to observe the prohibition of inserting such clauses, according to a restriction implicitly derived from the aforementioned Article 871 of the Commercial Code, and to derive the corresponding legal consequence, which cannot be other than to sanction with invalidity the clause of the contract transgressing the legal mandate, if this becomes necessary to maintain the balance and therefore the contractual justice between the parties.9

The theory of ‘adhesion contracts’ has been applied to insurance contracts since 1936. In a decision adopted in December of 1936 by the Colombian Supreme Court, Magistrate Eduardo Zuleta decided: The insurance contract is one of those that Saleilles called adhesion contracts and other authors, perhaps with more awareness, contracts by adhesion that are characterized by the following: (a) in them the offer aimed at a specific person, has a general and permanent character and is presented frequently printed, in the form of a countertype, to be accepted or rejected; (b) the supply generally comes from a natural or legal person who holds a ‘de facto’ or a ‘de iure’ monopoly or, at least, a great economic power, either by reason of his own forces or by his union with other enterprises with similar features; (c) these types of contracts consist of numerous difficult to read clauses, carefully drafted in the interest of the person making the offer and its scope cannot be, in most cases, duly appreciated by the adherent; (d) unlike what happens with common contracts in which clauses and conditions are discussed, bargained and measured freely by both parties, adhesion contracts excludes any discussion between the parties, against the disposals of the contracts autonomy principle, since one of them elaborates, to formulate the offer, a regulation or statute and the other is limited to the conditions of this if it needs that service that the contractor is able to provide.

9

This is a free translation of a section of Decision No. 2001-01489, of the 14th of December 2011, in which the Colombian Supreme Court explained what happened while the Consumer Protection Law entered into force.

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This theory has been widely applied by the Supreme Court and even by the Constitutional Court in several judgements since 1936. Applying this thoery to current legal trends, which seek to enact financial and insurance consumer rights, lead regulatory authorities in the financial and insurance markets to embrace specific rules to the insurance contract.

2.2

Consumer Protection Law and Its Relationship with the Regulation of Insurance Contracts

The Colombian Consumer Protection Law was enacted in 2011, after an intense trend introduced by consumer unions that led the Congress to draft a bill in which consumer rights were considered, a product liability regime was established and a complete group of consumer protection tools were created. This law is Law 1480 of 2011, whose article 2 provides that it has a wide scope covering all rights and obligations arising between producers, suppliers and consumers, which means that they apply to all consumer relationships. These rules apply in a supplementary way because there are specific consumer protection regimes in specific sectors of the economy, such as the insurance market. Thus, these rules complement the consumer protection rules contained in the C.Com. and supplement the rules that this Code or further developments do not include. Article 3 of this law establishes that consumers have the right to receive information as follows: Obtain complete, truthful, transparent, timely, verifiable, comprehensible, accurate and suitable information regarding the products offered or put into circulation, as well as risks that may arise from their use or use, Mechanisms for protecting their rights and ways of exercising them (This is a free translation of point 1.3 of article 3 Law 1480). Point 2.2 of article 3 establishes that consumers have the duty to act in good faith towards producers and suppliers and against public authorities. The duty of providing transparent information imposes heavy burdens on producers and suppliers of goods and services in Colombia. Article 23 of Law 1480 provides the liability regime for information to be delivered to consumers: ARTICLE 23. MINIMUM INFORMATION AND RESPONSIBILITY. Suppliers and producers shall provide consumers clear, truthful, sufficient, timely, verifiable, comprehensible, accurate and suitable information on the products they offer and, without prejudice to what is indicated for defective products, shall be liable for any damages that whatsoever are consequence of inadequate or insufficient information. In all cases, the minimum information must be in Spanish. PARAGRAPH. Except for those transactions and products that are subject to mandatory measurements or calibrations provided by a legal standard or metrological technical regulation, with regard to sufficiency or quantity, losses are considered admissible in relation to weight or volume reported in products that by their nature can suffer such variations.

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When in insurance contracts the insurance company modifies the insured amount contractually, unilaterally, it will have to notify the insured and proceed with the adjustment of the premium, within thirty (30) days.

In terms of definitions, Law 1480 defines ‘adhesion contract’ as the contract in which the clauses are arranged by the producer or supplier, so that the consumer cannot modify them, nor can he do anything other than accept or reject them. (This is a free translation of point 4 of article 5 of Law 1480 of 2011). Accordingly, in terms if contract construction rules, Law 1480 of 2011 created a new rule by which, consumption contracts have to be always construed in favour of consumer’s interests. Thus, Law 1480 of 2011 establishes that, regardless of any ambiguity in the text of the contract, consumption contracts have to be construed according to the consumers’ interests: ARTICLE 34. FAVORABLE INTERPRETATION. The general conditions of the contracts will be interpreted in the most favourable way to the consumer. In case of doubt, the clauses more favourable to the consumer will prevail over those that are not.

Regarding insurance contracts, this law, apart from providing an exact rule on the modification of insured value, raised to legal level what the Colombian Supreme Court has been saying since 1936: an insurance contract is an ‘adhesion contract’. Article 37 of Law 1480 establishes the minimum requirement that must be complied with in ‘adhesion contracts’, mentioning specific conditions for insurance contracts. Section 3 of this article establishes that in insurance contracts, the insurer will make an advance delivery of the contract to the policyholder, explaining the content of the coverage, the exclusions and the guarantees. The sanction that this law gives in case this is not complied with is to declare the contract null and void. According to the above, Law 1480 of 2011 created specific transparency rules for consumption contracts in Colombia, such as the insurance contract, to prevent future defaults in such contracts, caused by possible breaches of the parties in their pre-contractual duties consisting in acting transparently. In other words, this law prevents future default because if transparency is observed during the pre-contractual stage, then the duty of good faith would be simpler to comply with during the contractual stages. This consequence is a direct application of the consumer right of having conviction of the agreement he is entering into with the producer or supplier. One of the most important tools that are created with this trend is the wide regulation on ‘abusive clauses’. This regulation was enacted following the consumer protection principles inserted in Law 1328 of 2009 and Law 1480 of 2011. Abusive clauses are: Those which produce an unjustified imbalance to the detriment of the consumer and those which, under the same conditions, affect the time, manner or place in which the consumer can exercise his rights. In order to establish the nature and magnitude of the imbalance, all the particular conditions of the particular transaction being analysed will be relevant. Producers and suppliers may not include unfair terms in contracts with consumers, if they are included will be ineffective by law. (This is a free translation of article 42 of Law 1480.)

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In terms of the financial service market, article 11 of Law 1328 of 2009 listed the types of abusive clauses that are prohibited in an insurance contract. These are those that  Predict or imply limitation or waiver of the exercise of the rights of financial consumers.  Invest the burden of proof to the detriment of the financial consumer.  Include spaces, provided that their processing is not authorized in detail in a letter of instructions.  Any other that limits the rights of the financial consumers and duties of the monitored entities derived from the contract, or exempts, mitigates or limits the responsibility of said entities, and that may cause damages to the financial consumer.  The others established by the Financial Superintendence of Colombia in a prior and general manner. Law 1328 gives the parties of the insurance contract and the Financial Superintendence of Colombia the right to declare void any unfair stipulation or terms in a contract. This means that such clauses could be understood as unwritten or without effect in favor of the financial consumer. Law 1480 of 2011 extended the list in its article 43 and created a wide range of clauses that if inserted into an ‘adhesion contract’ are to be declared null and void, without the necessity of being declared as such by a judge. Law 1480 of 2011 gives the Colombian Financial Superintendence the power to enact additional types of clauses, which can be considered abusive and in case one of these clauses is present in an insurance contract, declare it void and null. Accordingly, External circular No. 029 of 2019, issued by the Colombian Financial Superintendence, contained a full chapter with a complete list of the clauses that the supervisor may consider abusive. This is included in article 6.1 of Chapter I, Title III, of Part 1 of this Circular. It means that according to the list established in laws 1480 and 1328, based on transparency and good faith reasons, the SFC listed a particular type of clauses, which can be declared null or void automatically for being abusive, when inserted in an insurance agreement. Apart from the list of ‘abusive clauses’, there is a list of ‘abusive activities’, which contains the behaviours that are considered abusive by the insured after the execution of the insurance contract. Thus, apart from the fact that the contract itself can contain abusive clauses that are automatically null and void, the insurer can also act in an abusive manner that can affect the legitimate interests of the insured. In these cases, the SFC can sanction the insurer after discovering abusive activities against the insured. Thus, the strengthening of consumer rights implies that since 2009, insurance contracts can no longer include abusive clauses, and if a contract includes such, then these clauses shall be automatically considered null and void, disregarding administrative sanctions that the SFC may impose for the issuance of such.

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3 Current Regime As described above, the current regime on transparency in insurance contracts involves several issues that I want to highlight according to what was described above.

3.1

An Insurance Contracts Is Always Considered as an ‘Adhesion Contract’

Colombian judicial precedent in the twentieth century and laws enacted in this millennium established that the insurance contract is an ‘adhesion contract’, and thus higher transparency rules are required from the insurer. However, due to the high influence of consumer protection trends, additional transparency rules are required from the insured, called self-protection duties. An example of this is the obligation to read the information that the insurer provides. Self-protection measures are inserted into article 6 of Law 1328 of 2009, requesting consumers to  Ensure that the entity with which they wish to contract or use the products or services is authorized and supervised by the Financial Superintendence of Colombia  Inquire about the products or services that you intend to acquire or employ, inquiring about the general conditions of the operation; That is, the rights, obligations, costs, exclusions and restrictions applicable to the product or service, demanding the necessary verbal and written explanations, which are sufficient and sufficient to enable informed decision-making.  Observe instructions and recommendations issued by the financial entity on the management of financial products or services.  Review the terms and conditions of the respective contract and its annexes, as well as to keep the copies that are provided to them.  To know about the bodies and means available by the entity to file petitions, requests, complaints or complaints.  Obtain a timely response to each request for a product or service. Financial Consumers who do not observe and apply, self-protection practices required in Law 1328 of 2009, may lose their rights upon supervised entities and may not enforce such rights upon the corresponding authorities. Lack of selfprotection measures by consumers, however, does not exempt the insurance company from the special obligation to act in good faith by disclosing the information described in the regulation. It is highly important to be clear about the fact that the insured is considered a financial consumer for all purposes of this law and the Consumer Protection Law. This drives us to our next discussion.

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Absence of a Different Scheme for Massive and Corporate Insurance Products to Allocate Transparency Duties

The first issue I want to describe is related to the fact that, according to the type of coverage provided in the insurance policy, whether massive or corporate, the transparency duties and right of the parties of the insurance contract are the same. This means Colombia does not have a legal regime by which these duties and rights are different depending on the type of coverage. This means that regardless of the fact that the insurance agreement was proposed by the insurer or imposed by the insured after a bidding process, the insurance contract is always considered an ‘adhesion contract’ and thus, in all cases, has to be construed in favour of the insured. It means that even if the insured proposes the terms of the insurance agreement, through a bidding process for example, the contract is always going to be construed in his favour. It also means that the concept ‘adhesion contract’ applies regardless of the status of the insured. In other words, these laws do not consider the fact that, in many cases, the insured has a greater bargaining power than the insurer. In some lines of businesses, the insured has greater bargaining power because of the size of its business, the sophistication of its activities and/or the ability to a captive that acts as reinsurer of the insurer. In such cases, the insurer may have lesser capacity to understand the insured risk and even have access to the information related to it. That is why in these situations, it would be desirable that the law allows the contract to be considered as a free-discussion-of-terms contract and that general construction rules be applied in case ambiguity arises. This idea would be easy to insert into Colombian law because the current regime is based on the consideration that the insurance contract consists only of policies written to cover personal risks or risks of small-sized companies. These laws are not taking into account large risk policies in sophisticated lines such as engineering, construction and erection all risk policies, surety bonds, third party and products liability, project cargo, oil and gas, marine and aviation insurance. Large risks can be considered as those related to corporations and in which the consumer of the insurance contract is not a physical person or a small entity, which does not have any bargaining power vis-à-vis the insurance company. Large risks insurance contracts can be opposed as mass consumer insurance contracts. For the above-mentioned reasons, it would be desirable that Colombian law makers consider these ideas to promote a change in the law. A proposed change in the law may imply that in cases in which the consumer of the insurance contract proposes the terms of the insurance contract, the contract shall not be considered as an adhesion contract or as a consumer relationship but as a contract in which its parties have the same powers in the negotiation. This will mean that much of the regime described above, which protects the insured as the weak party of the contract, will not apply. Thus, the contract will have to be construed according to general contract construction rules in which the will of the parties have to be identified rather than constructing clauses in favour of the insured.

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Transparency in the Insurance Contract Is Required from Both the Insured and the Insurer

The Colombian laws described above, which tackle the issue of transparency in insurance contracts, impose heavy burdens on both the insured and the insurer. To the insured, this burden implies a pre-contractual duty of declaring sincerely the state of the risk he is transferring to the insurer. During the contractual period, the insured has additionally to be aware of the changes the risk may face, because he has the duty to notify material changes of the risk to the insurer. Accordingly, the insurer has the right to charge a higher premium, to avoid the contract or to impose additional conditions in case a material change in the risk is notified. When the claim arises, the insured has the duty to present a claim containing no fraud. These duties, which develop from a pre-contractual stage, are connected with the principle of utmost good faith, which leads the insurance contract. To the insured, burdens are drawn out through a wide piece of regulation that has its grounds on consumer protection principles, described above. However, this burden seeks to avoid possible situations in which the insurer, being the supposedly stronger party in the agreement, takes advantage of this issue and acts against legitimate rights of the insured. This, again, goes against the most intimate base of utmost of good faith.10 The current Colombian regulation has gone further and even required insurers, apart from the fact of providing detailed information on the written policy to the insured, to provide insurance literacy tools to the insured and to the community in general.

3.4

Absence of Transparency Has Different Consequences

If parties to an insurance contract ignore transparency rules, they may suffer several consequences. In case the insured is at default, consequences may include reduction of the conditions of the policy, increase of the premium and even, losing his interests under the policy or the compensation after a loss, as was described in a detailed fashion. In case the insurer is at default in complying his transparency and good faith duties, consequences may vary between the possibilities of the contract to be construed in favour of the insured, a claim that was not supposedly covered is considered covered or an administrative sanction is imposed. 10 Jaramillo Salgado, Patricia. La Protección del consumidor de seguros en Colombia: antecedentes, evolución, retos y perspectivas. Universidad de los Andes de Chile, Sección Chilena de AIDA, 7 de junio de 2012. Sanchez Guerrero (2016), pp. 17–58.

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This means that as a matter of fact that transparency is inserted deeply within the utmost good faith rule, in case any party defaults their right under this principle, there are several consequences available againt this defaulting party.

4 Case Law In April 2007, the Civil Branch of the Colombian Supreme Court of Justice ruled, in SC 26. Rad. 1997-04528-01, that regardless of the fact that in insurance contracts several transparency duties are imposed on the insurer and the fact that this is an ‘adhesion contract’ in which one of its parties, the insurer, is a professional entity, the insured has to likewise comply with his duties of good faith and transparency: The professional nature inherent to the insurance activity is not under discussion. But the whole point is that, when weighing the scope of the concept ‘due to knowing’ established in the norms, it is indispensable to understand that if the insurer, having within its reach the possibility of making the inquiries that lead him to establish the genuine state of risk, omits to perform them, even when having elements that invite him to think that there are discrepancies between the information from the policyholder and the reality, it is inextricably linked to the insurance relationship, without that to the effect he can allege voidance, because the cardinal principle of prudence – in other terms his professionalism – would have been challenged, and it is clear that under such conditions an alleged knowledge emerges of ‘the facts and circumstances on which the vices of the statement are based’, so that the nullity no longer works, and we want to insist that the foregoing knowledge emerges as one of the exceptions conceived by the legislator so that nullity does not operate fatally.

In a 2016 ruling,11 the Civil Chamber of the Supreme Court, referring to Article 871 of the Commercial Code, stated: This norm enshrines a duty for the policyholder to manifest, without covering, reservations or pretences, the current conditions against the possible occurrence of the uncertain event whose protection is sought. And although death is an unavoidable fact whose protection allows the law, in that event the obligation refers to specifying the health condition of the insured in a way that will show, for sure, the terms in which he will respond if it occurs in its term. Although such presentation of the risk may be spontaneous, when it is generally considered by the ‘state of risk’ at the time of the contract, the insurer has the power to provoke it by means of a questionnaire on specific points. It is even possible that in the first instance it may be necessary to carry out surveys or tests and tests to establish it. Therefore, the lack of honesty of the policyholder on aspects of their full knowledge and that knowing the insurer would affect the relationship, either to refrain from specifying it, delimit the exclusions or increase the value of the policy, dispute with ‘good faith’ Required and entails the relative nullity of the agreement. (. . .) In any case, as regards ‘life insurance’, Article 1158 id provides that ‘[w] hen the insurer does not have medical examination, the insured person may not be considered exempt from the obligations referred to in Article 1058 Nor of the penalties to which its infringement gives rise’.

11

Supreme Court of Justice, SC 2803-2016, 4th of March 2016, Rad. n.○ 2008-00034.01.

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It cannot therefore be emphasized that the professionalism required by the insurer's activity at the outset requires the exhaustion of all the means at its disposal in order to ascertain the ‘state of risk’ at the moment it is assumed, as if it were his sole charge, on pain of inactivity resulting in a ‘renunciation’ of ‘relative nullity because of reticence’.

In November 2016, in SC 18563, after doing a wide analysis of previous cases, the Supreme Court of Justice confirmed that in those cases in which the insurer did not use all the mechanisms that the law allows in order to know the state of the risk but in which, however, the insured intentionally failed to disclose substantial information about the risk, nullity of the insurance contract can be claimed by the insurer. In these cases, the Court considered that the insured breached the rule of acting with good faith and thus, with no transparency, and declared the insurance contract null in which no right to receive indemnity was given to the insured. What we can extract from this judicial precedent is excatly what we have been highlighting during this chapter, consisting in that heavier burdens of transparency are imposed on the insurer, but the first party to comply with transparency duties is the insured. This is because the insured is required, from a precontractual basis, to declare sincerely, the state of the risk. Wider pieces of judicial precedent refer to the duty of transparency of the insurer, but these rules are contained in Laws and regulations applicable to the operations of the insurance company.

5 Conclusions The issue of transparency on the insurance contract, as I can understand it, is a linked duty inserted in the principle of utmost good faith that surrounds the contract. Current consumer protection trends imposed heavier duties on the insurer, but principles arising from these trends do not deter from the application of the duties imposed on the insured. Instead, current consumer protection laws established a set of rights for the consumer but required him to act in good faith and adopt selfprotection tools. This starts to set an idea that in current times, the insurance consumer is a more sophisticated consumer that has the duty to inform himself of the risks when entering into the contract because currently there are tools to get this information. However, the strong legal and judicial trend that implies the insurance contract is a consumer and adhesion contract, hasn’t allowed a full application of the regulation imposing the insured a duty of self-protection. I want to emphasize that the insured’s duty of self-protection has a strong base which must be complied with, and thus the insured has to act accordingly. In other words, the law gives the insured the tools to protect himself and thus requires him to use these tools. Apart from the abovementioned, the insurance contract is always considered as an adhesion contract, Colombian law exceeds it protection in cases in which the insurer has sufficient bargaining power and disregarding the fact that he imposes the terms and conditions of the contract, in case of doubt its clauses will be construed against the insurer and only on his favour. This issue may imply a modification of the law as

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explained above, to create a more equilibrated regime in non-massive consumer insurance contracts. Self-protection tools are a brief start to change the idea that the entire duty of transparency is on the insurer side and thus, implies the insured has to be aware of these rights and use them on his favour to therefore, be able to receive full compensation from these rights. Finally, I firmly consider that there is a need of a more equilibrated way to construe the insurance contract in non-massive insurance relationships, which will enhance the duties of intermediaries and the ability of large insureds to request their insurance necessities with a corresponding softening on the insurers’ duties.

References Aanjo Mejia J (1997) C- 232 of 1997. Colombian Constitutional Court. 15h of May, 1997. Bogotá, Colombia Bardey D. Asimetrias de información en los mercados de seguros: teoría y Evidencia. Revista Fasecolda. Bogotá, Colombia, pp 14–18 Chiappori P, Salanie B (2000) Testing for asymmetric information in insurance markets. J Polit Econ 108:56–78 (Chicago, Illinois, United States of America) Colombian Supreme Court of Justice, SC 2803-2016, 4th of March 2016, Rad. n.○ 2008-00034.01. Bogotá, Colombia Jaramillo Salgado P (2012) La Protección del consumidor de seguros en Colombia: antecedentes, evolución, retos y perspectivas. Universidad de los Andes de Chile, Sección Chilena de AIDA, 7 de junio de 2012, 1936. Judicial Magazine No. T:XLIV, No. 1920, Santiago, Chile, p 674 Lopez Blanco HF (2004) Comentarios al Contrato de Seguros. Dupré Editores Bogotá, 4ª Edición 2004. Bogotá, Colombia, pp 32–33, 71–76 Sanchez Guerrero D (2016) Measures for protecting the insurance consumer in contexts of liberalization of insurance markets. Revista Iberolatinoamericana de Seguros 45:17–58 (Bogotá, Colombia) Spindler M (2011) Asymmetric information in the insurance markets: does this really exist? Insurance and Economics No. 64, July 2011. The Geneva Association, Geneva, Switzerland Trejos SF (2005) Exp. 9559. Civil Law Chamber. Colombian Supreme Court 24th October 2005. Bogotá, Colombia

Transparency in the Insurance Contract Law of Georgia Ketevan Iremashvili

1 Introduction Ideally, the discussion about the Georgian concept of transparency has to be started directly by observing duties and liabilities of insurer. Such an approach would have been more precise for the contemporary meaning of transparency context. However, there are practically no regulations in Insurance Section of the Civil Code of Georgia regarding primary duties of insurer with regard to transparency. Therefore, it is reasonable if the discussion about the Georgian non-existing concept of transparency will be launched by analyzing the duties of policyholder and possibilities of interpreting, inducting, and deducting the context of transparency from other existing provisions. Good faith principle was integrated in norms of Insurance Section of the Civil Code of Georgia regulating insurance contract. However, there is an actual misbalance between the burdens that legislator puts on the parties in this regard. More specifically, these norms regulate the duties of policyholder. Another insignificance in those regulations is that they only address the duty of disclosure. It is true that good faith in insurance in the first place resembles the duty of disclosure and there was a time when these two terms practically had the same meaning.1 The burden to carry on this duty was solely on policyholders, which was stipulated by the need of ensuring stability of insurance activity as business.2 However, in a contemporary context good faith principle has thoroughly incorporated the reciprocal element of insurance relationship. According to modern pattern of transparency,

1 2

Merkin and Rodger (1997), p. 29. Ibid.

K. Iremashvili (*) Tbilisi Open University, Tbilisi, Georgia © Springer Nature Switzerland AG 2019 P. Marano, K. Noussia (eds.), Transparency in Insurance Contract Law, AIDA Europe Research Series on Insurance Law and Regulation 2, https://doi.org/10.1007/978-3-030-31198-8_15

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obligations implied by good faith principle are equally distributed between the parties. The logic of equal structuring between good faith liabilities of parties is rooted back in the essence of insurance contract. Because of informational asymmetry especially relevant for insurance case, both parties experience dependency towards each other. More accurately said, both parties to the contract are in dual positions of superiority and dependency at the same time. Superiority of insurer’s position is preconditioned by the level and accuracy of knowledge about its own policy, about the implications in terms and conditions of the contract, and foreseeability of reimbursement possibilities in certain cases. Superiority of policyholder’s position, on the other hand, rests on her/his power over the insured object. No matter how well technologies are developed and how expanded the capabilities are for insurer to independently obtain information about insured object, still it is under the control and influence of policyholder and all informational power is in his/her hands in the end. The condition of such a mutual asymmetry logically stipulates the need for distributing disclosure duties between both parties. Moreover, with analysis of informational asymmetry in insurance contract law, one may go even further and establish the conclusion about mutual fiduciary nature of insurance contract. It is true, that generally insurance contracts do not fall under the categories of fiduciary contracts although the utmost importance of good faith principles in insurance relationships has long been recognized. There is a slight promotion of fiduciary nature of insurance with regard to liability insurance in the literature.3 The lack of specification of insurer’s good faith liabilities does not restrict the judge in exercising one’s power of expanding the context of various norms. In other words, by teleological interpretation of norm judge shall declare the implication of good faith liabilities on the side of insurer. The function of judge is critical here. For example, Article 819 of the Civil Code refers to termination of payment of premiums and states that policyholder is authorized to terminate the payment of premiums if after the formation of contract it became clear that economic condition of insurer worsened to such a degree that there exists a real threat to fulfilment of obligations undertaken by insurer. If read in a direct sense, there is no indication about any obligation of insurer in this formulation. However, if interpreted in an expanded and a logical way, this formulation implies the duty of insurer to provide policyholder with information about its worsening economic conditions to the degree that threatens the possibilities of reimbursement. In other words, the term it became clear shall be interpreted in the best interests of policyholder. This means that policyholder has legitimate right to obtain all necessary information relevant to his/her reasonable expectations towards the contract. Similarly to this, the number of good faith liabilities defined by the code shall not be limited to duty of disclosure. In certain specific cases, the violation of good faith on the policyholder’s side may be demonstrated in a considerable decrease of duty of care towards the insured object, which goes far beyond the duty of disclosure and has more connection with moral hazard theory. In sum, the number and context of duties implied by the good faith

3

Jerry and Richmond (2007), p. 180.

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principle shall not be limited even if there is lack in legislative framework or judicial reasoning there. The power of judge in expanding the number and context of these duties may be simply justified by the argument that the importance of good faith principle is especially critical for those contracts the essence of which is based on trust.4 As an adhesion contract, insurance certainly belongs to this category. Along with misbalance in distributing the liabilities implied under the principle of good faith between the parties, the lack of systematic accuracy is observed in the code. In some cases, provisions placed in several sections of insurance law require to be interpreted in a more general context due to their essence and role in contractual relationship of insurance. For example, Article 830—The Duty of Policyholder to Obey Instructions of Insurer5 is placed under the Part III of the Section: Loss Insurance/a. The Essence of the Contract. The inconsistency here is resembled in the circumstance that this part deals with Property Insurance whereas the duty of policyholder to obey instructions of insurer could apply to the rest of the types of insurance as well. This duty is deducted from the duty of policyholder to inform the insurer about an insurance accident. There is no reasonable purpose for legislator to establish the duty incorporated in Article 830 without having it interpreted in the logical frame of the duty of policyholder to inform the insurer about an insurance accident. This is why it could be concluded that the duty included in the Article 830, by its very essence, systematically and logically belongs to general provisions regulating insurance contract. Such an interpretation empowers judges to expand the scope of Article 830 and apply it to the rest of insurance types included in the code.6 The same analysis applies to the Article 834. This article imposes the duty on policyholder to inform the insurer in case of sale of insured object. The article is systemically placed in the part regulating property insurance. Generally, the purpose which legislator aims to achieve is providing information to policyholder when party to the contract has changed. Same logic has to be employed here. Despite the fact that this regulation is placed in a property insurance section, it is reasonable to assume that the concept of party substitution in the context of duty of disclosure is relevant to all types of insurance, and therefore it has to be deemed to have the force of general provisions. Consequently, the article shall be interpreted with a teleological extension. Duties implied under the good faith principle have considerable importance in consumer contracts.7

4

Vashakidze (2007-1), p. 52. Article 830: Duty to fulfil the insurer’s instructions—“1. If the event covered by insurance occurs, the policyholder shall be obligated to avoid or reduce the damage as far as possible and fulfil the insurer’s instructions in that respect. 2. The insurer shall reimburse the expenses that have been incurred by its instructions.” 6 Iremashvili K., “The Criteria of Equality in Insurance Relationships,” 70, available at http://press. tsu.ge/ge/net_editions/xj-niq8km-r9euks3/xqgxxvs79x5lrl_8d/Ketevan Iremashvili. 7 Sovern (2006). 5

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The increased importance of good faith in insurance is stipulated by the very nature of insurance itself. Insurance contract is based on the utmost trust between the parties.8 The correlation of dependency between the parties is observed in insurance in the following way: parties become dependent on the accuracy of information obtained from one another.9 In case on insurer’s dependency, information regarding the insured object is implied; whereas in case of policyholder’s dependency, information regarding the terms of the contract and indemnification procedures is implied. Promotion of good faith principle during contractual relationships between the parties is perceived as one of the indications of effective economic system as well.10 In one of its decisions,11 the appellate court states that justice, good faith, and morality determine the standard of behavior in private law relationships. Although many norms lack the direct reference to good faith principle, those are still based on it. In other words, along with the binding nature of wording used in the law, the interpretation has to be made on the base of good faith principle.12 The utilization of good faith principle creates possibilities of considering those judgments or values that were directly included neither in law, nor within the contract.13 Good faith principle has to be equally distributed between both parties of the contract.14 When contracting with consumer, insurer’s duty of good faith shall not be interpreted against consumer. It is unreasonable to use mixed standards towards the

8 Fiduciary relationship is a relationship based upon utmost trust, binding one party to exercise the utmost duty of care towards the interests of another party. See, Garner (2004), p. 1315. Traditionally within the list of fiduciary relationships there fall relationships between attorney and a client, doctor and patient, and so forth. In such relationships, one party is considerably in a superior position compared to another party. Such superiority is preconditioned by the possession of specific information and qualification related to the fulfilment of the contract. This is why exercising utmost duty of care towards the interests of the weaker party is expected in fiduciary relationships. See, id. It is worth mentioning how US courts interpret the fiduciary nature of liability insurance contracts. When interpreting such contracts in favor of policyholder, US courts refer to violation of fiduciary duties by the insurer. According to their judgments, insurer shall consider the interest of the policyholder when protecting one’s interest. During the negotiation procedure, insurer shall agree only on those offers that fit within the best interest of policyholder. The cases when insurer is guided by its own interest at the expense of suppressing the interests of policyholder are qualified as violation of fiduciary duties by the courts. See, Jerry and Richmond (2007), p. 180. 9 Supreme Court of Georgia, the Section of Civil Law Disputes, October 10, 2014, case # as-657-624-2014. 10 Baker (1996). 11 Supreme Court of Georgia, the Section of Civil Law Disputes, October 9, 2013, case # as-17081602-2012. 12 Supreme Court of Georgia, the Section of Civil Law Disputes, October 20, 2014, case # as-698-668-2014. 13 Ibid. 14 Lowry and Rawlings (2003), p. 74. With further references to the cases of Appellate Court of England and Decision of House of Lords—Banque Financière de la Cite S.A. v Westgate Insurance Co Ltd [1991] 2 AC 249, affirming the Court of Appeal, [1990] 1Q B 665.

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parties of the same contract.15 Utilization of good faith is effective in practice because it protects reasonable expectation of parties and provides cooperation based on trust, enhances the prioritization of human and social elements. On the other hand, the utilization of good faith principle minimizes costs of human, administrative, and time resources associated with contract formation. More specifically, parties are not obliged to include every detail within the contract.16 The right of insurer to obtain the information has to be interpreted in an expanded way. The information regarding the insurance accident implies not only those types of information that are necessary for evaluating insured risk and the loss, but also any other type of information having considerable legal importance. This reasoning also applies to that type of information that entitles insurer with the right to avoid or terminate the contract.17 When defining the legal consequences for breaching policyholder’s duty of disclosure at the stage of contract formation, the influence of such a breach on insurer’s condition has to be considered. If insurer does not face damage because of such breach, there is no entitlement for claiming damages. Such an interpretation rests on the universal principle of law according to which there is no entitlement for claiming the damage, because there is no damage per se.18 There is always need for balancing the interests of both parties. In one of the court decisions, the breach of duties formulated in Article 814 I of the Civil Code of Georgia is qualified as detrimental to primary interests of insurer. In such cases, insurer is disabled to participate in the procedures of measuring the volume of insured accident.19 In one of the court decisions,20 City Court stated that according to Article 814 II of the Civil Code of Georgia after the occurrence of insured event insurer may request from insured information necessary for defining the insured event and its volume. According to Article 814 IV of the Civil Code of Georgia, insurer shall fulfil its obligation after the confirmation of occurrence of insured event and the amount of insurance reimbursement. Following the reasoning of court, the analysis of this norm shows that insurer’s duty to reimburse is directly connected with the possibility of defining the volume of damage. In fact, the latter is a precondition for fulfilling the duty of reimbursement by the insurer. Generally, the breach of duties implied under the good faith principle from insured’s side is one of the most important grounds for the denial of reimbursement

15

Schwartz and Appel (2009), p. 11. Vashakidze (2007-1), p. 52. 17 Motsonelidze (2013), p. 120. 18 Gray (1921), p. 287. 19 Supreme Court of Georgia, the Section of Civil, Company and Bankruptcy Law Disputes, June 6, 2001, case # 3k/450-01. 20 Tbilisi Appellate Court, the Section of Civil Law Disputes, March 29, 2012, case # 2b/78-12. 16

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from the insurer.21 Good faith liabilities of insured also imply the duty of care towards the insured object. In this regard, the concept of moral hazard has to be considered. When insured event is under the control of insured, moral hazard is increasing.22 In this regard, it is worthwhile to mention opinion developed on the base of economic analysis of insurance in which the good faith of insured is assessed. According to this opinion, the utilization of more and rather expensive services included in health insurance policy has to be regarded as a rational behavior and not as a bad faith act of policyholder.23 Transferring the risk to insurer does not release the insured from the duty of care towards the insured object. According to Article 830 I of the Civil Code after the occurrence of insured event insured is obliged to reasonably avoid or minimize the damage and follow instructions of insurer. Insured shall exercise the same level of care towards the insured object, as it would have shown in the absence of insurance. For example, if insured sees that his/her house is on fire, s/he is not expected to stand still and stare at the house with the hope that house is insured anyway.24 The reasonableness of standardization of contracts is preconditioned by objective factors. Consumers favor this form of communication because of minimizing financial resources and those connected with time.25 In this regard, it is important to consider opinion developed in economic theory according to which people prefer to use their time more rationally rather than reading provisions of contract. Moreover, according to this theory, even when read, there is less likelihood that they will discover provisions detrimental to them in the contract. Obviously, consumers prefer the terms of insurance coverage to be defined externally—by insurer.26 In addition to that, social science insists that simplicity of information, rather than a huge volume of legal text, easily attracts consumer. The reasons behind consumers’ laziness may be shaped also by their over-optimistic expectations. More specifically, consumers avoid reading provisions regarding legal consequences of breaching their obligations, because of the minimal or no likelihood of committing such a breach from their side.27 It is important to mention that the necessity of consumer protection does not arrive in conflict with its duties. The status of consumer does not release the insured from the duty to read the contract. Moreover, there is a presumption used during the interpretation of consumer contracts, presumption of intent, according to which the contract is deemed to be read by consumer. Consequently, it is assumed that consumer is aware about the terms of the contract.28

21

Baker (1994) Ibid. 23 Baker (1996). 24 Tsiskadze, Chanturia/Zoidze/Ninidze/Shengelia/Khetsuriani (Editors), Commentaries to the Civil Code of Georgia, Book 4, Part II, 2001, 150. 25 Zweigert and Kotz (1996), p. 134. 26 Iremashvili (2011), p. 52. With further reference to Swartz (2001), Fall, p. 4. 27 Sovern (2006). 28 Vaughan and Vaughan (1995), pp. 168–169. 22

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The protective function of principle contra proferentem is implied in one of the court decisions.29 According to court’s reasoning, insurer shall formulate the provisions of contract in a fair manner especially when policyholder has no control over this process. In legal literature, there are many references about the detrimental effects of insurer’s denial of reimbursement for policyholder.30 The US insurance doctrine provides the possibility of using puninitive damages for insurers.31 According to US insurance doctrine, the claim for punitive damages for breach of good faith duties by the insurer is inappropriate if there is no element of intention in insurer’s behavior and if it is a result of omission or incorrect evaluation from insurer’s side.32 In Georgian Doctrine of Insurance Law, the concept of punitive damages is not shared. This approach is one of the reflections of loyalty towards the traditions of German Law. The mere justification that applies here is that the usage of penalty sanctions in Private Law is regarded to be unreasonable.33 During the interpretation of duties implied under the good faith principle, the principle of reasonableness shall be applied.34 More specifically, the policyholder’s expectation towards the contract shall be determined according to expectation of an average, reasonable policyholder.35

2 The Development of Georgian Insurance Contract Law The development of Georgian Insurance Contract Law and Contract Law in general is related to the adoption of the Civil Code. The Civil Code of Georgia was adopted on 25 November 1997. It was receipted from the German Civil Code and despite its considerable flaws in substantive or technical parts, as well as numerous changes made to the code since its adoption, the fundamental values of German (European) Contract Law are preserved in the Code. Regulations addressing insurance contract

29

Supreme Court of Georgia, the Section of Civil Law Disputes, October 20, 2014, case # as-698-668-2014. 30 Baker T., Tort Remedies for Breach of Insurance Agreements, 11. Compare with Hinchliffe (2011), p. 68. 31 Ibid, 15. 32 Schwartz and Appel (2009), p. 15. 33 Author refers to Court Decision according to which party cannot be sanctioned by measure inconsistent with ordinary principles of property liability, Supreme Court of Georgia, 2001/1, 3p/ 629-01, 1214; Supreme Court of Georgia, 2002, 3k/1184-01. Consequently, penalty sanctions are regarded to be incompatible with philosophy of Georgian Private Law. See, Vashakidze G., The System of Complex Obligations of Civil Code of Georgia, 2010, 194. 34 Supreme Court of Georgia, 2001/1, 3p/629-01, 1214; Supreme Court of Georgia, 2002/1, 3k/ 1184-01; Supreme Court of Georgia, 2002/1, 3k/287-02. Compare with Vashakidze G., The System of Complex Obligations of Civil Code of Georgia, 2010, 201. 35 Baker (1994). Compare with Schwartz and Appel (2009), p. 12.

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are systemically allocated in the Particular Part of Law of Obligations. There are totally 60 articles (799–858) addressing contractual relationships between the parties. According to the principles of pandect law, those provisions of General Part (Introduction) of the Civil Code and General Part of Law of Obligations, as well as General Part of Contract Law of Law of Obligations apply to contractual relationships between the parties of insurance contract. The Civil Code is a single source of Insurance Contract Law in the country. Although the Georgian Law on Insurance contains some basic terms of insurance that could be considered as elements of insurance contract law and could be applied in this regard, there are significant inconsistencies between the law and the code. As the code is more precise and regulates insurance contract in a specific section of Contract Law of Law of Obligations, its regulations shall prevail. Right after introducing a new piece of legislation in civil law in the country, commentaries to the Civil Code of Georgia were prepared. These commentaries, including the one on insurance contract, were written by highly respected professors and practicing lawyers in the country including academics, judges, public officials, etc. The commentaries to the Civil Code of Georgia provided a strong and a powerful basement for various fields of civil law to develop. However, due to the rapidly changing socio-economic climate in the country, several regulations of civil code were constantly changing. This did not have any significant implication neither on the general provisions at various levels of the code, nor on the insurance contract provisions. However, the need of crafting new commentaries to the code emerged. Quite recently, the new group of authors was completed and assigned with a task of re-writing the commentaries to the Civil Code of Georgia. This new group comprised of some old and some totally new members. New commentaries to the Civil Code of Georgia have been prepared based on the current legal and judicial practice in the country and those are enriched with contemporary notions of fundamental concepts of civil law worldwide. Georgian Contract Law is largely affected by judicial decisions and doctrinal interpretations of judges. The same is true for insurance contract law cases; however, judges do not expand their argumentations on such disputes that much. If not exceptional cases, judges basically refer to general norms of contract law rather than attempting to interpret the precise meaning of various provisions on insurance.36 Insurance Law concepts are basically viewed and analyzed from the perspective of general concepts of contract law. Such argumentations are valuable for strengthening linkage between several parts of Civil Code; however, this is not enough for developing insurance contract law as a separate discipline.

36 In most decisions, judges use a general concept of imbalance in insurance contract stressing the superiority of insurer and weakness of policyholder. For example, such argumentations may be found in several decisions: Supreme Court of Georgia, the Section of Civil Law Disputes, January 28, 2013, case #as-1643-1540-2012; Appellate Court of Tbilisi, the Section of Civil Law Disputes, November 21, 2012, case # 2b/3080-12; Supreme Court of Georgia, the Section of Civil Law Disputes, October 9, 2013, case # as-1708-1602-2012.

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The Good Faith Principle is established in the General Provisions/Introductory Part of the Civil Code. Section 3 of Article 8 of the Civil Code of Georgia states that participants of legal relationships are obliged to fulfill their rights and obligations in a good faith manner. This provision is a cornerstone and a guiding principle of Georgian Civil Law. It is clearly exhibited and implied in number of articles throughout the code.

3 Insurance Contract Law According to the Civil Code of Georgia 3.1

The Architectural Principles of the Civil Code of Georgia and the Systemic Allocation of Insurance Law Section

The Civil Code of Georgia is tailored according to the principles of Pandect Law. In this vein, the body of the code is divided into the General Introduction and several pieces. Legal norms regulating contractual relationship of policyholder and insurer are found in the Section of Law of Obligations. This section itself is divided into the introductory part—Introduction to the Law of Obligations and the other part, which covers specific contracts, like sales, loans, etc. including insurance. Articles 799–858 cover contractual relationship of insurance. The section regulating insurance contract itself is divided into two parts, first being an introductory part—General Provisions (hereinafter—GP) and the other part regulating particular types of insurance. The system37 of Insurance Section of the Civil Code38 at the first glance may create vagueness in terms of interpretation as several articles are placed within inappropriate locations. This is true for those articles that are although systemically designed as special norms, by their legal nature have a broader context and meaning of general norms. For example, the second part of the Insurance Section—Insurance Premium shall not be systemically separated from the first part. Norms incorporated in the second part share the context of general norms as they apply to all types of insurance contracts. Thus, based on the above-mentioned, for proper interpretation of norms of Insurance Section the conflict between the systemic allocation and the context of norms has to be considered and thoroughly analyzed.

37

The system of Insurance Section of the Civil Code is constructed in the following way: I. General Provisions; II. Insurance Premium; III. Loss Insurance: a. the Essence of the Contract, b. Third Party Insurance, c. Civil Liability Insurance; IV. Life Insurance; V. Accident Insurance. 38 In the spring of 2017, new amendments to the Civil Code of Georgia were reviewed within the Insurance State Supervision Service of Georgia (ISSSG) and presented to the Parliament of Georgia. These amendments introduce new articles on Health Insurance. From a systemic standpoint, these articles will be incorporated in a separate part (VI) of the Insurance Section of the Civil Code.

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The system of legal norms regulating insurance contract is combined according to the classification of insurance. GP is aimed at introducing basic principles/guidelines of Insurance Contract Law in Georgia, including founding values of Transparency. However, after analyzing several provisions of the Insurance Section of the code, it will become clear that there are considerable flaws in terms of systemic accommodation of several principles within the particular parts of the section. This is true also with regard to provisions addressing Transparency issues. For example, Article 830—The Duty of Policyholder to Obey Instructions of Insurer.39 This article is placed under the Part III of the Section: Loss Insurance/a. The Essence of the Contract. This part deals with Property Insurance whereas the duty of policyholder to obey instructions of insurer could apply to the rest of the types of insurance as well. This duty is deducted from the duty of policyholder to inform the insurer about an insurance accident. There is no reasonable purpose of legislator to establish the duty incorporated in Article 830 without having it interpreted in the logical frame of the duty of policyholder to inform the insurer about an insurance accident. This is why it could be concluded that the duty included in the Article 830, by its very essence, systematically and logically belongs to the GP. Such an interpretation empowers judges to expand the scope of Article 830 and apply it to the rest of insurance types included in the code.40 The same analysis applies to the Article 834. This article imposes the duty on policyholder to inform the insurer in case of sale of insured object. The article is systemically placed in the part regulating property insurance. Generally, however, the purpose which legislator aims to achieve is providing information to policyholder when party to the contract has changed. Same logic has to be employed here. If legislator wanted to touch upon the concept of party substitution in the context of duty to inform, legislator had to incorporate relevant provision within the GP, releasing the judge from the burden of heavy navigation when applying this norm to various types of insurance. Because of such systematic flaws as indicated above, the analysis of the concept of Transparency in contractual relationships of insurance will not be limited to the systemic approach, but rather it will be implemented by article-by-article principle.

39

Article 830: Duty to fulfil the insurer’s instructions—“1. If the event covered by insurance occurs, the policyholder shall be obligated to avoid or reduce the damage as far as possible and fulfil the insurer’s instructions in that respect. 2. The insurer shall reimburse the expenses that have been incurred by its instructions.” 40 Iremashvili K., “The Criteria of Equality in Insurance Relationships,” available at http://press.tsu. ge/ge/net_editions/xj-niq8km-r9euks3/xqgxxvs79x5lrl_8d/KetevanIremashvili, 70.

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Provisions on Policyholder’s Duty of Disclosure Pre-contractual Duty

In the very beginning, it has to be stated that GP articles addressing the values of Transparency literally focus on the duties of policyholder. There are no articles included within the Insurance Section that would impose duties on insurer in a Transparency context. For the purposes of developing a complete/reciprocal content of Transparency, articles regulating the corresponding duties of policyholder will be analyzed. GP contains several articles imposing duty on policyholder to inform the insurer.41 Insurance Section provisions addressing policyholder’s duty of disclosure are separated according to stages of contractual relationship. The duties of pre-contractual stage are included in Article 808 of the Civil Code of Georgia.42 The establishment of policyholder’s duty of disclosure on a pre-contractual stage serves several functions. In a broader view, this is aimed at preserving good faith relationships between the parties. In a narrower perspective, this is aimed at protecting insurer’s legitimate interest of being equipped with necessary information when entering contractual relationship. As for the practical context, this is important for preserving the legality of contract itself. The consequences of delivering false information to the insurer43 are quite severe primarily for the policyholder. It is worth mentioning that in all cases where legislator describes the legal consequences 41 These are the following: Article 808: The Duty to Inform the Insurer; Article 809: The Consequences of Delivering False Information to the Insurer; Article 810: Cancelation of Contract in Cases when not Providing Information to the Insurer; Article 811: The timeframe for Cancelation of Contract in Cases when not Providing Information to the Insurer; Article 812: Cancelation of Contract as a Result of Occurring of Insured Event; Article 813: The Duty to Inform the Insurer about the Increase of Insured Risk; Article 814: The Duty to Inform the Insurer about the Occurrence of Insured Event. There is no article included in GP that would impose the same duties on insurer. Additionally, there is no direct indication of such duty with respect to none of the parties in the definition of insurance. 42 Article 808: The Duty to Inform the Insurer—“1. At the stage of contract formation policyholder shall inform insurer about all circumstances that s/he is aware of, which have essential importance for insured risk or for the occurrence of insured event. Essential circumstances are those which can affect insurer’s decision to deviate from the contract or agree on it with modified substance. 2. Essential circumstances are also those about which insurer asks in a written and a precise way. 3. If according to the 1st section of this article insurer is not informed about the essential circumstances, then insurer is entitled to deviate from the contract. Same consequences apply if policyholder intentionally avoids to inform insurer about essential circumstances. 4. The termination of insurance is forbidden if insurer had known about the hidden circumstances or policyholder is not liable for not informing about such circumstances.” 43 Article 809: The Consequences of Delivering False Information to the Insurer—“1. Insurer is entitled to deviate from the contract also if notification about essential circumstances contains false information. 2. Deviation from the contract is forbidden if insurer had known about false circumstances or policyholder is not liable for sending notification containing false information. Insurer is entitled to terminate the contract during one month after receiving the notification containing false information.”

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of the breach of policyholder’s duties, it supports the idea of fairness and equality between the parties. For example, according to the 2nd section of 809: Deviation from the contract is forbidden if insurer had known about false circumstances or policyholder is not liable for sending notification containing false information. The same is true for Article 812 that regulates cancellation of contract when insured event occurred.44 According to this provision, if insurer terminates the contract after occurring of insured event, insurer is not released from its liability to reimburse the loss, if the circumstance about which the duty to inform was breached did not have effect on the occurrence of insured event or on the fulfilment of insurer’s obligation. In both cases, the consequences of policyholder’s breach shall not be directly interpreted but rather additional factors have to be considered this way promoting fairness in contractual relationship. Several articles deal with particular issues like specific types of policyholder’s breach of duty to inform45 and the timeframe for cancelation of contract in cases when not providing information to the insurer.46

3.2.2

The Duty of Disclosure During the Insurance Period

The duties relevant to insurance period are included in Article 813 of the Civil Code of Georgia.47 Logically, policyholder’s duty of disclosure is not limited to the pre-contractual stage. During the contractual relationship, changes may occur, and therefore policyholder is obliged to inform the insurer about such changes. The legislator emphasizes not all minor changes but necessarily those ones, which could have had affected insurer’s will either to enter insurance contract or agree on it with different terms. 44

Article 812: Cancelation of Contract as a Result of Occurring of Insured Event—“If insurer terminates the contract after occurring of insured event, insurer is not released from its liability to reimburse the loss, if the circumstance about which the duty to inform was breached did not have effect on the occurrence of insured event or on the fulfilment of insurer’s obligation.” 45 Article 810: Cancelation of Contract in Cases when not Providing Information to the Insurer—“If policyholder was supposed to answer questions regarding the insured risk in writing, then insurer is entitled to terminate the contract for breach of information duty regarding those circumstances about which policyholder was not asked directly, but policyholder intentionally kept silent.” 46 Article 811: The timeframe for Cancelation of Contract in Cases when not providing Information to the Insurer—“1. Insurer is entitled to terminate the contract during one month after breaching the duty to inform (included in the General Provisions of Insurance Section). This term starts from the moment when insurer becomes aware about the breach of the duty to inform. 2. Policyholder shall be notified about the termination of contract.” 47 Article 813: The Duty to Inform the Insurer about the Increase of Insured Risk—“1. Policyholder is obliged to immediately inform insurer about the increase of insured risk which arouse after contract formation, if this could have had an essential impact on insurer’s decision to agree on contract. 2. In the case described in the 1st section of this article, insurer is entitled to terminate the contract within the one month termination period or claim for corresponding increase of insurance premium. If policyholder caused the increase of insured risk intentionally, insurer is entitled to terminate the contract without consideration of termination period.”

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Article 813 only refers to a general concept of increase of insured risk. However, some norms from various parts of Insurance Section, logically apply to the notion of policyholder’s duty of disclosure during the insurance period. In this vein, two major articles must be observed: the second section of Article 82748 and Article 834.49 The first addresses policyholder’s duty of disclosure regarding the double insurance. The second addresses policyholder’s duty of disclosure regarding the sale of insured property/the substitution of party to the contract. Both cases apply to the insurance period, and therefore Article 813 has to be interpreted in logical combination of these norms.

3.2.3

The Duty of Disclosure During the Occurrence of Insured Event

The duties relevant to the occurrence of insured event are included in Article 814 of the Civil Code of Georgia.50 The policyholder’s duty of care is best reflected in the duty of disclosure during the occurrence of insured event. Transfer of risk to the insurer does not release the policyholder from continuing constant care on the insured object. Policyholder shall remain vulnerable to the occurrence of insured event despite the insurance factor. The possession of insurable interest at the moment of occurrence of insured event is an important precondition for reimbursing the insured loss. Therefore, Article 814 that deals with duty to inform the insurer about the occurrence of insured event shall be interpreted in combination with the concepts of duty of care and insurable interest. For the proper interpretation of this norm, it has 48 Article 827: Underinsurance or partial insurance; double insurance—“1. If the insured amount is less than the insured value at the moment when the insured event occurs (underinsurance or partial insurance), the insurer shall pay the damages according to the ratio of the insured amount to the insured value. 2. The person who has insured the same interest concurrently with several insurers shall immediately notify each insurer about it. The notice shall indicate the identity of all the insurers and the amount of insurance. 3. If the given interest is insured against the same risk with several insurers and the combined amounts of insurance exceed the insured value or if because of other reasons the combined amount of the compensations that would have been paid by the insurer if there had been no other contract, exceeds the total damage (double insurance), then the insurers shall be liable before the policyholder as joint and several debtors to the extent of the sum that they have agreed under the contract of insurance, but the policyholder may not receive in total the sum exceeding the real damage.” 49 Article 834: Obligation to notify of the alienation of the insured property—“The insurer shall immediately be notified of alienation of the insured property. If the acquirer or the alienator does not notify the insurer immediately, the insurer shall be released from liability if the insured event occurs after two weeks from the moment when the insurer ought to have received the notice.” 50 Article 814: The Duty to Inform the Insurer about the Occurrence of Insured Event—“1. Policyholder is obliged to inform insurer regarding the occurrence of insured event immediately after becoming aware about this. 2. After the occurrence of insured event insurer is entitled to claim for receiving any type of documents from policyholder, which is necessary for defining the dimension of insurance event or the obligation of insurer. 3. Insurer shall not rely on an agreement by which it becomes released from its obligation to reimburse the loss if policyholder breaches the duty to inform but the interests of the insurer will not be significantly affected by such a breach. 4. Insurer shall fulfill its liability of reimbursing the loss after defining of insurance event and the amount of insurance reimbursement.”

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to be analyzed in combination with Article 830 from property insurance part of the Insurance Section. The latter deals with the obligation of policyholder to follow insurer’s instructions once insurance event has occurred. Logically, these instructions are given only after informing insurer about the occurrence of insured event. Therefore, Article 814 shall be interpreted in combination with Article 830. The idea of equality and fairness when describing legal consequences of breach of policyholder’s duty is well reflected in the 3rd section of Article 814. According to this norm, insurer shall not rely on an agreement by which it becomes released from its obligation to reimburse the loss if policyholder breaches the duty to inform but the interests of the insurer will not be significantly affected by such a breach.

4 Interpretation of Insurance Section Provisions 4.1

Method of Interpretation

Methods of interpretation of legal norms are generally very important. Their importance is significantly increased in situations where there are substantial or technical flaws in legislation and the need for a logical reading of the text is urgent. Given the conditions that there are no specific rules prescribing duties of insurers in the context of transparency, judges face a serious challenge of preserving the value of good faith on the one hand and fitting within their limits of discretion on the other hand. Such a great challenge requires from judges perseverance and out of box approach. The first requires from judges the expression of will in restoring equality between the parties. The absence of relevant regulations in the code is not an excuse for judges to abandon the necessity of protecting balance between the parties. However, the second is a purely creative and an intellectual effort of navigating between induction and deduction as core skills of legal interpretation.

4.2 4.2.1

Restoring Equality Between the Parties of Insurance Contract Employing Legal Norms of Insurance Law Section

After exhibiting some of the major flaws of Insurance Section of the Civil Code with regard to transparency, solutions for restoring equality between the parties of insurance contract must be tackled. For these reasons, several solutions could be observed. These are the following:

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Firstly, before seeking for assistance outside the Insurance Section judges shall concentrate on its very first article—Article 799: The Definition of Insurance.51 Although there is no direct indication about any of the elements of transparency in this definition, judges can employ universal method of interpretation like induction. However, before that a careful reading of the article is required. After reading the definition, judges can stress bilateral and conditional obligations of parties, thus emphasizing the reciprocal nature of insurance contract.52 By employing induction as a method of interpretation, judges can expand the notion of reciprocity from primary obligations of the parties (the payment of premium from policyholder’s side and the reimbursement of loss from insurer’s side) to the “secondary”/additional obligations of parties, these being the duties of both parties to inform each other on all stages of contractual relationship. Through these logical connections from primary to “secondary” elements of insurance contract, judges can use the concept of reciprocity for justifying the fact of imposing equal burden on both parties to the contract. There are also possibilities of referring to specific norms of Insurance Section and interpreting them as best as it can relate to the notion of Transparency. In this format, two major examples may be discussed here. These are the Articles 81753–81854 (those two shall be reviewed in a combination) and Article 819. It is worth mentioning a particular judicial decision55 that addresses the issue of interpretation of Articles 817 and 818. As indicated above, Article 817 talks about late payment of insurance premium and defines legal consequences for it. Without further argumentations, it is obvious that violation of policyholder’s primary obligation/duty to pay premium will lead to unfavorable consequences. However, things get complicated when one reads the formulation of 1st section of Article 817— insurer may specify a two-week payment term in writing. Judicial decisions of

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1. According to insurance contract, insurer is obliged to reimburse the loss resulted from the insurance event in favor of policyholder. In case of agreement on fixed sum, insurer is obliged to pay insurance reimbursement or fulfil any other promised action. 2. Policyholder is obliged to pay the insurance premium. 52

Iremashvili K., Commentaries to the Article 799. The Definition of Insurance, available at http:// www.gccc.ge/. 53 Article 817. Late payment of insurance premium 1. If an insurance premium is not paid on time, the insurer may specify a two-week payment term in writing, and shall indicate the consequences of the failure to pay within the specified term. 2. If the insured event occurs after the expiry of such term and that time the policyholder has delayed the payment of the premium or interests, the insurer shall be released from liability. 54

Article 818. Contract termination by reason of late payment of insurance premiums If the policyholder does not pay the insurance premium on time, the insurer can give the policyholder a one month’s prior notice of termination of the contract and terminate the contract if the term expires without payment. 55 Supreme Court of Georgia, the Section of Civil Law Disputes, October 9, 2013, case # as-17081602-2012.

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appellate and supreme courts were developed on this case to resolve a current dilemma about how the term may shall be interpreted and even further how should this notification be qualified. On the one hand, the appellate court argued that insurer shall notify policyholder about termination of contract. The reasoning behind this conclusion is that insurer should not wait for expiration of the contract with intention of receiving premiums anyway. On the other hand, the Supreme Court stated that notification from insurer’s side shall be regarded as a right of insurer and not as an obligation. Such conclusion is based on the argumentation that Articles 817 and 818 are not imperative norms by their very nature. Accordingly, the non-employment of this right, following the court’s statement, shall not be regarded as a violation of duty of good faith from insurer’s side. Supreme Court insists that such an interpretation of Articles 817 and 818 does not lead to threatening equality between parties. After assessing the argumentations of both courts, the reasoning of appellate court seems to be more persuasive. The likelihood that insurer might misuse its power increases the need of protection of policyholder. The same logic applies to judiciary decisions on other cases.56 In all these cases, including the appellate court on the case being reviewed here, courts do not literally state that notifications included in 817 and 818 are obligations, rather they specify that these are the rights of insurer that has to be used in a good faith manner. Undoubtedly, insurer as a more sophisticated counterparty of the contract even with the non-consumer counterparty may well misuse this right of notification.57 Therefore, Articles 817 and 818 shall be interpreted in the best interest of policyholder. This requires even more expansion of the argumentation of appellate court on the case indicated above in the following way: The right of the insurer to notify implies within itself the obligation to notify policyholder about its will to terminate the contact. In other words, insurer may stay silent only if this silence implies insurer’s agreement on termination of contract, and insurer will stop receiving

56

Appellate Court of Tbilisi, the Section of Civil Law Disputes, November 21, 2012, case # 2b/ 3080-12, compare with Supreme Court of Georgia, the Section of Civil Law Disputes, February 21, 2013, case # as-85-81-2013. 57 Because of their superior power, insurers tend to misuse their rights. An academic review was done about the insurer’s malpractice with regard to duty of good faith in the US. It turns out, some insurance companies used to be silent about the insurable interest at the stage of contract formation and only then after the passing of considerable time during insurance period and after receiving corresponding premiums they claimed absence of insurable interest and insisted on cancellation of contract. The cancellation of contract in its own turn led to preservation of paid premiums for insurers, as according to uniform insurance practice it is harder to argue the revocation of paid premiums than reasonability of factual conditions that premiums are being earned. As assessed by the scholars, such a reality led not only to the breach and depredation of the value of insurable interest (my opinion is that the author indirectly refers to the concept of good faith in general), but also to the economic inefficiency of such insurance contracts. Jerry and Richmond (2007), p. 311 compare with Loshin (2007), December, 3, also compare with Iremashvili (2013), pp. 62–64.

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premium once it decides upon termination. This approach is more approximated with the concept of equality between parties of the contract.58 There is also another provision in Insurance Law section of Civil Code—Article 81959 that gives the possibility for establishing insurer’s duty of disclosure. By direct and grammatical interpretation of this norm, there is no direct duty of disclosure imposed on the insurer. However, if logical method of interpretation is employed, the term if it turns out may be interpreted in favor of policyholder, meaning, this term implies the duty of insurer to notify the policyholder about its worsening financial conditions. Such reasoning applies more to the concept of good faith than mere reliance on the verbal expression of this provision.

4.2.2

Employing Legal Norms Outside of Insurance Law Section

The other way to approach the problem of inequality created by the legislator is to seek for assistance outside the Insurance Section. In this case, judges may refer to several provisions of the Civil Code and by the use of deduction create logical links between these non-insurance provisions and the content of insurance contract. It will not be appropriate to review all those provisions that judges could seek outside the Insurance Section here. However, nominating some of them will be relevant. In terms of outside the box logic, judges can refer to the 3rd section of Article 8 of the Civil Code. This is the “golden rule” of Georgian bona fide concept, and it applies to all types of civil law relationships, including contracts.60 This provision systemically belongs to the General Part of the Civil Code/the Introduction and this way it gives judges the opportunity to deduct specific liabilities of parties (for our purposes, the insurer), which are not separately and specifically defined in the Insurance Section. Judges can also refer to the Article 318 of the Civil Code.61 This provision systemically belongs to the General Part of Law of Obligations of the Civil Code. The reference to this article gives judges the opportunity to deduct 58 Iremashvili K., “The Criteria of Equality in Insurance Relationships,” available at http://press.tsu. ge/ge/net_editions/xj-niq8km-r9euks3/xqgxxvs79x5lrl_8d/KetevanIremashvili, 77–79. 59 Article 819. Discontinuing the payment of insurance premiums The policyholder may discontinue the payment of insurance premiums if it turns out after concluding the contract that the insurer’s financial condition has worsened to the extent that there is a real risk that the insurer may default on its contractual obligations if the insured event occurs. 60 Article 8: The Subjects of Civil Law

1. Participants of legal relationships are obliged to fulfill their rights and obligations in a good faith manner. 61

Article 318: The duty to Inform Some obligations may imply the right to receive information. The duty to inform has to be fulfilled when it is important for defining the essence of obligation and party can give such an information without humiliating its own right. The costs shall be covered by the recipient of information.

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the specific, insurer’s duty to inform from the concept of duty to inform being general to the law of obligations. By interpreting this provision, judges can argue that the reciprocal duty to inform is implied in the primary obligations of the parties and that otherwise the purpose of the contract cannot be achieved. Judges can also refer to the 1st section of Article 325 of the Civil Code.62 This provision systemically belongs to the General Part of Contracts being a sub section to the Law of Obligations of the Civil Code. The reference to this article gives judges the possibility to expand the notion of equality between the parties and apply this idea to the stage of formation of contract. The purpose of preserving equality between the parties can be achieved by both—providing relevant legislative provisions or relevant interpretation in the absence of those and establishing proper standards for contract drafting. The insurer’s duty to inform can be established or implied through the contractual provisions as well. The Article 325 gives a good key for bridging such argumentations. It applies to the principle of contra proferentem, which is included in Article 345 of the Civil Code with uniform formulation of the principle: Vague provisions of the standard contract are interpreted in favor of the other party. Contra proferentem could serve a good function of justifying the increased need of protection of policyholder as not necessarily of a consumer but generally of a weaker party to the contract.

5 Scope of Judicial Review While analyzing the corresponding articles of GP (808–814), it becomes obvious that the burden of delivering information on all stages of contractual relationship is on policyholder. Neither in GP, nor in the other parts of Insurance Section, there may be found a single provision about the insurer’s duty to inform. This visual configuration of Insurance Section creates the emptiness in Georgian context of transparency and enhances inequality between the parties to insurance contract. In such unfair conditions, judges have to seek for assistance outside the Insurance Section and produce fair judgment by employing relevant methods of interpretation. Contemporary Georgian case law continuously emphasizes inequality in contractual relationships of insurance indicating the stronger position of insurer as of an entrepreneur. Of course, this is not a comprehensive list of decisions where judges address the good faith issues in insurance. However, these cases give clear picture about judiciary’s approach towards the basic concepts of transparency. Despite of developing such approaches, judges fail in successful employment of methods of logical

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Article 325: Defining the provisions of obligation on a principle of fairness If the provisions of fulfilment of obligations have to be defined unilaterally by one party of the contract or by the third party, then in cases of vagueness it shall be assumed that such definition has to be made on the principle of fairness.

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and systemic interpretation. The absence of provisions defining insurer’s duty to inform in the Insurance Section creates increased urgency for judges to think outside the box and employ all necessary tools for restoring equality between the parties.

6 Conclusion The fact that Insurance Section provisions of the Civil Code of Georgia solely concentrate on the duties of policyholder has to be seen as a reflection of historical content of duty of disclosure. In this vein, it may be said that the shift of the content of duty of disclosure from policyholder towards the insurer has not been exhibited in the civil law of Georgia, at least on a legislative level. On the other hand, judges repeatedly insist on the superior power of insurer as a party to the contract, but there is a significant lack of argumentation in their decisions that would allow establishing doctrinal conceptions of transparency. At current stage, there is still the possibility of supporting the transparency concept in Georgian Insurance Contract Law by using the general provisions of the Civil Code at various levels and relevant interpretation techniques of norms. For the future perspective however, it will be ideal if sufficient provisions will be added to the section on Insurance Law of the Civil Code. These provisions shall establish a set of clear and precise duties of insurer for all stages of contractual relationship.

References Baker T (1994) Tort remedies for breach of insurance agreements: theory: constructing the insurance relationship: sales stories, claims stories, and insurance contract damages, Symposium on the law of bad faith in contract and insurance. Tex Law Rev 72:1395, 1423–1426 Baker T (1996) On the genealogy of moral hazard. Tex Law Rev 75:237–292 Garner B (ed) (2004) Black’s law dictionary, 8th edn. Thomson West Gray J (1921) Custom, the nature and sources of the law Hinchliffe P (2011) The consumer’s view, and principles of European insurance contract law: a model optional instrument. In: Heiss H, Lakhan M (eds) Sellier/European Law Publishers, Munich Iremashvili K. The Criteria of Equality in Insurance Relationships. Available at http://press.tsu.ge/ ge/net_editions/xj-niq8km-r9euks3/xqgxxvs79x5lrl_8d/KetevanIremashvili Iremashvili K. Commentaries to the Article 799. The Definition of Insurance, Available at http:// www.gccc.ge/ Iremashvili K (2011) Characteristics of legal regulation of health insurance, Law Review, Ivane Javakhishvili Tbilisi State University Faculty of Law, #2 Iremashvili K (2013) Insurable interest Doctrine and analysis of its critics. Ivane Javakhishvili Tbilisi State University Faculty of Law, Journal of Law, #2 Jerry R, Richmond D (2007) Understanding insurance law, 4th edn. LexisNexis Loshin J (2007) Insurance law’s hapless busybody: a case against insurable interest requirement. Yale Law J 117(3):474 Lowry J, Rawlings P (2003) Insurance law: Doctrines & principles. Hart, Oxford

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Merkin R, Rodger A (1997) EC insurance law. Longman Motsonelidze N (2013) The role of contemporary biomedicine in insurance law, Law Review, Ivane Javakhishvili Tbilisi State University Faculty of Law, # 2 Schwartz V, Appel C (2009) Common-sense construction of unfair claims settlement statues: restoring the good faith in bad faith. Am Univ Law Rev 58:1477 Sovern J (2006) Toward a new model of consumer protection: the problem of inflated transaction costs. William Mary Law Rev 47:1635 Swartz K (2001) Justifying government as the backstop in health insurance markets. Yale J Health Policy Law Ethics 2(1):89–108 (Fall) Tsiskadze, Chanturia/Zoidze/Ninidze/Shengelia/Khetsuriani (Red.), Commentaries to the Civil Code of Georgia, Book 4, Part II, 2001 Vashakidze G (2007-1) Good faith according to civil code of Georgia – abstraction or practical law. Georgian Law Rev 10:52 Vaughan E, Vaughan T (1995) Fundamentals of risk and insurance, 7th edn. John Wiley & Sons, Inc Zweigert K, Kotz H (1996) Introduction to comparative law, Translated from the German by Weir T., 3rd Revised edn. Clarendon Press, Oxford

Court Decisions Supreme Court of Georgia, the Section of Civil Law Disputes, October 10, 2014, case # as-657-624-2014 Supreme Court of Georgia, the Section of Civil Law Disputes, October 20, 2014, case # as-698-668-2014 Supreme Court of Georgia, the Section of Civil Law Disputes, January 28, 2013, case #as-16431540-2012 Supreme Court of Georgia, the Section of Civil Law Disputes, October 9, 2013, case # as-17081602-2012 Supreme Court of Georgia, the Section of Civil Law Disputes, February 21, 2013, case # as-85-812013 Supreme Court of Georgia, 2002/1, 3k/1184-01 Supreme Court of Georgia, 2002/1, 3k/287-02 Supreme Court of Georgia, 2001/1, 3p/629-01 Supreme Court of Georgia, the Section of Civil, Company and Bankruptcy Law Disputes, June 6, 2001, case # 3k/450-01 Appellate Court of Tbilisi, the Section of Civil Law Disputes, November 21, 2012, case # 2b/308012 Appellate Court of Tbilisi, the Section of Civil Law Disputes, March 29, 2012, case # 2b/78-12

Transparency in the Insurance Contract Law of Japan Tadao Koezuka

1 Introduction The language on the rights and obligations contained in a written insurance contract form pertains into insurance products, which are intangible.1 An insurance company unilaterally establishes the Standard Insurance Policy, which regulates the contents of insurance contract. Moreover, as the insurance contract is a kind of “adhesion contract”, consumers with less bargaining power have less power and are given no opportunity to negotiate the conditions of insurance contract. They have a right to adhere to the terms or conditions or not, meaning, “take it or leave it”.2 Consequently, the insurance products tend to be unfair and against consumers’ interests because consumers have no choice but to make contracts although these contracts are against their interests. In Japan, this problem has been argued as “transparency” in the Standard Insurance Policy in the insurance industry, the academic society, and the administrative body. Apart from that, generally, why is consumer bound by the general contractual conditions although the consumer does not take part in stipulating the provision and does not know the provisions at all? This issue has been of particular interest to the academic societies. The insurance industry has been moving towards simple and plain conditions in recent years, which the Insurance Commission directed to be disclosed to consumers in making insurance-contracts. From the viewpoint of consumers, it is necessary for

1 2

Deguchi and Okada (2016), p. 11. Stempel (1994), §3.5, p. 97: Deguchi and Okada (2016), p. 12.

T. Koezuka (*) Kagawa University, Takamatsu, Japan e-mail: [email protected] © Springer Nature Switzerland AG 2019 P. Marano, K. Noussia (eds.), Transparency in Insurance Contract Law, AIDA Europe Research Series on Insurance Law and Regulation 2, https://doi.org/10.1007/978-3-030-31198-8_16

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them to understand the contents of insurance contract that they intended, and to know why this insurance product has been recommended when consumers make insurance-contract. In this way, “transparency” in insurance contract means that consumer has better understanding of clauses by visualizing the contents of intangible insurance products and the process of making insurance-contract. Therefore, “transparency” is related with contract law and regulation. This article aims to present “transparency” of insurance contract, including historical view, in Japan. First, I will account why General Insurance Policy Conditions legally bind contract-parties in Japan. Second, we will look how “transparency” is ensured in insurance contracts in Japan. Third, I will check the cases before the enactment of the duty to provide information to customers. Fourth, I will propose how “transparency” in a process for making insurance contract can be ensured. Fifth, we will look at the Revised Civil Code3 where the standard contractual conditions are stipulated. Lastly, I will conclude the study.

2 Legally Binding on Contract Parties by General Insurance Policy Conditions 2.1

Insurance Policy and “Freedom of Contract”

In Japan, the principle of “Freedom of Contract” is one of the fundamental principles of Private Law, implicitly recognized as a general principle of insurance market. Contracts between parties at arm’s length should be valid as concluded, namely, (1) any person can determine, except as otherwise provided in laws and ordinances, whether to make a contract; (2) the contract is valid only if making a contract, except as otherwise provided in laws and ordinances, without preparing in writing; (3) any contract parties can determine, except as otherwise provided in laws and ordinances, the contents of the contract. The principle of “Freedom of Contract” is applied to insurance contracts. Thus, as it is essential to use insurance policy in insurance contract, any contract parties can determine the contents of insurance contracts through negotiation. However, in reality, policyholders cannot negotiate with insurers. They have a right to make a choice whether to contract or not. The insurance contracts are thus considered “adhesion contracts.” However, why are contract parties bound by insurance policies without having a chance of negotiating? Is this against the principle? The principle of “Freedom of Contract” allows contract parties to use insurance policy in determining the contents of insurance contracts although there is no negotiation over the text of policies or riders and premium, and so on. Nonetheless, the clauses in insurance policies are written not by contactors but 3

Civil Code [Min-Pô], Act No. 89 of 1896.

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only by insures. Therefore, the contents or the clauses in insurance policy are doubtful whether rational or not from the standpoint of contractors. Then it becomes a problem why contractors, who are given no chance in writing the contents or the clauses by the insurers, are bound by insurance policies.

2.2

The Judgement of the Great Court: A Leading Case

We have a leading case in which the binding nature of the text or the clauses in the insurance policy is recognized by the Great Court (the present Japanese Supreme Court) on December 12, 1915.4,5 In this case, X (plaintiff, defendant, and appellee) made a fire insurance contract with Y, a foreign company (defendant, appellee, and appellant) that ran insurance business in Japan. The application for insurance was written, and that applicant approved its insurance policy as applied. However, an exemption clause, which was generally not written on Japanese fire insurance policies, was inserted in Y’s policy as follows: the insurance company shall not pay insurance money to damages arising from forest fire or burning forest. X claimed insurance money from Y because the other day a spreading forest fire caused X’s house to burn. However, Y denied payment because of an exemption clause on the insurance policy. The Tokyo High Court, on May 17, 1915,6 upheld X’s claim because Y did not inform X about the exemption clause, and X did not intent to make an insurance contract of which an exemption clauses was inserted. Y appealed to the Great Court. The Great Court overturned and remanded the Tokyo High Court’s ruling, holding that: (1) the contracting parties were presumed to intend the contents of the insurance contract where the insurance policy is based until it is proven otherwise, i.e., if they made an insurance contract without manifesting the intention of not using the insurance policy; and (2) X was presumed to have accepted the rights and duties arising from the fire insurance contract and given by the fire insurance policy, after signing the application by which act the contract was perfected, even if he or she did not understand the details of the fire insurance policy. From this decision, the rule is as follows: the contracting parties of the insurance policy are bound because of their intention that the rights and duties arising from the insurance contract should be provided by the insurance policy. A number of opposition theories were issued against this decision.7

4 The Great Ct. of Cassation Judgment of December 12, 1915, Minroku 21-2182 [The Taishinin Taishô 4 nen 12 gatsu 24 nichi, Dai Ichi Minjibu Hanketsu, Minroku No. 21, p. 2182]. 5 Ueyanagi (1980), pp.10–11; Ishida (1994), pp.6–7; Osawa (1996), pp. 90–91; Amari (2008), pp. 6–7; Ôtsuka, (2010), pp. 6–7. 6 Tokyô High Court Judgment on May 17, 1915, 2001, Shinbun No. 1011, p. 21 [Tokyô Kô Han May 17, 1915 Shinbun No. 1011, p. 21]. 7 See, regarding the doctrine on the several theories in Japan, Kawakami (1988), pp. 46–112.

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However, this decision generally has regulated not only the insurance practice but also the general contractual condition or regular transaction agreements in Japan.

2.3

National’s Control to General Insurance Policy Conditions for Consumers

The insurance policies are doubtful whether fair, proper and rational, or not, as they are created by insurers who possess quality and quantity of information, and stronger negotiating powers than consumers; nonetheless, the Great Court made the above decision. Accordingly, the insurance policies are required for national’s control for consumers’ protection.8 The three controls or regulations below could help improve “transparency” of the insurance policies. (1) Legislative Control. The Consumer Contract Act9,10 was established in 2000. This act makes an irrational clause that harms the interests of the consumers in the insurance policies rational, and the clauses in insurance policies will be voided if they violate the terms under Art. 8, Art. 9, and Art. 1011 of the Act. (2) Administrative Control. The business of a juridical person shall be subject to the supervision of a competent government agency. In relation to the insurance policy, the Financial Services Agency12 (FSA) guides and supervises financial institutions, including insurance companies, to request insurance companies’ application for approval of conditions or terms in insurance policies. Concretely, this is stipulated in the Insurance Business Act13 as follows: a person who seeks to obtain a license shall submit to the Prime Minister a written application for the license, attached the general policy conditions as the necessary documents (Art. 4II③); after commencing business, an insurance company must obtain authorization from the Prime Minister, otherwise it shall be punished by a non-criminal fine if it seeks to modify the general policy conditions (except the particulars specified by Cabinet Office Ordinance as being not very likely to impair the protection of policyholders, etc.) (Art. 123I, Art. 333I⑳); when the Prime Minister finds it necessary to protect policyholders, etc., he/she may order the insurance company to modify the general policy conditions, otherwise it shall be punished by a non-criminal fine (Art. 131). 8

Koezuka (2016), pp. 55–66. The aim of the Consumer Contract Act is to protect the interests of Consumers, in consideration of the disparity in the quality and quantity of information and negotiating power between Consumers and Business Operators (§1). 10 Consumer Contract Act [Syôhisya-Keiyaku-Hô] Act No.61 of May 12, 2000. 11 http://www.japaneselawtranslation.go.jp/law/detail/?id¼2036&vm¼04&re¼01. 12 Financial Service Agency [Kinyû-Chô]. https://www.fsa.go.jp/en/index.html 13 Insurance Business Act [Hoken-Gyô-Hô] Act No. 105/1995. 9

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(3) Judicial Control. The nature of legislative and administrative control is general and abstract. Their controls work as “ex-ante regulation” before disputes. On the other hand, judicial control is specific and individual. The court takes control of the general policy conditions as “ex-post regulation”, determining whether the condition is in breach of laws and regulations after the event of any disputes arising over the general policy conditions. One of the judicial controls is the method of interpreting the general policy condition. The rule of “Contra Proferemtem”14,15 is applied to a clause in the insurance policy if it is ambiguous.

3 Ensuring “Transparency” in Insurance Contracts 3.1

“Transparency” in General Insurance Policy Conditions

In 1974, “Your Plain Talk Car Policy”, in which simpler words used in auto insurance policy were to be given their ordinary and plain meaning, was available in the USA. In 1990 onwards, a movement for “transparency” of the insurance policy started in Japan. In July 1991, the General Insurance Association of Japan (GIA) put together and published a report entitled “On Simplification for Terms of No-Life Insurance”16 rewriting the difficult technical terms to simpler terms, and deepen mutual understanding between consumers and insurers of insurance products, basing

14

Judgment of the Supreme Court of Japan, 2nd Petty Bench, November 10, 1995, Vo1. 49 Minji Hanreishu (Minshu) No. 9, p. 2918 is a legal case in which the Supreme Court reached a judgment based on the rule of “Contra Proferemtem”. The issue in this case is whether a common-law wife came under the “spouse” of the exemption clause in a voluntary automobile liability insurance policy. The Osaka High Court Judgment on November 29, 1991, Hanta No. 777, p. 201 made a judgment denying a claim of the plaintiff and appellant. Then the appellant for revision made an application for final appeal because a common-law wife did not come under the “spouse” based on the rule of “Contra Proferemtem”. The Supreme Court rejected the demand for revision, declaring that it was not necessary to discriminate between a legal “spouse” and a “common-law wife.” 15 Judgment of the Supreme Court of Japan, 2nd Petty Bench, February 20, 1987, Vo1. 41 Minji Hanreishu (Minshu) No. 1, p. 159 is a legal case in which the Supreme Court reached a judgment based on the rule of “Contra Proferemtem”, too. The issue in this case is whether the insurance company was exempted from payment of voluntary automobile liability insurance claim because the insured did not give notice of an accident within 60 days from accident day under the exclusion clause. The Sendai High Court Judgment on July 19, 1985, Vol. 20 Kôminshu No. 1, p. 60 made a judgment denying a claim of a defendant and appellant. Then the appellant for revision made an application for final appeal, the Supreme Court rejected the demand for revision, declaring that failure to observe the obligation to inform the insurance company of an accident shall not result in exemption from payment of insurance company to the insured. 16 “On Simplification for Terms of No-Life Insurance” [“Songaihoken-Yôgo-no- Heiika-nitsuite”].

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on a proposal of the Quality of Life Council, a Japanese governmental organization that exists purportedly to protect consumer interests.17 Moreover, it is important that the structure of the insurance policy makes it easier for consumers to understand the insurance product and to find a necessary item. However, in reality, the general insurance policy conditions are not easy for a layperson to understand, and to know what was written in it because of the difficult structure and many legal terms in its policy conditions. Especially from standpoint of protecting consumers, it is necessary to promote “transparency” of the exemption clause in the insurance policy because the accidents, which the exemption clause in insurance policy is applied, are several and wider than the exempted accidents applied in the Insurance Act.18 The exemption clauses sometimes take consumers at a disadvantage, and disputes occur between the concerned policyholders and insurers. Thereafter, GIA established the “Guideline for Explanations on Documents for Solicitation” (“Boshu Bunsho nado no Hyouji ni kakaru Gaidorain”) in 2006 and the “Guideline for Promoting Comprehensibility of the General Insurance Policy” (“Hoken Yakkan no Wkariyasusa Koujo Gaidorain”) in 2008. Indeed, the General Insurance Policies have been easy to understand for consumers. In addition, GIA issued the “Guideline for Terms in the Insurance Policy and Documents for Solicitation”, which took a direction that insurance companies work on readability, as a revised edition of the report “On Simplification for Terms of No-Life Insurance” in 2017. In this way, the insurance industry was expected to make an effort to improve “transparency” in insurance contracts.

3.2

“Transparency” of Insurance Contracts by Enactment of Insurance Act

Japan’s Commercial Code,19 enacted in 1899, had stipulated the Life Insurance and Non-Life Insurance in Chapter 10, but this Code became outdated, or did not fit into the present insurance business and insurance situation. For example, the Commercial Code had no regulation on Accident Insurance Contract and Sickness Insurance Contract, which are paid with fixed cash benefit because there is no prescribed rule for their contracts in the Commercial Code. In 2008, the Chapter 10 in Commercial Code was abolished, and Japan’s Insurance Act,20 which regulates Accident Insurance Contract and Sickness Insurance Contract, was established in 2008 and entered into force on 1 April 2010. 17

Kanazawa (2018), pp. 37–38. Insurance Act [Hoken-Hô] Act No. 56/2008. 19 Commercial Code [Shô-Hô] Act No.48/1899. 20 Kozuka and Lee (2008), p. 73. 18

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Insurance Act increased, overall, the “transparency” of insurance contracts, basing on the protection of consumers. The points of the new Act,21 from the view of policyholder protection, are as follows: (1) Expansion of the coverage of Insurance Act. The Commercial Code was not available to mutual benefit contract, but the Insurance Act is available to mutual benefit contract, which is essentially the same as Insurance Contract; (2) Enactment of provisions on Accident and Sickness Insurance. As above, provisions on Accident and Sickness Insurance were enacted; (3) Development of provisions for policyholder protection. Provisions for policyholder protection were prescribed in consideration of the disparity in the quality and quantity of information and negotiating power between policyholders (insurance contractor, insureds, and beneficiaries) and insurers; (i) the old provision on obligation to disclose in the Commercial Code was abolished and a new provision was set – a new duty to disclose important matters to insurer in making a contract for insurance coverage, all policyholders must do is to declare the questions that insurer asks and review the provisions of the duty to disclose an important matter to the insurer; (ii) insurers are allowed to cancel the insurance contract if the insurance solicitor finds disturbance in the important matters declared; (iii) a new provision in Insurance Act was stipulated, and the insurer is responsible for the delays in performance of the insurer’s main obligation to pay insurance money after the expiration of the ordinary period for investigation; (iv) Insurance Act invalidates the provisions in General Insurance Policy, which are more disadvantageous to policyholders than above provisions in the Insurance Act. (4) A flexible rule on Non-Life Insurance. The Non-Life Insurance Contract in the Commercial Code was invalid when the insurance amount is higher than the insurance value. This rule is not flexible and not suitable in practice. However, in the new Act, the contract is generally kept valid although the insurance amount is higher than insurance value; (5) Secured priority for insurance money in Liability Insurance. A victim is given a statutory lien, as a priority, to insurance money and recovery for the damage sustained; (6) Development of provisions for changing beneficiaries. The Commercial Code did not provide the provisions on changing beneficiary. However, in the new Act, the provisions on Life Insurance, Accident, and Sickness Insurance for paying fixed cash benefit provided that the policyholder may declare his/her intention to change beneficiary to the insurer and that policyholder may change beneficiary by will. (7) Enactment of a provision for preventing moral risk. The insurer may cancel the insurance contract because of serious events that break the relationship of trust between policyholder (insured or beneficiary) and insurer. As such, from the point of view of consumers, the Insurance Act made it clear that the insurer may cancel the insurance contract. 21 Ochiai and Yamashita (2008), pp. 5–9; Hagimoto et al. (2008), p. 3; Hagimoto (2009), pp. 11–12; Amari (2009), pp. 8–16.

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Case Law Before the Enactment of the Duty to Provide Information to Customers

In the 2016 revised Insurance Business Act, the provisions on the duty to provide information to customers were stipulated. However, even in these days and in the past, there is and was no provision on the duty to actively or positively provide information to customers in the Civil Code, Insurance Act, Insurance Business Act, and Consumer Contract Act, etc., except under the 2016 revised Insurance Business Act. Whether Judicial Lower Courts admit this duty or not22 depends on the cases, but based on regulation by FSA for Insurance Business, namely, the Insurance Business Act, insurance company and insurance solicitor are prohibited from not providing information on the material points of inspection to consumers, or providing false facts to them. The regulation is directly related to a contractual effect, but Judicial Courts are apt to establish this duty from the regulation of the prohibited acts. On substantial theory, the “self-responsibility” of consumers leads to a duty to provide information to customers. To do so, consumer should know that information and be provided with that information. Because the “self-responsibility” is conditioned on the circumstance that a person can determine by himself or herself, and he or she cannot determine his or her rights and duties without the information on what these rights and duties are that he or she acquires and incurs when business operators one-sidedly have the information.23 However, the Supreme Court took a strict judgment on a duty to provide information. Here, we introduce three main cases.

3.3.1

Hakodate District Court Judgment on March 30, 2000, Hanji No. 1720, p. 33, Hanta No. 1083, p. 16424,25

A massive earthquake struck the Okujiri Island area in Hokkaido in 1993, and the houses of the Okujiri Island residents were burned down by fire after the earthquake. This case is in relation with the duty to provide information. The residents (the consumers, or the plaintiffs), who have not entered into the earthquake insurance contract, have claimed for damages caused by a breach of duty of the insurance companies (the defendants) to disclose information on the earthquake exclusion clause and to provide its exclusion.26 The earthquake insurance contract is so special

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There were disputes over whether insurance company or insurance solicitor had the duty to explain in Variable Life Insurance Claim Lawsuit. Fukazawa (2014), pp. 36–38. 23 Kogayu (1996), pp. 93–94. 24 Hakodate District Court Judgment on March 30, 2000, Hanji No. 1720, p. 33, Hanta No. 1083, p. 164 [Hakodate Chi Han Heisei 12 nen 3 gatsu 20 nichi, Hanji No.1720, p. 33, Hanta No. 1083, p. 164]. 25 Kuroki (2001), pp. 41–47; Deguchi (2002), pp. 179–183; Kawakami (2001), pp. 97–99; Kinoshita (2003), pp. 106–109. 26 However, the insurance company denies the consumer’s claims for insurance payments pursuant to the fire insurance policy with earthquake exclusion clause if the damages of their houses caused by the earthquake are applied to the earthquake exclusion clause.

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that consumers can enter into its contract only when they can make a fire insurance contract. The Hakodate District Court held that: (1) in Japan, insurance companies had never provided coverage for damages caused by fire arising from earthquake since 1888 when fire insurance was established; (2) in general, based on the principle of “self-responsibility”, a fundamental principle in private law, when information provided from business operators gave consumers the blame for “self-responsibility” because consumers could not collect information by themselves, the general duty to disclose information and to provide information were admitted to business operator; (3) the general duty to disclose information and to provide information is based on the regulation prohibiting insurance companies and insurance solicitors from not providing the material points of inspection and providing the false facts; (4) their general duty was sought based on the principle of “good faith”; (5) in this case, the insurance companies had no general duty when the consumers made the fire insurance contracts; (6) however, whether the consumers had specific duties on specific circumstances depended on each specific case; (7) consequently, the insurance companies had no specific duties when the consumers entered into the contracts with the insurance companies. Therefore, the Hakodate District Court held that the insurance companies had no duties in this case.

3.3.2

Osaka High Court Judgment on October 31, 2001, Hanji No. 1782, p. 124

The case that lead to the Osaka High Court Judgment on October 31, 2001, Hanji No. 1782 has the following facts: the powerful earthquake occurred in 2001 in Kobe area. A fire originated in a shoes store in Kobe, broke out and spread to a total of 85 houses and shops. Then the residents (the consumers, or the plaintiffs) claimed damages against insurance companies (defendants) based on the fire and earthquake insurance because of non-performance of the duty of providing information and of explanation. On 25 April 2000, the Kobe District Court permitted the insurance claim of some residents but denied the insurance claim of the rest because the earthquake was applicable to the earthquake exclusion clause. Thereafter, the rest of residents and the insurance companies both appealed against the decision. The Osaka High Court made a judgment that: (1) in relation to the duty to provide information to consumers, the insurance companies (appellees and appellants) had a responsibility, in good faith, to provide information on the contents of the earthquake insurance and the meaning of the consumer’s imprint on the earthquake insurance application form is not to have legal intention to make contract of earthquake insurance, and to explain them, in consideration of the disparity in information between the consumers and the insurance companies’ and the meaning of consumers’ imprint is one of important matters that insurance companies are obliged

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to provide information on and explain to consumers under Art. 16②27 of the Act on the Control of Insurance Solicitation28; (2) the consumers were allowed to claim for damages as consolation money because the insurance companies provide to information them consumers might enter into the earthquake insurance contract, therefore the insurance companies violated duties of provide to information and explanation, and deprived consumers of the opportunity for “self-determination”.29 The decision permitted the specific two duties in this case on the ground of the disparity in the quality and quantity of information and negotiating power between the consumers and the insurance companies, and it was natural for the insurance companies to have two duties because generally the fire insurance contract included the earthquake insurance coverage. In the case that the earthquake insurance coverage was not included in the contract, the insurance companies should have explained its coverage as material points of inspection under the Act on the Control of Insurance Solicitation.

3.3.3

Supreme Court Judgment, 3rd Petty Bench, December 9, 2003, Vo1. 57 Minji Hanreishu (Minshu) No. 11, p. 1887 (Quashing and Decision by Final Appellate Court)

This judgment is a judgment of the Supreme Court30 that quashed the Decision of the Osaka Higher Court on the ground that considering the intention or decision of whether to include earthquake insurance contract is not related to moral interests such as life, body, etc., but to proprietary interests, in regards to the intention in this case, although the provision and explanation of information from the side of insurance companies did not reach the desired level, this action cannot be regarded as illegal to award consolation money, unless there are exceptional circumstances.31 This case was not related to the duty to providing information. The approach using the rule of “Contra Proferemtem” is easier in protecting the consumers than the approach using the breach of the duty to provide and explain information. However, in practice, insurance company must explain whether common-law wife fell within the definition of “spouse”.

27

This provision is same as Art. 300➀ of the Insurance Business Act. Act on the Control of Insurance Solicitation [Hokenboshû-no-Torishimari-nikansuru-Hôritsu] Act No. 171 of 1948. This act was repealed in 1995 when the Insurance Business Act was amended. The provisions of the Act on the Control of Insurance Solicitation are incorporated in the Insurance Business Act. 29 As to “self determination” in the era of Big Data, Yamamoto (2017), pp. 29–34. 30 Supreme Court Judgment, 3rd Petty Bench, December 9, 2003, Vo1. 57 Minji Hanreishu (Minshu) No. 11, p. 1887 [Sai Han Heisei 15 nen 12 gatsu 9 nichi Vo1.57 Minji Hanreishu (Minshu) No. 11, p. 1887]. 31 Sumida (2004), p. 117; Nishimoto (2004), p. 79; Makinori Gotô (2004), pp. 102–103; Kasai (2004), pp. 68–71; Kuroki (2004), pp. 196–200 (pp. 34–38); Isomura (2004), pp. 25–26; Iemoto (2004), pp. 33–47; Takehama (2004), pp. 117–118; Kusano (2005), pp. 136–137; Yamashita (2005), pp. 94–97; Shidahara (2006), pp. 356–379; Shimada (2005), pp. 102–104; Okada (2010), pp. 52–53; Kuroki (2010), pp. 16–17. 28

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4 “Transparency” in a Process for Making InsuranceContract 4.1

Before Revising Insurance Business Act in 2016

The first Insurance Business Act was established in 1900 and abolished in 1939, and the Insurance Business Act was fully revised to the new Insurance Business Act. Subsequently, the Act was again revised in 1995. The point in the 1995 amending Act is very important: (1) the lifting of the ban on the mutual life insurance business entries and non-life insurance business entries through subsidiaries in their respective business fields; (2) introduction of insurance products and insurance premiums; (3) establishment of “Fund for Policyholders” (“Hokenkeiyakusya Hogo Kikin”), which is the role of the former “Policyholders Protection Corporation”. Moreover, in 1998, lawmakers abolished the obligation to use the insurance rating calculated by the rating organization in the “Act on Non-Life Insurance Rating Organization of Japan”32 and insurance companies were allowed to produce original insurance products, and consequently non-life insurance market competition emerged, as the other business world; (4) the Act on the Control of Insurance Solicitation, which did not positively promote “transparency” of contract process in prohibiting certain insurance solicitation,33 was repealed and incorporated in the 1995 amending Act. However, before 2016, there had not been stipulated any provisions directly written on “transparency” for insurance contract in the Insurance Business Act, looking at the consumer protection side. The Act was again revised, indirectly protecting consumers, as follows34: (1) Establishment of “Policyholders Protection Corporation”35 in 1998; (2) Enhancement of its Corporation in 2005; (3) Establishment of a System for Protection of Customers’ Interests in 2008; (4) Introduction of the Financial Services ADR (Alternative Dispute Resolution) in 2009. As consumer protection is considered very important, some acts improving “transparency” in insurance contract were established as follows: (1) the Consumer Contract Act36 established in 2000 and enforced in 2001; (2) the Act on Sales, etc., of financial instruments37 established in 2000 and enforced in 2002; (3) the Act Concerning Confirmation of Identification of Customers, etc., by financial

32 Act on Non-Life Insurance Rating Organization of Japan [Songaihoken-RyouritsusansyutsuDantai-ni-Kansuru-Hôritsu] Act No.193/1948. 33 The Act regulated the act of insurance solicitation not through the provision on providing information to consumers but through the provision prohibiting falsely informing the consumers, or failing to disclose thereto any important particulars stipulated in the insurance contract. 34 Yasui (2010), pp. 6–12. 35 Policyholders Protection Corporation [Hokenkeiyakusya-Hogo-Kikô]. 36 Consumer Contract Act [Shôhisya-Keiyaku-Hô] Act No. 61/ 2000. 37 Act on Sales, etc. of Financial Instruments [Kinyû-Shôhin-Hanbai-Hô] Act No. 101/2000.

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institutions, etc. and Prevention of Unauthorized Use of Deposit Account, etc.,38 established in 2002 and abolished in 2008 because of the full enforcement of the Act on Prevention of Transfer of Criminal Proceeds (or The Criminal Proceeds Transfer Prevention Act),39 established in 2002 and enforced in 2003; (4) the Act on the Protection of Personal Information,40 established in 2003 and enforced in 2005. Those Acts, which directly protected consumers in the Deregulated Insurance Market in Japan, is related to insurance solicitation.

4.2 4.2.1

After Revising Insurance Business Act in 2016 Enactment of the Provision of a Duty to Provide Information to Customers

Before 2006, the Insurance Business Act, or the above 1995 amending Act, only prohibits “falsely informing the policyholder or the insured, or failing to disclose thereto any important particular stipulated in the insurance contract” under Art. 300 (1) (i), and if this offense is committed, any person shall be punished. It was suspected that under Art. 300 (1) (i) the scope of ‘important particular’ is limited to the contents of insurance contracts, and that this provision is strictly operated as falsely information is punished.41 In this way, on the one hand, there is no provision on active duty to provide information to customers in Insurance Business Act; on the other hand, a bank shall, to contribute to the protection of customers, etc. with regard to the acceptance of deposits or instalment savings, etc. provide information on the contents of contracts pertaining to the deposits, etc. and other information that would be helpful for the depositors, etc., under Art. 12-1(i) of the Banking Act,42 although deposit or instalment is easier for customers to understand than insurance. This is irrational because deposit or instalment is easier for customers than insurance.43

38 Act Concerning Confirmation of Identification of Customers, etc. by Financial Institutions, etc. and Prevention of Unauthorized Use of Deposit Account, etc. [Kinyûkikannnado-niyoru-Kokyakunado-no-Honninkakunin-nado-oyobi-Yokinkôza–nado-no-Huseinariyô-no-Bôshi-ni-KansuruHôritsu] No. 32/2002. 39 Act on Prevention of Transfer of Criminal Proceeds [Hanzai-ni-yoru-Shûeki-no-Iten-Bôshi-nikansuru-Hôritsu] Act No. 22/ 2007. 40 Act on the Protection of Personal Information [Kojinjôhô-ni-kansuru-Hôritsu] Act No. 57/ 2003. 41 Masahi Ishida, Understanding Insurance Business Act—Explanation on Amendment of Insurance Business Act in 2016; New Rule on Insurance Sale and Response on it—[Naruhodo Hokengyôhô—Heisei 26 nen Hoken-Gyôhô-Kaisei-no Kaisetsu; Hokenhanbai-no-Shin-Rû-ru-tosono-Taiô—] p. 33 (Hoken-Mainichi-Shinbunsha, 2016). 42 Banking Act [Ginkô Hô] Act No. 59/ 1986. 43 Ishida (2016), p. 38.

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Then the Working Group on the Status of Insurance Products, Service, etc. (WG),44 the Financial System Council (FSC),45 in FSA, reported “On the Status of New Insurance Products, Service and the Solicitation Rule”46 on June 7, 2015. The report suggested that it is suitable to make it clear that the duty to provide information to customers has a legal basis in the insurance solicitation.47 Therefore, the Insurance Business Act was revised in 2016 to stipulate that insurance companies and insurance solicitors shall be obligated to provide information to customers in insurance solicitation under Art. 294(1) to improve a correct understanding of insurance products, service, etc. This provision promotes “transparency” of process of conclusion of insurance contracts.48

4.2.2

Enactment of the Provision of a Duty to Ascertain Customers’ Intentions

It is proper that consumers could make insurance-contract with insurers after correctly understanding the insurance products, as insurance products are intangible and are composed of so many clauses called the insurance general policy. It is important to provide the duty to ascertain customers’ intentions, but before 2016 there was no provision, in any act, that insurance companies and insurance solicitors shall be obligated to ascertain customers’ intentions. The WG reported that insurance companies and insurance solicitors shall be obligated to ascertain customers’ intentions to provide an insurance products suitable to consumers’ intentions. As such, the report said that it was important for customers to make insurancecontract with the recognition that the insurance product offered to them matched their intentions to understand their need of a better insurance to cover their risks. Therefore, the 2016’s revised Insurance Business Act stipulated that insurance companies and insurance solicitors shall be obligated to ascertain customers’ intentions on insurance solicitation under Art. 294-2. This provision promotes more “transparency” of process of conclusion of insurance contracts.49

44 Working Group on the Status of Insurance Products, Service, etc. [Hokenshôhin Sâbisu-noTeikyô-nado-no-Arikata-ni-kansuru-wâkingu gurûpu]. 45 The Financial System Council [Kinyû-Singikai]. 46 “On the Status of New Insurance Products, Service and the Solicitation Rule” [“Hokenshôhin Sâbisu-oyobi-Boshû-Rûru-no-Arikata-ni-tsuite”]. 47 WG in FSC (2015), p. 12. 48 See, Suzaki (2014), pp. 12–13; Ishida (2015), pp. 660–672; Yamashita (2015), pp. 83–90, pp. 93–96; Furuta (2016), pp. 87–90; Tokio Marine & Nichidô Fire Insurance Co., Ltd. (2016), pp. 441–449; Nakaide (2017), pp. 37–38. 49 See, Suzaki (2014), pp. 9–12; Ishida (2015), pp. 672–680; Yamashita (2015), pp. 90–96; Tokio Marine & Nichidô Fire Insurance Co., Ltd. (2016), pp. 449–452; Nakaide (2017), pp. 38–39.

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“Comprehensive Guidelines for Supervision to Insurance Companies” by Financial Service Agency

FSA exercises supervision over insurance companies based on Comprehensive Guidelines.50 After the Insurance Business Act has been revised, Comprehensive Guidelines (ver. 2017)51 are written in detail: On the duty to provide information: whether insurance company or insurance solicitor shall provide information for conclusion of the insurance contract and related reference information in an appropriate manner during insurance solicitation or insurance contract?52; whether the information necessary for customers to understand the contents of insurance products and information for calling customers’ attention shall be written on the provided document or the electric alternatives?53; whether insurance company or insurance solicitor shall develop an appropriate system54 for providing written documents on “the outline of insurance contract” and “information for calling attention”?55 On the duty to ascertain customers' intentions: whether insurance company or insurance solicitor shall provide an opportunity for customers to approve a recommended insurance contract after confirming its consistency with their intentions?56 Moreover, FSA determined the methods of ascertaining and confirming consumers’ intention and the insurance products that insurance company or insurance agency shall ascertains and confirms.57 FSA asks insurance company or insurance solicitor to develop a process and internal rules for ascertaining customers’ intentions, and to provide insurance solicitors an appropriate instruction, education, and management.58

4.2.4

Fiduciary Duty and Financial Service Agency

FSA decided and announced a policy of establishing and promoting the “fiduciary duties” as a normal duty in financial institutions in “Financial Administrative Policy

50 The two legal problems were pointed out: (i) what is the legal nature of the Guidelines or their grounds; (ii) whether FSA was legally qualified to publish its interpretation on the new duties of providing information and ascertaining customers’ intentions in the Insurance Business Act. Deguchi (2016), pp. 132–138. 51 The revised Guidelines was issued in September 2017. 52 FSA (2017), p. 129. 53 FSA (2017), p. 129. 54 See, Kuriyama (2016), pp. 10–12; Tôyama (2016), pp. 44–46; Furuta (2016), pp. 91–94. 55 FSA (2017), p. 136–139. 56 FSA (2017), p. 139–140. 57 FSA (2017), p. 140–143. 58 FSA (2017), p. 143–146.

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in Accounting Period in 2016”.59 Next, FSA announced “Financial Administrative Policy in Accounting Period in 2017”.60 It is important that insurance broker and bank disclose commission, when they contract with customers, to promote “transparency” in the process of making insurance-contract. Fiduciary Duty Insurance Broker and Banks must undertake to help promote “transparency”. On the other hand, Insurance Agency or Insurance Joint Agency is exempt from a duty of disclosing commission. A number of Insurance Joint Agencies, which sell many insurance products from several insurance companies, are going up. Many customers buy insurance products in Japan because it is convenient for them to be able to compare and make a choice from a variety of insurance products. Insurance Companies cannot set aside them. However, customers were afraid that a Joint Agency might recommend an insurance product with a higher commission. This is “commission bias”. To keep the “transparency”, it was necessary to prevent Insurance Joint Agency from recommending an insurance product with a higher commission. A Regulation introduced into the Ordinance for Enforcement of the Insurance Business Act (Ordinance of the Ministry of Finance No. 5 of February 29, 1996), Insurance Joint Agency is regulated through a method of comparative and recommending sale under Art. 227-2III④ in order not to recommend an insurance product with a higher commission through comparison sale.61

5 Revised Civil Code The part of the law of obligations in the Civil Code was amended in 2017, promulgated on June 22, 2017 and would come into force on April 1, 2020. In relation with “transparency”, there has been no provision on the “Standard Adhesive Terms and Conditions” in any Act; what is more remarkable is that the provisions on the “Standard Adhesive Terms and Conditions” have been prescribed in the revised Civil Code. The Civil Code is not a special code for protecting consumers but a general code for citizens, and then the provisions on “Standard Adhesive Terms and Conditions” in the revised Civil Code generally regulate rights and obligations arising from standard policy, not specially focusing on Standard Insurance Policy. However, the provisions on “Standard Adhesive Terms and Conditions” promote “transparency” in insurance contracts. 59

FSA (2016), pp. 10–11. An insurance broker is obligated to disclose commission to a costumer under Art. 297 of the Insurance Business Act, when he or she asks for it in the course of offering to make an insurance contract. Insurance agency is not obligated to disclose it. However, banks decided and declared to independently disclose commission in 2016. 60 FSA (2016), pp. 9–10. FSA took a policy of promoting “transparency” in financial institutions’ effort to establish and promote “fiduciary duties” as a normal duty. 61 See, Kuriyama (2016), pp. 13–19; Tôyama (2016), pp. 47–59; Yasuda, (2016), pp. 63–67.

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Concretely, the revised Civil Code explains the ground that the contents of the contracts based on “Standard Adhesive Terms and Conditions” are valid: (1) a person who agreed to conduct standard transaction62 shall be considered to agree with each condition in standard adhesive terms and conditions (Art. 548-2 I) unless a counterparty gives a disadvantage, which limits the rights of counterparties and creates additional obligations on them, and is against good faith63 by a condition of the contractual clauses (Art. 548-2 II); (2) a person who prepared to contract with using Standard Adhesive Terms and Conditions shall show the contents of the Terms and Conditions to the counterparties without delay (Art. 548-3 I); (3) a person who prepared to contract with using Standard Adhesive Terms and Conditions permits to change the contents of Standard Adhesive Terms and Conditions, provided counterparties agree to the change under certain conditions (Art. 548-4 I). The Standard Insurance Policy is applicable to the provisions on the “Standard Adhesive Terms and Conditions” if the policy meets their terms and conditions.

6 Conclusions As stated above, “transparency” is rising in the field of insurance contract and regulation in Japan. Insurance products are intangible and they consist of standard policy where rights and obligations are written. As insurance contracts are called “adhesion contracts”, consumers have only a choice of whether to take it or leave it when they make insurance-contract. Therefore, “transparency” is an important factor in making contract. Especially from the viewpoint of “self-responsibility” and “self-decision”, the intention to be bound by the insurance policy is very essential. However, in practice, insurance companies cannot help using insurance policy when making insurance-contract, even if it is difficult for consumers to understand the contents of insurance products. Then, why are consumers bound by the insurance policy? The Great Court accounted the reason why the contract parties were bound. It is the Court’s theory that contracting parties were bound by the General Contract Clauses because of their presumed intentions of using them. This theory was difficult for consumers to ensure “transparency” of insurance policy because this theory was not useful in solving the problem, namely, insurance terms were not used in everyday conversation and the legal terms and structure of the insurance policy are complex.

Art. 548-2 of the Civil Code defines a “Standard Transaction” and “Standard Adhesive Terms and Conditions”; the former means to be the transaction that a specified person who conduct for an unspecified large number of people and that is rational for both in all or a part of the uniformed contents; the latter means to be the whole of the conditions a specified person prepared to use as contents of the contract. 63 See, Nakaide (2017), p. 40. 62

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Thereafter, there was a movement for ensuring “transparency” of the insurance policy by a way of using simpler terms and constituting simpler structure. From the viewpoint of “self-decision” and “self-responsibility”, it is necessary for consumer to understand the terms in insurance policy and its structure. It is unfair for consumers to be bound by “Byzantine” policy written in small print. Next, insurance industry developed and produced a variety of third-sector insurance, such as accident and sickness insurance with fixed amount, which is neither a kind of Life Insurance nor a kind of Non-Life Insurance. However, there was no contractual regulation for the third-sector insurance in the Commercial Code. This means that “transparency” is not ensured in the field of the third-sector insurance, which was unilaterally made by insurance company. Then Insurance Act was enacted in 2008, which now regulate accident and sickness insurance with fixed amount. Thirdly, ensuring “transparency” is important in the process of making insurancecontract. Providing information on insurance contract by insurance company or insurance solicitor promotes consumers’ understanding of the contents of insurance contract. However, the Supreme Court has not ruled that the insurance company has a duty to provide information on the material points of inspection to consumers in insurance contract. To my understanding, whether Judicial Lower Courts admit this duty or not depends on the cases. However, Insurance Business Act regulates insurance company and insurance solicitor to provide information. “Transparency” would thus be ensured in a process of making insurance-contracts. Fourthly, generally, the Standard Adhesive Terms and Conditions would have been contractually regulated by the Revised Civil Code. This tendency is applicable to other standard contractual conditions and terms. Nowadays, Administrative or Consumer Affairs Agency seeks consumers shift away from consumer protection towards consumer self-reliance for consumers to make autonomous and reasonable choices about products and services in their lives. Moreover, the Japanese society is expected to change to a “Consumer Citizen Society.”64 In this meaning, the importance of “transparency” would be further increasing.

64

Act on Promotion of Consumer Education [Shôhisha-Kyôiku-no-Suishin-ni-kansuru-Hôritsu] Act No. 61 of 2012. “The term ‘Consumer Citizen Society’ as used in this Act means a society in which consumers actively commit themselves to the creation of a just and sustainable society with mutual respect for the individuality of each consumer, as well as the diversity of consumer lifestyles and with an awareness of how their own consumption behavior could influence social and economic trends both at home and abroad, and the global environment at present as well as over future generations”. Art. 2II.

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References Amari K (2008) Case Study, Supplementary Jurist No. 194 Commercial Law (General provisions and commercial transactions) Legal Cases 100 [Shôho (Sôsoku Shôkoi) Hanrei Hyakusen], 5th edn Amari K (2009) Enactment of insurance act and forthcoming challenges [Hokenhô no Seitei to Kongo no Kadai]. In: Amari K, Yamamoto T (eds) The disputed points in insurance act and outlook for insurance act [Hokenhô-no-Ronten-to-Tenbô]. Shôji-Hômu Deguchi M (2002) Case study. Jurist No. 1215 Deguchi M (2016) A legislative approach to the Article 1 of the insurance business law [HokenGyôhô–ni-kansuru-Ripôronteki-Kôsatsu]. J Insur Sci No. 635 Deguchi M, Okada T (ed) (2016) The insurance business act [Hoken-Gyô-Hô]. The General Insurance Institution of Japan FSA (2016) Financial administrative policy in accounting period in 2016 [Heisei 28 jimunendo Kinyu gyôseihôshin] FSA (2017) Comprehensive guidelines for supervision to insurance companies [Hokengaisha muke no Sôgouteki na Kantoku Shishin] Fukazawa Y (2014) Insurance solicitation [Hoken-Boshû]. In: Yamashita T, Nagasawa T (eds) System of disputed points insurance law [Ronten-Taikei Hoken-Hô 1], vol 1. Daiichi-Hôki Furuta K (2016) Amendments of solicitation regulation for insured of group insurance and their practical considerations [Dantai Hoken no Hihokensha ni taisuru Boshû Kisei no Meikakuka to Jitsumu jô no Ryuiten]. J Insur Sci No. 635 Goto M (2004) Case study. Hôgaku Kyôshitsu No.287 Hagimoto O (ed) (2008) Material on planning insurance act [Hokenhô-Ritsuan-Kankei-Shiryô], an extra edn. Shôji Hômu No. 321 Hagimoto O (ed) (2009) Questions and answers on the insurance act [Ichimon-ittô- Hoken-Hô] (Shôji Hômu) Hagimoto O, Sakamoto S, Tomita K, Motoi S, Nishina H (2008) Summary and detail on enactment of insurance act [Hokenhô no Seitei no Keii to Gaiyô]. In: Hagimoto O (ed) Material on planning insurance act [Hokenhô-Ritsuan-Kankei-Shiryô], an extra edn. Shôji Hômu No. 321 Iemoto M (2004) Case Study, Vol. 55 Law and Politics No.3 Ishida Masashi (2016) Understanding Insurance Business Act-Explanation on Amendment of Insurance Business Act in 2016; New Rule on Insurance Sale and Response on it-[Naruhodo Hokengyôhô-Heisei 26 nen Hoken-Gyôhô-Kaisei-no Kaisetsu; Hokenhanbai-no-Shin-Rû-ruto-sono-Taiô-] (Hoken-Mainichi-Shinbunsha) Ishida Mitsuru (1994) Case Study, Supplementary Jurist No. 129 Commercial Law (General provisions and commercial transactions) Legal Cases100 [Shôho (Sôsoku Shôkoi) Hanrei Hyakusen], 3rd edn Ishida Mitsuru (2015) Insurance Business Act 2015 [Hoken Gyôhô 2015] (Bunshindô) Isomura T (2004) Case Study, Hôgaku Kyôshitsu No.294 Supplementary Appendix Hanrei Select 2004 Japanese Law Translation: http://www.japaneselawtranslation.go.jp/law/detail/?id¼2036& vm¼04&re¼01 Kanazawa O (2018) Insurance law [Hoken-Hô]. Seibundô Kasai O (2004) Case Study, NBL No.795 Kawakami S (1988) Legal theory on regulation for general contract clauses [Yakkan Kisei no Hôri]. Yûhikaku Kawakami S (2001) Case Study, 2001 annual important legal cases comments [Heisei 12 Nendo Juyô-Hanrei-Kaisetsu], an extra edn. Jurist No. 1202 Kinoshita K (2003) Case Study, private law legal case remarks [Shihô-Hanrei-Rimâkusu] No.26 Koezuka T (2016) General transaction clause [Yakkan]. In: Nishiyama Y (ed) Actual enterprise law [Akuchuaru Kigyôhô], 2nd edn. Hôritsu-Bunka-Sha

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Kogayu T (1996) Tort based on breach of duty to explain and theory on Civil Code (the Last Part) [Setsumei-Gimu-Ihan-niyoru-Huhôkôi-to-Minpô-Riron]. Jurist No. 1088 Kozuka S, Lee J (2008) The new Japanese insurance act: comparisons with Europe and Koera, vol 14. Zeitschrift für japanisches Recht No. 28 Kuriyama Y (2016) The background and meaning of the recent in insurance distribution [Hoken Boshû Kaikaku no Haikei to Igi]. J Insur Sci No. 635 Kuroki M (2001) Case Study, Hareiji No. 1737 (Hanrei-Hyôron No. 506) Kuroki M (2004) Case Study, Hanji No. 1867 (Hanrei-Hyôron No. 549) Kuroki M (2010) Supplementary Jurist No. 202 Insurance Law Legal Cases 100 [Hokenhô Hanrei Hyakusen], 1st edn Kusano K (2005) Case Study, Hanta An Extra Ed., 2004 Annual Main Civil Legal Case Comments No.1184 Nakaide S (2017) Revision of the Japanese Insurance Business Act in 2014-Insurance Distribution Channels in Japan and New Rules on the Solicitation of Insurance-. Z Japan R / J. Japan. L. No. 44 Nishimoto T (2004) Case Study, Ginkô Hômu 21 No. 633 Ochiai S (2008) Signification of new insurance act and outlook on related legislation [Atarashii Hokenhô no Igi to Tenbô]. In: Ochiai S, Yamashita N (eds) The theory and practice of insurance law [Atarashii-Hokenhô-no- Riron-to-Jitsumu], an extra edn. Kinyû Shôji Hanrei Ochiai S, Yamashita N (eds) (2008) The theory and practice of insurance law [Atarashii-Hokenhôno-Riron-to-Jitsumu], an extra edn. Kinyû Shôji Hanrei Okada T (2010) Case Study, Supplementary Jurist No. 200 Consumer Law Legal Cases 100 [Shôhisyahô Hanrei Hyakusen], 1st edn Ôsawa Y (1996) Case Study, Supplementary Jurist No. 138 Non-Life Insurance Legal Cases 100 [Songaihoken Hanrei Hyakusen], 2nd edn Ôtsuka R (2010) Case Study, Supplementary Jurist No. 202 Insurance Law Legal Cases 100 [Hokenhô Hanrei Hyakusen], 1st edn Shidahara S (2006) Case Study, Vol. 58 Hôsôjihô No.1 Shimada K (2005) Case Study, Hanta No.1178 Stempel JW (1994) Interpretation of insurance contracts. Little, Brown & Company Sumida M (2004) Case Study, Hôgaku Seimiar No. 951 Suzaki H (2014) On the report by the “Working Group on the provision of insurance products/ services” of the financial system council [Atarashii Hokenshôhin Sabisu-oyobi-BoshuRûru-noArikata-nitsuite]. JILI J [Seimeihoken-Ronschû] No. 187 Takehama O (2004) Case Study, 2004 Annual important legal case comments [Heisei 15 Nendo Juyô-Hanrei-Kaisetsu], an extra edn. Jurist No. 1269 Tokio Marine & Nichidô Fire Insurance Co., Ltd. (ed) (2016) [Tokyô-Kaijô- Nichidô-Kasai-Hoken Kabushiki-Gaisha] No-life insurance business law and practice [Songai-Hoken-no-Hômu-toJitsumu], 2nd edn. Kinzai Tôyama S (2016) The insurer’s liability based on the tort of the independent agent [Daikibo Noriai Dairiten to Shozoku Hokengaisha no Sekinin]. J Insur Sci No. 635 Ueyanagi K (1980) Case Study, Supplementary Jurist No. 70 Non-Life Insurance Legal Cases 100 [Songaihoken Hanrei Hyakusen], 1st edn WG in FSC (2015) Report; “Working Group on the Status of New Insurance Products, Service and the Solicitation Rule” [Hôkokusho; “Atarashi-Hokenshôhin Sabisu-oyobi-Boshû-Rûru-noArikata-nitsuite”] Yamamoto T (2017) Transformation of self-determination in big data society. NBL No.1089 Yamashita N (2005) Case Study, Private Law Legal Case Remarks [Shihô-Hanrei-Remâkusu] No. 30 Yamashita T (2015) Insurance solicitation rules after reform of the insurance business law of Japan in 2014 [Hokenboshû-ni-kakaru-Gyôhô-Kisei-ni-tsuite]. JILI J [Seimeihoken-Ronschû] No. 193

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Yasuda K (2016) Novelty and influence of independent agents’ duties to provide information regarding comparison and recommendation [Noriai-Dairiten-niokeru Hikaku-Suishô-nikansuru Jôhô-Teikyo-Gimu to sono-Eikyô]. J Insur Sci No. 635 Yasui T (2010) The latest explanation of the insurance business act [Kaitei-ban Saishin-Hoken-gyôHô-no-Kaisetsu], revised edn. Taisei Publishing

List of Judgments Judgment: The Great Ct. of Cassation Judgment of December 12, 1915., Minroku 21-2182 [The Taishinin Taishô 4 nen 12 gatsu 24 nichi, Dai Ichi Minjibu Hanketsu, Minroku No. 21, p. 2182] Judgment: Tokyô High Court Judgment on May 17, 1915, 2001, Shinbun No.1011, p.21[Tokyô Kô Han May 17, 1915 Shinbun No.1011, p.21] Judgment: Sendai High Court Judgment on July 19, 1985, Vol. 20 Kôminshu No. 1, p.60 Judgment: Judgment of the Supreme Court of Japan, 2nd Petty Bench, February 20, 1987, Vo1.41 Minji Hanreishu (Minshu) No.1, p.159 Judgment: Osaka High Court Judgment on November 29, 1991, Hanta No. 777, p.201 Judgment: Judgment of the Supreme Court of Japan, 2nd Petty Bench, November 10, 1995, Vo1.49 Minji Hanreishu (Minshu) No.9, p.2918 Judgment: Hakodate District Court Judgment on March 30, 2000, Hanji No.1720, p.33, Hanta No. 1083, p.164 [Hakodate Chi Han Heisei 12 nen 3 gatsu 20 nichi, Hanji No.1720, p.33, Hanta No. 1083, p.164] Judgment: Osaka High Court Judgment on October 31, 2001, Hanji No. 1782, p.124 [Osaka Kô Han Heisei 12 nen 10 gatsu 31 nichi Hanji No. 1782, p.124] Judgment: Supreme Court Judgment, 3rd Petty Bench, December 9, 2003, Vo1.57 Minji Hanreishu (Minshu) No.11, p.1887 [Sai Han Heisei 15 nen 12 gatsu 9 nichi Vo1.57 Minji Hanreishu (Minshu) No.11, p.1887]

Transparency in the Insurance Contract Law of Peru Alonso Núñez del Prado Simons

1 Introduction The principle of transparency in insurance derives from the very foundations of the insurance business. The insurance contract is unthinkable without a mutual insurance, since no insurer with common sense would dare to issue a single policy, not even a few. A sufficient group of natural or juridical persons is required to contract a similar coverage that allows the formation of a common fund that will answer to the losses some may suffer. These losses or claims are covered by this fund, in other words by the premiums paid by the insured for similar policies of a particular insurance line, say fire, transportation or general liability. The insurer does not pay the claims with its own money, but with the money collected from the other insureds to the specific fund. Therefore, insurers are actually fund managers of the policyholders, which is also the basis for the insurance system being supervised throughout the world and in Peru by constitutional order (Art. 87) like banks, pension fund managers and the financial system in general. Transparency in the insurance contract, as we shall see, implies the text (general and special conditions of the policy), the price or premium that must have a detailed technical support and obviously the payment of losses, including the processes of adjustment and rejection of claims. From there, too, the very management of the insurer, the selection of personnel, the board of directors, the management and the investments must be transparent in the broadest and most profound sense of the term. The insured and the public should be able to know and understand each of the details of how the insurers are managing their money.

A. Núñez del Prado Simons (*) Catholic University of Peru, Lima, Peru e-mail: [email protected] © Springer Nature Switzerland AG 2019 P. Marano, K. Noussia (eds.), Transparency in Insurance Contract Law, AIDA Europe Research Series on Insurance Law and Regulation 2, https://doi.org/10.1007/978-3-030-31198-8_17

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The supervisory entity, in the Peruvian case, the Superintendencia de Banca, Seguros y Administradoras de Fondos de Pensiones (SBS), should ensure that insurers meet all the necessary requirements for transparency to be provided on a permanent basis. In other words, the SBS is mainly due to the insured, whose interests it safeguards in its supervisory work.

2 Transparency in Insurance Contract Law 2.1

Concept

In an insurance contract, transparency can be defined—according to Manfred Wandt1—as: 1. comprehensibility, 2. unambiguity and 3. certainty. These terms describe different aspects of transparency. Comprehensibility means that a rule of law is drafted in a manner understandable to the public. In the law of the insurance contract, it means that the Act must be understandable for the insured (the average insured, which is a legal fiction comparable to a reasonable person under the civil law). A rule should be considered as unambiguous when its wording (including the regulation and legal consequences) does not invite to a different possible interpretations. The unambiguity would be the absence of reasonable doubts about its interpretation. If a provision is clear, it cannot be determined by interpreting it in itself, since the reference for clarity is in principle in other legal norms. Thus, a rule that is not ambiguous could be considered unclear and vice versa. Certainty is the opposite of ambiguity, that is to say that a certain level of certainty in its interpretation should result from the reading of the norm. We know that a complete certainty is impossible but the idea is that the norm is as clear as possible. On the other hand, the objective of comprehensibility may conflict with that of clarity; but in the case of an insurmountable conflict between the two, clarity takes precedence over comprehensibility. This priority of clarity, according to Wandt, is based on the fact that if an average insured faces a problem of comprehensibility, he is able to overcome it by other means, such as the search for legal advice. A deficit of clarity, on the other hand, cannot be compensated. The Regulation on Transparency of Information and Insurance Contracts (RTI) contained in Resolution SBS No. 3199 of May 24, 2013 defines in its Article 3 the Transparency Principle.2 The companies directly, or through their insurance promoters and marketers; and, if applicable, insurance brokers, should provide users with clear, adequate, specific

1

Wandt and Unan (2012). “Transparency of information is a mechanism aimed at improving the user’s access to information, so that the latter can, in a responsible manner, make informed decisions regarding the services that they wish to contract”. 2

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and timely information that will enable them to know the costs, rights and obligations involved in the conclusion of an insurance contract, as well as those relevant aspects related mainly to the benefits, risks and conditions of the insurance offered in the market. The transparency of information is not only applicable before and during the conclusion of the insurance contract but throughout the entire contractual relationship as established by the Regulation.

2.2

Importance

Transparency has a greater impact than in commodity exchange contracts. This difference is based on the characteristics of an insurance policy in which until the occurrence of an insured loss there is no exchange of money for physical goods, but with a promise for money. The absence of a physical manifestation of mere promise hinders visual inspection, as in contracts for the exchange of goods. The insurance product only includes the policy and its general and special conditions. However, the insurance cannot be considered a completely invisible property since the contract is written in the policy. The insurance only manifests itself in the policy, with the aggravating fact that it is not written in common language, but in technical and legal language. In addition, insurance can only be perceived as a complicated legal product in which coverage have exclusions that are eventually included by adding special clauses, which make it difficult for the average insured to understand. Insurance also refers to a promise for extended periods, usually one year, but in the case of life insurance, for decades. That is why there are rules on how the policyholder managed the insured risk. We are, then, dealing with the transparency of complex legal regimes. Insurance as a complex product makes it difficult for the policyholders to understand all its properties before acquiring unless they have the advice of a professional in the field because a layman can hardly fully understand an insurance product; but this also happens in other areas. If a person wants to acquire a computer, he or she is not likely to have the knowledge of the operation of its electronic systems and other parts, unless he or she is a professional in the field; nor will he or she know the details of the manufacturer’s business or its margins. This principle can only claim the transparency of the properties of the product, which are indispensable for the decision to purchase. The main purpose of the principle of transparency in an exchange contract is to put the buyer in a position to determine if the product meets its reasonable expectations. In insurance, this intrinsic need is in some cases evident since the coverage can serve an existential need, as would be the case of a life insurance, when it is contracted with intentions to save in the long term. In addition to transparency in the duties and rights and of the parties, costs are very important in these cases. It is necessary to inform the insured what proportion of his premium is used to cover the general expenses of the insurer, and therefore cannot be included in the accumulation of capital. Cost transparency is

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also important and some legislations3 allow the insurer to alter premiums if the technical bases of calculation change. It is reasonable to demand in an abstract way the greater contractual transparency, including that of costs in the areas of life and health insurance. However, the legislator must decide what rights and duties are essential, what are the transparency requirements that the contract in terms of duties and rights must comply and why other means apart from the policy and transparency of its general and special condition can be increased for the policyholder. In particular, the legislator should assess whether and to what extent the information and advice is adequate to increase the insured’s understanding of the product in the transparency requirements that are not related to the contractual text. In assessing the suitability of such means, it is necessary to consider whether the average insured is willing to make use of and demand such information and advice without affecting their relationship with the insurer. The costs of preparing additional information and counseling materials should also be assessed because they may ultimately increase the costs of the insured.

2.3

The Evolution of the Treatment of Contractual Transparency in Peru and Modern Trends

Until 1992, the Peruvian Market had unique wording policies—often they are bad translations of the English—that had been approved by the SBS and in which at least nominally it was tried to protect the insured since they were standardized like the different clauses (special conditions). In addition to the interest of insurers, who always had influence at all governmental levels, this was one of the reasons why the regulation of the insurance contract of the 1902 Commerce Code (largely a copy of the Spanish Code of 1875) remained for so long. As in other parts of the world, policy wordings served a legislative function because they had been pre-approved by the SBS, as well as the modifications once made. The problem was that the system generated corruption and rates were much higher in Peru than in the international market.4 The liberalization of the market brought with it, originally, bewilderment and many problems, as suddenly the tariffs were no longer in force and insurers could charge what seemed convenient. At first, the reaction was conservative and most continued to use tariffs. A paradigmatic case was the case of the Institute of Training

3

In Germany, the regulation allows the insurer to alter premiums if the technical basis for calculating the rates has changed (Section 203 VVG). 4 For example, the rates for fire and allied lines established in the official tariff that governed the Peruvian market could reach seven or eight per thousand and are currently less than two per thousand. Shortly after the market was released in 1991, the rates reached less than one per thousand.

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in Insurance, created several years earlier and where, basically, he was taught to use the existing tariffs, he found overnight that most of his teachers were not prepared for the new task and shortly closed its doors by determination of its own founders, the members of the Peruvian Association of Insurance Companies (APESEG) that noticed that it had stopped fulfilling its functions. Competition caused prices to gradually decline to levels below the international market, and on the other hand, the regulator, the SBS, came across circumstances it was not used to. The adjustment period took some time, but a few were all adjusted, some better than others. Mergers, acquisitions and the like while also separating life operations and general risks, which has not yet ended, drastically reduced the number of insurers.5 At the same time, among the brokers, the largest absorbed the smallest and the international operations began to have greater importance. It gave what we could call a process of concentration and two insurers (Pacífico y Rímac) today have an unimaginable market share (70%) in other times and in other latitudes. All this occurred at the same time that the country took off economically, which had a strong impact on the industry that has had an exponential growth in recent times, although still has a low level of insurance penetration in relation to GDP, which is below the majority of countries in the region. It seems that it is not successful enough in the attempt to increase the insurance conscience in our country.6 Part of the explanation is the bad image that insurance companies have in the population, where they are seen as efficient salesmen of policies, but bad payers of claims.7 We must learn what the developed countries have known and practiced for many years. One of the causes of the bad image of the insurers was the lack of a modern and adequate legislation that can put a stop to what was happening. However, the

5

Before the liberalization of the insurance market in Peru, there were about 20 insurers and some years later the market was reduced to less than 10. Pacifico merged with Peruano-Suiza, El Sol with La Nacional, which was later acquired by Mapfre, Rimac with Internacional, the latter company bought Wiese-Aetna and Royal Sun Alliance, Universal and Vitalicia were liquidated, as well as other mergers and liquidations. 6 Rindebro, Ulric, Reporte de seguros en el Perú. https://www.apeseg.org.pe/wp-content/uploads/ 2018/05/Reporte-de-Seguros-en-Per%C3%BA.-BN-americas.pdf. (p. 5). Accessed 1 July, 2019. 7 Zurita, Manuela. El Comercio (Día 1). https://elcomercio.pe/economia/dia-1/mapfre-debemoshaber-ganado-imagen-aprovechadoras-manera-aniego-san-juan-lurigancho-sedapalindemnizaciones-seguros-siniestro-noticia-613179. Accessed 1 July, 2019. Martínez Ventura, Jazmín and others. Apuntes sobre la nueva ley de contrato de seguro: Análisis y críticas a dos años de su publicación. http://www.google.com/url?sa¼t&rct¼j&q¼&esrc¼s& source¼web&cd¼8&ved¼2ahUKEwjZzZKs75TjAhVRuVkKHdgDFIQFjAHegQIBxAC& url¼http%3A%2F%2Frevistas.pucp.edu.pe%2Findex.php%2Factualidadmercantil%2Farticle% 2Fdownload%2F13582%2F14206&usg¼AOvVaw1wyWKtOj1fEJ4o6xRJZss6. Accessed 1 July, 2019. Castillo, Diego, Estas son las 8 empresas que controlan la salud privada en el Perú. http://utero. pe/2015/10/16/estas-son-las-8-empresas-que-controlan-la-salud-privada-en-el-peru/. Accessed 1 July, 2019. Torres López, Fabiola. Los dueños de la salud privada en el Perú. https://ojo-publico.com/93/losduenos-de-la-salud-privada-en-el-peru. Accessed 1 July, 2019.

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Peruvian case had several additional ingredients, such as the existence of few companies and the two that took a very large share of the cake. Further, it must be added that the SBS, efficient in monitoring financial strength, was unable to prevent clauses that are not only abusive but illegal to circulate in the market because it has registered around 1500 polices. In fact, the National Institute for the Defense of Competition and the Protection of Intellectual Property (INDECOPI) indicated many times the directions to follow, as well as the limits that established the arbitration clauses, which were indiscriminately included in all policies and which made it impossible for policyholders without resources to sue insurers, especially those in the provinces who had no resources to litigate in Lima. It is necessary to recognize that in this aspect, INDECOPI has played an important role, especially since the promulgation of the Consumer Protection and Protection Code.8 With the liberated market, the SBS began to have problems and this is why, through Act # 26595 of 1996, the Congress delegated to the President the power to elaborate a new Commercial Code, because the current, dated in 1902, was obsolete. That Act also empowered a Special Commission to coordinate with the various sectors, institutions and individuals that had an interest in making their opinions and suggestions known.9 The Commission10 concluded its work and presented the Draft Law of the Insurance Contract and, through Ministerial Resolution No. 288-2006-JUS of July 7, 2006, the Ministry of Justice ordered the publication on its website for a period of 15 days. As stated in the consideration of the aforementioned ministerial resolution, it was necessary to pre-publish the proposal so it can be reviewed and analyzed comprehensively by the operators of the law and the public. Unfortunately, the aforementioned Draft Bill did not come to Congress. Several years later, in 2011, the aforementioned Draft was given to Congressman Javier Bedoya de Vivanco, who presented it to Congress without hiding its origin, through Bill No. 028/2011-CR. Afterwards, he asked the author to help him by selecting a group of specialists. When this happened, together with the President of the Justice Commission, they commissioned the group to update the draft and gave them the opinions of the various institutions consulted. In short, after they worked on it, their text was approved for the most part with some minor modifications that unfortunately did not improve it, and it became Act 29946 of the insurance contract.

8

https://elcomercio.pe/economia/peru/indecopi-apeseg-multo-aseguradoras-s-9-6-millones-cuatroanos-noticia-616092. 9 According to Article 3 of the Law, the Commission would be created by three members of Congress, two law faculties, one from the Chamber of Commerce of Lima, one from the National Confederation of Chambers of Commerce, one from the Ministry of Justice, one of APEMIPE, one of INDECOPI and one of CONASEV. 10 The author was part of the Commission at the invitation of its President, Jaime Zavala Costa.

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2.4

415

Transparency in the Insurance Contract

The insured’s clear understanding of its insurance coverage was already a major need at the time of the promulgation of the # 29946 Insurance Contract Act (LCS), which came into force in May 2013. Article 26 lists the essential contractual elements that must be included in the general conditions (GC) of insurance. As I have already pointed out, we had and still have a market of few insurers and very concentrated in two, product of the mergers to which I have referred, with an obsolete legislation that allowed the CG and clauses of the policies—that required only to be registered and not prior approval—derived in the exclusion of pre-existing diseases when an insured change plan or insurer. The Insured Ombudsman Office, reduced the proportion of claims settled in favor of the insured. It has been reduced from 2/3 to half (1/3), in addition to having failed to publish their resolutions. Further, an unjust law was enacted for retirees and unemployed persons11 regarding compulsory life insurance created by Law 4916. With the goal of placing the Peruvian market in order, which became chaotic because of the liberalization, the members of the Commission who drafted the Project chose to incorporate an article (26) creating a process of writing minimum GC (general conditions and additional clauses). For these purposes, we established a maximum period of two years during which the SBS would draft policies from those used in Peru and the international market, especially those from more developed countries and at the same time close to ours, as would be the case of Spain and those in the markets where we reinsure (England) or have preeminence in some risks (Germany in Engineer Insurance). For these purposes, we consider prior approval necessary during the process. Unfortunately, it was impossible and Article 27 establishes that in personal, mandatory and massive insurance, policies must be subject to the conditions and minimum clauses established by the SBS. The regulations the SBS established were what we know as particular conditions already indicated in the previous regulations. We then remain in the hands of the free wording of conditions and clauses in all kinds of insurance. Afterwards, a Project in the Congress tried to exclude from the application of the LCS the majority of the insured market through a modification for the large risks that will turn out to be most of the companies as it has happened in Chile, but the bill was rejected in Congress.

11 At the time, I published an article criticizing this rule in El Comercio on September 8, 2010 under the heading “Do not do what you should, but what should not be done.”

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The Insurance Contract in Peru The Contractual Good Faith Principle Between the Parties and the Fraud in the Insurance Contract

Some Background Good faith is required in all civil contracts, as established in Article 1362 of our Civil Code that has been widely commented by Manuel de la Puente y Lavalle.12 In an insurance contract, the parties are obliged to act in good faith. This was established by Section 17 of the Maritime Insurance Act of 1906 of England. The obligation of maximum good faith was understood, mainly, as the duty of the insured to declare everything related to risk being honest with the insurer. However, the text of the aforementioned Act imposes the principle on both parties and requires good faith of both the insured and the insurer. The aforementioned was included in Article 376,13 subsection 1 of the Commercial Code of Peru in force from 1902 until May 27, 2013. From which it can be concluded that the obligation of good faith already reached in that legal body to both parties.

The Principle of Maximum Good Faith The relationship between someone seeking insurance and the insurer that provides it has been defined under what is known as the doctrine of the highest good faith uberrima bona fidei. From the first days of maritime insurance, moving on to other forms, the responsibility to reveal all the relevant facts has rested on the contracting party or policyholder. This means that it must provide all the information it possesses and is relevant to the risk it wishes to insure—not just the one it considers important—and must offer it voluntarily, without needing it to be required. I believe that most people linked to the insurance industry would agree on defining a ‘material fact’ as the one that would influence a prudent insurer in accepting the risk or the rate it would charge for it. As can be seen, it is of utmost importance that the contractor of an insurance complies with the doctrine of the highest good faith. Although it is less frequent because of the characteristics of the insurance contract, equity leads us to affirm that the obligation to disclose and generally to proceed with maximum good faith also falls on the insurer, as we shall see later.

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De la Puente y Lavalle, Manuel. El contrato en General. Tomo I. Palestra Editores. Lima, 2001. Págs. 327–388. 13 Art. 376. Any insurance contract will be void: Due to the proven bad faith of one of the parties at the time of the conclusion of the contract.

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In the insurance market, it is generally accepted that when they have not been asked, some circumstances do not have to be revealed,14 which has been confirmed in the Comparative Law Court Decisions.15 If, as we have indicated in general, these facts do not require disclosure, the final decision is only made after meriting all the other details that surround the specific case. The duty to exercise maximum good faith rests equally on who negotiates the contracting of the policy, be it an agent or the representative of a professional broker, applying the rules of the mandate (Article 37 of Law 29946).16 If it does not comply with disclosing all the details concerning the risk, the English law used to consider17 it as a breach by the owner, which, as we have indicated, makes the policy null and void. As in the previous cases, although this is a valid statement in general terms, it needs to be evaluated in detail on a case-by-case basis. Formerly, the duty of good faith was limited to pre-contractual duties without considering those that corresponded to the parties once the policy had been issued, and most cases of the nineteenth century referred to violations of good faith by concealments or misrepresentations that occurred during that stage, because it was understood that the obligation ended with the signing of the contract. Subsequent experience made it necessary for jurisprudence to establish that the maximum good faith must exist during the contract negotiations, but it must continue until the moment the policy expires or becomes effective.18 Therefore, for some insurances such as fire and theft, a condition expressly states that during its term, the insurer must be notified of any change that increases the risk and for which an additional premium may be required. This obligation reverts to the renewal and the policyholder would violate his obligations, if he will pay the renewal premium, without having declared a relevant change that increases the risk. Let us see now some of the ways in which this duty of the highest good faith could be violated. Unintentionally, the insurance applicant could:

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U. K. Marine Insurance Act (1906), S. 18.3 (Disclosure by the assured). Strive Shipping Corp v. HellenicMutual War Risks Association (“The Grecia Express”) [2002] EWHC 203 (Comm), [2002] Lloyd’s Rep I.R. 669. Kausar v. Eagle Star Insurance Co Ltd [2000] Lloyd’s Rep IR 154. by Staughton LJ at p. 157. Drake Insurance Plc v. Provident Insurance Plc [2003] EWCA Civ 1834, [2004] Lloyd’s Rep I.R. 277. 16 The aforementioned Article 37 of Law 29946 says “The letter of appointment that the insured or contracting party extends to an insurance broker, authorizes the latter to perform administrative acts of representation, but not of disposition.” 17 Before the last Reform. 18 This has been pointed out by the Supreme Court (Civil Chamber of Cassation) of Colombia “the duties of loyalty, probity and good faith that the parties, in any contract and more in this insurance, reciprocally, duties that underpin the intrinsic coherence and total that should show the contractual behavior of one party against the other, so that both in the preparation stage and in the execution of the contract”. Exp. 7125, May 8, 2003. 15

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– Stop communicating some vital information, forgetting or not realizing that it is important, that is, an omission. An example would be that the applicant for a life insurance policy did not reveal that he had suffered rheumatic fever in his childhood. Proposal-requests do not always include a question about this disease and the applicant may not realize its importance. – Provide information that you believe is correct when in fact it is not. It is known as a false involuntary declaration and could occur if the landlord described the work done by his tenant as “engineering” when, without his knowledge, the tenant would have entered into the manufacture of plastic products; or could go even further, and deliberately – Hide a relevant fact that constitutes concealment; or – Get to the point of providing false information. Thus, an insurance applicant, who claims to be 70 when in fact he is 75, makes a false fraudulent statement. There is, however, a dominant current in continental European law that argues that the compensation must be commensurate with the seriousness of the fault, provided that it has been committed in good faith. In this regard, the Insurance Contract Law (29946) in force in Peru was drafted, which amended the old Commercial Code of 1902. We will explain it in detail below.

Bad Faith of the Insured. Preservation of the Contract and Nullity for Fraud (Fraud) or Serious Misconduct The new Insurance Contract Law -LCS- (29946), promulgated on November 27, 2012 and in force in Peru 180 days later, that is to say since May 27, 2013, includes good faith as the first of its principles, established in Article II of the General Provisions, a kind of preliminary title of the standard. Consequently, it also welcomes the idea that good faith is necessary for both parties. What is also applicable—as it is known—to any contract. Most of the Peruvian law (Articles 9 to 15 of the LCS) in good faith refers to the duties of the insured to provide the insurer with information before the contract enters into force. However, as is generally accepted in the doctrine and comparative law, Peruvian law (Articles 59 to 73) establishes that the duty of good faith is not limited to pre-contractual matters; it applies to the way in which the parties behave to each other after the contract has been formalized. The members of the Commission who drafted the Project consider it appropriate to opt for the preservation of the contract (Article 15) by abandoning the English doctrine that had prevailed in the Commercial Code of 1902. We decided to follow the path of European Continental Law (Germany, France, Spain, Italy), of which ours is an heir, which seeks to preserve the contract in cases of reluctance or inaccurate statements not malicious. The English Law and the Commercial Code (Article 376) valid until May 27, 2013, when the new Law came into force, allow the

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insurer to deduce the nullity of the contract if the reluctance or inaccurate information is relevant. In other words, we prefer to limit the option of nullity of the contract to only cases of fraud and inexcusable guilt, which have often been neglected by the insurers when they criticized the turn that was being made with the new Law. What really bothers about this change is that the enormous discretion of the insurers to decide their position in the face of claims in which there is a fault of the insured is being limited. Articles 13 and 14 of the new Law establish the rules for cases of reluctance and/or inaccurate declaration not malicious.19 We opted for the solution of European Continental Law and in the event of a loss, the compensation is reduced ‘in proportion to the agreed premium difference and that which would have been applied had the real state of risk been known’. Under previous legislation, an insurance company, if the reluctance or inaccurate declaration were important, could consider the contract null and deny payment of the full amount of the loss. This way is being modified in the English Law, since they have realized that the rest of European countries have legislated looking for the preservation of the contract and the proportional reduction of the compensation, as in our Law.

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Reticence and/or inaccurate statement not malicious. Article 13: If the reluctance and/or inaccurate declaration does not obey the deceit of the contracting party and/or insured and is verified before the loss occurs, the insurer must offer the contracting party the revision of the contract within a period of thirty (28) days computed from the referred verification. The offer must contain an adjustment of premiums and/or coverage and grant a term of ten (10) days for the contracting party to pronounce on acceptance or rejection. If the revision is accepted, the readjustment of the premium is paid as agreed. In the absence of acceptance, the insurer may terminate the contract by means of a communication addressed to the contracting party, within a period of thirty (28) days computed from the expiration of the ten (10) day period established in the previous paragraph. The premiums accrued pro rata correspond to the insurer, up to the moment in which the resolution was made. Review not accepted. Article 14: If the verification of the reluctance and/or inaccurate declaration indicated in the preceding article is subsequent to the production of a claim, the compensation due is reduced in proportion to the difference between the agreed premium and the one that had been applied. have known the real state of risk. Subsistence of the contract. Article 15: In cases of reticence and/or inaccurate declaration, the nullity, revision or termination of the contract is not applicable when: (a) At the time of completion of the contract, the insurer knows or must know the true state of the risk. (b) The circumstances omitted or declared inaccurately stopped before the accident occurred or when the reluctance or inaccurate declaration not malicious, did not influence the production of the incident or the extent of compensation or benefit due. (c) The omitted circumstances were content of an express question not answered in the questionnaire and the insurer also entered into the contract. (d) Circumstances omitted or declared inaccurately reduce the risk.

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If, as often happens, the true facts only come to light as a result of a loss, the insurer will have to decide whether the violation is serious enough to refuse to accept the claim. This is a decision that must be analyzed carefully, because the rejection of a claim may have to be justified later in the judicial process, with the consequent cost overruns. It is indispensable—given the characteristics of the insurance business—that this code of conduct—the obligation of the immense bona fidei—that was established so long ago, continues to dominate all the relationships of the industry; and be accepted by all those who work in the insurance market.

Bad Faith of the Insurer As I have already noted, the concept of ‘bad faith’ basically applied to the insured until the English courts recalled that the Marine Insurance Act demanded good faith from both parties and the American courts followed them. In the Latin American context, we have the Colombian professor J. Efrén Ossa C.20 and the Argentine writer Rubén S. Stiglitz21 in the same sense; also, Amadeo Soler Aleu.22 In Peru, Zaida Osorio Ruiz23 made a brief comment, but made it clear that good faith is also required of the insurer. Some years before, Carlos Rodríguez Pastor noted the obligations of the insurance company.24 As mentioned above, bad faith can occur in the phase of contractual negotiations and, in the case of the insurer, it is directly connected to the drafting of the contract which, in most countries, is regulated by the Insurance Contract Law (LCS) that provides for it. In the Peruvian case, the articles (39, 40 and 41) of the LCS related to the abusive clauses are examples of how the bad faith of the insurer is sanctioned when it includes these in the policies: ‘they are null and void by what they are it is not agreed’.

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This same loyalty (good faith) must correspond to the insurer in the conception of the policy and in the execution of the contract. Efrén Ossa (1984), p. 41. 21 The express acceptance of the right of the insured or the mere passing of time (tacit) prevents the insurer from arguing defenses that is ignoring the right of the insured to be compensated or to obtain the promised benefit. The first assumption (express acceptance) translates the will to face the main obligation. The second hypothesis, induced acceptance (by law) of the default of the insurer, is justified on the basis that if the obligor, having in his possession the necessary information and the possibility of verifying the loss and the extension of the benefit at his expense, does not pronounce against the rights of the insured and, on the contrary, lets pass the term (of preclusion) imposed by Article 56 (in Peru it would be Article 332 of Law 267029), Insurance Law, must bear the consequences. . . Derecho de seguros, tomo II, Pág. 295, Editorial La Ley. 22 . . . the insurer must be issued with respect to the right of the insured to receive compensation. Article 56 states: “The insurer must rule on the insured’s right within thirty days of receiving the information. . . The omission to pronounce implies acceptance.” Soler Aleu (1978), p. 181. 23 Osorio Ruiz (1999). 24 Rodríguez Pastor (1987), p. 121.

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Before the enactment of the new Insurance Contract Law—LCS—(29946) Dr. Luis A. Meza published a list25 detailing all the clauses that are not only abusive but illegal that Peruvian insurance companies included in their contracts without the Superintendence of Banking, Insurance and AFP (SBS) taking action to avoid it. The Peruvian Association of Insurance Brokers (APECOSE) even sent a letter with the information to the SBS but it did not get a reaction. In short, in Comparative Law, usually, the law itself or, in some cases, the case law, sanction insurers that take advantage of being the drafters of the contracts by including unacceptable conditions because they significantly imbalance the rights and duties of the parties in the insurance contract. As for post contractual bad faith, the behavior of an insurer when the claim was reported can be understood as the affirmation of the insurance contract and the waiver of any challenge; especially if an unjustified and excessive delay is added before its pronouncement. The foregoing implies an unprofessional and negligent conduct that does not respect the principle of maximum good faith, which is mandatory for both parties in any contract, especially in the insurance.

2.5.2

Jurisprudence and Comparative Law

The provisions of Article 2 of the aforementioned Commercial Code of 1902, which establishes as the main source after that legal body, the “uses of commerce”, that is, custom, was ratified by the first and fifth criteria (rules) of interpretation of Art. IV of the LCS. Although matters related to the insurer’s obligations of good faith tend to be more defensive than original cause of action in disputes, the development of international jurisprudence has established this duty of the insurer in the context in which its right

25 Web Page of Asociación Peruana de Corredores de Seguros (APECOSE): http://www.apecose. com/wp-content/uploads/2012/05/CL%C3%81USULAS-ILEGALES-EN-P%C3%93LIZAS-DESEGURO-EN-EL-PER%C3%9A.pdf. “It is a sample referred to:

1. Clauses in which the insured renounce the jurisdiction that favors them. 2. Clauses that set statutes of limitations shorter than legal ones. 3. Clauses that seek to annul Article 332 of Law No. 26702”. This study was used by Dr. Meza himself to prepare his master’s thesis. In: Page Cybertesis National University of San Marcos. http://cybertesis.unmsm.edu.pe/bitstream/cybertesis/2292/1/meza_cl.pdf. Conclusion N • 6, page 183: “The existence of contradictory, ambiguous or difficult to understand contractual documents, when not in violation of express legal norms, does not promote the full determination of the insured risks, on the contrary, they encourage a dangerous indetermination and abuse There are clauses of insurance policies that, despite violating specific provisions of Law N• 26702 and resolutions of the insurance system’s own control authority, are contained in policies that appear as current in the official registry (SBS) and/or circulate in the Peruvian market.”

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to consider void the contract for concealment or false or reluctant statement may be subject to a requirement that he exercised that right in good faith.

2.5.3

The Claims Management Process and Good Faith

In jurisprudence and comparative law, it has been established that the postcontractual duty of good faith of the insurer can be applied, for example, when he exercises some of his contractual rights. In most cases, the delay of the insurer in the attention of the claim is made.

2.5.4

Reservation of Rights

Another issue linked to an insurer’s assertion that it is able to consider the insurance policy null and void or reticent or concealment is if the insurer has not used its right to have it nullified or has confirmed it. The exoneration or confirmation extinguishes the right to cancel in relation to a specific concealment. For an exoneration to occur for the insurer, the insured is not required to act to his detriment. A waiver may emerge if the insurer discovers that the insured has made a false or reluctant statement when the risk is already in place, but decides not to use their right to void the policy. Insurers must have knowledge of the undeclared fact or have had it if they had acted diligently or it is public and must have made a communication to the insured, which allows the insured to interpret the words or conduct of the insurer in that way. This may include the failure of the insurer to consider a policy null and void (or to manifest it) and/or not to return the premium to the insured in the event that the policy is null and void and the payment of the claim is declined.26 Although the delay itself is not sufficient for an exemption, since the insurer is entitled to a reasonable period to evaluate the information, make inquiries and/or the appropriate questions and reach a decision, when the insurer takes further delay of a reasonable time and the insured acts confidently, the insurer is prevented from canceling the policy. In summary, it is accepted that if insurers require more time to investigate and make a decision, they must expressly reserve their rights before taking any positive step in relation to the policy and if they do not do so, it must be considered that they have affirmed it. The foregoing is also supported by Peruvian legislation in the so-called own act theory (Article 231 of the Civil Code).

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Birds (2010).

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Bad Faith of the Insurer in the LCS

First, we consider it important to remember a forgotten concept in our country and in many others, as a result of the legal form adopted in the setting up of insurers (corporations), namely, although Insurance Law was a branch of Commercial Law, it has independence now because it refers to a supervised industry and administers funds from the public, as it happens with other financial entities. Unlike what happened in the Anglo-Saxon world—for example, in the United States, where insurers were originally organized as mutual or even cooperatives—in our countries we opted from the beginning for share companies that have led us to forget that the money they administer is the funds created by the insured (and therefore they belong to them and not to the insurers) so that they can be used to pay for the losses that any of the contributors may suffer, provided they had correctly declared their risks both in quality and quantity. This is obvious in a mutual organization but is hidden in corporations, where insurers feel ‘owners’ of funds. Happily, something that allows us to remember this ‘forgetfulness’ is that the insurance industry has continued to be supervised in most of the countries in the world because they administer funds from the insured public. The new Peruvian LCS (29946) has incorporated a period of 30 days to invoke the reluctance (Article 9), which in other legislations was established to challenge the contract for that reason. Thus, in Argentina, the period is 3 months (Article 5 of the Insurance Law) and in Spain for only 1 month, as in our case. In the legislations in which a term has not been established, it is logical to conclude that the concept of reasonable term that has developed in England, where there is no definite term, would be applicable, but there is abundant jurisprudence in the sense that it must have certain limits supported by the principle of reasonableness. On the other hand, it is important to keep in mind that there is a direct relationship between ‘bad faith of the insurer’ and the figure of ‘claim consent’. The first is the origin of the second. Thus, it can be said that the bad faith of the insurer (negligence and delay in the attention of a claim) results in the consent of the claim. Article 332 of the Financial System Law (26702) is in our legislation the previous norm that accepted the doctrine that ‘the bad faith of the insurer results in the consent of the loss’. It says that it is consented after 30 days have passed since the required documentation was submitted. In the middle of all this problem, it is pertinent to remember that in the attention of a claim there are two aspects involved: 1. The coverage; and 2. The amount of compensation. The insurers and/or adjusters, depending on the case, must first accept that the claim is covered and then establish the amount to be indemnified. There are clearly two moments in the attention of a claim. As an illustration: in the case of a car accident, it must first be determined if it is covered by the policy and then proceed to establish the amount to be compensated or repaired as the case may be. This logic

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works for all risks because it is idle to evaluate the amount before determining whether the claim is covered under the policy. Rubén S. Stiglitz27 is pronounced in the same line. In the recently enacted LCS, Article 74,28 the longest of the norm, welcomes and regulates the consequences of the delay or lack of diligence of the insurer (bad faith) in the attention of a claim. It is put in two cases, first, when there is an adjustment agreement, the insurer has ten (10) days to rule and, second, when there is none, the thirty-day period provided by the Law 26702 is maintained. Our legislation has opted an objective regulation in which, after the terms have expired, the claim is construed as consent. These rules must be understood as minimal, since if the insurer proceeds beyond the established deadlines, the insurer is negligent and unprofessional. Thus, the general principle of good faith would apply and a claim would be considered accepted.

“The default of the insurer in pronouncing only implies acceptance of the right of the insured to be guaranteed, but does not presuppose that the manifestation of will induced by the law, extends to the amount of compensation required.” Derecho de seguros, tomo II, Pág. 296, Editorial La Ley. Buenos Aires 2005. 28 Section XVII, Compensation, Insurer’s Statement. Article 74: The payment of the compensation or the insured capital that is made directly to the insured, beneficiaries and/or endorsees, must be made within a period of no more than thirty (28) days following the consent of the loss. The claim is construed as consent, when the insurance company approves or has not rejected the adjustment agreement duly signed by the insured within a period not exceeding ten (10) days counted from its subscription and notification to the insurer. In the event that the insurer does not agree with the adjustment indicated in the agreement, it may demand a new adjustment within a term not exceeding thirty (28) days, to consent or reject the claim, determine a new amount or propose to go to the clause of arbitration or the judicial way. In cases where, objectively, there is no adjustment agreement, either because the adjuster has not been required to participate or it has not yet finalized its report, the loss shall be construed as consent when the insurer has not ruled on the amount claimed. within a period that does not exceed thirty (28) days from the date of completion of all the documentation required in the policy for the payment of the loss, except as indicated in the following paragraph. When the adjuster requires a longer period to complete their report, they may present a duly substantiated request to the Superintendence, specifying the technical reasons and the time required, under responsibility. The Superintendence will pronounce itself in a motivated manner on said request within a maximum term of thirty (28) days, under responsibility. Also, when the insurer requires a longer period to carry out additional investigations or obtain sufficient evidence on the origin of the claim or for the appropriate determination of its amount, and the insured does not approve, in the specific case, the extension of said term, the insurer may submit a request duly justified only once and, requesting a period no longer than the original, to the Superintendence within said 30 days. The Superintendence will pronounce itself in a motivated manner on said request within a maximum term of thirty (28) days, under responsibility. In the absence of a ruling within that period, the request is deemed approved. In case of default of the insurance company, it will pay the insured an annual moratorium interest equivalent to one point five (1.5) times the average rate for active operations in Peru, of the currency in which the insurance contract is expressed for all the time of the default. 27

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Nullity for Fraud or Fraud

The LCS sanctions fraud with the nullity of the contract. Moreover, this is the consequence of the fraudulent acts of the insured in the previous instances and during the validity of the policy. The first is contained in Article 8.29 The sanction of nullity is not only imposed on fraud, but also on inexcusable fault which is a concept that has to be evaluated on a case-by-case basis, as it is very difficult to define theoretically. The nullity derived from intentional acts during the term of the contract is contemplated in Article 59 of the LCS30 and refers to the ‘conventional expiration’ that can only be agreed in cases where the breach of a charge originates in the fraud or the inexcusable guilt, since the norm itself contemplates the effects of non-compliance with the burdens for other reasons and for those cases, as we have seen, the preservation of the contract has been opted for. The same policy is followed in all the LCS in which the fraud and serious fault is sanctioned, and in the other cases, the amount of compensation is reduced proportionally. The solution is similar in cases of aggravation and reduction of risk.31

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Article 8. Reticence and/or inaccurate misleading statement. The reluctance and/or inaccurate declaration of circumstances known to the contracting party and/or insured, which would have prevented the contract or modified its conditions if the insurer had been informed of the true state of the risk, renders the contract void if the deceit or inexcusable fault of the contracted and/or insured. 30 Article 59. Conventional expiration. When the present law does not determine the effect of the breach of a charge imposed on the insured, the parties may agree to the expiration of the rights of the insured if the breach is due to his intent or inexcusable fault, according to the following regime: Loads before the loss (a) If the cargo must be fulfilled before the loss, the insurer must plead the expiration within thirty (28) days of the known breach. (b) When the loss occurs before the insurer alleges expiration, it is released from the payment of its benefit if the breach affected the occurrence of the loss or the extension of its obligation. (c) Post-claim charges (d) If the load must be executed after the loss, the insurer is released due to the failure of the insured, if it influenced the extension of the assumed obligation. (e) In case of slight fault, the compensation is reduced proportionally to the aggravation of the loss resulting from the breach. In case of expiration, the insurer bears the premium for the time elapsed until it becomes aware of the breach of the load. 31 AGGRAVATION AND DECREASE OF RISK Article 60. Aggravation of risk The insured or the contracting party, as the case may be, must notify the insurer in writing of the facts or circumstances that aggravate the risk and are of such magnitude that, if they are known by the latter at the time of the contract’s conclusion, he or she would not do so. more burdensome conditions. Article 61. Effects of the aggravation of risk Notify the insurer of the aggravation of the risk status, this must tell the contractor, within fifteen (15) days, his willingness to maintain the terms of the contract, modify or resolve it.

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Rules and Principles on the Interpretation of the Insurance Contract

General Disposition Article I of the General Provisions establishes that the law applies to all types of insurance and that it is mandatory unless expressly admits otherwise. Likewise, it is supplementary in compulsory insurance and those regulated by special laws. One of the novelties that this norm has brought, even at the international level, is the incorporation of the principles that govern the institution of insurance in Article II of the ‘General Provisions’. To the four classics (good faith, indemnity, insurable interest and doctrine of the proper cause (‘proximate cause’ in English legislation), we added mutuality, because in Peru it was being forgotten to the point that some insurers made increases in the individual premiums for high claims in medical insurance, as if the insured could have control of their diseases The Commission of 2006 decided to also include the ‘in dubio against stipulatorem’, which is already

As long as the insurer does not state its position in the face of the aggravation, the conditions of the original contract continue. When the insurer chooses to terminate the contract, he has the right to receive the premium proportional to the time elapsed. If you are not informed in a timely manner, you are entitled to receive the premium for the period of insurance in progress. Article 62. Effects in case of accidents If the contracting party or, where appropriate, the insured, fails to report the aggravation, the insurer is released from its benefit if the loss occurs while the aggravation of the risk subsists, except that: (a) The contracting party or, as the case may be, the insured party incur the omission or delay without inexcusable fault; (b) If the aggravation of the risk does not affect the occurrence of the loss or the measure of the benefit borne by the insurer; (c) If he does not exercise the right to resolve or to propose the modification of the contract within the term established in article 61; (d) The insurer knows the aggravation, at the time when the complaint should be made. In the cases mentioned in subparagraphs a, b and c of this article, the insurer has the right to deduct from the amount of compensation the proportional amount equivalent to the extra premium that it had charged to the contracting party, if it had been informed in a timely manner of the aggravation of the risk contracted. Article 63. Termination of the right to resolve The right to resolve referred to in article 61 expires, if it is not exercised within the prescribed period or if the aggravation has disappeared. Article 64. Exceptions to the aggravation of risk The provisions on aggravation of risk do not apply when provoked to avoid the loss or to mitigate its consequences, for a generally accepted duty of humanity, for self-defense, a state of necessity or for compliance with a legal duty. Article 65. Aggravation between the proposal and acceptance The provisions of this section are also applicable to the aggravation produced between the proposal and the acceptance of the insurer.

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in the criteria (misnamed ‘rules’ in the Law) of interpretation32 of the contract (Article II). In this case, we discussed whether it was appropriate to develop or define each of the concepts in the legal text itself, and we agreed to leave them open to the interpretation of judges, courts and doctrine. The disadvantage is that it is not explained that the principle of compensation has exceptions, such as life insurance, insurance at replacement value and agreed value.

Appropriate Cause or Proximate Cause While the Project was already in Congress, a controversy broke out within the Peruvian Association of Insurance Law, AIDA Chapter in Peru, on whether we should have included among the principles the Doctrine of the Proximate Cause (proper to English law) instead of the Adequate or Proper Cause. The questioning came from a specialist in marine insurance, who started from the fact that most controversies on the subject were submitted to the English courts. In my perception, the notions of ‘adequate cause’ and ‘proximate cause’ are very similar and there are no substantial differences. It is more a denomination issue than anything else. The ‘proximate cause’ is an Anglo-Saxon Law doctrine, which is explained and developed in the jurisprudence and doctrine of English Insurance Law, while the ‘appropriate cause’ is a theory that originated in European Continental Law, specifically in Germany by the philosopher Johannes von Kries—and that at the outset referred to the criminal sphere. However, if each is investigated by its side, there are great coincidences. My position of opting for the adequate cause was because our legislation (Article 1260 and following of the Civil Code) already had it incorporated and it did not make much sense to opt for a different denomination. There is also another series of theories with much similarity, such as that of equivalence or of the conditio sine qua non (von Bury), the typical cause (Beling, Mezger), the necessary cause, the most effective cause and the most efficient cause that emphasize various aspects and Anglo-Saxon jurisprudence has incorporated into the Doctrine of the Proximate Cause. However, there seems to have been at some point in our doctrine (Fernando de Trazegnies, Juan Espinoza, Carlos Cárdenas) a textual translation of the expression ‘proximate cause’ (near cause) that linked it almost exclusively with ‘proximity’ and that has led to a wrong interpretation or at least different from what it means for the Anglo-Saxons. Although it would be considered improbable, it would also be possible that a concept of ‘proximate cause’ different from that of English Law had arisen in European Continental Law. 32

Some years before the enactment of the law, lawyers Pedro Richter and Mario Castillo published a much less ambitious project, reducing the rules of interpretation to the indispensable ones and including in these the types of policies. Richter Valdivia and Castillo Freyre (2006), pp. 39–42. A much broader development of these interpretive norms can be found in: Villa Zapata (1999), pp. 530–531.

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It is important to differentiate the textual interpretations that can be made when reading a text, from what the English courts have done regarding what is ‘immediate’ and ‘remote’. In 1908, in a case known as Pawsey vs. Scottish Union & National, Judge Lamb gave a definition that is still cited in the Faculties of Law and in court decisions, of what constitutes ‘proximate cause’. He said “proximate cause means the active, efficient cause that sets in motion a train of events, which brings about a result, without the intervention of any force started and working actively from a new and independent source”. In my opinion, this definition makes it clear that except for its origins (AngloSaxon and Germanic), there are no major differences between ‘proximate cause and ‘adequate cause’; and that ‘proximate cause’ is not equal to immediate cause. Because of this small controversy, I made a research among different specialists of some Latin American countries and I concluded that there was no legal, jurisprudential, or doctrinal clarity in most legal systems. From Argentina, I was informed that in terms of civil liability, the theory of appropriate causality applies and that the same thing happened in property, accident and transport insurance. From Uruguay, it was commented that it was not clear which doctrine of causation follows its Commercial Code, which regulates insurance, although it is certainly inspired by classical doctrines, since it is of 1865. They added that it was not peacefully agreed upon by the legislator and that the same thing happened with jurisprudence, but they were encouraged to tell me that the concept driving today is mainly that of effective cause. That is, for example in liability insurance, the need is to prove the causal link between the harmful event and the damage caused that must be effective to produce the damage occurred. For Chile, they pointed out that there was nothing in the law, and that arbitral jurisprudence is difficult to investigate because there are no records that have reached higher courts. In any case, they concluded, from experience we can say that the next cause governs, although it is probable that the incidence of remote or adequate has been discussed in the trial. From Mexico, I was told that there was no definition of causality in Mexican law. It is treated in a pragmatic manner, taking into account the common sense of the specific case, supported by credible and available evidence to decide the natural, direct and immediate cause of the damage suffered. It has been treated according to the relevant cause of the accident that occurred and its natural consequence, direct and immediate, resulting in a covered damage. To the extent that the natural, direct and immediate consequence of the first cause results in a covered damage, the subsequent factors should not be relevant in determining the risk. In that same order of ideas, they added, if the natural, direct and immediate consequence of the first cause results in a covered damage, other causes are irrelevant or should not be considered important in determining whether the damage was caused by these other causes, as the damage is a natural consequence of the first cause.

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3 Contract by Adhesion and the Treatment to ‘Large Risks’ Article III of LCS says that the insurance contract is concluded by adhesion, except in the clauses that have been negotiated between the parties and that differ substantially with those pre-drafted. In Peru, a contrary trend had developed that considered the insurance contract not as an adhesion contract, but as a “general contracting clause” based on the text of Article 1390 of the Civil Code.33 Although the statement is almost a truism in the doctrine, the inclusion of this article in the text was born from the reality lived in our market by several of the members of the Commission in which we heard that in an arbitration award and even in some regulation34 a kind of ‘doctrine’ had developed that nobody has dared to sustain in the academic media, nor is it known abroad. It was argued, contradicting the primacy of reality principle, that an insurance contract ceases to be an adhesion when a broker or insurance broker intervenes. I would like to ask those who claim such a thing to show me the cases in which the intervention of an adviser has managed to modify or eliminate important terms of the contract pre-written by the insurer. What a broker achieves, and often with difficulty, is that some clauses are incorporated, also pre-written by the company. The relevant modifications are only obtained—as SBS has hinted at—in the so-called ‘Large Risk Insurances’—which are very few in the country—that, because of their negotiation capacity (they pay very large premiums), achieved the so-called ‘self-made policies’. An alternative, related to what I have just explained, which was discussed within the Commission, was to incorporate a special regulation for what is called ‘Large Risks’, which are nothing other than the policies of large companies or economic groups, as the SBS had suggested from a Project that was being discussed in Spain. We solve it by means of the commented Article III, that is to say that in case of conflict the insurer will have to prove that the insured was able to substantially change the pre-written texts, so that in case of doubt the ‘interpretation against stipulatorem’ is no longer going to be applied.35

33

De la Puente y Lavalle, Manuel. Op. cited. Volume III. P. 137–138; and Villa Zapata, Walter. Op cited. pp. 464–465. 34 Art. 24 of the Res. SBS 1797-2011 is: “The insurance broker carries out an intermediation and advisory activity in the contracting of insurance coverage in the national market, regardless of the insurance companies, decreasing, with their participation, the differences arising from the information asymmetry existing between the contractors or potential contractors and insured and the insurance companies, which improves the conditions of transparency in the insurance contracting”. 35 An author who in Peru began to address the issue of interpretation ‘against stipulatorem’ in the insurance contract was: Gonzales Barrón (2002), pp. 241–246. One of the authors who first began to deal with consumer protection in insurance was: Meza Carbajal (2001).

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References Birds J (2010) Birds’ modern insurance law, 8th edn. Sweet & Maxwell Corzo de la Colina, Rafael y otro. Seguros de grandes riesgos y protección desproporcionada de los asegurados en la Ley del contrato de seguro. Ius et Veritas 54 Efrén Ossa GJ (1984) Teoría General del Seguro. Editorial Temis, Bogotá Gonzales Barrón GH (2002) El contrato de seguro en el Perú. Jurista editores, Lima Meza Carbajal LA (2001) Protección del consumidor de seguros en el Perú. Centro de investigación en seguros, Lima Osorio Ruiz Z (1999) Contrato de seguro. San Marcos, Lima Richter Valdivia P, Castillo Freyre M (2006) El contrato de seguro. Palestra, Lima Rodriguez Pastor C (1987) Insurance and reinsurance law. Manuel J. Bustamante de la Fuente Foundation, Lima Soler Aleu A (1978) El Nuevo Contrato de Seguros. Ed. Astrea, Buenos Aires Villa Zapata W (1999) Comentarios a la legislación de seguros. San Marcos, Lima Wandt M, Unan S (eds) (2012) Transparency in insurance law. Seminar held in Istanbul in May 2012 organized by the AIDA chapters of Turkey and Germany and published by them

Transparency in the Insurance Contract Law of Russia Zubarev Leonid Vladimirovich

1 Introduction The concept of transparency in the context of the Russian insurance contract law is relatively new. There is no formal definition of transparency or established court practice on this subject. For this book, we consider transparency in insurance contract law from two opposite angles and review two distinct duties of disclosure. The insured has a duty of disclosure of the risk and the insurer has a duty of disclosure of contractual terms. Over the years, the scope of these duties has been changing and evolving. Today, the emphasis has moved towards imposing more duties on the insurer as insurance products are becoming more and more sophisticated and the interests of the insured including consumers are getting more and more attention. The court practice has created a positive obligation upon the insurer to actively solicit information from the insured and to check it. This is just another confirmation of the general trend of extending higher standards of behaviour that are expected from the insurer in the consumer insurance to commercial and industrial insurance contracts and disputes.

Z. L. Vladimirovich (*) CMS Russia, Moscow, Russia e-mail: [email protected] © Springer Nature Switzerland AG 2019 P. Marano, K. Noussia (eds.), Transparency in Insurance Contract Law, AIDA Europe Research Series on Insurance Law and Regulation 2, https://doi.org/10.1007/978-3-030-31198-8_18

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2 Disclosure Obligations of the Insurer 2.1

General Overview

The Law on Insurance adopted in 1992 was one of the first legal acts of the postSoviet Russia.1 In absence of the Civil Code at the time, this Law was the only source of insurance contract law. Chapter II of the Law was called “Insurance Contract” and provided for the definition of the insurance contract, its material terms, as well as for principal obligations of the parties. Notably, the first obligation of the insurer in the list was to make the insured familiar with the terms and conditions of insurance (paragraph 1 (a) of Article 17). The terms and conditions of insurance in the Russian legal context represent a separate document called the Rules of insurance. From the civil law point of view, the Rules of insurance were (and still are) one of the main contractual documents that contain insurance contract terms. The Rules of insurance are included into the set of documents to be presented to the regulator when applying for the insurance licence. As the Law did not provide for any guidance as to the content of the Rules of insurance, the Federal Service for Insurance Supervision of the Russian Federation being the insurance regulator at the time developed the Licensing Conditions of Insurance Activity in the Russian Federation (Order No 02-02/08 of 19 May 1994).2 Among other licensing requirements, the Licensing Conditions set out material terms of the Rules of insurance. They included: – – – – – –

description of potential insured and any limitations in this regard; subject matter of insurance; list of insurable events (general and special terms); insurance tariffs; period of insurance; the procedure for entering into insurance contracts and payment of insurance premiums; – mutual obligations of the parties to the insurance contacts and possible grounds for refusal to pay insurance indemnity; – dispute resolution procedure. According to the Licensing Conditions, the Rules of insurance should also contain standard form documents (insurance contracts and insurance policies or

1

Law of the Russian Federation No. 4015-1 of 27.11. 1992 on the Organization of Insurance Business in the Russian Federation (with the Amendments and Additions of 26.07. 2017). Rossiiskaya Gazeta No. 6, 12.01.1993. 2 Order of Russian Insurance Supervision Service No. 02-02/08 of 19.05.1994 on the Approval of a new wording of The Conditions of Licensing the Insurance Activity on the territory of The Russian Federation. “Rossiiskiye Vesti” No. 118 of 29.06.1994 (cancelled by the Ministry of Finance Order No. 13H of 30.01.2006).

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certificates). The Rules were subject to prior approval by the regulator but there was no mention of how such information should have been disclosed to the insured. In practice, insurers presented hard copies of the Rules of insurance to the insured at the time of entering into the insurance contract. In January 1996, Part II of the Civil Code of the Russian Federation came into force.3 Part II is dedicated to law on contracts and includes Chapter 48 dealing with the insurance contract. Chapter 48 does not refer to any duty of the insurer to disclose terms and conditions of insurance to the insured. Instead, Article 943 of the Civil Code provides that the Rules of insurance are binding on the insured only if the insurance contract directly refers to the Rules of insurance and – the Rules of insurance and the insurance contract comprise one document or are printed on the back of the insurance contract; or – the Rules of insurance are attached to the insurance contract and physically delivered to the insured. If the Rules of insurance are not binding on the insured he may use them against the insurer in case of a dispute if the insurance contract has a reference to the Rules. In other words, it is crucially important for the insurer to have evidence that the Rules of insurance were delivered to the insured. A note in the insurance contract to this effect usually does the trick, as in practice the insurers quite rarely print the Rules on the back of the insurance contract. Better still, the insurers often require a hand written signature of the insured on their copy of the insurance contract. The Civil Code does not provide for any requirements as to what the Rules of insurance should contain or when the insurer must disclose them to the insured. Until late 2003 the Licensing Conditions were the only subordinate legislation on the subject. In December 2003 the Law was significantly amended.4 Requirements as to the content of the Rules of insurance were incorporated into the body of the Law. According to the new version of Article 3 of the Law, the Rules of insurance should contain further provisions such as procedure for determining the sum insured, the insurance tariff and the insurance premium; procedure for calculating the amount of losses and the amount of insurance indemnity as well as grounds for refusal to pay insurance indemnity. Notably, no rules concerning timing of disclosure were introduced.

2.2

Influence of Consumer Protection Policies

The insurance industry in Russia has been developing from predominantly corporate insurance business to more and more consumer-focused insurance offering.

3

The Second Part of the Civil Code of the Russian Federation No. 14-FZ of 26.01.1996. Sobranie Zakonodatelstva Rossiyskoy Federatsii No. 5 of 29.01.1996, item 410. 4 Federal Law No. 182-FZ of 23.12.2003 On the Introduction of Amendments and Addenda to the Civil Code of the Russian Federation. Rossiiskaya Gazeta No. 261 of 27.12.2003.

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Inevitably, the growing demand for consumer insurance products has led to the growing number of disputes between consumers and insurance companies. These disputes as any other disputes involving individuals are considered by the courts of common jurisdiction. The vast majority of disputes between individuals and companies involve consumer protection legislation. As the number of insurance related disputes involving consumers has been growing, the courts have faced a question whether the consumer protection legislation applies to insurance or not. The Law on Protection of Consumers’ Rights of 7 February 1992 No 23005-1 is the main and effectively the only piece of legislation that governs the relationship between consumers and businesses. It has been subject to many modifications and amendments but the core provisions remain intact. According to the preamble of the Law, it regulates relationships between consumers and manufacturers, providers, importers and sellers in the course of selling goods, performing works or rendering services. The Law provides that the consumers expect goods and services to be of proper quality and safe for their life, health and property as well as for the environment. The consumers are entitled to receive information about goods and services and manufacturers, providers, importers and sellers. The Law also sets force a right of the consumers to education and protection of their interests as well as establishes the mechanism for implementation of these fundamental rights of the consumers. The Law on Protection of Consumers’ Rights sets out basic rules for consumer protection. However, it does not say whether it applies to certain kinds of services such as insurance or other financial services. This question has been considered by the courts of common jurisdiction and over the years, their position has drifted. In its Review of the court practice of the first quarter of 2008 dated 28 May 2008,6 the Supreme Court explained that the Law on Protection of Consumers’ Rights did not apply to property and liability insurance contracts. According to the Review, while the Law on Protection of Consumers’ Rights governs relationships between consumers and manufacturers, providers, importers and sellers in the course of selling goods, performing works or rendering services, insurance relationships are different and are subject to regulation by Chapter 48 of the Civil Code of the Russian Federation and the Law on Organisation of Insurance Industry in the Russian Federation as well as by special laws governing certain types of insurance (e.g., compulsory motor liability insurance). Paragraph 1 of Article 929 of the Civil Code of the Russian Federation provides that under the contract of non-life insurance the insurer undertakes, subject to the insurance premium, upon occurrence of an insurable event and within the sum insured, to indemnify the insured or the beneficiary for the damage in the insured property or other insurable interest of the insured caused by the insurable event. 5

Law Of The Russian Federation No. 2300-1 of 07.02.1992 on the Protection of the Consumers’ Rights. Vedimosti Siezda Narodnych Deputatov RF i Verchovnogo Soveta RF No. 15, 1992, p. 766. 6 The review of court practice of the Supreme Court of 28.05.2008 Review of legislation and judicial practice of the Supreme Court of the Russian Federation for the first quarter of 2008. Bulletin of the Supreme Court of the Russian Federation, No. 8 of August 2008.

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Pursuant to paragraph 1 of Article 2 of the Law on Organisation of Insurance Business in the Russian Federation, insurance is the relationships of protection of the interests of natural and legal persons upon occurrence of defined insurable events out of monetary funds created by the insurers using insurance premiums and other funds of the insurers. The Supreme Court said that the purpose of insurance is to cover the risk of civil liability towards other persons or the risk of occurrence of other losses as a result of the insurable event. The Supreme Court concluded that it followed from the analysis of the above-cited legal norms that the relationships of non-life insurance do not fall under the scope of the Law on Protection of Consumers’ Rights and the provisions of this Law did not apply to the relationships of non-life insurance. Interestingly enough, life and accident and health insurance policies were not mentioned in this review. It means that by default the Law on Protection of Consumers’ Rights was applied by the courts to disputes arising out of such policies. However, because of relatively low insurance penetration rate, relatively low sums insured and in absence of any express encouragement by higher courts, the court practice of applying consumer protection regime on life and accident and health insurance policies was rather scarce. Some 4 years later, the Supreme Court looked into this issue again. Resolution of 28 June 2012 No 17 “On the court practice in relation to consumers’ rights protection”7 came as a bombshell. In paragraph 2 of Resolution No 17, the Supreme Court stated as follows: If certain types of the relationships involving consumers are governed also by special laws of the Russian Federation containing civil law rules (e.g. capital construction financial participation contract, insurance contract, both life and non-life, bank deposit contract, contract of carriage, power supply contract) the Law on Consumers Rights Protection applies to the relationship arising out of these contracts to the extent not governed by special laws.

The Supreme Court named provisions of the Law on Protection of Consumers’ Rights that should definitely apply to insurance. They included Articles 8–12 on the right to receive information, Article 13 on liability for violating the rights of the consumers, Article 14 on compensation of damage, Article 15 on compensation of moral damages, Article 17 on jurisdiction and exemption from court duties. In addition, the Supreme Court extended the definition of the consumer. According to the Law on Protection of Consumers’ Rights, a consumer is a natural person who orders, acquires or intends to order or acquire goods or services or uses goods or services exclusively for personal, family, domestic or other needs not connected with entrepreneurial activity. The Supreme Court clarified that the person using goods or services also includes heirs, people who buy the goods from the first owner and similar persons. It became clear beneficiaries who are not policyholders and do not acquire insurance policies also fall under the definition of the consumer.

7 Resolution of Plenum of the Supreme Court No. 17 of 28.06.2012 on the court practice in relation to consumers’ rights protection. Rossiiskaya Gazeta, N 156, 11.07.2012.

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In practice, it meant that the Law on Protection of Consumers’ Rights became almost fully applicable to any group or individual insurance policy issued for the benefit of a natural person. There was a slight technical issue, though. The opposite legal position of the Supreme Court outlined in the Review of the court practice of the first quarter of 20088 was still in effect. However, this legal uncertainty only lasted for a couple of months—in its Review of the court practice of the second quarter of 2012 dated 10 October 2012,9 the Supreme Court cancelled its previous explanation of 28 May 2008 and finally settled the issue. For the current analysis, we focus on those provisions of the Law on Protection of Consumers’ Rights that regulate transparency in the insurance relationships. As mentioned above, one of the fundamental rights of the consumers is a right to receive information. Article 8 of the Law on Protection of Consumers’ Rights provides for the basic description of this right as follows: 1. A consumer has a right to demand disclosure of necessary and reliable information about the manufacturer (provider, seller), its working hours and goods (works, services). 2. The information mentioned in paragraph 1 of this article must be clear and accessible and should be brought to the consumer’s notice at entering into contracts of sale-purchase of goods and performance of works (rendering services) by means customary to particular consumer service sectors in Russian and at the manufacturer’s (provider’s, seller’s) discretion in state languages of the subjects of the Russian Federation and native tongues of the people of the Russian Federation.

Therefore, according to Article 8, the consumer is entitled to receive two types of information—information about the manufacturer (provider, seller) and the goods (works, services). Article 9 of the Law on Protection of Consumers’ Rights describes the requirements for information about the manufacturer (provider, seller). The manufacturer (provider, seller) must inform the consumers about its trading name, its location and working hours. The seller (provider) must place this information on the wall sign. In case a particular kind of business is subject to licensing the manufacturer (provider, seller) must inform the consumer about the nature of the business, the licence number, the licence validity term and the name of the licensing state body. As regards the goods, works or services, basic requirements as to the scope of information about them are set out in Article 10 of the Law on Protection of Consumers’ Rights. According to this Article, necessary and reliable information about the goods (works, services) must be provided to the consumers in a timely manner allowing them to make a right choice. Such information must include

Review of court practice of the Supreme Court of 28.05.2008 “Review of legislation and judicial practice of the Supreme Court of the Russian Federation for the first quarter of 2008”. Bulletin of the Supreme Court of the Russian Federation, No. 8 of August 2008. 9 Review of court practice of the Supreme Court of 10.10. 2012 Review of legislation and judicial practice of the Supreme Court of the Russian Federation for the second quarter of 2012. Bulletin of the Supreme Court of the Russian Federation, No. 1 of January 2013. 8

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a description of the consumer characteristics of the goods, works services, composition, full price in roubles, rules for safe and effective use, shelf life, the address and the name of the manufacturer (provider, seller), etc. Clearly, the provisions of the Law on Protection of Consumers’ Rights have been designed for conventional goods, works or services and are not suitable for financial service including insurance. Therefore, after the sharp turn of the court practice on applicability of the Law on Protection of Consumers’ Rights to insurance in 2012 there was a need to adopt the general disclosure requirements to specific nature of the insurance services. In July 2013, significant changes were introduced to the Law on Organisation of Insurance Industry that, among other things, provided for special regulation of the duty of the insurer to disclose the terms of insurance to the consumers.10 At the same time, the requirement for obtaining prior approval by the regulator was lifted. Paragraph 6 of Article 6 of the Law on Organisation of Insurance Industry11 requires the insurer to have a website in the Internet with a purpose of providing information to insureds, beneficiaries and persons intending to enter into an insurance contract. The Law on Organisation of Insurance Industry sets out minimum requirements in relation to the content of such information that must include but is not limited to information about the insurer, its managers and shareholders, scope of its licence and financial information. As a general rule, any change in this information must be published within five business days. Technical requirements for disclosure of this information are set forth by the Central Bank of the Russian Federation.

10 Federal Law No. 234-FZ of 23.07.2013 on the Introduction of Amendments into the Law of the Russian Federation on Organising the Insurance Business in the Russian Federation. Rossiiskaya Gazeta No. 163 of 26.07.2013. 11 Law of the Russian Federation No. 4015-1 of 27.11.1992 On the Organization of Insurance Business in the Russian Federation. Rossiiskaya Gazeta No. 6 of 12.01.1993.

Paragraph 6 of Article 6 of the Law on Organisation of Insurance Industry (1) full name and address, phone numbers and working hours of the insurer, its branches and agencies; (2) information about top managers and shareholders of the insurer; (3) information about the state registration number, the taxpayer number, the registration number in the state register of participants of the insurance market as well as information about the licence and its validity period; (4) list of kinds of insurance; (5) Rules of insurance and insurance tariffs; (6) annual financial reports and auditors’ reports for the last three years; (7) annual consolidated financial reports and auditors’ report for the last three years; (8) ratings (if any); (9) information about the activities of the insurer, its experience in various kinds of insurance; (10) information about membership in associations (unions) including self-regulatory bodies; (11) other information that must be published pursuant to the legislation of the Russian Federation or trade custom.

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3 Regulatory Requirements Order of the Central Bank No 3740-U of 27 July 201512 requires the insurer to ensure for each visitor of its website open and around-the-clock access to the information listed in paragraph 6 of Article 6 of the Law on Organisation of Insurance Industry. The right to access and use such information cannot be limited in any way. In particular, it is prohibited to require registration of visitors and/or collection of personal data as a condition for obtaining the information. It is prohibited to demand downloading any special software or entering into licensing agreements with the software developer and paying a fee. Furthermore, the insurer must put the information on its website in such a way that it takes not more than three hyperlinks to access it. The Central Bank prescribes that if the information contains separate files they must be created in such a format that allows downloading and copying, such as Microsoft Word (doc, docx, rtf), Microsoft Excel (xls, xlsx), Adobe Acrobat (pdf); TIFF, JPEG (tif, jpg) with definition not less than 300 dpi. Annual reports and auditors’ reports must be uploaded in such a way that allows downloading graphic copies of the originals. All information must be in Russian. In addition, it may be presented on the website in other languages of the subjects of the Russian Federation and native tongues of the people of the Russian Federation as well as in foreign languages. The Central Bank provides for quite strict requirements as to the process of uploading, amending or deleting the information. Such activities can only by performed by the staff of the insurance company. No outsourcing is allowed. The insurer must fix the exact time of performance of any change of the information on the website of the insurer and details of the person who did it. It is necessary to keep electronic register of all activities by the staff of the insurer in relation to the information uploaded on the website. The insurer must have a version of its website suitable for a computer with a 1024 dpi or higher definition monitor. In addition, the insurer must make it possible for the users to identify date and time of uploading or the latest modification of the information, to navigate and search for information in the text-only mode and to enlarge and to downsize fonts and page interface elements. The above regulations may seem to be very technical and not very crucial to the core of the insurance activities, yet in the course of its regulatory audits of insurance companies the Central Bank scrutinizes their websites and demands full compliance with the disclosure rules. Regulatory sanctions that the Central Bank may impose for the failure to comply with these rules come in addition to liability that insurance companies may incur under the Law on Protection of Consumers’ Rights. These regulatory sanctions are explained in more detail in Chapter II.

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Direction of the Bank of Russia No. 3740-U of 27.07.2015 on Requirements to the Procedure for Posting by the Insurer of Information on the Internet. Vestnik Banka Rossii journal No. 75 of 04.09.2015.

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The Central Bank is active not only in relation to setting up technical requirements for insurance activities. More and more often, it takes proactive approach in establishing legal requirements for the disclosure of information about insurance services by insurance organisations. For example, on 9 August 2018 the Central Bank approved Basic Standards for protection of rights and interests of individuals and legal entities which receive financial services provided by insurers.13 These Basic Standards provide for detailed rules on the procedure for entering into insurance contracts including the scope of information by insurance companies about their products and the method for providing such information as well as meticulous requirements regarding claims handling and payment of insurance indemnity. As regards disclosure requirements, the Basic Standards elaborate on the relevant provisions of the Law on Protection of Consumers’ Rights and de facto extend their application to all customers including legal entities. For example, according to the Basic Standards, when entering into an insurance contract the insurer has to disclose information about circumstances that influence the rate of insurance tariffs and the amount of insurance premiums and must provide information about consequences of late payment of the premiums. The insurer also must provide information about principles behind calculation of damage to property or sum insured and investment income in case of life insurance. The Basic Standards require that all information to be provided by the insurer must be up to date and should be presented in either electronic form on the insurer’s website or on paper. In the latter case, the Basic Standards provide requirements in relation to font size, etc. In addition to the Basic Standards for protection of rights and interests of individuals and legal entities which receive financial services provided by insurers, the Central Bank approved Basic Standards for carrying out operations on financial markets by insurance companies. It is aimed at streamlining the ways insurance companies operate including when they conclude insurance contacts and disclose information about their services. For example, these Basic Operational Standards require that the insurer must provide information to the insured regarding the consequences of the absence of insurable interest. Moreover, according to the Basic Operational Standards if the insurance contract contains a reference to the Rules of insurance published on the insurer’s website, the insurer must provide the insured with such Rules of insurance by email or by handing over a flash-drive or a CD containing them to the insured.14 It remains to be seen how the above standards will be enforced in practice. They are pieces of subordinate legislation that, nevertheless, purport to govern civil law relationships. As of May 2019, no court cases consider their application. The courts interpret and apply civil law rules concerning disclosure obligations.

13

Basic standards of the Bank of Russia No. KFNP-24 of 09.08.2018 for protection of rights and interests of individuals and legal entities which receive financial services provided by insurer. http:// www.cbr.ru. Accessed 10.08.2018. 14 Basic standards of the Bank of Russia No. KFNP-24 of 09.08.2018 for carrying out operations on financial markets by insurance companies. http://www.cbr.ru. Accessed 10.08.2018.

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4 Court Practice From the civil law point of view, the obligation of the insurer to disclose the terms of insurance to the insured is met when the insurer delivers the Rules of insurance to the insured and has evidence of the delivery. For example, the Court of the Perm Region on case No 33-1893/201715 resolved that: The plaintiff (the insured) had a chance to review the terms of the Programme of insurance as stated in Annex N 1, and undertook to honour all other terms of the Programme of insurance, the insurance contract and other documents evidencing contractual relationships between the insured and the insurer and related to entering into, performance and termination of these relationships. The insured did not make any demands for provision of additional information either before or after entering into the contract. Therefore, the argument of the plaintiff (the insured) that the defendant (the insurer) was in breach of Article 10 of the Law on Protection of Consumers’ Rights cannot be taken into account.

The same court on another case No 33-11486/2016 established16 that All terms and conditions of the insurance contract were contained in the application for insurance, the insurance policy and attachments to it. These terms and conditions were in line with the legislation of the Russian Federation on insurance including in relation to calculation of the insurance indemnity, investment income, insurable events and the procedure for the unilateral termination of the contract. The plaintiff (the insured) could have refused to enter into the contract if the terms were not acceptable. However, his handwritten signature on the contract and his actions aimed at the performance of the contract in the form of premium payments confirm that the plaintiff acted consciously and voluntarily accepted contractual obligations. The case file does not have any evidence that the plaintiff applied to the defendant (the insurer) with a request for additional information in order to make a choice of the services. The plaintiff did not provide reliable and convincing evidence that the font size used in the contact did not allow the plaintiff to understand the terms correctly or could have influenced his decision to enterion to the contract.

When speaking about technical requirements for presentation of information about insurance products the issue of small print is worth mentioning. Insurance legislation does not have specific rules regarding the font size of presentation materials and contractual documents. However, these rules form a part of the voluminous legislation on sanitary rules and norms (SanPiN) approved by the Ministry of Health. In particular, on 10 April 2003 the Ministry of Health issued Decree No 39 approving Hygienic Requirements for Published Books for Adults

15

Appellate decision of the Court of the Perm Regional of 15.02.2017 on case No. 33-1893. SPS ConsultantPlus. 16 Appellate decision of the Perm Regional Court of 28.09.2016 on the case No. 33-11486/2016 Requirement: the recovery of the money paid as insurance premium, liquidated damages, compensation for moral damages and losses. SPS ConsultantPlus.

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(SanPiN 1.2.1253-03).17 Resolution of the 9th Appeal Court of 6 July 2016 on case No A40-29005/1618 is a recent example of how courts interpret Articles 8 and 10 of the Law on Protection of Consumers’ Rights and apply SanPiN 1.2.1253-03 in relation to small print in insurance contracts. The Court ruled that: In accordance with paragraph 1 of Article 10 of the Law on Protection of Consumers’ Rights the manufacturer (provider, seller) must provide to consumers information about the goods (works, services) in a timely manner ensuring the possibility of correct choice. Pursuant to systemic interpretation of Articles 8 and 10 of the Law on Protection of Consumers’ Rights information about services to be provided to the consumer must be clear and easily accessible. It must exclude the possibility of misleading the consumer and ensure that he can read the text without technical aids (magnifying glass, glasses, etc.). Small print in the contract makes it significantly harder to understand the text of the contract which does not allow the consumer to receive full information and to make correct choice. Norms of SanPiN 1.2.1253-03 are aimed at preventing deseases of organs of vision of the readers and, therefore, at ensuring the observance of the rights of the consumers. When the insurer was preparing the terms of the contracts it must have taken into account the requirements of the said SanPin as they influence the consumer’s perception of the text of the contract. Small print in the text of the contract is a direct evidence of the breach of the rights of the consumer because it makes it difficult for the consumer to visually perceive the text of the contract. This circumstance did not allow the consumer to easily familiarize himself with the terms of the contract, to receive full information and to make the correct decision when selecting the services.

According to Article 12 of the Law on Protection of Consumers’ Rights, in case the manufacturer (provider, seller) does not make it possible for the consumer to obtain information about the product (services) at the inception of the contract the consumer has a right to rescind the contract within a reasonable time and to claim the refund of the purchase price and compensation of damages. In Russia, policyholders have always had a right to unilaterally terminate the policy at any time. The default position of paragraph 3 of Article 958 of the Civil Code is that no premium is refunded in such case unless the contract provides otherwise. In practice, insurers have usually kept a part of the premium corresponding to the policy period during which they were on risk and returned the rest to the insured. However, with the insurance products becoming more and more sophisticated and the number of consumer insurance policies and related disputes growing bigger and bigger it has become apparent that general rules on unilateral termination of insurance contract contained in the Civil Code must be somehow tailored to the need for better consumer protection. In July 2013, the Law on Organisation of Insurance Industry in the Russian Federation was amended to provide for the right of the Central Bank to establish

17

Decision of the Chief State Sanitary Doctor of the Russian Federation N 39 of 10.04.2003 on Putting into Operation the Sanitary-Epidemiological Rules and SanPin Normatives 1.2.1253-03. Rossiiskaya Gazeta No. 88 of 13.05.2003. 18 Resolution of the Ninth Arbitration Court of Appeal of 06.07.2016 No. 09AP 06.07.2016-20451/ 2016 on case No. A40-29005/16. SPS ConsultantPlus.

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minimum standards for the terms and conditions of certain kinds of insurance. On 20 November 2015, the Central Bank issued Decree No 3854-U19 stating that insurers carrying out personal (consumer) insurance must provide for so-called cooling-off period. The Rules of insurance must now provide for the right of the consumer to cancel the policy within five business days and to get the premium back in full unless the cover has already incepted. Otherwise, the customer is entitled to the proportional refund of the premium. Other examples of minimum standards developed by the Central Bank include Decree No 3793-U of 13 September 201520 dealing with voluntary medical insurance of foreign citizens applying for work permits in Russia and Decree No 3380-U of 12 September 201421 regarding minimum standard requirements for voluntary motor insurance contracts. Finally, the Central Bank has a right to approve Rules of insurance for compulsory lines of business. Such compulsory Rules of insurance cannot be altered by the parties and include the Rules of compulsory third party motor liability insurance approved by the Central Bank on 19 September 2014.22 These Rules are mandatory; each insurer offering compulsory insurance products must comply with them and disclose them on his website regardless of the fact that these Rules are publicly available. As follows from the Law on Organisation of Insurance Industry in the Russian Federation and the above Decrees, the Central Bank and the Government have a right to dictate the content of both voluntary and compulsory insurance products offered by the insurers to individuals with a purpose of protecting consumers’ interests. Other legislative acts assist the Central Bank in this task. For example, according to Article 16 of the Law on Protection of Consumers’ Rights, terms of the contract that infringe the legitimate rights of the consumers are null and void. Russian scholars commenting on insurance law point out that such contractual terms infringing the rights of the consumers contradict the law per se and, therefore, there is no need to apply special remedies such as the concept of unfair or onerous

19 Direction of the Bank of Russia No. 3854-U of 20.11.2015 on the Minimum (Standard) Requirements for the Terms and Procedures for Carrying out Individual Kinds of Voluntary Insurance. Vestnik Banka Rossii journal No. 16 of February 20.02.2016. 20 Direction of the Bank of Russia No. 3793-U of 13.09.2015 on the Minimal (Standard) Demands Made on the Terms and Procedure for Carrying Out Medical Insurance in the Part of the Voluntary Medical Insurance of Foreign Citizens and of Stateless Persons Staying on the Territory of the Russian Federation for the Performance of Labour Activity. Vestnik Banka Rossii journal No. 3 of 20.01.2016. 21 Direction of the Bank of Russia No 3380-U of 12.09.2014 on the Minimum (Standard) Requirements for the Terms and Procedures for Conditions of Implementation of Voluntary Insurance of Ground Transport (except railway transport) and Voluntary Insurance of Civil Liability of Owners of Vehicles. Vestnik Banka Rossii journal No. 88 of 02.10.2014. 22 Direction of the Bank of Russia No. 3384-U of 19.09.2014 on Limiting Amounts of Base Installments of Insurance Rates and Coefficients of Insurance Rates, Requirements for the Structure of Insurance Rates, as Well as the Procedure for Their Application by Insurers When Determining Insurance Premiums for Obligatory Insurance of Civil Liability of Owners of Vehicles. Vestnik Banka Rossii journal No. 88 02.10.2014.

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contractual terms. If, however, the terms of the contract do not contradict the law, consumer protection rules cannot be engaged. In the majority of cases the notion of legality/illegality of contractual terms is used to recognise such terms as infringing the rights of the consumers.23

5 Contra Proferentem Rule In this context, the legislation and the court practice assume that the consumer is always a weak party to the contract. In cases where consumers demand compensation of losses caused by providing of inadequate or false information about the goods or services it is presumed that the consumer does not have specific knowledge of the product’s features. The Supreme Court of the Russian Federation supports this approach. In its Resolution No 16 “On the freedom of contract and its limits” dated 14 March 2014,24 the Supreme Court ruled that in case of uncertainty of contractual terms they should be construed contra proferentem. In cases where one of the parties is a professional in a certain area (e.g., a bank in case of a loan agreement or an insurer in in case of an insurance contract) any uncertainty of contractual terms must interpreted against such professional.

6 Liability of Insurers for Breaches of Disclosure Requirements The manufacturer (seller, service provider) is responsible for providing incomplete or false information about the goods or services to the consumer. Pursuant to Article 22 of the Law on Organisation of Insurance Industry in the Russian Federation, the manufacturer (seller, service provider) must compensate the losses of the consumer caused by providing false or incomplete information about the product within 10 calendar days. According to Article 23 of the Law on Organisation of Insurance Industry in the Russian Federation, failure to do so will cost the manufacturer (seller, service provider) 1% of the price of the product per each day of delay. In relation to insurance, there has been some discussion and controversy as to what constitutes the price of insurance services—the insurance premium or the amount of indemnity. The Supreme Court has finally resolved that the price of insurance services is the amount of the insurance premium (Resolution No 20

Еfremova М.D., Petrischev V.S., Rumiantsev S.А. and others; exec. editor Y.B. Fogelson. Protection of financial services consumers’ rights. М.: Norma, Infra-М, 2010. 24 Decision of the Plenum of the Higher Arbitration Court of the Russian Federation No. 16 of 14.03.2014 on the Freedom of Contract and Its Limits. Vestnik VAS RFN of 05.05.2014. 23

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“On the court practice in relation to voluntary personal property insurance” dated 27 June 2013).25 In addition to the default interest, the consumer has a right to demand compensation of moral damages. Compensation of moral damages under Russian law means compensation for pain and suffering and is usually possible if the consumer has also suffered damage to health. However, Article 15 of the Law on Protection of Consumers’ Rights allows the consumer to claim moral damages in case the manufacturer (service provider, seller) is in breach of any consumer’s right, including the right to obtain full information about the product: Article 15. Compensation of moral damages Moral damages caused to the consumer by the manufacturer (service provider, seller, authorized representative, importer) of the rights of the consumer set force by the legislation of the Russian Federation on protection of consumers’ rights is subject to compensation by the harm doer subject to his fault. The amount of compensation of moral damages is established by the court and does not depend on the amount of the real damage. Compensation of moral damages is payable independently of any other compensation of the real damage and losses suffered by the consumer.

Finally, the Law on Protection of Consumers’ Rights provides for a Russian analogue of punitive damages for violation of consumers’ rights. According to paragraph 6 of Article 16 of the Law, in addition to any amounts that it may be required to pay to the consumer pursuant to the court decision, the manufacturer (service provider, seller) must pay a penalty of 50% of the amount awarded by the court to the consumer. In addition to regulatory sanctions that insurance companies may be exposed to for breaches of their disclosure obligations, they may also be subject to administrative liability for breaching the rights of the consumers. This aspect is discussed in more detail in Chapter II.

7 Disclosure Obligations of the Insured 7.1

General Overview

Sub-Articles 1 and 3 of Article 944 of the Civil Code are dedicated to one of the most important legal concepts that distinguishes the insurance contract from other contracts, namely, an obligation of the insured to provide the insurer with the information that is necessary for concluding a contract and evaluating the insured risk, as well as the consequences of breaching such obligation:

25

Decision of the Plenum of the Higher Arbitration Court of the Russian Federation No. 20 of 27.06.2013 on the On the court practice in relation to voluntary personal property insurance. Rossiiskaya Gazeta No. 145 of 05.07.2013.

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1. Upon entering into an insurance contract, the insured (or policyholder) must inform the insurer about the circumstances known to him that have material significance for determining the probability of occurrence of the insurable event and the amount of possible damage (insurance risk) if the insurer is not or should have not been aware of such circumstances. Material circumstances are, in any case, those circumstances that are expressly defined by the insurer in his standard insurance contract form (insurance policy) or in his written request. 3. If it is established after the conclusion of an insurance contract that the insured has reported knowingly false information about the circumstances mentioned in Sub-Article 1 of this Article to the insurer, the insurer has the right to demand that the contract be invalidated and the consequences outlined by Sub-Article 2 of Article 179 of the Civil Code be applied. The insurer cannot demand the invalidation of the contract if the circumstances that were not reported to the insurer have ceased to exist.

The importance of this provision cannot be overestimated. First, the obligation to provide information about the risk secures the mere possibility to conclude an insurance contract and to define a premium (a price of the contract) that corresponds to the insured risk. Furthermore, the law protects the interests of the insurer in case he is misled by a dishonest insured and provides the insurer with a right to challenge the contract in court. As can be seen from Sub-Article 3 of Article 944 of the Civil Code, the law does not limit the insured party’s disclosure obligation to information expressly requested by the insurer in the application form or expressly mentioned in the contract. A similar provision can be found in Article 250 of the Code of Maritime Shipping,26 but it is even more onerous for the insured. The expression, “in any case”, which is used in Article 944 of the Civil Code, means that the insured must also disclose any other information that is material (or important) for the purposes of evaluating the insurance risk. While the insurer is a professional in the risk assessment business, it is the policyholder, who possesses full information about the real risk and the specific subject matter of insurance. Furthermore, the doctrine suggests that the insured must behave as if there is no insurance. First, it relates to the full disclosure obligation that is aimed at ensuring the bona fide behavior of the insured. However, the legislator and the courts are quite relaxed when this obligation is not met. It is explained primarily by the fact that in the current complex world amateurs are unable to follow up all necessary information while professionals such as insurers know perfectly well what information they need and how this information can be obtained. Therefore, the courts are imposing an onus of obtaining such information on the insurer.27

26

Merchant Shipping Code of the Russian Federation No. 81-FZ of 30.04.1999. Sobranie Zakonodatelstva Rossiskoy Federatsii No. 18 of 3.05.1997, item 2207. 27 Fogelson Y.B. Insurance Law: theoretical foundations and practical applications: monograph. М.: Norma, Infra-М, 2012.

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Court Practice

As shown by court practice, the courts apply Article 944 of the Civil Code in a narrow way. First, the courts interpret the policyholder’s disclosure obligation as applying only to the information expressly requested by the insurer. Second, in the absence of any provisions to this effect in the law, the courts oblige the insurer to verify the information provided by the insured. Third, the courts extend the rule of Article 948 of the Civil Code that limits the insurer’s right to challenge the insurance value of the insured property in case he did not check it at the inception. They apply this estoppel to any disputes regarding the breaches of the disclosure obligations by the insured. Finally, the courts take a very strict approach and set a very high bar for an insurer that wants to demonstrate the insured party’s intent to mislead him. We set out below few examples of how this rule is interpreted by the courts of common jurisdiction dealing with consumer related disputes and by the state commercial courts considering disputes between companies. We start with the courts of common jurisdiction, as their practice seems friendlier towards the insured setting a certain trend for the rest of the judicial community. On the other hand, the court of common jurisdiction do not have may difficulties in establishing intentional misrepresentation by the insured since it is much easier to prove the intent of an individual than the intent of a legal entity. For example, the Court of the Stavropol Region (case No 33-2258/2017)28 ruled that in the case of a life insurance contract the insured deliberately concealed information about the state of his health and the presence of a pre-existing condition: Fraud means an intentional misleading of the party aimed at inducing it to enter into the contract. A fraudster intentionally creates an illusion about the nature of the transaction, its conditions, its participants, subject matter and other circumstances influencing the decision of the other party. When concluding a transaction under the influence of fraud the affected party is forced to act not in his free will and is influenced by dishonest actions of the other party deliberately creating a false impression about the circumstances having significance for concluding the transaction.

The Court of the Pushkin District of Saint-Petersburg (case No 2-783/2016)29 resolved that “the plaintiff did not fully comply with the requirements of Sub-Article 1 of Article 944 of the Civil Code” as he “had a desease that had been diagnosed prior to entering into the insurance contract and was a proximate case” of the insurable event. The Court denied the claim as the plaintiff “did not disclose his desease in the application for insurance”. The Moscow City Court (case No 33-13946/2016)30 summarized this approach rather well: “The court finds the arguments of the insured that the insurer could have

28

Appellate decision of the Court of the Stavropol Region of 22.03.2017 on case No. 33-2258/2017. SPS ConsultantPlus. 29 Decision of the Court of the Pushkin District of Saint-Petersburg of 04.04.2016 on case No. 2-783/2016. SPS ConsultantPlus. 30 Appellate decision of the Court of Moscow City of 20.04.2016 on case No. 33-13946/2016. SPS ConsultantPlus.

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checked information provided by the insured or request further explanations from the insured . . . as not convincing. According to Article 944 of the Civil Code, the insured is obliged to provide to the insurer true information about her state of health. It was established during the trial that prior to entering into the contract the insured had deseases that she failed to disclose to the insurer”. An example of an opposite approach that finds its way into the practice of the state commercial courts as well is the Resolution of the Court of Saratov Region (case No 33-1473)31: As long as the burden of requesting and collecting of information about the risk is on the insurer it is the insurer who bears the risk of entering into the contract without a proper check of the state of health of the insured and without establishing circumstances affecting the risk insured.

A similar argument was used by the Moscow City Court (case No 33-49083/ 2016),32 which supported the insured: “the insurer did not use its right to check the risk insured, did not request medical documents from the insured, did not offer the insured to pass medical check-up. The court arrived at the conclusion that the insurer did not exercise due diligence when entering into the contract”. There are numerous other examples where the courts of common jurisdiction lean towards supporting the insured and imposing on the insurer a burden of investigating the disclosed information. Such approach seem to prevail also in the practice of the state commercial courts. As regards the state commercial courts, to start with we would like to quote the Resolution of the 13th Appeal Court (case No. А56-2313/2014)33 rendered in favour of the insurer: At the inception the insurer has a right to clarify with the insured the facts that are necessary for evaluating the insurance risk. With this in mind, the insured at the inception is offered to answer certain questions (to fill in the application form). The insurer assumes that the parties act in good faith and, therefore, the information provided by the insured is correct. The insurer has exercised his right and obligation to evaluate the risk because he has sent a proposal form to the insured in which the insured filled in the respective paragraphs with the information that is necessary for taking a decision to enter into an insurance contract. It was only after the report of the occurrence of the insurable event that the insurer became aware that at the inception the insured had knowingly provided false information. The insurer could not or could have not found out about it before he was presented with the documents regarding the subject matter of insurance.

31

Appeleate Resolution of the Court of Saratov Region of 18.03.2015 on case No 33-1473. SPS ConsultantPlus. 32 Appeleate Resolution of the Moscow City Court of 08.12.2016 on case No. 33-49083/2016. SPS ConsultantPlus. 33 Resolution of The Thirteenth Arbitration Court Appeal of 03.09.2014 on case No. А56-2313/ 2014. SPS ConsultantPlus (cancelled by the Arbitration Court of the North-West Region of 10.12.2014 on case No. А56-2313/2014).

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We believe this Resolution is a model of the correct interpretation of Article 944 of the Civil Code and the correct balance of the rights and obligations of the parties to the insurance contract in case of providing misleading information regarding the subject matter of insurance at the inception. The court has confirmed that, based on the presumption of good faith behaviour, the insurer is not required to verify the information provided by the insured and cannot bear the negative consequences of his lawful behaviour. However, this Resolution was later cancelled by the North-Western District Court, which was also supported by the Supreme Court of the Russian Federation (Resolution of the Supreme Court dated 6 April 2016 No. 307-ES15-1748).34 These higher instances reversed the conclusions as follows: The insurer relied on the good faith of the insured and did not check the provided information. The insurer could check and should have checked (emphasis added) the information provided by the liquidator before entering into the contract or within reasonable time forthwith. Obtaining information is not a burdensome process. The information about the claims and lawsuits against the insured can be found on the official website of the Supreme Commercial Court of the Russian Federation on the Internet, the information on the disciplinary sanctions imposed on the liquidator can be found on the website of the self-regulatory body.

Therefore, the highest courts establish a rule, “trust but verify”, and discourage the insurer from relying on good faith of the insured and require him to check all the facts provided by the insured under the risk of losing his defence under Sub-Article 3 of Article 944 of the Civil Code (invalidation of the policy ab initio). As mentioned above, the courts strictly interpret Sub-Article 3 of Article 944 of the Civil Code, “linking” this interpretation to Article 945 of the Civil Code. For example, the Court of Moscow, in case No. А40-150484/15-151-1191,35 stated as follows: Events are not insurable events if they occurred as a result of treatment of illness or consequences of accidents that took place prior to, or after, the policy period, while the insurer is unaware of them. Within the policy period the insured was recognised as disabled and diagnosed with 2nd grade diabetes. The insurer has to prove that the insured had a direct intent to provide knowingly false information. The insurer did not use his right to check the health condition of the insured, to check the validity of the information and to evaluate the insurance risk, taking into account the factors that are relevant to the probability of the occurrence of the insurable event. Therefore, the insurer accepted the information contained in the insurance application form as sufficient and admissible.

34

Resolution of the Supreme Court of the Russian Federation of 06.04.2015 No. 307-ES15-1748 on case No. А56-2313/2014. SPS ConsultantPlus. 35 Resolution of the Arbitration Court of the Moscow Federal District of 15.06.2016 N F05-6336/16 on case No. А40-150484/2015. SPS ConsultantPlus.

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The insurer did not clarify the circumstances relevant to the degree of the risk and the insured did not provide any knowingly false information . . .

The Resolution of the West-Siberian District Court on case No. А70-806/201536 is an example of the clear understanding of the boundaries set out by the law for the insurer: The courts were correct in applying Sub-Article 2 of Article 945 of the Civil Code as the insurer has a right to examine the state of health of the insured person. The courts correctly noted that the insurer could have used his right to exclude unjustified risks, but he did not do so. In this regard, the courts were right to decline the arguments of the insurer regarding entering into the insurance contract under the influence of deceit by the insured person.

The next court decision is an example of the unusual interpretation of the provisions regarding the misrepresentation of facts and circumstances in insurance contracts. The Resolution of the Supreme Court on case No. 305-ES15-1600337 makes the following conclusion: A transaction concluded under the influence of deceit can be voided by a court only if it is established that the deceiving party had planned to deceive the other party and that the misrepresented circumstances formed the basis for the decision to conclude the transaction.

The Decision of the Court of the Ivanovo Region on case No. А17-3464/2014 reads38: The insurance contract can be declared void subject to the evidence of a direct intent of the insured aimed at misleading the insurer, including in relation to the information about the insured property, as well as to the evidence that knowingly false information relates to the circumstances that have material significance for determining the probability of the occurrence of the insurable event and the amount of possible damage. Taking into account the literal meaning of the word “knowingly”, i.e. “consciously, unconditionally, unquestionably, as known (to the acting person)”, it is necessary to establish the circumstances of the policyholder’s deliberate (conscious, unconditional, unquestionable) provision of the incorrect information about the insured risk.

This Decision is one of the few examples where the courts interpret certain words or expressions used in the law by reference to Russian glossaries, which seems to be perfectly sensible. However, in cases where the insured is a legal entity, such literal interpretation may cause certain difficulties. This is why other courts have taken a more reasonable approach to interpreting the intent of the insured through his good or bad faith behaviour. For example, in the

36 Resolution of the Court of the West-Siberian District of 21.07.2016 N F04-3018/2016 on case No. А70-806/2015. SPS ConsultantPlus. 37 Resolution of the Supreme Court of the Russian Federation of 18.12.2015 on case No. 305-ES1516003, А40-188339/2014. SPS ConsultantPlus. 38 Decision of the Arbitration Court of the Ivanovo Region of 01.04.2015 on case No. А17-3464/ 2014. SPS ConsultantPlus.

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Resolution of the North-Caucasian District Court on case No. А53-4787/2013,39 the court cited Sub-Article 2 of Article 179 of the Civil Code: A fraud is also committed when a person intentionally fails to mention the circumstances that he should have disclosed acting in good faith according to the trade custom requirements (Sub-Article 2 of Article 179 of the Civil Code).

The Resolution of the Central District Court on case No. А36-5095/201440 resonates: The right of the insurer to verify the facts does not release the insured from his obligation to disclose the true information about the subject matter of insurance and related risks. A breach of such obligation by providing knowingly false information makes the transaction voidable pursuant to Article 179 of the Civil Code. A fraud is also committed when a person intentionally fails to mention the circumstances that he should have disclosed acting in good faith according to the trade custom requirements. The fraud, which was in the form of providing untrue (or incorrect) information about the existence of an automatic fire extinguishing system (dry powder extinguishers) when entering into the contract, was the ground for invalidating the transaction. The provision of this information, which directly influenced the probability of the occurrence of the insurable event (in the form of a fire outbreak) and the decision to enter into the insurance contract is an objective requirement. The insured was aware of it. As the information about the existence of the automatic fire extinguishing system (dry powder extinguishers) is knowingly false, the insurance contract is invalid.

As mentioned above, the courts increasingly expect the insurer to be more active when concluding insurance contracts. The courts have converted the insurer’s right to verify the insured risk into his obligation. Consider Article 945 of the Civil Code: 1. When concluding a property insurance contract, the insurer has a right to examine the insured property, and, if necessary, to appoint an expert examination (appraisal) to establish its insurance value. 2. When concluding a personal insurance contract (i.e. life, accident, health and medical insurance), the insurer is entitled to conduct a medical examination of the insured to establish the actual state of his health.

Unfortunately, the courts are very creative in interpreting this short Article. Both the Resolutions of the Ural District Court on case No. А71-5514/201341 and the Supreme Court on case No. 309-ES15-7642 state as follows:

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Resolution of the Arbitration Court of the North-Caucasian District of 08.09.2014 on case number No. А53-4787/2013. SPS ConsultantPlus. 40 Resolution of the Arbitration Court of the Central District of 25.11.2015 No. Ф10-4183/2015 on case number No. А36-5095/2014. SPS ConsultantPlus. 41 Resolution of the Arbitration Court of the Yral District of 07.11.2014 No. Ф09-7569/14 on case No. А71-5514/2013. SPS ConsultantPlus. 42 Resolution of the Supreme Court of the Russian Federation of 06.03.2015 on case No. 309-ЭС1576, А71-5514/2013. SPS ConsultantPlus.

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Pursuant to Article 945 of the Civil Code the insurer bears the burden of claiming and collecting the information about the insured risk, as well as the risk of entering into a contract without carrying out a proper inspection of the subject matter of insurance. The insurer is also entitled to examine the insured property when entering into a contract of insurance.

The Moscow District Court in the Resolution in case No. А40-127385/201543 declined the insurer’s arguments regarding the misrepresentation of facts by the insured and ordered the insurer to pay the insurance indemnity: The insurer, as the professional on the insurance services market, defined and accepted the information in dispute, did not request for, or collect, additional facts, did not find out the circumstances that were relevant to determining the level of risk and did not exercise his right to check the information provided by the defendant (insured). The information about the losses that had taken place and were mentioned by the plaintiff (insurer) in the lawsuit had been published in mass media before the disputed insurance contract was concluded. The information about court disputes is also in the public domain on the Internet. Therefore, the plaintiff (insurer) did not exercise his right to verify the insured risk.

The Court of the Far-Eastern District in Resolution No. F03-6210/201544 determined that: The insurer, as the professional on the insurance services market and, consequently, being more experienced in defining the subject matter of insurance, as well as the laws and other legislative acts regulating insurance in general, should have, pursuant to Article 945 of the Civil Code, resolved these issues prior to entering into the insurance contract. However, the insurer, having signed the contract and received the premium from the plaintiff (insured), has accepted the insurance risk.

The Resolution of the Court of the Central District on case No. А36-5095/ 2014,45 which we have already mentioned above, has, to the contrary, supported the insurer: The circumstances of providing knowingly false information were determined after the fire on the basis of the surveyor’s report that confirms the absence of an automatic fire extinguishing system on the insured party’s territory. As the legislation does not impose on the insurer the obligation to verify the provided information (emphasis added), the fact of providing knowingly false information cannot cause negative consequences for the insurer in the form of the statute of limitation (for filing a claim for invalidation due to misrepresentation) starting from the date of the application for property insurance. The insured party’s argument that the insurer bears the burden of proof that there was no fire extinguishing system was declined as one cannot prove a negative fact and each party should provide proper evidence of performing his obligations under the contract. Based on the above, the court believes that it is the plaintiff (insured) who, having stated in the

Resolution of the Arbitration Court of the Moscow District of 23.05.2016 No. Ф05-5225/2016 on case No. А40-127385/2015. SPS ConsultantPlus. 44 Resolution of the Arbitration Court of the Far-Eastern District of 27.01.2016 No. Ф03-6210/2015 on case No. А51-4964/2014. SPS ConsultantPlus. 45 Resolution of the Arbitration Court of the Central District of 25.11.2015 No. Ф10-4183/2015 on case No. А36-5095/2014. SPS ConsultantPlus. 43

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application form that the premises where the insured property was located had autonomous fire extinguishers, must prove that the extinguishers were, indeed, really present on the premises.

Thus, we could summarise that the courts, while rightly considering the insurer to be better equipped professionally in evaluating the risks, have rather consistently delivered the message that a professional (the insurer) should not pin his hopes on the information provided by an amateur, the insured. Although, the courts conceptually support the position that the insurer should not be misled by the insured, the insurers often lose their cases because the courts are rather strict in applying the consequences of the insurer’s failure to use his right to collect additional information about the insured risk. The courts are increasingly turning the insurer’s right to evaluate a risk into his obligation to check the information provided by the insured, and generally apply the estoppel of Article 948 of the Civil Code applicable in the case of contesting the insurance value as an addition to Article 944 of the Civil Code.

7.3

Ongoing Disclosure Obligation of the Insured

The disclosure obligations of the insured do not cease to exist when the policy is issued. According to Article 959 of the Civil Code, the insured must inform the insurer about the increase of the risk insured: Article 959. Consequences of the increase of the risk insured during the term of the insurance contract 1. During the term of the non-life insurance contract the insured (the beneficiary) must notify the insurer about any significant changes in the circumstances disclosed at the inception of the contract immediately upon becoming aware of them provided such changes can materially influence on the increase of the risk insured. Significant are in any case those changes that were expressly mentioned in the insurance contract (the policy) and in the Rules of insurance delivered to the insured. 2. Having received the notice about the circumstances that result in the increase of the risk insured the insurer is entitled to demand changes in the terms of the insurance contract or to charge additional premium corresponding to the increase of the risk. If the insured (the beneficiary) objects to the changes in the terms of the insurance contract or to the payment of additional premium the insurer is entitled to demand termination of the contract in accordance with the rules of Chapter 29 of this Code. 3. In case the insured or the beneficiary fail to perform the obligation stated in sub-article 1 of this article the insured is entitled to demand termination of the insurance contract and compensation of damages caused by termination of the contract (sub-article 5 of article 453). 4. The insurer is not entitled to demand termination of the insurance contract if the circumstances resulting in the increase of the risk insured have ceased to exist. 5. In case of life insurance the consequences of changes in the risk insured during the term of the insurance contract set out in sub-articles 2 and 3 of this article only apply if they are expressly provided for by the contract.

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Article 959 of the Civil Code puts an ongoing disclosure obligation on the insured. The courts confirm that this legal norm is mandatory and consistently reject claims by the insurers that a failure to report material changes in the circumstances disclosed when applying for the contract constitutes a ground for refusal to pay the insurance indemnity. The Resolution of the Supreme Court No. 305-ES16-1294746 confirms that: As at the moment of theft the insured property was with the insured, the courts did not have any reason to exclude the event from the list of insurable events. A failure of the insured to report the material changes in the circumstances that result in the increase of the insured risk where, as in the case in question, such circumstances ceased to exist prior to the occurrence of the insurable event [. . .] leads to consequences other than the refusal to pay the indemnity or invalidation of the contract.

There is another disclosure obligation of the insured provided by the Civil Code. The insured must notify the insurer about the occurrence of the insurable event. Specifically, Article 961 of the Civil Code reads: 1. The insured under the non-life insurance contract must notify the insurer or his representative as soon as the insured becomes aware of the occurrence of the insurable event. If the insurance contract provides for a deadline or a method of notification, such notification must be made within the agreed period of time and by the agreed method. The beneficiary has the same obligation if he becomes aware of the occurrence of the insurable event and intends to receive the insurance indemnity. 2. A failure to perform the duty set forth by Sub-Article 1 of this Article entitles the insurer to refuse the payment of indemnity, unless it is proved that he had been aware of the occurrence of the insurable event in good time or that the absence of such information could not have affected his obligation to pay the insurance indemnity.

As follows from the above, the purpose of these rules is to discourage the insured to conceal information on the insurable event from the insurer.47 Further, it is the insured that must prove that the absence of the information about the occurrence of the insurable event did not affect the obligation of the insurer to pay the indemnity. The insured must demonstrate that the late notification did not prejudice the position of the insurer in any way. However, over the years, the courts have developed the opposite approach. For instance, the North-Western District Court is very consistent in this regard (see Resolutions on cases No. А56-79127/2014,48 No. А56-28189/ 201449 and No. А56-28260/201450): 46

Resolution of the Supreme Court of the Russian Federation of 18.10.2016 N 305-ЭС16-12947 on case No. А40-156113/2014. SPS ConsultantPlus. 47 Arkhipova A. G. Uberrima fides doctrine in insurance and its embodiment in the Russian legislation. Vestnik Grazhdanskogo Prava. 2015. N 4. 48 Resolution of the Arbitration court of the North-Western District of 22.12.2015 on case No. А5679127/2014. SPS ConsultantPlus. 49 Resolution of the Arbitration court of the North-Western District of 30.10.2015 on case No. А5628189/2014. SPS ConsultantPlus. 50 Resolution of the Arbitration court of the North-Western District of 22.04.2015 No. Ф07-1367/ 2015 on case No. А56-28260/2014. SPS ConsultantPlus.

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As implied in this rule, the failure of the insured to notify the insurer about the occurrence of the insurable event in a timely manner is not an unconditional ground for refusing to pay the insurance indemnity. If the insurer refuses to pay the insurance indemnity, he must demonstrate how the late notification of the occurrence of the insurable event affected his obligation to pay the indemnity.

In other words, the court practice seems to have reversed the burden of proof of the prejudice by the late notification and put it on the insurer.

8 Conclusion Transparency in the Russian insurance contract law is not formally defined. Once can try to derive this principle from various provisions of a number of legal acts dealing with protection of consumers rights and general court practice on insurance. Over the years and in line with the global trend, Russian insurance legislation has been developing towards providing more protection to consumers, and in relation to transparency mainly with regard to disclosure obligations of the insurer. Today, the insurer has to disclose a lot of information. For example, the insurer must upload onto its website in the Internet all of its terms and conditions of insurance (including the time of adopting and uploading them), which was simply unheard of five years ago. The insurers are liable for breaches of the disclosure obligations in accordance with the legislation applicable to protection of consumers’ rights. The Central Bank of Russia, the regulator of the insurance market, along with the Rozpotrebnadzor, the consumer protection authority, is very active in pursuing the insurers for breaches of their disclosure obligations. Against this background, the classical duty of disclosure of the risk by the insured, which has never been too strict in Russia anyway, has been converted by the courts into even less burdensome obligation of the insured. Moreover, the court practice has created a positive obligation upon the insurer to actively solicit information from the insured and to check it. This is just another confirmation of the general trend of extending higher standards of behaviour that are expected from the insurer in the consumer insurance to commercial and industrial insurance contracts and disputes.

References Appeleate Resolution of the Court of Saratov Region of 18.03.2015 on case No 33-1473. SPS ConsultantPlus Appeleate Resolution of the Moscow City Court of 08.12.2016 on case No. 33-49083/2016. SPS ConsultantPlus

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Appellate decision of the Court of Moscow City of 20.04.2016 on case No. 33-13946/2016. SPS ConsultantPlus Appellate decision of the Court of the Perm Regional of 15.02.2017 on case No. 33-1893. SPS ConsultantPlus Appellate decision of the Court of the Stavropol Region of 22.03.2017 on case No. 33-2258/2017. SPS ConsultantPlus Appellate decision of the Perm Regional Court of 28.09.2016 on the case No. 33-11486/2016 Requirement: the recovery of the money paid as insurance premium, liquidated damages, compensation for moral damages and losses. SPS ConsultantPlus Arkhipova AG (2015) Uberrima fides doctrine in insurance and its embodiment in the Russian legislation. Vestnik Grazhdanskogo Prava, 4 Basic standards of the Bank of Russia No. KFNP-24 of 09.08.2018 for carrying out operations on financial markets by insurance companies. http://www.cbr.ru. Accessed 10 Aug 2018 Basic standards of the Bank of Russia No. KFNP-24 of 09.08.2018 for protection of rights and interests of individuals and legal entities which receive financial services provided by insurer. http://www.cbr.ru. Accessed 10 Aug 2018 Decision of the Arbitration Court of the Ivanovo Region of 01.04.2015 on case No. А17-3464/ 2014. SPS ConsultantPlus Decision of the Chief State Sanitary Doctor of the Russian Federation N 39 of 10.04.2003 on Putting into Operation the Sanitary-Epidemiological Rules and SanPin Normatives 1.2.1253-03. Rossiiskaya Gazeta No. 88 of 13.05.2003 Decision of the Court of the Pushkin District of Saint-Petersburg of 04.04.2016 on case No. 2-783/ 2016. SPS ConsultantPlus Decision of the Plenum of the Higher Arbitration Court of the Russian Federation No. 16 of 14.03.2014 on the Freedom of Contract and Its Limits. Vestnik VAS RFN of 05.05.2014 Decision of the Plenum of the Higher Arbitration Court of the Russian Federation No. 20 of 27.06.2013 on the On the court practice in relation to voluntary personal property insurance. Rossiiskaya Gazeta No. 145 of 05.07.2013 Direction of the Bank of Russia No 3380-U of 12.09.2014 on the Minimum (Standard) Requirements for the Terms and Procedures for Conditions of Implementation of Voluntary Insurance of Ground Transport (except railway transport) and Voluntary Insurance of Civil Liability of Owners of Vehicles. Vestnik Banka Rossii journal No. 88 of 02.10.2014 Direction of the Bank of Russia No. 3384-U of 19.09.2014 on Limiting Amounts of Base Installments of Insurance Rates and Coefficients of Insurance Rates, Requirements for the Structure of Insurance Rates, as Well as the Procedure for Their Application by Insurers When Determining Insurance Premiums for Obligatory Insurance of Civil Liability of Owners of Vehicles. Vestnik Banka Rossii journal No. 88 02.10.2014 Direction of the Bank of Russia No. 3740-U of 27.07.2015 on Requirements to the Procedure for Posting by the Insurer of Information on the Internet. Vestnik Banka Rossii journal No. 75 of 04.09.2015 Direction of the Bank of Russia No. 3793-U of 13.09.2015 on the Minimal (Standard) Demands Made on the Terms and Procedure for Carrying Out Medical Insurance in the Part of the Voluntary Medical Insurance of Foreign Citizens and of Stateless Persons Staying on the Territory of the Russian Federation for the Performance of Labour Activity. Vestnik Banka Rossii journal No. 3 of 20.01.2016 Direction of the Bank of Russia No. 3854-U of 20.11.2015 on the Minimum (Standard) Requirements for the Terms and Procedures for Carrying out Individual Kinds of Voluntary Insurance. Vestnik Banka Rossii journal No. 16 of February 20.02.2016 Еfremova МD, Petrischev VS, Rumiantsev SА, and others (2010) Exec. Fogelson YB (ed) Protection of financial services consumers’ rights. М.: Norma, Infra-М Federal Law No. 182-FZ of 23.12. 2003 On the Introduction of Amendments and Addenda to the Civil Code of the Russian Federation. Rossiiskaya Gazeta No. 261 of 27.12.2003

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Federal Law No. 234-FZ of 23.07.2013 on the Introduction of Amendments into the Law of the Russian Federation on Organising the Insurance Business in the Russian Federation. Rossiiskaya Gazeta No. 163 of 26.07.2013 Fogelson YB (2012) Insurance law: theoretical foundations and practical applications: monograph. М.: Norma, Infra-М Law of The Russian Federation No. 2300-1 of 07.02.1992 on the Protection of the Consumers’ Rights. Vedimosti Siezda Narodnych Deputatov RF i Verchovnogo Soveta RF No. 15, 1992, p. 766 Law of the Russian Federation No. 4015-1 of 27.11. 1992 on the Organization of Insurance Business in the Russian Federation (with the Amendments and Additions of 26.07. 2017). Rossiiskaya Gazeta No. 6, 12.01.1993 Law of the Russian Federation No. 4015-1 of 27.11.1992 On the Organization of Insurance Business in the Russian Federation. Rossiiskaya Gazeta No. 6 of 12.01.1993 Merchant Shipping Code of the Russian Federation No. 81-FZ of 30.04.1999. Sobranie Zakonodatelstva Rossiskoy Federatsii No. 18 of 3.05.1997, item 2207 Order of Russian Insurance Supervision Service No. 02-02/08 of 19.05.1994 on the Approval of a new wording of The Conditions of Licensing the Insurance Activity on the territory of The Russian Federation. “Rossiiskiye Vesti” No. 118 of 29.06.1994 (cancelled by the Ministry of Finance Order No. 13H of 30.01.2006) Resolution of the Arbitration Court of the Central District of 25.11.2015 No. Ф10-4183/2015 on case number No. А36-5095/2014. SPS ConsultantPlus Resolution of the Arbitration Court of the Far-Eastern District of 27.01.2016 No. Ф03-6210/2015 on case No. А51-4964/2014. SPS ConsultantPlus Resolution of the Arbitration Court of the Moscow District of 23.05.2016 No. Ф05-5225/2016 on case No. А40-127385/2015. SPS ConsultantPlus Resolution of the Arbitration Court of the Moscow Federal District of 15.06.2016 N F05-6336/16 on case No. А40-150484/2015. SPS ConsultantPlus Resolution of the Arbitration Court of the North-Caucasian District of 08.09.2014 on case number No. А53-4787/2013. SPS ConsultantPlus Resolution of the Arbitration court of the North-Western District of 22.04.2015 No. Ф07-1367/ 2015 on case No. А56-28260/2014. SPS ConsultantPlus Resolution of the Arbitration court of the North-Western District of 22.12.2015 on case No. А5679127/2014. SPS ConsultantPlus Resolution of the Arbitration court of the North-Western District of 30.10.2015 on case No. А5628189/2014. SPS ConsultantPlus Resolution of the Arbitration Court of the Yral District of 07.11.2014 No. Ф09-7569/14 on case No. А71-5514/2013. SPS ConsultantPlus Resolution of the Court of the West-Siberian District of 21.07.2016 N F04-3018/2016 on case No. А70-806/2015. SPS ConsultantPlus Resolution of the Ninth Arbitration Court of Appeal of 06.07.2016 No. 09AP 06.07.2016-20451/ 2016 on case No. A40-29005/16. SPS ConsultantPlus Resolution of the Supreme Court of the Russian Federation of 06.03.2015 on case No. 309-ЭС1576, А71-5514/2013. SPS ConsultantPlus Resolution of the Supreme Court of the Russian Federation of 06.04.2015 No. 307-ES15-1748 on case No. А56-2313/2014. SPS ConsultantPlus Resolution of the Supreme Court of the Russian Federation of 18.10.2016 N 305-ЭС16-12947 on case No. А40-156113/2014. SPS ConsultantPlus Resolution of the Supreme Court of the Russian Federation of 18.12.2015 on case No. 305-ES1516003, А40-188339/2014. SPS ConsultantPlus Resolution of The Thirteenth Arbitration Court Appeal of 03.09.2014 on case No. А56-2313/2014. SPS ConsultantPlus (cancelled by the Arbitration Court of the North-West Region of 10.12.2014 on case No. А56-2313/2014)

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Review of court practice of the Supreme Court of 10.10. 2012 Review of legislation and judicial practice of the Supreme Court of the Russian Federation for the second quarter of 2012. Bulletin of the Supreme Court of the Russian Federation, No. 1 of January 2013 Review of court practice of the Supreme Court of 28.05.2008 “Review of legislation and judicial practice of the Supreme Court of the Russian Federation for the first quarter of 2008”. Bulletin of the Supreme Court of the Russian Federation, No. 8 of August 2008 Resolution of Plenum of the Supreme Court No. 17 of 28.06.2012 on the court practice in relation to consumers’ rights protection. Rossiiskaya Gazeta, N 156, 11.07.2012 The Second Part of the Civil Code of the Russian Federation No. 14-FZ of 26.01.1996. Sobranie Zakonodatelstva Rossiyskoy Federatsii No. 5 of 29.01.1996, item 410

Transparency in the Insurance Contract Law of Turkey Ecehan Yesilova Aras

1 Legal Instruments Regulating Insurance and Insurance Activities 1.1

Turkish Commercial Code; Sixth Book “Insurance Law”

The provisions of the Turkish Commercial Code (TCC) related to insurance law (Articles 1401–1520) are placed in the Sixth Book. The title of the Sixth Book is the “Insurance Law”, which goes far beyond the (Turkish) legislator’s will because a review of the provisions under this title shows that only “insurance contract law” is regulated here.1 These provisions, almost seventy percent of which were drafted in mandatory form, do not grade the risk. Thus, the person who is in front of the insurer on the contract table, whoever he is, becomes the “consumer of insurance”, and gains the protection of mandatory provisions of the Sixth Book of Turkish Commercial Code (TCC).2 That is, a “merchant” title of the person getting insurance protection will not prevent to take the protection of the mandatory provisions. In other words, these provisions provide the same degree of protection to an industrial company and a housewife under an insurance contract.

Unan (2016a), p. 3. According to the mentioned author, right title should be “Insurance Contract Law”. 2 Unan (2016b), p. 5. 1

E. Y. Aras (*) Izmir Democracy University, Izmir, Turkey e-mail: [email protected] © Springer Nature Switzerland AG 2019 P. Marano, K. Noussia (eds.), Transparency in Insurance Contract Law, AIDA Europe Research Series on Insurance Law and Regulation 2, https://doi.org/10.1007/978-3-030-31198-8_19

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Insurance Activities Code

The Insurance Activities Code (IAC)3 regulates the insurance supervision law, not the insurance contract law. As such, the addressees of the provisions contained in the Insurance Activities Code (IAC) are the actors of the insurance business (insurer, insurance mediators and insurance experts).4 Priority will be given to the application of the mandatory provisions of the Turkish Commercial Code (TCC) concerning the conclusion and content of the contract. However, the subtitle of Article 11 of the Insurance Activities Code (IAC) is “Insurance Contracts”, and the five paragraphs in it contain the provisions related to the conclusion and scope of the contract and the language of its terms. Arguably, it is not proper to put a provision related to contract law into a Code of supervision law.5 Its importance in our subject is that Article 11 of the Insurance Activities Code (IAC) is directly related to the transparency of the insurance contract. However, the applicability of these regulations, ensuring transparency of the insurance contract, along with the provisions of the Turkish Commercial Code (TCC) is doubtful. Since the Insurance Activities Code (IAC) is a supervision law, the addressees of its provisions are, in fact, only members of the insurance business who are required to be supervised. As such, it should be accepted that the provisions directly related to insurance contract law were removed implicitly from the Insurance Activities Code (IAC).6 In fact, the Turkish Commercial Code (TCC) is both a “lex posterior” in terms of the date of enforcement and a “lex specialis” compared to the “Insurance Activities Code” (IAC) in terms of “insurance contract”.

1.3

Policy General Conditions

The Government (meaning: Undersecretariat of Treasury) determines, regulates and publishes the policy general conditions under the name of “Insurance General Conditions”. However, Article 11(1) of the Insurance Activities Code (IAC) envisaged the State merely as the approval authority. This provision mandated that each insurance company should draft its own “Insurance General Conditions” and, following the approval of the State, prepare the main content of the insurance contract accordingly. In other words, the mentioned provision requires the Insurance General Conditions to be the main spine of the insurance contract, as it is desired that the community of persons exposed to the same risk be subject to coverage under the same conditions and terms. In fact, it is undoubtedly criticized that the State, which is 3

Act No: 5684; Date: 3.6.2007; OR Date: 14.06.2007, No: 26552. This Code was prepared in line with the “National Programme of Turkey for the Adoption of the EU Acquis”. 4 Bozer (1981), p. 8; Yazicioglu (2003), p. 42; Ozer (2005), p. 24; Tasbasi (2005), p. 66. 5 Unan (2016a), p. 99. 6 Unan (2016a), p. 99.

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merely the “approval authority” in the Turkish legislator’s wording, has transcended its boundaries virtually and became a position that drafts all the Insurance General Conditions in the country and approves the text prepared by itself.7 As the general conditions of insurance are actually prepared by the State in our country, they are usually designed to restrict the rights of insurers and to strengthen the position of insured persons and beneficiaries.8

1.4

Secondary Directives Regulating Insurance Mediators

In the Insurance Activities Code (IAC), two types of insurance mediators are foreseen, namely, the “agent” and the “broker”. Article 21 of Insurance Activities Code (IAC) is about the “brokers” while Article 23 is about the “insurance agency”. Based on these articles, “Regulation on Insurance Agents”9 and “Regulation on Insurance and Reinsurance Brokers”10 were put into force. However, it cannot be said that these regulations make the national legislation completely parallel with the provisions of Directive 2002/92/EC. In particular, the information obligation of the insurance mediators is regulated exclusively for the agents in our legislation, which is an important issue different from the EU law and a serious shortcoming.11

1.5

Consumer Protection Code

The concept of “consumer” in the consumer law and the concept of “insurance consumer” in insurance law are not equal. The consumer law regulates that the insurance is a “financial service” (CPC Article 49/I). That is, the insurer is a “service provider” (CPC Article 3-ı) in respect to the consumer law. The consumer legislation has defined “consumer” as “a natural or legal person acting for non-commercial or non-professional purposes” (CPC Article 3-k). If the party of an insurance contract is a “consumer” in respect to the Consumer Protection Code (CPC), the insurance contract will be considered as a “consumer transaction” and it will get protection of consumer legislation. In fact, most of the insurance contracts in our country are concluded with people who have a “consumer” title in terms of consumer law. The person who is a party to an insurance contract, i.e., the “insurance consumer”, will benefit from double protection if she is a “consumer” in the sense of consumer law. This person will benefit both from the mandatory “insurance contract law” 7

Unan (2016b), p. 3. Unan (2016b), p. 3. 9 OR Date: 14.4.2008, No: 26847 (repeating). 10 OR Date: 21.06.2008, No: 26913. 11 Yazicioglu (2010), p. 31. 8

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provisions of the “Turkish Commercial Code” (TCC) and the protective provisions of the Consumer Protection Code (CPC). If insurance contract law and consumer law have provisions that provide protection at different levels on the same issue, the provision of the law which is favorable for the consumer should be applied.12 When we look at the provisions of the Consumer Protection Code (CPC), we see many provisions relevant to the insurance contract. If the insurance contracts are concluded with the “consumer” in terms of the consumer law, it has the characteristics of consumer law depicted as “Installment Sale Contracts”, “Off-Premises Contract” and “Distance Contracts”.13 These provisions of the Consumer Protection Code (CPC) are particularly important in terms of “transparency in insurance contracts”.

1.6

Turkish Code of Obligations

Turkish Commercial Code Article 1451(1), in a hierarchical manner, puts the Turkish Code of Obligations at the second place after the Turkish Commercial Code (TCC). This means that if there is no provision to be applied within the total of six books of the Turkish Commercial Code (TCC) concerning the insurance contract, the Turkish Law of Obligations, which is the basic law of contract law, shall be applied. This provision particularly emphasizes that the provisions on merchants in the First Book of the Turkish Commercial Code (TCC) are also applicable if the insurance contract is established between merchants. On the other hand, the provision mentioned above gets the “misleading provision” nature in the doctrine by putting the “Turkish Code of Obligations” at the second place right after the Turkish Commercial Code (TCC)14 because the Road Traffic Code and the Road Transport Code contain provisions directly relevant to the issue of insurance contract. Therefore, if Article 1451 of the Turkish Commercial Code (TCC) is literally applied, it will not be possible to enforce these said Codes and to apply the Consumer Protection Code (CPC) on the insurance contract.

12

Unan (2016b), p. 4. Unan (2016a), p. 1. 14 Unan (2016a), p. 553. 13

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2 Transparency in Insurance Contract Law 2.1

Aim and Relevance

The organized structure of the insurance companies and their potential to make their demands accepted by the policyholder necessitates a protection for the insured against the insurer. Thus, the principle of “freedom of contract” is limited for the insurance contract. Although there are some measures protecting the weak side (policyholder) of the contract like State supervision over insurance companies and the mandatory provisions of Turkish Commercial Code (TCC), they are not enough. It is a real necessity for the contracting parties to act in accordance with the principle of good faith.15 Almost every contract is prepared by one of the parties. Insurance contracts have special and sophisticated details.16 The existence of general insurance conditions under the control of the state reflects the fact that the wording of the insurance contract should be written by a specialized team. The legal, economic and technical aspects of the insurance contract have been intertwined.17 Therefore, transparency is much more important in the insurance contract than in any other contract. This significance manifests itself in various provisions of the law governing insurance contract law and insurance supervision law.

2.2 2.2.1

Contract Transparency Conclusion of the Contract

Manner of Conclusion The insurance contract will be concluded within the framework of the Turkish Code of Obligations envisaged for all type of contracts. That is, the parties should make a mutual and fitting expression of will on the essential elements of the contract.18 This principle also applies to insurance contracts that are set up online. The insurance provisions of the Turkish Commercial Code do not provide any special provisions concerning the form of the insurance contract. Thus, the contract can be concluded even verbally; but the parties can agree on the form of the contract, and if such a form is agreed, it will be regarded as a valid form (Turkish Code of Obligations Articles 12 and 17). The policy is an important evidence for the conclusion of the contract.

15

Bozer (1981), p. 23. Bozer (1981), p. 33. 17 Kender (2011), p. 162. 18 Bozer (1981), p. 52; Kender (2011), p. 163. 16

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Result of Silence of the Insurer If the insurer has not rejected the application form made by the person desiring to make the insurance contract within 30 days from the date of the offer, the insurance contract will be deemed to have been concluded (TCC Article 1405(1)). Even if the contract is concluded by silence, the insurer must fulfil its obligation to inform (TCC Article 1423). If the policyholder is able to give an application form at a level sufficient to conclude the contract, it may be considered that she does not need to be informed about the contract terms. However, in cases where we can assume that the policyholder may behave in different way if the insurer provided some information earlier, the policyholder may claim that the information obligation is violated.19

2.2.2

Deviation of the Policy from the Terms of the Application Form

If the contents of the policy and its annexes deviated from the terms set out in the application form (or from the terms mutually agreed by the parties), such terms shall be ineffective to the extent that these are detrimental to the policyholder, insured or beneficiary (TCC Article 1425(2)).

2.3 2.3.1

Product Transparency Scope of the Insurance Cover

The insurer shall be liable to indemnify the loss caused by, or pay the insurance sum upon the materialization of, the risk specified in the insurance contract. The burden of proving that any of the risks specified in the insurance contract fell outside of the insurance cover shall lie with the insurer (TCC Article 1409).

2.3.2

Cost Transparency

If the insurer increases the premium pursuant to an adjustment clause without altering the scope of the insurance cover, the policyholder shall have the right to terminate the contract within one month from the date of receipt of the insurer’s notification (TCC Article 1414). In case the risks get higher due to changes in the Insurance General Conditions or to the violation of the duty of disclosure by the policyholder, the insurer’s right to claim additional premium is regulated (TCC Articles 1425(3); 1439; and 1445).

19

Unan (2016a), p. 71.

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If the payment of the premium will be made in instalments, the amount of the instalments and due dates, and the result of the non-payment of the premium are written on the policy or notified to the policyholder in written form with the policy (TCC Article 1431(2)). However, Article 1425 of the TCC has specified that the terms relating to default must be included in the policy. While the terms regarding the consequences of the default is mandatorily included in the policy, in case of default of any of the instalments,20 this time again another provision (Article 1434 (3) TCC) regulates an obligatory notification giving a warning for demanding payment. The insurers due to the notification costs have criticized the last mentioned Article.

2.4 2.4.1

Transparency on Policy Contents

The Turkish Commercial Code (TCC) has made a general specification instead of counting the points that need to be included in the content of the policy. According to Article 1425(1) TCC, the insurance policy shall set out the respective rights of the parties, provisions relating to default, general and special conditions. If there is an amendment in general conditions after the insurance contract has been concluded, the amendments in favor of the policyholder, insured and beneficiary will be applied immediately and directly, unless otherwise stated in the Code. Where such an alteration justifies a request for additional premium, the insurer shall be entitled to claim the additional premium within 8 days from the alteration. If the request was not accepted within 8 days, the contract shall continue based on the previous general conditions (Article 1425(3) TCC).

2.4.2

Wording

The policy shall be drafted in an intelligible and easily readable manner (TCC Art. 1425/1). Article 11(5) of the Insurance Activities Code (IAC) also stipulates that foreign words cannot be included in the insurance contract and, instead, the use of the words in the Turkish Language Association is essential.

20

TCC Article 1434(3): If any of the subsequent installments was not paid at the relevant maturity date, the insurer shall notify the policyholder by way of a registered letter or a notice served through a notary public that payment must be effected within ten days, failing which the contract is to be deemed as having been terminated at the expiry of the ten-days-period. If the outstanding amount remained unpaid at the expiry of this period, the contract shall be terminated. Any additional rights of the insurer arising under the Turkish Code of Obligations in respect of the policyholder’s default are reserved.

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Using General Conditions in Insurance Contracts: Limits of Freedom of Contract

Compulsory Inclusion of General Conditions of Insurance The main content of insurance contracts is the “Insurance General Conditions”. Article 11(1) of the Insurance Activities Code (IAC) specified that the main backbone of the contract should be based on these general conditions. The addressee of this provision is the insurance company and if the contract is made without using the Insurance General Conditions, it is envisaged to be an administrative fine of TL 10.000 under Article 34(2)-f of the same Code. Since insurance has an important role in economic and social life, and it is an institution based on trust, the insurer must have a solid financial and technical structure. The State supervision was deemed necessary in achieving this goal.21 Article 1 of the Insurance Activities Code (IAC) actually sets out this necessity. The critical point of this provision in terms of our subject is that the protection of the rights and interests of persons in the insurance contract is noted as one of the purposes of the supervision.22 The government deemed it necessary to involve in the contract and tried to give uniformity to the insurance conditions because the policyholder is considered to be in a weak position against the insurer in terms of the imposition of the conditions upon her. This is mainly the State’s supervision over the insurance activities business23 and the aim is to maintain the balance between the parties.24 In practice, the Undersecretariat of Treasury tries to achieve this goal by organizing the general conditions of the insurance itself.25 Insurance contracts are a matter where the legislator fully interferes with the contractual freedom of contract between the parties. That is, (i) the freedom of contract of the parties is interfered and compulsory insurance is established in cases where it is deemed necessary for the public interest (Article 13 of the Code of Insurance Activities). Again, based on public interest, (ii) the freedom to choose the counterparty is interfered and it was stated that some sorts of the compulsory insurances could only be contracted by specific public legal entities with an “insurer” title. Finally, (iii) the freedom to determine the content of the contract was intervened and in Article 11(I) of the Code of Insurance Activities, the main content of the contract was required to be formed by the Insurance General Conditions approved by the Undersecretariat of Treasury. The provision of Article 11(1) of Code of Insurance Activities is as follows: “The main content of insurance contracts is specified in accordance with the general terms approved by the Undersecretariat of Treasury and is to be applied by all

21

Kender (1975), p. 15; Arseven (1987), p. 24; Ozer (2005), p. 22. Kabukcuoglu Ozer (2012), p. 9. 23 Ozer (2005), p. 24; Tasbasi (2005), p. 66. 24 Rayegan (1968), p. 3. 25 Unan (2014), p. 173. 22

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insurance companies in a similar way. However, insurance companies can determine special conditions in accordance with the specialties of the matter. In that case, these special conditions shall not be misleading and will be shown clearly in the insurance contract under the title of special conditions.” The Insurance General Conditions, indeed, are mainly contractual provisions, showing the rights and obligations of the parties. However, due to the significance of the insurance in the economic life, these general conditions are subject to State control.26 When the explicit wording of Article 11(I) of the Insurance Activities Code (IAC) is considered, the legislator’s demand is that each insurance company should prepare its own general conditions and submit it to the Undersecretariat of Treasury for approval.27 In practice, however, the Undersecretariat of Treasury went beyond the approval power given by the legislator and assumed the mission of drafting the general conditions in the form of a common text on behalf of all insurance companies.28 In the Insurance General Conditions, which are directly prepared by State (Undersecretariat of Treasury), no distinction has been made between insurer and the policyholder from being consumer or a merchant. It is a fact that the insurers in our country use the general conditions prepared by the Undersecretariat instead of submitting their own text. However, the supervision required by Article 11 (1) of the Insurance Activities Code, which is a supervision law, is not in this direction. In other words, the provision is now used in a way that goes beyond its purpose. In fact, the mentioned provision has three requirements: (i) the main content of the insurance contract should be Insurance General Conditions; (ii) approval of the general conditions by the Undersecretariat; and (iii) application of the approved general conditions in the same way to the insured persons subject to the same risk. Determination of the Undersecretariat of Treasury as an approval authority, and the preparation of respective general condition by each of the insurer will also mean the provision of product diversity.29 In fact, the use of the Undersecretariat of Treasury as an approval authority is a controlled system of free competition from which the insured get benefits.30 However, the insurance companies in Turkey do not choose this procedure and do not prepare the Insurance General Conditions by themselves. The insurer appears to be the party that unilaterally creates the contract content by adding the Insurance General Conditions (which is the main backbone of the

26

Kender (1975), p. 16; Bozer (1981), p. 33. Kabukcuoglu Ozer (2012), p. 153; Can (2012), p. 28. 28 Regarding the view that this implementation should be changed since the mandatory provisions of the Turkish Commercial Code provide adequate protection; see Unan (2012), p. 77. 29 Kabukcuoglu Ozer (2012), p. 153. 30 Arseven (1987), p. 30. 27

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contract) prepared by the Under-Secretariat of Treasury to the contract. As the freedom of contract, in particular the freedom to determine the content of the contract, is unilaterally enjoyed by the insurer, mandatory provisions are included in the Turkish Commercial Code (TCC) to protect the weak party of this contractual relationship.31

Insurance Contract: Contract Within Pre-formulated Standard Conditions? Pre-formulated General Conditions: Aim and Meaning Under Code of Obligations Where a pre-formulated general condition is used in a contract, the aim is to shape the side points in favor of those who prepare or use these conditions, such as the way and elements of the performance, the consequences of the non-performance, and the court of competent jurisdiction (Article 20 Turkish Code of Obligations). Thus, the complementary provisions, which the legislator brings itself to the benefit of both sides, are eliminated unilaterally.32 Here, the most crucial point is that the general conditions cannot be used in place of the mandatory provisions and on the essential elements of the contract, i.e., the premium and the scope of cover.33 In other words, the general conditions shall replace only the “complementary (regulatory)” provisions. Legal Character of Insurance Contract In the Doctrine,34 there is a view that the insurance contract is a contract containing a pre-formulated “standard conditions” in the frame of Article 20 of the Turkish Code of Obligations. The distinctive nature of a contract having standard condition is that it uses the freedom of preparing the content of the contract on a unilateral basis; that is, it is the inclusion of a text prepared by the merchant or another establishment, with a unilateral will and without negotiation, and submission of the contract to the counterparty under such conditions. In other words, the merchant excludes an individually negotiated contract by imposing general conditions on a contract with each different person.35 If the client knows the content of a provision (or all of the contractual provisions), comprehends its meaning and importance, and has position

31

Can (2009), p. 260 et seq.; Kabukcuoglu Ozer (2012), p. 152; Memis (2016), p. 5 et seq. Havutcu (2003), pp. 4–5; Atamer (2011), p. 13 et seq. 33 Unan (2016b), p. 31. 34 Bahtiyar (2008), p. 151; Memis (2016), pp. 16–19; Can (2006), p. 1; Yazicioglu (2003), p. 40; Ceker (2011), pp. 7–8; Ozdamar (2009), p. 131; Unan (2014), p. 173; Atamer (2011), p. 15; contra Yesilova (2015), p. 466. 35 Havutcu (2003), p. 79; Atamer (2001), p. 61 et seq. 32

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to involve in the content,36 i.e., negotiation is possible with the merchant (counterparty), then it is deemed negotiated. In that case, that provision is not regarded as a “standard condition”.37 In short, it is sufficient not to deem a condition a “standard condition”, if it is possible for the parties of the contract to make a negotiation on the term(s) of the contract. This means, it is not actually necessary to realize the negotiation; possibility to negotiate is enough to not being a “standard condition”. Under this view, the insurance contract is open to negotiation with insurer and the Turkish Commercial Code (TCC) has provided the necessary legal base for the policyholder to influence the content of the contract. The information duty of the insurer, which is regulated under Article 1423 of the Turkish Commercial Code (TCC), is an indication of this. Under paragraph 1 of the mentioned Article, before the contract is concluded, both the insurer and its agency, by allowing time for examination, shall give notice to the counterparty in writing, regarding all the information about the contract to be concluded, i.e., the rights and obligations of the insured, the provisions needing particular attention. These points are noted on a printed-form document prepared by the Undersecretariat of Treasury, and referred as the “Information Form” and submitted before the conclusion of the contract by signing.38 Undoubtedly, its signing does not mean that it is negotiated,39 but the phrase of the provision “in the condition of recognizing necessary time” to the policyholder is an indication that the negotiation is possible.40 In addition, by defining the information duty for insurer against all policyholders without making distinction between the merchant and consumer, I think, the Turkish legislator has almost made an environment for and encouraged the negotiation of the contracts. If the insurer’s information duty has been met and the necessary examination time is granted to the policyholder before the conclusion of the contract, the policyholder will be again unable to claim that insurer did not grant negotiation opportunity. Currently, all insurance companies are using the same general conditions because of the misapplication of Article 11(1) of the Code of Insurance Activities. However, I cannot share the view that there is no possibility of negotiations in the insurance business and it is, therefore, a malfunctioning market. The Turkish legislator made it 36

Havutcu (2003), p. 88. Atamer (2013), p. 134. 38 For details see Ozdamar (2009), p. 240 et seq.; Yazicioglu (2014), p. 202 et seq. 39 Within the framework of the information obligation of the insurer, it is not enough to sign and give the form, verbal explanations should also be made (for details see Ozdamar 2009, p. 240 et seq.); explanation of the provisions one by one and agreement of the counterparty is not adequate for the conclusion of an “individual contract”; to accept the existence of this, “negotiation” or possibility to negotiate, i.e., having the opportunity to bring concrete alternatives should have existed (Atamer 2013, p. 128 et seq.). 40 Regarding the view that one should question the qualification of the insurance contract as a contract of adhesion, see Bozer (1981), p. 35. In the Doctrine, Can also states that the insurance contract cannot be accepted to be a contract of adhesion because of special conditions, which could change the general conditions of the insurance; implicitly the last mentioned author accepted that the policyholder has the power to negotiate and influence the content of the contract (Can 2009, p. 279). 37

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possible that the general conditions of insurance can be customized by “special conditions” depending on the feature of the concrete risk and the expected coverage. The lack of application of this tool in practice results from the unawareness and unconscious attitude of the customer.

2.4.4

Abusive Clauses and Judicial Control

Although the supervision power given to the Undersecretariat of Treasury in terms of contract law is limited with “approval”,41 the Undersecretariat of Treasury, itself, actually became a drafter and an approver, as the insurance companies do not prepare individual Insurance General Conditions. Both the “approval” and additionally the “regulator”, which it created by itself, actually lead to an excessive supervision over the “general conditions of insurance”, going beyond the vision and will of the Code of Insurance Activities. This kind of administrative supervision is not an obstacle to judicial review,42 as the nature of both supervisions is different. It is not possible, especially in the area of insurance, to accept that a text issued by the administration is already in compliance with the law at all times. The legal expertise and adequate number of specialists required to prepare the general conditions without error are not in the possession of the Undersecretariat of Treasury.43 The general conditions of insurance constitute the main content of the insurance contract but it should not be forgotten that they are also contractual provisions and cannot be contrary to the mandatory provisions of the law. The fact that the Undersecretariat of Treasury itself has drafted and approved these conditions will not set an exception to this principle.44 It is within the exclusive authority of the legislator to create a mandatory provision. Even if the Undersecretariat of Treasury is a public authority, it does not have such power. As such, the special condition comes before the general condition, with the condition that it should not be contrary to the mandatory provisions.45 The Insurance General Conditions prepared by the Undersecretariat of Treasury or the special conditions added by parties to it may sometimes be abusive, although they are not contrary to the mandatory provisions. In other words, it may disrupt the balance between the parties against the policyholder, insured or the beneficiary. Therefore, it is worth thinking about how the judicial review could be made if there is a dispute regarding the insurance contract with an abusive clause. In this way, when an insurance contract involving an abusive clause is a matter of dispute, it is necessary to consider how to make judicial review. If the abusive clause

41

See Article 11 Insurance Activities Code. Havutcu (2003), p. 49. 43 Unan (2013), p. 13. 44 Yazicioglu (2003), p. 51. 45 Kender (1975), p. 77; Yazicioglu (2003), p. 52. 42

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is included in the Insurance General Conditions, which is drafted by Undersecretariat of Treasury, as the abusive clause itself has an administrative nature, it will only be cancelled by the Council of State.46 If the abusive clause is included in the special conditions of the insurance contract and drafted in a “general condition” style, then the judicial courts shall make the review specified in Articles 21 and 25 of the Turkish Code of Obligation, and nullify it.

2.4.5

Special Conditions

Although in Article 11(1) of Insurance Activities Code, the clear wording of the provision requires that the main contents should be the Insurance General Conditions prepared by the insurer and approved by the Undersecretariat, the legislator has made it possible to open the general conditions (controlled via approving) into negotiations and change them with the “special conditions”, if the business characteristics necessitate. In other words, the terms of the general conditions are reversible, with the condition that they should not be contrary to the law.47 The possibility of customizing the insurance contract, that is making specific to the present relationship and being able to change some provisions of the general conditions by considering the characteristics of the policyholder or insured, may be possible with the so-called “special conditions”.48 In sum, the general conditions that the Undersecretariat drafted and approved by itself are not untouchable. The special conditions are the terms decided and agreed upon by the parties and have the characteristic of customizing the contract as it has the feature of changing the general conditions.49 However, not every provision under the heading “special condition” should be considered negotiated and jointly decided on by the parties, because even the provisions under the heading of special conditions may have the characteristics of pre-formulated general conditions. Especially in hull insurance, it is an indispensable practice to use the “general conditions”, in the foreign language, which is called as Institute clauses, as a special condition.50 As such, the contents of the reinsurance contract by the foreign reinsurance company, i.e., the coverage conditions, are inevitably presented without negotiation to the insured under the term “special condition” in the insurance contract. In today’s insurance practice, insurance coverage is not provided unless reinsurance is provided, i.e., the insurance

46

On the other hand, there is also a view in the Doctrine that the judge shall review the legal compliance of the general conditions of the insurance, and the Court shall investigate and determine the violation of the mandatory provisions, without regard to the fact that the Insurance General Conditions are drafted and approved by the administration (Karayalcin 1984, p. 206; Bozer 1981, pp. 34, 54; Kender 2011, p. 171; Bahtiyar 2008, p. 158; Can 2012, p. 29). 47 Unan (2013), p. 26. 48 For detailed information see also Karayalcin (1984), pp. 212, 234, 235; Memis (2016), pp. 8–10. 49 Kender (2011), p. 172. 50 Yazicioglu (2003), p. 48.

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company gets the coverage first, and then provides the coverage.51 Therefore, the reinsurance contract, willingly or not, affects the insurance contract in terms of the content.

3 The Insurer’s Duty to Inform and Warn 3.1

Meaning and Normative Basis

Article 1423 of the Turkish Commercial Code, under the heading of “Obligations of the Insurer”, has regulated the subject in a general provision with a sub-heading as “Information Obligation”. Accordingly, “Before the conclusion of the contract and sufficiently in advance for due consideration, the insurer and its agent shall inform in writing the policyholder of all matters related to the insurance contract, the insured’s rights, the provisions to which the insured has to pay special attention, notification duties that may arise in the course of the insurance cover. Moreover, the insurer shall, independent of the policy, let know the insured during the contract period of the facts and developments that can be of importance to the insurance relationship. If this duty was not duly fulfilled, the contract shall be deemed as having been concluded in accordance with the terms written in the policy, unless the policyholder objects to the conclusion of the contract within fourteen days. The burden of proving that the information obligation has been duly fulfilled shall lie with the insurer.” It is stated in Article 11(3) of the Insurance Activities Code (IAC) “Information to be provided by the insurance companies and insurance agents shall be governed by Regulation”. In addition to the issues as to who shall make the information to whom, how and when it shall be made, this Regulation,52 however, has gone beyond its scope and specified the consequences of the violation of the “information obligation” as well. The sub-heading of Article 1423 of the Turkish Commercial Code (TCC) has not chosen “information” but “clarification”, which has a meaning of explaining the information given.53 In fact, the meaning of “clarification” covers helping to give decision (counselling) in the forms of making personal assessment and recommendation, as well as giving the necessary information.54 However, considering the content of the provision, no obligation is imposed on the insurer beyond informing. As such, it is not appropriate to choose the sub-heading of the provision as

51

Atabek (1974), p. 78. “Regulation Regarding Insurance Contracts about Information Obligation of Insurers” (OR Date: 28.10.2007; No: 26684). 53 However, the legislator chooses the name of the Regulation mentioned in the footnote above as “Information”. 54 Yazicioglu (2014), p. 198; also see Ozdamar (2009), p. 126 et seq. 52

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“clarification obligation”, rather than information. Even if the sub-heading is “clarification obligation”, it is doubtful whether such insurer’s obligation covers the mission of “warning”. In particular, as Article 2.202 of the PEICL, it is difficult to say in terms of Turkish legislation that it is the insurer’s obligation to warn the applicant in case there is an incompatibility between the cover offered and the applicant’s requirements.

3.2

Factors Making the Provision of Information a Requirement

According to Article 2 of the Turkish Civil Code, everyone has to comply with the rule of good faith while using their rights and performing their obligations. Hence, those who come together with the intention to conclude a contract must also comply with the rule of good faith in the negotiation process. This obligation requires negotiating with serious intent to make a contract, not to engage in effective deceptive conduct regarding the conclusion of the contract or its contents, to give the necessary information to the counterparty, and to warn the counterparty if she falls into a fault. If these requirements are violated, the damage of the counterparty will be born because of the culpa in contrehendo responsibility. Even if the rule of good faith were not present in our legislation, the cover subject to the contract is an intangible legal product because of the nature of the insurance contract. Without the assistance of an expert, it would be difficult for the applicant to understand the Insurance General Conditions, especially the cover, which are written with a general and abstract language. The long-term legal relationship will not allow the applicant to redress the mistake whenever she wants; it would not be possible to terminate or change the relationship, or not be economical. On the other hand, the insurer who has professional expertise can give all the information that this person needs, and understand and recommend the coverage most appropriate to the risks she is exposed to. The aim of norms in this field is to eliminate the inequality of information between the parties and the resulting power imbalance.55

3.3

The Recipient of the Information

The recipient of the information to be made before the contract is the real person or legal entity that started negotiations with the insurer. It was clarified in the Directive No. 2008/7 of the Undersecretariat of Treasury if the insurer should still give information when the recipient is merchant while they have to behave as a prudent merchant (Article 18 (2) TCC). Accordingly, Article 1423 of the Turkish 55

Yazicioglu (2014), pp. 200–201.

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Commercial Code, which regulates the Insurer’s Information Obligation, provides a general provision for the applicant or the policyholder without making a distinction between the merchant and non-merchant or between the real and legal persons. As such, it was clarified in the Directive mentioned above that the information would be given even to a broker when she attends to the pre-contract negotiation stage; and the information given to her is deemed given to the counterparty. The (written) information to be made during the continuation of the contract shall be made to the policyholder or the person who will provide the benefit from the contract.56 If the information is made only to the policyholder, the insurer should fulfil this obligation against the beneficiary, on demand, as well.57

3.4

Exceptions

The Undersecretariat of Treasury is authorized to exclude some insurance branches or types of risks or certain insurance contracts from the information duty.58 Based on this authority, the Undersecretariat has exempted compulsory insurances and statesponsored agricultural insurances only in terms of the information duty during the pre-contract period.

3.5

The Scope of Obligation

This issue is regulated under Articles 8 and 9 of the Regulation Regarding Insurance Contracts about Information Obligation of the Insurers. The scope of the information at pre-contract stage is limited to the “Information Form” prepared by the Undersecretariat of Treasury. The Undersecretariat drafts a minimum content in this form for each type of insurance. The Insurer completes this form, prints in two copies, signs and gives to the applicant by signing. The signature of the applicant constitutes a rebuttable presumption that he is informed about the points in this form. In addition to the Information Form, the Insurance General Conditions are also given to the applicant, upon request, during the negotiations. Article 10 of the Regulation named above provides the scope of the information to be given during the continuation of the contract. The insurer and its agency must give information with respect to the legal changes on the contracted insurance,

56 Articles 10 and 11 of Regulation Regarding Insurance Contracts about Information Obligation of the Insurers. 57 Article 6(2) Regulation Regarding Insurance Contracts about Information Obligation of the Insurers. 58 Article 9(5) Regulation Regarding Insurance Contracts about Information Obligation of the Insurers.

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bankruptcy and liquidation of the insurer, the cancellation of the licenses in the relevant branches, revocation of the authority to make contract in any of the branches, every sort of change and development directly affecting the rights, debts and obligations of the policyholder and beneficiaries which appear during the continuation of the contract.

4 Policyholder’s Duty of Disclosure 4.1

Legal Character, Duty or Obligation?

The sub-heading of the 12 articles between Articles 1435–1446 of the Turkish Commercial Code (TCC) is “Obligation of Disclosure”. However, a basic sanction has been laid down in case of the contravention of this obligation, which is based on the rules that the insurer can avoid the contract or that the policyholder “will lose the right to indemnity”. That is, it was not mentioned that the insurer has the right to claim damages or to sue and demand the fulfilment of the obligation. As such, above-mentioned sub-headings should be “duty” rather than “obligation”.59

4.2

Those to Fulfil the Obligation

Under the Turkish Commercial Code (TCC), the duties to be fulfilled against the insurer primarily belong to the insured. However, under Article 1412, on the condition that she is notified about the insurance,60 the information and the behavior of the representative, if any, of the insured, as well as the beneficiary in life insurances, will be deemed the same as the information and behavior of the policyholder.61 The term “representative” in the article has a broader meaning in the insurance law compared to the law of obligations, and therefore those to whom risk management is left have to be deemed as “representative” as well, under Article 1442 of the TCC. In this sense, a tenant of a house, which is insured against fire risk, does not have the status of policyholder or insured person, but she is the one to whom the owner has left the risk management with the “tenant title” and has to be

59

Unan (2016a), p. 389. For the insurer to be deemed liable for notification, the existence of the negotiation has to be notified to the insured within the time required for the fulfilment of “pre-contract notification duty” or to be notified in other ways (Seker Oguz 2010, pp. 62, 63, 67). 61 Article 1412 TCC: “Where this Code attaches any legal consequence to the policyholder’s behavior or knowledge, the same consequence shall attach also to the behavior or knowledge of the insured, or representative or in cases of life insurances of the beneficiary, provided that they were aware of the insurance contract.” 60

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deemed to be the “representative” of the owner (policyholder) in terms of the insurance law.62

4.3

Scope of the Duty at the Conclusion of the Contract

The purpose of the duty of disclosure is to provide the insurer with the opportunity to assess the risk and, consequently, to decide whether to take the risk under coverage, in other words, to establish the contract, and if she is to establish, to enable her to make a decision on the conditions and particularly on the premium requested.63 In other words, in establishing a contractual relationship, the policyholder’s duty of disclosure has the key role and it is just one of the legal instruments used in the maintenance of balance of performances.64 The policyholder shall inform the insurer of all important circumstances of which it is or ought to be aware at the time of conclusion of the contract. Circumstances that are not so disclosed at all or disclosed insufficiently or wrongly to the insurer shall be deemed of importance if they could lead to the non-conclusion of the contract or to its conclusion with different terms. Circumstances asked by the insurer orally or in writing shall be deemed important until proof to the contrary (TCC Art. 1435). If the notification duty is fulfilled by addressing the agency of the insurer, authorized to make contract, this notification shall be deemed made to the insurer. Since the brokers are not authorized to represent the insurer, the notifications made to them shall not be deemed made to the insurer.65

4.3.1

Form

The Code does not envisage a written form. The policyholder may fulfil such duty orally, in writing or in official form. However, if a questionnaire is given, it must be accepted that she fulfils this duty with a written reply, as a rule. However, if the insurer asks the question orally, an oral answer is natural and sufficient. Giving a list of written questionnaires is not an obligation for the insurer. This method is chosen because the insurer knows or predicts the important matters better, thanks to the expertise, and wish that disputes would not arise on them in the future.66 Under the last sentence of Article 1435 of TCC, the matters to be asked orally or in writing by

62

Unan (2016a), pp. 123–125. For more details see Oztan (1966), pp. 26, 27; Unan (2016a), pp. 407, 408; Agsakal (2015), p. 33. 64 Seker Oguz (2010), pp. 22, 31. 65 Senocak (2014), p. 108. 66 Agsakal (2015), pp. 44–48. 63

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the insurer shall be deemed important until proven otherwise. However, if the insurer provides a questionnaire to the policyholder to answer, it is also specified that the insurer can ask questions on the condition that they are clear and in written form, and the policyholder is required to answer such questions (Article 1436(2) TCC). While the presumption that a matter on which the insurer asks an oral or written question shall be important is specified in Article 1435 TCC and the duty to inform the insurer about all of the important matters is left to the policyholder. There is no duty of disclosure related to the matters not listed in the questionnaire according to the explicit wording of the legislator if another question, out of the questionnaire, is not asked, or asked orally, by the insurer, except for the situations that policyholder has a will to hide, in bad faith.

4.3.2

Written Questions

The system preferred by the Turkish Commercial Code (TCC) while setting out the issue is a mixed system based on the disclosure procedure.67 In other words, it is primarily based on the disclosure procedure, however, it is seen that the policyholder needs to answer the questionnaire prepared by the insurer as well. In fact, in Article 1435 TCC, the policyholder is obliged to inform the insurer of all the important matters that she knows or needs to know during the conclusion of the contract. As it is understood from this provision, it is the duty of the policyholder to determine the important matters and inform the insurer about them. In this regard, the method has the most characteristic feature of disclosure procedure.68 However, the insurer can ease policyholder’s burden of assessing and predicting as to what the “important matter” is by getting involved in the procedure and presenting questionnaires or asking some questions on matters as an addition to the questionnaire.69 It is understood from the joint interpretation of Articles 1435 and 1436 TCC that the policyholder would fulfil the obligation of disclosure by giving complete and correct answer to the “written” questions directed to her. If the insurer has given to the policyholder a list of questions to be answered, the policyholder shall not be liable for any circumstances remaining outside the scope of the questions contained in that list, unless the policyholder has hidden an important issue in bad faith. The insurer may also ask questions about circumstances not included in the list. These questions have to be in writing and clear. The policyholder has to answer these questions (Article 1436 TCC).

67

Agsakal (2015), p. 46. Agsakal (2015), p. 44. 69 Unan (2016a), p. 425. 68

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Knowledge of the Insurer about the Truth

If the real situation concerning non-disclosed or incorrectly disclosed circumstances or facts is known to the insurer, it shall not have the right to avoid the contract arguing that the duty of disclosure has been violated. The burden of proof shall lie with the policyholder (Article 1438 TCC).

4.4

Duty of Disclosure during the Contract Period

After conclusion of the contract, the policyholder shall not accomplish acts or transactions that would lead to an increase of the amount of indemnity due to aggravation of the risk or current status, without the insurer’s prior consent. If the policyholder or another person authorized by the policyholder, accomplishes acts or transactions, which increase the probability of the materialization of the risk or aggravate the current status, or if circumstances designated by the parties at the conclusion of the contract as aggravation of the risk are materialized, the policyholder shall notify the insurer immediately or, if these transactions had been concluded without its knowledge, within ten days as of the date of awareness (Article 1444 TCC). The outline of the legal setting in this and the subsequent Article 1445 is as follows: after the contract is concluded, the policyholder can aggravate the risk only with the permission of the insurer. If the policyholder breaches this rule and aggravates the risk or somebody else aggravates the risk with the permission of the policyholder, the insurer should be informed about the circumstance immediately. If some matters are labelled as “risk aggravation” in the contract, the policyholder should inform the insurer of them immediately. If the risk aggravation has arisen completely outside the policyholder’s discretion, the policyholder shall inform the insurer within 10 days of the “learning” date of the circumstance. Within one month from the date of learning of the risk aggravation, the insurer may terminate the contract or request additional premium. If the premium is not agreed by the policyholder, the contract shall be deemed terminated. After materialization of the risk, if the insurer realizes after an investigation that the risk was aggravated but the duty of the disclosure was not fulfilled during the contract period (a) if there is a negligence of the policyholder in the aggravation of risk and there is a relationship in the materialization of the risk, there will be a deduction from the indemnity in proportion to the degree of negligence; (b) if the policyholder acted with intent in the aggravation of the risk and did not inform the insurer about it, and if there is a connection between changes made and the risk materialized, the insurer shall not pay the indemnity, but if there is no connection, the insurer has a right to make a deduction from the indemnity.

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After the Occurrence of an Event

After conclusion of the contract, the policyholder shall not accomplish acts or transactions that would lead to an increase of the amount of indemnity due to aggravation of the risk or current status, without the insurer’s prior consent. If the policyholder or another person authorized by the policyholder accomplish acts or transactions, which increase the probability of the materialization of the risk or aggravate the current status, or if circumstances designated by the parties at the conclusion of the contract as aggravation of the risk are materialized, the policyholder shall notify the insurer immediately or, if these transactions had been concluded without its knowledge, within ten days as of the date of awareness (Article 1446 TCC). It is necessary to determine the scope of this duty, which is regulated in the abovementioned provision, by considering the purpose. Once the insurer is informed that the risk has been realized, it will make an examination and investigation to protect its interests, collect evidence when necessary, and take or make somebody to take protective measures when necessary. To be deemed to have made a disclosure that can serve these purposes, it is necessary at least to share with the insurer the outline of where and when the risk occurred and what the outcome is.70 In the provision, there is no form requirement for the notification. If a special form requirement is not agreed in the insurance contract, even oral notifications will be valid. In the above-mentioned provision, no special arrangement has been made for the possibility of intent. An arrangement should have been made to ensure that the insurer is free from the performance obligation in such a case.71

5 Duty to Provide Information and Duty to Allow Investigation After the materialization of the risk, the policyholder must, under the contract or upon the insurer’s request, provide all information and documents, which are necessary for determining the extent of the risk and indemnity, and which might be expected from the policyholder, to the insurer within a reasonable time. Further, the policyholder shall, having regard to the information and documents it received, allow the insurer to investigate the site of the risk or other relevant sites and take appropriate measures as might be expected. If the amount to be paid increased because of a breach of this duty, a deduction shall be made from the indemnity by considering the degree of negligence (Article 1447 TCC).

70 71

Unan (2016a), p. 502. Unan (2016a), p. 504.

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The scope of the duties set out in the above-mentioned provision is determined as follows: (a) providing information and documents to the insurer within a reasonable time to determine the extent of the risk and the indemnity; (b) authorizing the insurer to conduct inspections in the place where the risk occurred or at other relevant places; and (c) to take appropriate measures to be expected from the policyholder. In fact, the importance and function of the above-mentioned provision is the specification that the information and documents shall be provided within a “reasonable time”72 because, as a matter of course, to legally claim indemnity, the policyholder must have already submitted the information and documents related to the risk to the insurer, as the burden of proof that the risk is within the coverage of the policy is on the policyholder. If she avoids providing this information and documents, she would not have fulfilled the burden of proof. In addition, it is already specified in the last sentence of Article 1427(2) TCC that the indemnity payment of the insurer would not be due in case the policyholder does not give, with negligence, the information and documents to the insurer.73 According to the provision, the extent of the “reasonable time” and “the sort of the information and documents to be expected from the policyholder” will be assessed in the respective conditions of each event.74

6 The Effects of Consumer Protection Code on Transparency 6.1

Generally

The insurance activity is an activity that is under legal protection. The government’s sectoral supervision (supervision over the insurance sector), which was introduced by the Insurance Activity Code, on the one hand, and the mandatory provisions of more than 70% of the Sixth Book of the Turkish Commercial Code (TCC) on the other, aimed at protecting every beneficiary of the insurance without discriminating between consumer and merchant. In addition, the fact that the “Insurance General Conditions” constituting the main content of the insurance contract is drafted by the government (Undersecretariat of Treasury), even if it is wrong, also provides, naturally, an additional protection.75 This protection mechanism reinforces the 72

Unan (2016a), p. 506. TCC Art. 1427(2): “Following materialization of the risk, the obligation to pay the insurance indemnity or the fixed sum shall fall due, when the insurer has completed its investigation about its obligation, after the documents related to the risk are given to it and in any event within forty five days from the date of notification made according to Article 1446. In life insurances this period shall be fifteen days. If the investigation was delayed because of a fault that cannot be attributed to the insurer, the period shall not begin to run”. 74 Unan (2016a), p. 507. 75 Unan, Semp, 165. 73

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idea that consumers do not need greater special protection. However, it is not agreeable that the consumers who have a special protection, thanks to the Consumer Protection Code (CPC), would be deprived of these rights in case they make contract under insurance law. Therefore, if the consumer law grants greater protection to the consumer compared with the insurance law, then a policyholder or insured who is accepted as “consumer” in the sense of the Consumer Protection Code (CPC) can benefit from the provisions of the consumer law within the frame of the insurance contract as well.76 In conclusion, to summarize under this heading, with respect to the contracts of policyholder and insured person who does not make insurance contract for commercial and occupational purposes (Article 3(1) l-k Consumer Protection Code (CPC)), these contracts will be deemed “consumer transactions” and these people will get the “consumer” title within the frame of Consumer Protection Code (CPC). Among the insurance law or the consumer law, the priority will be given to the one granting greater protection in the insurance contract featured as a consumer transaction.

6.2 6.2.1

Norms Relating to Transparency in Insurance Contract Concluded with Consumer Form, Wording, Legibility

Under Article 4 (1) of the Consumer Protection Code (CPC), it is obligatory that the contract itself and the information to be made pursuant to this contract be arranged in a form having 12 font size, understandable, clear, plain and legible wording. A copy of this text should be given to the consumer in paper format or in a form of permanent data storage.77 It is understood from the provision that the written language must be clear and plain, in the official language of Turkey and in the official alphabet (i.e., not affecting its readability by using stylized text). A contract condition that is not clear, which may have more than one meaning, will be interpreted in favor of the consumer.78

6.2.2

Prohibition to Change Contract Conditions

Under Article 4 (2) of the Consumer Protection Code (CPC), the terms and conditions set forth in the contract cannot be changed against the consumer within the term

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Unan, Semp, 165, 166. Regarding the view that considering electronic mail, CD, DVD, memory card or other technological devices equal with the paper by the permanent data storage provision would not be appropriate in terms of the consumers who does not use technology, see Unan (2014), p. 170. 78 Unan (2014), p. 169. 77

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of the contract. This provision shall have an impact in terms of the insurance contract, especially with respect to the contractual condition of “unilateral premium increase”.79

6.2.3

Defective Service

When Article 14 (2) of the Consumer Protection Code (CPC) is applied to the insurance contract, the declarations made by the insurer (provider of insurance service) via advertisements shall be included in the contract text and the insurer will be bound to them as a rule. The provision also sets out a limited number of conditions for eschewing from the rule of including the advertisement declarations in the contract, in exceptional conditions where the burden of proof is on the insurer.

References Agsakal I (2015) The results of violation of duty of disclosure at conclusion of the insurance contract. Adalet (in Turkish) Arseven H (1987) Insurance law (in Turkish) Atabek R (1974) Reinsurance contracts. Banka ve Ticaret Hukuku Enstitusu Yayinlari (in Turkish) Atamer Y (2001) Supervision on general conditions under the viewpoint of limitation of freedom of contract (in Turkish) Atamer Y (2011) General conditions under New Turkish Code of Obligations. In: Symposium on General Condition in Turkish Law 8 April 2011 (Banka ve Ticaret Hukuku Enstitusu Yayinlari, No. 467) (in Turkish) Atamer Y (2013) Is it general condition or a contract concluded by individual bargaining. In: Symposium on Turkish New Code of Obligations and Code of Commercial Law. Vedat (in Turkish) Bahtiyar M (2008) General conditions of insurance policy. In: All my articles, vol I. Beta (in Turkish) Bozer A (1981) Insurance law. Banka ve Ticaret Hukuku Enstitusu (in Turkish) Can M (2006) General view to insurance general conditions regarding professional liability insurance. Banka ve Ticaret Hukuku Enstitusu, No:431 (in Turkish) Can M (2009) Turkish insurance private law course book. Imaj (in Turkish) Can M (2012) Legal principals relating to insurance contracts pursuant to Turkish Commercial Code No:6102, is there any provision needs reevaluate? Imaj (in Turkish) Ceker M (2011) Insurance law under Turkish Commercial Code No:6102. Karahan (in Turkish) Havutcu A (2003) Protection of consumer against general conditions via supervision on content. Guncel (in Turkish) Kabukcuoglu Ozer D (2012) Commentary on code of insurance activities. XII Levha (in Turkish) Karayalcin Y (1984) All risks clause in transport insurance contracts. In: Symposium on transport of goods regarding liability and insurance law. Istanbul (in Turkish) Kender R (1975) Panels on insurance activities subject: insurance law. Türk Sigorta Enstitüsü Yayınları (in Turkish) Kender R (2011) Insurance private law in Turkey. XII Levha (in Turkish)

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Unan (2014), p. 170.

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Memis T (2016) Judiciary supervision of conditions of insurance contracts. XII Levha (in Turkish) Ozdamar M (2009) Pre-contractual information duty of insurer. Yetkin (in Turkish) Ozer D (2005) The legal structure of state supervision. In: Turkiye’de Sigorta Hukukunun Sorunlari Sempozyumu 19–20 Kasım 2004. Turkiye Barolar Birligi Yayinlari (in Turkish) Oztan F (1966) Duty of disclosure at conclusion of the insurance contract. Banka ve Ticaret Hukuku Enstitusu No:54 (in Turkish) Rayegan K (1968) State supervision on insurance companies in Turkish law (in Turkish) Seker Oguz Z (2010) Pre-contractual notification duty according to Turkish Commercial Code and to The Report of the New Commercial Code. Filiz (in Turkish) Senocak K (2014) General view to duty of disclosure at conclusion of the insurance contract. In: Internationale Symposien zu aktuellen Entwicklungen im turkischen und deutschen Aktiengesellschafts-und Kapitalmarktrecht sowie Versicherungsrecht 19–20 Juni 2014 (in Turkish) Tasbasi I (2005) State supervision on insurance companies. In: Turkiye’de Sigorta Hukukunun Sorunlari Sempozyumu 19–20 Kasim 2004. Turkiye Barolar Birligi Yayinlari (in Turkish) Unan S (2012) Commentary on insurance general conditions regarding compulsory liability insurance of doctors (in Turkish) Unan S (2013) Commentary on insurance general conditions of commercial credits insurance. Istanbul (in Turkish) Unan S (2014) The effects of consumer protection code dated 2013 on insurance contracts. In: Internationale Symposien zu aktuellen Entwicklungen im turkischen und deutschen Aktiengesellschafts-und Kapitalmarktrecht sowie Versicherungsrecht 19–20 Juni 2014 (in Turkish) Unan S (2016a) Commentary of Turkish Commercial Code sixth book insurance law, vol I. XII Levha (in Turkish) Unan S (2016b) The law of insurance consumer. XII Levha (in Turkish) Yazicioglu E (2003) Hull insurance contract. Beta (in Turkish) Yazicioglu E (2010) Insurance mediators law. XII Levha (in Turkish) Yazicioglu E (2014) Information obligation of insurer. In: Internationale Symposien zu aktuellen Entwicklungen im turkischen und deutschen Aktiengesellschafts-und Kapitalmarktrecht sowie Versicherungsrecht 19–20 Juni 2014 (in Turkish) Yesilova A (2015) Using general conditions in insurance contracts. In: Symposium on general conditions 17 April 2015. Izmir Barosu Dergisi (in Turkish)

Transparency in the Insurance Contract Law of the Western Balkans Nikola Filipović

1 Introduction The concept and notion of transparency is relatively new in insurance (contract) law. The idea of transparency is penetrating Serbian law from the relevant EU regulations in this field, and most Serbian laws do not explicitly mention transparency as a concept. However, as transparency is understood as clarity and comprehensibility of the contract, a number of general provisions might apply to this end. Transparency and disclosure duties in particular have been analyzed extensively from comparative perspective.1 As potential candidates for membership in the EU, Serbia and Montenegro launched negotiation process, while Bosnia & Herzegovina signed Stabilization and Association Agreement, which is a first step in the process that entails harmonization with EU acquis. As such, the concept of transparency on the EU level will without doubt largely influence the development of the concept in the jurisdictions covered by the chapter. Additional problem might be that even on the EU level, especially in the EU secondary legislation, there are some inconsistencies in the use of the expression. Transparency is sometimes described as the goal to be achieved, while sometimes it is defined as a tool to achieve the goal, i.e., consumer protection.2 Until the countries embarked on the process of harmonization of law as part of the EU accession aspiration, there were no explicit pre-contractual information duties for the insurers in Insurance Law, and very limited duties of the insurer under Contract Law.

1 2

Slavnić and Jovanović (2008), pp. 26–48. Slavnić and Filipović (2015), pp. 286–290.

N. Filipović (*) University of Graz, Graz, Austria © Springer Nature Switzerland AG 2019 P. Marano, K. Noussia (eds.), Transparency in Insurance Contract Law, AIDA Europe Research Series on Insurance Law and Regulation 2, https://doi.org/10.1007/978-3-030-31198-8_20

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The chapter reflects on the concept of transparency in insurance contract law in Serbia, Montenegro, and Bosnia & Herzegovina. This area of European continent is often referred in official EU documents as the Western Balkans (however, this expression also includes North Macedonia and Albania, which are not covered in the chapter). As countries covered in the chapter share common legal background, as part of Yugoslavia for better part of the twentieth century, same language, and bearing in mind that Law of Obligation and Torts of former Yugoslavia is with small amendments either still enacted in all of the countries, with small differences albeit different in name, or was a starting point and main inspiration for enactment of new laws of obligations, it makes sense, especially in the area of contract law, to examine the legal systems of these countries together. In all countries, insurance contracts are subject to three layers of legal requirements. At the first level, the rules of general contract law will apply. However, some of the duties, especially those in pre-contractual stage, are regulated by different law—Insurance Law, which is regarded as the law that for the most part regulates corporate aspects (establishment and functioning) and to some extent supervision of the insurance undertakings. Such regulation of contracts in laws that deal with insurance supervision, although unusual, is not uncommon in modern insurance legislation. Insurance law also regulates the status and obligation of insurance intermediaries. Finally, insurance contract might be subject to special requirements if the contract in question is a consumer contract, the rules and requirements derive from Consumer Protection Laws. Therefore, the legal acts to be examined in this contribution include Law of Obligations as the general law applying to contractual relations, Insurance Law, and Consumer Protection Law. The chapter aims to provide an overview of the provisions of each “layers” of the laws in the region that might be used to assess and address transparency issues. A problem, which is widely recognized among scholars, is the absence of relevant case law databases and uneven court practice on similar matters in the region. Therefore, approach will be mostly doctrinal, and focused on the text of the law itself, since there has been no big misselling scandals that would give opportunity to courts to make a stance on certain matters of transparency in insurance contract law, and to clarify the meaning of certain legal standards that are usually used to define transparency (clarity, comprehensibility, etc.) However, in past few years, there has been a widespread problem with foreign currency-indexed mortgage loans. This type of financial product, although from different financial sector, can provide us with some insight on the reasoning of the court in cases of misselling of financial products, as consumers were not fully aware of all the risks tied to it. Because this problem drawn public attention and some of the cases have been (relatively) quickly resolved, we shall attempt to analyze some of these decisions and draw some analogies with the possible similar claims in insurance sector.

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2 Historical Notes on the Development of Insurance Law in the Region of Western Balkans The Serbian medieval state succumbed to the Ottoman expansion and after several stages of vassal hood finally lost independence in the mid-fifteenth century. After centuries of local uncoordinated rebellions, a major uprising in the early nineteenth century led by a pragmatic Miloš Obrenović, with help from Austria and Russia, carved semi-independence and vassal status for modern Serbian principality. The most important aspect of this semi-independence was the delegation of legislative powers to Serbian principality. Although, himself illiterate, Miloš Obrenović realized the importance of law, the need for modern legal system, and the role the educated legal elite has in creation of a state. Situation was grim, to say the least, after centuries of Ottoman occupation Serbia lacked modern schools and educated elite that could create a legal framework of modern state.3 In such circumstances, the ruler enlisted help from ethnic Serbs living outside Serbia, mostly on territory of Austrian Empire, where many of them had prominent legal careers.4 What followed was what could be described as the “first Europeanisation” of Serbian law. In 1835, Dimitrije Davidović, lawyer from the University of Pest and Vienna, created the first Serbian constitution. This constitution was never enacted, unfortunately.5 In 1844, Serbia became the fifth6 country in Europe that enacted its own civil codification. “Srpski građanski Zakonik”—Serbian Civil Code, drafted by Jovan Hadžić, a lawyer from Vienna, was heavily influenced by the ABGB from 1811, and transplanted many provisions from the AGBG in the Serbian Civil Code, thus providing maybe prime example of the “legal transplants” theory of the American—Scottish scholar Alan Watson. The first Commercial Code followed in 1860, which was influenced by French Code de Commerce from 1807. In 1892, the first Law on Insurance was enacted, and in 1898, the first Law on Joint Stock Companies.7 The Serbian Civil Code from 1844 referred to insurance in only two provisions (Articles 798 and 799) of Chapter XXIX “Contracts of Bold or Fortunate”, which was a description for aleatory contracts. Article 798 regulated only insurance against damages (fire and flood), but was subsequently extended to apply to all types of insurance, and Article 799 established a principle of invalidity of contracts in case

3

Nikolić (2010), pp. 339–344. Sava Tekelija was the first Serbian who attained PhD in Law at the University of Pest. He was an ethnic Serbian but subject of the Austrian Empire and member of Austrian noble family, of Serbian descent—Tekelija. 5 The constitution was subject to approval of the Ottoman government in Istanbul, and was deemed as “too liberal” at the time, both from the representatives of Austria and Russia, as well as from Ottomans. 6 According to professor Nikolić (2010), only Bavaria—Codex Maximilianeus bavaricus civilis (1756), France—Code civil des Français (1804), Austria—Allgemeine bürgerliche Gesetzbuch (1811), and Netherland—Burgerlijk Wetboek (1838), had enacted Civil Codifications before Serbia. 7 Antonijević (1974), p. 11. 4

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the insured knew at the time of conclusion of the contract that damage has occurred, and the loss of right to compensation, if the insured caused the damage himself.8 During the most part of the nineteenth and early twentieth century, insurance industry was haunted by what would today be described as “low level of financial literacy”, or perhaps even financial illiteracy of the general population. It went so far that in 1861, farmers (around 86% of population in Serbia at the time) were legally prohibited from issuing and entering into contractual relations regarding bills of exchange because of abnormally high interest rates they were usually subject to from banks and creditors, resulting in their eventual loss of land and property.9 After the World War I and unification, the Kingdom of Serbs, Croats and Slovenians, renamed Kingdom of Yugoslavia in 1921, had different applicable laws regulating contracts in different geographical areas. In territories that composed the pre-war Serbia, the Serbian Civil Code was applicable. In northern parts of

The first insurance contract in Belgrade was concluded in 1839. A judge of the Appellate Court, Lazar Zuban, insured his house against fire. Acting on behalf of the insurer, the Trieste Insurance Company “Assicurazioni Generali Austro-Italiche” was agent Vasilije Vasiljević, a renowned trader from Zemun. As a curiosity, we will add that several days after the conclusion of the fire insurance contract, covering the house of the judge in Savamala, the house burned down and the agent paid off the insured sum of 175 thalers. See: Petrović et al. (2013), pp. 68–69. 9 Bartoš et al. (1974), pp. 11–13, also Stojan Radčević Ristić, a former district governor and retired insurance company inspector wrote an interesting book on his retirement entitled “Guidelines for the protection of the policyholders and those who are offered life and property insurance”. Without doubt, in his long experience as insurance inspector and district governor he encountered many situations where policyholders were misinformed if not outright cheated in their dealings with insurance companies. The author was writing in length about dishonest and unfair actions by the insurance companies, representatives, agents, and sellers. His suggestions to the reader is that when the agent starts presenting benefits of insurance, or when he makes an offer of insurance contract, one should: (1) review the certification of an agent or seller and his authorization, above all to collect money; (2) the agent should be asked to disclose general and specific terms and conditions for specific insurance he offers, conditions should be studied thoroughly, even asking the agent to come back tomorrow so one could study the conditions properly; (3) the agent should not be allowed to complete the offer himself, but it should be done rather by either future insured or someone he trusts; (4) advance payments should not be made regardless of the type of insurance offered as one of the methods to ensure that insurance business will be reliable; The author also pointed out that one of the prevailing problems of insurance industry that must be solved is the compensation schemes of the insurance agents. “As long as agents are charged with a salary, a commission, travel, and other expenses under the current account, obliged to the monthly activities they may be tempted to deceive policyholders who are still unskilled”. Further, he notices that some of the agents dared not to return to the places where they committed deceptions and machinations for personal financial benefits. We may notice that the problem he pointed out some 80 years ago is still a point of debate in insurance law. Insurance Distribution Directive in Article 17(3) as a general principle prescribes that: “In particular, an insurance distributor shall not make any arrangement by way of remuneration, sales targets or otherwise that could provide an incentive to itself or its employees to recommend a particular insurance product to a customer when the insurance distributor could offer a different insurance product which would better meet the customer’s needs.” The problem of whether the new Insurance Distribution Directive should attempt to ban commissionbased remuneration of intermediaries/distributors was one of the most hotly debated topics in the process of drafting the new Directive. 8

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Serbia, uncodified Hungarian precedent civil law was present. In Croatia and Slovenia, the Austrian Civil Code of 1811 (AGBG) was the source of law, although amendments enacted during WWI were not enacted in all of the areas where it was applicable. Montenegro had their own Civil Codification of 1888 “Opšti imovinski zakonik”, which represented the result of the German Historic Law School and was particularly drafted by Valtazar Bogišić to accommodate social and trade relations that existed in Montenegro at the time (which was a theocratic state ruled by PrinceBishops until 1852). In some parts where Muslim population was dominant, the prevailing source of law was the Sharia Law. The work on the unification of the civil law was interrupted by the World War II, as there was some argument on whether the basis for the future civil codification should be the Serbian Civil Code or the Montenegrin Civil Codification. In the aftermath of World War II, the Royal government was overthrown and new the Communist regime raised to power. One of the first acts after liberation was passing the Law on Annulment of all Legal Acts passed before 6th of April 1941 and during enemy occupation, essentially abolishing the entire legal system that was in place before the World War II. A century of civil law tradition in Serbia ended. With the lack of new legislation on private law, courts of second Yugoslavia were supposed to judge based on legal principles derived from previously existing laws under the binding condition that they were in accordance with the principles of the socialist ideology. This marked the beginning of the development of new legal system based on the ideas of socialist self-management. The communist ideology had inherent distrust for any notion of civil or private, since private stood as the polar opposite to the idea of collective, which was the foundation of the ideology. This is not to say that insurance law and private law did not develop, but only that in that development they were influenced by ideological narratives of the time. Constitutional reform followed in 1974, and under the new Yugoslav constitution, Yugoslavia became a federal country consisting of six Republics of Slovenia, Croatia, Bosnia & Herzegovina, Serbia, Montenegro and Macedonia, and two autonomous regions in Serbia (Vojvodina, and Kosovo and Metohija). Under the constitution, there was a division of competences between federal level and republics. Movement of goods and services was one of the (few) federal competences, and Federal Law of Obligations was enacted in 1978 unifying contract law for the first time on the territory of entire Yugoslavia. To this day, it is the primary source of Law on Contracts and Torts in all of the countries of the former Yugoslavia. Despite the fact that it was enacted during the socialist regime and under the prevailing concept of social property, trade and contract were ruled on different principles from contemporary European ones. The Law of Obligations is usually regarded as a very successful and modern legal text.10 Similar to the Swiss Law of Obligations (which was one of the main inspirations for the creators), it includes both rules on general civil law and commercial contracts. It outlived both the state and the ideological system it was enacted in, which can serve as a testimony to its creators

10

Karanikić et al. (2012), pp. 68–70.

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and the quality of provisions it contains. The law was a Federal Law of Yugoslavia, and as such applied in all now independent countries covered in the chapter. Therefore, there will be no separate chapters dedicated to the contract law of individual countries, but rather when discussing certain issue reference will be made in the footnote to the appropriate articles of the national Law of Obligations. (Essentially same article in different law).

3 Law of Obligations Insurance contract is defined as a contract between the negotiator of insurance who assumes the obligation to pay a specific amount to insurance organisation (insurer), while the insurer shall assume the obligation, should an event take place, which represents case covered by the insurance, to pay insured person or to a third party, compensation, stipulated amount or do something else.11 Consumerist narrative in law and interference in contractual relations especially in financial sector is justified by the need to address the information asymmetries and protect the weaker party. While in some legal systems it is seen as a recent development coming from the EU law,12 it was present in theory that affected the conception of the Law of Obligations. As a mean to preserve the equality of contractual parties, law of obligation for insurance contract prescribes for the most part imperative norms13 (as opposed to general rules of contract law that parties can contract otherwise unless explicitly prohibited by the law). Such imperative intervention in the area of contractual relations is justified and defended as the means to preserve the equality of the parties, and to protect the policyholder from speculative actions of the insurer. Note that the general paradigm of the Law of Contract and Torts is that the negotiator of insurance (regardless of his legal status and actual capacity) is considered the weaker party in need of protection, a somewhat opposite from the general paradigm in comparative insurance contract laws, which usually assumes that the insurer needs protection from potentially speculative acts of the applicant. Departure from imperative provisions is permitted only if it is to the obvious interest of the person insured.14 The legislators recognized the potential weaker position of the insured, especially with regard to knowledge of all the legal details that might be important for this contractual relationship, and attempt to make the position of the insured as safe as possible. In other words, rights of the insured

11

Article 897 of the Serbian Law of Obligations, Article 994 of the Law of Obligations of Montenegro, Article 897 of the Law of Obligations of FBiH and Republika Srpska. 12 Benjamin (2010), p. 792. 13 Šulejić (2005), pp. 50–51. 14 Article 900(2) of the Serbian Law of Obligations, Article 997 of the Law of Obligations of Montenegro, Article 900 of the Law of Obligations of FBiH and Republika Srpska.

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should not depend on the small printed letters in insurance conditions, in many instances the insured needs protection.15 This article was used in court practice to declare provisions of the insurance contract void, which stipulated that contract would be terminated without notice, if the policyholder does not pay premium within 10 days of maturity of the premium.16 This principle is further upheld by prescribing Nullity of Clauses on Forfeiture of rights. Contract clauses that provide for the forfeiture of the right to compensation or to the amount insured, should the insured person, after the occurrence of the event covered by insurance, failed to execute some of the prescribed or stipulated obligations shall be void.17 Legal theory considers that such loss of rights would constitute a penalty, a private one but a fine in nature, which may be abused by the insurer.18 A sanction for the breach of the duties of the insured is reimbursement of the damages that insurer suffered from actions of the insured, a form of indemnity for the insurer.19 A stipulation “obvious interest of the insured” has been criticized by some in Serbian legal theory as the interest of the insured, and especially obvious interest, might be subject of debate, dispute, and difficult to prove. A stipulation “not to the detriment of the insured” was deemed better suited for the protection of the insured as it would create less complication in practice.20 Articles 907 to 918 regulate the obligations of insured (or negotiator of the insurance) in length. One of the key obligations is to report to the insurer, at the conclusion of the contract, all circumstances which are material in assessing the risk, and which were known, or could not have been unknown, to him.21 Sanctions for the breach of this obligations, provided that information was material in assessing the risk (information is such that it would induce the insurer, if he knew the real situation, not to enter into contract) and it was known to the insured, depends whether the failure to disclose was deliberate or unintentional. In case the action was intentional, insurer is allowed to seek nullity of the contract and is allowed to keep the collected premiums, and is entitled to request payment of the premiums for the insurance period within which he requested nullity of the contract.22 Insurers’ right to request nullity is terminated within three months from the day he became aware of the incorrectness in application. Nullity of the contract is not ex lege effect of the breach of obligation, but can be awarded at the request of the insurer. This

15

Jankovec (1980), p. 775. Vs. BiH, Rev. 629/83. 17 Article 918 of the Serbian Law of Obligations, same as Article 1015 of the Law of Obligations of Montenegro. 18 Šulejić (2005), p. 114. 19 Jankovec (1980), p. 820. 20 Petrović (2015), pp. 235–236. 21 Article 907 of the Serbian Law of Obligations, Article 1004 of the Law of Obligations of Montenegro, Article 907 of the Law of Obligations of FBiH and Republika Srpska. 22 Article 908 of the Serbian Law of Obligations, Article 1005 of the Law of Obligations of Montenegro, Article 908 of the Law of Obligations of FBiH and Republika Srpska. 16

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means that the insurer has to prove the fraud of the insurer to rely of the provisions of this Article, which limits the effective use of this remedy in practice since fraud is difficult to prove even if there are some indications of it.23 If the strict requirements of this paragraph are not satisfied, then rules on unintentional incorrectness or incompleteness of application should apply. It this case, the insurer has the choice of either stating that he is repudiating the contract or propose an increase of the insurance premium, proportionally to the higher risk involved, within 1 month after becoming aware of the incorrectness or incompleteness of the application. This Article does not require that information is of such nature that it would affect the decision of the insurer to conclude the contract, insurer can use the remedies provided here even if he would conclude the contract but with higher premium.24 It also does not apply when there is no fault of the insured for incorrect or incomplete information.25 As additional constraint on insurer, if they are at the moment of entering into contract aware, or could not have been unaware, of circumstances relevant for assessing the risk, which were incorrectly notified or omitted by the negotiator of insurance, insurer loses the right to invoke incorrectness of the application.26 This is considered an extension of the general obligation of good faith and honesty.27 Duties in the other directions, those that insurers need to provide to the negotiator of the insurance or the insured, are stipulated in only one Article not specifically prescribed as duty to inform but in Article that defines the elements of the insurance policy and general and specific terms of conditions of insurance. The insurer is obliged to warn the person concluding a contract of insurance that general and specific terms and conditions of insurance constitute part of the contract, and to present him the relevant text, in case such terms and conditions are not printed on the insurance policy itself.28 It is advised that the insured should pay close attention to the conditions and terms of the insurance, because it is here that many of the provisions that determine the coverage of the risk are found. If the conditions are not given to him, he cannot properly inform himself of his rights and obligations.29 One of the mandatory elements of the policy is ascertainment that the terms and conditions are given and presented. Such information in the policy should serve as

23

Jankovec (1980), p. 798. Ibid 800. 25 It was recognized that there is a gap in situation where the insured intentionally omits information that are not substantial do the decision of the insurer to conclude the contract, as Article 908 deals only with intentional misrepresentation of information substantial for the decision of the insurer. In this case, Article 909 should apply notwithstanding that it deals only with unintentional omission of information. 26 Article 911 the Serbian Law of Obligations, Article 1008 of the Law of Obligations of Montenegro, Article 911 of the Law of Obligations of FBiH and Republika Srpska. 27 Jankovec (1980), p. 803. 28 Article 902(2) of the Serbian Law of Obligations, Article 999 of the Law of Obligations of Montenegro, Article 902 of the Law of Obligations of FBiH and Republika Srpska. 29 Jankovec (1980), p. 784. 24

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the reminder to the insured to ask for the terms and conditions if they were not presented to them. The law does not require the insured to read, or familiarize himself with the terms and conditions in anyway, as the only requirement is they are formally given to him. The insured cannot claim that he did not read the terms, following the ancient rule of ignorantia juris nocet.30 On the other hand, the terms and condition do not bind the insured unless they are given to him.31 The burden of proof of such claim is on the insured. Furthermore, the Law of Obligations does not stipulate the sanctions for the breach of this obligation of the insurer; it was left to the courts to determine it, which leads to some inconsistencies in the court practice. However, there might be another provision upon which transparency can be assessed, the general duty of disclosure in Serbian contract law—Liability for Failing to Notify. A contracting party responsible for notifying the other party of facts relevant for their mutual relationship shall be liable for loss sustained by the other party because of non-notification or delay.32 A potential importance of this Article of the Law of Obligations has not gone unnoticed by the theory; however, it was pointed out that because of its general character it has a limited scope, as the complex nature of the insurance contract leaves open the question as to what exactly should be disclosed under this article.33 It is nevertheless important as it allows the courts to examine on a case-by-case basis under the Law of Obligations whether the parties in any contractual relation were properly informed. However, the standard applied would not be the one of the average consumer but of the good master of the house, which would significantly affect the scope of the required disclosure. An additional article that draws attention when discussing matters of transparency is the rule on interpretation of contracts. Should a contract be concluded in conformity with a form printed in advance, or prepared and proposed in some other way by one of the contracting parties, unclear provisions shall be interpreted so, as to benefit the other party.34 This rule is considered more restrictive than the rule from relevant EU aquis as its rationae materiae would not apply to pre-contractual stage, as documents and information exchanged are not considered part of the contract.35 However, even in pre-contractual stage, parties would have the obligation to act in good faith. The general terms of contracts of adhesion can also be scrutinized under the Law of Obligations. Provisions of the general terms and conditions can be null and void if they are contrary to the fair business usage. Courts also have the power to deny the application of certain provisions of the general terms and condition if they are

Šulejić (2005), pp. 216–217. Ibid. 32 Article 268 of the Serbian Law of Obligations, Article 275 of the Law of Obligations of Montenegro, Article 269 of the Law of Obligations of FBiH and Republika Srpska. 33 Petrović (2015), p. 190. 34 Article 100 of the Serbian Law of Obligations, same as Article 98 of the Law of Obligations of Montenegro, Article 100 of the Law of Obligations of FBiH and Republika Srpska. 35 Petrović (2015), p. 298. 30 31

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“unjust or excessively strict toward the other party”.36 This include the terms and conditions precluding the other party to raise demurrers, or those on the ground of which such party is left without contractual rights or loses time limits. Unjust in this article could be interpreted as unfair within the meaning of unfair terms in consumer contracts. This article provides court with carte blanche to assess any abuse of economic power imbalance or imbalance of equality of duties as unfair.37 This article would apply to all negotiators of insurance regardless of their legal status; however, it is only limited to contracts of adhesion. As we can see, the Law of Obligation and Torts does not prescribe specific information to be disclosed by the insurer. It does not require standards of clarity and comprehensibility. However, the need to protect the weaker party is recognized as legitimate concern, but the law itself relies on the general principles.38 The Law of Obligations does not recognize the concept of “large risk”; however, it contains provisions that exclude certain types of risk from its scope. The Law of Obligations is not applied to navigation insurance, insurance of claims and reinsurance. These insurances as a rule are concluded between parties of similar economic strength, therefore the underlying principle of the Law of Obligations might be interpreted, at least implicitly, as the law that applies only to contract of insurance where a significant imbalance between contracting parties exists.39 As such, it contains provisions that often favor the weaker side.

3.1

Good Faith and Honesty

Good faith and honesty are defined in Article 12. In establishing obligation and realizing the rights and duties out of these relations, the parties shall adhere to the principles of good faith and honesty. It is recognized as one of the basic principles of the contract law with many derivative principles that flow from it.40 The principle is set up both as imperative norm (duty of the parties) and as general clause, and

36 Article 143 (2) of the Serbian Law of Obligations, Article 138(2) of the Law of Obligations of Montenegro, Article 143(2) of the Law of Obligations of FBiH and Republika Srpska. 37 Petrović (2015), p. 368. 38 As an illustration of the principle of protection of the buyer/weaker party that appears as an overarching principle in the law, we may point out the provisions that regulate sales paid by installments. The document witnessing the contract, under threat of nullity, must include a clause authorizing the buyer to repudiate the contract if he notifies the seller accordingly in writing, within a three day time limit from the day of signing the document, and that the buyer cannot renounce such right in advance. This provision essentially grants the buyer a cooling off period of 3 days after the conclusion of contract. This rule does not exist as a general principle either in Insurance Law or in the Consumer Protection Law. However, it exists for this particular case in the sale of goods in the Law of Obligations. 39 Petrović (2015), p. 232. 40 Antić (2008), p. 39.

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difficulties might arise when the court applies this principle. The danger was noticed when this expression was unnecessarily changed with other less clear expressions such as fairness, good practice, etc.41 The general clause, or legal standard such as good faith and honesty is an undefined rule of conduct, thus should be defined by the court on a case-by-case basis.42 It represents guideline and forum for weighing the interest of both parties in a legal relationship. It appears that the Law of Obligations, in one of its basic principles, bounded the parties in a legal relationship to act in good faith even before the contract is concluded (culpa in contrahendo).43 Therefore, in the Serbian law, this principle would be fully applied even in pre-contractual stage of the contact between insurers and future policyholders. Such general provision could be used to establish the duties beyond what is established in the law and contract.44 Like in many other civil law jurisdictions, good faith represents an open norm, a norm the content of which cannot be established in an abstract way but which depends on the circumstances of the case in which it must be applied, and which must be established through concretization.45 It would appear that, at least from a theoretical perspective, the general principle of good faith and honesty and certain articles of Law of Obligations such as Liability for failure to Notify would provide sufficient grounds to establish transparency requirement as a general principle. However, to test in practice whether up to what extent the courts recognize these duties in insurance contract law, we would have to have at least: (a) a willingness to dispute insurance contracts with insurers; (b) efficient court system to resolve such matters in time; and (c) willingness of judges to engage in interpretation of law not on purely technical and formal level but on a more functional approach. Unfortunately, to the best of our knowledge, there has been no decisions based on either of these provisions. However, courts have recently sided with consumers in number of disputes arising from misselling of foreign currency indexed mortgage loans, as we will examine in separate chapter.

3.2

Application of Law of Obligations in Case of Misseling of Financial Products

In the region, there has been no big misselling scandals in the insurance sector, perhaps because it is still a relatively undeveloped and emerging insurance market with around 5% of the population enjoying the benefits of some sort of life

41

Stojanović (1980), p. 109. Ibid. 43 Antić (2012), pp. 8–9. 44 Stojanović (1980), p. 110. 45 Hesselink (1995), p. 198. 42

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insurance.46 However, a highly relevant example of massive (mis)sale of risky financial products occurred recently in Serbia, as well as throughout the Central and Eastern Europe. These are foreign currency indexed mortgage loans broadly marketed in the entire region. In the past decade, Swiss Franc in particular emerged as an attractive currency for mortgage loans. Through “currency clause”, the risk of radical changes of currency exchange rates were transferred exclusively to borrowers who are not familiar with that type of speculative loan product. In other words, in the absence of adequate information the product was not transparent enough. Currency clause provided that contracts did not involve paying out loans in foreign currency, but rather Swiss Franc is used as index parameter to determine the value of the loan and monthly installments. Funds were advance, received, and paid in national currency. The amount of the loan in foreign currency was determined at the buying rate for the foreign currency applied by the bank on the date funds were advanced. After the funds have been advanced, the amount of the loan, the related interest, the administration fees, and default interest and other charges were to be determined in the foreign currency.47 Such clause is legal, as it is explicitly regulated in the Law of Obligations: “Should monetary obligation be made out in a foreign currency or in gold, its fulfillment may be demanded in domestic currency, according to the rate of exchange valid at the moment of fulfillment of the obligation”.48 However, it is subject to challenge in the court under the general principles of contract law. In other words, such clause is legal and valid only if it is in accordance with the general principles of good faith,49 equal considerations,50 prohibition of misuse of rights,51 prohibition of causing damage,52 responsibilities in performing obligations,53 etc. After the value of the Swiss Franc increased abnormally compared to value of domestic currency (240% increase over the period of 10 years),54 customer found themselves: (a) unable to repay rising monthly installments; and (b) after 10 years of repaying the loan, they still owned the entire sum that was loaned. CHF loans played the most prominent role in Hungary and Poland. Hungary decided to convert most of CHF loans to its domestic currency. The Central Bank decided to subsidize the conversion, which took place at prevailing exchange rates. This solution required

46

Insurance is Serbia is dominated by non-life insurance, which makes up 77% of the market. Almost one third of the premiums are premiums from mandatory motor vehicle liability insurance. Report from the National Bank of Serbia for 2016. 47 Tereszkiewicz (2016), p. 171. 48 Article 404 CG, Article 395 of the Serbian Law of Obligations, same as Article 303 of the Law of Obligations of Montenegro. 49 Article 12 of the Serbian Law of Obligations. 50 Article 15 of the Serbian Law of Obligations. 51 Article 13 of the Serbian Law of Obligations. 52 Article 16 of the Serbian Law of Obligations. 53 Article 17 of the Serbian Law of Obligations. 54 Expert witness findings in Case ПЖ 2743/2016.

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large amount of money for liquidity provision, which some countries, such as Serbia and Croatia, could not afford. Poland, on the other hand, did not consider conversion as a solution. The Polish Financial Supervision Authority (KNF) issued ‘Recommendation “S” on good practice for mortgage banking’ with the intention to stop foreign currency lending, hoping that the percentage of the CHF loans will soon water down in the total loan mass.55 In the absence of institutional solution in Serbia, consumers turned to the courts in an attempt to fight for their rights. Consumers filed suits against the banks including the still unresolved first collective suit in the Serbian legal history.56 For the most part, relevant cases claimants, probably advised by the lawyers, opted to attempt to dispute the validity of the currency clause and sought repudiation of the contract.57 In number of cases from both the courts of first instance and appellate courts,58 the courts granted or upheld the repudiation of the contracts to claimants because of changed circumstances—hardship, rebus sic stantibus. Under this institute, should, after concluding the contract, circumstances emerge that hinder the performance of the obligation of one party, or if because of them the purpose of the contract cannot be realized, while in both cases this is expressed to such a degree that it becomes evident that the contract no longer meets the expectations of contracting parties, and that, generally speaking, it would be unjust to maintain its validity as it stands—the party having difficulties in performing the obligation, namely, the party being unable, because of changed circumstances, to realize the purpose of contract, may request its repudiation.59 Economic experts testified on the abnormal rise of the value of Swiss Franc, and the court upheld the claimants’ views that this constitutes a change of circumstances that led to a breach of principle of equal consideration, as well as the breach of principle of equality of the parties and the principle of good faith and honesty, and granted the repudiation of the contracts. Especially interesting in this context is the finding of the former president and the judge of the Constitutional Court of Serbia that: “Contracting parties are required to adhere to the principle of good faith and honesty in realizing rights and duties out of 55

Obradović (2016), pp. 105–106. This suit sparked a review of the entire chapter of the Civil Procedure Law dedicated to the collective claims. The chapter was subsequently found unconstitutional, since the Consumer Protection law did not contain any definition of the “collective consumer interest”, therefore, it was impossible to determine when the collective civil procedure correlating to this interest could be activated. Constitutional Court Decision IUz-51/2012. Following this decision, Serbia switched to administrative model of protection of collective interests of the consumers in the next Consumer Protection Law in 2014. 57 Despite the fact that some claimants asked for nullity of the contracts and the courts sided with them, we are still waiting for the appellate court decision on this stance, as opposed almost a uniform rule emerged that appellate courts required lower courts to grant the repudiation of the contract when clients filed the claim. Additionally, even the Supreme Court delivered an opinion on the matter of unilateral increase of interest rates in accordance with the banks “business policy”, ruling them illegal. Рев 1282/2015. 58 ПЖ 2237/2016, ПЖ 3826/15, ПЖ 924/15, ГЖ 1781/16. 59 Article 133(1) of the Serbian Law of Obligations. 56

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contractual relation with care of good businessman/good master of the house. . . Beside that, banks are required under Consumer protection law to inform the client about the risks of the contract they are offering, therefore bank has the duty to inform the customer on legal effects and application of the currency clause, clarifying all the specific conditions that can determine. . . This is an expression of good faith and honesty in concluding the credit contract”.60 In other words, disclosure duties are considered an expression of the general principle of good faith. This illustrates two important points. First, despite almost 15 years since the First Consumer Protection Laws were enacted in Serbia, courts are still reluctant to develop a practice in this field. Consumer protection laws, despite being present, and providing solid grounds for claims against misselling of financial products, through application of rules on unfair clauses in consumer contract or unfair business practices, are still somewhat of an unknown area for the Serbian court system. However, in resorting to Law of Obligations, an area where apparently both judges and lawyers feel much more comfortable, since it is an old and tested law, a second important fact is revealed. The general principles of contract law from Law of Obligations can be widely applied to situations not foreseen when the law was passed in 1978. The Law of Obligations has a powerful tool to address possible issues that might arise from misselling practices and breach of duties by financial institutions, including non-transparent clauses and/or business practices. Disclosure of relevant information is a manifestation of the principle of good faith, individualization and elaboration of general duties arising from this principle. Breach of these duties will be breach of the basic principle of the Serbian contract law. Despite frequent criticism of courts in the region, this is a positive example of courts acting proactively, applying principles to the benefit of consumers in the absence of institutional solution between commercial banks, supervision authority, and consumers. As an interesting precedent, consumer protection in Serbia is addressed under the general principles of contract law rather than under consumer protection laws.

3.3

Draft of the New Serbian Civil Code

In 2006, the Republic of Serbia endeavored on a major project of drafting a New Serbian Civil Code. After almost a decade of work, academic and general public were presented with the Draft of the Serbian Civil Code in the summer of 2015. Public debate will ensue in the following years. Provisions on the insurance contract were subject to much discussion, especially in the groups such as Serbian Insurance Law Association. Over 20 academic, scientific, and professional papers were published, containing numerous alternative solutions to the proposed provisions, unfortunately response and feedback from the Commission were sometime

60

Slijepčević (2016), p. 5.

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lacking.61 Once adopted, this Code will be the main legal source for all contractual relations. The draft of the Civil Code contains the general principle of good faith and honesty as supreme principle of the Civil Code that cannot be limited or excluded.62 Adding to the general principle of good faith and honesty, the Code also prescribes a general rule—the duty to inform. All subject of the (civil) legal relations have duty to inform each other on facts and circumstances important for exercising their rights.63 Insurance contract is regulated in Articles 1390–1504. Apart from the general duties and principles, the law stipulates that all the documents drafted by the insurer must be clear and comprehensible on the same language that the negotiations are conducted. When interpreting documents, if there is doubt in its meaning, it will be most favorably interpreted for the negotiator of insurance, policyholder or beneficiary.64 The burden of proof that the negotiator has received all the documents the insurer was obliged to give him is upon the insurer. No special form is required when performing the duties to inform.65 Clauses of the insurance contract that were not specially negotiated do not bind the negotiator of the insurance, policyholder or insured if such clauses create significant imbalance in the duties and obligations to their detriment, contrary to the principle of good faith and honesty. If the contract can be sustained and performed without the clause, it remains binding on the parties. The burden of proof that the clause was negotiated in on the insurer.66 The right of withdrawal is only allowed for contracts of insurance concluded between absent parties, i.e., distance selling and outside of business offices of the insurer.67 In the case of distance selling, the insurer should inform the negotiator of insurance on the existence (or absence) of the right of the negotiator to withdraw from contract, without any explanation or fines, timeframe and conditions for the repudiation of the contract, including information on the amount of premium that can be demanded from the insured until the claim for repudiation is made, practical instruction on exercising the rights of repudiation, including the address where notification of repudiation, clauses on applicable law and the jurisdiction of the court.68 Information must be communicated in writing or on other durable medium.

61

Slavnić (2012), pp. 27–29; Slavnić (2016), pp. 67–95. Article 4 of the Draft of the Civil Code. 63 Article 10 of the Draft of the Civil Code. 64 Article 1395 of the Draft of the Civil Code. This article was changed after critical review on one of AIDA Serbia conferences. In the original draft, the only person who could rely on “most favorable” interpretation was the negotiator of insurance; neither policyholder nor beneficiaries were included in original draft. For more details see: Slavnić Jovan, “New areas and rules of contract interpretation in favour of one contract party in the insurance contract – contribution to the consultation on insurance contract regulation in the Draft Civil Code of Serbia”, Modern Insurance Law current trends and issues, XV conference of AIDA Serbia. 65 Article 1396 of the Draft of the Civil Code. 66 Article 1397 of the Draft of the Civil Code. 67 Article 1414 of the Draft of the Civil Code. 68 Article 1413 of the Draft of the Civil Code. 62

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The right of withdrawal cannot be exercised for insurance contract covering travellers and luggage, motor vehicle liability insurance, insurance contract with a duration of less than a month, and insurance contracts that are performed in whole before withdrawal right was exercised. The insurer must return collected premiums within one month of the withdrawal from the contract. In case any damages were paid, the insurer has the obligation to return the damages. The Civil Code takes over the provision on interpretation of the standard form contracts (contracts of adhesion) from the Law of Obligations. Such contracts will be interpreted contra proferentem. Essentially, most of the duties from Insurance Law regulating pre-contractual disclosure and standards of such disclosure are going to be repositioned from Insurance Law to the new Civil Code (similar and perhaps inspired by the repositioning of these duties in Germany from Insurance Supervision Law to Insurance Contract Law following the 2008 reform of the Insurance Law). Foreign investors council of Serbia has repeatedly called for insurance contract to be regulated in an independent law, as opposed to the current (and possible future) situation where the contract is regulated in General Civil or Contract Codification, and the extent to which it is reasonable to regulate insurance contract with so-called “semi imperative” norms, and the difficulties in establishing what is “unquestionable interest of the insured” when aberration from these norms is allowed are also questioned.69

4 Insurance Law The requirement that customer needs to be provided with specified information about a contemplated transaction is a regulatory technique that has enjoyed considerable popularity, with an aim to improve transparency in pre-contractual stage.70 In all of the countries, pre-contractual information duties as prescribed by the EU Directives on insurance are implemented through separate laws—Insurance Laws. Insurance laws for the most part regulate registration, status, and organization of insurance undertakings. Insurance laws in Western Balkans were enacted after the dissolution of Yugoslavia. However, when the law is analyzed from the aspect of transparency requirements—most importantly pre-contractual information duties, they are quite similar and rarely go beyond duties mandated by the Insurance Directives. Insurance laws usually contain two requirements relating to transparency. One is a general requirement from insurance undertakings and intermediaries to act in accordance with good business practices, professional rules, and business ethics in some cases. The other is to inform customers about certain aspects of insurance contract (pre-contractual information duties), setting up the standards of

69 70

Slavnić (2012), pp. 33–34. Weatherill (2013), p. 92.

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such disclosure—clear, comprehensible and/or accurate. These standards are sometimes further elaborated by the supervision agency through guidelines or recommendations.

4.1

Serbia

Until the enactment of the New Insurance Law in 2014, there was no explicit duty to provide information to the negotiator of the insurance.71 The duty to provide advice is constituted only for insurance intermediaries. Insurance Law regulates establishment, functioning, organization, and some aspect of supervision of insurance undertakings. It contains provisions that affect insurance contract as Chapter III of the Law prescribes information to be communicated to the negotiator of insurance before conclusion of the contract. The chapter contains only three articles. Before the conclusion of the insurance contract, the negotiator of the insurance should be informed at least on: (1) name, legal form, head office, address of the head office of the insurance undertaking with which contract is going to be concluded; (2) terms and conditions and applicable law; (3) duration of the contract; (4) risks covered and exclusions; (5) premium, means of payment of premium, contributions, taxes and other expenses, which are counted in addition to the premium and overall amount to be paid; (6) rights of repudiation of contract, terms for repudiation and the rights of withdrawal; (7) timeframe within which the offer is binding for the insurance undertaking; (8) methods and timeframe for claims or means to exercise other rights from insurance contract; (9) methods of dispute resolution; (10) name and address of the Supervision Authority and the rights to file complaints to protects the rights and interest with this Authority.72 In case of life insurance, the insurer should additionally inform the negotiator of insurance about: (1) means of calculation, timeframe, and distribution of bonuses; (2) surrender value of the policy (3) paid-up values of the policy; (4) for investment linked insurance policies, definition of the investment fund to which the benefits are linked, investment fund prospect and structure of investment; (5) tax regulation applied to life insurance. In case of insurance of legal expenses, insurer should also inform negotiator of insurance about freedom of choice of the representative providing the representative fulfils legal requirements. For the duration of contract, insurance undertaking should inform in writing the negotiator of insurance about: (1) changes in name, legal form, head office, or address of the insurance undertaking; (2) changes in terms, conditions, applicable law, duration, risks covered and exclusions, chanes in premium and rights of repudiation and in case of life insurance changes in means of calculation, timeframe

71 72

Petrović (2015), p. 190. Article 82, Insurance Law of Serbia.

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and distribution of bonuses, surrender value, paid-up value, changes in the prospect and structure of the investment fund to which benefits of insurance policy are linked in case of investment linked insurance policy. The law further elaborates on content and quality of disclosure. The text and content of notification should be clear, comprehensible, and in Serbian language. Information required must be disclosed in writing or on other durable medium that allows for negotiator of the insurance or the policyholder to access, save, and reproduce data in unchanged format, in the period that corresponds to the purpose of keeping. Information that insurance undertakings provide through media must be accurate, clear, and comprehensible. Information must be based on reliable data, must not conceal the real purpose information/disclosure, and must not lead receivers of the information to misapprehension. Information should be provided free of charge, as it is prescribed that the insurance undertakings must bear the costs. Some of the duties such as duty to inform the insured about the participation in profit have found their way into the Law from Guideline on transparency. Some concepts such as “durable medium” have not been defined or explained in the Law, but since the main purpose of the Law was further harmonization with the EU rules, durable medium should be considered the same as in the Directive 2002/65.73 For the breach of these duties, insurance undertakings can be fined anywhere between (approximately) 800 and 40,000 euro.74 The insurers are strictly prohibited from giving incorrect or unclear information that are based on unreliable data, and must not lead in anyway the receiver of the information.75 Insurance undertakings, agents, and intermediaries have the duty to protect the rights and interests of the insured, negotiator of insurance, and insurance beneficiaries in accordance with regulations, the rules of profession, and good business practices.76

4.2

Montenegro

The Insurance Law of Montenegro follows a similar pattern. It contains only one article about pre-contractual information duties for insurance undertakings and one additional for insurance intermediaries. The law requires that insurance undertaking, in addition to the general terms and conditions, provides the negotiator of insurance with: (1) name, legal form, head office, address of the head office of the insurance undertaking with which contract is going to be concluded; (2) duration of the contract; (3) means and condition for termination of the contract; (4) premium, means of payment of premium, contributions, taxes and other expenses, which are

73

Golubović et al. (2015), p. 135. Article 265 of the Insurance Law of Serbia. 75 Golubović et al. (2015), p. 135. 76 Article 15 of the Insurance Law of Serbia. 74

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counted in addition to the premium and overall amount to be paid; (5) timeframe within which the offer is binding for the insurance undertaking; (6) rights of repudiation of contract, terms for repudiation, and the rights of withdrawal; (7) methods of dispute resolution; (8) applicable law.77 Additionally for life insurance, insurance undertaking should inform negotiator about: (1) means of calculation, timeframe, and distribution of bonuses; (2) surrender value of the policy; (3) paid-up values of the policy; (4) tax regulation applied to life insurance; (5) for investment linked insurance policies, definition of the investment fund to which the benefits are linked, investment fund prospect, and structure of investment; Information required must be communicated in writing, although intermediaries may provide information on durable medium, such option is not allowed for insurance undertakings.78 Information must be clear and comprehensible. It is also not necessary for insurance undertakings to highlight the risks covered and exclusions from the policy, nor the supervisory authority and complaints handling procedures available to the customer. Overarching requirement is that insurance undertakings act in accordance with the rules of profession, good business practices, and business ethics.79 For the breach of information duties, the fines imposed under the law are between 2500 and 20,000 Euros.80

4.3

Bosnia & Herzegovina

Because of its unique state structure, set up by Dayton Agreement, Bosnia & Herzegovina is highly decentralized and has two autonomous entities, the Federation of Bosnia & Herzegovina and Republika Srpska; each has its own Insurance Law and Insurance Supervision agency. As a unique solution in the region, both entities established insurance ombudsman service. The Insurance Law of Republika Srpska requires that the information communicated to the insured before or after the conclusion of contract must be clear and accurate, in written form in official language of Bosnia & Herzegovina.81 Before the contract is concluded, insurance undertaking should provide insurer with: (1) information about insurance undertaking (name, organizational form, entity in which the head office is located, address and head office of the branch office); (2) information about insurance contract (monetary compensations and other rights from the contract, duration, termination, amount, time limits and ways premium can be paid,

77

Article 81d of the Insurance Law of Montenegro. Article 81 c Insurance Law of Montenegro. 79 Article 15 Insurance Law of Montenegro. 80 Article 196 Insurance Law of Montenegro. 81 Article 23 Insurance Law of Republika Srpska. 78

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means of calculation, timeframe and distribution of bonuses, surrender value of the policy, information about premium for each of indemnities available, in case of unit linked insurance products information about investment fund to which the benefits are linked and assets tied to the investment fund, withdrawal conditions, tax regulation applied to the insurance contract in question, procedure and information about claims filing process, applicable law on insurance contract when parties had no freedom to choose one themselves, or the law that insurer proposes as applicable when parties have freedom to choose one). The Insurance Law of Federation of Bosnia & Herzegovina was recently enacted in March of 2017. Information disclosure duties of the insurance undertakings include: (1) name, legal form, head office, address of the head office of the insurance undertaking with which contract is going to be concluded; (2) terms and conditions and applicable law; (3) duration of the contract82; (4) timeframe within which the offer is binding for the insurance undertaking; (5) premium, means of payment of premium, contributions, taxes and other expenses which are counted in addition to the premium and overall amount to be paid; (6) terms for repudiation; (7) methods of dispute resolution; (8) Supervision Authority. Additionally in case of life insurance, the contract negotiator should be informed about: (1) means of calculation, timeframe, and distribution of bonuses; (2) surrender value of the policy; (3) paid-up values of the policy; (4) right of withdrawal within 14 days of conclusion of contract; (5) tax regulation applied to the life insurance in question; (6) for unit linked insurance products, additional information should be provided on fund prospect and structure of investment. Information must clear and comprehensible. Insurance Supervision Agency should further define methods of information disclosure, presumably in a rulebook or guideline, which has not yet been enacted. Fines for breach of disclosure duties are between (approximately) 25,000 and 100,000 Euros.83

5 Consumer Protection Law All of the countries also adopted separate laws with regard to consumer protection and did not incorporate consumer protection in the general civil law legislation, although Bosnia & Herzegovina was on two occasions very close to adopting such approach in 2006 and 2010, to include consumer law in the general law of obligations. However, such initiative failed because of political and inter-entity clashes on the issue.84 82

This law imposes unusual duty for the insurance undertakings. It requires that in pre-contractual stage, the insurer must inform the policyholder, in writing, about duration of the contract twice! Subparagraphs c and f of Article 200 (1) both require disclosure during the duration of the contract. It is unlikely that such requirement is imposed intentionally to enhance transparency, but much more likely due to omission on the side of the redactors of the text of the law. 83 Article 216 of the Insurance Law of FBiH. 84 Mekšić (2010), pp. 420–421.

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Consumer Protection Laws provide the most elaborate and detailed framework relating to disclosure and transparency duties. However, we should point out that there are two limitations, rationae materiae and rationae personae, when it comes to Consumer Protection Laws in the region. First, in all of the countries, there is a separate law on protection of customers85 of financial services. Rationae materiae, law on protection of customers of financial services should apply to insurance as a financial service. However, the law, somewhat surprisingly, excludes insurance from the scope of application. In Serbia, financial services only include banking services, leasing services, and financial arrangements.86 In Montenegro and Bosnia & Herzegovina, financial services only include banking and financial leasing. The law in Serbia explicitly provides that for the insurance undertakings, the Insurance Law should be applied. However, that law as we examined provides mostly rules on corporate matters of insurance undertakings. The law on consumers protection, as lex generali, for all consumers, should therefore apply to consumers when they conclude insurance contracts. Second problem, rationae personae—Law on Protection of Consumers, defines consumers as natural person who purchases goods and services outside of his professional or other commercial activities. This definition has been taken from consumers right directive that considers consumer as a natural person who is acting for purposes outside his trade, business, craft or profession. The problem here is that the notion of consumer in consumer acquis is much narrower than the concept of consumer in insurance acquis.87 Another problem is that under both the Law of Obligations and Law on Insurance, the law speaks about “negotiator of insurance” regardless of his legal form and status, while the consumer protection law speaks only of natural persons acting outside of their profession. Consumer protection law, therefore, might not extend protection to policyholders, beneficiaries, and other persons who have interest and connection to the insurance contract but has not concluded the contract themselves. The concept of trader could also possibly extend to include intermediaries, as the law defines traders as natural or legal persons acting for purposes relative to his business, trade, or commercial activities. As intermediaries are acting within their professional activities, this should be sufficient to qualify them as traders under the Consumer Protection Law.88 As a general rule, all the countries of the region have adopted very narrow concept of the consumer and none of the countries accepted the possibility that a consumer can be a legal person, although such possibility existed under old Serbian Consumer Protection Law from 2005.89 This creates an unusual situation where national Consumer Protection Laws and legal regime inspired by the Consumer Rights Directive are applied to insurance

85 The Law defines customer (literal translation would be user of financial service) as natural persons, narrowing the scope of application. Article 2 (9). 86 Article 2 (1) Consumer Protection Law of Serbia. 87 Petrović (2015), p. 124. 88 Ibid, 125. 89 Karanikić (2012), p. 84.

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contracts despite the fact that the EU legislator did not intend to extend such regime to insurance services. Consumer Protection Laws provide the most detailed framework for assessing transparency of the contracts through detailed disclosure requirements and through provisions on the unfair clauses and unfair commercial practices. In Serbia, it has been more than 15 years from enactment of the first Consumer Protection Law in 2002. Since 2002, Serbia has changed four different Laws on Consumer Protection, in 2002, 2005, 2010, and 2013. On average, consumer protection laws are changed every 4 years, with the first two laws failing to produce any effect in practice. In Montenegro, Consumer Protection Law was adopted in 2014. In the Federation of Bosnia & Herzegovina, in 2006, and Republika Srpska adopted its Consumer Protection Law in 2012. The provision on unfair terms in consumer contract provides the most valuable and interesting criteria for assessing transparency. Unfair clauses are considered void (null). Unfair clauses are all clauses that, contrary to the principle of good faith and honesty, create significant imbalance in rights and duties to the detriment of the consumer.90 The Serbian Law on Consumer Protection is specific because it extends the meaning of the unfair clause to all clauses in the contract regardless of the way they were negotiated. All the insurance contract provisions regardless of how they have been formulated, whether they have been contracted separately or are part of the annexed insurance terms, would fall within the meaning of unfair term. Even individually negotiated clause can be unfair under the Serbian Consumer Protection Law. The Consumer Protection Law in Montenegro and both entities of Bosnia is more restrictive as it only applies to clauses that have not been individually negotiated. The Consumer Protection Laws invoke the general principle of good faith and honesty contained in the Law of Obligations. Therefore, it is possible to argue that any breach of the principle of good faith and honesty will be unfair. Ambiguous or incomprehensible clauses may indirectly be challenging the freedom of contract and impose a need of reassessing whether agreement on all the key insurance contract elements has been reached in full. Additionally, the Consumer Protection Law in Serbia has explicit transparency requirement in Article 4191: “Contract provision will bind the consumer only if it is communicated clearly, in comprehensible form so that a reasonable person with consumer’s level of knowledge and expertise would understand it”. Transparency is considered one of the elements of fairness. Unclear provision will be considered unfair; they will not become part of the contract and will be considered void.92 It was pointed out that essentially unfair term should not be considered fair even if they are communicated in a clear and comprehensible manner, as procedural transparency should not displace essential fairness of the term.93

90

Article 43 of the Consumer Protection Law of Serbia. Literal translation would be “publicity demand”. 92 Petrović (2015), p. 371. 93 Ibid, 372. 91

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The laws provide the list clauses that are always considered unfair, and those that are assumed to be unfair, unless proven otherwise. In conjunction with the general rule on nullity of contracts, nullity is not subject to any statutory limitation periods. In addition to specific unfair clauses, there is also a general prohibition for unfair business practices.94 Although the law is considered in this area to be fully harmonized with the EU acquis, some practical difficulties in the enforcement still persist.95 The criteria for assessing fairness in Serbia are expanded compared to the Directive on unfair terms in consumer contracts. They include: nature of the goods and services for which the contract was concluded, circumstances attending the conclusion of the contract and to all other terms of the contract or of another contract on which it is dependent; but also, additionally: the manner in which the consent was given and the manner in which the consumer was informed about the contents of the contract. This means that courts could examine the way in which information was communicated to the consumer when assessing fairness. In the Federation of Bosnia and Herzegovina, the law considers that the consumer is informed about the terms if the trader warned the consumer about them and made them available to the consumer.96 However, the law in Bosnia & Herzegovina also introduces the possibility of assessing fairness against reasonable expectations of the consumers, as the term can be unfair if it would deviate from such expectation.97 In Montenegro, the terms on price and (main) subject of the contract are always fair if they are clear, comprehensible, unambiguous, easy to read, and easy to notice.98 The Serbian consumer protection law does not exclude quality/price ratio of the goods or services from fairness assessment. Therefore, courts in Serbia should ex officio also consider the quality price ratio when assessing fairness.

6 Transparency in Theory and Soft Law The concept of transparency is coming into the Serbian law from EU directives and regulation in the area of insurance. Some legal scholars have taken critical attitude to this principle. While it is widely accepted that transparency is closely connected to issues of consumer protection, some would argue that transparency is synonymous to consumer protection. This opinion is derived from relevant EU and EIOPA documents where transparency is a measure of consumer protection achieved by regulatory intervention.99 Furthermore, doubts were expressed on whether the EU

94

Article 17 and 18 of the Consumer Protection Law of Serbia. Đurović (2013), pp. 180–185. 96 Article 93 (4) of the Consumer Protection Law of Federation of Bosnia & Herzegovina. 97 Article 95 (b) of the Consumer Protection Law of Federation of Bosnia & Herzegovina. 98 Article 106 of the Consumer Protection Law of Montenegro. 99 Slavnić (2014a, b), pp. 439–441. 95

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will recognize the boundaries to which the narrative of consumer protection, and subsequently transparency, should be pushed, as consumer protection policies are embraced as one of the primary means of closing the gap between citizens, general population, and the EU bureaucracy in Brussels.100 Theory points out that transparency is predominantly defined through legal standards, such as clarity, accuracy, and comprehensibility. Such legal standards should be applied on a case-by-case basis.101 However, laws usually do not provide objective criteria in assessing the clarity of provisions of the contract. Transparency requirement is interpreted in such manner that the provisions must be redacted in clear and comprehensible manner, without use of small letters.102 Clauses that can potentially negatively affect the insured, such as those on risk exclusions, loss of rights, should be printed so that they attract the attention of the negotiator of insurance.103 However, such requirements should not be relativized through focus on standards of technical redaction, and such standards do not necessary lead to more transparency, especially when there is simply no way to describe exclusions, participation in profit, and some other important part of the contract. The insurer should not at the expense of transparency completely abandon the use of technical expressions.104 Disclosure and advice should serve the purpose of clarifying the meaning of the expressions that consumer does not comprehend.105 A set of rules on interpretation must also be in place as one of the aspects of effective transparency. Soft Law might play prominent role in this regard. The Serbian National Bank and Insurance Ombudsman of Republika Srpska issued some useful guidelines in this area. The National Bank of Serbia issued a series of six Guidelines in 2007. Guideline number one is titled: “On availability of information to financial public and transparency on insurance market”. This was the first time that an official text dealt with the issue of transparency, explaining what was expected from the market participants. It was seen as one of the “bright spots” of the Serbian legal system with regard to consumer protection at the time.106 The scope of the Guideline was perhaps ahead of its time, as it applies to insurance companies, insurance intermediaries (both brokers and agents), other companies that under the law provide other insurance services, which bears resemblance to the approach taken in the IDD. Because of the “nature of insurance” and inherited complexity of the sector, all the actors in the market need to have better access to information to make appropriate decision. Level of transparency directly influences decision-making process. As its goals, the Guideline proclaims: (1) protection of the interest of the insured, beneficiaries, and the policyholders;

100

Ibid. Petrović (2015), p. 284. 102 Ibid. 302. 103 Ibid. 104 Ibid. 286. 105 Ibid. 289. 106 Petrović (2013), p. 141. 101

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(2) increasing accessibility of information to all interested parties; (3) encouraging trust of the population in financial system and insurance sector in particular. Chapter V of the Guideline explicitly prescribes the nature/character of the information to be disclosed. These information should be: (1) true; (2) reliable; (3) accurate; (4) relevant; (5) disclosed in timely manner, in good time; (6) free of charge for the users; (7) easily accessible; (8) comprehensive; (9) comparable; (10) linked, systemic and consistent. Furthermore, information should be disclosed in good faith and should accurately represent what is disclosed or can reasonably be expected to represent. According to the Guideline, every insurance products should be properly described, clarifying its characteristics in the process so that the client may, based on the information disclosed, make an adequate decision. Special emphasis is on risk exclusions, they should be explicitly enumerated and disclosed in manner that is clear, unambiguous, and not misleading for the client. Important exclusions are considered those that can affect the decision of the customer, those that significantly affect the price of the product, or reduce the expenses insurance undertaking has. Documents addressed to the insured should contain remarks that: (1) insured should read the entire document; (2) any interested party can verify the address and basic information and legal status of the insured on web site of the National Bank of Serbia. Insurance undertakings should clearly indicate the cases when the client can make the claim for damages, possibility to make complaints to both insurance undertaking and the National Bank of Serbia as supervisory authority, clear description of complaint procedure, and possibility to take the case to the court in final instance. When using technical terminology, insurance undertakings should consider whether the client can understand the meaning and whether the use of such technical terminology is necessary and if used should be clearly defined and fully explained. Unnecessary referrals (to other documents presumably) should be avoided as they can confuse the client. Small letters should be avoided. Insurance undertakings should review in details documents for the clients, and whether the basic information are clear, concise, and not misleading. Documents with short description of the products should be properly titled, explaining the client whether they have the right to cancel the insurance contract before expiry of the insurance, duration of the contract, referrals and exclusion from applications should be clear, pointing the client to relevant parts of general or special conditions of insurance. Insurance undertakings and insurance intermediaries and agents should treat clients fairly and honestly in accordance with good business practice. It is necessary that insurance undertakings provide simple, clear and unambiguous information, comprehensible to average policyholder and client about the insurance services and contracts offered. Information provided to the potential client should allow the making of an informed decision and should include: (1) information about intermediary or agents (especially on his status whether he is tied or independent); (2) information on insurer; (3) all relevant information about the product (including but not limited to the price, conditions, purpose of the product, risk factors, special risk exclusions, guarantees and similar); (4) monthly or annual installments and

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estimated returns the insurer should pay (if applicable in particular case); (5) information about the gains the insured is entitled; all the risks borne by the insured must be explained in true and fair manner, which would allow him to comprehend all the rights and duties from the contract; (6) other rights and duties described in clear, unambiguous, and comprehensible manner. Insurers should take care that the information they disclose are accurate in material sense, do not mislead the client, unambiguous, comprehensible, and easily accessible. By easily accessible, Guideline considers written or electronic format of information. The desired level of transparency should allow the insured to clearly and safely compare the value of the product offered by different insurance undertakings, regardless of the distribution channel. Insured should have complete certainty and safety concerning the purchased product and covered risks. Insurance undertakings and intermediaries should, together with the policy, always hand to the insured the general and special insurance conditions. It is necessary to allow the insured to be completely informed about the insurance contract in its entirety before the conclusion of the contract. The most relevant information about the contract handed to the insured on durable medium (paper, electronic medium, cd) should be adequate, tailor made, and easily comprehensible to the client. This relevant information should be no longer than one page of A4 paper. Insured should sign the statement that “they have been offered the opportunity to acquaint themselves with the content of the insurance contract, that they have been informed about the general, specific and supplementary conditions of the particular insurance contract he is concluding”. In case of life insurance policies where the participation in the profit is part of the contract, insurance undertaking should disclose all relevant information, as well to deliver to the insured, once a year, reports on profit. Insurance undertakings should avoid unclear and ambiguous marketing of the products and services. The Guideline applies to disclosure duties to clients in general, not consumers in particular. It envisions extensive duties to inform, as well as further elaborates on the quality of information that need to be communicated. It makes clear indication of some “key” information that need to be disclosed to the client, of particular concerns are the potential risk exclusions because they are emphasized on several places. We can agree that this is one of the most important information for the insured, one that can affect him most significantly if he turns to be in error concerning the cover he enjoys. However, this emphasis is diluted because on several other places all information, or all relevant information, are also demanded to be communicated, risking potential information overload. Many of the recommendations from this Guideline eventually found their way in the new Insurance Law that was enacted in 2015. Overall, the Guideline is in line with the theoretical understanding that transparency is comprehensibility, unambiguity and certainty. The Guideline makes effort in further elaborating transparency requirements; however, it does not deal with the issue of conflicting goals, nor does it set the hierarchy of the goals. The Guideline also demonstrates inherent conflict between the objective of comprehensibility and the objective of clarity. While some would argue that in the case of an insurmountable conflict between the two objectives, clarity takes

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precedence over comprehensibility, because if an average policyholder is confronted with a deficit of comprehensibility, he is often in a position to overcome such deficit by other means such as seeking legal counsel. A deficit of clarity, on the contrary, cannot be compensated.107 One example of conflicting instructions is that the Guideline is encouraging the insurance undertakings to avoid the use of technical expressions, to make sure that they are clearly defined, and yet avoid unnecessary references and dereferences (which might be necessary to define the expression). Furthermore, the objective of providing the insured with “complete safety and certainty” with regard to the purchased product, risk and coverage might be overly ambitious goal to set. It does not consider some recent findings in the field of behavioral economics. The Guideline does not consider proportionality nor differences in insurance products (complex and non-complex). The legal standards of clarity and comprehensibility contained in all insurance laws of the region are yet to be further developed and refined by the courts. However, both soft law and legal theory give a solid direction about what is expected when applying these standards. One obstacle might be the unwillingness of the courts to interpret legal standards in functional rather than formal way. In Republika Srpska, the Insurance Ombudsman issued a General Recommendation in 2010 because of a large number of complaints and disputes between policyholders and insurance undertakings. Despite the fact that both the law and the Codex of professional ethics of insurance undertakings require that insurance undertakings inform policyholders about relevant aspects of the insurance contracts and especially about risks covered and excluded, which proved to be the biggest source of disputes, in practice, many policyholders remain unaware about important provisions of the insurance contract they concluded. Insurance Ombudsman reminds insurance undertakings about their duties and potential fines for breach of those duties, and calls insurance undertakings to implement mechanisms for application of the articles of law requiring pre-contractual information disclosures to the policyholders.108 Such recommendation 4 years after the law established pre-contractual information duties for insurance undertakings in this entity of Bosnia & Herzegovina is a testimony to a general problem in the region, even when the law imposes obligations inspired by the EU rules, enforcement of these obligations is usually inadequate.

107

Wandt (2012), pp. 10–12. Opšta preporuka 06-603-4/10. From 31.12.2010. available at http://www.azors.rs.ba/azors/lat/ pod_akti/ombudsman/Peporuka_ugovaranje.pdf.

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7 Final Remarks When assessing the transparency of (provisions of) insurance contract, it would seem that there are several possible paths. The most general approach, in the Law of Obligations, and future Serbian Civil Code, where the general principle of good faith is present as overarching and general duty of all the contracting parties. Good faith principle together with the rule on liability for failing to notify could be used in establishing transparency requirements for the insurer under the general law of obligations. The Law of Obligation also establishes a general contra proferentem rule. More detailed requirements to communicate clear or comprehensible information can be found in Insurance Laws of all countries. The information to be disclosed to the policyholder are enumerated; however, the legal standards of clarity and comprehensibility have not been elaborated further, neither in the law itself nor in the practice. Guidelines and recommendations of the supervisory authorities could be useful when discussing matters of transparency; however, they are soft law and non-binding on the market participants. They can provide solid basis for courts to address problems of transparency; however, courts in general tend to engage in very formalistic interpretation of provisions of the law. Thus, it is questionable as to what extent clarity and comprehensibility standards would be interpreted by the court beyond the formal requirement of giving the required information on paper or other durable medium when required. In such cases, the Law of Obligations may provide more grounds for maneuver through the application of good faith principle. In case the negotiator of an insurance is the consumer, he can rely on specific Consumer Protection Law, which is the most detailed instrument. However, because the law adopts a very narrow definition of consumers, only natural persons can rely on the provisions of the law. The Law on Protection of Customers in Financial Services, which should perhaps regulate this area, does not apply to insurance. As we already pointed out, the Law of Obligations and Insurance Law extend protection to any negotiator of insurance regardless of his legal form and status. The Consumer Protection Law in Serbia has introduced significantly stringent requirements when it comes to unfair terms in consumer contracts. Not only does the law provide for the possibility to asses price/quality as one of the elements of fairness, it also introduces the possibility to assess ways in which information is communicated to the consumer from the same perspective. The law in Bosnia and Herzegovina explicitly introduces “reasonable expectations” for consumer contracts, which can also be used to address the problem of incomprehensible or ambiguous clauses and terms. Financial institutions often attempt to legitimize their business practices by relying on mandatory disclosure required from them by sector specific regulations such as insurance law or consumer protection law. The Law of Obligations proved to possess the capabilities to address these issues and to strike down such practices. In an attempt to shield themselves from liability, financial institutions would invoke their full compliance with financial regulation, while overlooking the general requirements under the Law of Obligations. So far, the courts proved more willing

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to engage in contesting non-transparent practices by financial institutions than the supervisors. In doing this, they rely more on the Law of Obligations than on the consumer protection laws. Sanctions for the breach of duties derived from the Law of Obligations can either be annulment or rescission (repudiation) of the contract. In court practice, transparency is primarily examined through the application of the Law of Obligations. While Consumer Protection Law and Law on Insurance provide a more detailed and structured framework for assessing transparency, jurisprudence seems to be still reluctant in applying these “new” requirements and principles. It is possible that courts can avoid this, in part due to a wide principles and the fact that the Law of Obligations is designed to protect the weaker party in general so the result can be the same.109 Courts have proven to be very conservative and adhering to the advice that it might be dangerous to change the concept of good faith with some other expressions and principles that are not as nearly well-defined or elaborated, such as “fairness”, “good practice”, etc. Legal theory in Serbia is divided on the matter. Some have taken the critical view on this concept, often quoting that it is not sufficiently clear what is considered under this principle, while others welcomed the notion in service of consumer protection and warned against too narrow interpretation of the transparency, as the technical redaction of terms, conditions and clauses. Disclosure duties are recognized as part of good faith and honesty, as expression of the principle, as good faith is a general clause that requires individualization on a case-by-case basis. Transparency might not be a separate and individual principle but an individualization of the general principles of good faith and honesty in Insurance Contract Law.

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Legal Acts, Court Decisions and Other Official Documents Decision of Commercial Appellate Court in Belgrade, ПЖ 3826/15 from 26.05. 2016 Decision of Commercial Court in Belgrade, ПЖ 2743/2016 from 01.12.2016 Decision of the Appellate Court in Novi Sad, ГЖ 1781/16 from 01.09.2016 Decision of the Commercial Appellate Court in Belgrade ПЖ 2237/2016 from 02.03.2017 Decision of the Commercial Appellate Court in Belgrade ПЖ 924/15 from 26.05.2016 Decision of the High Court of Bosnia and Herzegovina vs. BiH, Rev. 629/83, from 19.01.1984 Decision of the Supreme Court of Serbia, РЕВ 1282/2015 from 05.10.2016 Draft of the Civil Code of Serbia available at: http://www.mpravde.gov.rs/files/NACRT.pdf National Bank of Serbia, Insurance Supervision Department, Insurance Sector in Serbia Report for 2015 available at: http://www.nbs.rs/internet/english/60/60_6/insurance_IV_2015.pdf Opšta preporuka Ombudsman u Osiguranju, 06-603-4/10. From 31.12.2010. Available at http:// www.azors.rs.ba/azors/lat/pod_akti/ombudsman/Peporuka_ugovaranje.pdf Smernica Narodne Banke Srbije broj 1- O dostupnosti podataka i informacija finansijskoj javnosti i o transparentnosti na tržištu osiguranja (Guideline number 1 of National Bank of Serbia - On availability of information to financial public and transparency on insurance market) available at: https://www.nbs.rs/internet/latinica/20/osg/smernica_1_transparentnost.pdf Zakon o društvima za osiguranje, Službeni Glasnik Republike Srpske 17/05, 01/06, 64/06, 74/10, 47/17 (Insurance Law of Republika Srpska) Zakon o obligacionim odnosima Crne Gore, Službeni List Crne Gore 47/2008 (Law on Obligations of Montenegro) Zakon o obligacionim odnosima Federacije Bosne i Hercegovine i Republike Srpske, (“Službeni list RBiH”, br. 2/92, 13/93 i 13/94) (“Službeni glasnik RS”, br. 17/93 i 3/96) (Law on Obligations of Federation of Bosnia & Herzegovina and Republika Srpska) Zakon o obligacionim odnosima Republike Srbije, Službeni list SCG 1/2003 (Law on Obligations of Serbia) Zakon o Osiguranju Federacije Bosne i Hercegovine, Službene novine Federacije BiH 23/17 (Insurance Law of Federation of Bosnia & Herzegovina) Zakon o Osiguranju Republike Crne Gore, Službeni list Republike Crne Gore, broj 78/2006 (Insurance Law of Montenegro) Zakon o Osiguranju Republike Srbije, Službeni Glasnik Republike Srbije 139/14 (Insurance Law of Serbia) Zakon o Zaštiti korisnika finansijskih usluga, Službeni Glasnik Republike Srbije 36/2011(Law on Protection of Consumers in Financial Services of Serbia) Zakon o Zaštiti korisnika finansijskih usluga, Službeni List Crne Gore 043/15 (Law on Protection of Consumers in Financial Services of Montenegro) Zakon o Zaštiti potrošača, Službeni Glasnik Bosne i Hercegovine 271/06 (Consumer Protection Law of Federation of Bosnia & Herzegovina) Zakon o Zaštiti potrošača, Službeni Glasnik Republike Srbije 62/2014 (Law on Consumer Protection of Serbia) Zakon o Zaštiti potrošača, Službeni List Crne Gore 002/14 (Law on Consumer Protection Monenegro)

Comparative Analysis of Transparency in the Insurance Contract Law of Colombia, Chile, Peru, and Spain Rafael Lara and Iñaki Zurutuza

1 Regulatory Framework In Spain, the regulation of the insurance contract was initially included in the Commercial Code of 1885, in its Articles 380 to 438. However, given the obsolete nature of this regulation, in 1980 this set of precepts was repealed by the current Act 50/1980, of October 8, of Insurance Contract (LCS hereafter). The LCS is a special mercantile law specifically dedicated to provide an updated regulation of this contractual figure that since its enactment was conceived as a regulation in which the position of the insured as a consumer should be protected.1 This is a conception that underlies the principle recognized in the Spanish Constitution (CE onwards) of protection of consumers and users (Articles 51.1, 51.2, and 53.3 CE), and under which it is also explained that in Spain the regulatory framework of the insurance contract is not limited to the LCS itself, but must be completed with the regime established in the Revised Text of the General Act for the Defense of Consumers and Users of 2007 (TRLGDCU hereinafter) and in Act 7/1998, of April 13, on General Conditions of Contract (LCGC hereinafter).2 In a similar way, the insurance contract in Peru was originally regulated in its Commercial Code of 1902, in its Articles 375 to 429, and this regulation was subsequently repealed on May 27, 2013 with the entry into force of Act n○ 29946 “Insurance Contract Act” (Act n○ 29946 onwards).3 Therefore, also in Peru, the

1

Caballero Sánchez (1997), passim. Lara González (this volume). 3 Martínez Ventura et al. (2014), pp. 110–124; Núñez del Prado Simons (2017), pp. 229–269. 2

R. Lara (*) · I. Zurutuza Public University of Navarra, Navarra, Spain e-mail: [email protected]; [email protected] © Springer Nature Switzerland AG 2019 P. Marano, K. Noussia (eds.), Transparency in Insurance Contract Law, AIDA Europe Research Series on Insurance Law and Regulation 2, https://doi.org/10.1007/978-3-030-31198-8_21

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insurance contract is currently regulated through a special Act that has replaced the original regulation contained in the Code. Likewise, in the Peruvian system, the provisions of this specific Act to regulate the insurance contract must be completed with the legislation enacted in this country to protect consumers, namely the “Consumer Protection and Defense Code”, approved in 2010 by Act n○ 29571, and which shall be supplementary to what is not provided for in Act n○ 29946 with respect to contracting parties or insured persons who have the status of consumer or user. On the other hand, in Chile and Colombia, the contractual insurance figure is currently regulated in their respective Commercial Codes. Thus, in Chile, the insurance contract is regulated in its Commercial Code of 1865, specifically in Article 512 and successive articles, although according to the new wording given to these precepts by the Act concerning the insurance contract n○ 20667 of 2013 (Act n○ 20667 onwards), whose first article provided that the content of Title VIII of Book II of the Code should be replaced by that contained in this Act. In addition, and as in the case of Peru, for the assumptions of insurance contracted by consumers, the Chilean legal system also provides for the supplementary application of specific regulations for the protection of consumers, which is Act 19.496 on the Protection of the Rights of Consumers of 1994 (LPC/1994 onwards), modified by Act n○ 20555 of 2011 (Act n○ 20555 onwards), in which the insurance contract was recognized as an adhesion contract.4 With respect to Colombia, it is Article 1036 and successive articles, as well as Article 1703 and following articles of its Commercial Code that contain the current regulation of the insurance contract; in the former, the most common insurance contracts are regulated, while in the latter, the maritime insurance contract is included. Thus, as in Chile, and unlike what happens in Spain and Peru, the Colombian system lacks a specific Act dedicated to regulating the insurance contract, so it is governed by that set of provisions of the Code that have been referred to and, additionally, by the Civil Code.5 This regime has to be completed with the existing regulation in this country to promote transparency in the insurance contract, first specified in Act n○ 1328 of 2009, by which rules are issued in financial, insurance, securities market and other provisions (Act n○ 1328 onwards), and, later, in Act n○ 1480 of 2011, by means of which the Consumer Statute is promulgated and other provisions are enacted (Act n○ 1480 onwards).

4 5

Barrientos Zamorano (2016), passim, and Ríos Ossa (this volume). Herrera Díaz (this volume).

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2 The Concept of Transparency In Spain, the idea of transparency in the context of the insurance contract presupposes, as happens in other types of contracts with accession clauses, a contractual situation in which there is an informational asymmetry between the parties. That is why the purpose of transparency in relation to adhesion contracts in general is to guarantee the existence of adequate knowledge regarding the rights and obligations derived from a particular contractual position, through the provision of the necessary information to correct said asymmetry.6 Thus, transparency must be understood as “clarity”, “specification”, and “simplicity” in the information, applying this concept in its entire dimension to the content of an “insurance transaction”, rather than just the content of an “insurance contract”. Transparency has to be required both when advertising the product, in the pre-contractual phase,7 and during the development or execution of the contract.8 Consequently, transparency will entail for the insurance company the imposition of a series of pre-contractual and contractual information duties. Moreover, this is the perspective from which the TRLGDCU and the LCGC start by trying to protect consumers and users by increasing the availability of information regarding the general conditions to which they will adhere.9 In a parallel sense, the idea of transparency in Peru has been reflected in Article 3 of the Regulation on Transparency of Information and Contracting of Insurance, approved through Resolution n○ 3199 of 2013 of the Superintendency of Banking and Insurance.10 The aforementioned precept with a heading “transparency of information principle” configures transparency as a mechanism aimed at improving the user’s access to information, so that he can, in a responsible manner, make informed decisions regarding the services he wants to contract. Therefore, this article establishes that companies directly, or, through their insurance promoters and marketers, or insurance brokers, must provide users with clear, sufficient, concrete, and timely information that allows them to know the costs, rights and obligations that imply the conclusion of an insurance contract, as well as those relevant aspects related to the benefits, risks, and conditions of the insurance offered in the market. It also adds this precept that the transparency of information is not only applicable before and during the conclusion of the contract, but throughout the entire contractual relationship under the provisions of the Regulation, so as in Spain it is clear that this entails existence of a series of pre-contractual and contractual information duties. In Chile, based on the definition of transparency in the insurance contract as intelligibility, lack of ambiguity or certainty in relation to information, it has been 6

Lara González (this volume). Miranda Serrano (2016), pp. 21 and 22. 8 Nieto Carol (2016), pp. 63–66. 9 Gómez Santos (2015), pp. 12–20. 10 Núñez del Prado Simons (this volume). 7

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pointed out that the issue of transparency in this contract implies, as in Spain or Peru, the necessary compliance with a series of pre-contractual and contractual information duties for the insurance company. In this sense, it has been pointed out that the idea of transparency conceived in this way tends to be reflected in the legal texts that regulate access to information that is intelligible for the party insured as a consumer, as is the case in Article 17 LPC/1994, on the terms and language of the contract, or in Articles 17B to 17L of this Act, on the clarity and intelligibility of pre-contractual information.11 Finally, in Colombia, transparency in the Law of Insurance has been defined as the satisfaction of the duty of good faith, understanding that this duty must be satisfied from the double perspective of the insurer and the insured party. For that, Act n○ 1328 has established that it will intervene with transparency, and therefore, in good faith, when it provides accurate, sufficient, and timely information to the consumer of insurance services. As for the insured, his performance will be transparent, in good faith, when he honestly declares the state and changes the risk.12 However, it should also be noted that under Article 863 of the Commercial Code, good faith begins in commercial contracts from the pre-contractual phase, so as in the other legal systems studied transparency in Colombian law entails the existence of duties of information, both pre-contractual and contractual. Ultimately, based on the foregoing, it can be said that the concept of transparency in Insurance Law is identified in all countries with the need to provide information that is accurate in both quantitative and qualitative terms for the policyholder or the insured, as the weaker contractual party, may know perfectly the rights and obligations derived from the contractual relationship that can potentially be established with the insurance company. Correlatively, transparency also implies that the insured must provide the information that is appropriate in relation to the insured risk or other information. In addition, all these duties of information that transparency entails for the two contracting parties exist both in the pre-contractual phase and in the execution phase of the contract, and only with its compliance can be understood that it has acted based on the principle of good faith.

3 The Transparency Control 3.1

Introductory Note

Starting from the concept of transparency in the insurance contract that has just been drawn, the control of the same can be identified with those rules of the different regulations applicable to this contract and directed, on the one hand, to establish requirements in a way that the insurer has to comply with the clauses in the text of

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Ríos Ossa (this volume). Herrera Díaz (this volume).

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the contract (formal transparency control, or inclusion or incorporation control, in more classical terminology); on the other hand, to establish duties of information for the insurance company to ensure that at the time of contracting the policyholder or insured have an effective knowledge of the main object or economic part of the contract, because this is the only way to speak of an authentic consent free, formed and issued with full freedom of knowledge (material or substantive transparency control, or qualified transparency control, as the Supreme Court has also called it in Spain).13 There are many rules that in the different legal systems that are the object of study have been issued under the protection of their respective legislations in terms of insurance to materialize this control of transparency in the insurance contract. We proceed next to analyze first among these rules those that establish certain duties of information imposed on the insurance company from the pre-contractual phase to provide the policyholder or the insured with an adequate understanding of the clauses and conditions included in the contract. Then the rules regarding the information duties of the policyholder or insured will be examined. Further, in relation to these duties of information of both contracting parties, some consequences that may arise from their non-compliance will be noted.

3.2 3.2.1

The Duties of Information of the Insurance Company Spanish Law

The key rule regarding the control of transparency in the insurance contract is Article 3 LCS. It includes a formal transparency control mechanism inasmuch as it provides that the general conditions of the insurance contract, “. . .shall be included by the insurer in the insurance proposal if any and necessarily in the contract policy or in a complementary document. . .” Therefore, this rule is intended to ensure that the insured has the possibility of knowing the general conditions even before the conclusion of the contract, in the pre-contractual phase. This precept also contains material transparency control mechanisms, aimed at ensuring the insured person’s effective knowledge of the content of the contract by establishing that “the general and specific conditions will be drafted in a clear and precise manner”. In this same line, Article 5.5 LCGC provides that “the wording of the general clauses must conform to the criteria of transparency, clarity, specification and simplicity”, and Article 80.1 letter a) TRLGDCU, that in contracts with consumers and users in which clauses are not negotiated individually, these should be written with “clarity, clarity and simplicity in the writing, with the possibility of direct comprehension . . .”

13

Miranda Serrano (2018), pp. 7 and 11.

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In case of non-compliance with these duties related to transparency control, there are two alternatives: either the interpretation of the clause in question contra proferentem or contra stipulatiorem and in favor of the adherent (Articles 6.2 LCGC and 1288 of the Civil Code), or the declaration as unincorporated of the clause and its consequent nullity (Article 8.1 LCGC). In addition, considering the distinction between injurious clauses and clauses limiting the rights of the insured, it should be noted that Article 3 LCS also expressly imposes on the insurer the duty not to include in any case general conditions harmful to the insured, and the duty to highlight in a special way the limiting clauses that will also have to be accepted in writing. Along with these duties, it is necessary to refer to other duties of information that the articles of the LCS impose on the insurance company for the sake of transparency. Thus, Article 8 sets a duty of partial information by providing that in the event that the content of the policy differs from the proposal of insurance or the agreed clauses, and provided that the policyholder takes the corresponding claim within the deadline one month from the delivery of the policy, the insurer will have the duty to correct the existing divergence.14 In the scope of the different classes of insurance regulated by the LCS, there are also different information duties whose observation is imposed on the insurance company.15

3.2.2

Peruvian Law

The angular precept regarding the control of transparency in the insurance contract in the Peruvian system, somewhat similar to Article 3 of the Spanish LCS, is Article 6 of Act n○ 29946, relating to the “content of the application for insurance”, in which it is provided that the insurer has the duty to provide the text of the insurance application specifying that “the general, special and special conditions that form part of the policy must be available prior to the applicant to be included in the contract”. This pre-contractual duty for the insurer that collects the aforementioned precept must be put in relation to Articles 26 and 27 of this same Act, relating respectively to the “content of the policy” and the “approval of minimum conditions and/or clauses.”16 From the point of view of transparency, it is important to point out that the first of these two precepts, in addition to listing the information that must necessarily appear on the policy together with the general and special conditions of the contract, establishes that in general the policy that will be delivered to the contracting party must have a “. . . clear wording, in legible characters and in prominent characters for the case of article 27.” More specifically, this same Article 26 adds that “the general, particular and special conditions that are applicable to the contract must meet the

14

Tirado Suárez (2014), pp. 204–208. Lara González (this volume). 16 Núñez del Prado Simons (this volume). 15

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following requirements: 1. Concretion, clarity and simplicity in the wording with the possibility of direct comprehension. . .” That is, in a line very similar to the aforementioned Articles 5.5 LCGC and 80.1 letter a) TRLGDCU in Spain. As for Article 27, referred to in Article 26 to provide that the policy to be delivered must have a wording “. . . in distinguished characters . . .” for the cases contemplated by the same, it refers to the minimum conditions and/or clauses to approve by means of Resolution of the Superintendency of Banking and Insurance, to which the policies will have to be subject in particular in the matter of personal, obligatory, and massive insurances. In the event that the policies used in this insurance class deviate from these approved minimum conditions, or from the Act itself, the consequence will be the prohibition of its use by the Superintendency itself, as well as the application of the corresponding sanctions. On the other hand, as has been pointed out regarding Spanish Law based on Article 8 LCS, another information duty expressly established by Act n○ 29946 for the insurance party is set out in its Article 29, on the “differences between the proposal and the policy”. In this precept, as in the LCS, it is provided that when the policy text differs from the content of the proposal or offer, the insurer must advise the contracting party, in detail and by means of an additional and different document to the policy, of these differences and that he has thirty days to reject them. Having done so, the difference will be considered tacitly accepted by the contracting party if he does not claim within thirty days of receiving the policy.

3.2.3

Chilean Law

The control of the transparency in the Chilean Law of the insurances as far as the duties of pre-contractual information of the insuring company respects, is concreted fundamentally in what is foreseen by the following rules: Articles 514 and 529 Commercial Code, according to the wording given to these precepts by Act n○ 20667; and in relation to them, Article 17 LPC/1994, according to the wording given to its many sections by Act n○ 20555. The Articles 514 and 529 of the Code establish the pre-contractual obligation for the insurance company to provide the policyholder with information on the terms of the contract in writing. In this sense, by virtue of the provisions of these two precepts and in the interest of a better understanding and certainty about the content of the contract, the information must contain the type of insurance in question, the risks covered and the exclusions, the amount insured, how to determine it and deductibles, the premium or method for its calculation, the period of duration of the contract, and information on other relevant issues. This duty to inform in writing must comply with the provisions of Article 17 LPC/1994, in which the first paragraph establishes that the adhesion contracts related to the activities governed by this Act, including those of the companies of insurance, “. . . must be written clearly legible, with a font size of not less than 2.5 millimeters and in Spanish . . .” The consequence of not complying with these transparency requirements, foreseen by the precept itself, will be that the clauses

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that do not comply with these requirements will not produce any effect with respect to the consumer.17 Based on the analysis of these foregoing rules, it is highlighted that in a similar way to Spanish and Peruvian Law, in Chilean Law there is also a transparency control over the activity of the insurance companies that is applied from the pre-contractual phase. However, it should be noted that under the provisions of the aforementioned Article 529 of its Code, a singular element can be observed in this respect in Chilean law that regulates the insurance contract. Moreover, this Article 529 does not limit itself to specifying the information already mentioned that the insurance company must provide before concluding the contract, but also “to advise the insured . . .” to “. . . illustrate it about the conditions of the contract and assist it during all the validity, . . .” of the same. In this sense, it can be said that Article 529 establishes through this rule a material transparency control aimed at ensuring that the insured party has an effective knowledge of the content of the contract to be entered into that begins in the phase before its subscription and extends to its execution phase.18 In addition, it is observed within the articles of the Chilean Code a precept that like Article 74 paragraph 2 of the Spanish LCS establishes in civil liability insurance the duty to inform the insured that the insurer has in the event that before it is filed a claim by someone who is also insured with that same insurer or there is another conflict of interest. This is Article 573 paragraph 2 of the Code, in accordance with the wording given by Act n○ 20.667, and it provides that in case of these circumstances, the insurer must communicate “. . . immediately . . .” to the insured about its existence. As in the Spanish LCS, this provision of the Chilean Code does not determine the consequence attached to the breach of this duty.

3.2.4

Colombian Law

The rules that in Colombian Law regulate transparency for the insurance company, similar to those examined in the legislations of the countries already seen, are not found in the provisions of the Commercial Code that regulates the insurance contract, but in the two aforementioned Acts that in Colombia protect consumers, namely, Act n○ 1328 and Act n○ 1480.19 On the one hand, Article 3 Act n○ 1328, on the guiding principles that must govern the relations between financial consumers and the entities that are subject to surveillance by the Financial Superintendence of Colombia, including insurance entities, it incorporates the principle of “transparency and certain information, sufficient and timely”, stating that these entities must provide financial consumers “. . . certain information, sufficient, clear and timely, which allows, especially, that 17

Ríos Ossa (this volume). See also Momberg Uribe (2015), pp. 739–758. Again, Ríos Ossa (this volume). 19 Herrera Díaz (this volume). 18

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. . .” these consumers “. . . know properly their rights, obligations and costs in the relationships they establish with the entities under surveillance”. On the other hand, Article 3, point 1.3, Act n○ 1480 establishes that consumers and users will be entitled to “obtain complete, truthful, transparent, timely, verifiable, comprehensible, accurate and adequate information regarding the products that are offered or put into circulation, as well as the risks that may arise from their consumption or use, the mechanisms of protection of their rights and the ways to exercise them”. Correlatively, within the Title that this Act specifically devotes to the duties of information of suppliers and producers, Article 23 provides that “suppliers and producers must provide consumers with information, clear, truthful, sufficient, timely, verifiable, understandable, precise and suitable on the products that they offer . . .”, being responsible for the damages that are consequence of an inadequate or insufficient information. Along with these rules of the Colombian Consumer Statute from which pre-contractual information duties are deducted for the insurance party, within this Act n○ 1480, its Article 37 must also be highlighted, in relation to the requirements to be met by the adhesion contracts in general, namely, having sufficiently, anticipated and expressly informed the adherent in Spanish about the existence, effects, and scope of the general conditions; that the general conditions of the contract are concrete, clear, and complete; and that in written contracts, the characters are legible to the naked eye and do not include blank spaces. In addition, this Article 37, paragraph 3, provides that the insurer must make early delivery of the clauses to the policyholder, explaining the content of the coverage, exclusions, and guarantees, which is another clear example of material transparency control. Finally, this precept in fine determines the consequence in case of breach of these duties of information, which is the invalidity of the general conditions to which said non-compliance refers.

3.3 3.3.1

The Duties of Information of the Policyholder and/or Insured Spanish Law

Article 10 LCS imposes on the policyholder a duty of information related to the incident circumstances in the assessment of the risk to be insured because it establishes that it has the obligation to “. . . declare to the insurer, according to the questionnaire that he submits, all circumstances known to him that may influence the risk assessment”. As the rule refers to the need to carry out this declaration “. . ., before the conclusion of the contract. . .”, it is a duty of pre-contractual information. This duty of information that the policyholder has in relation to the declaration of the risk status continues in force during the execution phase of the contract, as Article 11.1 LCS provides that the policyholder (or the insured) must “. . . during the term of the contract . . .” notify the insurer, as soon as possible, “. . ., the alteration of the factors and circumstances stated in the questionnaire . . . that aggravate the risk

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and are of such a nature that if they had been known by the latter at the time of the perfection of the contract would not have celebrated it or would have concluded it in more burdensome conditions”. The only exception legally envisaged with respect to this duty of contractual information is that provided in relation to the insurance of persons in Article 11.2, under which in this class of insurance the policyholder or insured shall be exempt from communicating the variation of the relative circumstances to the insured’s state of health, which cannot be considered an aggravation of the risk. The consequences of not fulfilling these duties is linked by Article 12, paragraph 2, to the occurrence of a loss, in which case: either the insurer would be released from its benefit if the policyholder or the insured had acted in bad faith; or if it is determined that there is no bad faith, the benefit of the insurer would be reduced proportionally to the difference between the agreed premium and that which would have been applied had the true entity of risk been known. Another duty of information that the policyholder (or the insured or the beneficiary) has under Article 16 LCS is to notify the insurer of the occurrence of the claim within a maximum period of seven days after its knowledge, unless the policy has set a longer period. The consequence in case of breach of this duty, unless it is proven that the insurer had already been aware of the loss by other means, would be the recognition of the right of the insurer to claim the damages caused by the lack of this statement. Complementing this duty of information related to the communication of the occurrence of the loss itself, Article 16, paragraph 3, LCS establishes that the policyholder (or the insured) must inform the insurer about all the circumstances or consequences of the accident. The consequence in case of breach of this duty is provided in Article 16 in the event that such breach would have involved intent or gross negligence, in which case the loss of the right to compensation would occur.

3.3.2

Peruvian Law

From the prism of good faith as a principle that must backbone the performance of the insured at the time of the conclusion of an insurance contract in Peru, Article 8 Act n○ 29946, entitled “Reluctance and/or inaccurate misleading statement”, it follows that as in Spain the contracting party and/or insured has the pre-contractual and contractual duty to inform the insurer and also with accuracy about the circumstances known by him that affect the state of risk. Thus, this precept provides that “the reluctance and/or inaccurate statement of circumstances known to the contracting party and/or insured, which would have prevented the contract or modified its conditions if the insurer had been informed of the true state of risk, voids the contract if half fraud or inexcusable fault of the contractor and/or insured”. As can be seen, the consequence in case of breach of this duty will be the nullity of the contract, provided that such breach has been incurred with intent or through inexcusable fault. Furthermore, Article 13 Act n○ 29946 contains the rules related to cases of reticence and/or inaccurate non-malicious declaration found before the production

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of the accident, in which case the consequence will no longer be invalidity but potentially the revision of the contract and its maintenance or resolution, depending on the decision of the contracting party and/or insured. In this sense, the aforementioned article states that “if the reluctance and/or inaccurate declaration is not due to fraud or inexcusable fault of the contractor and/or insured and is verified before the loss occurs, the insurer must offer the contractor the review of the contract within a period of thirty days computed from the referred verification”. In this offer of revision, an adjustment of premiums and/or coverage will be included and a period of ten days will be granted for the contracting party to pronounce an acceptance or rejection. In case of non-acceptance, the insurer may terminate the contract. In the event that the verification of the reluctance and or inaccurate non-fraudulent declaration took place after the production of an accident, Article 14 Act n○ 29946 establishes, as does Article 12, paragraph 2, Spanish LCS, that the compensation due will be reduced in proportion to the difference between the agreed premium and the one that would have been applied had the real state of risk been known.20 Finally, regarding this duty of information, it must be pointed out that even if the information is not fulfilled due to reluctance and/or inaccurate statement about the circumstances that influence the state of risk, there would also be some cases in which, based on Article 15 Act n○ 29946 such breach would not result in any of the consequences mentioned, the nullity, revision, or termination of the contract. As in Spanish Law, Act n○ 29946 establishes in its Article 68 and successive articles the duty for the contracting party, the insured, the beneficiary, if any, or any third party, to inform the insurer about the occurrence of a loss, although in this case leaving the Superintendency to set the term for this in accordance with the insurance class. In addition, as in Spain also, the contracting party, the insured, or the beneficiary must provide the insurer, at his request, with the truthful, reasonable, and necessary information to verify the loss or extension of the benefit under his charge and allow him the necessary inquiries to such purposes. In the event of failure to comply with this duty to give notice of the loss, and as a result of this there is damage to the insurer, the insurer shall have the right to reduce the indemnity to the extent of the damage suffered, unless the lack of notice did not influence the verification or determination of the loss.

3.3.3

Chilean Law

In the legislation of Chile, as in Spain and Peru, the pre-contractual duty of information of the insured party in relation to the state of risk, as well as the consequences associated with the infraction of this duty, is also expressly contemplated. Specifically, in Articles 524, 525, and 539 of its Commercial Code, according to the wording given to these precepts by Act n○ 20667.

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Indeed, Article 524, relating to the “obligations of the insured”, provides in paragraph 1 that the insured has the duty “to declare sincerely all the circumstances that the insurer requests to identify the insured thing and to appreciate the extent of the risks”. In relation to this, Article 525 clarifies that to be considered that there is a correct statement referred to in Article 524.1 ○ “. . ., it will be sufficient for the contracting party to inform the wording of what the insurer requests . . .” and in relation to “. . . the facts or circumstances that I know . . .”. It follows that although the standard does not refer to it in an explicit manner, Chilean Law also adopts, as it is reflected in the Spanish LCS, the system or form of the questionnaire that the insurance party must submit to the insured for the purpose of complying with this duty of information.21 On the other hand, regarding the scope of this duty of information of the insured, this will depend on the very terms in which the questionnaire is submitted to him and, logically, on the information that really acts in his knowledge. That is why paragraph 2 of this Article 525 provides that in the event that the insurance contract is concluded without the insurer having requested the declaration on the risk status through the corresponding questionnaire, the latter cannot allege the errors, reluctance, or inaccuracy of the contracting party, as well as those facts or circumstances that are not included in such request. However, under Article 525, paragraph 3, if before the production of the accident said errors, reticence, and inaccuracies were found in the information requested by the insurer through the questionnaire, and were also determinants of risk, the consequence would be the possibility for the insurer to terminate the contract; if they are not determining the risk, the insurer could propose a modification of the terms of the contract, to adjust the premium or the conditions of the coverage to the circumstances not reported. If the finding of errors, reticence, or inaccuracy was subsequent to the occurrence of the accident, Article 525, paragraph 4, also differentiates various consequences depending on their consideration or not as risk determinants; in the affirmative case, the insurer will be exempted from its obligation to pay compensation; if not, the insurer will have the right to reduce the compensation in proportion to the difference between the agreed premium and the one agreed upon in the case of knowing the true state of the risk. Finally, we must allude to the consequences derived from the breach of this duty that the insured has, when he provides in the declaration referred to in Article 524.1○ consciously false information. Such a consequence is contemplated in Article 539 and it is either the nullity of the contract, or the resolution of the same if the insured incurs in that conduct when claiming compensation for an accident. As in Spain or Peru, the Chilean Code also regulates the duty of the insured to inform about the occurrence of the loss, although in a more limited way than in the other two mentioned regimes. Thus, regarding this duty the Article 524.7○ of the Code only provides that the insured has the obligation to notify the insurer, as soon as possible after becoming aware of the occurrence of any event that may constitute

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or constitute an accident, as well as to declare faithfully and without reluctance, its circumstances and consequences. Unlike Spain and Peru, there is no reference here to the consequences of not fulfilling this duty, and no criteria is provided to determine the deadline for notification.

3.3.4

Colombian Law

In the same line of the Chilean Commercial Code, in the Colombian Commercial Code there are several provisions that for the sake of transparency regulate the duty of the policyholder to report on the state of the risk both in the pre-contractual phase and in the development of the contract.22 These provisions are the Articles 1058, 1059, and 1060. In its Article 1058, which refers precisely to the “declaration of the state of risk”, it establishes that the policyholder “. . .is obliged to declare truthfully the facts or circumstances that determine the state of the risk, according to the questionnaire proposed by the insurer”. Therefore, to comply with this duty of pre-contractual information, Colombian law also expressly resorts, as in the Spanish LCS, to the questionnaire system that the insurer must submit to the policyholder. In the event of defaulting on this duty because of the existence of reluctance or inaccuracy in the information to be provided known to the borrower, Article 1058 provides the same consequence, namely, the relative nullity of the contract, in the following two cases: (a) when the declaration was made subject to the aforementioned questionnaire and the knowledge of such information had retracted the insurer to conclude the contract, or induced to stipulate more onerous conditions (1058 par. 1); and (b) when the statement has not been made subject to the questionnaire, the taker would have concealed, through fault, information that would imply objective aggravation of the state of the risk (1058 par. 2). In relation to both cases, it must be borne in mind that Article 1059 provides that if the insurer chooses to terminate the contract, it would be entitled to retain the entire premium as penalty. However, the consequence would not be nullity in the event that the inaccuracy or reluctance stemmed from the fault of the policyholder, in which case the consequence provided for in Article 1058, paragraph 3, in case of loss consists, as in the other studied regulations, in the obligation of the insurer to pay a percentage of the insured benefit equivalent to the rate or premium stipulated in the contract represents with respect to the rate or premium appropriate to the true state of the risk. The duty to inform about the state of the risk in the execution phase of the contract is referred to in Article 1060, paragraph 1, which stipulates that “the insured or the policyholder . . . are obliged to maintain the risk status”, for which “. . . must notify the insurer in writing of the events or circumstances not foreseeable that occur after the conclusion of the contract and that, . . . mean aggravation of the risk or variation of their local identity”. Once the notification of the change in risk has been made, the

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insurer may revoke the contract or demand a readjustment in the value of the insurance premium. The consequence of breach of this duty of contractual information of the policyholder or insured for lack of timely notification of risk modification is determined in Article 1060, paragraph 4, and is the termination of the contract. Together with this consequence, in case that such breach has occurred with the bad faith of the insured or the policyholder, the right of the insurer to withhold the unearned premium will be recognized. On the other hand, and as in the legislations of the previous countries, in the Colombian legal system, and specifically in Article 1075 of its Commercial Code is also established the duty of the insured party or the beneficiary of “. . .to give notice to the insurer of the occurrence of the accident . . .”, in this case within the term of “. . .three days following the date on which they have known or should have known”, although this term may be extended (but not reduced) if the parties so decide. Therefore, it is a more rigid term than the seven days provided in the Spanish LCS. Regarding the consequences derived from the breach of this duty, in Article 1078, paragraph 1, of the same Code, these are specified, in a similar line to that provided in the Spanish LCS and in the Peruvian Act n○ 29946, in the reduction of the compensation that may be appropriate, since “. . .the insurer may only deduct from the compensation the value of the damages caused by said non-compliance”.

4 Conclusion The study of the question of transparency in the insurance contract, in relation with the four legal systems in which this issue has been arisen in this chapter, requires the previous knowledge of both: the specific Acts that regulate the insurance contract; and the legislation that regulates the protection of consumers of insurance having considered insurance contract as a contract of adherence. In this regard, nowadays we can notice that there are two countries, Spain and Peru, in which the insurance contract is regulated by means of a special merchant Act specifically dealing with this type of contract, while in Chile and Colombia this contract keeps being regulated by several provisions of their respective Codes of Commerce. Besides, in all these countries different Acts have been enacted to complete the specific regulation of the insurance contract with provisions concerning the rights of the consumers that are included in those Acts about the protection of consumers. In such a legal framework, the concept of transparency has been mainly defined in these countries based on the idea that the insurance contract is a contract of adherence in which an informational asymmetry situation between the contracting parties happens, existing an imbalance between the insurer and the insured. Therefore, from this perspective the definition of transparency has been related to all the information that the insurer must give to the policyholder or to the insured to correct the quoted asymmetry.

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This duty of giving of information of the insurer, which the transparency implies, has been concreted in two senses. On one side, in qualitative terms, it has been concluded that transparency means comprehensibility, unambiguity, and certainty. On the other side, in quantitative terms, it has been stated that transparency only exists if the amount of information that is given is not only accurate and adequate but also sufficient so that the insured can perfectly understand what he contracts. These two dimensions of the transparency entail that to guarantee it the insurer will have to comply with both pre-contractual and contractual information duties. However, at the same time the concept of transparency must be considered from the point of view of the giving of information to the insurer that corresponds to the policyholder or the insured. In this sense, it can be remembered that the Colombian doctrine has expressly defined transparency in insurance contract law as the fulfilment of the duty of good faith that parties entering into an insurance contract have to comply with. Therefore, to respect this principle, contained within the Civil or Commercial Codes of these four countries, the policyholder or the insurer must also comply with different duties of information both in the pre-contractual phase and at the time of the execution of the contract. Taking into account the concept of transparency that has just been drawn, the transparency control in the insurance contract is identified with the set of rules aimed at: on the one hand, establishing requirements of form that the insurer has to fulfill to make sure that the clauses predisposed by him get to be included or incorporated to the insurance contract (control of formal transparency); on the other hand, establishing duties of information for the insurer to ensure that at the time of contracting the policyholder or the insured has an effective knowledge of the main object or economic part of the contract, because only thus we can appreciate the existence of an authentically free consent, formed and issued with full freedom to know. However, in addition, from the point of view of the insured party, and in relation to the aforementioned principle of good faith, the duties of information of the policyholder or the insured must also be included within this control of transparency. In this context, and according to the study that has been done of the legal systems of these four countries, to implement the control of transparency in the insurance contract we can distinguish the existence of similar duties of information for the contracting parties, although the consequences of failure to comply with these duties can differ from one system to another, above all considering the varied insurance typology that exists in the insurance market. It can be said that in general the insurer has a pre-contractual duty of information in relation to the content of the insurance contract itself as the insurer must include the general conditions of the insurance within the proposal of the insurance and necessarily within the policy; by this way, these conditions can be available for the adherent before signing the contract, and he can assess perfectly the significance and the implications of the contract. Besides, these conditions must be drafted with concreteness, clarity, and simplicity, and with possibility of direct comprehension. In case of breach of this duty is common that the consequence could be that the affected clause is declared null or void or the interpretation of the clause in question against proferentem and in favor of the adherent.

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Apart from this main and common duty of information of the insurer, which can be noticed in the four legal systems and that extends throughout the entire term of the contract, there are another specific duties of information related to the insurer that are not established (at least explicitly) equally in the studied regulations concerning the insurance contract of the four countries. Among them, since it has been contemplated in similar terms in Spain and in Peru, we can highlight the partial duty of information in the event that the content of the policy differs from the insurance proposal or the agreed clauses. Regarding the information duties of the policyholder or the insured, by studying the regulation of all countries, we can infer that there is a common pre-contractual and contractual duty of declaring to the insurer all circumstances known by him (the insured) that may influence the risk assessment. Although some regulations do not expressly refer to it, to comply with this duty we also can state that the system of the questionnaire that the insurer must submit to the insured party is normally used. With regard to the consequences in case of breach of this duty, these consequences can be very different and changing from one country to another depending on these elements: whether the policyholder or the insured has acted with bad faith and/or whether the non-compliance has occurred before or after the claim. Another common duty of information of the policyholder or the insured (or the beneficiary or a third party) that is established in the four legal systems is the duty to inform about the occurrence of the loss, and in relation with it in a complementary way, about all the consequences and circumstances of the loss. Although this duty is established in all systems, some aspects in relation with it differ from one system to another. In this way, the certain period to inform and the consequences in case of breach can vary from one country to another.

References Barrientos Zamorano M (2016) Normas sobre la protección de los derechos de los consumidores en el contrato de seguro en Chile. Mapfre, Madrid Caballero Sánchez E (1997) El consumidor de seguros: protección y defensa. Mapfre, Madrid Gómez Santos M (2015) La protección del asegurado como consumidor. Cesco: 1–20. https:// previa.uclm.es/centro/cesco/pdf/trabajos/34/113.pdf Herrera Díaz R (this volume) Transparency in the insurance contract law of Colombia. In: Marano P, Noussia K (eds) Transparency in Insurance Contract Law. Springer, Cham Lara González R (this volume) Transparency in the insurance contract law of Spain. In: Marano P, Noussia K (eds) Transparency in Insurance Contract Law. Springer, Cham Martínez Ventura J, Alfaro Rosas P, Bossio Bossio C, Guillén Lazo A, Tomanguillo Vásquez A (2014) Apuntes sobre la nueva Ley de Contrato de Seguro: análisis y críticas a dos años de su publicación. Revista de Actualidad Mercantil 3:110–124 Miranda Serrano LMª (2016) Control de transparencia de las condiciones del contrato de seguro: más allá de los clásicos requisitos de inclusión. In: Bataller Grau J, Peñas Moyano MªJ (eds) III Congreso Nacional de Ordenación, Solvencia y Supervisión en Seguros Privados y II Congreso Internacional de Derecho de Seguros. Lowcostbooks, Valencia, pp 17–75

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Miranda Serrano LM (2018) El control de transparencia de condiciones generales y cláusulas predispuestas en la contratación bancaria. Revista para el Análisis del Derecho (Indret) 2:1–80. http://www.indret.com/pdf/1386.pdf Momberg Uribe R (2015) Análisis de los modelos de vinculación del Código Civil y la legislación de protección al consumidor: hacia un principio general de protección de la parte débil en el derecho privado. Revista Chilena de Derecho 43(2):739–758. http://www.redalyc.org/pdf/1770/ 177048407016.pdf Nieto Carol U (2016) Transparencia y protección de la clientela bancaria. Aranzadi, Cizur Menor Núñez del Prado Simons A (2017) La nueva Ley del Contrato de Seguro en el Perú. Revista IberoLatinoamericana de Seguros 47:229–269 Núñez del Prado Simons A (this volume) Transparency in the insurance contract law of Peru. In: Marano P, Noussia K (eds) Transparency in Insurance Contract Law. Springer, Cham Ríos Ossa R (this volume) Transparency in the insurance contract law of Chile. In: Marano P, Noussia K (eds) Transparency in Insurance Contract Law. Springer, Cham Tirado Suárez FJ (2014) La aplicación de la Ley General de Protección de Consumidores y Usuarios al Contrato de Seguro. In: Bataller Grau J, Veiga Copo AB (eds) La protección del cliente en el mercado asegurador. Civitas, Cizur Menor, pp 187–233

Comparative Analysis of Transparency in Insurance Law in the Civil/Continental Law Jurisdictions Kyriaki Noussia

1 Introduction Transparency relates to fairness in the civil law systems and is often embedded in the civil code provisions on good faith. Keeping that initial submission in mind, transparency is important in the field of insurance law, as insurance is a complex legal product accompanied by a complex legal framework. This interplay of complex legal product on the one hand and a complicated legal framework on the other, supplemented by a seller’s market focused on a relatively few insurance companies, requires a high level of transparency.

2 Regulatory Framework: Transparency as a Notion in Insurance Contract Law in the Civil/Continental Law Jurisdictions In general, transparency concerns insurance law as a whole respectively of all its sub-sectors. The objective is basically about keeping the power and/or information gap between the actors involved as low as possible but the methods with which the legislator tries to achieve transparency, as well as the addressees of the provisions creating transparency, are different. In terms of content, it is usually about a transparent disclosure of the relationship between the insurance agent and the insurance company towards the policyholder, i.e., more specifically it is about his legal and economic dependence on one or more insurance company, his professional

K. Noussia (*) University of Exeter, Exeter, UK e-mail: [email protected] © Springer Nature Switzerland AG 2019 P. Marano, K. Noussia (eds.), Transparency in Insurance Contract Law, AIDA Europe Research Series on Insurance Law and Regulation 2, https://doi.org/10.1007/978-3-030-31198-8_22

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qualifications, and possible conflicts of interest. Finally, transparency in the context of insurance contract law is commonly equated with the requirement for the legislator to create a most possible transparent relationship between insurers and policyholders. More specifically, as per the Austrian Consumer Protection Act, the insurer has the obligation to draft the contractual components containing the general policy conditions in a clear and comprehensible way; however, the issue of transparency— especially in insurance law—cannot be reduced to the requirement of transparency of the terms and conditions of the insurance contract alone. Thus, the legislator tries—apart from the general transparency requirement—by a multitude of measures to assure the transparency of the products of “insurance” in general respectively through the individual insurance contracts. In insurance contract law, transparency can therefore—in general—best be described as a condition that makes the insurance product as such, and thus the insurance contract, its content and consequences comprehensible to the parties involved. More specifically, on the insurance contract, its form and content, transparency can be understood as comprehensibility supplemented by “certainty”, “clarity”, and “completeness”. If transparency is meant to be described with the words “comprehensibility”, “certainty”, “clarity”, and “completeness” there is again much room for interpretation. A legal norm is comprehensible if it is understandable to the legal user with regard to its purpose and the legal consequences resulting from it. A legal norm is certain if it does not offer an unjustified margin of discretion, and sufficiently clear if it does not try to conceal the rights that the legal user derives from it, whereas completeness means that the effects of a legal norm must not be obscured by omitting certain parts. In Croatia, the legislation does not expressly define the concept of transparency in insurance contract law, and therefore transparency in the insurance contract has the effect of enabling the preservation of balance between the contracting parties, to protect their rights, as well as the true will of the parties themselves, the preservation of legal certainty and equality of the legal status of contracting parties, and the principle of good faith in dealing. Insurance law in Croatia is fully codified but the provisions are found in several acts of legislation that are not in mutual subordination, hence no single codification in a single act exists as far as transparency is concerned. Hence, transparency is regulated in the Civil Obligations Act (in force since 1 January 2006), the principal legal source of civil law in the Republic of Croatia, and consequently the most important legal source of the Insurance Contract Law. The Insurance Act (applicable in its entirety as of 1 January 2016) is the most important status-organizational legal regulation in the Croatian insurance law and which, in addition to its status-organizational provisions, contains several provisions that are directly related to the insurance contract. Transparency is denoted and regulated in Articles 380–382 referring to information that the insurer (insurance company) has the duty to communicate/deliver to the policyholder before the conclusion of an insurance contract or during the conclusion of an insurance contract. The Consumer Protection Act regulates the fundamental rights of consumers in the purchase and acquisition of goods and services on the market, and contains provisions that in part regulate the matter of insurance contracts (like the

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Civil Obligations Act), provided that the said provisions supplement or even change some provisions of the Civil Obligations Act regarding the insurance contract. As per Japanese law, transparency in insurance contract is an essential kind of adhesion contract. Japan’s Insurance Act actively promotes transparency and imposes duties upon the contractual parties. In 2008, the Chapter 10 in the Commercial Code was abolished, and Japan’s Insurance Act, which took regulation to Accident Insurance Contract and Sickness Insurance Contract, was established in 2008 and entered into force on 1 April 2010. The Insurance Act increased, overall, the “transparency” of Insurance Contracts, basing on the protection of consumers. In Germany, transparency constitutes a well-recognized element in contract law but with regards to insurance contracts, transparency is even more important and cannot be overestimated mainly as insurance is a so-called legal product and because of that, in effect, insurance contracts are not characterized by an exchange of physical goods for money but by the exchange of a promise of performance for financial compensation. In the absence of any physical manifestation of the mere promise, a visual inspection is not possible at all—but this fact does not render the insurance product non-transparent per se. In Greece, the law is strongly oriented towards transparency. The law on the insurance contract is codified in Law 2496/1997. This is supplemented by Law 4364/2016, which implemented the Solvency II Directive 2009/138 EU. Although Law 4364/2016 basically addresses insurance regulation, however, some of its provisions have an impact on private insurance law as well. The law on insurance intermediaries consists of Law 1569/1985 and Presidential Decree 190/2006 (the later implementing Directive 2002/92 EC). In Portugal, the diversity that characterizes transparency is more problematic than beneficial. It is argued that the pre-existing standardization of the insurance contracts made ground for a common knowledge, of parties to an insurance contract. In Sweden, transparency is relevant in many different perspectives, i.e., it is an essential element of the relationship between the insurer and the intermediaries on one hand, and their customers on the other hand. Transparency is relevant in both ways: the customer needs information about the insurance, and the insurer and the intermediary need information from the customer to provide the right product and to be able to calculate the risk. Further, transparency is an essential element of the relationships between the insurance undertakings and intermediaries on one hand, and the supervisory authorities on the other hand. In Sweden, and with regard to transparency in insurance law, the legislation is not moving towards more information to the customers, but instead towards information of higher quality, better documented advising situations, and towards standardization of terms and language to facilitate comparisons. When describing the legal instruments regulating transparency in Swedish insurance law, it is essential to look at traditional legislation, preparatory works, and case law, as well as soft law such as non-binding guidelines and recommendations issued by private and public actors. One explanation of the great impact of soft law is that all Swedish insurance companies that since the beginning of the twentieth century operated on the Swedish market intimately cooperated with each other, hence, often, the Swedish legislator has refrained from

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legislating on a specific issue because the insurance industry already self-regulated the very same issue. There are also many cases where the government has identified a problem, but has decided for the time being to refrain from legislating, on the condition that the industry makes its own adequate soft-law arrangements or conducts other activities. Neither the Swedish Insurance Contract Act of 2005 (2005:104) (ICA) nor the preparatory works contain a definition of the term “transparency”. Instead, the transparency principle is stated in the Insurance Business Act (IBA), a public law regulating the insurance business. In the insurance law field, transparency aims at clarification of the insurance contract, or at simplification of information about the insurance contract. In Swedish insurance law, several regulations aim to ensure that the customers have access to adequate and easily understandable information to make well-balanced decisions about their insurance. In Russian insurance contract law, transparency is relatively new; hence, it is not formally defined but derives its existence from various legal instruments. In Israel, the law requires transparency in insurance and imposes duties of disclosure on the parties in various relationships in the insurance field: between insurer—insured, insurance agent—insurer/insured, Third Party injured—liability insurer of tort feasor. The primary source of the Israeli Insurance Law is the Insurance Contract Law, 1981. The Insurance Contract Law brought significant changes as compared with the prior law. As a consumer protection orientated law, the Insurance Contract Law limited the duties of disclosure of the insured as compared with the previous duties based on the Common Law, and instead of the broad duty to initiate disclosure of information during the pre-contractual phase, as previously required from the insured, the disclosure duties are limited, and the insurer’s right to be exempt from payment of insurance benefits, due to nondisclosure, were also limited. The above testify a clear ambit to safeguard transparency in insurance. In Poland, no definition of transparency appears in the Polish law. Transparency is recognized as one of the fundaments of the free and efficient trade, and the Polish law applies the notion of transparency in double meaning. First, as a general principle of functioning of insurance as an industry and, in the second, as a manner in which the information duties of the parties to the insurance contract should be effected. Under the Dutch law, transparency in insurance contract law raises many questions but the legislation (Dutch Civil Code (Burgerlijk Wetboek)) does not contain specific rules on the interpretation of contractual provisions and no specific definition of transparency in Dutch (insurance) contract law exists. Still, with the development of consumer law, the principle of transparency in Dutch (insurance) contract law gained an importance. In Turkey, the provisions of the Turkish Commercial Code related to insurance law (Articles 1401–1520) are placed in the Sixth Book titled “Insurance Law”, and transparency is much more important in the insurance contract than in any other contract, the latter significance being manifested in various provisions of the law governing insurance contract law and insurance supervision law.

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In the Western Balkans, the notion of transparency is relatively new in insurance (contract) law. Transparency is enacted in the Serbian law from the relevant EU regulations in this field and via a soft law instrument, a Guideline of the National Bank of Serbia that elaborated certain expectations from market participants with regard to transparency. Transparency is understood as clarity and comprehensibility of the contract. A number of general provisions might apply to this end. Transparency is sometimes described as the goal to be achieved, while sometimes it is defined as a tool to achieve the goal, i.e., consumer protection.

3 The Duties of Information from the Insurer’s and from the Assured’s Perspective in the Civil/Continental Law Jurisdictions As per the Austrian Insurance Contracts Act and with regard to transparency in insurance contract law, the Insurance Contract Act plays only a subordinate role, i.e., it defines the way in which information has to be passed on to the policyholder and the legal consequences, which are linked to a non-disclosure of the necessary information. However, if transparency in insurance contract law is understood in a broad sense, the Insurance Contract Act also plays an important role and the customer is obliged to make special disclosures before the conclusion and during the existence of an insurance, which shall prevent the insurer from taking incalculable risks. With this framework, the legislator tries to ensure the necessary transparency in insurance contract law. The legislator has attempted to compensate the legal protection deficit of the policyholder resulting therefrom by increased transparency, both with regard to the content of the insurance contract and its representation. The policyholder not only has to provide information before concluding the contract but also if significant circumstances change during the contractual relationship. If a term is grossly disadvantageous, it is ineffective. This means relative nullity, which again means that the court only takes it up if it is claimed. According to the Austrian case law, the transparency requirement is met if the clause was formulated in a comprehensible way. Furthermore, it is necessary that the content and scope of the clause is transparent. The relevant clause must reliably inform the consumer of his rights and obligations under the contract. The clause must enable the policyholder to enforce his rights and must not to impose unauthorized duties on him. However, the policyholder must not be deceived or left in uncertainty about the legal consequences of the specific clause. The explanations given here show only an overview of the complex issue of the requirements of “transparency” of the insurance contract in Austria. However, the general overview already shows a few things in a clear way. Transparency is a topic of the entire insurance law, and therefore also of particular importance to the

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insurance contract law. Furthermore, transparency aspects play a greater role in insurance law than in other legal areas. The focus is clearly on the protection of the policyholder. Finally, the issue of transparency is—as it has been shown—not to be restricted to the protection of the policyholder alone. On the contrary, the insurer is also faced with a serious need for transparency. In general, a need for sufficient information to be provided by the policyholder cannot be denied. The reasons why transparency plays such an important role in insurance contract law are the complexity of the product of insurance and the complex legal framework. Steps to broaden the notion of transparency would therefore be considered as highly beneficial. In Germany, regarding transparency in insurance, there are the pre-contractual duties of the insurer and of intermediaries to provide information and to advise. There also exist requirements for the design of written information and of the GCI; requirements for the inclusion of the GCI into the contract, in particular with regard to the issuance of the GCI; there also exist requirements regarding the methods of interpreting the GCI to avoid or eliminate a lack of transparency, such as the principle of narrow interpretation applied to exclusion clauses or the well-known contra proferentem rule; as well as the transparency requirements for the content of the GCI. Regarding transparency after the conclusion of the contract and during the contractual period, the law sets the duties of the insurer to inform about the content of the contract and about specific provisions of contract law, and there is also a duty of the insurer to advise if there is a discernible need. In Greece, disclosure and transparency provisions establish statutory duties for insurers and intermediaries. Since 1997, the Greek insurance contract law developed a policyholder protection position. It introduced an obligation of the insurer to provide pre-contractual information to the proposer in connection to the policy cover and its terms, and enabled the policyholder to avoid the policy if its terms did not correspond to their expectations. In terms of contract construction, courts rigorously apply the contra proferentem principle and the doctrine of fairness of contract terms. The recent enhancement of disclosure and transparency provisions creates a link between regulation and private enforcement. Transparency is not only a regulatory obligation, but also a statutory duty owed to policyholders. Hence, regulatory transparency seems to be the foundation leading to private enforcement. Enhanced transparency is likely to lead to less litigation. In Israel, various provisions were legislated by the Israeli legislator, the courts and the regulator—the Commissioner of Insurance—imposing duties of disclosure in the various stages of the insurance transaction, both in the pre-contractual stage, during the policy period, and especially after the occurrence of the insured event. The Insurance Contract Law (1981), which applies to all kinds of insurances, is consumer orientated. The Israeli Supreme Court has broadened the disclosure duties by interpreting the law in favor of the insured. In addition, the Commissioner of Insurance issues directives on disclosure applying to a vast scope of cases and branches of insurance. Hence, in Israel, it is notable that the regulator and the legislator place great importance in transparency and have introduced ways to safeguard the policyholder via its observation.

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Under the Italian law, a special duty of information and of advice for insurers and intermediaries, which is being derived from the fiduciary relationship between the intermediary and/or the insurer and the client in the distribution of insurance products, is enriched by the obligations to inform and to advise the customer to support his or her consent and to offer to him or her a product that meets his or her interests. Before the conclusion of an insurance contract, transparency requires the provision by intermediaries towards policyholders of adequate information to enable them to make informed choices corresponding to their needs. To that end, based on the complexity of the contract being proposed, they shall explain to the policyholder the characteristics, duration, costs and limits of the cover, as well as any financial risks connected to the underwriting of the contract and any other element useful to provide complete and correct information. A duty of advice is also provided and enhances transparency as well. Japan’s Insurance Act promotes transparency in a way that it helps the consumer make the most appropriate self-decision in entering into insurance-contract. Consequently, the consumer takes self-responsibility for making insurance-contract. Moreover, it is important that the structure of the insurance policy makes it easier for consumers to understand the insurance product and to find a necessary item; hence, it is necessary to promote the transparency of the exemption clause in the insurance policy. In Russia, transparency in insurance is statutorily regulated and imposed as a duty via different laws. In Poland, transparency as per the Polish law denotes a dual obligation, i.e., the promotion of the functioning of insurance as an industry that relies on a good faith rule, as well as a principle of providing information. The Polish legislator provided for principles of making the rule of transparency effective. Although transparency is important, it should not operate without limitations. Hence, the supervisory authorities should not regulate on transparency “at all costs”. In Portugal, the Portuguese Insurance Contract Act of 2008 (‘PICA’) places importance in transparency, as information plays a very important role within PICA, and transparency is generally regarded as a key value in pre-contractual negotiations, thereby referring to the plainness and intelligibility of contract terms. It also serves the purpose of making accessible to insurance customers all the data that they need to take in and process, to make an informed decision for an insurance product “fit for purpose”. In the Netherlands, the scope of the application of the principle of transparency has increased and its consequences became more significant. The Dutch law contains no rule on the principle of transparency. However, the general contract rules on interpretation apply and have been functioning well. Transparency is important but it is noted that it has to be within boarders so as not to harm the insured. In Turkey, the law promotes transparency, whilst noting as a yardstick the fact that the insurance activity is an activity that is under legal protection. The government’s sectoral supervision, on the one hand, and the mandatory provisions of the more than 70% of the Sixth Book of the Turkish Commercial Code on the other,

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aimed at protecting every beneficiary of the insurance without discriminating between consumer and merchant, denote at first glance that transparency may not be that needed as the protection and benefit it offers already exist in the Turkish law. However, it is not agreeable that the consumers are on such a basis deprived of their right to seek transparency. In the laws of the Western Balkan countries, transparency is regulated via many laws, such as the Law of Obligations or via the Serbian Civil Code where the general principle of good faith is pertinent and promotes the use of transparency. It is stated that good faith as a principle, together with the rules on liability for failing to notify the assured, could be used as ways of establishing the necessary transparency requirements for the insurer under the general law of obligations and at the same time establish a general contra proferentem rule.

4 Conclusions Transparency plays an important role in insurance contract law because of the complexity of the product of insurance per se, i.e., by definition, and also because of the complex legal framework regulating insurance in the various legal systems, which in turn imposes a need for transparency to enhance clarity. In the Netherlands, the scope of the application of the principle of transparency increased and inferred a duty to observe transparency. Despite the Dutch insurance contract law lacking a provision on the principle of transparency, the general contract rules on interpretation, unfair contract terms, as well as the duty to act in good faith, have been efficiently filling this gap. Therefore, there is only some discussion in the Dutch scholarship as to the particularities of the consequences of providing the insured with non-transparent contract terms. The sanctions for the lack of transparency differ between unclear and ambiguous terms, and in the former case, if found unfair, may be removed from the insurance contract. In Sweden, the duty to observe transparency in insurance derives from the nature of insurance as a complex product and from the need of customers to have knowledge about the products to make the best choice. The diversity of insurance terms available in the market can be judged, from a transparency perspective, as problematic as non-standardization of the insurance contracts terms may lead to ambiguity in interpretation made ground for a common knowledge, both among people working in the insurance industry and among the customers. The Swedish legislation asks for information of higher quality, for better documented advising situations, and for a standardization of terms and language, and all this promotes transparency. In Turkey, the Turkish Commercial Code has made a general specification instead of counting the points that need to be included in the content of the policy. Any amendments must be in favor of the policyholder, insured, and beneficiary and he needs to be informed. The Article 1423 of the Turkish Commercial Code and the general duty of good faith dictate a duty for the insurer to inform.

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In the Western Balkans, transparency is routed as per the need for good faith for all the contracting parties. Transparency is also dictated by the rule on liability for failing to notify, as per the general law of obligations and a general contra proferentem rule. Until now, the jurisprudence is reluctant in applying the above requirements and principles. However, as the Law of Obligations is designed in such a way to protect the weaker party in general, the end result can be the same. In Croatia contractual insurance law, transparency is achieved statutorily through the Civil Obligations Act, the Insurance Act, and the Consumer Protection Act. It is suggested that in the Civil Obligations Act, there is a legal gap in imposing the duty to inform and therefore, perhaps, de lege ferenda, the insurer’s obligation to provide certain additional information (or even advice) regarding the terms of insurance to the policyholder or insured person should be regulated. However, the Insurance Act stipulates, inter alia, the information that the insurer has the duty to provide to the policyholder before the conclusion of the insurance contract. It is noted that the law imposes a burden of vast information provision that is not always positive in the eye of the non-expert consumer. Hence, the described overload of information can also lead to the negation of transparency in the insurance contract. In Austria, transparency in insurance contract law is understood in a broad sense. The Insurance Contract Act also plays an important role and the customer is obliged to make special disclosures before the conclusion and during the existence of an insurance, which shall prevent the insurer from taking incalculable risks. The insurer needs to observe transparency and provide all relevant information and advice, i.e., the obligation to observe transparency is an increased one, both with regard to the content of the insurance contract and its representation. With this framework, the legislator tries to ensure the necessary transparency in insurance contract law, and in this way, reaffirms that the focus is clearly on the protection of the policyholder. In the German law, transparency in insurance gains even more as insurance contracts and insurance business subsist on legal certainty and transparency. Transparency is observed via the existence of the pre-contractual duties of the insurer and of intermediaries to provide information and to advise. Regarding transparency after the conclusion of the contract and during the contractual period, the law sets the duties of the insurer to inform about the content of the contract and about specific provisions of the contract law, and there is also a duty of the insurer to advise if there is a discernible need. In Greek law, transparency is not only a regulatory obligation, but also a statutory duty owed to policyholders. Disclosure and transparency provisions establish statutory duties for insurers and intermediaries. In terms of contract construction, courts rigorously apply the contra proferentem principle and the doctrine of fairness of contract terms. Transparency is destined to counter-balance asymmetries of information. Therefore, market confidence and transparency are essential pre-requisites for the existence of the market, as transparency and disclosure of information enhances market confidence. Hence, it is apparent that disclosure and transparency provisions establish statutory duties for insurers and intermediaries. However, it remains an issue of legal interpretation whether breach of such statutory duties entitles policyholders to a legal action for damages, or not, which in any case may

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not always be an adequate remedy to policyholders. Overall, it is submitted that enhanced transparency is likely to lead to less litigation. In Israel, various provisions were legislated by the Israeli legislator, the courts, and the regulator—the Commissioner of Insurance—imposing duties of disclosure in the various stages of the insurance transaction, both in the pre-contractual stage, during the policy period, and especially after the occurrence of the insured event. In Italy, there is a special duty of information and of advice for insurers and intermediaries. A duty of advice is also provided and enhances transparency as well. Because of information asymmetry to the disadvantage of the consumer, a special duty of information and of advice is placed on the insurer. Such a duty is closely linked to the discipline of unfairness of contractual content in consumer contracts. Lack of transparency equates contractual injustice. It is argued that even the use of unfair commercial practices, of practices that are capable of distorting customer behavior can be identified as flaws of the law to observe and protect transparency. All the special rules contained in the Insurance Code and in Consumers Code should not be separate with respect to the rule of good faith both in the contractual phase and in the pre-contractual phase. The insurance contract, even if it is particular and characterized by strong technicality, must be framed in the general principles of contract law in general. The Italian civil courts in deciding on transparency move within the general framework set by the rules of the civil code and, in particular, the principle of good faith and the contra proferentem rule, hence the need for the Italian legislature to better frame the obligation to observe transparency. In Japan, the Insurance Act promotes transparency in a way that it helps the consumer make the most appropriate self-decision in entering into insurancecontract. Transparency as a notion gains advantage in the field of Insurance Contract and Regulation in Japan. As insurance contracts are adhesion contracts, the need to observe transparency becomes even more important but the jurisprudence so far (Supreme Court) has not placed a duty for the insurer to provide information on the material points of inspection to the consumers. Lower courts jurisprudence sometimes admits this duty and sometimes not, on a case-by-case basis. Finally, the Insurance Business Act imposes a duty to inform. Therefore, transparency can be ensured in a process of making insurance contracts. In Poland, transparency denotes a dual obligation, i.e., the promotion of the functioning of insurance as an industry that relies on a good faith rule, as well as a principle of providing information. In Portugal, transparency is generally regarded as a key value in pre-contractual negotiations, thereby referring to the plainness and intelligibility of contract terms. It also serves the purpose of making accessible to insurance customers all the data that they need to take in and process, to make an informed decision for an insurance product “fit for purpose”. In conclusion, two points should be addressed. First, the realization that the notion of transparency is of pivotal importance in insurance in all the examined jurisdictions. Secondly, although of pivotal importance, transparency is sparsely regulated directly in insurance law. However, an implied duty derives, not least from the need to protect the assured. The jurisprudence and legislature are moving

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nowadays towards a broader establishment of a duty to observe transparency in insurance law. Steps to broaden the notion of transparency would be highly beneficial and all continental law countries have to at different extents legislate to promote good faith, and hence also transparency. The fragmentation in the level of enacted legislation to safeguard transparency should not hinder further efforts to ameliorate its level of existence in the insurance contract law. At the same time, a balance needs to be sought so that transparency does not happen at all costs and result in actually acting to the detriment of the parties.

Part III

Common Law

Transparency in the Insurance Contract Law of Australia Robin Bowley

1 Introduction This chapter examines the extent to which transparency is achieved in the Australian insurance contract law. It focuses on the contractual relationship insurance between insurers and insured clients as set out in the Insurance Contracts Act 1984 (Cth) (the ICA). The analysis in both parts is structured under the four “quadrants” of the duty of utmost good faith1—the first quadrant being the insured’s pre-contractual obligations; the second being the insurer’s pre-contractual obligations; the third being the insured’s post-contractual obligations after the inception of the policy and the fourth being the insurer’s post-contractual obligations. Whilst ‘transparency’ is not directly used in the legislation governing insurance in Australia, the term appears in other Australian legislation dealing with unfair terms in consumer and small business contracts. Nevertheless, this chapter shows that the meanings commonly attributed to the term, including frank, open, candid; easily seen through, recognised, understood or detected; and manifest, evident, obvious, clear2 are key underlying themes throughout both the ICA and the related case law, and in the regulation of insurers and intermediaries. For this reason, this chapter examines transparency in a wide sense to refer not only to the clarity and to comprehensibility of terms within insurance contracts, but also to the frankness,

1 2

These ‘four quadrants’ of utmost good faith were first conceptualised by Mann (2016b), p. 176. Gwynn and Laugesen (2017) and Macquarie Dictionary (2017).

R. Bowley (*) University of Technology Sydney, NSW, Australia e-mail: [email protected] © Springer Nature Switzerland AG 2019 P. Marano, K. Noussia (eds.), Transparency in Insurance Contract Law, AIDA Europe Research Series on Insurance Law and Regulation 2, https://doi.org/10.1007/978-3-030-31198-8_23

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openness and candour in the conduct between insurers, insureds and intermediaries throughout the life cycle of insurance contracts.3

2 An Overview of the Insurance Contracts Act 1984 (Cth) Since 1 January 1986, most classes of insurance contracts in Australia have been regulated under the ICA. The exceptions to the application of the ICA include contracts of marine insurance,4 insurance that is required under state or territory legislation (including workers compensation and compulsory third party insurance for motor vehicles), private health insurance5 and reinsurance. The ICA was introduced following the recommendations of a wide-ranging review by the Australian Law Reform Commission (ALRC) between 1976 and 1982. In its Report No. 20 ‘Insurance Contracts’ (ALRC 20), the ALRC noted with concern the imbalance between insurers and insureds, as well as the tendency of insurers to rely upon minor and technical breaches of policy wordings to refuse claims. The federal government adopted the recommendations in the ALRC 20 report to introduce legislation to remedy these concerns. The Explanatory Memorandum to the Insurance Contracts Bill 1984 (Cth) that introduced the ICA reflected notions of transparency (which are italicised below) when explaining that the main purposes of the Bill were to: ‘. . . improve the flow of information from the insurer to the insured so that the insured can make an informed choice as to the contract of insurance he enters into and is fully aware of the terms and limitations of the policy; and to provide a uniform and fair set of rules to govern the relationship between the insurer and the insured’.6 As discussed below, the ICA regulates the relationship between insurers and insureds throughout the life cycle of a contract of insurance, with its provisions governing pre-contractual disclosure, the ability of insurers to refuse (or limit their liability) when determining claims, and the circumstances under which insurers may cancel contracts. One of the most significant provisions of the ICA is Sec. 13, which imposes duties of utmost good faith on each party to an insurance contract governed by the ICA. Furthermore, Sec. 14 of the ICA prevents parties to a contract of insurance from relying on a provision of the contract except in the utmost good faith. Because of its generality, the meaning of utmost good faith is challenging to define conclusively, 3 This chapter is necessarily selective in the cases it discusses. For a more comprehensive examination of the principles of Australian insurance law, the leading texts include Enright and Merkin (2015), Pynt (2017) and Mann (2016a). 4 The Marine Insurance Act 1909 (Cth) (MIA) governs contracts of marine insurance in Australia. Because of the small size of the Australian marine insurance market, there have been far fewer cases on the MIA in comparison to those on the ICA. For an overview of the law of marine insurance in Australia, see Enright and Merkin (2015), pp. 705–842. 5 The Private Health Insurance Act 2007 (Cth) governs private health insurance. 6 Explanatory Memorandum, Insurance Contracts Bill 1984 (Cth), 1.

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and as the considerable number of academic commentaries have acknowledged,7 the application of the duty will depend on the circumstances of each case. As the authors of the leading text Sutton on Insurance Law have noted, the wide concept of utmost good faith has been held to encompass notions of fairness, reasonableness and community standards of decency and fair dealing; and also to require both parties to an insurance contract to have due regard to the interests of the other party.8 As noted in the introduction, whilst the term ‘transparency’ is not directly used in the ICA (or in Chapter 7 of the Corporations Act 2001 (Cth) (the Corporations Act), which, as Sect. 2 of this Chapter explains, regulates financial services including insurance), the term appears in other Australian legislation dealing with unfair contract terms. The Australian Securities and Investments Commission Act 2001 (the ASIC Act) (which is examined in Sect. 2 of this chapter) incorporates consumer protection provisions in relation to financial services. Subdivision BA of the ASIC Act deals with unfair contract terms in consumer and small business contracts. Section 12BG of the ASIC Act explains that when determining if a term in a consumer or small business contract is unfair, one of the factors the court must consider is whether the term is ‘transparent’. Whilst the term is not defined, Sec. 12BG(3) of the ASIC Act explains that a term is ‘transparent’ if it is expressed in reasonably plain language, legible, presented clearly and is readily available to the party affected by the unfair term. If a term in a consumer or small business contract is found to be unfair, the term will be void.9 However, as Sec. 15 of the ICA provides that relief under other legislation does not apply to contracts of insurance governed by the ICA, the unfair contract term provisions do not apply to contracts of insurance. Whilst a 2013 reform bill proposed the incorporation of unfair contract terms provisions into the ICA,10 leading to mixed reactions from commentators,11 these proposals were not incorporated into the Insurance Contracts Amendment Act 2013 (the ICAA), which was passed by the Senate on 20 June 2013 and given royal assent on 28 June 2013.

7

See for example Hawke (1994), p. 91; Godfrey (2002), p. 1; Nattrass (2012), p. 299; McGivern (2013), p. 159. 8 Enright and Merkin (2015), pp. 471–476. 9 Australian Securities and Investments Commission Act 2001 (Cth) Sec. 12BF(1). 10 The Insurance Contracts Amendment (Unfair Terms) Bill 2013 (Cth) proposed to incorporate a mirror provision to Sec. 12BG of the ASIC Act into a new Sec. 15B of the ICA; however, this proposal was not adopted. For commentary see Mann and Drummond (2017), p. 10. 11 See for example Merkin (2012), p. 272; Nattrass (2012), p. 299.

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3 The Pre-contractual Phase: Obligations of the Insured and the Insurer Part IV of the ICA regulates pre-contractual disclosure. Before an insurance contract is entered into, the ICA requires the insured to disclose (and not to misrepresent) information which they know or ought reasonably to know to be relevant to the risk to be transferred—and provides the insurer with remedies if these obligations are not fulfilled. Specific disclosure requirements apply to consumer forms of insurance. As well as imposing pre-contractual disclosure obligations on the insured, the ICA also imposes several obligations on the insurer. These include clearly informing the insured of the duty of disclosure, notifying the insured of unusual terms, and of derogation from the “standard cover” regime (which applies to consumer forms of insurance). Between 2003 and 2004, a wide-ranging review of the adequacy of the ICA was undertaken by leading insurance lawyer Nancy Milne and former ASIC Chairman Alan Cameron (the Milne-Cameron Review). As the sections below explain, the Milne-Cameron Review made a number of recommendations for improving the operation of the ICA to ensure that it reflected contemporary market developments and achieved an appropriate balance between the interests of insurers and insureds. However, the recommendations of the Milne-Cameron Review were not enacted until the passing of the ICAA in 2013, which introduced several changes to the ICA applying to contracts of insurance entered into after 28 December 2015 (30 months after the date of royal assent to the ICAA),12 examples of which are discussed below. The Explanatory Memorandum to the Insurance Contracts Amendment Bill 2013 (Cth) reflected notions of transparency when explaining the objective of these reforms was to: ‘. . . ensure that the duty of disclosure requirements in the ICA strike an appropriate balance between, on one hand, ensuring insurers have reliable information to assess and price risk and, on the other hand, the need to avoid placing unfair burdens on insureds in respect of the remedies available against them for non-disclosure’.13 (Emphasis added) As discussed below, the need for insurers to have reliable information to assess and price risk has been a consistent theme in the cases that have applied the provisions of Part IV of the ICA dealing with pre-contractual disclosure.

12

For an overview of the reforms introduced through the ICAA 2013, see Box and Webster (2013), p. 114; Tarr (2015b), p. 68. 13 Insurance Contracts Amendment Bill 2013 (Cth), [2.52]; See also Tarr (2015a), p. 110.

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The First Quadrant of Utmost Good Faith: The Insured’s Pre-contractual Duty of Disclosure

Section 21 of the ICA sets out the disclosure obligations of an insured before entering into a contract of insurance. It provides: ‘(1) Subject to this Act, an insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that: (a) the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or (b) a reasonable person in the circumstances could be expected to know to be a matter so relevant, having regard to factors including, but not limited to: (i) the nature and extent of the insurance cover to be provided under the relevant contract of insurance; and (ii) the class of persons who would ordinarily be expected to apply for insurance cover of that kind’.

The two numbered provisions in Sec. 21(1)(b) were added by the ICAA in response to the recommendations of the Milne-Cameron Review to provide greater clarity to the operation of the objective knowledge limb. Section 21(2) of the ICA lists four exceptions to the duty of disclosure, which include matters that diminish the risk; that is of common knowledge; that the insurer knows or ought to know in the ordinary course of its business; and matters in respect of which the insurer has waived compliance with the duty of disclosure. The High Court of Australia (HCA) has held that each policy and renewal is a separate contract attracting a fresh duty of disclosure.14 Along similar lines, Sec. 26 of the ICA provides that the insured must not misrepresent information that they know, or which a reasonable person in their circumstances could be expected to know, to be relevant to the risk to be transferred. In cases where the insured fails to disclose, or misrepresents, information that is relevant to the risk to be transferred, as discussed below the ICA provides the insurer with remedies, which differ for contracts of general and life insurance.15 It has also been held that the duty of utmost good faith under Sec. 13 of the ICA does not place a higher duty on the insured than the pre-contractual disclosure obligations under Part IV of the ICA.16

14

CE Heath Underwriting and Insurance (Aust) Pty Ltd v. Edwards Dunlop & Co Ltd (1993) 176 CLR 535; (1993) 7 ANZ Ins Cas 61-165; [1993] HCA 21. 15 For the definition of a ‘contract of life insurance’, see Sec. 9 of the Life Insurance Act 1995 (Cth). 16 CIC Insurance Ltd v. Barwon Region Water Authority (1998) ANZ Ins Cas 61-425; [1998] VSCA 77 at [40]. For commentary see Mann (2016a), p. 83.

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General Insurance

For contracts of general insurance, in cases where the insured’s failure to disclose, or misrepresentation of relevant information is made fraudulently, under Sec. 28(2) the insurer may avoid the contract. If the insured’s failure to disclose, or misrepresentation of relevant information is not made fraudulently, under Sec. 28(3) the insurer may not avoid the contract—but may reduce its liability to the amount that would place the insurer in a position it would have been in had the non-disclosure or misrepresentation not occurred. Additionally, Sec. 60 of the ICA sets out the circumstances in which an insurer may cancel a contract of general insurance. These circumstances include the failure of the insured to comply with the duty of utmost good faith or the duty of disclosure; where the insured fails to pay policy premiums; and where an insured makes a fraudulent claim.17 The following cases illustrate the application of these remedies. In the leading HCA decision of Permanent Trustee Australia Ltd v. FAI General Insurance,18 the majority of the court held that an insured’s “shopping around” for alternative professional indemnity (PI) cover did not constitute ‘relevant’ information that would require disclosure under Sec. 21(1)(a). In consultation with its broker, Permanent Trustee Australia (Permanent) had decided not to approach one of its existing insurers (FAI) to participate in the renewal of its PI insurance if satisfactory quotes were obtained from other insurers. Permanent subsequently accepted a 30-day discounted extension from FAI to its insurance policy. During the period of this 30-day extension, Permanent notified its insurers (including FAI) of circumstances likely to give rise to a claim. FAI refused to indemnify Permanent based on its failure to disclose its intention not to renew its insurance with FAI. In finding for Permanent, the majority emphasised that Sec. 21 focused on matters that were relevant to the insurer’s decision to accept the risk being transferred, rather than on commercial or emotive considerations. As McHugh, Kirby and Callinan JJ put it: Insurers do business in a commercially competitive world. They must know that any rational insured would look for three particular qualities in its insurer: capacity to meet a claim; diligence and expedition in its dealings with it; and, the amount and competitiveness of the premium . . . Insurers have no right to, and cannot credibly be believed to have any right to the perpetual or unchanging goodwill, and therefore custom, of each and all of its insureds.19

Fourteen years earlier, in Advance (NSW) Insurance v. Matthews,20 the HCA had upheld an insurer’s refusal of a fire damage claim under a home insurance policy based on the insured’s breach of Sec. 21(1)(b). When completing an application for a

17

Section 56 of the ICA deals with fraudulent claims and is discussed in Sect. 4.1 below. Permanent Trustee Australia Ltd v. FAI General Insurance (2003) 214 CLR 514; 12 ANZ Ins Cas 61-565 [2003] HCA 25. 19 Permanent Trustee Australia Ltd v. FAI General Insurance (2003) 214 CLR 514; 12 ANZ Ins Cas 61-565; [2003] HCA 25 at [35]. 20 Advance (NSW) Insurance v. Matthews (1989) 166 CLR 606; 5 ANZ Ins Cas 60-910; [1989] HCA 22. 18

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home and contents insurance policy, Mr and Mrs Matthews had answered “no” to the questions ‘Have you ever had any claim rejected?’ and ‘Are there any other facts relating to the risks to be insured or the persons making this application which should be disclosed to enable a true assessment of the application to be made before acceptance?’ However, Mr Matthews had previously had a claim for fire damage at one of his business properties rejected several years earlier. After examining the definition of ‘the insured’ in the policy, the HCA concluded that Mr Matthews’ fraudulent non-disclosure also extended to Mrs Matthews, and upheld the insurer’s avoidance of the contract under Sec. 28(2). The objective knowledge limb of Sec. 21(1)(b) was also held to have been breached in GIO General Ltd v. Wallace.21 In that case, a homeowner failed to disclose both the increased use of his property for purposes connected with his tree surgeon business, and threats and property damage he experienced due to disputes with neighbours and employees of his business. The New South Wales Court of Appeal (NSWCA) found his failure to disclose such information enabled the insurer to reduce its liability under Sec. 28(3) when a deliberately lit fire damaged his home. Along similar lines, in Lindsay v. CIC Insurance,22 Rogers CJ Comm D had previously held that the undisclosed use of a suburban office complex as a brothel constituted information that a reasonable person could expect to know was relevant under Sec. 21(1)(b) of the ICA—and which justified the insurer’s reduction of its liability to nil under Sec. 28(3) when the office complex was damaged by fire. More recently, in Prepaid Insurance v. Atradius (No 2),23 McDougall J considered the effect of incorrect statements made by the commercial manager of a telecommunications provider in an application for a trade credit insurance policy. The commercial manager had provided incorrect responses to questions relating to the repayment practices of a major customer (which subsequently became insolvent), which constituted non-disclosures under Sec. 21 and misrepresentation under Sec. 26, respectively. In an earlier 2012 decision, McDougall J had held that the commercial manager’s ‘reckless indifference’ to the truth of his responses amounted to fraudulent misrepresentation and non-disclosure, thereby entitling the insurer to avoid the policy under Sec. 28(2).24 However, the NSWCA over-turned this reasoning, holding that a fraudulent misrepresentation required the absence of an honest belief in the truth of the representation,25 and remitted the matter back for re-determination. In the 2014 decision, McDougall J nevertheless found that Sec. 28(3) was engaged because of the commercial manager’s incorrect statements. In concluding that ‘if truthful and complete answers had been given in respect of the

21

GIO General Ltd v. Wallace (2001) 11 ANZ Ins Cas 61-506; [2001] NSWCA 299. Lindsay v. CIC Insurance (1989) 16 NSWLR 673; 5 ANZ Ins Cas 60-913. 23 Prepaid Insurance v. Atradius (No 2) [2014] NSWSC 21. 24 Prepaid Services Pty Ltd & Ors v. Atradius Trade Credit Insurance NV (2012) 17 ANZ Ins Cas 61-937; [2012] NSWSC 608. 25 Prepaid Services Pty Ltd & Ors v. Atradius Trade Credit Insurance NV (2013) 17 ANZ Ins Cas 61-981; [2013] NSWCA 252. 22

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payment plans, Atradius would not have issued the policy’, His Honour held that the insurer could reduce its liability to nil.26

3.1.2

Life Insurance

For cases of non-disclosure or misrepresentations of relevant information in contracts of life insurance, Sec. 29 of the ICA provides insurers with similar remedies to those applicable to general insurance, with some key differences. For fraudulent non-disclosure and misrepresentation, Sec. 29(2) enables the insurer to avoid the contract. For non-disclosure and misrepresentations, which are not fraudulent, Sec. 29(3) enables the insurer to avoid the contract within 3 years of entering it. Lastly, the ICAA introduced an additional new remedy for insurers under Sec. 29(4) to vary the sum insured under the policy to more accurately reflect the premiums that would have been payable had an insured complied with the duty of disclosure or not made a misrepresentation for contracts of life insurance entered into after 28 December 2015. The cases reviewed below illustrate how these provisions provide fair and workable mechanisms for achieving a properly informed transfer of risk in the life insurance context. In Schaffer v. Royal & Sun Alliance Life Assurance Aust Ltd,27 the insured had misrepresented the results of previous medical tests for breathlessness when applying for a life insurance policy. The insurer therefore proceeded to cancel the contract under Sec. 29(3) of the ICA. However, evidence from the insurer’s underwriters did not conclusively establish that the insurer would not have entered into any contract of life insurance with her—instead the underwriters’ evidence indicated they would have required further testing before deciding whether to issue the policy, and if so on what terms. However, in the later decision of Davis v. Westpac Life Insurance,28 it was held that Sec. 29(3) was satisfied where the life insured had failed to disclose a sleep apnoea condition. Evidence from the underwriters conclusively established that the insurer would not have issued the policy on any terms had it been made aware of the insured’s condition. The test for fraudulent non-disclosure under Sec. 29(2) was clarified in NRG Victory Australia v. Hudson.29 In that case, the life insured Mr Hudson had experienced severe dermatitis from exposure to epoxy-based products in his previous occupation as a spray painter. This caused him to cease this work and seek alternative employment, eventually gaining a role as a forklift driver. In an application for an insurance policy 3 years after leaving his spray-painting job, he answered a question about current medical conditions in the negative. When he subsequently

26

Prepaid Insurance v. Atradius (No 2) [2014] NSWSC 21 at [133]. Schaffer v. Royal & Sun Alliance Life Assurance Aust Ltd (2003) 12 ANZ Ins Cas 90-116; [2003] QCA 182. 28 Davis v. Westpac Life Insurance (2008) 15 ANZ Ins Cas 80-132; [2007] NSWCA 175. 29 NRG Victory Australia v. Hudson (2003) 13 ANZ Ins Cas 90-121; [2003] WASCA 291. 27

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developed a serious rash, the insurer declined his claim based on fraudulent non-disclosure. However, the Western Australian Court of Appeal rejected the insurer’s denial of Mr Hudson’s claim. After accepting Mr Hudson’s evidence that he believed he had recovered from the skin condition, the court held that the relevant standard of knowledge standard was that of an ordinary worker in Mr Hudson’s position, rather than the standard of knowledge to be expected from a doctor with an expert knowledge of skin diseases. More recently in Hitchens v. Zurich Australia Ltd,30 the insured, a Mr Hitchens, had fraudulently misrepresented his recent medical history when applying for an income protection policy. He had provided false answers to questions about his attendance at numerous medical centres to obtain prescription medication, and to questions about the extent of his medical conditions. He had also failed to answer several questions on the policy application form. In upholding Zurich’s avoidance of the policy, White J dismissed Mr Hitchens’ contention that by not following up on these incomplete responses the insurer had waived the duty of disclosure, reasoning that that ‘on any view, an underwriter is not expected to be a detective’.31

3.1.3

Consumer Forms of Insurance: Standard Cover and Disclosure Requirements

An innovative recommendation from the ALRC 20 report, which lead to the adoption of the ICA, was the introduction of ‘standard cover’ for consumer forms of insurance. The standard cover regime applies to motor vehicle, home building, home contents, sickness and accident, consumer credit and travel insurance, which are prescribed as ‘eligible contracts of insurance’ in the Insurance Contracts Regulations 2017 (the IC Regulations). One leading commentator has explained that ‘Standard cover was designed to address the difficulties encountered by insureds which existed due to the expertise of insurers in drafting policies and carefully defining risks and the inexperience and inability of the vast majority of insureds to understand the policy and its precise legal effect. In broad terms, standard cover achieves this by matching the community’s understanding of fundamental risks with the minimum cover required by the policy’.32 The IC Regulations set out ‘prescribed events’ that will be covered; exclusions that will not be covered; and minimum amounts that such ‘eligible contracts of insurance’ will cover. As Sect. 3.2 below explains, Sec. 35(2) of the ICA requires the insurer to ‘clearly inform the insured in writing’ of any derogation from standard cover in ‘eligible contracts of insurance’. For ‘eligible contracts of insurance’, the insured’s pre-contractual disclosure obligations are covered in Sec. 21A—which in contrast to Sec. 21, requires the insurer to ask more specific questions in applications for insurance. For example, in

30

Hitchens v. Zurich Australia Ltd (2015) 18 ANZ Ins Cas 62-076 [2015] NSWSC 825. Hitchens v. Zurich Australia Ltd (2015) 18 ANZ Ins Cas 62-076; [2015] NSWSC 825 at [178]. 32 Traves (2012), p. 4. 31

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Michail v. Australian Alliance Insurance Co Ltd,33 Dorney DCJ held that the insurer was justified in reducing its liability to nil under Sec. 28(3) in respect of damage to the insured’s Aston Martin convertible. His Honour held that the insured had failed to disclose the previous suspension of his driver’s licence and his accumulation of traffic infringements, which he held were ‘known’ by the insured within the meaning of Sec. 21A(6). The insured’s appeal to the Queensland Court of Appeal was dismissed.34 The ICAA introduced amendments to Sec. 21A to prevent insurers from asking “catch-all” questions in applications for eligible contracts of insurance, and also introduced a new Sec. 21B to govern an insured’s disclosure requirements when renewing an eligible contract of insurance. Whilst Sections 28(2) and 29(2) of the ICA enable insurers to avoid the contract where the insured has either fraudulently misrepresented, or fraudulently failed to disclose relevant information, Sec. 31(1) of the ICA provides the court with a discretionary power to disregard such avoidance of by the insurer. However, under Sec. 31(2) the court may only exercise this power if it considers the insurer has not been prejudiced by the insured’s non-disclosure or misrepresentation, or where it considers any such prejudice to be minimal or insignificant. In exercising the Sec. 31 (1) discretion, Sec. 31(3) requires the court to be mindful of the need to deter fraudulent conduct. Two cases illustrate the application of Sec. 31. Firstly, in Von Braun v. Australian Associated Motor Insurers,35 the insured had misrepresented the agreed value of his motor vehicle with his previous insurer as $65,000—whereas it had actually been $60,000. When the vehicle was stolen, the insurer avoided the contract under Sec. 28 (2) of the ICA based on this fraudulent misrepresentation. However, in the Supreme Court of the Australian Capital Territory, Higgins J exercised the Sec. 31 power to adjust the agreed value of the motor vehicle down to $56,000. By contrast, in the earlier decision of Burns v. MMI-CMI Insurance Ltd,36 the insured had only disclosed one previous burglary in an insurance application— whereas there had actually been around 30–40 previous burglaries. In the Supreme Court of Victoria, Beach J refused to exercise the Sec. 31 power, reasoning that no amount of premium could have induced the insurer to enter into a contract of insurance if full disclosure had been made.

33

Michail v. Australian Alliance Insurance Co Ltd [2013] QDC 284. Michail v. Australian Alliance Insurance Co Ltd [2014] QCA 138. For commentary, see Tarr (2015a), pp. 109, 114. 35 Von Braun v. Australian Associated Motor Insurers (1998) 10 ANZ Ins Cas 61-419; [1998] ACTSC 122. 36 Burns v. MMI-CMI Insurance Ltd (1994) 8 ANZ Ins Cas 61-287. 34

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559

The Second Quadrant of Utmost Good Faith: The Insurer’s Pre-contractual Obligations

As Traves has comprehensively discussed,37 the ICA includes a number of provisions requiring the insurer to notify the insured of both their obligations and of the scope of cover under policies before accepting an application for insurance.38 Firstly, before entering into a contract of insurance, Sec. 22 requires the insurer must clearly inform the insured in writing of the general nature and effect of the duty of disclosure, which, as Sect. 3.1 above noted, is contained in Sec. 21, and for eligible contracts of insurance, in Sec. 21A. The IC Regulations prescribe the forms of writing that must be used to inform the insured of the duty of disclosure for general, life and eligible contracts of insurance. If the insurer fails to comply with Sec. 22, it may not exercise any remedies for non-disclosure unless the insured’s failure to disclose was fraudulent. In Suncorp General Insurance Ltd v. Cheihk,39 the insurer had declined the insured’s claim for the agreed value of his Porsche when it was stolen, based on his failure to disclose previous convictions for driving whilst disqualified and the cancellation of his drivers’ licence in the renewal of his policy. However, the NSWCA dismissed the insurer’s appeal against an earlier NSW District Court finding that was favourable to Mr Cheihk. Whilst noting that Suncorp’s renewal notice included one mention of the duty of disclosure, the NSWCA held that Sec. 22 had not been complied with, as the notification was included on the reverse side of the Certificate of Insurance without drawing the insured’s attention to it. As Stein JA summarised: ‘Hidden away, and un-highlighted in any fashion, is a sentence which make reference to the duty of disclosure’.40 Because of its failure to comply with Sec. 22, Suncorp was unable to avoid its liability to indemnify Mr Cheihk for his loss under Sec. 28. Secondly, for contracts of insurance that are not prescribed as ‘eligible contracts of insurance’, Sec. 37 requires insurers to clearly notify insureds of ‘unusual terms’. Insurers are prevented from relying on ‘unusual terms’ unless they have clearly informed the insured in writing before the insurance contract was entered into. Whilst the ICA does not define ‘unusual terms’, examples of policy terms that have been held to have been ‘unusual’ include an insurer’s interpretation of ‘delivered’ within a trade credit insurance policy (although in that unusual case the insurer

37

Traves (2012), p. 1. However, Sec. 71 of the ICA provides that provisions of the ICA that require notices, statements, documents or other information to be provided before the contract is entered into will not apply in cases where the insurance is arranged by a broker. 39 Suncorp General Insurance Ltd v. Cheihk (1999) 10 ANZ Ins Cas 61-442; [1999] NSWCA 238. 40 Suncorp General Insurance Ltd v. Cheihk (1999) 10 ANZ Ins Cas 61-442; [1999] NSWCA 238 at [13]. 38

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had become insolvent by the time the insured brought legal proceedings),41 and a ‘burning cost adjustment’ clause within a transport fleet policy.42 Thirdly, for ‘eligible contracts of insurance,’ Sec. 35 requires insurers to clearly inform the insured in writing of any derogation to the standard cover set out in the IC Regulations. An example of where this requirement was not satisfied was seen in Lockwood & Lockwood v. Insurance Australia Ltd.43 After the insured couple’s motor vehicle was seriously damaged when it was driven by their unlicensed 14-year-old son without their permission, the insurer declined their claim based on a widely drafted exclusion clause in their motor vehicle policy. Kourakis J held that the wide ambit of the exclusion clause would have the effect of rendering the cover for theft under the policy largely nugatory, and that the insurer’s wide discretion to refuse claims to be a substantial derogation from the purpose of the policy as it would have been understood by laypersons.44 By contrast, in the earlier case of Hams v CGU Insurance Ltd,45 Einstein J had held that CGU’s provision of two booklets containing the policy wording satisfied the requirements of Sec. 35(2) of the ICA to ‘clearly inform . . . in writing’ the owners of a large sheep station in North West NSW about a flood exclusion in their “rural pack” insurance policy. After considering competing expert hydrological evidence and the principles of proximate cause, His Honour held that the flood exclusion in the policy applied to discharge CGU from liability to indemnify Mr and Mrs Hams for significant damage to their sheep station following a flood that occurred in February 2000. Einstein J clarified the insurer’s obligations under Sec. 35(2) in the following terms: I certainly do not accept that as a general rule it would be incumbent upon an insurer to provide along with a document containing the provisions [of the policy], either a text on insurance law or an annotated Policy identifying and explaining either the general principles of insurance law or the principles dealing with the proper approach to the construction of Policy provisions. The fact is that the principles which underpin the law of insurance are often complex in the extreme and it could not be the case, as it seems to me, that a condition precedent to an insurer establishing that it had clearly informed the insured in writing of the relevant limitation, required the insurer to annotate the Policy by reference to principles of insurance law.46

41

Messagemate v (Aust) Pty Ltd v. National Credit Insurance (Brokers) Pty Ltd (2002) 85 SASR 303; (2003) 12 ANZ Ins Cas 61-546; [2002] SASC 327. Williams J held that whilst the specialist broker had arranged this policy, the broker could not be held liable for what His Honour characterised as FAI’s “absurd” construction of the term ‘delivered’ within the policy. 42 Suncorp Metway Insurance Limited v. Mason Place Pty Ltd [2011] QDC 209 at [11]. 43 Lockwood & Lockwood v. Insurance Australia Ltd (2010) 16 ANZ Ins Cas 61-843; [2010] SASC 140. 44 Traves (2012), pp. 7–8. 45 Hams v. CGU Insurance Ltd (2002) 12 ANZ Ins Cas 61-525 [2002] NSWSC 273. 46 Hams v. CGU Insurance Ltd (2002) 12 ANZ Ins Cas 61-525; [2002] NSWSC 273 at [244].

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Justice Einstein’s reasoning was followed in the similar flood damage case of Marsh v. CGU Insurance Ltd t/as Commercial Union Insurance,47 where Mildren J remarked that ‘Even though s 35 is plainly beneficial legislation, a fair reading of s 35(2) does not warrant the conclusion that the result need go further than provide for the relevant exclusion in the policy wording in clear and unambiguous language and in a manner which a person of average intelligence and education is likely to have little difficulty in finding and understanding if that person reads the policy in question’.48 However, in more recent years there have been changes to the insurer’s obligations to inform consumers about the coverage of their policies before insurance contracts are entered into. Following the devastating Queensland floods of 2011, the wide-ranging Natural Disaster Insurance Review (NDIR) undertook a comprehensive inquiry into Australia’s legal and institutional arrangements for dealing with flood risk. The NDIR found there was widespread misunderstanding amongst many Australian consumers about coverage for flood damage within home and contents policies,49 and also that a wide range of flood definitions were used in the Australian insurance market.50 A particular problem noted by the NDIR was the manner in which many consumers were informed about the coverage in their policies for flood damage as required by Sec. 35(2) of the ICA.51 After noting that the flood exclusion in Hams v. CGU52 was to be found on one page of the policy document that had exceeded 40 pages in length,53 the NDIR Report identified the pressing need for clearer notification to consumers about the inclusions and exclusions in respect of flood cover in home and contents policies. Following a consultation process by the Australian Treasury to improve the availability and transparency of flood insurance cover for Australian consumers,54 two key reforms were introduced into the ICA in 2012. The first of these reforms was the introduction of a standard definition of flood for eligible contracts of insurance.55

47

Marsh v. CGU Insurance Ltd t/as Commercial Union Insurance (2004) 13 ANZ Ins Cas 61-594; [2004] NTCA 1. 48 Marsh v. CGU Insurance Ltd t/as Commercial Union Insurance (2004) 13 ANZ Ins Cas 61-594; [2004] NTCA 1 at [11]. 49 Commonwealth of Australia, Inquiry into flood insurance and related matters: Final Report, September 2011, Natural Disaster Insurance Review, 98. 50 Commonwealth of Australia, Inquiry into flood insurance and related matters: Final Report, September 2011, Natural Disaster Insurance Review, 109. 51 See also Tarr (2001), p. 199; Traves (2012), p. 1. 52 Hams v. CGU Insurance Ltd (2002) 12 ANZ Ins Cas 61-525; [2002] NSWSC 273. 53 Commonwealth of Australia, Inquiry into flood insurance and related matters: Final Report, September 2011, 99. 54 Commonwealth of Australia Reforming flood insurance: A proposal to improve availability and transparency (November 2011), see https://archive.treasury.gov.au/documents/2221/PDF/transpar ency_november2011.pdf. 55 Insurance Contracts Act 1984 (Cth) Sec. 37B. The prescribed definition is set out in Reg 34 of the Insurance Contracts Regulations 2017 (Cth). See also Bell (2012), p. 312.

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The second reform was the introduction of Key Facts Sheets for prescribed eligible contracts of insurance—these being home buildings insurance contracts and home contents insurance contracts.56 Key Facts Sheets are required to provide a summary on two A4 sized pages of the cover and exclusions under the policy, as well as information about policy limits, excesses, legal liability, maximum level of cover and the contact details of the insurer.57 This information is required to be set out in the format prescribed in the IC Regulations.58

4 The Post-contractual Phase: Obligations of the Insured and the Insurer 4.1

The Third Quadrant of Utmost Good Faith: The Insured’s Post-contractual Obligations

The third quadrant of utmost good faith concerns the obligations of an insured once a policy comes into operation. Certain acts or omissions by insureds, for example the failure to notify changes to the risks covered by a policy, can mean a contract may not be operating on a fully informed basis. The most litigated of all the ICA provisions is Sec. 54, which places certain restrictions on the ability of insurers to refuse to pay claims once a contract of insurance comes into operation.59 In its review of the common law applied to insurance contracts, the ALRC 20 report observed that many insurance policies allowed insurers to refuse to pay claims, and in several cases to cancel policies, because of minor or technical breaches of policy requirements by insureds. The ALRC noted with concern that in many cases, breaches of policy requirements did not cause or contribute to losses claimed by insureds.60 The commission therefore recommended the adoption of a causal connection test between an insured’s breach of a policy requirement and the loss claimed, which if satisfied would allow insurers to refuse to pay claims. In cases where the causal connection test could not be satisfied, the ALRC 20 report recommended the adoption of a proportionality test enabling insurers to reduce their liability for a loss by reference to the extent to the prejudice resulting from an

56

Insurance Contracts Regulations 2017 (Cth) Reg 12. Insurance Contracts Act 1984 (Cth) ss 33A – 33D. 58 Insurance Contracts Regulations 2017 (Cth) Regs 12 – 13; Schedule 5. 59 In Entwells Pty Ltd v. National & General Insurance Co Ltd (1991) 6 ANZ Ins Cas 61-059 at 77,136, Ipp J held that ‘. . . s 54(1) does not limit or restrict the effect of s 13. It merely provides the extent of the remedy for the duty imposed by s 13’. For commentary, see Mann (2016a), pp. 63–64. 60 Australian Law Reform Commission, Insurance Contracts, Report No 20 (1982) [218] – [220]. 57

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insured’s breach of a policy requirement.61 These recommendations were incorporated into Sec. 54 in the following terms:

4.1.1

‘Insurer May Not Refuse to Pay Claims in Certain Circumstances

(1) Subject to this section, where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured or of some other person, being an act that occurred after the contract was entered into but not being an act in respect of which subsection (2) applies, the insurer may not refuse to pay the claim by reason only of that act but the insurer’s liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurer’s interests were prejudiced as a result of that act. (2) Subject to the succeeding provisions of this section, where the act could reasonably be regarded as being capable of causing or contributing to a loss in respect of which insurance cover is provided by the contract, the insurer may refuse to pay the claim. (3) Where the insured proves that no part of the loss that gave rise to the claim was caused by the act, the insurer may not refuse to pay the claim by reason only of the act. (4) Where the insured proves that some part of the loss that gave rise to the claim was not caused by the act, the insurer may not refuse to pay the claim, so far as it concerns that part of the loss, by reason only of the act. (5) Where: (a) the act was necessary to protect the safety of a person or to preserve property; or (b) it was not reasonably possible for the insured or other person not to do the act; the insurer may not refuse to pay the claim by reason only of the act. (6) A reference in this section to an act includes a reference to: (a) an omission; and (b) an act or omission that has the effect of altering the state or condition of the subject-matter of the contract or of allowing the state or condition of that subject-matter to alter.’ The causal connection test recommended in the ALRC 20 report appears in Sec. 54(2) and allows insurers to refuse to pay claims in cases where an insured’s act or omission causes or contributes to a loss in respect of which insurance cover is provided by the policy. For example, in Austcan Investments Pty Ltd v. Sun Alliance Australian Law Reform Commission, Insurance Contracts, Report No 20 (1982), [228] – [229]. For commentary, see Mann (2016a), pp. 409–410.

61

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Insurance Ltd,62 the insured changed of the use of its premises from selling waterbeds to manufacturing waterbeds (which involved storing large quantities of flammable lacquer at the premises). A clause in the policy required alterations to the activities carried on at the premises to be notified to the insurer, which the insured failed to do. After a fire (the cause of which was attributed to the flammable lacquers) damaged the premises, the insurer succeeded in avoiding liability under Sec. 54 (2) because of the insured’s actions in allowing the change to the use of the premises. By contrast, Sec. 54(2) was not engaged in Ferrcom Pty Ltd v. Commercial Union Assurance Co of Australia Ltd.63 In that case, the insured held an unregistered mobile machinery policy that covered for damage to the insured’s mobile crane. The policy required material changes to the ‘facts or circumstances existing at the commencement of the policy’ to be promptly notified to the insurer. After the commencement of the policy, the insured registered the mobile crane so that it could be driven on public roads; however, the insured’s broker failed to notify this change to the insurer. The mobile crane was subsequently damaged when it overturned whilst lifting some steel structures from a rail truck. The HCA held that the insurer was entitled to reduce its liability in respect of the claim to nil under Sec. 54(1) because of the ‘prejudice’ it had suffered through its loss of the opportunity to cancel the policy and go off-risk had it known of the change to the use of the crane. Similar reasoning was applied by the Queensland Court of Appeal in Gibbs Holdings Pty Ltd v. Mercantile Mutual Insurance (Aust) Ltd,64 where the insured had failed to comply with a policy requirement to notify the insurer of changes in the use of its warehouse. The majority of the Queensland Court of Appeal accepted that the insured’s actions in allowing a plastics manufacturer to occupy part of its warehouse did not cause or contribute to a fire (which had actually been deliberately lit in another section of the warehouse) under Sec. 54(2). Nevertheless, the majority followed Ferrcom to conclude that the insurer’s ‘prejudice’ under Sec. 54(1) was its loss of opportunity to go off-risk by cancelling the policy. The insureds in both Ferrcom65 and Gibbs66 also pursued legal actions against their brokers for failing to notify these changed circumstances to the respective insurers. However, in two other cases the insurers were unable to establish ‘prejudice’ under Sec. 54(1) resulting from breaches of policy conditions by insureds. Firstly, in Antico v. Heath Fielding Australia Pty Ltd,67 the insured company director failed to 62

Austcan Investments Pty Ltd v. Sun Alliance Insurance Ltd, (1992) 7 ANZ Ins Cas 61-116. Ferrcom Pty Ltd v. Commercial Union Assurance Co of Australia Ltd (1993) 176 CLR 332; 7 ANZ Ins Cas 61-156; [1993] HCA 5. 64 Gibbs Holdings Pty Ltd v. Mercantile Mutual Insurance (Aust) Ltd (2002) 11 ANZ Ins Cas 61-484; [2000] QCA 524. 65 Ferrcom Pty Ltd v. Commercial Union Assurance Co of Australia Ltd (1993) 176 CLR 332; 7 ANZ Ins Cas 61-156; [1993] HCA 5. 66 Gibbs Holdings Pty Ltd v. Mercantile Mutual Insurance (Aust) Ltd (2002) 11 ANZ Ins Cas 61-484; [2000] QCA 524. 67 Antico v. Heath Fielding Australia Pty Ltd (1997) 188 CLR 652; 9 ANZ Ins Cas 61-371; [1997] HCA 3. 63

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obtain the insurer’s consent before incurring significant legal costs in defending a claim for an alleged breach of his directors’ duties. The Directors and Officers insurance policy required a Queen’s Counsel (QC) to provide an opinion about the prospects of defending such claims before the insurer would be liable to cover legal fees. However, the HCA held that the insurer would only suffer prejudice if the insurer could establish that a QC would have opined that there were no prospects of defending the claim. As the evidence did not establish this, the HCA held that the insurer had not been ‘prejudiced’ by the insured’s omission. This meant the insurer was unable to reduce its liability in respect of the director’s claim under Sec. 54(1).68 Secondly, in Moltoni Corp Pty Ltd v. QBE Insurance Ltd,69 the insured demolition company failed to promptly notify its insurer about an injury sustained by one of its employees. The insurer argued that the 17-month delay in notifying the injury caused its prejudice through losing the opportunity to require the injured employee to undergo alternative medical examinations and treatments. However, the HCA held that as the insurer had only raised these alternative courses of action as possibilities, it was not entitled to reduce its liability under Sec. 54(1), explaining that ‘the relevant prejudice suffered [under s 54(1)] is to be measured by reference to what would have happened (as distinct from what could or might have happened) if the act or omission had not occurred’.70 It is also worth noting for completeness that in the early years of the previous decade, a number of Sec. 54 cases before the courts considered the effect of the failure to promptly notify professional indemnity insurers about circumstances likely to give rise to claims against insureds. A contentious issue in several of these cases concerned the effect of ‘deeming provisions’ in policies—which extended cover to include claims made after expiry of the insurance period if during the period of insurance the insured became aware of facts or circumstances giving rise to the claim, and notified the insurer of those facts and circumstances before the policy expired.71 However, as Australian insurers ceased including such ‘deeming provisions’ in their policies, the scope for disputes about insureds’ failures to promptly notify potential claims has now been greatly diminished.72 The other key provision of the ICA dealing with insurance claims is Sec. 56, which enables the insurer to refuse to pay a claim that is made fraudulently. For example, in Tiep Thi To v. Australian Associated Motor Insurers Ltd,73 the Victorian Court of Appeal upheld the insurer’s refusal of a claim for damage to the insured’s Toyota Landcruiser after it was driven and crashed by her unlicensed

Antico v. Heath Fielding Australia Pty Ltd (1991) 188 CLR 652 at 674 – 675; [1997] HCA 35. Moltoni Corp Pty Ltd v. QBE Insurance Ltd (2001) 205 CLR 14; 11 ANZ Ins Cas 61-512; [2002] HCA 73. 70 Moltoni Corp v. QBE Insurance Ltd (2001) 205 CLR 14; [2001] HCA 73. 71 For a comprehensive overview of the decisions on this topic, see Mead (2009), p. 1. 72 Kirby (2011), p. 11. 73 Tiep Thi To v. Australian Associated Motor Insurers Ltd (2001) 11 ANZ Ins Cas 61-490; [2001] VSCA 48. 68 69

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15-year-old son. Being unaware that her policy covered damage when the vehicle was being driven by an unlicensed person without her consent, the insured falsely stated in her claim that her 15-year-old son had been set upon by a gang of youths roaming her neighbourhood who had stolen and damaged the vehicle. Buchannan JA held that ‘. . . the existence of an underlying valid claim does not render fraud irrelevant; the dishonest intention required for fraud is at least one to induce a false belief in the insurer for the purpose of obtaining payment or some other benefit under the policy, with or without belief or knowledge of a lack of entitlement; and fraud which relates to the claim made with the requisite intent will disentitle the claimant even if made subsequent to the first presentation of the claim’.74

4.2

The Fourth Quadrant of Utmost Good Faith: The Insurer’s Post-contractual Obligations

The fourth quadrant of utmost good faith concerns the insurer’s post-contractual conduct. In recent years, there have been an increasing number of cases in which aggrieved clients have challenged the decision-making processes used by insurers to decline claims. As discussed below, in many of these cases the insurers’ adherence to the duty of utmost good faith under Sec. 13 of the ICA has been questioned— particularly in cases where the insurers were not open and frank in their dealings with the insureds. The decisions that have been handed down by the courts on such challenges have led to the growth of jurisprudence on the standards expected of insurers when determining claims. The leading HCA decision on Sec. 13 of the ICA is CGU Insurance Ltd v. AMP Financial Planning Pty Ltd.75 In 1999, two representatives of the Australian financial services company AMP had acted outside the terms of their respective authorities, resulting in many of AMP’s clients incurring significant losses. AMP then faced pressure from ASIC to devise a protocol for settling claims by the affected clients in a timely manner. However, AMP’s professional indemnity policy with CGU prevented it from admitting liability or settling claims without obtaining the CGU’s written consent, and also required AMP’s liabilities to clients (and hence its right to indemnity under the policy) to be conclusively established by advice from a Senior Counsel. Whilst CGU indicated through its lawyers that it ‘agreed in principle’ to the protocol that had been devised to compensate the affected clients, it also advised that it reserved its decision on its liability to indemnify AMP, and advised AMP to act as a ‘prudent uninsured’. After almost 2 years of delays and changes of lawyers, CGU refused AMP’s claim. The majority of the HCA upheld CGU’s

74

Tiep Thi To v. Australian Associated Motor Insurers Ltd (2001) 11 ANZ Ins Cas 61-490; [2001] VSCA 48 at [23]. 75 CGU Insurance Ltd v. AMP Financial Planning Pty Ltd (2007) 235 CLR 1; 14 ANZ Ins Cas 61-739; [2007] HCA 36.

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refusal of AMP’s claim because of its failure to comply with the policy’s requirement to obtain CGU’s consent before settling the clients’ claims. However, in his dissenting judgement, Kirby J (who had chaired the ALRC 20 inquiry that led to the ICA) was highly critical of CGU’s failure ‘to act with clarity, candour and decisiveness’,76 as well as what he characterised as the ‘dilatory, prevaricating, confused, uncertain, inattentive and misleading way in which, over two years, CGU, with its four successive firms of solicitors, delayed and postponed its decision to deny indemnity’.77 Whilst the HCA’s decision found by a 4:1 majority that CGU had not breached its duty of utmost good faith in its refusal of AMP’s claim, many other courts have found insurers to have breached this duty in the determination of claims. The field of Total and Permanent Disability (TPD) insurance has given rise to several cases where courts have found breaches of the duty of utmost good faith by insurers in determining such claims.78 TPD insurance policies are typically arranged by trustees of superannuation funds to provide lump sum benefits for incapacitated superannuation fund members. Whilst such claimants are not usually parties to the insurance contract arranged between superannuation trustees and insurers, the ICAA recognised the status of claimants in such positions as ‘third party beneficiaries’.79 The ICAA also extended insurers’ duties of utmost good faith towards third party beneficiaries,80 thereby reflecting the practice by many previous courts.81 Whilst TPD definitions vary between insurers, one typical example of the criteria that must be satisfied for TPD benefits to be payable is that ‘the Insured Person is unable to follow their usual occupation by reason of an accident or illness for six consecutive months and in our opinion, after consideration of medical evidence satisfactory to us, is unlikely ever to be able to engage in any Regular Remuneration Work for which the Insured Person is reasonably fitted by Education, Training or Experience’.82 The determination of TPD claims can be a complex process, requiring insurers to evaluate frequently conflicting evidence from medical specialists, allied health professionals, investigative surveillance and labour market analyses to determine whether a claimant has satisfied the TPD definition in the applicable policy. The courts have held that in cases where an insurer’s decision-making process is found to be unreasonable, TPD claims may be determined by the court on the available evidence.83 The following cases highlight examples of decision-

76

CGU Insurance Ltd v. AMP Financial Planning Pty Ltd (2007) 235 CLR 1; 14 ANZ Ins Cas 61-739; [2007] HCA 36 at [72]. 77 CGU Insurance Ltd v. AMP Financial Planning Pty Ltd (2007) 235 CLR 1; 14 ANZ Ins Cas 61-739; [2007] HCA 36 at [139]. 78 For an overview of these cases, see Bowley (2016), p. 194. 79 Insurance Contracts Act 1984 (Cth) s 11. 80 See now Insurance Contracts Act 1984 (Cth) s 13(4). 81 For commentary on these amendments, see Box and Webster (2013), p. 114; Tarr (2015b), p. 68. 82 Hannover Life Re of Australasia Ltd v. Dargan [2013] NSWCA 57 at [16]. 83 Lazarevic v. United Super Pty Ltd [2014] NSWSC 96 at [147].

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making processes of insurers, which have been held to be in breach of the duty of utmost good faith and fair dealing through their lack of openness and transparency. In Wyllie v. National Mutual Life Association of Aust Ltd,84 an accountant who had suffered a stroke applied for a TPD benefit under his superannuation policy. When the insurer requested his treating doctor to provide a report on the extent of his incapacity it failed to provide the relevant TPD definition that needed to be satisfied in order for benefits to be payable to Mr Wyllie. The insurer relied upon the treating doctor’s (misconceived) conclusion that Mr Wyllie was capable of performing closely supervised accounting work in declining his claim, and refused to provide him with access to the documentation it had relied upon in declining his claim. In finding for Mr Wyllie, Hunter J concluded that the insurer had failed to act reasonably, fairly or in good faith in its assessment of Mr Wyllie’s claim. His Honour characterised the insurer’s conduct as ‘manifestly unfair’ in failing to provide Mr Wyllie with an opportunity to address the matters upon which the treating doctor had formed the opinion that he did not satisfy the TPD definition in the policy for benefits to be payable.85 Along similar lines in Sayseng v. Kellogg Superannuation Pty Ltd and Anor,86 the insurer formed the view that a manual worker who had lodged a claim for TPD benefits had exaggerated the extent of his back injury, after considering reports form medical specialists and private surveillance agents. However, the insurer did not provide Mr Sayseng with an opportunity to comment on this adverse information before declining his claim. In setting aside the insurer’s denial of Mr Sayseng’s claim, Bryson J was highly critical of the insurer’s failure to provide Mr Sayseng with the opportunity to comment upon the adverse information before making its final determination.87 The insurer’s decision-making process in rejecting a TPD claim was sharply criticised in Dumitrov v. SC Johnson and Son Superannuation Pty Ltd and Anor. Gzell J concluded that the insurer had failed to inform the claimant (a manual worker with limited English) about the information he needed to present to substantiate his claim; did not inform the assessing doctor of the relevant TPD definition in the policy; failed to make further inquiries in relation to a specialist medial report that was favourable to the claimant; and also did not provide the claimant with an opportunity to comment on the reports it relied upon to decline his claim. Having determined the insurer had breached its duty of utmost good faith in determining the claim, in a subsequent decision Gzell J awarded the claimant interest under Sec.

84

Wyllie v. National Mutual Life Association of Aust Ltd (1997) 217 ALR 324; [1997] NSWSC 146. Wyllie v. National Mutual Life Association of Aust Ltd (1997) 217 ALR 324 at 342; [1997] NSWSC 146. 86 Sayseng v. Kellogg Superannuation Pty Ltd and Anor [2003] NSWSC 945. 87 Sayseng v. Kellogg Superannuation Pty Ltd and Anor [2003] NSWSC 945 at [93] – [97]; upheld on appeal: Hannover Life Re of Australasia Ltd v. Sayseng (2005) 13 ANZ Ins Cas 90-123; [2005] NSWCA 214. 85

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57 of the ICA to compensate for the insurer’s unreasonable withholding of insurance monies.88 In the more recent decision of Wheeler v. FSS Trustee Corp Atf First State Superannuation Scheme,89 Robb J held that the insurer had breached its duty of good faith and fair dealing through its “constructive denial” of a TPD claim by a former police officer for a psychological injury. After not responding to three requests by the claimant’s solicitors and the trustee of her superannuation fund to release medical reports relating to the claim, the insurer gave the claimant only 14 days to respond to a “procedural fairness” letter, which enclosed the full volume of information the insurer had collected in the 3 years after the TPD claim had been lodged. Having found the insurer in breach of its duty of utmost good faith,90 His Honour then proceeded to find that the claimant satisfied the requirements for TPD benefits on the evidence before the court.91

5 Conclusion As a risk transfer arrangement, insurance contracts nearly always involve information imbalances between insurers and insureds. On the one hand, insureds generally have a better understanding about the nature of the risk they are seeking to transfer to the insurer, and on the other hand, insurers have the resources and capabilities to assess and price risk. To ensure that contracts of insurance operate on a fully informed basis, it is very important for insurers and insureds to be open and transparent in their dealings with the other parties. This chapter has shown how in Australia the ICA promotes such transparency between insurers and insureds throughout the policy life cycle. Through selected case studies, it examined the operation of the ICA provisions that govern pre-contractual disclosure for contracts of general, life and consumer forms of insurance. It also explained how the ICA requires insurers to inform the insured about matters such as the duty of disclosure and unusual terms in policies. In the post-contractual stage, it discussed the insurer’s remedies under Sec. 54 in the event of post-contractual acts or omissions by the insured and a range of cases where insurers were held to have breached the duty of utmost good faith in their determination of claims. Overall, the chapter has demonstrated that since its inception in 1986 the ICA has ensured transparency in a manner

88 Dumitrov v. SC Johnson and Son Superannuation Pty Ltd (No 2) (2007) 14 ANZ Ins Cas 61-722; [2007] NSWSC 42. 89 Wheeler v. FSS Trustee Corp Atf First State Superannuation Scheme [2016] NSWSC 534. 90 Wheeler v. FSS Trustee Corp Atf First State Superannuation Scheme [2016] NSWSC 534 at [300]. 91 Wheeler v. FSS Trustee Corp Atf First State Superannuation Scheme [2016] NSWSC 534 at [366] – [368].

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that strikes a true and fair balance between the interests of insurers and insured in Australia.

References Books Enright I, Merkin R (2015) Sutton on insurance law, 4th edn. Thomson Reuters, Toronto Gwynn M, Laugesen A (2017) Oxford Concise Australian Dictionary, 6th edn. Oxford University Press, Oxford Macquarie Dictionary (2017) Macquarie Dictionary: Australia’s National Dictionary, 7th edn. Macquarie University, Macquarie Park Mann P (2016a) Mann’s Annotated Insurance Contracts Act, 7th edn. Thomson Reuters, Toronto Pynt G (2017) Australian Insurance Law: a first reference, 4th edn. LexisNexis, New York

Journal Articles Bell J (2012) When will a flood be classified as a “flood”? A review of the Insurance Contracts Act reform. Insur Law J 23:312 Bowley R (2016) The progressive evolution of Australian insurers’ duty of utmost good faith to third party claimants. Insur Law J 27:194 Box R, Webster T (2013) Evolution not revolution: Insurance Contracts Amendment Act finally passed. Aust Insur Law Bull 28(8):114 Godfrey K (2002) The duty of utmost good faith: the great unknown of modern insurance law. Insur Law J 14:1 Hawke F (1994) Utmost good faith - what does it really mean? Insur Law J 6:91 Kirby M (2011) Australian insurance contract law: out of the chaos – a modern, just and proportionate reforming statute. Insur Law J 22:11 Mann P (2016b) The elusive second quadrant of utmost good faith: what is the scope of an insurer’s pre-contractual duty of utmost of good faith? Insur Law J 27:176 Mann P, Drummond S (2017) Utmost good faith, unconscionable conduct and other notions of fairness - where are we now? Insur Law J 29:10 McGivern B (2013) Coming to the party: the evolution of post-contractual duties of utmost good faith under the ICA. Insur Law J 24:159 Mead P (2009) Notifications under claims made and notified professional indemnity insurance policies and the effect of ss 54 and 40 of the Insurance Contracts Act 1984 (Cth). Insur Law J 20:1 Merkin R (2012) Unfair terms in insurance contracts: a solution in search of a problem. Insur Law J 23:272 Nattrass R (2012) Extending the unfair contract terms laws to insurance contracts: is the duty of good faith fair enough? Insur Law J 23:299 Tarr J-A (2001) Disclosure under the Prescribed Insurance Contracts Regime: Section 35 of the Insurance Contracts Act 1984 and Consumer Protection Revisited. Aust Bus Law Rev 29:198 Tarr J-A (2015a) Insurance contract disclosure - an uncertain balance. Insur Law J 26:110 Tarr J-A (2015b) Accountability 30 years on: Insurance Contracts Act Reform. Aust Bus Law Rev 43:68

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Traves S (2012) Utmost good faith, reliance upon and notification of terms: the obligations of insurers and the rights of insureds. Insur Law J 23:4

Official Reports Commonwealth of Australia, Inquiry into flood insurance and related matters: Final Report, September 2011, Natural Disaster Insurance Review

Legislation Australian Securities and Investments Commission Act 2001 (Cth) Insurance Contracts Act 1984 (Cth) Insurance Contracts Amendment Bill 2013 (Cth) Insurance Contracts Regulations 2017 (Cth) Life Insurance Act 1995 (Cth) Marine Insurance Act 1909 (Cth) Private Health Insurance Act 2007 (Cth)

Case Law Antico v. Heath Fielding Australia Pty Ltd (1997) 188 CLR 652 9 ANZ Ins Cas 61-371 [1997] HCA 3 Austcan Investments Pty Ltd v. Sun Alliance Insurance Ltd (1992) 7 ANZ Ins Cas 61-116 Burns v. MMI-CMI Insurance Ltd (1994) 8 ANZ Ins Cas 61-287 CE Heath Underwriting and Insurance (Aust) Pty Ltd v. Edwards Dunlop & Co Ltd (1993) 176 CLR 535 (1993) 7 ANZ Ins Cas 61-165 [1993] HCA 21 CGU Insurance Ltd v. AMP Financial Planning Pty Ltd (2007) 235 CLR 1 14 ANZ Ins Cas 61-739 [2007] HCA 36 CIC Insurance Ltd v. Barwon Region Water Authority (1998) ANZ Ins Cas 61-425 [1998] VSCA 77 Davis v. Westpac Life Insurance (2008) 15 ANZ Ins Cas 80-132 [2007] NSWCA 175 Dumitrov v. SC Johnson and Son Superannuation Pty Ltd and Anor [2006] NSWSC 1372 Entwells Pty Ltd v. National & General Insurance Co Ltd (1991) 6 ANZ Ins Cas 61-059 Ferrcom Pty Ltd v. Commercial Union Assurance Co of Australia Ltd (1993) 176 CLR 332 7 ANZ Ins Cas 61-156 [1993] HCA 5 Gibbs Holdings Pty Ltd v. Mercantile Mutual Insurance (Aust) Ltd (2002) 11 ANZ Ins Cas 61-484 [2000] QCA 524 GIO General Ltd v. Wallace (2001) 11 ANZ Ins Cas 61-506 [2001] NSWCA 299 Hams v. CGU Insurance Ltd (2002) 12 ANZ Ins Cas 61-525 [2002] NSWSC 273 Hannover Life Re of Australasia Ltd v. Dargan [2013] NSWCA 57 Hannover Life Re of Australasia Ltd v. Sayseng (2005) 13 ANZ Ins Cas 90-123 [2005] NSWCA 214 Hitchens v. Zurich Australia Ltd (2015) 18 ANZ Ins Cas 62-076 [2015] NSWSC 825 Lazarevic v. United Super Pty Ltd [2014] NSWSC 96

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Lindsay v. CIC Insurance (1989) 16 NSWLR 673 5 ANZ Ins Cas 60-913 Lockwood & Lockwood v. Insurance Australia Ltd (2010) 16 ANZ Ins Cas 61-843 [2010] SASC 140 Marsh v. CGU Insurance Ltd t/as Commercial Union Insurance (2004) 13 ANZ Ins Cas 61-594 [2004] NTCA 1 Messagemate v. (Aust) Pty Ltd v National Credit Insurance (Brokers) Pty Ltd (2002) 85 SASR 303 (2003) 12 ANZ Ins Cas 61-546 [2002] SASC 327 Michail v. Australian Alliance Insurance Co Ltd [2013] QDC 284 Michail v. Australian Alliance Insurance Co Ltd [2014] QCA 138 Moltoni Corp Pty Ltd v. QBE Insurance Ltd (2001) 205 CLR 14 11 ANZ Ins Cas 61-512 [2002] HCA 73 NRG Victory Australia v. Hudson (2003) 13 ANZ Ins Cas 90-121 [2003] WASCA 291 Permanent Trustee Australia Ltd v. FAI General Insurance (2003) 214 CLR 514 12 ANZ Ins Cas 61-565 [2003] HCA 25 Prepaid Insurance v. Atradius (No 2) [2014] NSWSC 21 Prepaid Services Pty Ltd & Ors v. Atradius Trade Credit Insurance NV (2012) 17 ANZ Ins Cas 61-937 [2012] NSWSC 608 Prepaid Services Pty Ltd & Ors v. Atradius Trade Credit Insurance NV (2013) 17 ANZ Ins Cas 61-981 [2013] NSWCA 252 Sayseng v. Kellogg Superannuation Pty Ltd and Anor [2003] NSWSC 945 Schaffer v. Royal & Sun Alliance Life Assurance Aust Ltd (2003) 12 ANZ Ins Cas 90-116 [2003] QCA 182 Suncorp General Insurance Ltd v. Cheihk (1999) 10 ANZ Ins Cas 61-442 [1999] NSWCA 238 Suncorp Metway Insurance Limited v. Mason Place Pty Ltd [2011] QDC 209 Tiep Thi To v. Australian Associated Motor Insurers Ltd (2001) 11 ANZ Ins Cas 61-490 [2001] VSCA 48 Von Braun v. Australian Associated Motor Insurers (1998) 10 ANZ Ins Cas 61-419 [1998] ACTSC 122 Wheeler v. FSS Trustee Corp Atf First State Superannuation Scheme [2016] NSWSC 534 Wyllie v. National Mutual Life Association of Aust Ltd (1997) 217 ALR 324 [1997] NSWSC 146

Transparency in the Insurance Contract Law of England Kyriaki Noussia

1 Definition of Transparency in Insurance Contract Law Transparency in insurance in English contract law denotes an aspect of insurance law that deserves to be well analysed. Unavoidably, the notion of transparency in insurance contract law refers to the role that transparency plays in insurance law. In other words, we are dealing with the question of the existence and of the exact extent of standards of transparency, i.e., we are dealing with the requirement of transparency, which mainly attaches to the rights and duties of the contractual parties (including product and cost transparency). In any case, it is admitted that a standard of transparency exists in all areas of contract law and such a standard is continuously enlarged in the course of the evolution of the law. The question, however, remains if insurance as a legal product and the insurance market as a whole exhibit such unique features that could justify the existence of a sui generis insurance law principle of transparency.1 In the context of an insurance contract, transparency may be defined as comprehensibility, unambiguity and certainty. These terms merely describe different aspects of transparency. A legal rule should be framed in a way that it is understandable for its addressee. The problem in determining the level of comprehensibility lies in the determination of the person of reference. In insurance contract law, this will usually mean that the legal rule must be comprehensible for the policyholder, i.e., the average policyholder. The question of what constitutes an average policyholder

1

Wandt (2012), pp. 9–10; See general Merkin (2010) and Merkin et al. (2014).

K. Noussia (*) Law School, University of Exeter, Exeter, UK e-mail: [email protected] © Springer Nature Switzerland AG 2019 P. Marano, K. Noussia (eds.), Transparency in Insurance Contract Law, AIDA Europe Research Series on Insurance Law and Regulation 2, https://doi.org/10.1007/978-3-030-31198-8_24

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may not be assessed empirically as the term refers to a legal fiction comparable to that of the reasonable person under the common law.2 Insurance contracts have been labelled as “contracts of adhesion”, i.e., agreements in which one of the parties—the policyholder—has no option other than to adhere to the terms dictated by the other party—the insurer—or reject the conclusion of the contract. The power of the insurer in determining the rights and obligations of the insurance contract derives from the fact that most of its terms are standard terms, pre-formulated by him. As a basic means of policyholder protection, most legal systems have devised mechanisms that limit the authority of insurers concerning the drafting of standard terms. Among these mechanisms, transparency plays a role adhered to both by courts and authorities, and in doing so it stands out as a nearly universally accepted factor that constitutes a protection mechanism for the policyholder.3 While there is no generally accepted definition of the transparency rule governing standard terms, a “common core” of this rule can be detected, which is widely used in statutes and regulations. According to this “core rule”, standard terms need to be drafted in a “plain, intelligible language” and it follows that transparency is meant to enable policyholders to assess their rights and obligations correctly and to take a well-informed decision when entering into a contract with the insurer. In insurance contracts, clauses are only regarded as transparent when the reasonable policyholder cannot only understand their meaning but can also comprehend the basic economic consequences of the respective provisions. Only if this standard is met it can be assumed that the policyholder has been provided with an appropriate level of information to be able to evaluate the product offered.4 The transparency rules governing insurance contracts can be distinguished by the group of policyholders they apply to. Until recently, under the narrower approach, which is followed in English law, the transparency rule only applied to consumer policyholders, as it had been expected by Directive 93/13/EEC, and hence only affected policies issued to policyholders who were natural persons and were acting in obtaining insurance for purposes that were out of their trade, business or profession. Recently, i.e., since the enactment of the Insurance Act 2015, the transparency rule has been further elaborated and its application is extended to all policyholders and in various cases and circumstances.5

2

Wandt (2012), pp. 9–10; See general Merkin (2010) and Merkin et al. (2014). Brand (2012), pp. 53–54; See general Merkin (2010) and Merkin et al. (2014). 4 Brand (2012), p. 54; See general Merkin (2010) and Merkin et al. (2014). 5 Brand (2012), p. 55; See general Merkin (2010) and Merkin et al. (2014). 3

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2 The Issue of Transparency in Insurance Contract Law in England 2.1

Previous Regime (Unfair Contract Terms in Consumer Contracts Regulation 1999)

The Unfair Terms in Consumer Contracts Directive 93/13/EEC is a European Union Directive governing the use of surprising or misleading terms used by business in pre-formulated contracts with consumers. The Directive places a list of examples of terms that may be regarded as unfair and a doctrine according to which many terms in a consumer contract could be held as unfair. Unfair terms are invalid and not binding for consumers. The Directive aims to protect the consumer from terms that he accepted despite the significant imbalances that these terms impose in the rights and obligations in favour of the counterparty of the consumer. The above entail the overall need for extended transparency in insurance contract law. The Unfair Terms in Consumer Contracts Directive 93/13/EEC was initially implemented via its transposition into the Unfair Terms in Consumer Contracts Regulations 1994, which came into force on 1 July 1995, and which were subsequently replaced by the Regulations as those were amended, and which came into force on 1 October 1999. Transparency in consumer contracts has an important role to play in ensuring that markets operate effectively and that both parties in a business to consumer transaction can have an element of trust in each other. It should be seen as a vital element in ensuring that free exchange and party autonomy, which traditionally underpin English contract law, are sustainable principles in the context of complex modern consumer markets. Unfair terms are not binding on consumers and it is open to consumers themselves to challenge in court any terms that they may consider unfair. In some circumstances, some terms are exempt from the Regulations’ test of fairness in relation to certain matters, i.e., they need not be fair. Such exempt matters are the definition of the main subject matter of the contract (Regulation 6(2)(a)) and the adequacy of the price as against the goods or services provided in exchange (Regulation 6(2)(b)). The exemption only applies where the relevant term is transparent enough, i.e., in plain, intelligible language that the consumer is able to read and understand. Hence, all terms, whether they relate to exempt or non-exempt matters, are required to be expressed in plain, intelligible language (Regulations 6 (2) and 7(1)). Terms must also be set out with due prominence that reflects their importance to the parties. The requirements of transparency dictate that the wording of terms must be comprehensible to consumers, and such that they can understand how the term affects the rights and obligations both parties have under the contract. Terms must be sufficiently clear that consumers can have a proper understanding of them for sensible and practical purposes. Where a term does not meet the

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transparency requirements, a matter that would otherwise be exempt under Regulation 6(2), will not be exempt, and the fairness test will apply.6

2.2

Financial Services Act 2012

In 2007, the FSA published a report, which considered whether there was a lack of transparency in the commercial general insurance market that gave rise to consumer detriment and, if so, whether commission disclosure was justified. The report concluded that introducing mandatory commission disclosure was not justified, as the costs of doing so were greater than the benefits. However, it highlighted wider concerns giving rise to market inefficiencies, such as the lack of transparency in commissions paid to intermediaries in this market. In the same year, the European Commission published a report following its competition inquiry into business insurance. The Commission also found evidence of a lack of transparency in the commercial insurance market relating to intermediary remuneration and services, which it considered could give rise to customer detriment and impair market efficiency. From these reports, the FSA concluded that mandating commission disclosure was not justified. However, it decided to keep this issue, and the wider market issues identified, under review. The FSA’s work in this area continued until 2011 because of its continued concerns. In March 2008, the FSA published a discussion paper (DP08/2) on transparency, disclosure and conflicts of interest in the commercial insurance market. In this paper, the FSA outlined its thoughts on commission disclosure and the wider conflicts of interest and transparency issues identified in the commercial insurance market (relating to intermediary remuneration, services and status), together with proposed solutions to make this market more competitive and efficient. In DP08/2, the FSA explained that it considered that transparency issues had worsened because of the impact of the trend in insurers acquiring brokers. The Commission itself had also voiced similar concerns, and had indicated that this issue would be considered when it carried out its full review of the Insurance Mediation Directive (2002/92/EC) (IMD). The FSA believed that commercial customers needed full transparency of information on remuneration, services, the status of insurance intermediaries, and conflicts of interest. However, it had found evidence that suggested that the market was not meeting this standard. To address these concerns, the FSA set out three possible, potentially cumulative, solutions in DP08/2 that it considered could be achieved either by way of regulation or by industry-led initiatives. The solutions proposed in DP08/2 were: (a) more rigorous supervision and enforcement of existing rules and principles, including more guidance and targeted supervision; (b) an enhanced regime to improve the quality of disclosure of commission, services and status; (c) mandatory automatic

6 The Law Society (2012), file:///C:/Users/kpkn201/Downloads/unfair-consumer-contract-termslsresponse.pdf.

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commission disclosure. The FSA’s five outcomes for commercial customers are as follows: (a) customers should have clear and comparable information about the commissions that the intermediaries receive; (b) customers should have clear and comparable information about the services that the intermediaries provide; (c) customers should have clear information about the capacity in which an intermediary is acting; (d) customers should be alerted to their right to request commission information; (e) customers should be made aware where there is a chain of intermediaries. The Financial Services Act 2012 amended the Financial Services and Markets Act 2000 inserting in Section 3B a requirement that the new regulators should have regard to the desirability of publishing information about regulated firms/individuals, or requiring such persons to publish information; and the principle that regulators should exercise their functions as transparently as possible. The regulator reviewed the extent of its constraints in the light of these requirements. The general proposals dealing with more effective disclosure of information both by the FCA and from firms have been produced in consultation with trade bodies, consumer groups and various independent Panels, and aim to help consumers make better informed choices, to influence firm behaviour and to enable external stakeholders to hold the Financial Conduct Authority (FCA) to account. The information that the FCA could release about its processes and the actions it takes relate to various categories. In relation to supervision such information may include aggregated information about supervisory activity, potentially including the number of planned and unplanned supervisory visits that have taken place across different sectors, the number of variations of permission and in which sectors, and types of requirements imposed. In relation to whistle-blowers, such information may include some feedback for whistle-blowers about the action that has been taken after they have contacted the FCA, as well as data in an aggregate form about the number of whistle-blowing incidents and any action taken with the information received. In relation to enforcement it may include more information than currently set out in the annual enforcement performance account, more (detailed) information about firms, individuals and markets, as well as requiring firms to publish information related to greater disclosure of product performance (i.e., more transparency on annuities and more claims data on certain insurance products), as well as other forms of firm disclosure (such as complaints data destined to improve the transparency and the understanding of what the data shows). However, it is remarked that not all disclosure aids transparency, and that it is important to be clear about the net impact of any changes (including the potential for unintended consequences). The 2012 Act aimed to enable the FCA to publicise enforcement action at the warning notice stage under Section 391 of FSMA, and to publish, or require an authorised person to publish, information about a direction under Section 137Q of FSMA to withdraw (or refrain from making) a financial promotion.

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The Consumer Rights Act 2015

The Consumer Rights Act 2015 (the Act) has important implications for businesses entering contracts with consumers. It applies to both contract terms and consumer notices, with definitions being provided in the glossary. Broadly, Part 2 of the Act protects the consumer against contractual wording that could be used to give the business an unfair advantage. It requires that such wording should be fair—not weighting the contract unfairly against the consumer—or hidden away, and transparent, if written, enabling the consumer to make informed choices, for instance using clear, jargon-free language that consumers can understand. Nearly all business-to-consumer contract terms and notices are subject to the Act—whether or not they are in writing, and whether or not there has been any individual negotiation between the trader and the consumer. However, there are two exemptions: (a) certain terms and notices covered by legal provisions are exempt; and (b) there is also a partial exemption for terms that specify the main subject matter of the contract or set the price. This is the main, i.e., core exemption under the Act but it applies only if terms are transparent and prominent and does not apply to notices. A term may not be assessed for fairness to the extent that: (a) it specifies the main subject-matter of the contract; or (b) the assessment would be of the adequacy of the price as compared to what is supplied. Such an exemption is often termed as ‘the core exemption’ because it covers the essential features of the bargain. It means that a term is not unfair simply because it describes a product that the consumer considers as representing poor value for money or sets a price that is higher than other businesses charge. However, terms dealing with these issues may still be assessed on other grounds, for example, the timing of a payment, or whether the main subject matter or price can be varied. Where terms of these kinds are not prominent and transparent, ‘the core exemption’ does not apply and they are subject to a full assessment for fairness. To benefit from ‘the core exemption’, a ‘main subject matter’ or price-setting term must be transparent—i.e., it must be expressed in plain and intelligible language and, if in writing, it must be legible. A term in a consumer contract is unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations under the contract, to the detriment of the consumer. Transparency is also fundamental to fairness. The Act requires that a written term in a consumer contract is expressed in plain and intelligible language and is legible. This sits alongside a more general requirement that consumers are given a real chance, before entering a contract, to see and understand all terms that could operate to their disadvantage The CMA considers that the Act’s effect is to apply in substance the same tests of fairness, and of transparency, to both terms and notices. Broadly, the effects of the fairness test are that wording is more likely to satisfy the law if it is drafted and presented in a way that respects consumers’ legitimate interests. ‘Significant imbalance’ is concerned with the parties’ rights and obligations under the contract. It arises where a term is so weighted in favour of a trader

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that it tilts the balance of the contract significantly in the trader’s favour—for instance, by granting the business a discretion that could be used unfairly to increase the benefits it enjoys or to impose a disadvantageous burden on the consumer. As a starting point, when assessing fairness, it is useful to ask whether the wording places the consumer in a legal position less favourable than that which is otherwise provided for by the law. Although the imbalance must be significant, unfairness does not require proof that a term has actually caused harm. Wording may be open to challenge if it could be used to cause consumer detriment. ‘Good faith’ relates to the substance of terms, as well as the way they are expressed. It is based on the general principle of ‘fair and open dealing’, where terms are expressed fully, clearly and legibly, and with due respect for the consumer’s interests. Agreements with consumers should not contain concealed pitfalls or traps, and terms that might disadvantage the consumer should be given appropriate prominence. A business should not take advantage of consumers’ vulnerability in deciding what their rights and obligations should be and should look like. Businesses need to deal fairly with consumers, taking into account their legitimate interests. Consumers tend to have weaker bargaining power because of their lack of financial resources, their need for the service or product they are buying, their lack of experience of negotiation and their relative unfamiliarity with the subject matter of the contract. Part 2 of the Act includes a specific requirement that all written terms have to be transparent, which means that they must be expressed in plain, intelligible language and be legible. Legibility and simple clarity of language are not enough to ensure compliance. Contractual documentation needs to be drafted so as to put consumers into a position where they can make an informed choice whether or not to make a contract. The contract should set out all obligations in a clear and comprehensible way, so that the consumer can see how they relate to each other and can foresee and evaluate any future consequences of entering the agreement. Wording that could act disadvantageously for them must not be concealed, but on the contrary should be drawn to their attention. Failing the transparency test does not make a term or notice unenforceable against the consumer independently of the fairness test. However, where the meaning of the wording is ambiguous, i.e., where there is more than one possible meaning, there is a requirement that it should be given the meaning that is most favourable to the consumer.7

2.4

The Consumer Insurance (Disclosure and Representations) Act (CIDRA) 2012

The Consumer Insurance (Disclosure and Representations) Act (CIDRA) 2012 applies to consumer insurance and sets out what happens if a consumer gives

7

CMA (2015), https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attach ment_data/file/450410/Unfair_Terms_Explained.pdf.

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incorrect information to their insurer. The CIDRA also deals with group insurance in which the proceeds of the policy may be paid to beneficiaries who are not the insured, such as, a policy taken out by an employer for the benefit of its employees. The CIDRA came into force in April 2013. The CIDRA only applies to consumer insurance contracts. These are defined as insurance bought by individuals for purposes wholly or mainly unrelated to their trade, business or profession. This definition deliberately follows the general approach of European law. The definition of insurance is left to the common law. The CIDRA has substantially contributed to the concept of transparency in insurance law in various ways. The CIDRA follows the practice of the Financial Ombudsman Service (FOS) and abolishes the consumer’s duty to volunteer information, often referred to as the duty of disclosure and fundamental to the Marine Insurance Act 1906. Instead, the insurer must ask appropriate questions and the consumer must answer them honestly and carefully. Not least, the CIDRA imposes on the consumer a duty to take reasonable care not to make a misrepresentation. This also applies when a policy is varied or renewed. The standard applied is objective, being that of the reasonable consumer taking into account all relevant circumstances, such as the type of insurance and how it was sold. The particular characteristics of the individual consumer are only relevant if the insurer knew, or ought to have known about them. Hence, in relation to the emerging sub-discipline of consumer insurance, it will be recalled that the CIDRA modified the law to provide for a single duty on consumers to take reasonable care not to make a misrepresentation to the insurer. As explained by the Commissions, what is now Section 14 of the Insurance Act 2015, does for all insurance contracts, including consumer insurance contracts, what Section 2(5) of the CIDRA does for consumer insurance contracts. Where the consumer gives incorrect information, the CIDRA distinguishes between three types of misrepresentation, i.e., reasonable, careless and deliberate or reckless. Misrepresentations that are careless or deliberate and reckless are described as “qualifying misrepresentations” for which the insurer will be compensated if it can show that it would have acted differently had it known the true facts. There is no remedy if the consumer’s misrepresentation was reasonable. For a misrepresentation to be deliberate or reckless, the insurer must show that the consumer both knew that the statement was untrue or misleading, or did not care whether it was or not, and also knew that the matter was relevant to the insurer or did not care whether it was or not. Two presumptions assist the insurer, i.e., that the consumer is presumed to have the knowledge of a reasonable consumer and that if the insurer asks a clear question, the subject matter of the question is presumed to be relevant. If the misrepresentation is deliberate or reckless, i.e., essentially fraudulent, the insurer may avoid the policy and can generally keep the premium. If the misrepresentation is careless, the insurer’s remedy depends on what it would have done, had proper information been provided. If the insurer would have declined the risk altogether, then there is the option to avoid the policy and refuse any claim but the insurer should in such a case return the premium. If the insurer would have written the policy on different terms, then those terms apply from inception. These

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terms may include different limits or exclusion clauses. If the insurer would have charged a higher premium, any claim can be reduced pro rata to the underpayment. These provisions represent a very considerable change to the Marine Insurance Act 1906, under which the only applicable remedy is the possibility for insurers to avoid the entire policy, regardless of the circumstances of the misrepresentation. In addition, the CIDRA provides that misrepresentations by a beneficiary under a group scheme will affect that individual but not the other members of the scheme. It abolishes “basis clauses” that incorporate all representations as insurance warranties. In contrast, the Marine Insurance Act 1906 provides that breach of a warranty automatically discharges the policy, regardless of whether it is relevant to the risk insured. Finally, the CIDRA gives some guidance on whether an intermediary is acting as the agent of the policyholder or of the insurer when the policy is being agreed. Since the CIDRA came into force, research carried out by the Chartered Insurance Institute and confirmed by discussion with the FOS indicates that consumer disputes involving questions of misrepresentation have become rarer. Instead, disputes arise over the wording and extent of the cover provided.8 In effect, the CIDRA has remarkably improved the consumer’s position in relation to the duty of disclosure and remedies for breach of the duty and has promoted transparency whilst preserving the rights of the consumer assured; for the consumer’s duty to volunteer material facts is replaced by the duty to take reasonable care not to make a misrepresentation. Hence, it can be said that the CIDRA has promoted transparency in that it has made it more effective as needed only in cases where is it deemed as necessary, as our discussion has shown.

2.5

The Marine Insurance Act 1906 and the Insurance Act 2015

In insurance law, under the Marine Insurance Act 1906, transparency requirements were elaborated in many forms. It could be argued that the strict duty of disclosure imposed by the Marine Insurance Act 1906 was an elaboration of transparency cloaked as such so as to protect the assured. In effect, for over 200 years a policy of insurance has been regarded as a contract of the utmost good faith. The Insurance Act 2015 retains some provisions of the Marine Insurance Act 1906, codifies some of the developments that have occurred since 1906 and introduces new legal concepts. The key provisions are the introduction of the new duty to make a fair presentation, the provision on warranties and similar terms risk mitigation clauses, and insurers’ remedies for fraud. In addition, under the Insurance Act

8

Hertzell (2016), https://uk.practicallaw.thomsonreuters.com/6-615-6445? transitionType¼Default&contextData¼(sc.Default)&firstPage¼true&comp¼pluk.

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2015 if the insurer wishes to contract on different terms and a term is “disadvantageous” to the insured, the insurer must abide with transparency provisions and take sufficient steps to bring the term to the insured’s attention, as well as ensure that the term is clear and unambiguous.9 In relation to transparency, the provisions on the new duty to make a fair presentation and the provisions on contracting out are of major importance.

2.5.1

Utmost Good Faith, Duty of Disclosure

In the Marine Insurance Act 1906, Section 17, which is, with modifications, based on the judgment of Lord Mansfield in Carter v. Boehm,10 provides that a contract of marine insurance is one of the utmost good faith and if either party does not show good faith, then the policy may be avoided. This is followed by Sections 18, 19 and 20 that deal respectively with disclosure by the assured, disclosure by the assured’s agent to insure and misrepresentation by the assured. Section 14 of the Insurance Act 2015 repeals the concluding sentence of Section 17 of the 1906 Act, along with any corresponding rule of the common law, to leave the bare statement that a contract of marine insurance is one of the utmost good faith.11 Sections 18-20 of the Marine Insurance Act 1906, which apply to non-marine, as well as marine insurance,12 set out the pre-contractual duties of the assured and any agent to insure. An assured must disclose all material facts, being defined as facts that would influence the judgment of a prudent underwriter (as per Section 18), an agent to insure must disclose material facts known to the agent whether or not the assured was aware of them (as per Section 19) and the assured must not misrepresent material facts (as per Section 20). As per Sections 18 and 20 the assured needs disclose, or not misrepresent “material” facts, defined as any fact that would affect the underwriting judgment of a prudent insurer. The meaning of this phrase was amplified by the House of Lords, in Pan Atlantic Insurance Co Ltd v. Pine Top Insurance Co Ltd,13 which held that it suffices that expert evidence from an underwriter in the market at the time demonstrates that the fact would have been of interest even if it would not have affected the final underwriting decision.14 9

Hertzell (2016), https://uk.practicallaw.thomsonreuters.com/6-615-6445? transitionType¼Default&contextData¼(sc.Default)&firstPage¼true&comp¼pluk. 10 Carter v. Boehm (1766) 3 Burrow 1905. 11 Merkin and Gurses (2015), pp. 1005–1007; See general Merkin (2010) and Merkin et al. (2014). 12 Assicurazioni Generali SpA v. Arab Insurance Group [2003] Lloyd’s Rep IR 131, at [55]; Brotherton v. Aseguradora Colseguros SA (No.2) [2003] Lloyd’s Rep IR 746, at [12]; HIH Casualty & General Insurance Ltd v. Chase Manhattan Bank [2003] 2 Lloyd’s Rep 61 at [42], Lord Hoffmann; Highlands Insurance Co v. Continental Insurance Co [1987] 1 Lloyd’s Rep 109, 114. 13 Pan Atlantic Insurance Co Ltd v. Pine Top Insurance Co Ltd [1994] 2 Lloyd’s Rep 427. 14 Sea Glory Maritime Co, Swedish Management Co SA v. AL Sagr National Insurance Co [2013] EWHC 2116 (Comm); Lewis v. Norwich Union Healthcare Ltd [2010] Lloyd’s Rep IR 198.

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A number of important features of the Marine Insurance Act 1906 attracted the attention of the Law Commissions.15 Those features relate also to transparency. First, the prudent insurer test appears on its face to require the assured to predict what a prudent insurer might find of interest. Secondly, proof of materiality and inducement justify avoidance of the entire policy, an outcome that is frequently disproportionate to the degree to which the insurer has been misled. Thirdly, the provisions of Section 19 impose a duty on the agent to insure to disclose facts known to him whether or not they are known to the assured: there is no definition of agent to insure and it is disputed whether the term refers only to a placing broker or extends to intermediate agents; the type of information that falls within Section 19 is unclear; and the duty is placed squarely on the agent but the sanction is that of avoidance as against the assured. Fourthly, although the assured is under a duty to disclose what is known or ought to be known in the ordinary course of business, and equally the assured is not under a duty to disclose what is known or ought to be known to the insurer, there is no clear statement of exactly when either party possesses the requisite knowledge.16 Because of Consumer Insurance (Disclosure and Representations) Act 2012, which came into force on 6 April 2013, those duties no longer apply to consumers. They were instead replaced by a single duty to take reasonable care to avoid misrepresentation, thereby abolishing any disclosure requirement and leaving the onus squarely on the insurers to ask questions. The Insurance Act 2015 addresses the position as regards commercial insurance. However, both the 2012 and 2015 Acts apply in full to renewals and variations, in the latter case based on that the duty is to be applied purely to the variation and not retrospectively to the contract before its variation.17

2.5.2

Fair Presentation Under the Insurance Act 2015

The Insurance Act 2015, Section 21(2), repeals Sections 18-20 of the Marine Insurance Act 1906, dispenses with utmost good faith in the context of the assured’s pre-contractual duties and replaces it with the concept of “fair presentation” (Section 3), a phrase found in pre 1906 authority and regarded by the Law Commissions as a more appropriate formulation of the duty.18 Much of the old law is re-enacted, but with significant change. Unlike the position now applicable to 15

Merkin and Gurses (2015), pp. 1005–1007. Merkin and Gurses (2015), pp. 1005–1007; See general Merkin (2010) and Merkin et al. (2014). 17 Airmic, Airmic calls for insurance law reform, (Strategic Risk, 15 June 2015), http://www. strategic-risk-global.com/airmic-wants-insurance-law-reform /1384905.article; Allianz, Allianz Insurance Embraces the Insurance Act 2015 Reforms’, (garratinsurance.co.uk) http:// garrattsinsurance.co.uk/allianz-insurance-embrace-the-insurance-act-2015-reforms/. 18 Bates v. Hewitt (1866-67) LR 2 QB 595; Morrison v. The Universal Marine Insurance Company (1872-73) LR 8 Ex. 197; Blackburn v. Vigors (1887) 12 App Cas 531; Harrower v. Hutchinson (1869-70) LR 5 Q.B. 584; Haywood v. Rodgers (1804) 4 East 590; Ionides v. Pender (1873-74) LR 16

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consumer insurance, the duty of disclosure has been retained for business policies, reflecting the established market reliance on disclosure, so that a business assured remains under the dual obligations to disclose, and not to misrepresent, material circumstances. In each case the objective materiality test has been retained by Section 7(3) of the 2015 Act, despite widespread criticism of it in the consultation process: the view taken by the Law Commissions was that the overwhelming majority of commercial risks are placed by brokers who are equally cognisant with insurers as to what facts are material, so that the test is unlikely to be damaging in practice. It should be added that Section 8(1) of the 2015 Act codifies the subjective inducement requirement—in practice the real protection for the assured—by removing the right of the insurer to any remedy for breach of duty unless the insurer can prove that, but for the breach, the insurer either would not have entered into the contract of insurance at all or would have done so only on different terms. This will doubtless be construed in the same way as the previous law, so that it is necessary for the insurers to show that, had there been compliance with the duty of fair presentation there would have been a different underwriting outcome.19 Because of the conflicting dicta in Pan Atlantic Insurance Co Ltd v. Pine Top Insurance Co Ltd20 the common law flirted briefly with the idea that proof of objective materiality led to a presumption of inducement, but that was rapidly abandoned21 and has not re-emerged in the Act. With regard to the law of misrepresentation as it is set out in Section 3, every material representation as to a matter of fact must be substantially correct, and moreover Act is repeating in Section 7(5) the earlier principle that a material representation is substantially correct if a prudent insurer would not consider the difference between what is represented and what is actually correct to be material.22 Every material representation as to a matter of expectation or belief must be made in good faith.23 The most important changes are made to the duty of disclosure. First, although there is much complex authority on the classes of fact that are likely to be material, the Act for the first time provides illustrations, namely: special or unusual facts relating to the risk; any particular concerns that led the assured to seek insurance cover for the risk; and anything that those concerned with the class of insurance and field of activity in question would generally understand as being something that should be dealt with in a fair presentation of risks of the type in question. It is

9 QB 531; Sibbald v. Hill (1814) II Dow 263; Anderson v. Pacific Fire & Marine Insurance Co (1871-72) LR 7 C.P. 65. 19 Drake Insurance plc v. Provident Insurance plc n 24 above; Toomey v. Banco Vitalicio de Espana SA de Seguros y Reasseguros [2004] EWCA Civ 685. 20 Pan Atlantic Insurance Co Ltd v. Pine Top Insurance Co Ltd [1994] 2 Lloyd’s Rep 427. 21 Assicurazioni Generali SpA v. Arab Insurance Group [2003] Lloyd’s Rep IR 131. 22 Eagle Star Insurance Co Ltd v. Games Video Co (GVC) SA, The Game Boy [2004] 1 Lloyd’s Rep 238. 23 Merkin and Gurses (2015), pp. 1005–1015; See general Merkin (2010) and Merkin et al. (2014).

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anticipated by the Law Commissions that the market will put together protocols for specific classes of business, so that the disclosure process can be within settled parameters. Secondly, under Section 3(3)(b) disclosure must be in a manner reasonably clear and accessible to a prudent insurer. Thirdly, and somewhat controversially, although Section 3(4)(a) preserves the rule that the assured must disclose every material circumstance that the assured knows or ought to know, an entirely new provision—Section 3(4)(b)—provides for a lesser form of disclosure that nevertheless complies with the duty of fair presentation, namely that the disclosure “gives the insurer sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing those material circumstances”.24,25 Knowledge plays a key role in the operation of the disclosure provisions, and this feature of the Act perhaps embodies the most obvious changes from the earlier law. The 2015 Act is consistent with the 1906 Act, in that as per Section 3(4) the assured need to disclose only what is known or ought to be known in the ordinary course of business, and as per Section 4(5) there is no duty to disclose what the insurer knows or ought to know. The Act seeks to define “knowledge”. From the assured’s point of view, “knowledge” is defined by Section 4. Where the assured is an individual, that individual’s knowledge must be disclosed, and consists of actual knowledge and “blind-eye” knowledge, the latter meaning matters that the individual suspected, and of which the individual would have had knowledge but for deliberately refraining from confirming them or enquiring about them (as per Sections 4(1)(a) and 6(1)). Where the assured is not an individual, then information known to those individuals who form part of the assured’s senior management must be disclosed (as per Sections 4(3)(a)).26 Two important changes are hereby made, i.e., (a) by Section 4 (6) of the 2015 Act, the assured must disclose circumstances that should reasonably have been revealed by a reasonable search of information available to the insured (i.e., whether the search is conducted by making enquiries or by any other means); and (b) the concept of an “agent to insure” owing separate duties to the insurers has been scrapped and replaced by Section 4(3)(b) by which the assured is under a duty to disclose what is known to one or more of the individuals who are responsible for the assured’s insurance, whether as employee of the assured or independent agent such as a broker (Section 4(8)(b)). Under the pre-existing law, it was uncertain whether the broker had to disclose information obtained by the broker in dealings with third parties.27 The effect of Section 4(4), (5) is that an assured is not taken to know confidential information known to an individual who is an employee of the

24 Marc Rich and Co AG v. Portman [1996] 1 Lloyd’s Rep 430; [1997] 1 Lloyd’s Rep 225; WISE Underwriting Agency Ltd v. Grupo Nacional Provincial SA [2004] 2 Lloyd’s Rep 483. 25 Merkin and Gurses (2015), pp. 1005–1007; See general Merkin (2010) and Merkin et al. (2014). 26 Australia and New Zealand Bank Ltd v. Eagle and Colonial Wharves Ltd [1960] 2 Lloyd’s Rep. 241; Meridian Global Funds Management Asia Ltd v. Securities Commission [1995] 2 AC 500. 27 El Ajou v. Dollar Land Holdings plc [1994] 2 All ER 685; Societe Anonyme d’Intermediaires Luxembourgeois v. Farex Gie [1995] LRLR 116.

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assured’s agent and the information was acquired by the agent (or an employee) through a business relationship with a person not connected with the insurance. With regard to the insurer, as per Section 5(3), information is to be presumed as known to him where there is: (a) actual knowledge on the part of “one or more of the individuals who participate on behalf of the insurer in the decision whether to take the risk, and if so on what terms” in whatever capacity, including (as per Section 6 (1)) “blind eye” knowledge (as defined for the purposes of the assured); (b) presumed knowledge, consisting of common knowledge and things that an insurer offering business of the class in question would reasonably be expected to know; and (c) imputed knowledge, in the possession of an employee or agent who ought reasonably to have passed it on, as long as the relevant information “is held by the insurer and is readily available”.28 Hence, it can be summed up that in relation to the duty of disclosure, the Law Commissions retained the obligation to volunteer relevant information for all insureds who are not consumers. However, the Insurance Act 2015 also includes new provisions relevant to the duty of disclosure. The duty also includes waiver provisions similar to those of the Marine Insurance Act 1906. An insured will have complied with the duty to make a fair presentation if it has provided enough information to put the underwriter on notice to ask further questions. Additionally, the Insurance Act 2015 gives some guidance on how information must be disclosed and who must provide it. The new duty recognises that gathering information in large organisations involves a lot of processes and aims to recognise the impact of Information Technology (IT). The duty of disclosure deals with both the substance of the information provided and its form. The insured must disclose all “material circumstances”, which it knows or ought to know. Failing that, he has to provide sufficient information to put the underwriter on notice to ask further questions. The insured cannot comply with its obligation through merely providing information on every possible fact and circumstance. A fair presentation of a complex risk requires adequate signposting to draw the underwriter’s attention to the relevant facts. The insured knows information known by its senior management; knows information known by the persons arranging the insurance; and he also ought to know information that would reasonably have been revealed through a reasonable search. The Marine Insurance Act 1906 included some limitations to the insured’s duty of disclosure, which have been maintained by the Insurance Act 2015. An insured does not have to disclose information if the insurer knows it, ought to know it or is presumed to know it. The insurer knows what is actually known to its underwriter or their agent. The insurer ought to know both information that should have been passed on to the underwriter and information that the insurer holds in its systems provided that it is “readily available” to the underwriter. The insurer is presumed to know information that underwriters writing the relevant class of business should know. The Commissions did not think that the law should protect the naïve or poorly trained underwriter. Instead the Commissions sought to reinforce good professional

28

Merkin and Gurses (2015), pp. 1005–1015; See general Merkin (2010) and Merkin et al. (2014).

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standards. If the insured fails to make a fair presentation, the insurer always has a remedy provided that it can show that it would have acted differently had it known the truth. If the insured is deliberate or reckless, the insurer can avoid the policy and keep the premium. If the insurer would not have written the risk, again it can avoid the policy but must return the premium.29,30

2.5.3

Contracting Out

Under the Insurance Act 2015, the parties should be free to contract out of the provisions of the Act, as per Section 16(2), subject to transparency safeguards as these are set out in Section 17. There is good reasoning for allowing parties to contract out, subject to the satisfaction of the transparency requirements. Party autonomy is at the heart of English commercial law, and the ability to alter default rules and respond to needs of the assured and changes that occur in law and practice have enabled the market to flourish and establish itself as a leading insurance centre over the course of the last decade. That being the case, it would have been a huge blow for the non-consumer market had the Insurance Act 2015 introduced any constraint on party autonomy. Also, commercial risks often involve a much greater variety of unusual risks than those covered by consumer insurance, making it essential from a risk management perspective to make use of risk control tailormade clauses. Also, in the non-commercial insurance market, the bargaining position of the parties is more balanced, making it rather difficult for the insurers to exploit the vulnerability of the assureds by insisting on terms detrimental to the interests of the insurer. Also, it is the case that the insurers still have an inherent advantage, as they are in a position to know about the niceties of insurance law more than an average assured would; but there is no doubt that the intensive use of professional intermediaries when placing commercial risks helps enormously in bridging the knowledge gap. Hence, in non-consumer policies, a term that puts the assured in a worse position than he would be under the Insurance Act 2015, i.e., a disadvantageous term, is enforceable if the insurer takes sufficient steps to draw

29

Hertzell (2016), https://uk.practicallaw.thomsonreuters.com/6-615-6445? transitionType¼Default&contextData¼(sc.Default)&firstPage¼true&comp¼pluk. 30 Eversheds (2015), The Insurance Industry in 2015 – six key developments, (www.eversheds.com, 12/1/2015), http://www.eversheds.com/global/en/what/articles/index.page?ArticleID¼en/Finan cial_institutions/Insurance_industry__6_key_developments_in_2015; Explanatory Notes to the Insurance Act 2015,http://www.publications.parliament.uk/pa/bills/cbill/2014-2015/0155/en/ 15155en.htm; Law Commission and Scottish Law Commission, Insurance Contract Law: Analysis of Responses and Decisions on Scope, scoping responses paper (August 2006), http:// lawcommission.justice.gov.uk/areas/insurance-contract-law.htm; Law Commission and Scottish Law Commission (2014), Insurance Contract Law: Business Disclosure; Warranties; Insurer’s Remedies for Fraudulent Claims; and Late Payment, Final Report (Law Com № 353/ Scot Law Com № 238, 2014) http://lawcommission.justice.gov.uk/ areas/ insurance-contract-law.htm.

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disadvantageous terms to the attention of the assured before the contract is entered into31 and if such a term is clear and unambiguous as to its effect.32 It will therefore not be possible for insurers to avoid the Insurance Act 2015 simply by introducing a simple additional clause into their policy documentation excluding the application of the Insurance Act 2015 without bringing the Insurance Act 2015 to the insured’s attention and also without explaining not only the unambiguity but also the practical effects and consequences of it. Depending on the characteristics and sophistication of the insured in question and the circumstances of the transaction, it may further be necessary for the insurer to spell out expressly the default position under the 2015 Act and any disadvantageous deviations from it. In addition, what needs be understood and has probably not caught the attention of the legislator is that in many cases, i.e., where previous law (in effect the Marine Insurance Act 1906) has been repealed, there is no “old law” as such to revert to and therefore new provision must be drafted by the parties on an ad hoc basis. This makes even more imperative the need to adhere to transparency.

3 The Consequences of Breach of the Transparency Rule in Insurance Contracts The ways in which there can be a breach of the transparency rule in insurance contracts is via the use of improper standard terms in insurance contracts. Such modes of breach vary to some extent across the jurisdictions of the European Union because the wording of Article 5 of the Unfair Contract Terms Directive 93/13/EEC does not specify consequences of a breach. However, a non-transparent term is considered in most Member States to be unfair, and as such non-binding on the contracting partner. The transparency rule is complemented by the ambiguity doctrine whereby the policy is reasonably susceptible to more than one interpretation when viewed in a common sense, non-technical manner, and in cases where we are construing the policy as a whole after the usual methods of contract Interpretation have failed. Another case of non-transparency would be that of unambiguous terms in very small print or in unwarranted use of technical language. As far as instances of non-transparency caused by ambiguous terms are concerned, however, the ambiguity doctrine is a minimum standard for all member-states of the European Union concerning consumer insurance contracts. Non-transparent terms are considered to be unfair and unfair terms are not binding on either the consumer as per the English law’s approach. Transparency has therefore been an important tool for courts to monitor the core provisions of insurance contracts, which are otherwise not scrutinised for fairness. The intensity of transparency control varies very much from jurisdiction to jurisdictions, but the English courts seem to have taken a less 31 32

Section 17(2) of the Insurance Act 2015. Section 17(3) of the Insurance Act 2015.

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strict approach. Strictly speaking, as regards transparency, the focus, of a transparency yardstick and threshold to preserve, has been on intelligibility of clauses. In addition, the transparency rule as a whole is complemented by the ambiguity doctrine.33

4 Conclusion Transparency plays a vital role in insurance law. In England, the Insurance Act 2015 is an attempt to strike balances between the insurer and the assured and, in that sense, it is argued that it is also, explicitly or implicitly preserving the notion and principle of transparency. Although judicial determination in the form of handing down seminal decisions may not arrive soon, it is apparent that the reform has undoubtedly promoted transparency as a concept and a prerequisite. Most notably, in relation to contracting out, it is admitted that the provisions reflect the philosophy of the Law Commission. Sections 16 and 17 of the Insurance Act 2015 reach the compromise that the Law Commission had in mind without disrupting the overarching aim of the Insurance Act 2015. In other words, insurers have enough flexibility to bypass the Insurance Act 2015 by following a test that is relatively straightforward, legal in nature but also pragmatic to apply. However, a potential judicial issue that will need to be clarified in future judgments is relating to Section 17(4) of the Insurance Act 2015 and in particular in relation to the ways in which to apply the transparency requirement to different types of insurance markets. In effect, Section 17(4) of the Insurance Act 2015 has been intentionally drafted broadly to allow court flexibility when considering future developments in the way insurance is being placed.

References Airmic, Airmic calls for insurance law reform, (Strategic Risk, 15 June 2015), http://www.strategicrisk-global.com/airmic-wants-insurance-law-reform/1384905.article Allianz, Allianz Insurance Embraces the Insurance Act 2015 Reforms’, (garratinsurance.co.uk) http://garrattsinsurance.co.uk/allianz-insurance-embrace-the-insurance-act-2015-reforms/ Brand O (2012) Requirements regarding the transparency of standard terms. In: “Transparency in Insurance Law”, AIDA Seminar, Istanbul, 4 May 2012, pp 53–65 CMA (2015) Unfair Contract Terms Explained, CMA37(a), 31/7/2015, https://assets.publishing. service.gov.uk/government/uploads/system/uploads/attachment_data/file/450410/Unfair_ Terms_Explained.pdf Eversheds (2015) The Insurance Industry in 2015 – six key developments, (www.eversheds.com, 12/1/2015), http://www.eversheds.com/global/en/what/articles/index.page?ArticleID¼en/ Financial_institutions/Insurance_industry__6_key_developments_in_2015

33

Brand (2012), pp. 61–62; See general Merkin (2010) and Merkin et al. (2014).

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Explanatory Notes to the Insurance Act 2015, http://www.publications.parliament.uk/pa/bills/cbill/ 2014-2015/0155/en/15155en.htm Hertzell D (2016) Reforms to UK insurance law: overview of key changes. Thomson Reuters Practical Law, Toronto, https://uk.practicallaw.thomsonreuters.com/6-615-6445? transitionType¼Default&contextData¼(sc.Default)&firstPage¼true&comp¼pluk Law Commission and Scottish Law Commission (August 2006) Insurance contract law: analysis of responses and decisions on scope, Scoping responses paper, http://lawcommission.justice.gov. uk/areas/insurance-contract-law.htm Law Commission and Scottish Law Commission (2014) Insurance contract law: business disclosure; warranties; insurer’s remedies for fraudulent claims; and late payment, Final Report (Law Com № 353/ Scot Law Com № 238, 2014) http://lawcommission.justice.gov.uk/areas/insur ance-contract-law.htm Law Society (October 2012) Unfair terms in consumer contracts, a new approach? Issues Paper, UK Merkin R (2010) Colinvaux’s Law of Insurance, 9th edn. Sweet & Maxwell, London Merkin R, Gurses O (2015) The Insurance Act 2015: rebalancing the interests of insurer and assured. Modern Law Rev 78(6):1004–1027, 1005–1007 Merkin R, Hjalmarsson J, Bugra A, Lavelle J (2014) Marine insurance legislation. CRC Press, Boca Raton Wandt M (2012) Transparency as a General Principle of Insurance Law. In: “Transparency in Insurance Law”, AIDA Seminar, Istanbul, 4 May 2012, pp 9–23

Transparency in the Insurance Contract Law of Israel Peggy Sharon

1 Introduction The Israeli Law requires transparency and imposes duties of disclosure on the parties in various relationships in the insurance field: between insurer—insured, insurance agent—insurer/insured, Third Party injured—liability insurer of tortfeasor. We will first present the Israeli Law arrangements regarding the relationship of the insurer-insured. The insurance transaction is concluded between these parties under the uncertainty of whether the insured event might occur, and hence the insured, on the one hand, needs to consider the benefit he may enjoy from purchasing the insurance policy and the price thereof, and on the other hand, the insurer will focus on the evaluation of the probability that the damage will occur and its scope, according to which factors he will price the premium. Each of the parties only has partial information relating to the insurance transaction, and the relationship is characterized by inequality and lack of information balance.1

2 The Legal Sources of Insurance Law in Israel: General The primary source of the Israeli Insurance Law is the Insurance Contract Law, 1981.

1

See Schwartz and Schlinger (2005), p. 64.

P. Sharon (*) Tel Aviv, Israel e-mail: [email protected] © Springer Nature Switzerland AG 2019 P. Marano, K. Noussia (eds.), Transparency in Insurance Contract Law, AIDA Europe Research Series on Insurance Law and Regulation 2, https://doi.org/10.1007/978-3-030-31198-8_25

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Before the legislation of this law, the Insurance Law was based mainly on the English Common Law, which was applied since the British Mandate on Palestine (1922–1948) and continued to apply in Israel after the establishment of the State of Israel. The drafters of the new law sought to establish arrangements more balanced as between the insurer and insured.2 The Insurance Contract Law was inspired by the Continental Laws of Germany, France, Italy and mainly the Swiss Insurance Law, 1908. It brought significant changes as compared with the prior law: as a consumer protection orientated law, the Insurance Contract Law limited the duties of disclosure of the insured as compared with the previous duties based on the Common Law, and instead of the broad duty to initiate disclosure of information during the pre-contractual phase, as previously required from the insured, the disclosure duties are limited, and the insurer’s right to be exempt from payment of insurance benefits because of nondisclosure is also limited. The Insurance Contract Law also regulates the position of the insurance broker and provides in express terms that the broker is considered by law as the agent of the insurer for the conveyance of information from the insured, payment of premium and giving notifications. This aspect of the law replaced the previous legal position of the broker, which was determined by the court, according to factual evidence, case-bycase.

2.1

The Role and Powers of the Commissioner of Insurance

In view of the specific characteristics of the insurance contract, the Israeli legislator enacted the Control Law over Financial Services (Insurance) Law, 1981 (hereinafter: The Control Law). Insurance is an essential and indispensable service consumed by the public, Therefore, the protection of the insured vis-à-vis the insurance company is in the public interest. The insurance product is characterized as a sale of an abstract service that the layman may find very difficult to understand. These characteristics necessitate the setting of specific yardsticks governing the insured-insurer relationship and the distribution of risk.3 The Israeli Supreme Court recognizes the vitality of this service purchased as a matter of routine by the public. In view of that, the legislator imposed on the State the duty to control and oversee the insurance market. By the Control Law, the Commissioner of Insurance was granted the authority to give licenses to insurers and intermediaries and set the various considerations that the Commissioner should

2 See Draft of the Insurance Law, 1975 (published in Hatza’ot Chok [bills] No. 1209 October 16th 1975, p. 22). 3 See C.A. 11081/02 Dolev Insurance Company Ltd., v. Kadosh (2007).

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consider while examining a request for a license, all directed to one central objective, which is the protection of the interests of the insureds.4 The State therefore, established specific regulators of the Insurance industry. The State regulation is aimed at securing a proper operation of the insurers and preventing a possible collapse of insurance companies because of improper policy of risk management.5 One of the main purposes of said regulation is to make sure that when required, the insurance companies will be ready and able to pay the insurance benefits to the insureds under the policy terms.6 In some judgements, the authorities of the regulator were construed as being divided into two separate goals: protecting the insureds on the one hand, and on the other hand, regulating the insurance market and protecting the stability of the insurance companies. In one case,7 the Court stated that the supreme aim envisaged by the Control Law is to protect the insureds. In view of the gap of information and imbalanced powers of the parties to the insurance contract, the Courts gave a broad interpretation to the authority of the Commissioner to issue directives that will bind the insurance market at large. In the same year, 1981 the Insurance Contract Law was legislated. The objective of this law as declared by the legislators is to protect the consumer. The Insurance Contract Law deals with the relationship between the parties to the insurance contract whereas the Control Law regulates the State control over the insurance business. The Insurance Contract Law is part of the Private Law whereas the Control Law is a part of the Administrative Law.8 However, these two laws sometimes overlap, for example, Chapter 5 of the Control Law regulates matters that are part of the contractual relationship of the insured and insurer (duties of the insurance company towards the insured as being part of the Private Law). According to the Control Law, the Ministry of Finance can intervene in the contractual relationship of insureds and insurers and set regulations for all branches of insurance or part thereof, concerning instructions on terms of insurance contracts, for example—motor vehicle insurance (property) and the branch of apartment insurance. In these branches, the regulator provided terms for the insurance policies that cannot be stipulated against except for the benefit of the insured. The Commissioner of Insurance is appointed by the Minister of Treasure and was authorized by the Control Law to give instructions concerning the ways of operation and management of insurers, intermediaries, officers thereof and anyone employed by them, to secure the proper management of the insurance companies and the

4

See SCJ 7611/01 Maccabi Magen v. Minister of Treasure (2004). See SCJ 6127/00 The Commissioner of Insurance v. Zion Insurance Company (2004). 6 See SCJ 6127/00 The Commissioner of Insurance v. Zion Insurance Company (2004). 7 See: SCJ 7721/96 The Association of Insurance Loss Adjusters v. the Commissioner of Insurance (2001). 8 See Elias (2016), p. 1597. 5

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intermediaries, guard the interests of the insured and the client and to prevent harm to the insurer’s ability to fulfil its obligations (Article 2(b) of the Control Law). Based on this Article, the Commissioner of Insurance is authorized to issue general directives. Another power granted to the Commissioner of Insurance is based on Articles 60–62 of the Control Law that grants the Commissioner competence to deal with and determine complaints concerning an action of an insurer or Insurance broker. While dealing with a complaint the Commissioner of Insurance may issue general directives to all insurers to rectify a wrong action, which was revealed by the complaint and is relevant to other insurers. In addition, the Commissioner of Insurance may decide the specific dispute brought by the complaint, and its decision is deemed quasi-judicial and may be appealed before the District Court. The directives of the Commissioner of Insurance play an important role in the issue of transparency.

3 The Insured’s Disclosure Duty Towards the Insurer The main object of the duty of disclosure of the insured is to limit the information gap between insured and insurer that may lead to a wrong classification of insureds and a wrong sectioning of risk groups.9 The rationale at the basis of imposing a duty of disclosure on the assured is anchored not only in moral considerations but also in the assumption that it is cheaper to impose on the assured a duty of disclosure regarding the details within his knowledge, since otherwise, the costs of clarifying the information by the insurer will be transferred to the assured by raising the insurance premium.10 The information gaps between the insurers and the assureds are likely to cause an erroneous classification of the assureds and to an erroneous segmentation of the risk groups . . . at the end of the process, the entire insurance mechanism is likely to collapse.11

3.1

Pre-Contractual Disclosure Duties

The duty of disclosure imposed on the insured during the pre-contractual phase is regulated by Articles 6–8 of the Insurance Contract Law, 1981. These Articles significantly limit the duty of disclosure of the insureds in Insurance Contracts as compared with the general duty of disclosure set in the General Contracts Law.12

9

See Shalev (1990), p. 20. See Schwartz (1997), p. 31. 11 C.A. 1809/95 Yehoshua Helman v. La National Insurance Co. Ltd., 50(3) PD77 (1996). 12 Contracts Law (General Part), 1973 (published in Sefer Ha-Chukkim [book of laws] No. 694 April 19th 1973). 10

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Under the General Contracts Law, each contracting party owes a duty of good faith to the other party, a duty that includes full disclosure and the duty not to mislead the counterparty. This principle was changed as far as the insurance contract is concerned, by the Insurance Contracts Law, 1981, which favored the insured, and limited the insured’s duties of disclosure, as compared with the parties to a general contract. Under the Insurance Contract Law, the insured owes a duty to give full and honest answers to questions posed by the insurer before the conclusion of the contract (Article 6A). Hence, the disclosure is confined to the issues related to by the insurer with no requirement from the insured to initiate disclosure on other issues except for concealment of material matter with fraudulent intent. As will be detailed hereinafter, the insured is required not to conceal, with fraudulent intent, a matter that he knows to be a material matter, a concealment of which will be considered by the law to be an incomplete and dishonest answer.

3.1.1

Duty to Provide Complete and Honest Answers to Questions Posed by Insurer

Article 6A provides as follows: Where before the conclusion of the contract, the insurer asks the insured person in writing, either on the insurance offer form or otherwise, a question as to a matter likely to affect the willingness of a reasonable insurer to conclude the contract at all or to conclude it on the conditions contained in it (any such matter hereinafter referred to as a “material matter”), the insured person shall reply to it in writing, completely and honestly.

The Article requires written questions, in the absence of which the insurer cannot rely on the answers. A “material matter” was defined as such that may influence the willingness of a reasonable insurer to conclude the contract. Hence, a question regarding a matter that is not substantive may not be considered “a question” under Article 6. Reasonable insurers—the law seeks an objective test concerning the materiality of the question.13 A “material matter” is defined as any matter that may influence the chances of risk materialization, special defects in the property insured, or matters relating to the insurance history of the insured or his being a moral hazard in view of previous insured events.14 Refusal of an insurer to insure or renew the insurance contract15; Any fact that may have bearing on the credibility of the insured, including facts relating to his past involvement in criminal matters;

13

See C.A. 1845/90 Sinai v. Migdal Insurance Co. PD 47 (5661). See C.A. 103/72 Lloyds Underwriters v. Alayof PD 27 (1) Page 145. 15 See C.A. 108/71 Nemirovsky v. Menora Insurance PD 26(1) Page 301. 14

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A full and honest answer means a true and full answer, and therefore any response that is partial or conceals part of the facts will not satisfy the requirement. For example, a response pertaining to various diseases in a question regarding the health condition of the insured, concealing a heart attack or heart disease, will be within the Article.16 In the matter of L.C. v. Menora,17 the insured replied “No” to a question whether she suffered from symptoms of diseases and any health disorder. In retrospect, it became evident that the Plaintiff suffered from mental stress. The Plaintiff argued that she did not know that it was a disease, and therefore replied in the negative. The court held: . . . purely pretending innocence, and in any case, she (the Plaintiff) had the duty to list these symptoms in her declaration. The interpretation of these symptoms could have been imposed, in this case, on the insurance company, who was entitled to thoroughly examine them or to ignore them, but the very disclosure of the symptoms, their description and details. . . was the clear duty of the insurance candidate Plaintiff.

Article 6(b) prohibits posing broad questions embracing various matters. Such a question will not require an answer as defined unless it was reasonable upon the signing of the contract. As the Insurance Contract Law is consumer protective orientated, the duty of the insurer to pose specific and clear questions is aimed at limiting the insured’s duty of disclosure to specific and clear questions. Answers to be attached to the policy: Article 4 of the Insurance Contract Law requires the insurer to attach a copy of the answer to the policy to be able to rely on it. The Court held that this Article applies in circumstances of doubt or dispute over whether the insured did answer the specific question, and does not apply where this fact is clear and undoubted.18

3.1.2

Duty Not to Conceal Material Matters with Fraudulent Intent

The law also imposes on the insured the duty to initiate disclosure where he has information that is material for the insurer, even if he was not expressly asked about it. This duty stands separately and in addition to the duty to give full and honest answers to the insurer’s questions.19 Article 6(c) provides: 16

See C.A. 855/86 Moria v. Isharov PD 42(2) Page 201. See C.F. 33476/94 (Tel-Aviv) L.C. v. Menora Israeli Insurance Co. Ltd., Dinim Magistrates, Volume 16, 627. 18 See Article 16(a) of the Insurance Contract Law; C.A. 2230/92 Tzemach v. Zion Insurance Company Ltd. 48(2) PD 256. 19 See C.A. 1809/95 Helman v. La National Insurance Co. 50(3) PD 77, 82; Schwartz and Schlinger (2005), p. 294; RCA 104/08 John Doe v. Menora at p. 11; However, this is a limited duty, and the party that alleges its breach should prove fraudulent concealment of the matter and awareness of the insured of the materiality of the matter. 17

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The concealment by the insured person, with fraudulent intent, of something he knows to be a material matter shall be treated as the giving of a reply which is not complete and honest.

The legislator, and subsequently—the courts, made a clear distinction between the mental state of the assured under Article 6(a)—providing a response to a question and Article 6(c)—initiated disclosure. Article 6(a) of the law does not require any specific mental element for failure to provide full and honest answers. This duty may be breached even where the insured acted in good faith.20 In comparison, in Article 6(c), a proof of fraudulent intent is required. Yaron Elias in his book of “Insurance Law”,21 also reiterates that Article 6(a) of the Law does not require a certain mental state of the assured. The same consequence applies if the faulty answer results from malice, negligence or good faith.22 Under Article 6(a), it is irrelevant that the assured did not attribute importance to the information not revealed. Suffice it that any reasonable person would have known that the answer is not full and correct.23 The false reply of Plaintiff was perhaps given unintentionally and without a calculated desire to deceive the defendant insurance company, but rather inattention to the disease, but in a situation in which any reasonable person should have known that the reply is not complete and accurate.

The test is that of the “reasonable person” and it is of no interest what the insured actually thought, when completing the proposal form. In Helman v. La Nacional Insurace,24 the court ruled: “The goal of Article 6 is to oblige the insured to give a “complete and honest answer” to the insurer’s questions on a “material matter” (Article 6(a)) and to disclose other material matters, even if not questioned about such matter (Article 6(c)), and that is the initiated disclosure duty. . .”. In John Doe v. Menora25: The Court dealt with the question whether the insured should update the insurer concerning a change in his health condition, which occurred after the time of signing the proposal form and his health declaration, and before the date of the conclusion of the insurance contract (The “Interim period”). The Supreme Court held that as regards the duty of disclosure of the insured in life insurance during the interim period, Article 6(c) of the Insurance Contract law should apply, with the necessary adaptations. To succeed in arguing that the non-disclosure is a breach within the scope of this Article, the insurer should prove—non-disclosure, fraudulent intent, the

20

See Friedman (1972), p. 158. See Elias (2016). 22 Also see C.C 776268/95 Lerner v. Shimshon Insurance Co. (1997). 23 C.C 776268/95 Lerner v. Shimshon Insurance Co. (1997), p. 11. 24 C.A. 1809/95 Joshua Helman v. La Nacional Insurance Co. (1996). 25 R.C.A. 104/08 John Doe v. Menora. 21

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non-revealed issue being a material matter, and awareness of the insured to the materiality of the matter. These elements should be checked with reference to each point in time—upon signing the health declaration or the interim period. The insured will not always be aware of the fact that a change occurring in this period might evolve into a material change of risk that is important to the insurer. Although upon the signing of the declaration one may link the knowledge of the insured of the materiality of the matter to an intent to defraud, in the interim period there is no such inference of fraudulent intent during the interim period. For concealment of a matter by the insured to be considered an answer that is not complete and honest, three conditions must materialize: (1) The matter must be material, as in important enough to deter a reasonable insurer from signing the contract, upon its existing terms or altogether; (2) The insured must be aware that the concealed matter is material; and (3) That the concealment of the matter was driven by fraudulent intent. The first condition is examined by an objective standard, whereas the other two are examined subjectively.26 Fraudulent intent is the key factor to impose an expectation of Initiated Disclosure on the insured, even when the insurer did not pose questions relevant to the matter. The burden of proof is on the insurer, and as ruled in Hachsharat Hayeshuv v. Yosef Gill27: “. . .The burden of proof concerning fraudulent intent on the part of the insured is one of great difficulty, if not impossible, since it is unlikely that the insured shall confess on his own volition. Therefore, it must be deducted from all the circumstances of each individual case. . .” and in Harel Insurance Co. v. Kislev28: “. . .intent is usually a deducted conclusion from extreme circumstances, for we are not mind-readers. . .” In Eliyahu Insurance Co. v. The Estate of Rachel Piamenta,29 the Supreme Court delved into the interpretation of Article 6(c) of the Insurance Contract Law and ruled that in most cases where information about a material matter remains undisclosed, it will be deemed “concealment” even if no active measures were taken to hide the information. As for “fraudulent intent”, it is necessary that the actions of the insured will stem from his intention to conceal a material matter based on his assumption that otherwise, the insurer will not sign the contract. When examining the “material matter”—the question of whether a matter is “material” will be determined by the nature of the matter and its relevance to the risks, which the policy aims to cover, as well as the gravity of the expected risk and its likelihood. The level of “awareness” that the information is in-fact material should be substantial, and the courts do not tend to see the insured as someone able of evaluating the importance of information to the insurer. This “awareness” can be easily concluded where the insurer presented questions regarding the matter, question that reveals the insurer’s interest in such

26

C.A. 282/89 Rotenberg v. Clal Insurance Co. (1992). C.A. (District-TA) 1083/92 Hachsharat Hayeshuv v. Yosef Gill. 28 C.A. (District-Haifa) 4301/99 Harel Insurance Co. v. Kislev (2000). 29 C.A. 1064/03 Eliyahu Insurance Co. v. The Estate of Rachel Piamenta (2005). 27

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material information. Where the information pertains to a matter that any reasonable person would understand as relevant to the insurance, it would be up to the insured to prove that he was not aware of said relevance. The insured’s subjective awareness is also interpreted in light of the gap of information between the parties, and because of the [court’s] tendency to protect the insured, it is up to the insurer to explain the scope of risk to the insured, in a detailed and explicit way. On the matter of disclosure in policies, which include retroactive coverage, the court has ruled in Menora v. Yuvalim30: “The elements of risks and uncertainty must exist in retroactive coverage policies. . .this means that these kinds of policies do provide retroactive coverage, but the coverage only applies for insurance incidents where neither party knew of their occurrence at the time of concluding the contract. . .there is no way to allow an insured to receive retroactive coverage for damage which he knew of at the time of finalizing the contract.”

3.1.3

Remedies for Breach of the Insured’s Disclosure Duties

The failure of the insured to give a complete and honest answer to a question posed by the insurer, entitles the insurer before the occurrence of the insured event—to rescind the contract of insurance (Article 7(a)) and where the event had occurred before the contract was rescinded—the remedy shall be partial insurance benefits (Article 7(c)), or full exemption from liability towards the insured in case of fraud or where a reasonable insurer would have not concluded the contract even for higher premium (Article 7(c)(1), 7(c)(2)). The law distinguishes between the case where the insurer learned about the non-disclosure before the occurrence of the insured event, and where the insurer knew about the non-disclosure only after the occurrence. In the first case, the insurer is entitled to rescind the contract and reimburse the premium, and in the second—to reduce the insurance benefits proportionally. Article 7(a) entitles the insurer to rescind the contract—hence, it is not cancelled automatically from inception. The insurer should give a cancellation notice to the insured within 30 days from the date he became aware of the breach. The contract of insurance is cancelled 15 days after the notification had been duly served. Article 7(b) provides for reimbursement of premiums for the period after cancellation, after deducting the insurer’s costs. Where fraudulent intent of the insured is proven—there will be no reimbursement of premium. Article 7(c) provides for the partial payment of insurance benefits. Where the insured event occurred before the cancellation of the policy—the insurer is obliged to pay only the share of the insurance benefits, which is in the same ratio between the premium, which would have been charged for the true facts, had they been known, and the premium actually charged.

30

C.A. 1530/02 Menora Insurance Co, v. Yuvalim Aguda Shitufit (2004).

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The burden lies on the insurer to prove the premium that would have been charged for the hidden facts and where the insurer fails to do so—he will not be granted a reduction of his liability to partial payment.31 Pursuant to Article 7 (c)(2), following the occurrence of an insured event, the insurer is completely exempt from payment of insurance benefits when the insured provided an incorrect answer when questioned on a material matter, and it does not matter if he did so with intent to deceive. This rule was expressly held by the Supreme Court in the matter of Zemach v. Zion,32 and was approvingly quoted later in a large number of judgments. . . . when we are dealing with giving a complete and honest response to a written question that the assured was asked by the insurer, it is not necessary that it should be accompanied by intent to deceive on the part of the assured, in order for the insurer to be eligible for the exemption from the payment of insurance benefits pursuant to Article 7(c)(2) of the Law.33

3.2 3.2.1

Post Contractual Disclosure Duties Duty to Disclose Aggravation of Risk

Under Article 17, where the Insured becomes aware that a material change has occurred, he shall immediately notify the Insurer to such effect in writing. This duty is aimed at minimizing the information gap between the insured and insurer, where an unexpected change may significantly have bearing on the risk. The Law assumes that the insurance contract is concluded for a certain risk and where the risk changes during the policy period, the insurer should be afforded with the opportunity to reassess its willingness to insure the insured and negotiate the terms upon which the contract will be adapted to the new risk. This object does not relate to all types of insurance as in some of them the risk is dynamic and the aggravation thereof is already considered for the premium. Under Article 49 of the Law, Articles 17–19 will not apply to life insurance under Article 54, this relates also to accident, sickness and disability insurances. Article 17 defines ‘material change’ as any of the following: (1) A change in a material matter, concerning which a question was put to the Insured before the conclusion of the contract, such change occurring after a reply to this question was given;

31

See C.C. 5290/01 Zaid v. Migdal Insurance Co. (2004). See C.A. 2230/92 Zemach v. Zion Insurance Co. Ltd. 33 See also C.A. 1272/94 (Tel-Aviv) Dina Cachlon v. Migdal Insurance Co. Ltd., District Dinim, Volume 26(7) 525; See also C.F. 5734/93 (Beer-Sheba) Abu Elkian Taleb v. Clal Insurance Co. Ltd., Magistrate Dinim, Volume A, 895; and C.F. 1449/90 (Ashdod) Asher Basiri v. Menora Insurance Co. Ltd., Magistrates Dinim, Volume A, 179. 32

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(2) A change which occurred after delivery of the policy to the Insured in respect of a matter expressly noted therein as a material matter; (3) the discovery that the reply to a question concerning a material matter was incorrect and that the risk to the Insurer is substantially increased in consequence. Within 30 days from the day on which notice of a material change is delivered to the insurer or from the day on which he otherwise becomes aware thereof, whichever the earlier, and so long as the event of risk insured against has not occurred, the insurer may cancel the contract by written notice to the insured. Where the insurer cancels the contract by virtue of this Article, the insured is entitled to a refund of the premium paid by him in respect of the period subsequent to the cancellation unless he acted with fraudulent intent. Where the insurer does not cancel the contract, he will be regarded as agreeing to its continued existence notwithstanding the change. Where the event insured against occurs before the contract is cancelled by virtue of this Article, the insurer is only liable for such part of the insurance benefits as bears to the whole thereof the same proportion as the agreed insurance premium bear to the premium which according to his usual practice was to have been paid in the situation subsequent to the change; and he is altogether free from liability if any of the following is the case: (1) Notice under Article 17 was not given, the omission being made with fraudulent intent; (2) A reasonable insurer would not have entered into the contract, even for higher premium, if he had known what the situation was after the change; in this case, the insured is entitled to a refund of the premium paid by him in respect of the period subsequent to the change. In any of the following cases, the insurer is not entitled to the remedies mentioned in Article 18: (1) Where the change ceased to exist before the occurrence of the event insured against or did not affect its occurrence or the liability of the insurer or the extent thereof; (2) Where the change was the result of a measure taken at the discretion of the insurer; (3) Where the change was the result of a measure taken to prevent grave damage to a person or to property, provided that the insured notified the insurer, in writing, of the taking of the measure immediately after he took it or became aware that it had been taken.

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P. Sharon

Duty to Cooperate After Occurrence of Insured Event

Upon the occurrence of the insured event, the insured and/or the beneficiary should notify the insurer immediately of the occurrence and of the insured’s right to benefits of insurance. The notification may be in writing or verbal, and its objective is to enable the insurer to check its liability under the policy when the information and evidence relating to the occurrence are fresh and existing, and to enable the insurer to mitigate the damage.34 The duty of the insurer to examine its liability under the policy is triggered by a written claim to pay insurance benefits.35 The written claim may be delivered to the insurer together with the notification concerning the insured event, or afterwards.36

4 The Insurer’s Disclosure Duty Towards the Insured 4.1 4.1.1

Pre-Contractual Disclosure Duties Duties and Remedies Under the Insurance Contract Law, 1981

The Insurance Contract Law imposes on the insurer various duties that are aimed at making the policy terms and exclusions clear and understandable for the insured. First, the policy should be delivered to the insured: Article 2 (a) provides: Where an insurance contract has been concluded, the Insurer will deliver to the Insured a document signed by the Insurer specifying the rights and obligations of the parties (hereinafter: ‘policy’) unless it is customary in the class of insurance concerned not to issue a policy.

Article 3 provides: Any condition or exclusion to liability of the Insurer or on the extent thereof shall be specified in the policy close to the subject to which it relates or be indicated therein with special emphasis. The Insurer is not entitled to rely on a condition or exclusion in respect of which this provision is not complied with.

34

See: Herman (1995), p. 37. Article 23(a) of the Insurance Contract Law. 36 See Yadin (1981), p. 81. 35

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603

Duties and Remedies Under the Contract Law (General Part), 1973: Good Faith in Pre-Contractual Phase and During Performance of Contracts

According to Elias,37 a pro-consumer mindset guides both the Israeli legislator and the courts, and understandably, Israeli courts tend to impose duties of good faith of a greater magnitude on the insurers. The pro-consumer mindset considers the various factors that necessitate greater scrutiny, such as the special characteristics of the field of Insurance, and the public role of the insurers. The breach of the duty of disclosure on the part of an Israeli insurer is usually examined from a contractual perspective, and the insured can sue for any contractual remedy, including specific performance or damages.38 Whether pertaining to the pre-contractual phase (governed by Article 12 of the Contract Law) or the contract period itself (governed by Article 39 of the Contract Law), the duty of good faith often serves as the primary legal vehicle for the expansion of the scope of duties on the part of the insurers. Since the insurer is usually the drafter of the contract and its terms, the interpretation of the duty of good faith by the courts may also span beyond the written contract, possibly imposing additional duties on the insurer.39 The importance of the public interest and public trust in the insurers, the public role played by the insurer, the social goal of caring for those who suffered injury or damage, the power gap between the consumer and insurer, the standard form, the contract and its complexity, etc., require a greater duty of good faith on the part of the insurer.40 According to Friedman & Cohen,41 misrepresentation may render the contract voidable. In Aljaber v. The Phoenix Insurance Co.,42 an American citizen was involved in an accident while driving with an American driving license. The insurer argued for non-coverage in view of a condition according to which the insurance is subject to an Israeli driving license. The insured argued that the insurance broker did not explain to him the requirement of an Israeli license, and therefore the insurer should be bound by her negligence. The court accepted the argument that the insurance broker acted as agent of the insurer during the pre-contractual negotiations, therefore, in case the agent misleads the third party, such third party may cancel the legal act even in case where the principal was innocent. In view of the fact that the insurance broker did not act in excess of her authority, hence the insurer is bound by the fact that the insured was not informed about this requirement and therefore, the coverage applies to the accident even in the absence of an Israeli

37

Elias (2016), vol. B, pp. 259 and 260. Elias (2016), vol. B, p. 265. 39 C.A 188/84 Tzur Insurance Co. v. Hadad (1986). 40 C.A 11081/02 Dolev Insurance Co. v. Kadosh (2007). 41 Friedman and Cohen (2003), p. 500. 42 CC 23366/00 Aljaber v. The Phoenix Insurance Co (2003). 38

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driving license. In this case, the insured chose not to cancel the contract of insurance as a whole but rather cancel the condition of which he was not informed, (i.e., partial cancellation). In Pneidar v. Castro,43 a landmark case on pre-contractual disclosure duties, a company officer in a construction company did not warn the buyer of an apartment that the company did not own the land on which the building stood. Because of the fiduciary relationship, the buyer was awarded damages and the officer was found personally liable, even though he was not party to the contract and in-fact was an organ of the company, technically seen as an agent under agency laws. In the Additional Hearing,44 Justice Barak emphasized that the duty of good faith and fair dealing, which stems from Article 12, has become deeply engrained in Israeli ruling. According to Friedman & Cohen45: “. . .as Article 15 of the Contracts Law reads: “misrepresentation includes non-disclosure of facts which by law, custom or circumstances should have been disclosed by the other party. . .therefore whoever claims to have been misled by way of non-disclosure must point to the existence of a disclosure duty stemming from law, custom or circumstances”. Article 14(a) of the Contracts Law reads: “He who is engaged in contract due to mistake and it can be assumed that had it not been for this mistake he would not have entered into the contract, and the other party knew or should have known of this, may cancel the contract.”. The general disclosure duty pertains to material facts where one party knows that the other is mistaken about. These key Articles 15 and 14(a) are joined by the general duty of good faith and fair dealing in negotiations [in Article 12]. . .”. The insurer’s duty of disclosure is therefore comprised of both an active duty to disclose and a duty to refrain from misrepresentation.46 The key difference between Article 12 (good faith and fair dealing) and Articles 14(a) (mistake), Article 15 (misrepresentation), Article 17 (duress) and Article 18 (oppression), is that the remedy for the breach of Article 12 is damages, while the remedy for breach of the others is cancellation of contract. Naturally, sometimes the behavior of a party will be a breach of several articles, awarding both damages and cancellation, yet in other times there could be instances of mistake or misrepresentation that will not be intentional or negligent enough to constitute a breach of the duty of good faith, therefore awarding cancellation but not damages. Furthermore, Article 15 of the Contracts Law provides that a party that had entered into a contract because of misrepresentation by the other party may terminate the contract. Therefore, if the insured is misled by the insurer, he may terminate the contract and demand restitution.

43

C.A 230/80 Pneidar v. Castro. A.H 7/81 Pneidar v. Castro. 45 Friedman and Cohen (1991), pp. 580–581. 46 C.A 453/11 M.S. Alluminum Products Ltd. v. Aryeh Insurance Co. (2013). 44

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605

Duties According to Court Precedents

As indicated above, the insured’s duty of disclosure was limited by the Insurance Contract Law to giving full and honest answers to insurer’s questions. By that, the insured’s duties of disclosure are narrower than those of a party to any general contract, e.g., a contract of sale, hire, etc. However, the Insurance Contract Law did not limit the insurer’s duties of disclosure and good faith as imposed by the General Contracts Law. Where the insurance involved is such that is very crucial and important for the insured, the disclosure duty expected on the part of the insurer will be broader, as ruled in Stanitzky v. Bank Leumi Mortgages47: “. . .The more important a transaction is to the consumer. . .the greater the importance of the disclosure duty”. In Dolev v. Kadosh, the insurer claimed that the use of a vehicle by a person allowed by the insured to drive for the purpose of his business was not covered by the policy, which gives coverage to the policyholder or anyone driving the vehicle with his permission, yet also reads: “for the purposes of the business or profession of the policy holder”. The question at hand was whether the wording of the relevant section excludes such use by that other person. The court ruled that failure on the part of the insurer to disclose the conditions and exclusions, explicitly and as early as at time of the pre-contractual stage of the insurance offer, shall result in revocation of the insurer’s right to rely on said conditions. In Zeflovich v. Aryeh Insurance Co.,48 the court ruled that to reduce insurance benefits because of underinsurance, the insurer must first give a preliminary warning to the insured, before signing the policy, about his/her state of underinsurance or risk of being underinsured. Furthermore, the insurer should explain to the insured the effect of underinsurance over the scope of coverage. In M.S. Aluminium Products Ltd v. Aryeh Insurance Co.,49 Justice Barak-Erez ruled that the broader the coverage and the rarer the risks covered, it is up to the insurer to make it clear to the insured that he is not necessarily covered against all risks, which might be the insured’s false expectation in the engagement, and that such clarification should take place in the negotiation stages. Furthermore, when an insurance policy does not cover fairly common risks, the kind one would expect to have coverage from, the insurer must make it abundantly clear that the policy indeed does not cover said risks. Moreover, the insurer is required to point out exclusions, conditions and even circumstances where the insurance does not apply at all. In Borovsky v. Menora,50 the plaintiff claimed that the insurer misled her, exploiting her lack of knowledge and experience in the field of pension scheme, by selling her a “risk” type policy with higher premiums than other insureds, where the insurer could have sold her a different policy where she could have enjoyed the

47

R.C.A 7664/13 Stanitzky v. Bank Leumi Mortgages (2014). C.C 64653/04 Zeflovich v. Aryeh Insurance Co. (2006). 49 C.A 435/11 M.S. Aluminium Products Ltd v. Aryeh Insurance Co. (2013). 50 C.C (TA District) 2668/99 Borovsky v. Menora (2002). 48

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coverage she sought for much less money. The court ruled that the insurer must offer the insurance which is the best for the candidate and the cheapest policy amongst those marketed by the insurer, and explain the differences between them, yet avoid flooding the candidate with information that will harm his ability to make an informed decision. If the policy issued differs in terms from the insured’s request, the insurer must explain these differences or else the policy will be interpreted by the courts according to the insured’s reasonable expectations.51 Moreover, when finalizing the contract, the insurer has a duty to ascertain that the insured is fully aware of the exclusions and conditions of the policy.52 The Israeli courts, bearing in mind that the contents of the insurance offer and policy terms are dictated entirely by the insurer, have ruled that there is a duty of fairness to avoid application of ambiguous and vague phrasing53 or the inclusion of terms and conditions that drain the policy of its content and objective54 The scrutiny of the insurer’s acts is quite far reaching, as in one case, the Supreme Court has ruled that a contract made overcomplicated to the point of uncertainty (in particular—when dealing with a standard form contract), could be deemed a breach of disclosure duties.55 According do Y. Elias56 Israeli Court rulings have blurred the lines between the initiated disclosure duties stemming from the duty of good faith and the prohibited misrepresentation provision of Article 55 of the Control Law, to the point where Article 55 now imposes an initiated disclosure duty, and that an insurer may find himself in breach by way of inaction. Even so, he points to two major distinctions: (1) The duty of disclosure stemming from the duty of good faith remains throughout the entirety of the pre-contractual and contract period, whereas the misrepresentation provision in Article 55 is limited to the pre-contractual phase; and (2) The disclosure duties stemming from the duty of good faith is much broader than the one stemming from Article 55, since the latter only forbids misrepresentation on “material matters”. Article 39 of the Contracts Law often comes into play after the insured event happens, often rendering the insured in financial difficulty. In Tzur v. Hadad, the Israeli Court ruled that as the insurance policy is to be interpreted against the drafter, so should the exclusions. A correct interpretation of an insurance policy cannot overlook the exclusions, yet if the insurer is trying to retroactively argue an unreasonable interpretation of these exclusions, apart from context, to avoid coverage, and said interpretation does not coincide with the parties intentions at the time the contract was signed, then the insurer shall be in breach of the duties of good faith

51

C.A. 846/76 Atya v. Ararat Insurance Co, Ltd (1977). C.A. 4819/92; Eliyahu Insurance Co. v. Yashar PD/29(2) 749. 53 C.C. 16318/96 Hazan v. Shimshon Insurance Co. (1998). 54 C.C. (TA) 13567/96 Ovadia v. Hadar Insurance Co. 55 R.C.A 3489/09 Migdal Insurance Co. v. Zvulun Valley Metal Plating Ltd. (2013). 56 Elias (2016), vol. A, p. 279. 52

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and fair dealing. The same can also apply to an insurer misusing legal proceeding to avoid payment57 or abusing his contractual rights.58 In Gvirtz v. Menora,59 the insured had not made any deposits for several years into his pension fund because of a surgery, after which he was unemployed for 3 years. During this time, the insurer (the fund) did not warn him of the expected damage to his rights because of non-payment of his installments. The court ruled that the insurer was not responsible to advise the insured on how to act, yet had to make sure the insured understood how he should act, under the duty of good faith and fair dealing (pension funds have duties of full disclosure60). In Sold v. Menora,61 the insured was misled by the insurer to believe that her renewed insurance policy will provide “guaranteed return”. The court reiterated the ruling in Atia v. Ararat,62 deciding that the under-disclosure shall be remedied by interpretation of the contract in accordance with the insured’s reasonable understanding [of the contract].

4.1.4

Duties and Remedies According to Directives of the Commissioner of Insurance

The Commissioner of Insurance issued in 201663 a directive64 in which he imposed on insurers and on Insurance Agents a list of duties and obligations to ensure transparency and a vast flow of information to the insured. The Commissioner of Insurance emphasizes that the stages before the conclusion of the insurance contract are very important for both the candidate for insurance and the insurer. The candidate for insurance is interested in receiving detailed and reliable information for him to make an educated purchase, so that he will be able to purchase the insurance product the most suitable for his needs. The insurance company is interested in having the information that will assist it in the decision whether to accept the risk and how to price it. This directive applies to the marketing of new insurances and/or adjoining of insureds to new insurances both individual and group insurances. According to this directive, the first duty of the insurer and the insurance agent is to examine the needs of the candidate to offer him the insurance that will be in

57

C.C (TA) 13567/96 Ovadia v. Hadar Insurance Co. C.A 191/80 The Pheonix Insurance Co. v. Devora Hotel Ltd. (1981). 59 PF(TA)6391-01-15 Baruch Gvirtz v. Menora Mivtahim Pensions Ltd. (Feb. 13th, 2017). 60 C.A (Labour Court) 1341/01 Rappaport v. Mivathim – Social Insurance Institution (2003). 61 OM 15650-09-16 Rachel Rappaport v. Menora Mivtahim Insurance Ltd. (2017). 62 C.A.846/76 Atia v. Ararat Insurance Co. PD 31(2) Page 780(1977). 63 Previously published in 2015 (Commissioner’s Directive 2015-1-12). 64 Published in June, 2016 (Commissioner’s Directive 2016-1-17) Adjoining to Insurance (published 9 June 2016, included in Reshumot—The Official Gazette No. 7701 of February 14th 2018), available at https://mof.gov.il/hon. 58

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accordance with his needs. The examination will include reference to existing insurances, which the candidate may have, reference to kinds of insurance existing, which the insurance company has, and the kind of insurances marketed by the insurance agent. (a) At the beginning of the marketing initiated by an insurance company or agent, the name of the insurance company or agent will be presented to the candidate together with a description of the role of the approaching person and the object of an approach, which is the sale of insurance. Permission of the candidate to continue the act of marketing is required. In case the candidate does not want to continue with this marketing activity—the insurer or the agent will not approach the candidate again at least half a year from the date of refusal. (b) Where a telephone is used, the call should be identified by the telephone number to enable the candidate to call back the insurer or the agent.

Duties of the Company and the Agent Towards the Conclusion of the Contract The main provisions of this directive oblige the company and the agent to act as follows: 1. Ask clear questions in accordance with the proposed insurance and in accordance with the character of the candidate including age and language. 2. Act fairly and transfer reliable information to the candidate. 3. Will give material information concerning the insurance including: the main description of the coverage, the premium—whether permanent or subject to change, the period of insurance, the insurance amount and the main limits. 4. Where the policy includes a first waiting period in which coverage does not apply, and/or exclusions to the coverage, exclusions relating to prior medical condition, or deductible insurer and agent will notify the candidate and will offer him detailed information relating thereto. 5. Terms of payments and dates of collection. 6. Notifying the candidate of his duty to give full and honest answers to questions on material matters and that in case he fails to do so it may influence the payment of insurance benefits.

Duties in Case of Adding to an Existing Policy: Coverage, Extension or Service Coverage Adding coverage or any extension to an existing policy will be carried out only after obtaining the insured and the insurer’s confirmation. Before obtaining such confirmation, the insurer or the agent will give the insured at least the following particulars:

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Description of the main terms of the additional coverage. The premium charged for the additional coverage. The period of insurance. The amount insured. Means of payment. A document detailing the terms of the policy including additional coverage or extension if requested by the insured.

Comparison to, and Cancellation, of the Original Policy Where the original policy was cancelled after the insured was adjoined to a policy offered to him according to this directive, the insured would be entitled to cancel the policy to which he was adjoined within 60 days from the conclusion of the contract and the insurer will enable him to reinstate the original policy without new underwriting or examination of the medical condition, etc.

Disclosure of Relevant Information After the Conclusion of the Contract The insurer or the insurance agent will give the insured a document with the terms of the insurance policy, a document detailing relevant information concerning the coverage, which will be presented in a clear and simple mode (a “details page”). This “details page” will include an explanation concerning the policy chapters and the coverages, the period of insurance, waiting period (where applicable), insured amount, deductibles, etc. Where the candidate shows interest in concluding an insurance contract the insurer or agent will offer to send it to him in writing, or by electronic email or text all the details as stipulated in the Articles above. At the request of the candidate, the insurer/insurance agent will give the candidate the insurance policy document and the attachments, in writing including via email or text. Another Commissioner Directive65 deals with renewal of the insurance contract, and sets rules for the renewal of the policies in which it was not provided that at the end of its period the insurance will be extended. The directive requires the insurer to obtain the agreement of the insured, which will be delivered by mail, post, electronic mail, mobile text or telephone call. The insurer, including through its agent, will document the agreement of the insured, and any conversation should be recorded. Thirty days before the end of the insurance period, the insurer will send the insured a notification that will include the date of expiration, the premium, the deductibles, the need in the insurance agreement

65

Commissioner’s Directive 2016-10-14 Document of Reasoning (published February 1st 2017, included in Reshumot—The Official Gazette No. 7701 of February 14th 2018), available at https:// mof.gov.il/hon.

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being a condition to the renewal and the insurer should indicate the importance of the insurance continuity, in the absence of which the insured may be exposed to liability. In the absence of the insured’s agreement to renew, the insurer may insure him for 21 days without his agreement after expiry of the insurance period subject to giving notification to the insured ahead. The courts recognized the binding force of the Commissioner’s directives, amongst which those imposing enhanced disclosure duties on insurers. For example, in the case of Abramov v. Menora,66 the insured passed away, after which it transpired that the employer ceased transferring the payments for his pension. The court emphasized the disclosure duties of the insurer based not only on the General Contracts Law and the Insurance Contract Law, but on the Commissioner’s directives as well. In this case, the court dealt with the issue whether the insurer (technically—a pension fund), was obligated to notify the insured regarding upcoming changes in his coverage, since his employer has ceased payments to the fund. The court ruled that the appropriate legal policy is to pursue a broad interpretation of the Commissioner’s authority and apply the respective directives. Moreover, the court reiterated the extensive duty of good faith and fair dealing expected on the part of a pension fund, even where the Commissioner’s directives do not apply.

4.2 4.2.1

Post-Contractual Disclosure Duties Duty to Disclose the Reasons for Declination

The insurer who wishes to decline fully or partially an insurance claim, should give the insured (or the Third Party Plaintiff), in writing, the reasons behind the declination. The duty was imposed by the Commissioner of Insurance in a Directive issued in 1998 and later was approved by the Supreme Court67 as being a binding legal duty of insurers. According to the Directive, the insurer should detail in its first position letter all the arguments for the declination of the claim. If the insurer fails to do so, it will not be possible for the insurer to raise any declination reason, which could have been raised at the first opportunity. In the case of The Phoenix v. Assulin, the Supreme Court explained that the rationale of this duty is to grant the insured or the third party claimant the full picture to enable him to decide on his future steps such as whether to accept a settlement offer or to instigate legal proceedings, etc. In view of the Directive and the Supreme Court precedent of Assulin, the courts struck out from Statements of Defence filed by insurers, any defence reasoning that was not included in the first declination letter. For example, in the matter of Eliahu

66 67

PF(TA) 11002-10-13 Noam Abramov v. Menora Mivtahim Pensions Ltd. (Nov. 18th, 2015). See LCA 10641/05 The Phoenix v. Assulin (4.5.2006).

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v. Ayash,68 a hotel guest sustained bodily injury to his head and neck after jumping into a swimming pool at the hotel. The hotel approached the insurer and received a laconic response letter according to which the accident has no insurance coverage under the policy. When the claim was filed in court by the injured, the hotel had sent a third party notice to the insurer. The Statement of Defence against the third party notice included declination arguments that were obviously not included in the above mentioned declination letter. The court accepted the hotel’s motion to strike out all these arguments detailed in the Statement of Defence being in breach of insurer’s duty to detail all declination arguments in its first position letter. The insurer appealed this decision and the Supreme Court dismissed the appeal stating that the declination letter did not include the full position of the insurer and by that it breached the object of enabling the insureds or the injured parties to weigh their steps before approaching the court. An answer according to which the accident does not have insurance coverage, does not disclose to the insured or to a third party, the full position of the insurer or all the reasons, which are at the basis of its position, as required by the Commissioner’s directive. Behind the vague reasoning given to Plaintiff may be a multitude of explanations and reasons due to which the accident does not have an insurance coverage. The Directive expresses a clear objective of protection of the insureds against a situation of information gap concerning the real and detailed position of the insurance company, which may make it possible to check the proper way to deal with it. The Directive of the Commissioner also contributes although indirectly to the avoidance of futile court proceedings as a potential claimant who knows ahead the defence arguments of the insurer, can consider thoroughly whether there is a chance for a claim against the insurer or whether its chances are too slim. A “super declination argument”, which is general and vague, and which may include a variety of arguments, does not differ from not giving any reasoning at all as in both cases Plaintiff does not have any ability to assess or to handle the position of the insurer. In the present case, the insurance company added to its defence factual allegations according to which the behavior of the insured caused the inapplicability of the insurance coverage to the accident. Such arguments should be brought to the knowledge of the insured to enable him to respond to them or to be convinced that they are right. Consequently, in this case as in many others, new defence allegations raised by the insurers not detailed in the first declination letter were struck out from the Statements of Defence, and the insurers were not allowed to raise them as defences in the court proceedings. Another legal basis for this duty of good faith is the duty imposed by the Contract Law (General Part), 1973, Article 39, which applies to the insurer when it performs the contract of insurance. By this duty, the insurer may not withhold information

68

LCA 2121/14 Eliyahu Insurance Co. v. David Ayash Ifrah & Others (2014).

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from the insured regarding his declination arguments and using them afterwards by surprise, in its Statement of Defence.69

4.2.2

Qualifications to the Duty

In the matter of Hachsharat Hayshuv v. Netofa, the court stated that the sanction set by the Commissioner should not be imposed in the following cases: (a) Where the insurer learned of a fact after it had declined the claim, and it was not possible to know this fact while checking its liability. (b) Where imposing the sanction will extend the scope of the policy to include risks not covered under the policy. (c) Where there is an exclusion to the coverage, which is known to the insured. The fact that the insurer did not detail the exclusion to the coverage in the declination letter, does not harm the insured’s rights, as he did not have such right anyway. In the Netofa case, the policy excluded cotton crops by an express exclusion. The insurer did not relate to this exclusion in the declination letter, but the court allowed it to add this argument to its Statement of Defence. The Supreme Court in the case of North America Bank70 emphasized that the insurer’s duty to detail all declination arguments at the first opportunity is limited to those arguments the factual basis of which was known to the insurer at that time, and allowed the insurer to raise arguments not mentioned in the first declination letter. In 2002, the Commissioner of Insurance issued another Directive according to which the insurer may raise additional arguments besides the first arguments given to the insured at the first opportunity, where there are facts or circumstances created afterwards or in case the insurer could not know thereof, at the date on which it declined the claim. In 2011, the Commissioner published a circular relating to handling and settlement of claims in which the insurers are required to give reasons for declination of claims and to specify the policy terms or the legal provisions which are the basis of the declination. A clear exclusion to coverage—it was decided in the matter of Hachsharat Hayshuv71 that where there is clear and express exclusion that excludes coverage for example, where the policy applies to certain types of damage, and a certain damage is not covered thereby, in such a case, not raising the exclusion in the

69

LCA 2994/04 Zirlin v. Harel Insurance Co.; C.A. 4819/92; Eliyahu Insurance Co. v. Yashar PD/29(2) 749, p. 777; LCA (T.A) 2143/05 Yonyov v. Hamagen Insurance Co. (2006); C.C. (T.A) 27334/04 Tapiaro v. Dikla Insurance Co. (2005); C.C. (T.A) 47645/07 Twito v. Menora Insurance Co. (2008). 70 C.A. 7276/07 The Official Receiver in the capacity of the Liquidator of North American Bank Ltd. v. Assurance Generale de France (2012). 71 C.M. (Haifa) 12838/02 Hachsharat Hayshuv Ltd. v. Netofa Agriculture Association (2002).

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declination letter will not deprive the insurer of the right to argue that the claim is not covered in view of this exclusion. Also, striking out of the defences from the Statement of Defence of the insurer will not avoid raising the policy limit stated in the insurance policy.

5 Duties of Disclosure of Intermediaries 5.1

Role and Legal Position of Intermediaries

The Insurance Contract Law deals in Articles 32–36 with the position of the insurance broker by setting several presumptions concerning thereto: while negotiating an insurance contract, the insurance broker shall be considered as the agent of the insurer. In respect of the insured’s disclosure duties, the knowledge of the insurance broker regarding such disclosure shall be considered knowledge of the insurer, and for receiving premiums, the insurance broker shall be considered as the agent of the insurer. In addition, in respect of the insured’s duties of notification, a notification to the insurance broker by the insured will be considered as a notification to the insurer. 32. In this article, ‘insurance agent’ is anyone who carries out The business of insurance brokering between Assureds and Insurers. 33. (a) For the purposes of negotiations towards an insurance contract and for its conclusion, the insurance agent will be regarded as the agent of the Insurer unless he acts as agent for the Insured upon his written request. (b) For the purposes of the duty of disclosure at the conclusion of the insurance contract, the insurance agent’s knowledge of the true facts concerning a material matter will be regarded as the Insurer’s knowledge thereof. 34. For the purposes of the receipt of the insurance premium, the insurance agent who acted as broker or is indicated in the policy as the insurance agent will be regarded as the agent of the Insurer unless the Insurer has notified the Insured in writing that the premium will not be paid to that agent. 35. For the purposes of notifications by the Insured or the beneficiary to the Insurer, the Insurance agent who acted as broker or is indicated in the policy as the Insurance agent, will be regarded as the agent of the Insurer unless the Insurer has notified the Insured and the beneficiary, in writing, that notices will be sent to another address. 36. The provisions of the Law of Agency-1965, will apply the necessary changes to an agency as defined in Articles 33–35.

Definition

Agency for the purpose of the contract

Agency for the purpose of Insurance Premium

Agency for the purpose of notifications

Application of the Law of Agency

These Articles reflect the tendency of the Insurance Contract Law to protect the insured, and hence in the abovementioned circumstances the actions and omissions

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of the insurance broker are related to the insurance company including payment of premium—receipt thereof by the insurance broker is deemed as receipt by the insurer, and hence the payments made by the insured to the insurance broker are protected and discharge the insured of his duty of payment even in circumstances where the money was not transferred by the insurance broker to the insurer. The above assumptions were applied by the District Court of Jerusalem in the matter of Hanoch Tenenbaum.72 In this case, the insured was a diamondteer who lost a package of diamonds he had received from a colleague. The insured approached his insurance company and requested indemnification for his loss, however, the insurer declined coverage based on the non-disclosure of the insured’s claim history. In the said case, the court found that the insurance broker was aware of the insured’s claim history, however, he failed to disclose this information to the insurer. Under such circumstances, the court ruled that the insurance company cannot rely on the insured’s non-disclosure, and thus it must indemnify the insured for his loss. However, the court determined that the insurance company was entitled to reimbursement from the insurance broker who was aware of the relevant information and had breached his duty to disclose it to the insurer. In mid-2007, the Israeli Supreme Court set new limits to the above rule according to which any relevant facts known to the broker will be regarded as facts known to the insurer. In Menashko v. Hamagen Insurance Co.,73 a storeowner had entered into an insurance contract providing coverage for damages sustained in the event of a burglary at his store. During the negotiations phase, which requires disclosure of prior events, the broker and the insured had cooperated in withholding information from the insurance company regarding the insured’s history (the store had been burgled a few years earlier). The Court ruled that in cases where the insured conspired with the insurance broker to conceal information from the insurer, the assumption that the insurance broker’s knowledge shall be considered knowledge of the insurer would not apply. In such cases, the Court ruled that both the Agency Law, as well as the duty to act in good faith, served to defeat the assumption set by the Insurance Contract Law, and thus prevent the insured from profiting from his wrongful conduct. Another judgment dealing with the broker’s status was handed down in November 2007 in the case of LCA 2281/05 Aryeh Insurance Co. of Israel Ltd. v. Moshe Kaplansky. In this case, a fire broke out in the insured’s business premises resulting in damages. To handle the insurance claim, the insured engaged the services of Adv. Kaplansky. During negotiations concerning the claim, the insurance broker approached the insured and notified it that as long as it is represented by Adv. Kaplansky, no agreement could be reached with the insurer. In view of the insurance broker’s position, the insured released Adv. Kaplansky and shortly afterwards reached an agreement with the insurance company.

72 73

CA (District Court—Jerusalem) 75/87 Hanoch Tenenbaum v. Pazit Insurance Agency Ltd. RCA 10337/06 David Menashko v. Hamagen Insurance Co. and Others (2007).

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Following the said agreement, Adv. Kaplansky sued the insurer alleging that it had caused the insured to breach its contract with him. Kaplansky contended that since, according to the Insurance Contract Law, the insurance broker is considered the agent of the insurer, the insurer should be held liable for the broker’s wrongful act. The Supreme Court rejected Kaplansky’s allegation and ruled that the Insurance Contract Law does not determine a general assumption that the insurance broker is the agent of the insurer, but rather states three specific situations in which such relationship exists: (1) during the negotiations before the signing of an insurance contract; (2) in matters of disclosure; (3) in receipt of payments from the insured. The court ruled that when none of these three situations is relevant, then the status of the insurance broker should be determined in accordance with the circumstances of the case, while bearing in mind the basic purpose of the Insurance Contract Law— to protect the insured. In the above case, the Supreme Court returned the case to the lower court to examine whether, under the circumstances, the insurance broker acted as the agent of the insurer, and whether the insurer should be held liable for the broker’s wrongful acts. The Insurance Contract Law and the Law of Agency 1965 deal with the duties of disclosure of the insurance agent. Article 36 of the Insurance Contract Law provides that the duties and obligations of an agent will apply to the insurance broker. According to Article 8 of the Law of Agency, the agent has a duty to disclose to the principal all information, and will give him any document that relates to the subject matter of the agency and will provide him with a full report concerning his actions. According to Article 2 of the Law of Agency, the knowledge of the agent binds the principal, which means that it obliges or imposes duties on the principal and grants the principal rights as the case may be. In Amnon Schloss v. Ragumi74: According to the Insurance Contract Law the insurance broker is deemed as the agent of the Insurer for the purpose of the negotiations for the conclusion of the Insurance Contract (Article 33A of the Law). The law also provides, concerning the duty of disclosure upon the conclusion of the contract, that the knowledge of the insurance broker concerning the true facts of a material matter should be considered as being the knowledge of the Insurer (Article 33D). . . In view of the fact that the knowledge of the insurance agent is the knowledge of the Insurer, the Insurer cannot cancel a policy for non-disclosure of a material matter, where the insurance broker knew about it.75

In Patashvili v. Hadar Insurance Co. Ltd.,76 the Court emphasized that Article 33A of the law creates a legal assumption that relates to the insurer of the actions of 74

C.A. 3214/98 Amnon Schloss v. Ragumi (1978) Ltd., PDI 58(4) pp. 445 and 452. See also: Haifa Magistrates Court CC 15346-02-9 Perach v Ayalon Insurance Co. Ltd. and Jerusalem District Court CC 75/87 Tennenbaum v. Pazit Insurance Agency Ltd. and also Elias (2016), p. 360. 76 C.C. (Ashkelon) 2629/03 Patashvili v. Hadar Insurance Co. Ltd. 75

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the insurance broker during the pre-contractual negotiations. This is a statutory agency created by the law, and therefore the actions of the insurance broker bind its principal—the insurance company. One of the results of the law and may be the most important is that what the broker knew concerning the true state of affairs is considered to be known also by the insurer, and therefore the insurer is deprived of the remedies provided by the law for non-disclosure. For example, one of the questions posed to the insured, which was a material matter, was whether the insured had been convicted of a traffic offence. The insured told the insurance broker that he had actually been convicted for such an offence but the agent who filled the proposal form wrote “not convicted”. In these circumstances the insurer will not be able to argue that the answer of the insured was not complete and honest (as required by Article 7A) in view of the fact that the insurer knew the true state of affairs, by this Article 33B prevents disputes that previously arose in cases where there was a gap between what was told to the insurance broker and that which was conveyed to the insurer. In the same way in the case of Tennenbaum v. Pazit, the insurance company mentioned above, it was provided that if the insurance broker knew about the insurance history of the insured this would be enough to conclude that this history was known also to the insurer by virtue of Article 33B of the law where the insurance broker did not pass to the insurer the true facts known to him the insurer cannot raise an argument of non-disclosure to the insured and the insurer’s sole remedy would be against the insurance broker.

5.2 5.2.1

Duties and Obligations of an Intermediary Under the Law The Agency Law, 1965

According to The Agency Law, 1965 Agency is defined as giving power to an agent to act on behalf or instead of a principal a legal act towards a third party (Article 1). Because of the authorization given to the agent, the act of the agent, including his knowledge and intent obliges the principal or grants him rights, as the case may be (Article 2). The agency under the law is a triangle relationship—the Principal, the Agent and the Third Party,77 and may be created by contract of authorization between principal—agent, by behavior of principal towards the agent or towards the Third Party, or a notification of agency sent by the Principal to the Third Party (Article 3). These ways of creating the agency relationship enhance the tri-party structure under the law.78

77 78

See: Barak (1996), pp. 610–629. Ben-Uliel (2000), p. 187.

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The basic principle of agency is that the legal act of the agent towards a third party creates a legal relationship between the principal and the third party. By that, the selfdetermination and control of the principal on his legal rights or duties is granted to the agent who may bring about a change in the scope of these rights or duties. The change is effected by a legal act, a term not defined by the law; however, it is mentioned in laws, and in each of them, it is given a different meaning according to the object of the specific law.79 The act of the agent is a normative act that may change the legal position of the principal towards the third party.80 The legal act is an act that has a legal effect, which means it may change the legal position of the principal by the creation, the change or the cancellation of rights, duties, immunities or powers. Therefore, a material act that does not have a legal effect is not a legal act. The distinction between a legal act and a material (physical) act is important to apply the legal consequences. For example, acts a person performs according to the instructions from another, which do not affect the rights (such as the physical transfer of documents or property), are outside the scope of the law.81 In this matter, there are conflicting views as to whether a material/physical act would also be within the scope of the Agency Law.82 The prevailing view is that of Supreme Justice Barak, according to which, for an act to be considered a legal act, it should be aimed at obtaining a legal change.83 As mentioned above, the creation of the agency relations can be by notification of the principal given to the third party. When the principal’s behavior towards a third party is considered by the third party as an expression of will by the principal to give power to an agent, the third party may rely on this behavior as binding the principal to the acts of the agent. Where an agent acts towards a third party on behalf of the principal, the agent leaves the scene and the legal relationship is between the principal and the third party. For example, where the company’s manager concludes a contract with a third party on behalf of the company and such act is within the authority of the manager, his act will bind or credit the company towards the third party and the manager steps out of the picture.84 In the same way, it was decided that where a company director concludes a contract on behalf of the company, he acts as its agent, and if his act is within his authority, he does not assume liability under the contract. In specific cases, the agent would not exit out of the picture, for example: where a person acts as an agent without being authorized for that purpose, or in excess of his authority, the principal may confirm the act post factum. A confirmation of the act after it was performed is considered as an authority granted from inception, subject

79

BGZ 620/85 Miyari v. Knesset Chairman, PDI 41(4) 169, p. 269. Proccachia (1986), p. 76. 81 See Proccachia (1986), p. 76. 82 See for example Proccachia (1986), p. 79. 83 This principle was cited by agreement by Supreme Court Justice D. Levine, CA 422/85 Bank Leumi LeIsrael v. The Israel Company for Reinsurance Ltd., PDI 45(5) 32, P. 38. 84 See for example: CA 230/80 Pneidar Ltd. v. Castro PDI 35(2), 713, p. 723. 80

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to the right acquired by a third party in good faith and where consideration before the confirmation will not be harmed.85 In addition, where the Third Party did not know during the act that the agent was acting without or outside the scope of his authority, he may consider the agent as his counter-party or retract from the act and sue for his damages from the agent, as long as the third party does not know about the confirmation of the act.

5.2.2

The Contract Law (General Part), 1973

Since the broker is involved in bringing together the parties to the transaction, this requires broad disclosure duties towards both parties to the insurance contract.86 In addition, under Section 61(b) of the Contract Law, the provisions of the Contract Law apply also to legal relationships that do not stem from a contract, the broker himself is bound by the duty of good faith and fair dealing to both insurer and insured, under Sections 12 and 39 of the Contract Law.87 Often, a broker breaching the duty of good faith and fair dealing will be breaching his duty of care as well. Such was the case of Dadon v. Almajmu’a Alahallia Insurance Co.,88 in which the broker was held liable for 25% of the damages because of his failure to clarify conditions and exclusions of the policy to the insured, as well as his failure to provide the insured with a copy of the policy before the insured event. The court ruled that these inactions constitute a breach of broad disclosure duties stemming from the Contract Law’s duty of good faith and fair dealing and the Duty of Care stemming from Torts Law. Furthermore, according to Friedman & Cohen: “In our [Israel’s] system, there is a tendency to broaden the disclosure duties in other cases (sic) where one party relies on the good judgement of the other party to the transaction. . .this disclosure duty requires giving information on every detail which is not obvious, concerning the transaction and its worth. It is also possible that the party, which is bound by the disclosure duties, might have to give information which reveal his own interest in the transaction. . .”.89 In Zeidnorg v. Yosher,90 an insurance broker urged the insured’s wife to sign a contract while the insured was hospitalized and demanded immediate payment of several thousand ILS as down payment for legal fees. This contract would give him 15% of all benefits for his services (most of which should not be charged for and are provided under article 35 to the Insurance Contract Law). This was deemed a breach of both the duty of care and the duty of good faith and fair dealing.

85

See Article 6A of the Law, See also: CA 148/82 Glick v. Arman. Weller (2005), pp. 714–715. 87 Geva (2006), p. 45. 88 C.C 12353/05 Dadon v. Almajmu’a Alahallia Insurance Co. (2007). 89 Friedman and Cohen (1992), pp. 829–830. 90 SC 28927-03-16 Zeidnorg v. Yosher (2016). 86

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In Taub v. Bank Mizrahi,91 the court held the bank to be a “quasi-insurance broker” for brokering limited-coverage mortgage insurance. Because of the bank’s failure to explain the mortgage loan receiver (and the insured) the intricacies of the connection between the limited sum of insurance and the mortgage debt, the bank was found to have breached its duty of care (as an insurance broker), as well as its duty of good faith and fair dealing, and its fiduciary and disclosure duties it owes the client (insured), being a bank.

5.2.3

The Tort Law

The Agency law does not deal with the issue of the liability in tort of the insurer towards the third party. However, it is possible to attribute the wrong done by the broker to the insurer by virtue of the tort law. Under Article 14 of the Tort Ordinance, the principal bears a vicarious liability for wrongs done by the agent. However, such liability will not be imposed in relation to an action that is incidental to a contract, it does not apply to any action forbidden explicitly by the principal and does not apply where the agent’s act was driven by a personal motive, unless the agent acted within the scope of his implied authority.92 Considering that the intermediary has a vested interest in marketing policies, which will endow him with a higher commission fee, the Israeli Courts have ruled that an intermediary should present the options that best fit the needs of the insurance candidate and failure to do so may result in liability for damages. The concern that desire to get the candidate to “sign the dotted line” might cloud a broker’s good judgement was reiterated by the court in Eyal v. Hachsharat Hayeshuv,93 where a broker sold an insurance risk plan to the insured, whilst the candidate was interested in a savings plan, thus breaching his duty of care. In the case of Sapir v. Giladi,94 an agent was found negligent for violating his fiduciary duties towards both candidate and insurer, by marketing an income protection insurance policy that covers only national league football players, to a player in a lower division league. Naturally, an intermediary also bears a responsibility to avoid misleading the candidate as to the scope and validity of the insurance policy. The broker is responsible for ensuring that the candidate meets the preconditions for coverage as stipulated in the contract and as the court declared in Makranko v. Clal Insurance: “The insurance broker. . .is responsible to check and make sure that the security measures are met. . .he is the one who comes in personal contact with the insureds, he is the one who knows of any change in the security measures in the policy which are material and relevant to the validity of the policy”.95 Moreover,

91

C.C. (Jerusalem) 57228-06-13 Benjamin Taub v. Bank Mizrahi Tfahot Ltd. (2016). Barak (1965), pp. 109–111. 93 SC 1435/05 Eyal v. Hachsharat Hayeshuv (2006). 94 C.C 38612/03 Sapir v. Giladi (2005). 95 C.C 20336/99 Makranko v. Clal Insurance Co. (2004). 92

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the broker is responsible for making sure the candidate is well aware of the terms of the policy, especially its exclusions,96 and that the candidate understands the legal repercussions of failure to meet conditions for coverage.97 The intermediary’s duty of care is seen as especially significant in regards to the insurance questionnaire. In Schloss v. Ragumi,98 a broker was found negligent for overlooking the candidate’s attempt to mislead the insurer, without warning her of the risks involved in breaching her respective duty of disclosure, which, as discussed above, is fairly limited in comparison to that of the insurer. Therefore, the court ruled that failure to prevent the candidate from giving misleading answers that may result in a cancellation of the policy, or at least to give fair warning of such possible outcomes, constitutes negligence. An intermediary is also responsible under the duty of care to monitor the handling of the insurance proposal. In Galam v. The Phoenix,99 the broker left the proposal form for car insurance on the desk of the underwriter when she was absent, which was against the established protocol, and the policy was not issued. After the candidate was involved in a car accident and filed a claim with the insurer, she was declined. The Court found the broker negligent and was held solely liable for the damages incurred by the candidate. An intermediary must ensure that the policy in fact matches the insurance proposal and that the premiums reflect the risk. Failure to do so shall be deemed negligence. In Shacham v. Hadar,100 for instance, an intermediary was found liable for failing to change the sum of insurance in accordance with an updated valuation of the insured property. If an intermediary’s negligence results in underinsurance, he may be found personally liable.101 The broker is responsible for warning the insured when the policy period is near its end. In Halevy v. Ayalon,102 the broker claimed that the insured seemed uninterested in renewing the coverage, to which the court replied: “. . .irresponsiveness on the part of the insured should have “raised a red flag”. . .he [the broker] should have warned the insured of the risks. . .”. The broker is also expected to inform the insured on how to materialize his rights under the policy, and if the insured event occurs, the broker is responsible to inform the insured on matters pertaining to statutes of limitations, and specifically: (1) that the statute of limitations in insurance claims is 3 years (as opposed to 7 years in torts claims); and (2) to warn the insured when the end of the limitation period is near.103

96

C.A 2991-04-08 Fischlovich v. Shirbit Insurance Co. (2008). C.A 47015/01 Bachar v. Ben-Yosef (2004). 98 C.A 3214/98 Schloss v. Ragumi (2004). 99 C.C 200/03 Galam v. The Phoenix Insurance Co, (2004). 100 C.C 12237/02 Shacham v. Hadar (2003). 101 C.C 64653/04 Zeflovich v. Aryeh Insurance Co. (2006). 102 C.C 7521/04 Halevy v. Ayalon Insurance Co. (2007). 103 C.A 10476-05-13 Gabbay v. Clal Insurance Co. (2015). 97

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In Levy v. Keel,104 the insurance policy was not renewed, and the insured found himself without coverage at the time of the insured event. The insurance broker claimed he had unsuccessful attempts to contact [by phone] and warn the insured close to the end of the contract period, that the contract period is near its end, and to inform the insured of the insurance agency’s inability to renew the policy on the insured behalf, since the insurer refuses to work with the agency. The court ruled that the agency has breached its duty of care by not making sure that the insured is duly informed well ahead of time and able to get his insurance in order before the end of the contract period. In Migdal v. Hassim,105 the court ruled that the role of an insurance broker does not end with the renewal of an insurance policy, but to seek the best offer for the insured that the broker can get from the insurers he works with. In this case, a broker was found negligent for renewing a policy without alerting the insured, an autogarage, of the exclusions that leaves him vulnerable to risk, which materialized— rendering the insured in a state of underinsurance.

6 Duties of Disclosure of an Insurance Broker 6.1 6.1.1

Position Under the Insurance Contract Law, 1981 Agent of the Insurer for Knowledge of Information Before the Contract

The agent owes a disclosure duty towards the insurer based on the agency law. Article 8.1 of the Agency Law provides that the agent will disclose to the principal any information and will convey to him every document that relates to the subject matter of the agency. In the matter of the Estate of Tchulek v. Menora Insurance Co.,106 the insurance agent knew that the insured was blind as the Court was convinced that she signed in front of the agent who told her where to sign. However, in the proposal form she declared that she did not suffer from any illness including sight, a question expressly posed by the insurance company. The insured died over a year after signing the proposal form and the claim was filed by her successor under a life insurance. The insurer argued for non-disclosure by the insured, however, the Court determined that in view of the fact that the agent was aware of the insured’s medical condition, the insurer is considered as being aware of the true information under Article 33A of the Insurance Contract Law by which the knowledge of the insurance agent concerning the true facts of a material matter will be deemed as a knowledge of the insurer.

104

C.C 45103-01-15 Levy v. Keel Insurance Agency (2002) Ltd. and others (2017). C.C. 38870-05-14 Migdal Insurance Co. v. Hassim (2016). 106 CC (Haifa Magistrates) 8824/04 Estate of Tchulek v. Menora Insurance Co. (2006). 105

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The insurance company filed a third party notice against the agent arguing that he breached his duty of disclosure towards the insurer, which is broader than the duty of disclosure of the insured107 and includes a fiduciary duty. The Court imposed on the insurance company to pay the insured amount to the Estate and obliged the agent to indemnify the insurer by payment of the whole amount awarded to the Plaintiff. Similarly, the Magistrate Court in Hadar v. Raz determined that the agent who did not disclose to the insurer, information he had known concerning the insurance history of the insured, breached his duty towards the insurer. However, in Y.D. Chalafim Ltd. V. Hachshara Insurance,108 it was decided that the information allegedly withheld by the agent and not conveyed to the insurer was not material information that would have influenced the insurer’s decision whether to insure the insured at all or upon its terms. In these circumstances, the Court determined that it is not information that should have been disclosed by the agent.

6.1.2

Agent of the Insurer for Payment of Premium

To protect the insured, the law provided that payment of premium made by the insured to the insurance agent will be considered as payment to the insurer. Article 34 provides: for the purposes of the receipt of the insurance premium, the insurance agent who brokered the insurance or is indicated in the policy as the insurance agent will be regarded as the agent of the Insurer unless the Insurer has notified the Insured in writing that the premium should not be paid to that agent.

Therefore, the risk that the premium will not eventually be transferred to the insurer lies on the insurer. For example, in the matter of Ben Shmuel v. Manor Insurance Agencies,109 the agent deposited the premium monies into his private account instead of transferring them to the insurance company. The Court held that based on the presumption set by the law in Articles 33 and 34 the payment of premiums to the agent concludes the contract between the parties although not transferred to the insurer. Where the agent instructs the applicant how to pay the premium that instruction binds the insurer110 According to directives of the Commissioner of Insurance concerning the agreements between insurer and insurance agents, the agents are liable to open a trust account for the insurer, it is forbidden to withhold the amounts or to set off any amounts such as commissions from the premium. The agent holds these monies as trustees for the benefit of insurers.

107

Article 8 of the Agency Law and CA 249/99 Ayalon Insurance Co. v. Nemet Efraim PDI 55 (4) 652. 108 CC (Nazareth District) 603/98 Y.D. Chalafim Ltd. v. Hachshara Insurance Company Ltd. (2003). 109 CC Magistrate Jerusalem 2569/96 Ben Shmuel v. Manor Insurance Agencies (1999). 110 CA (District Tel Aviv) 988/93 Efrati v. Menora Insurance Co. (1995).

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Similarly, in the Waked case the insurance agent delayed the notification concerning the occurrence of the insured event and by that breached his duty of care towards the insurer and was found liable for negligence.111

6.1.3

Agent of the Insurer for Conveyance of Notifications

According to Article 35: For the purposes of notices by the Insured or the beneficiary to the Insurer, the Insurance agent who brokered the insurance or is indicated in the policy as the Insurance agent, will be regarded as the agent of the Insurer unless the Insurer has notified the Insured and the beneficiary, in writing, that notices will be sent to another address.

This legal presumption is also for the protection of the insured. In the matter of Hachsharat Hayishuv Insurance Co. v. Malichi,112 the insurance company sued the insured for unpaid premium for his car insurance policy. The insured argued that he had suffered from financial difficulties, and therefore contacted the insurance broker and told him to cancel the policy and stopped paying the premium. The court accepted his notification to the agent who had dealt with the policy, as a proper notification of cancellation of the policy, even though it was not in writing. Based on Article 35 of the Insurance Contract Law, which provides that for the purpose of notifications, the agent who acted as intermediary of the insurance will be regarded as agent of the insurer, the notification to the broker was deemed as notification to the insurer. In Klein v. The Phoenix,113 the insurer was held liable for damages because of the broker’s failure to provide the insured with a copy of neither the insurance policy, nor a detailed explanation as to its terms and exclusions. The court ruled, in accordance with the ruling in Eliyahu v. Urim,114 that the insurer is responsible to supervise the actions of the broker as its agent.

6.1.4

Agent of the Insured Where Specifically Appointed by the Insured as His Agent

According to Article 33(a): For the purposes of negotiations for the conclusion of an insurance contract and for the purposes of the conclusion of the contract, the insurance agent will be regarded as the agent of the Insurer unless he acts as agent the Insured upon his written request.

111

CC (Acre Magistates) 3035/01 Waked v. Aryeh Insurance Company Ltd. (2004). CC (Magistrate Tel Aviv) 50081/01 Hachsharat Hayishuv Insurance Co. v. Malichi (2002). 113 C.C. 46554-02-12 Klein v. The Phoenix Insurance Co. (2016). 114 C.A 702/89 Eliyahu Insurance Co. v. Noam Urim (1991). 112

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Such an appointment of the insurance agent as an agent for the insured should be explicit and in writing, to make sure that the presumption of the law concerning the status of the agent as an agent of insurer is rebutted. In the matter of Nemet v. Menora Insurance Co.,115 the Court dealt with this issue of change in the agent status. The insured argued that he did not understand the significance and the meaning of his signature on appointing the insurance agent as his agent. The Supreme Court accepted the argument of the insurer that in this case the insurance broker is not the agent of the insurer as this provision appeared twice in the insurance policy and in very bold frames. According to Yaron Elias,116 a term that makes the insurance broker the agent of the insured may in many cases discharge the insurer of a liability that would have otherwise be imposed on him by virtue of the presumption of agency set by law, and therefore this condition should be subject to the requirements of the law in Article 3 to emphasize it to make it clear and visible. Because of the inequality between the insured and insurer, the provision of the law that sets the presumption of agency on behalf of the insurer is aimed at protecting the insured by levelling the balance of powers between them. Therefore, any stipulation on the statutory arrangement breaches the balance to the detriment of the insured, hence such appointment of the insurance broker as agent of the insured should meet the requirements of Article 3. In the matter of Vidal v. Ararat Insurance Co.,117 the insured argued that her signature under the Article appointing the broker as her agent was made automatically and without being aware that by that the insurance company will be discharged from any responsibility for the actions and representations of the broker. The Court decided that under these circumstances, one could not say that the Plaintiff demanded from the broker, in writing and with full awareness, to act as her agent within the scope of the provision of Article 33(a). As we can see, the insured should be fully aware of the legal consequences of appointing the insurance broker as his own agent and the burden of proof shall be borne by the insurer—to establish that the insured indeed intended to appoint the broker as his agent and understood the legal consequence thereof. As part of the disclosure duty in this context, the clause appointing the broker as agent of the insured should be emphasized (bold letters, different highlight or a frame).

115

CA 190/99 Nemet v. Menora Insurance Co. PDI 55 (4) 652 (2001). Elias (2016), pp. 1108–1109. 117 CC (Tel Aviv Magistrate) 32041/98 Vidal v. Ararat Insurance Co. (2003). 116

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625

Duties of Disclosure Towards Insured

The duties of the insurance broker towards the insured are mainly disclosure duties based on the duty of good faith provided by Article 12 of the Contract Law (General Part 1973). This duty includes:  The insurance broker should present before the candidate for insurance a wide range of possibilities in accordance with his request and disclose to him any relevant information concerning the various contractual options.118  Any change of policy by the insurer after a period during which a certain wording was applicable, obliges the insurer and the insurance broker to make the insured aware of such change and not rely on the insured to read the policy every year.119 In Baha Saief v. Pozy,120 the Supreme Court emphasized that the duties of the insurance broker towards the insured include duties of disclosure and of proactive explanation concerning the insurance contract during the pre-contractual negotiations. On the other hand, the Court stated that the insurance broker does not have to notify the insured of the insurer’s intention not to renew the policy. The Court notes that the broad scope of the duties borne by the insurance broker stem from the character of the insurance contract and from the relationship between the broker, the insurer and the insured. In view of the deep imbalance of power between the respective parties, resulting from the professionalism and the experience of the insurer and the absence of all of the above from the insured’s perspective; the subject matter of the insurance contract being abstract and intangible, which is less than clear to the insured; the fact that usually it is a standard form contract; and the complexity of the insurance contract itself—all these characteristics justify the broad scope of obligations and duties imposed on the insurance broker in favour of the insured. Within the relationship between the candidate for insurance and the insurance broker, the client expects that the broker will guard his interests in the best way and this expectation justifies a very broad disclosure duty on the part of the insurance broker. Having said that, it is important not to extend the broker’s duties towards absolute responsibility that may harm not only the broker’s and the insurer’s but also the insured’s who will eventually have to pay increased premiums to cover this extension.121 Notwithstanding the above, where the insured and the agent agreed not to reveal certain information to the insurer, in such a case the broker’s knowledge and knowhow will not be related to the insurer because in such a case the insured has colluded with the broker to mislead the insurer. 118

CC (TA) 2668/99 Menora Insurance Co. Ltd. v. Borovsky, 2000. C.A. 682/82 Ben Ariyeh v. Sahar Insurance Co. Ltd. PD 37(3) 589 (1983). 120 RCA 5695/06 Baha Saief v. Pozy (21.9.09). 121 Weller (2005), pp. 715–716. 119

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Where the third party and the agent agree to withhold information from the principal he cannot argue at the same time that the knowledge of the agent is considered as constructive knowledge of the principal. Such an act is contrary to the principles of fairness, and hence the insured will not be able to rely on the principles of agency under such circumstances.122  The insurance broker should disclose and explain to the insured any difference between the insurance which was requested and that which was actually provided.123

6.3

Duties of Disclosure Towards Insurer

Being considered by law as the agent of the insurer, the insurance broker owes to the insurer duties provided for in the Agency Law,124 the Insurance Contract Law125 and Tort Law, on which I shall elaborate in this chapter. Article 9(b) of the Agency Law provides that where fiduciary duties were breached by an agent with the consent of a third party, the principal shall be entitled to repudiate the legal actions, as well as remedies for breach of contract (as Article 9 (a) provides), and damages from both agent and third party. Moreover, the principal can also sue for damages under the Torts Ordinance, and more specifically Articles 35 (Negligence), Article 63 (Breach of Statutory Duty) and Article 56 (Fraud). According to Prof. Barak126: “. . .If the breach of fiduciary duties is paired with an act of tort, the principal shall have rights provided under two sources: the first, stemming from Agency Law, entitling the principal with remedies for breach of contract; the other, from the Torts Ordinance, entitling the principal with torts remedies. One does not negate the other, although compensation cannot surpass the actual damage”. In Sahar Insurance Co. v. Dahamsha,127 a negligent broker did not make sure that the policy issued by the insurer matched the insurance offer, leaving the insured’s cement truck partially exposed (the policy did not include coverage for the cement pump attached to the vehicle). Even so, the court awarded the insured insurance benefits as if the cement pump was covered, in light of longstanding rulings that interpret the insurance offer in a manner favoring the insured. In the appeal, the court found the broker, because of his negligence, liable for 30% of the amount awarded to the insured specifically for the cement pump. 122 Friedman and Cohen (1992), p. 865. See also C.A. 1533/01 (TA) Siri v. Ka’an Insurance Agency Ltd. (2003). 123 C.A. 846/76 Atia v. Ararat Insurance Co. PD 31(2) Page 780 (1977). 124 See Sects. 5.1 and 5.2.1. 125 See Sect. 5.1. 126 Barak (1996), p. 1092. 127 C.A. (Haifa) 2109/02 Sahar Insurance Co. v. Dahamsha (2002).

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Moreover, The more severe the negligence, the greater the liability to be imposed on the broker, much like in Sapir v. Giladi,128 where a broker was liable to pay the insurer back over 65% of the settlement amount between the insurer and insured. For the purpose of receiving damages, proof of breach of fiduciary duties under Agency Law shall not suffice, for one must show a causal connection between said breach (which is also parallel in a sense to the duty of care) and damage ensued. In Y. D. Chalafim Ltd. v. Hachsharat Hayesuv Insurance Co.129 the insurer sent a third party notice against the broker, claiming he had withheld material information on key matters regarding the insured, and had this information been disclosed, the insurer would not have issued the policy. The court found the broker’s non-disclosure to be negligent only on one matter—lack of insurance continuity, yet dismissed the argument that had the insurer known of this the policy would not had been issued, therefore, the third party notice against the broker was dismissed. Negligence on the part of the insurer may release a negligent broker from his liability, as was the case in N.D. Development and Transportation (1998) Ltd. v. Securitas Insurance Agency Ltd.,130 where an insurance broker misled the insured to believe her coverage was renewed, even though a renewed policy was not issued by the insurer and the broker made no effort to ensure its issuance. The insured vehicle was stolen and the claim was settled, yet the insurer still pursued the third party notice, claiming the broker was negligent towards both insurer and insured, and was therefore liable. The court found the broker to be bound by a duty of care, and fiduciary duties, towards the insurer and that he (the broker) indeed acted in negligence. Even so, the court decided that the broker shall not be liable and that no causal connection had been established, since the insurer failed to set neither special procedures nor clear rules on the renewal of policies, failed to guide the broker as to any procedures or rules on renewal of policies and never adhered to its own rules and procedures. In some cases, negligence on the part of another agent of the insurer might sever the causal connection between the broker’s negligent acts and the damage. In Hadar Insurance Co. v. Raz,131 The court ruled that despite negligent non-disclosure on the part of the broker, the insurance underwriting agency negligently approved the insurance offer, whilst acting as an agent of the insurer, thus severing the causal connection between the broker’s omission and the damage incurred to the insurer.

128

See Sect. 5.2.3 above. C.C (Nazareth District) 603/98 Y.D. Chalafim Ltd. v. Hachsharat Hayesuv Insurance Co. (2003). 130 C.C (Tel Aviv) 29388/03 N.D. Development and Transportation (1998) Ltd. v. Securitas Insurance Agency Ltd. (2006). 131 C.C (Petach Tikva) 4370/01 Hadar Insurance Co. v. Raz (2002). 129

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Duties Imposed by the Commissioner of Insurance

The Control Law details in Chapter 5 a list of duties imposed on the insurer and the insurance broker to avoid a misleading description of the insurance transaction. 55. (a) An insurer or insurance agent shall not give a misleading description of an insurance transaction proposed to a particular customer and shall not include a misleading description in a publication. (b) For this purpose, “Misleading description” means any oral, written or printed description likely to mislead as to any material point to a transaction. Without prejudice to the generality of this provision, the following shall be regarded as matters material to a transaction: (1) the name, seniority, merits, reputation and financial position of the insurer or insurance agent and the extent of its or his business: (2) the nature of the insurance transaction, the extent of and any restrictions on or preconditions to the insurance cover: (3) the length of the period of insurance, and the ways in which the insured person or the insurer may terminate it: (4) the insurance contributions and other payments due form the insured person, including the maximum contributions permitted under law and the rate of interest per annum on the credit granted for their payment: (5) the contributions, as compared with the ordinary or normal contributions or those formerly charged, in respect of the insurer concerned or other insurers: (6) the conformity of the terms of the policy with conditions prescribed or approved under law or the terms of a model policy: (7) an opinion given by any person in respect of the transaction or the insurer. (c) It shall be a good defence for an insurance agent to demonstrate that in giving a misleading description he relied on a written description supplied by an insurer and that he, in fact, did not know and could not have known that it was misleading.

In addition to the duties imposed by the Control Law on the insurance agent, additional duties were set by the Commissioner of Insurance obliging the brokers to act fairly towards the insured and towards the candidates for insurance. The Commissioner of Insurance imposed on both insurers and insurance agents duties of disclosure in directives published concerning renewal of policies and adjoining of insureds to insurance. A specific directive that applies to insurance agents and consultants was published by the Commissioner in the “Agents and Consultants Directive” of 2016.132 This directive deals with the duty of agents and consultants for the marketing of pensions or while consulting regarding pensions to give the client a document that details the reasoning for the recommendation of pension product as being worthwhile for the client or his relative. The directive sets a standard form for the reasoning document, which will include focused and limited information to ease

132

Commissioner’s Directive 2016-10-14 Document of Reasoning (published February 1st 2017, included in Reshumot—The Official Gazette No. 7701 of February 14th 2018), available at https:// mof.gov.il/hon.

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the client’s understanding of the information, and will enable its forwarding through a clearing system. This directive will come into force on July 1st, 2017.

7 Disclosure Duties Towards an Injured Party 7.1

Does the Insured Have a Duty to Disclose to the Injured Party His Liability Insurance Policy?

Under Article 68 of the Insurance Contract Law, there is a direct privity between the third party injured and the liability insurer of the party that caused the damage. According to Article 68: In liability insurance, the Insurer may, and at the request of the third party must, pay to the third party the insurance benefits owed to the Insured by the Insurer, provided that he notifies the Insured in writing thirty days in advance and the Insured does not object during that period; but any argument available to the Insurer against the Insured may also be raised by him against the third party.

By this provision, the third party can sue the insurer directly. This arrangement is aimed at protecting the interests of the third party and avoids the risk that the insured will not transfer (to the third party) the indemnification money paid by the insurer. However, the arrangement under Article 68 is not detached from the agreement between the insured and the insurer and is subject to the terms of the policy and its exclusions. Therefore, any defence argument that the insurer could raise vis-à-vis the insured may also be raised as against the third party. The law grants the insured the right to object to the payment to the third party for reasonable arguments (e.g., where the payment harms the reputation of the insured by admitting his failure to meet his obligations towards the third party, or where the insured claims that there is a good defence towards the third party’s claim, etc.). If the insured did not raise any objection to the payment, the insurer can directly pay the third party the insurance benefits. In Widovsky v. Beck, the court decided that: “Article 68. . .grants the injured [third party] a direct claim against the insurer on behalf of the tortfeasor. . . non-disclosure of the insurer’s identity may lead to a scenario where the plaintiff cannot exercise his right under the law to file a direct claim against the insurer. . .might lead to more procedures, a waste of judicial time and may expose the injured to a statute of limitations arguments raised by the insurer. . . it [disclosure of the insurer’s identity to the injured, by the insured] is also part of the duty of good faith and fair dealing which lies upon a litigant party, in all matters pertaining to the legal procedure. . .”.133

133

C.C 29355-06-13 Widovsky v. Beck (2014).

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Disclosure Duties of a Liability Insurer Towards an Injured Third Party

All parties to “the Triangle” (Insurer-Insured-Injured) are mutually bound by a general duty of good faith and fair dealing. The third party may require information about the existence of an insurance policy and its main terms.134 According to Weller, for the time being, and as long as this matter is not formally settled by law, it seems that the right thing to do in most cases is to require the insured to hand over information regarding the insurance to the injured third party, which stems from both duty of good faith and inductive reasoning based on Article 17 to the MotorVehicle Ordinance [New Version]. The insurer should within 14 business days of submission of such request, disclose to the third party the policy of insurance.135 Another duty is imposed on the insurer towards the third party injured, concerns giving full reasoning to a declination of coverage. As mentioned above, the insured is entitled to receive, in the first declination letter all the grounds for declination of coverage and so does the third party injured. In the matter of Eliyahu Insurance Co. v Ayash,136 the plaintiff was injured while being a guest at a motel owned by the defendant. He approached the insurer of the defendant and was responded by the insurer that after thorough examination of the matter, there is no insurance coverage for the accident. The plaintiff then filed a court claim for bodily injury against the insured and Eliyahu, its liability insurer. The question at hand was whether the statement of defence, filed by the insurer, may include declination grounds not raised in the declination letter. The Supreme Court ruled that in accordance with the Commissioner’s Directive, just as the insurer must raise all grounds of declination in the first declination letter to the insured, so is the case towards the third party injured. Therefore, any declination ground not raised in the first declination letter would be struck out from the statement of defence.

References Barak A (1965) Vicarious liability in the law of torts. Kiryath-Sepher, pp 109–111 Barak A (1996) The agency law, 2nd edn. Nevo, pp 610–629 Ben-Uliel R (2000) The agency law by Supreme Court Justice, Prof. A. Barak. Netanya Law School J 180:187 Elias Y (2016) The law of insurance, 3rd edn. Nevo, pp 279, 259–260, 265, 360 1108–1109, 1597 Friedman D (1972) Motor vehicle insurance. Tel Aviv University, p 158 Friedman D, Cohen N (1991) The law of contracts, vol A. Aviram, pp 580–581

134

Weller (2007), p. 399. Section 8(13)(1) of the Commissioner’s Directive 2011-9-5 Investigation and claims settling (published March 28th 2011), available at https://mof.gov.il/hon. 136 R.C.A 2121/14 Eliyahu Insurance Co. v Ayash (2014). 135

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Friedman D, Cohen N (1992) The law of contracts, vol B. Aviram, pp 829–830 and 865 Friedman D, Cohen N (2003) The law of contracts, vol C. Aviram, p 500 Geva J (2006) Practical aspect of insurance law. John Geva, p 45 Herman A (1995) Insurance law, 2nd edn. The Ya’akov Sharir Insurance College, p 37 Proccachia G (1986) The law of agency in Israel. Tel Aviv University, pp 76 and 79 Schwartz D (1997) Insurance laws, processes and trends. In: Rosen-Zvi A (ed) The anniversary book of law in Israel. Tel Aviv University and Israel Bar Association Tel-Aviv District, p 31 Schwartz D, Schlinger R (2005) Insurance law. Bar Ilan University, pp 64 and 294 Shalev G (1990) Duty of disclosure in insurance contracts. Hapraklit 40:20 Weller S (2005) Insurance contract law, vol A. Institute of Legislation and Comparative Law – The Hebrew University of Jerusalem, pp 714–716 Weller S (2007) Insurance contract law, vol B. Institute of Legislation and Comparative Law – The Hebrew University of Jerusalem, p 399 Yadin U (1981) The insurance contract law in interpretation of contract laws. In: Tadeschi G (ed) Institute of Legislation and Comparative Law – Hebrew University of Jerusalem, p 81

Transparency of the Insurance Contract Law of Singapore Christopher Chen

1 Introduction: Definition of Transparency in Insurance Contract Law This chapter explores the transparency issues related to contracts of insurance in Singapore. In the contractual context, there are two dimensions to transparency issues. First, there are issues related to insurers, who need information to make proper assessments of the risks to be underwritten. A substantial part of the legal discussion over insurance contracts has been devoted to this issue, addressing the underlying problem of asymmetric information in these contracts. Second, there are transparency issues for customers, regardless of whether they are businesses or consumers. These issues may include the transparency and features of insurance products and/or policy terms. Naturally, this raises concerns over misselling, financial consumer protection and the conduct of the business of insurers, insurance intermediaries and financial advisers. In addition to the concerns over moral hazards and risk assessments, for various regulatory purposes such as taxation, anti-money laundering and personal data protection, insurers and/or brokers need to know more about their customers today. Some of these issues do not directly flow from the contractual relationship but are imposed by regulations and should be implemented during the contracting stage. Nevertheless, these requirements (such as know-your-customer and client classification) undoubtedly affect customers before and after a policy is issued. In this chapter, we focus on issues that may affect insurance contracts, whereas some issues (e.g., know-your-customer for suitability or anti-money laundering purposes) are considered in this book.

C. Chen (*) Singapore Management University, Singapore, Singapore e-mail: [email protected] © Springer Nature Switzerland AG 2019 P. Marano, K. Noussia (eds.), Transparency in Insurance Contract Law, AIDA Europe Research Series on Insurance Law and Regulation 2, https://doi.org/10.1007/978-3-030-31198-8_26

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In the next section, that is Sect. 1, this chapter explores some of the issues related to insurance policies before and after a contract is made under Singapore law. The discussion is grouped into two categories. The first addresses the laws and regulations pertaining to the duty owed by a customer or insured to an insurer. The second examines transparency issues related to product features and/or policy terms. In Sect. 2, further analysis of the current state of Singapore is provided from the angle of transparency, and the meaning of transparency in insurance contracts is reflected on. We suggest there is a case for Singapore to follow the reforms of the UK and revise the pre-contractual duty to disclose. Regulators can probably do more to improve product transparency across all ranges of insurance products and insurancerelated services, rather than focusing only on life or investment-linked policies.

2 The Issue of Insurance Transparency Under Singapore Law 2.1

Duties Owed by the Customer

A signature feature of insurance contract law in perhaps every jurisdiction is the insured’s duty of utmost good faith and the obligation to disclose certain information to the insurer before a policy is issued. A more contentious point is whether an insured also has a duty to disclose material information after a policy has been issued. In this section, we explore these issues under Singapore law.

2.1.1

A Brief Historical Background of Insurance Contract Law in Singapore

As a former British colony, Singapore’s insurance contract law has largely followed English law. Under Section 5 of the Civil Law Act1 (formerly the Civil Law Ordinance), English insurance law has been part of Singapore’s mercantile law since 1878. Until the Application of English Law Act2 (APLA) was introduced in 1993, English statutes and judicial decisions automatically formed part of the Singapore law governing contracts of insurance. In 1993, the APLA severed the automatic link between English and Singaporean law (related to mercantile and insurance contract law); however, the substance of insurance contract law did not change much. The APLA reintroduced a number of English statutes (or parts of them) into Singapore law. One statute provides that ‘a number of very important English commercial statutes will continue to apply in Singapore so that the basis of our commercial law remains very much the same as 1 2

Cap 43, Revised Edition 1999. Cap 7A, Revised Edition 1999.

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English commercial law’.3 Statutes related to insurance contract law include the entirety of the Marine Insurance Act 19064; the Third Parties (Rights against Insurers) Act 1930 (except for those provisions amended by the Insolvency Acts in England)5; and the Policies of Assurance Act 1867 (with only small modifications).6 The Life Assurance Act 1774 was re-enacted into Section 62 of Singapore’s Insurance Act with only the last section of the act being modified,7 and Section 63 of the Insurance Act restated Section 86 of the Fire Prevention (Metropolis) Act 1774. Consequently, Singapore’s insurance contract law has been heavily influenced by English law. This has also been reflected in the number of judicial precedents that have been cited in relevant local judgments.8 As Singapore is a small jurisdiction and may not have enough cases to cover all corners of insurance contract law, English judgments help to fill in the gap pending the establishment of local jurisdiction.

2.1.2

The Marine Insurance Act and Local Jurisprudence on the Duty of Pre-Contractual Disclosures

Under Singapore’s private law, issues related to an insured’s duty to disclose have largely been regulated by the Marine Insurance Act (MIA), which is a carbon copy of the Marine Insurance Act of 1906 from England.9 Local case law and some English authorities before 1992 (which automatically formed part of Singapore law) have supplemented the statute’s interpretation. In this section, we summarise the situation under the MIA and the development of local jurisprudence in Singapore. For both consumer and business insurance, the insured’s pre-contractual duty to disclose is defined by the rules of the MIA (Cap 387). This chapter will not repeat English positions under the Marine Insurance Act 1906. Instead, the focus is on the development of local jurisprudence in Singapore. To put in short, as it was under the old English law before the law reforms in England, Section 18 of the MIA states that ‘the assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him . . .’ Otherwise, the insurer could avoid the policy.10 Section 19 of the MIA imposes a separate duty on an agent affecting insurance. The interpretation of the provision is similar to the English law.

3

See 61 Singapore Parliament Debate, col. 611. Application of English Law Act Section 4(1), sch. 1, part II (5). 5 Application of English Law Act Section 4(2) and sch 1, part II (6). 6 Application of English Law Act Section 4(1) and schedule 1, part I (2). 7 Application of English Law Act Section 7 and sch. 2 (amending the Insurance Act to incorporate the Life Assurance Act). 8 Chen (2014b), pp. 483–485. 9 Cap 387, Revised Edition 1994. (Marine Insurance Act). 10 Marine Insurance Act s 18(1). 4

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The test of materiality is the prudent insurer test.11 In sum, an insured is required to disclose all material information that may affect a prudential insurer to decide whether to issue a policy or to determine premiums before the policy is issued. If there is a breach of the duty, the insurer could avoid the policy. The underlying assumption is that ‘the insured is in possession of facts which may influence a prudent insurer’s decision in computing the risk undertaken.’12 There have been very few reported cases in Singapore related to the duty to disclose. In Tat Hong Plant Leasing Pte Ltd v Asia Insurance Co.,13 the materiality of information that should have been disclosed was decided by the court. Without informing the insurer, in a separate letter the insured (the lessor) changed a term in a standard agreement that had the effect of shifting responsibility for repairs and maintenance from the lessee to the lessor. The Singapore Court of Appeal held that varying the terms of a standard form lease agreement through a side letter amounted to a material fact that could affect the decision of the insurer on whether to underwrite the risk. Therefore, there was a breach of Section 18 of the MIA. Although the decision was hardly disputable on this point given that the term in question had the effect of increasing the insured’s burden (and therefore risk), the decision affirmed the so-called prudent insurer test to determine the materiality of information that should be disclosed. In a different, unreported, decision in 2011, the Singapore High Court considered the question of whether earlier loan shark activities amounted to material facts that should be disclosed in a robbery policy. Unfortunately, however, the court did not directly address the point because of evidence issues regarding the dates of the proposal form.14 Another question was whether Singapore should adopt the English requirement that the insurer has to prove that it is induced by the non-disclosure to issue the policy. In Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd,15 the British House of Lords decided that an insurer must prove it was induced by non-disclosure of the facts before avoiding a policy under Section 18 of the Marine Insurance Act 1906. However, because Pan Atlantic was decided after 1992, it did not automatically form part of Singapore’s insurance law. The position of the Singapore court has not yet been confirmed in a reported judgment in the official Singapore Law Reports. However, there have been three unreported judgments by the Singapore High Court accepting the English position.16 Thus, we can assume that Singapore also adopts the inducement requirement under Section 18 of the MIA.

11

Marine Insurance Act s 18(2). Poh (2009), p. 68. 13 Tat Hong Plant Leasing Pte Ltd v Asia Insurance Co [1993] SGCA 33, [1993] 1 SLR(R) 728. 14 Yong Sheng Goldsmith Pte Ltd v Liberty Insurance Pte Ltd [2011] SGHC 156. 15 Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1995] 1 AC 501 (HL). 16 See UMCI v Tokio Marine & Fire Insurance Co (Singapore) Pte Ltd [2008] SGHC 188; American Home Assurance v Hong Lam Marine Pte Ltd [1998] SGHC 399; Awang bin Dollah v Shun Shing Construction & Engineering Co Ltd [1996] SGHC 296. 12

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Regarding remedies for non-disclosure, before the English law was reformed in 2012 and 2015, there was only one remedy for breaching the duty of utmost good faith and disclosure under the Marine Insurance Act, i.e., avoidance of the policy ab initio.17 This position was affirmed by the House of Lords decision in 1991.18 As this decision was made before the ALPA, by default it forms part of the Singapore law, though no local case have considered the matter since then. Consequently, under Singapore’s insurance contract law (and the MIA), avoidance of a policy remains the sole remedy for an insured’s breach of the duty to disclose. As an all-or-nothing remedy, it seems to be inflexible.19 At the time of writing, no clear law reform is in sight for Singapore. Thus, it is unclear whether Singapore will adopt England’s new legislation or find other ways to reform Singapore’s insurance contract law in the future. In addition to non-disclosure, the MIA provides separate remedies for misrepresentation as set forth in Section 20 of the Act. It is worth mentioning that we have not seen any local decisions contemplating the meaning of s 20. Technically, some recent developments occurring in England over the past two decades have not been made a part of Singapore’s common law because of the ALPA, as mentioned earlier. For example, it is unclear whether Singapore law incorporates the position of the court in Economides v Commercial Assurance Co PLC20 limiting the meaning of ‘in the course of business’ to ‘business insurance’, given that Economides was reported in 1998. Thus, there may be a vacuum in Singapore’s common law, as the local courts have not seen enough cases since the break with English mercantile law to create uniquely Singaporean jurisprudence. It is also unclear how misrepresentation under the MIA and the general law (including both the common law and the Misrepresentation Act 1967, also reintroduced into Singapore in 199321) would interact with each other, as there have been no clear judicial decisions addressing the point yet. Finally, once a policy has been issued, the follow-up question is whether an insured also owes a duty to disclose material information post contract. The MIA does not clearly mandate such a duty after a policy is issued. The traditional position is that the insured’s duty ends when a policy is issued.22 Thus, unless a policy contains that obligation, the question is whether the duty of utmost good faith connotes a post-contractual duty to disclose. In general, Singapore law follows the English position that the insured owes no post-contractual duty of disclosure (as part of the duty of utmost good faith) except when the policy terms require it. It worth noting that the use of the basis of contract clause is still allowed in Singapore, and it is not uncommon to find such a clause in the proposal form or 17

See Marine Insurance Act Sections 17 and 18. Banque Keyser Ullmann SA v Skandia (UK) Ins Co Ltd [1991] 2 AC 249, 280-281 (UKHL). 19 It is arguable whether a proportionate approach would be better. See Li et al. (2016). 20 [1998] QB 587, [1997] 3 WLR 1066 (CA). 21 Misrepresentation Act (Cap 390, Revised Edition 1994). 22 Birds et al. (2015), para. 18-022. 18

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policy conditions of insurance contracts in Singapore. Section 33 of the MIA makes it possible to turn such a statement into a warranty in which an insured ‘affirms or negates the existence of a particular state of facts’.23 Such a clause would ‘enable insurers to deny liability on the basis of misrepresentation without proof of either materiality or inducement.’24 Thus, through the basis of contract clause, an insurer may turn a non-disclosure or misstatement made by a customer into a warranty, the breach of which would allow an insurer to discharge all liability from the date of the breach.25 This provides a powerful weapon to insurers to avoid their liability even when an insured event occurs. Such a clause is often hidden in the declaration section of a proposal form in the middle of a long text.26 Insurers probably feel the need to protect themselves against misrepresentations or the non-disclosure of material facts. However, combining the disclosure rule with the warranty rule may put customers in a very poor situation, given that they may lose all of their protection under a policy if somehow the insured has failed to disclose something the insurer deems to be material. It has been noted that insurers in Singapore tend to rely on material non-disclosures rather than the basis of contract clause to deny liability; this approach has been endorsed by soft law.27 Nevertheless, current Singapore law arguably overprotects insurers by giving them the right to decide the materiality of information and the power to not only avoid a policy but also disclaim all liability from the moment of a breach of the basis of contract clause. This may raise serious moral hazards on the side of insurers.

2.1.3

Regulatory Intervention and an Insured’s Pre-Contractual Duty of Disclosure

There have been some regulatory intervention to regarding the pre-contractual duty of disclosure under the Marine Insurance Act. First, to address the harshness of the disclosure duty under the MIA, Singapore law requires insurers to warn customers of the duty to disclose. The Insurance Act specifies that: [n]o Singapore insurer shall use, in the course of carrying on insurance business in Singapore, a form of proposal which does not have prominently displayed therein a warning that if a proposer does not fully and faithfully give the facts as he knows them or ought to know them, he may receive nothing from the policy.28

23

Marine Insurance Act Section 33(1). Bennett (2006), para. [44]. 25 Marine Insurance Act Section 33(3). 26 See, e.g., the website of NTUC Income: http://www.income.com.sg/forms/application/ regularpremium.aspx?ext¼.pdf; Great Eastern: https://www.greateasternlife.com/content/dam/ great-eastern/sg/homepage/personal-insurance/find-the-right-plan/protect-yourself-and-your-fam ily/life-protection/direct-great-term/direct-purchase-proposal-form.pdf. 27 Yeo (2014), p. 26. 28 Insurance Act (Cap 142, Revised Edition 2002) s 25(5). (Insurance Act). 24

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Otherwise, fines up to S$25,000 and S$2500 per day could be imposed for continuing offences.29 However, the law does not define what amounts to a ‘prominent display’ of such a warning. Some insurers put it near the top of the proposal form before any customer information is requested.30 Others put the warning in red or other colours,31 or simply print the warning in black ink. The idea behind the warning is in line with other risk warnings (where applicable) and product disclosure (discussed in Section B). A customer cannot later claim that he or she was unaware of the duty to excuse himself or herself from any of the non-disclosures made. Nevertheless, like other product disclosure issues, it is questionable whether such warnings are read by customers. Furthermore, even if a customer is aware of the warning, it is anyone’s guess whether he or she really understands what a duty of disclosure is without having had any training in insurance law. Second, a customer’s disclosure requirement is also, to a certain extent, affected by regulations on the sales process of insurance products.32 In 2015, the Monetary Authority of Singapore (MAS) imposed a new rule prohibiting a direct life insurer from issuing a life insurance policy until it had received a copy of the completed ‘life insurance advisory form’ (LIA form).33 The content of the LIA form34 is quite similar to that of the proposal form (e.g., the personal information and needs of an insured) except that a financial adviser rather than the person applying for insurance fills out the form. What makes the LIA form different from a typical proposal form is that it specifically allows a financial adviser to make a suitability assessment of a customer through specific questions on his or her investment risk profile, priorities and objectives in addition to the customer’s financial position and existing insurance portfolio. This information is needed to properly evaluate whether a particular insurance product is suitable for the customer. Although the regulatory objective is to protect financial consumers as part of the reforms to improve the quality of financial advisory services and the distribution of insurance products, there is a potential problem that is not resolved by the regulations: whether any defect in the information disclosed in the LIA form allows an

29

Insurance Act s 25(6). See, e.g., the website of NTUC Income: http://www.income.com.sg/forms/application/ regularpremium.aspx?ext¼.pdf; and the website of Axa: https://www.axa.com.sg/pdf/our_solu tions/car/smart-drive/smartdrive_application_form.pdf. 31 See, e.g., the website of Great Easter Life: https://www.greateasternlife.com/content/dam/greateastern/sg/homepage/personal-insurance/find-the-right-plan/protect-yourself-and-your-family/lifeprotection/direct-great-term/direct-purchase-proposal-form.pdf. 32 See more discussion in Sect. 2.2. 33 MAS Notice on market conduct standards for direct life insurer as a product provider (Notice 318, 2015) para 6. 34 The standard form is available from the website of Life Insurance Association Singapore in the website of LIA: http://www.lia.org.sg/files/document_holder/Industry_Guidelines_-_Life/ MU2015a_Final.pdf. 30

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insurer to void a policy under s 19 of the MIA, which imposes a duty on an agent to disclose material information to the insurer. Whether a financial adviser is an ‘agent’ under the MIA is a legal question, and to a certain extent, also a factual question. If a financial adviser is acting as an insurance broker (i.e., an agent for an insured),35 applying for insurance on behalf of an insured, there should be less problem applying Section 19. As the general position in Singapore is that statements made in the proposal form are attributable to the insured.36 In contrast, if a financial adviser is an insurance agent for an insurer,37 any false information in the LIA form should not be attributed to the insured. However, it is uncertain whether Section 19 is applicable when a financial adviser is neither an insurance broker nor an insurance agent (i.e., an independent third party financial adviser simply providing advice and making recommendations). As there is no local case on this issue yet, it may require the courts or legislators to clarify it in the future.

2.2

Transparency of Product Features and Terms

In this section, issues related to the transparency of insurance products and policy terms are examined. The insurer’s duty at common law is first discussed. Thereafter, Singapore’s Insurance Act (Cap 142) regulations and the Financial Advisers Act (Cap 110) are further explored. The former is the primary source of regulations for insurance companies and insurance intermediaries, and the latter governs financial advisers. The two sets of regulations may overlap to a certain extent in a complicated web of legislative definitions.

2.2.1

Insurer’s Duty of Utmost Good Faith?

Does an insurer have any duty to a customer to disclose information about an insurance product and its policy terms? In general, Singapore adopts the common law position that an insurer owes no general duty in contract, tort law or equity to disclose product information other than to forbear from making misrepresentations.38 The Unfair Contract Terms Act 1977, reintroduced into Singapore in

35

Under Singapore law, an insurance broker is a person carrying on insurance intermediary business as an agent for insureds. Insurance Act Section 2. 36 Poh (2009), p. 238. 37 Under Singapore law, an insurance broker is a person operating an insurance intermediary business as an agent for one or more insurers. Insurance Act, Section 2. 38 The law regarding misrepresentation in Singapore is generally similar to the English law, with the Misrepresentation Act 1967 also being reintroduced under the Application of English Law Act, as the Misrepresentation Act (Cap 390, Revised Edition 1994).

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1993,39 does not apply to contracts for insurance.40 Therefore, technically, insurers can use an exclusion clause to limit their liability for misrepresentations. In short, Singapore maintains the caveat emptor41 principle at common law. There are three additional issues. The first is whether an insurer’s duty of utmost good faith requires an insurer to disclose product information or policy terms to a customer. Singapore has reintroduced the Marine Insurance Act 1906 in its entirety. Under it, utmost good faith must be ‘observed by either party’.42 There have been signs that the Singapore court may apply the duty of utmost good faith in a broader manner. For example, in 2008 Chan Sek Keong CJ made the following observation in Tay Eng Chuan v Ace Insurance Ltd: Just as the insured was under a legal obligation to disclose fully to the insurer, on an uberrima fides basis, all material facts relating to his personal conditions and circumstances, the insurer had to also inform the insured of any unusual clause(s) in an insurance policy that might deprive the latter of his right to make a claim.43 This observation came after an earlier decision by Woo Bih Li J in NTUC Co-operative Insurance Commonwealth Enterprises Ltd v Chiang Soong Chee, who opined: [I]nsurers must take a proactive and responsible approach. Besides highlighting what the cover of each policy extends to, insurers should also highlight the more obvious areas which the cover does not extend to, although this may be counter-intuitive to them, and not wait for legislation to compel them to do so.44

These observations may shed new light on the insurer’s duty of utmost good faith at the pre-contractual stage. Nevertheless, no other cases have followed up on the issue. In Tay Eng Chuan, the case involved three interconnected clauses: a standard arbitration clause; a ‘legal action clause’ providing that ‘subject to the [arbitration clause], no action shall be brought to recover on the policy prior to the expiration of [60] days . . .’; and a ‘condition precedent clause’ requiring that ‘the due observance and fulfilment of the terms provisions and conditions of [the] policy . . . shall be a condition precedent to the liability of the [insurer] . . .’. In this case, the insured did not file for arbitration before bringing a legal action. Instead of trying to stay the legal proceeding based on the arbitration clause, the insurer argued that the condition precedent clause had been breached, so the insurer owed no liability to the insured. In this case, the Chief Justice decided that the combination of relevant provisions were so unusual the insurer should have alerted the insured first, seemingly based on 39

Unfair Contract Terms Act (Cap 396, Revised Edition 1994). Unfair Contract Terms Act First Schedule para 1(a). 41 Buyer beware. 42 Marine Insurance Act Section 17. 43 Tay Eng Chuan v Ace Insurance Ltd [2008] SGCA 26, [2008] 4 SLR(R) 95, [30]. 44 NTUC Co-operative Insurance Commonwealth Enterprises Ltd v Chiang Soong Chee [2007] SGHC 222, [2008] 2 SLR(R) 373, [50]. However, Woo Bih Li J does not clearly refer to the concept of utmost good faith in his judgment. 40

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the duty of utmost good faith. This decision might have been due in part to the insurer’s attempt to dismiss the entire claim just because the insured had failed to file for arbitration first. The judge might feel sympathetic towards the insured plaintiff that it was too much to rely on a widely drafted condition precedent clause to defeat a genuine claim (rather than simply stay the legal action). However, whether it was appropriate for the court to use utmost good faith as the justification for its ruling is questionable. On the one hand, the decision cited no other authority to support its ruling other than the previous lower court judgment in Chiang Soong Chee,45 which also did not cite any precedent for the ruling mentioned previously. The court also did not address the issue of applicable remedy for when an insurer is found to have breached its duty of utmost good faith after failing to disclose an unusual term. After all, the general position that avoidance of a policy is the sole remedy for breach under Section 17 of the MIA is still the Singapore position. Whether the Singapore court will allow other remedies in light of the recent changes to the UK law under the Consumer Insurance (Disclosure and Representations) Act 201246 and the Insurance Act 2015 remains to be seen. Instead, the judge seems to have used the concept of utmost good faith as an interpretative tool, though this approach is supported under the Australian47 or current UK law.48 Thus, whether the legal reasoning underpinning the decision is sustainable without a revision of the MIA is a question of law. On the other hand, it is unclear what was meant by the words ‘unusual clause’. It is uncertain whether the court meant to require an insurer to warn its insureds of this kind of warranty clause or an unusual combination of warranty, legal action and arbitration clauses as in the case before the court. In sum, the Singapore court has shown some willingness to apply the duty of utmost good faith in a new light. However, as there has not been much development of the issue it remains to be seen whether the court’s position will be upheld in the future.

2.2.2

Transparency of Insurance Products Under Insurance Regulations

Improving transparency is an important tool to protect financial consumers.49 Apart from the common law, insurers and insurance intermediaries are subject to regulations aimed at financial consumer protection to enhance transparency of insurance products. Under Singapore law, there are several regulations that are applicable. We will briefly introduce the relevant rules regarding insurance products in this section.

45

See note 1575. For a general discussion on the 2012 Act, see Lowry and Rawlings (2012). 47 Insurance Contract Act 1984 (Australia) Section 13. 48 Insurance Act 2015 (2015 c.4) Section 14. 49 Schwarcz (2014), p. 394. 46

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Financial Advisers Act and Regulations The primary regulations dealing with the disclosure of consumer financial products in Singapore fall under the Financial Advisers Act (FAA).50 After the global financial crisis, Singapore amended the FAA to include an express provision specifying a financial adviser’s obligation to disclose product information. Section 25 of the FAA generally states that a ‘licensed financial adviser shall disclose, to every client and prospective client, all material information relating to any designated investment product that the licensed financial adviser recommends . . .’ including its terms and conditions, benefits, premiums costs, expenses or fees, and the names of the insurer if the product is a life insurance policy.51 A ‘designated investment product’ includes a unit in a collective investment scheme, life insurance policy and other products prescribed by the MAS.52 In other words, a general insurance policy is outside the scope of Section 25 of the FAA. Contravention of the provision may lead to criminal penalties and continuing fines.53 However, the provision is inapplicable to financial advisory services provided to accredited or expert investors.54 This means that the provision is aimed at protecting retail customers. There is a separate provision dealing with false or misleading statements made by financial advisers.55 There are some points worth noting. First, Section 25 of the FAA is applicable only to ‘licensed financial advisers’. Under the FAA, there is a complex web of statutory definitions. Technically, an insurer or an intermediary licensed under the Insurance Act is an ‘exempt financial advisor’, not required to obtain a financial adviser’s license before financial advisory services have been provided.56 However, because Section 25 clearly refers to the term ‘licensed financial adviser’, it seems that insurers or insurance intermediaries are not subject to the provision, although they may still have to comply with other relevant financial adviser regulations. Second, a financial adviser is under a general obligation to meet certain standards when disclosing product information. The standards are clear and adequate and are not false or misleading.57 A financial adviser should also disclose its business information and identity together with any fees or commissions charged to a client.58 For life insurance products, a financial adviser should also disclose to the client the

50

Cap 110, Revised Edition 2007. (Financial Advisers Act). Financial Advisers Act Section 25(1). 52 Financial Advisers Act Section 25(6). 53 Financial Advisers Act Section 25(5). 54 Financial Advisers Regulation, Regulation 33(1). 55 Financial Advisers Act Section 26. 56 Financial Advisers Act Sections 2 and 23. 57 MAS Notice on information to clients and product information disclosure (FAA-N03, 2013) para. 11. 58 MAS Notice on information to clients and product information disclosure (FAA-N03, 2013) para. 12–22. 51

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‘distribution cost’ in the benefits illustration.59 However, an adviser is not required to disclose the exact amount and type of remuneration it receives.60 Thus, a customer probably does not have a clear idea of how much an adviser is paid for recommending a certain type of life insurance policy (notably the expensive types). Any conflict of interest should also be disclosed.61 A financial adviser should also disclose in a clear manner the nature and objective of a product (e.g., a life policy), the details of the product’s provider (e.g., details of the insurer issuing the policy), the parties’ contractual rights (e.g., an adviser informing a customer that misleading information might affect the validity of a policy), the client profile, the benefits and risks of a product (specified in the benefits illustration in a life insurance policy), etc.62 An adviser should also inform a customer of any free-look period and the terms and procedures for exercising the free-look provision.63 Third, as part of the know-your-client and suitability assessment procedures, a financial adviser must furnish certain documents to a customer when recommending a life insurance product. Those documents have three components: a product summary, a benefits illustration and a product highlights sheet.64 The meanings of these documents are elaborated further in the next section. However, a financial adviser’s obligation to furnish documents does not apply to all insurance products. The requirement is only applicable to life policies and investment-linked policies. Thus, in a way, customers of general insurance products receive less regulatory protection. In addition, since 2015, Singapore has promoted direct purchase insurance (DPI) products as part of a package to increase insurance penetration and address future concerns in an ageing society. Although it is meant to be direct sales between insurers and customers, a financial adviser may still promote a DPI to a customer even though it must ‘put in place procedures to ensure that [every representative or officer or the online portal] has . . . information relating to the DPI . . .’65 The information should include a copy of the product summary, benefits illustration

59

MAS Notice on information to clients and product information disclosure (FAA-N03, 2013) para. 22. 60 MAS Notice on information to clients and product information disclosure (FAA-N03, 2013) para. 22. 61 MAS Notice on information to clients and product information disclosure (FAA-N03, 2013) para. 23. 62 MAS Notice on information to clients and product information disclosure (FAA-N03, 2013) para. 24. 63 MAS Notice on information to clients and product information disclosure (FAA-N03, 2013) para. 24. 64 MAS Notice on recommendations on investment products (FAA-N16, 2011) para. 37(b). 65 MAS Notice on the distribution of direct purchase insurance products (FAA-N19, 2015) para. 10(b).

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and product highlights sheet.66 Thus, a financial adviser still has to comply relevant regulations even if the product is a DPI.

Insurance Regulations and Self-Regulation Apart from the FAA regulations, life insurers, in general, are required to provide more product information to customers under Singapore’s insurance regulations. Pursuant to Notice 318 on ‘market conduct standards for direct life insurer as a product provider’ issued by the MAS, some market conduct standards are now imposed on life insurers. In addition, Singapore relies on self-regulation to restrain insurers’ conduct and to provide more transparency with insurance products. We elaborate on this in full detail in this section. First, the MAS requires direct life insurers to ‘ensure that documents prepared for clients comply with the applicable standards stated in the Insurance Act and its notices and the notice on product disclosure and information to clients issued under the Financial Advisers Act of 2001’.67 In other words, the MAS expects life insurers to follow the rules pertaining to financial advisers in the case of direct sales of insurance products without a financial adviser involved. In particular, a life insurer must ‘prepare a product summary and benefit illustration for each of its life insurance policies, as required by the industry standards issued by the Life Insurance Association of Singapore’.68 In addition, direct life insurers are required to ‘ensure that any information given to a client is clear, adequate and not misleading’ and follows the industry standard.69 The regulation also forbids insurers from selling policies that are not written in plain language.70 Clearly, the purpose of this rule is to improve the customers’ understanding of insurance policies and to prevent insurers from hiding behind legal terminology. We further consider the pros and cons of this in Part III. We must highlight the point that MAS Notice 318 is applicable to life insurers only. This position is understandable given that life insurance policies tend to be longer in duration and have potentially higher risk (especially for investment-linked policies), such as interest rate risk or default risk of insurers. However, because general insurers may still sell some short-term accident and health policies,71 it may 66

MAS Notice on the distribution of direct purchase insurance products (FAA-N19, 2015) para. 14, referring to MAS notice on recommendations on investment products (FAA-N16) para. 37(b). 67 MAS notice on market conduct standards for direct life insurer as a product provider (Notice 318, 2015) para 3. 68 MAS notice on market conduct standards for direct life insurer as a product provider (Notice 318, 2015) para. 3. 69 MAS notice on market conduct standards for direct life insurer as a product provider (Notice 318, 2015) para. 4. 70 MAS notice on market conduct standards for direct life insurer as a product provider (Notice 318, 2015) para. 5. 71 Insurance Act Section 23.

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worthwhile for the regulator to broaden the scope of its regulations to general insurers, where appropriate, to avoid misselling and improve the quality of distribution for all insurance products. While there could be less misselling claims, customers of more standardised motor or household insurance policies are still in need to know more about the protection and coverage. In 2004, the LIA and General Insurance Association of Singapore (GIA) published further guidelines on information disclosure and advisory processes by jointly issuing the ‘guidelines on disclosure requirements for A&H products’ for accident and health insurance. The guidelines generally require insurers to provide at least two documents: ‘Your Guide to Health Insurance’ and ‘Product Summary’.72 The guidelines also provide direction on the details to be specified in those documents.73 Furthermore, they instruct insurers that proposers must confirm in writing that they have been given a copy of these documents and that the contents thereof have been explained to their satisfaction.74 This might lead to the issue of contractual estoppel briefly discussed below. In addition, the guidelines require insurers to specifically highlight in their marketing materials and application forms that benefits vest only in the event of an accident (for personal accident products).75 Finally, the guidelines require insurers to make continual disclosures to policyholders if modification is made to their product information or key policy provisions (e.g., premium rates or exclusion clauses).76 The GIA’s General Insurance Code of Practice77 also requires general insurers to explain all of the main features of a product or service, including the product summary, any significant or unusual restrictions warranties or exclusions and any significant conditions or obligations.78 A general insurer must also inform customers of the details of insurance costs, including information on premiums, any fees or charges and how to pay the premiums or fees.79 Therefore, in addition to regulatory rules, there is some degree of self-regulation to improve transparency in Singapore.

2.2.3

Remedies for Customers

Do customers have any remedy if an insurer, an intermediary or a financial adviser breaches any regulation before a policy is issued? First, if any misrepresentation

72

See LIA/GIA, Guidelines on disclosure requirements for A&H products, p. 1, available in http:// www.lia.org.sg/files/document_holder/Industry_Guidelines_-_Health/LIA_GIAdisclosure.pdf. 73 LIA/GIA, Guidelines on disclosure requirements for A&H products, pp. 1–3. 74 LIA/GIA, Guidelines on disclosure requirements for A&H products, p. 4. 75 LIA/GIA, Guidelines on disclosure requirements for A&H products, p. 5. 76 LIA/GIA, Guidelines on disclosure requirements for A&H products, p. 5. 77 Last revised in July 2016, available in http://www.gia.org.sg/pdfs/code_of_practice.pdf. 78 General Insurance Code of Practice, para. 3.1. 79 General Insurance Code of Practice, para. 3.3.

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takes place, a customer may file a claim to rescind the policy. However, rescinding the policy may not be the most desirable option. For example, in Zhu Yong Zhen v AIA Singapore Pte Ltd,80 the policy was suspended after the insured failed to pay the premiums at the end of the 16th year. The insured argued that she had been shown a product benefits illustration implicitly showing that the annual premiums from the 16th year would be covered by the accumulated policy dividends. In this case, the judge found that the ‘entire agreement’ clause in the policy precluded the product benefits illustration from being a policy term, and in fact, the product benefits illustration did not really support the insured’s claim. Consequently, the insured lost her protection after the 16th year because of her own mistake. Assuming the insured had grounds to claim misrepresentation, it would have been impractical for her to rescind her policy after 16 years, even if the misrepresentation had been made before the policy was issued. She would have lost her protection and it might have been more expensive to replace the same policy. Furthermore, even for general insurance, it is likely that an insured would discover a misrepresentation only after the insured event had taken place. If this were true, rescission would be against the purpose of the insurance because the insured would be left without coverage after the loss. In any event, the insured may encounter challenges in recovering the premiums paid, depending on the policy terms and the party negotiations after the rescission, in addition to any legal costs incurred in rescinding the contract at common law. Second, an insurer, an intermediary or a financial adviser should be liable to a customer for misrepresenting policy information. On the one hand, they might be liable under the Misrepresentation Act.81 On the other hand, a financial adviser who has breached his or her statutory obligation to disclose product information to a customer would be liable for the person’s loss if the adviser had made a recommendation in contravention of this obligation and the person had reasonably performed because of the contravention.82 This statutory duty complements common law and equitable remedies. However, the provision clearly refers to a ‘licensed financial adviser’, so an insurer or insurance intermediary (as exempt financial advisers) would not have a statutory duty if the statute’s wording were taken literally. Regardless, whether a customer suffers a loss is a separate question that must be proved by the claimant. Although no case has clearly applied it to insurance policies, Singapore courts also seem to accept the doctrine of contractual estoppel. Once an insured accepts a policy issued to him or her, the likelihood of that person successfully arguing that he or she does not know the content of the policy or that the policy is not suitable would be quite limited if the policy and/or the proposal form contained a provision stating

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[2013] SGHC 37, [2013] 2 SLR 478. Misrepresentation Act Section 2. 82 Financial Advisers Act s 25(5A). There is a separate liability for providing false or misleading information to a customer. See Financial Advisers Act Section 26(1C). 81

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that the applicant had received or seen some of the documents (e.g., the product summary or benefits illustration) or confirmed his or her own suitability (which may be required for investment-linked policies; see the following discussion).83 However, the exact extent and application of the doctrine still depends on the decisions to be handed down in future cases.84 Finally, a customer who breaches self-regulatory guidelines has no cause of action because the self-regulatory rules are not technically actionable. This is perhaps a trade-off between enforcing standards through self-regulatory rules and providing remedies for consumers. If self-regulatory rules were actionable, it could be more difficult for members of trade associations to agree on guidelines. After all, insurers probably would not want to voluntarily increase their own liability. Relying only on the common law and statutory remedies may increase the chances for agreement on bottom-line standards. However, whether self-regulation would be sufficient to regulate the behaviours of insurers and to improve quality of transparency is subject to a larger debate.85

3 Transparency Issues Surrounding Insurance Contracts Section 1 introduced several transparency issues surrounding insurance contracts. Singapore’s position on the duty of disclosure owed by an insured at common law and under the MIA is analysed. The common law and regulatory rules dealing with an insurer’s (or an intermediary’s) disclosure of product information to a customer are also examined. However, is Singapore’s current law sufficient? Has Singapore law contributed to a greater degree of transparency or is there a lot more that should be done? In this section we provide some general discussion to evaluate the current Singapore law from the transparency angle. Before concluding this chapter, in the following sections, more specific issues related to an insured’s duty of disclosure and an insurer’s obligation to provide product information are considered.

3.1

Harsh Pre-Contractual Disclosure Rules

As already discussed, Singapore’s insurance contract law originated with English law, notably the Marine Insurance Act 1906, enacted before the UK law reforms in 83

See Deutsche Bank AG v Chang Tse Wen [2013] SGCA 49, [2013] 4 SLR 886. In Deutsche Bank AG v Chang Tse Wen [2013] 4 SLR 886, a case about an alleged misselling of a complex non-insurance structured investment product, the Singapore Court of Appeal doubted the correctness of a more limited application of the contractual estoppel doctrine made by the High Court, although the Court of Appeal decided to leave it open for future cases to address the issue. At [79]. 85 Hamilton (1995). 84

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the twenty-first century. Unlike the UK, Singapore still maintains the pre-contractual disclosure duty for both consumers and business insurance as formulated under the Marine Insurance Act. Therefore, Singapore law also suffered from the shortcomings of the old Marine Insurance Act 1906 in the UK before the Consumer Insurance (Disclosure and Representations) Act 2012 and the Insurance Act 2015 were enacted. Consequently, the door for Singapore to reform its insurance contract law is open, at least for consumers. At the time of this writing, however, it is unclear whether any law reform will take place in Singapore in the near future. One underlying challenge is that it is difficult to measure how serious the problems of non-disclosure and misrepresentation are among Singaporeans and to evaluate insurers’ moral hazards because there are no clear data in the market to assess these issues. Therefore, it is impossible to examine whether the current Singapore law is optimal in terms of balancing the interests of customers and insurers and dealing with the asymmetry of information underlying insurance contracts. However, we argue that Singapore needs more insurance penetration to face its rapidly ageing society and in light of technology development in the era of the Internet and Big Data.86 How Singapore’s insurance contract law should evolve (e.g., to follow the new UK legislation or Australian model) is beyond the scope of this chapter. Nevertheless, we share some general comments on the current state of Singapore law related to a customer’s pre-contractual duty of disclosure. There are three main consumer insurance issues related to the goals of improving transparency, increasing legal certainty and controlling moral hazards. First, the current pre-contractual duty of disclosure is unduly harsh for consumers because they may not know what a prudent insurer would want to know and there is no flexibility in terms of remedies. Sometimes consumers are not even aware of the duty to disclose.87 In addition, as discussed above, many local insurers still use the basis of contract clause88 that is prohibited under the new UK law. There is no doubt that a consumer should offer genuine information to an insurer to enable the insurer to value the risk to be insured. However, in the twenty-first century, at least for ordinary consumers it is arguable that insurers know better what they need to know and it might be unconscionable to impose a rather one-sided duty formulated over a century ago for marine insurance. From this perspective, the current MIA could be refined to meet the reality of the local market, to create a fair market for customers and to protect insurers from moral hazards. In fact, suggestions have already been made that Singapore should consider the possibility of adapting the Consumer Insurance (Disclosure and Representations)

‘A sustainable populartion for a dynamic Singapore - Population White Paper’ 2013. Yeo (2014), para. 11. 88 However, it has been noted that insurers in Singapore tend to rely on material non-disclosure than the basis of contract clause to deny liability; and this approach has been endorsed by soft law. Yeo (2014), para. 26. 86 87

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Act 2012.89 Nonetheless, it is unclear where Singapore law will develop in the future at the time of writing. Second, there is the question of whether the terms of consumer policies, and in particular terms such as the basis of contract clause, should be further regulated. A broader idea is to revise the warranty rule in the MIA90 to offer greater legal certainty and fairness without compromising the ability of insurers to control the risk insured by the policy terms. Singapore may at least attempt to compromise the effect of the basis of contract clause if it does not prohibit this kind of term as the UK law does.91 A extreme position may involve further regulatory intervention with regard to the terms of consumer insurance products. Clearly, the new UK law does not go so far as to standardise the terms of consumer policies, and we argue that freedom of contract should still be the norm. Having some competition over terms should also benefit the market. However, in cases where certain terms (e.g., the basis of contract clause) are undesirable, we may consider finding new ways to deal with them, through either insurance legislation or consumer protection laws.

3.2

Has Singapore Done Enough to Improve Transparency to Protect Customers?

As discussed above, Singapore has strengthened its regulation of financial advisers to enhance the protection of financial consumers. Although the reform has been comprehensive, this chapter suggests that there are still some holes in Singapore’s regulatory framework where transparency for financial consumers of insurance products can be improved. First, there have been plenty of consumer complaints over insurance policies. Data provided by the Financial Industry Disputes Resolution Centre (FIDReC)92 offer a good perspective on the landscape of consumer insurance complaints.93 An analysis of insurance complaints between 2008/09 and 2012/13 produced a total of 1295 disputes, comprising 669 complaints against life insurers and 626 against general insurers. The data further show that a large proportion of the disputes with life insurers concerned advice or misselling (a total of 425 of 669, 63.53%) with another substantial proportion related to the liability of the life insurers (118 cases, 17.64%). In contrast, for general insurance, a large majority of disputes concerned the liability of the insurers (579 of 626, 91.85%). This data may shed some light on the future development of consumer insurance law.

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Yeo (2014), para. 16. Marine Insurance Act Section 33. 91 Insurance Act 2015 Section 9(2). 92 The FIDReC is an alternative dispute resolution body designed to handle financial consumer disputes. 93 See annual reports of the FIDReC in http://www.fidrec.com.sg/website/annualreports.html. 90

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From the data, it is obvious that most of the disputes over life and/or long-term health insurance policies are related to misselling. There could be a number of reasons why misselling is a notable problem in life insurance policies. First, life and health insurance products are often more complicated than the likes of motor vehicle policies. Moreover, to boost the customer’s return, some life insurance products are embedded with an investment component, which may also increase the likelihood of misselling. Second, life insurance policies tend to have a longer term. Thus, the rules of the MIA, such as the duty of utmost good faith, duty of disclosure and warranties applicable to life insurance policies, could increase customers’ legal risk, especially many years into a policy when the customer may have considerable difficulty acquiring the same coverage at the same price, as in the case of Zhu Yong Zhen v AIA Singapore Pte Ltd94 discussed previously. Misselling is not necessarily something that insurance contract law can address. As discussed in Sect. 2, the MAS has duly issued several regulations to improve financial consumer protection. What is confusing is that some regulations (e.g., the suitability assessment requirements) are applicable only to investment-linked policies (ILPs) so that the sale of conventional life, pension or health insurance policies are not subject to the same requirements as ILPs.95 We understand that ILPs may impose a higher level of risk than other life policies, justifying a higher level of regulation. However, non-ILPs may still pose other risks that raise the possibility of misselling, such as a lack of explanation of the scope of a travel or motor policy or whether a policy offers coverage in addition to that covered by the state-supported Medishield scheme. Regulators should consider applying broader product disclosure rules to all kinds of insurance products or services rather than focusing on those policies that come with significant investment risk. A more general question is whether providing documents to customers would be sufficient to improve transparency and protect financial consumers. This is so broad that this chapter cannot examine it in detail. However, although it is always important to make information available to customers, we should point out that there is also a danger of information overload, and it is arguable how much a customer may be able to read and digest. In general, the author accepts the proposition that customers should be responsible for their signature on a contract and should read the product information before making a decision.96 This approach enhances a customer’s own responsibility in making financial decisions and causes them to be more cautious, while also providing more legal certainty to the industry as long as insurers, intermediaries or financial advisers truthfully prepare their product information. Nevertheless, regulators could

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[2013] SGHC 37, [2013] 2 SLR 478. For example, in the Notice on Recommendation on Investment Products (MAS Notice FAA-N16 issued in July 2011), any life policy other than an ILP falls within the category of an excluded investment product; therefore, the suitability requirement under this notice is technically not applicable. See Annex 1 of Note FAA-N16. 96 Chen (2014a), pp. 200–202. 95

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probably do more to control the presentation of information and the process leading up to the customer’s receipt of the product’s documents to ensure the customer knows what he or she is doing before the contract is signed. This should ensure that more transparency would be effective in delivering information to a customer in the insurance market.

References A sustainable populartion for a dynamic Singapore - Population White Paper. 2013. http://popula tion.sg/whitepaper/resource-files/population-white-paper.pdf Bennett H (2006) The Marine Insurance Act 1906: reflections on a centenary. Singapore Acad Law J 18:669 Birds J, Lynch B, Milnes S (2015) MacGillivray on insurance law, 13th edn. Sweet & Maxwell, London Chen C (2014a) Judicial inactivitism in protecting financial consumer against predatory sale of retail structured products: a reflection from retail structured notes lawsuits in Taiwan. Columbia J Asian Law 27:165–220 Chen C (2014b) Measuring the transplantation of English commercial law in a small jurisdiction: an empirical study of Singapore’s insurance judgments between 1965 and 2012. Tex Int Law J 49 (3):469–505 Hamilton J (1995) The duty of disclosure in insurance law - the effectiveness of self-regulation. Aust Bus Law Rev 23(5):359 Li KX, Wang Y, Tang O, Jie M (2016) Disclosure in insurance law: a comparative analysis. Eur J Law Econ 41(2):349–369 Lowry J, Rawlings P (2012) ‘That wicked rule, that evil doctrine. . .’: reforming the law on disclosure in insurance contracts. Mod Law Rev 75(6):1099–1122 Poh CC (2009) General insurance law. LexisNexis, Singapore Schwarcz D (2014) Transparency opaque: understanding the lack of transparency in insurance consumer protection. UCLA Law Rev 61(2):394–462 Yeo HY (2014) Call for consumer reform of insurance law in Singapore. SAcLJ 26:215–236

Statutes Referred Application of English Law Act (Cap 7A, Revised Edition 1999), Singapore Civil Law Act (Cap 43, Revised Edition 1999), Singapore Insurance Contract Act 1984 (Australia) Insurance Act (Cap 142, Revised Edition 2002), Singapore Insurance Act 2015 (2015 c.4), UK Monetary Authority of Singapore Notice on recommendations on investment products (FAA-N16, 2011) Monetary Authority of Singapore Notice on information to clients and product information disclosure (FAA-N03, 2013) Monetary Authority of Singapore Notice on the distribution of direct purchase insurance products (FAA-N19, 2015) Monetary Authority of Singapore Notice on market conduct standards for direct life insurer as a product provider (Notice 318, 2015) Marine Insurance Act (Cap 387, Revised Edition 1994), Singapore

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Misrepresentation Act (Cap 390, Revised Edition 1994) Financial Advisers Act Cap 110, Revised Edition 2007

Cases Referred American Home Assurance v Hong Lam Marine Pte Ltd [1998] SGHC 399 Awang bin Dollah v Shun Shing Construction & Engineering Co Ltd [1996] SGHC 296 Banque Keyser Ullmann SA v Skandia (UK) Ins Co Ltd [1991] 2 AC 249, 280-281 (UKHL) Deutsche Bank AG v Chang Tse Wen [2013] SGCA 49, [2013] 4 SLR 886 Economides v Commercial Assurance Co PLC [1998] QB 587, [1997] 3 WLR 1066 (CA) NTUC Co-operative Insurance Commonwealth Enterprises Ltd v Chiang Soong Chee [2007] SGHC 222, [2008] 2 SLR(R) 373 Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1995] 1 AC 501 (HL) Tat Hong Plant Leasing Pte Ltd v Asia Insurance Co [1993] SGCA 33, [1993] 1 SLR(R) 728 Tay Eng Chuan v Ace Insurance Ltd [2008] SGCA 26, [2008] 4 SLR(R) 95 UMCI v Tokio Marine & Fire Insurance Co (Singapore) Pte Ltd [2008] SGHC 188 Yong Sheng Goldsmith Pte Ltd v Liberty Insurance Pte Ltd [2011] SGHC 156 Zhu Yong Zhen v AIA Singapore Pte Ltd [2013] SGHC 37, [2013] 2 SLR 478

Transparency in the Insurance Contract Law of South Africa Birgit Kuschke and Daleen Millard

1 Definition of Transparency in Insurance Contract Law 1.1

South African Legal System and Sources of South African Insurance Law

South African law is based on Roman-Dutch law, as amended over time by legislation, positive (case) law, trade usages, and the incorporation of some principles from foreign jurisdictions such as English law in some legal disciplines, such as in insurance law. The Constitution of the Republic of South Africa 1996 as supreme law of our country merely has an indirect horizontal application to civil obligations created by contract.1 Insurance in South Africa (insurance contracts, the insurance industry, and intermediaries and advisors) are specifically regulated by the following statutory

1

This means that contracts will be enforced and interpreted according to constitutional values and norms. Regarding the effect of the Constitution on the common law, it must be mentioned that the courts must develop the common law in the light of the spirit, purport and objects of the Constitution and by an appropriate evaluation of the values of ubuntu, as required by Sec. 39(2). The Constitution however enjoys a direct application to the relationship between the State and its citizens. This is however not relevant for this Report. See also Hutchison and Pretorius (2017), par 1.10 for an examination of the effect of the Constitution on contracts in general. B. Kuschke (*) University of Pretoria, Pretoria, South Africa e-mail: [email protected] D. Millard University of Johannesburg, Johannesburg, South Africa e-mail: [email protected] © Springer Nature Switzerland AG 2019 P. Marano, K. Noussia (eds.), Transparency in Insurance Contract Law, AIDA Europe Research Series on Insurance Law and Regulation 2, https://doi.org/10.1007/978-3-030-31198-8_27

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instruments, namely: the Long-term Insurance Act2 (“LTIA”)3 and the Policyholder Protection Rules for long-term insurance4 (“long-term PPR”) in terms of this statute; the Short-term Insurance Act5 (“STIA”)6 and the Policyholder Protection Rules for short-term insurance7 (“short-term PPR”) in terms of this statute8; the Insurance Act (“IA”)9; and the Financial Advisory and Intermediary Services Act (FAIS Act).10 These statutes always referred to insurance as either long-term or short-term, where long-term could be equated to life insurance and short-term to non-life. The IA formally abolished the misnomers that were short-term and long-term insurance, thereby formally bringing South African terminology in line with international standards. The IA did not, however, replace the LTIA and the STIA in their entirety, and the Acts remain in force. In South Africa, insurance does not resort under general consumer protection legislation and has been completely exempted from the general Consumer Protection Act.11 No national specific insurance contract legislation is in force. The long-term PPR and the short-term PPR were updated and both sets came into operation on 1 January 2018, containing important stipulations on matters such as transparency and disclosure.12 The supervisory authority is the Financial Services Conduct Authority (“FSCA”, previously, the Financial Services Board (“FSB”)). The former FSB was a corporate body established by the provisions of the Financial Services Board Act (“FSCA

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Act 52 of 1998. Long-term insurance business “means the business of providing or undertaking to provide policy benefits under long-term policies”, which are defined as “an assistance policy, a disability policy, fund policy, health policy, life policy or sinking fund policy, or a contract comprising a combination of any of those policies; and includes a contract whereby any such contract is varied”. All these policies are defined individually in greater detail in the Act (Sec. 1). These long-term contracts provide policy benefits and are issued for a defined longer periods, usually exceeding 1 year. 4 The long-term PPR 2010 came into operation on 1 January 2011. 5 Act 53 of 1998. 6 Short-term insurance “means the business of providing or undertaking to provide policy benefits under short-term policies”, which include an engineering policy, guarantee policy, liability policy, miscellaneous policy, motor policy, accident and health policy, property policy or transportation policy or a contract comprising a combination of any of those policies; and includes a policy whereby any such contract is varied. All these policies are defined individually in greater detail in the Act (Sec. 1). 7 The short-term PPR 2010 also came into operation on 1 January 2011. 8 The PPR for the long-term and short-term insurance industries are issued and amended by the FSCA and published in the Government Gazette and enjoy legislative power. 9 Act 18 of 2017 that came into operation on 1 July 2018. 10 Act 37 of 2002. 11 Act 68 of 2008. 12 See Government Gazette 41329 (in terms of Section 55 of the Short-term Insurance Act) and in Government Gazette 41321 (in terms of Section 62 of the Long-term Insurance Act). 3

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Act”),13 existed independently of and functioned outside the public service sector, and its members were appointed by the Minister of Finance. Under the new ‘Twin peaks’ system, the Prudential Authority replaces the Reserve Bank in overseeing financial soundness by: (a) protecting financial customers, including depositors and policyholders, against the risk that those financial institutions may fail to meet their obligations; and (b) assisting in maintaining financial stability. The Financial Services Conduct Authority (FSCA) supervises market conduct of financial firms.14 The FSCA provides conduct oversight to: (a) ensure that financial institutions treat financial customers fairly; (b) enhance the efficiency and integrity of the financial system; (c) provide financial customers and potential customers with financial education programs, and (d) promote financial literacy and financial capability. These changes became law in 2018 by way of the Financial Sector Regulation Act (FSRA)15 as the enabling statute. Insurance law in South Africa can be divided into those rules that regulate insurance business, the rules that influence the actual contract between insurers and policyholders, and the rules that stipulate the relationship between intermediaries and advisors. Rules pertaining to insurance business (prudential matters) are largely found in the Insurance Act. The insurance contract itself is regulated by Roman-Dutch law as influenced by the LTIA, STIA, and most recently the IA and the rules pertaining to intermediaries and advisors, and aspects of pre-contractual disclosure may be found in the FAIS Act. South African law was over time also influenced by English insurance law and although attempts were made to reinstate only the Roman-Dutch law as the basic common law, some aspects thereof remain part and parcel of our common law on insurance.

1.2

General Position on Pre-contractual Disclosure

The insurer’s pre-contractual duty of disclosure is a primary consumer protection mechanism.16 ‘Transparency’ entails a minimum degree of disclosure of information to enable both parties to verify the contents, operation and consequences of the agreement that they bind themselves to, in a free and open exchange for the sake of

Act 97 of 1990. Note that the FSCA was also referred to as “the Regulator”. The new FSCA is now known as the “Authority”. 14 The FSCA is established by Section 56 the Financial Sector Regulation Act 9 of 2017. 15 Act 9 of 2017. This statute came into operation on 29 March 2018. 16 Internationally, consumer rights include the right to disclosure of information and the right to fair and responsible marketing to encourage responsible and informed consumer choices and behaviour. See in general the CPA s 3(1)(e); National Credit Act 34 of 2005 s 3(e)(ii) for national recognition of this basic consumer right. 13

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fairness. In most countries, the rules pertaining to pre-contractual negotiations and advertising of insurance products are regulated by statute.17 In South Africa, the duty to speak is not based on a general requirement of bona fides, yet seen as a general ex lege requirement for contracting. In insurance, this duty of disclosure is derived primarily from the common law, and statutory rights of access to information under the provisions of Constitution of the Republic of South Africa and in certain instances the Promotion of Access to Information Act.18 It is furthermore supported by specific insurance consumer protection law found in the detailed provisions on mandatory disclosures in the FAIS Act, the LTIA, the STIA and importantly the 2018 Policyholder Protection Rules for longterm insurance (“PPRs”) issued under both these acts. Strict rules on advertising can be found in the General Code of Conduct (the “GCC”) issued under the FAIS Act and in the 2018 Policyholder Protection Rules for long-term insurance (“PPRs”). Although advertising may be seen as the more creative part of insurance business, South African law sets high standards on what may and may not be done when advertising insurance contracts. Advertising is therefore seen as part of the pre-contractual duties of insurers to the public. The FAIS Act furthermore specifically targets the activities of insurance intermediaries in pre-contractual disclosures. The fact that insurance products and services have been exempted from the scope of the Consumer Protection Act from 28 February 2014 should not diminish the insured’s right to rely on universal consumer protection principles as envisaged by South African insurance legislation. The insurer’s duty to disclose is in the last instance also derived from the common law duty not to make misrepresentations by commission or omission. When negotiating an insurance contract, the insurer’s duty to speak is recognised as an ex lege duty because of the involuntary reliance of the prospective insured on information supplied by insurers in the market. A failure to disclose material information or a disclosure of false information that goes to the root of the matter and induces the prospective policyholder to buy the insurance product is recognised as an actionable misrepresentation. Statutory provisions do not diminish the common law duty not to make misrepresentations, but provide details of the nature and extent of the information duty to provide clarity and legal certainty in the determination of the standards of transparency required in law. The South African insurance consumer is part of a society that is mainly economically inexperienced and illiterate. The asymmetry of information between retail

17 See for example the Third generation EU Directives on insurance: Directive 92/94/EEZ (Third non-life insurance Directive) and Directive 92/96/EEZ (Third life insurance Directive) that apply to all EU Member States. An interesting distinction made in the EU is the so-called “large risks” and reinsurance fall beyond the scope of the statutory pre-contractual information duty. Large risks are described in PEICL 1:103(2) (a), (b) and (c). Such a distinction is foreign to our law. Information duties, whether pre-contractual or during the existence of the contract, apply to most policies. Differentiation applies to the content of disclosures, depending on the type of cover and the nature of the risks insured. 18 Act 4 of 2013.

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financial services consumers and financial institutions means that financial services consumers are particularly vulnerable to unfair treatment. Typically, financial institutions have far more expertise and resources available to them in designing, distributing and servicing financial products than consumers have available to them in making decisions about financial transactions. The nature of financial products and services is such that, in many instances, the consequences of unfair treatment or poor decisions are only felt some time—in some cases many years— after transacting. Significant hardship can result. In South Africa, these challenges are exacerbated by low levels of both basic and financial literacy, increasing the risk of consumer exploitation.19 The issue of transparency is thus of great importance as one can argue that developing countries require an extensive protection regime that is simple to understand and easy to source. In view of this, relatively few statutes are in operation that prescribe the duties of insurers in this regard. Until 31 December 2017, the main benefit offered in the South African financial industry was that one single act, the FAIS Act20 and provisions issued under it applied to the duty of transparency of all financial service providers and suppliers, which include insurance. The 2018 PPRs changed the position to some extent as there is currently an overlap between the provisions of the FAIS Act and the two sets of 2018 Policyholder Protection Rules for long-term insurance (“PPRs”), which somewhat complicates the matter.

2 The Issue of Transparency in Insurance in South African Law 2.1

Transparency Duties Under the Common Law

Under our common law (Roman-Dutch law), contracts do not generally have to be fair, just or reasonable to be valid. For the conclusion of a valid contract, there must be consensus, specifically on the essential elements for an insurance contract21; contractual capacity of the parties; legality in that the agreement must not contravene statutory law, compliance with public policy22; physical possibility and certainty

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Treating Customers Fairly: The Roadmap 31 March 2011 [accessed at www.FSCA.co.za on 11 August 2013] (hereafter “TCF”) 6. 20 Act 37 of 2002. 21 See in general Hutchison and Pretorius (2017) and Christie and Bradfield (2016). 22 In this context, the requirement for concluding a contract that serves the criterion of fairness requires that cognisance be taken of the African concept of ubuntu, which can be broadly defined as a humanist philosophy. It reflects the communal nature of society, and as the court held in S v. Makwanyane and Another 1995 (3) SA 391 (CC) at par 237, ‘carries in it the ideas of humaneness, social justice and fairness’. Under Koyabe and Others v. Minister for Home Affairs and Others (Lawyers for Human Rights as Amicus Curiae) 2010 (4) SA 327 (CC); and Barkhuizen v. Napier 2007 (5) SA 323 (CC) par 51, it envelopes ‘the key values of group solidarity,

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(which will be extremely relevant for transparency, as the agreement must be sufficiently clear and certain before it can be seen as binding) and formalities (as prescribed by either statute or the parties). In South African law, writing is not a general formality requirement. In addition, good faith is also not a general requirement for the conclusion of a valid contract. The role of good faith in our common law is limited in that it merely underlies the ex lege duty imposed on the parties to disclose material facts. The duty of good faith is not in itself a distinct duty during the pre-contractual phase. This is confirmed by the South African High Court of Appeal in Brisley v. Drotsky23 in that ‘good faith may be regarded as an ethical value or controlling principle based on community standards of decency and fairness that underlies and informs the substantive law of contract’, and not a ‘free-floating’ requirement for the conclusion of a valid contract or a basis for avoiding contractual liability. Moreover, the High Court of Appeal in its judgment in the case of Everfresh Market Virginia (Pty) Ltd v. Shoprite Checkers (Pty) Ltd24 held that there is no general duty in our common law to enter into bona fide negotiations with the purposes or expectation of the conclusion of a contract.25 The contract must comply with constitutional values and

compassion, respect, human dignity, conformity to basic norms and collective unity’. See also Bennett (2011), p. 29; Gade (2011), p. 303. 23 2002 (4) SA 1 (SCA) 15. 24 2012 (1) SA 256 (CC). 25 In this case, the parties agreed that they would negotiate in good faith to amend or renew their existing contractual obligation. The appellant averred that the defendant did not enter into negotiations at all, breaching the agreement and its duty to negotiate in good faith. The court did not address the general duty of good faith, but rather the fact that our common law has to be developed and interpreted according to our Constitutional values and norms. It held that it was necessary to consider whether to develop the common law in accordance with the Constitution and whether the detailed provisions of the clause carry the necessary implication that the renewal was not to be regarded as null and void in every respect. The proposition that a common law contract principle provides meaningful parameters to render an agreement to negotiate in good faith enforceable is decidedly more consistent with Section 39(2) than a regime that does not. A common law principle that renders an obligation to negotiate enforceable cannot be said to be inconsistent with the sanctity of contract and the important moral denominator of good faith. Indeed, the enforceability of a principle of this kind accords with and is an important component of the process of the development of a new constitutional contractual order. There is no doubt that a requirement that allows a party to a contract to ignore detailed provisions of a contract as though they had never been written is less consistent with these contractual precepts: precepts that are in harmony with the spirit, purport and objects of the Constitution. Were a court to entertain Everfresh’s argument, the underlying notion of good faith in contract law, the maxim of contractual doctrine that agreements seriously entered into should be enforced, and the value of ubuntu, which inspires much of our constitutional compact, may tilt the argument in its favour. Contracting parties certainly need to relate to each other in good faith. Where there is a contractual obligation to negotiate, it would be hardly imaginable that our constitutional values would not require that the negotiation must be done reasonably, with a view to reaching an agreement and in good faith. This position was due to other complications in the case itself, not finally confirmed as a general rule of law that would apply to all contracts. The path has however been opened by this judgment to introduce such a disclosure duty based on constitutional values.

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the notions of public policy, i.e., conclude an agreement that is not contrary to boni mores. The duty to act in good faith is a general contractual duty, which exists only upon conclusion of the contract. Before the moment of conclusion, an ex lege pre-contractual duty exists that requires a party to disclose all material information to the other to enable them to bind themselves to a consensual obligation.26 Failure to comply with this duty of disclosure leads to a misrepresentation, which renders the contract not void, but merely voidable at the election of the prejudiced party.27 No special rules apply to adhesion or standard form contracts and no content or format is prescribed for these contracts. Although their use is prolific in all spheres of commercial practice, no special statutory regulation or control of their content or form is in force, other than the general common law contractual principles. In the absence of legislation that applies to specifically insurance contract law, the same position applies to pro forma insurance contracts. The contra preferentem rule serves as an example of a general contract law principle that affects the validity and enforceability of standard terms. It is a tertiary rule of interpretation to all contracts in South Africa, where primary or secondary rules of interpretation have not provided a solution for the interpretation of uncertainties or ambiguities, and allows the standard terms to be interpreted against the interests of the party who proposed or drafted it.28 Pre-contractual misrepresentations are not always contained in express statements, but can be made by either positive conduct (commissions) or omissions.29 In insurance, the problem is often caused by what the insurer chooses not to disclose, rather than what he does. An ex lege duty to speak does not apply in all circumstances, yet such a duty will be recognised where there is: an involuntary reliance of the one party on the frank disclosure of certain facts necessarily lying within the exclusive knowledge of the other such that, in fair dealing, the former’s right to have such information communicated to him would be mutually recognised by honest men in the circumstances.30

This will clearly be the case in insurance matters, as the prospective policyholder cannot usually ascertain or identify omitted information merely by conducting his

26 South African Eagle Insurance Co Ltd v. Norman Welthagen Investments (Pty) Ltd 1994 (2) SA 122 (A) at 126. 27 S 53 of the STIA. Also Allen v. Sixteen Stirling Investments (Pty) Ltd 1974 (4) SA 164 (D) 169; Feinstein v. Nigli 1981 (2) SA 684 (A) 700; and Bruwer v. Nova Risk Partners Ltd [2010] ZAGPJHC 96. 28 Fedgen Insurance Ltd v. Leyds 1995 (3) SA 33(A) 38(E); Durban’s Water Wonderland (Pty) Ltd v. Botha 1999 (1) SA 982 (SCA) 989H; Government of the Republic of South Africa v. Fibre Spinners & Weavers (Pty) Ltd 1978 (2) SA 794(A) 804C. See also Hutchison and Pretorius (2017), Chap 11 specifically par 11.6, and chap 17 par 17.5.7.6; Cornelius (2016) on all interpretation rules; Christie and Bradfield (2016), p. 232; Reinecke et al. (2013), par 235 specifically regarding its application in insurance law. 29 An omissio per commissionem. 30 In the words of Milner (1957), p. 177 at 189. See also ABSA Bank Ltd v Fouche 2003 1 SA 176 (SCA) for a decision on the general duty to disclose information.

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own due diligence examination.31 He is, because of his position as the weaker party at the bargaining table, subjected to an involuntary reliance on information provided to him by the more informed insurer. An ex lege duty to speak by parties specifically in insurance contracts was recognised in Mutual & Federal Insurance Co Ltd v. Oudtshoorn Municipality,32 and subsequently elaborated upon in Iscor Pension Fund v. Marine and Trade Insurance Co Ltd33 as follows: In some contracts parties are required to place their cards on the table to a greater extent than in others, but the determination of the extent of the disclosure does not depend on the label we choose to stick on a contract. The principles applicable to contracts of insurance do not differ in essence from those applicable to other kinds of contracts, but where one party has means of knowledge not accessible to the other party, and where from the nature of the contract the latter (as in the case of insurance) binds himself on the basis that all material facts have been communicated to him, the non-disclosure of such a fact is fatal.34

The general requirements in common law for an actionable misrepresentation, whether by commissionem or by omissionem, for all contracts including insurance contracts, are: (a) a false or misleading statement must be made by the insurer or someone for whose acts he is responsible. This would include his agents and appointed brokers; (b) the representation must be material. The interpretation of what will be seen as material and what is seen as merely trivial is not always clear. Materiality appears to depend on a two-pronged test, namely, whether the representation was made with the intention to induce the other party to contract, and whether the reasonable person would have been so induced.35 It is submitted that this must ‘go to the root of the matter’ as interpreted from the viewpoint of the ‘reasonable policyholder’36; (c) it should induce the prospective policyholder into concluding the insurance contract, yet does not have to be the decisive or dominant cause37; (d) the insurer must have had the intention to induce, not necessarily the intention to mislead or defraud.38 This is usually the case as advertisements are drafted with exactly this goal in mind, and not necessarily with evil intent.

31

See in this regard McCann v Goodall Group Operations (Pty) Ltd 1995 2 SA 718 (C) 723 where the courts highlighted that no duty to speak can exist where a party can ascertain information by common observation or ordinary diligence. 32 1985 1 SA 419 (A) 433. 33 1961 1 SA 178 (T). 34 At 185. 35 See also Mutual & Federal Insurance Co v. Oudsthoorn Municipality 1985 1 SA 419 (A) on 433 that the facts and the circumstances of each case will determine whether facts were material or not, rather than the nature of the contract or the type of transaction. 36 This appears to be the international standard. In most other countries in Europe, known in Germany for example as the “Durchscnittsversicherungsnehmer” or average applicant for insurance cover as set out in Deutsches BGHZ 112, 115. 37 Whether it in fact caused the inducement is a subjective question in our law, irrespective of whether the reasonable person has been so induced or not. See Schultz NO v Meyerson 1933 WLD 199. 38 Novick v. Comair Holdings Ltd 1979 2 SA 116 (W).

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The presence of fault is thus not a requirement for the innocent party to void or resile from the agreement,39 yet a subsequent additional civil action claiming damages will depend on whether the representation was made fraudulently or negligently.40 The policyholder may void the contract either entirely or partially,41 provided that the misrepresentation was material and made with the intention to induce, yet he may only claim delictual damages where fault is present.42 It can be argued that false or misleading advertising is equally bad, regardless of whether it pertains to shoes, coffee beans or insurance but that ignores the fact that insurance products are credence goods, while shoes and coffee beans are not.43 It is simple enough to establish whether shoes or beans are fit for use but whether an insurance product is suitable to a particular consumer is not so evident. Therefore, it can be said that it is even more important when advertising insurance to provide the correct information and not to mislead the public. To be transparent in this context means to refrain from luring unsuspecting and uninformed members of the public into transactions under false pretences or by abusing one’s superior position and to ensure that those who do react to advertisements do not do so because of deceitfulness. The following section discusses this aspect in detail.

39

As confirmed in the recent decision in Brink v. Humphries & Jewell (Pty) Ltd 2005 2 SA 419 (SCA) 421. 40 In the case of a delictual claim for damages, the normal requirements will apply of which fault is one. 41 Where the contract is in fact divisible. 42 This is possible where the misrepresentation is intentional or even where it was negligent, see Bayer South Africa (Pty) Ltd v. Frost 1991 4 SA 559 (A). As per the maxim imperitia culpae adnumeratur in the Digesta D 50.17.132 a lack of skill is regarded as culpable. 43 FSCA Treating customers fairly: A discussion paper prepared for the Financial Services Board (May 2010) 12 [accessed at www.FSCA.co.za on 11 August 2013] (hereafter “TCF Discussion paper”). The FSCA explains: “In the case of search goods, quality and price can be ascertained at low cost prior to purchase or where a credible warranty is attached. Selection of a shirt, for example, typically involves an evaluation of the fit, style and price prior to purchase. By contrast, experiencegoods are those whose quality can be ascertained at low cost through use, though not prior to purchase. So for example, evaluation of a vacuum cleaner is typically made after purchase. Moreover, a faulty vacuum cleaner can be returned and a replacement obtained at relatively low cost to the consumer. While the element of uncertainty at the point of purchase is clearly higher than in the case of search goods, the degree of uncertainty is bounded. Many services tend to fall into the experience category, as it is only after the laundry has been done, or the haircut performed, that the consumer may evaluate the quality. Credence goods and services, on the other hand, are those where quality can be ascertained only at some cost after purchase. A frequent characteristic of these goods and services is that the value of the purchase is either spread over a long period of time, or emerges only after a considerable lapse of time. Reversal of such a purchase usually involves considerable loss, both in terms of actual costs and benefits foregone of selecting some alternative.”

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Statutory Transparency Duties General Duties

As was stated at the outset, the FAIS Act44 and provisions issued under it apply to the duty of transparency of all financial service providers and suppliers, which include insurance. As South Africa does not have any dedicated insurance contract legislation, the FAIS Act specifically regulates the activities of all Financial Services Providers (FSPs) that advise or provide intermediary services to insureds and consumers of other financial products, as well as all intermediaries. The FAIS Act applies to all types of financial products and includes all insurance products. Section 1(6) provides that the FAIS Act must be construed as being in addition to any other law not inconsistent with its provisions and not as replacing any such law.45 The new 2018 Policyholder Protection Rules for long-term insurance (“PPRs”) also contain rules on pre-contractual disclosures, with the result that there is currently an overlap between the FAIS Act and the 2018 Policyholder Protection Rules for long-term insurance (“PPRs”).

2.2.2

Advertising

For all financial products, including insurance, the FAIS Act’s General Code of Conduct (GCC) states that advertisements for insurance products should not be misleading.46 More specifically, Part X of the GCC provides strict rules for advertising.47 In addition, Section 14 of the GCC contains extensive provisions on advertising,48 44

Act 37 of 2002. See Part IV paras 1(a) and 1(b). 46 S 16(1)(c) of the FAIS Act. 47 According to Section 1(1) of the GCC, advertisement means: “[A]ny written, printed, electronic or oral communication (including a communication by means of a public radio service), which is directed to the general public, or any section thereof, or to any client on request, by any such person, which is intended merely to call attention to the marketing or promotion of financial services offered by such person, and which does not purport to provide detailed information regarding any such financial services; and “advertising” or “advertises” has a corresponding meaning”. 48 “(1) An advertisement by any provider must-(a) not contain any statement, promise or forecast which is fraudulent, untrue or misleading; (b) if it contains- (i) performance data (including awards and rankings), include references to their source and date; (ii) illustrations, forecasts or hypothetical data- (aa) contain support in the form of clearly stated basic assumptions (including but not limited to any relevant assumptions in respect of performance, returns, costs and charges) with a reasonable prospect of being met under current circumstances; (bb) make it clear that they are not guaranteed and are provided for illustrative purposes only; and (cc) also contain, where returns or benefits are dependent on the performance of underlying assets or other variable market factors, clear indications of such dependence; (iii) a warning statement about risks involved in buying or selling a financial product, prominently render or display such statement; and (iv) information about past performances, also contain warning that past performances are not necessarily indicative of future performances; and (c) if the investment value of a financial product mentioned in the advertisement 45

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supplemented by the 2018 Policyholder Protection Rules for long-term insurance (“PPRs”) for both long-term and short-term insurance that also contain rules on the advertising of insurance products. The essence of the GCC and the Policyholder Protection Rules for long-term insurance (“PPRs”) is that advertisements must be factually correct (“excluding aspects of an advertisement constituting puffery”), balanced and not misleading.49 Factual correctness entails inter alia that the source of performance data should be disclosed and “balanced”, and includes the principle that a description of an insurance product in an advertisement “must not exaggerate benefits or create expectations regarding policy performance or the performance of related services that the insurer does not reasonably expect to achieve.”50 Another rule that aims to ensure transparency is that descriptions of products in an advertisement “must include key limitations, exclusions, risks and charges, which must be clearly explained and must not be worded positively to imply a benefit.”51 A final aspect of disclosure is that a provider must, if so requested by the client, provide information concerning the past investment performance of the product over periods and at intervals which are reasonable with regard to the type of product involved, including a warning that past performances are not necessarily indicative of future performances.52 Overall, the 2018 Policyholder Protection Rules for long-term insurance (“PPRs”) are much more detailed than the existing GCC rules and are aimed at ensuring that members of the public are not mislead by advertisements for insurance.

2.2.3

Disclosure Requirements

For just over a decade, matters pertaining to pre-contractual negotiations (such as misconduct by an independent broker) fell squarely within the ambit of the FAIS Act and for the time being, these rules remain in force. Therefore, where an employee or representative of an insurance company failed on his duties towards a prospective or

is not guaranteed, contain a warning that no guarantees are provided. (2) Where a provider advertises a financial service by telephone- (a) an electronic, voice logged record of all communications must be maintained. Where no financial service is rendered as a result of the advertisement, such record need not be maintained for a period exceeding 45 days; (b) a copy of all such records must be provided on request by the client or the registrar within seven days of the request; (c) all the information required by sections 4(1)(a) and (c) and 5(a) and (c) shall not be required: Provided that the client is provided with basic details (such as business name and telephone number or address) of the provider or relevant product supplier, and of their relevant compliance departments: Provided further that, if the promotion results in the rendering of a financial service, the full details required by those sections are provided to the client in writing within 30 days of the relevant interaction with the client. (3) Where a provider advertises a financial service by means of a public radio service, the advertisement must include the business name of the provider.” 49 Rule 10.4.1 of the Policyholder Protection Rules for long-term insurances (“Long-term PPRs”). The short-term PPRs contain a similar provision. 50 Rule 10.4.5 of the Long-term PPRs. The short-term PPRs contain a similar provision. 51 Rule 10.4.5 of the Long-term PPRs. The short-term PPRs contain a similar provision. 52 Rule 10.4.5 of the Long-term PPRs. The short-term PPRs contain a similar provision.

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current client, the FAIS Act regulates the situation because these preliminary contracts are most likely not independent from the ensuing insurance contracts. An insurer who employs or engages a representative to act on its behalf will be responsible for the intermediary service and advice the representative gives to the client, as well as the duties as per the insurance contract.53 It is impossible to conduct insurance business without having regard to the important role of preliminary contracts and the standards introduced by the FAIS Act in the form of supervisory rules. Although the FAIS Act contains no transparency rules pertaining to insurance products per se, it regulates the manner in which these contracts are negotiated and concluded. The detailed, consumer-oriented provisions of the FAIS Act recognise that in the majority of cases transparency is achieved when intermediaries and advisors adhere to the statutory rules, thereby ensuring that insureds conclude contracts for appropriate products of which they have sufficient detail and in terms of which they are able to exercise their rights and duties.54 In the same way that the 2018 Policyholder Protection Rules for long-term insurance (“PPRs”) introduced new rules on advertising, it also introduced rules over and above the rule in the FAIS Act on disclosure duties of insurance companies. In fact, the PPRs are so detailed that there are specific disclosure duties on insurers in general (Rule 11.3), disclosure duties before a policy is entered into (Rule 11.4), further disclosure after the inception of the policy (Rule 11.5) and ongoing disclosure (Rule 11.6). Rule 11.3 in both sets of Policyholder Protection Rules for long-term insurance (“PPRs”) states as follows: 11.3 General disclosure requirements Language and format 11.3.1 Any communication by an insurer to a policyholder in relation to a policy must(a) be in plain language; (b) not be misleading; (c) be provided using an appropriate medium, taking into account the complexity of the information being provided; (d) where applicable, be in clear and readable print size, spacing and format; and (e) in respect of any amount, sum, premium, value, charge, fee, remuneration or monetary obligation mentioned or referred to therein, be stated in actual monetary terms, provided that where any such amount, sum, premium, value, charge, fee, remuneration or monetary obligation is not reasonably pre-determinable, its basis of calculation must be clearly and appropriately described.

The remainder of Rule 11.3 further contains stipulations on the timing of the provision of information to policyholders, the content of the provision of information to policyholders and important stipulations on the respective responsibilities of

53

See Part IV par 3(b). For instance, where a service is provided in connection with an insurance product, the information disclosed must be factually correct. In providing a service, the intermediary or advisor should avoid uncertainty and confusion and should not provide misleading information. All disclosures must be in plain language. See Sec. 3 of the General Code of Conduct (“GCC”) in terms of Sec. 15 of the FAIS Act. 54

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insurers and intermediaries. Pertaining to the latter rule, Rule 11.3.6 stipulates that where an insurer makes use of the services of a representative to provide any information required by Rule 11, the insurer remains responsible to ensure that the information is provided under this rule. It is submitted that this places a burden on insurance companies, as it is not possible to monitor all the activities of intermediaries and their insurers all the time. Rule 11 also states that information disclosed to a prospective policyholder must “clearly and prominently” identify the insurer.55 The 2018 Policyholder Protection Rules for long-term insurance (“PPRs”) move from these general disclosures to the next stage, namely, where (when) the contract is concluded. Rule 11.4 stipulates that an insurer must provide a policyholder or intermediary with a quotation and the policyholder may reasonably be expected to rely on the information in the quotation.56 The insurer is duty-bound to disclose its name and contact details,57 the type of policy and a reasonable and appropriate general explanation of the relevant policy.58 It must also disclose the nature and extent of policy benefits, including, where applicable, when the insurance cover starts and terminates, and a description of the risk insured by the policy,59 and concise details on charges, fees, commissions and remuneration payable to intermediaries and any excesses that may become payable.60 Rule 11.4.2(e) contains detailed rules on transparency pertaining to premiums and it is evident that transparency is a prominent, underlying value in all these rules.61 The remainder of the rule stipulates that further, detailed disclosures must be made pertaining to a variety of aspects such as cooling-off,62 exclusions and limitations,63 obligations on potential policyholders to disclose material facts64 and the right to lodge a complaint.65

55

Rule 11.3.8 of the Long-term PPRs. The short-term PPRs contain a similar provision. Rule 11.4.1 of the Long-term PPRs. The short-term PPRs contain a similar provision. 57 Rule 11.4.2(a) of the Long-term PPRs. The short-term PPRs contain a similar provision. 58 Rule 11.4.2(b) of the Long-term PPRs. The short-term PPRs contain a similar provision. 59 Rule 11.4.2(c) of the Long-term PPRs. The short-term PPRs contain a similar provision. 60 Rule 11.4.2(d) of the Long-term PPRs. The short-term PPRs contain a similar provision. 61 Rule 11.4.2(e) of the Long-term PPRs. The short-term PPRs contain a similar provision. More specifically, the details that should be disclosed are as follows, namely: “(i) the premium that is payable under the policy; (ii) the frequency at which the premium is payable; (iii) details of any premium increases, including the frequency and basis thereof; (iv) whether an increase will be linked to any commensurate increase in policy benefits and any options relating to premium increases that the policyholder may select; (v) the implications of a failure to pay a premium at the frequency referred to in subparagraph (ii); and (vi)in the case of policies where the premium (with or without contractual escalations) is not guaranteed for the full term of the policy, the period for which the premium is guaranteed, including the frequency at which or the circumstances in which a review will take place”. 62 Rule 11.4.2(f) of the Long-term PPRs. The short-term PPRs contain a similar provision. 63 Rule 11.4.2(g) of the Long-term PPRs. The short-term PPRs contain a similar provision. 64 Rule 11.4.2(k) of the Long-term PPRs. The short-term PPRs contain a similar provision. 65 Rule 11.4.2(m) of the Long-term PPRs. The short-term PPRs contain a similar provision. 56

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As far as disclosure after the inception of the policy is concerned, it is evident that insurers have a duty to provide a policyholder within 31 days upon request with written information on the following: the timing and manner in which the policy benefits will or may be made available to the policyholder or a beneficiary; comprehensive details of any charges or fees to be levied against the policy or the premium; any commission or remuneration payable to any intermediary or binder holder in relation to the policy; and any excesses that may become payable by the policyholder and the circumstances under which it will be payable and the consequences of not paying. Further details that should be provided include comprehensive details of all exclusions or limitations, including prominent disclosure as contemplated in Rule 10.15 of any significant exclusions or limitations; any obligation to monitor cover, and that the policyholder may need to review and update the cover periodically to ensure it remains adequate; any right to cancel, including the existence and duration of, and any conditions relating to, the right to cancel; the right to claim benefits, including conditions under which the policyholder can claim and the contact details for notifying the insurer of a claim; any requirement to make an election during the duration of the policy, including any default provisions that may apply if such election is not made; and the representations made by or on behalf of the policyholder to the insurer which were regarded by that insurer as material to its assessment of the risks under the policy. It is evident that the 2018 Policyholder Protection Rules for long-term insurance (“PPRs”) do not conclude with disclosure duties at the pre-contractual phase (as the FAIS Act does) but these rules impose a continuous or ongoing disclosure duty. This entails communications by the insurer of changes to the policy while it is current and ongoing, information on terms and conditions, changes to terms and conditions, information on renewal of the policy and non-payment of the premium. It is submitted that pre-contractual disclosure duties, disclosure at point of sale and compulsory disclosures during the currency of the policy aim to cover every aspect of insurance contracts and have far-reaching consequences for insurers and intermediaries. All communications, regardless of when these are made, must be made in plain language. At claims stage, Rule 17 of both the LTIA and the STIA Policyholder Protection Rules for long-term insurance (“PPRs”) stipulates as follows: Communications with claimants 17.8.1 An insurer must ensure that its claims processes and procedures are transparent, visible and accessible through channels that are appropriate to the insurer’s policyholders and claimants. 17.8.2 All communications with a claimant must be in plain language. 17.8.3 An insurer must disclose to the claimant(a) the type of information required from the claimant; (b) where, how and to whom a claim and related information must be submitted; (c) any time limits on submitting claims; (d) any excesses payable by the claimant; (e) details of any administrative fee payable in relation to management of the claim; and (f) any other relevant responsibilities of the claimant.

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These very detailed, product-specific rules were preceded by the more general stipulations in the FAIS Act that are, irrespective of the new IA, still in force. Section 3 of the GCC places specific duties on service providers when rendering financial services. It states that when rendering these services (which would include the rendering of advice or intermediary services pertaining to an insurance product), the provider must ensure that representations made and information provided to a client by the provider must adhere to a number of requirements. These rules are extensive but provide inter alia that advice must be factually correct, in plain language, must not be misleading, provided timeously and in general should be sufficiently detailed to enable the client to make a purchase decision.66 Furthermore, the service must be rendered in accordance with the contractual relationship and reasonable requests or instructions of the client, which must be executed as soon as reasonably possible and with due regard to the interests of the client which must be accorded appropriate priority over any interests of the provider.67 In explaining the client’s monetary obligations, an intermediary must also explain how payment should be made and how often,68 and very importantly, what the consequences will be in the case of non-payment. An aspect that is important for long-term insurance policies is any anticipated or contractual escalations, increases or additions to the product, such as premium increases due to inflation. Furthermore, a client must be informed of the nature, extent and frequency of any incentive, remuneration, consideration, commission, fee or brokerages (“valuable consideration”), which will or may become payable to the provider, by any product supplier or any person other than the client, or for which the provider may become eligible, as a result of rendering of the financial service, as well as the identity of the product supplier or other person providing or offering the valuable consideration.69 66 In addition, the GCC stipulates that the provider must disclose to the client the existence of any personal interest in the relevant service, or of any circumstance which gives rise to an actual or potential conflict of interest in relation to such service, and take all reasonable steps to ensure fair treatment of the client. See vol II par 2.2 for an explanation. 67 Sec 3(d) of the GCC. 68 Sec 3(d) of the GCC. 69 Provided that where the maximum amount or rate of such valuable consideration is prescribed by any law, the provider may (subject to Sec. 3(1)(a)(vii)) elect to disclose either the actual amount applicable or such prescribed maximum amount or rate. As far as the proposed contract between the parties is concerned, the intermediary has an obligation to disclose to the client the following under Sec. 7 of the GCC, namely: concise details of any special terms or conditions; exclusions of liability, waiting periods, loadings, penalties, excesses; restrictions or circumstances in which benefits will not be provided; any guaranteed minimum benefits or other guarantees; to what extent the product is readily realisable or the funds concerned are accessible; any restrictions on or penalties for early termination of the contract or withdrawal from the product, or other effects, if any, of such termination or withdrawal; material tax considerations; whether cooling off rights are offered and, if so, procedures for the exercise of such rights; any material investment or other risks associated with the product; and where provision is made for increase of premiums, the amount of the increased premium for the first 5 years and thereafter on a 5 year basis but not exceeding 20 years.

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An intermediary must fully inform a client in regard to the completion or submission of any transaction requirement—such as an application form that ‘all material facts must be accurately and properly disclosed, and that the accuracy and completeness of all answers, statements or other information provided by or on behalf of the client, are the client’s own responsibility.’ Where the provider completes or submits any transaction requirement on behalf of the client, the client should be satisfied as to the accuracy and completeness of the details.70 Furthermore, a client should be informed of the possible consequences of the misrepresentation or non-disclosure of a material fact or the inclusion of incorrect information. It is also imperative to inform a client that he has the right to be supplied with a copy of, or written or printed record of any transaction requirement within a reasonable time should he request this. No provider may in the course of the rendering of a financial service request any client to sign any written or printed form or document unless all details required to be inserted thereon by the client or on behalf of the client have already been inserted. Where a service is provided in connection with an insurance product, the information disclosed during that service (which includes the service of advice and agency) must be factually correct. It should avoid uncertainty and confusion and should not be misleading. Disclosures must be in plain language.71 What is evident from the 2018 Policyholder Protection Rules for long-term insurance (“PPRs”) and Section 3 of the GCC is the significant overlap between these sets of rules. In a sense, the more general GCC Section 3 is now supplemented by very insurance-specific, detailed rules in the Policyholder Protection Rules for long-term insurance (“PPRs”) and the effect is that there can be no doubt that transparency as a value is firmly embedded in our insurance legislation.

2.2.4

Long-Term Insurance

It can once more be emphasised that the rules discussed in Sects. 2.2.1–2.2.3 above apply to all types of insurance contracts. To confirm the order of precedence of the PPR in relation to these extensive provisions of the FAIS Act, it is important to note that the FAIS Act was the more 70

As far as the proposed contract between the parties is concerned, the intermediary has an obligation to disclose to the client the following under Sec. 7 of the GCC, namely: concise details of any special terms or conditions; exclusions of liability, waiting periods, loadings, penalties, excesses; restrictions or circumstances in which benefits will not be provided; any guaranteed minimum benefits or other guarantees; to what extent the product is readily realisable or the funds concerned are accessible; any restrictions on or penalties for early termination of the contract or withdrawal from the product, or other effects, if any, of such termination or withdrawal; material tax considerations; whether cooling off rights are offered and, if so, procedures for the exercise of such rights; any material investment or other risks associated with the product; and where provision is made for increase of premiums, the amount of the increased premium for the first 5 years and thereafter on a 5 year basis but not exceeding 20 years. 71 See in particular clause 3(1)(ii) of the GCC.

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up-to-date source of the law but the 2018 Policyholder Protection Rules for longterm insurance (“PPRs”) duplicate some aspects. As a matter of interpretation, the rules must be read together. As was stated in Sect. 2.2.3, the Policyholder Protection Rules for long-term insurance (“PPRs”) are more product-specific as it contains detailed stipulations on matters such as product design (2), consumer credit and credit life (3), data management (13), periods of grace (15) and replacement of policies for short-term insurance (non-life). Whereas for long-term insurance (life), the Rules contain stipulations on product design (1), credit life insurance (2), determining premiums (6), data management (13), premium review (5) and replacement of policies (19). Furthermore, it deserves mention that Rule 8 of the 2018 longterm PPR voids any waiver or conduct to induce a waiver of any right or benefit conferred upon a policyholder. In addition, Rule 7 contains additional stipulations on specific void provisions. The LTIA and the 2018 PPR for long-term insurance continue to apply because some aspects of life insurance are not covered in the new IA and still regulated under the LTIA.72 The FAIS Act and the 2018 Policyholder Protection Rules for long-term insurance (“PPRs”) will apply to all pre-contractual negotiations for life insurance contracts and all other long-term insurance contracts.73 It is important to mention that henceforth, life insurance products are classified under Table 1 of the IA that identifies a number of classes and sub-classes of insurance. Classes include risk, fund risk, credit life, funeral, life annuities, individual investment, fund investment, income drawdown and reinsurance. In turn, risk policies are divided into a number of sub-classes, including individual death, individual health, individual disability (lump sum), individual disability (recurring payment), group death, group health, group disability (lump sum) and group disability (recurring payment). Fund risk policies are further categorised as death, disability (lump sum) and disability (recurring payment). There are no sub-categories for credit life policies. Funeral policies are divided between individual and group policies and life annuities are sub-categorised as guaranteed (fully or partially), market-related and with discretionary participation features. Individual investment policies, fund investment policies and income drawdown policies have this in common, namely, that the 72 Before the introduction of the IA, long-term insurance business meant the business of providing or undertaking to provide policy benefits under long-term policies, which are defined as “an assistance policy, a disability policy, fund policy, health policy, life policy or sinking fund policy, or a contract comprising a combination of any of those policies; and includes a contract whereby any such contract is varied”. All these policies are defined individually in greater detail in the Act (Sec. 1). These long-term contracts provide policy benefits and are issued for a defined longer periods, usually exceeding 1 year. 73 Before 1 January 2018, long-term PPR applied to the actual contracts as of 1 January 2011 and prescribed obligatory and standardised disclosures, deal with notices, void contractual provisions, the general format of policies, the effect of waivers and offences, and penalties levied for offences in contravention of the Act, the consequences of failure to pay premiums, non-compliance with policy conditions, cancellation of policies, cooling-off periods, and prescriptions on the contents of insurance agreements. The 2018 rules are much more detailed.

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sub-categories include guaranteed policies, market-related policies, linked policies and policies with discretionary participation features. The final class of insurance, namely, reinsurance policies, are further categorised as proportional in respect of a class or sub-class or non-proportional in respect of a class or sub-class. All these types of insurance business are subject to the disclosure regime mentioned above. In the final instance, Rule 18 of the 2018 Policyholder Protection Rules for longterm insurance (“PPRs”) states that the insurer must, within a reasonable period, also inform a policyholder in writing of the details of any available internal complaint resolution system and procedures, as well as full particulars relating to the Long-term Insurance Ombud.74 South Africa prefers the generic term ‘ombud’ to ‘ombudsman’ as used in other jurisdictions.

2.2.5

Short-Term Insurance

The STIA and the 2018 Policyholder Protection Rules for long-term insurance (“PPRs”) for short-term insurance continue to apply as some of the aspects of short-term (non-life) insurance are still regulated by the STIA.75 The FAIS Act and the 2018 PPRs will also apply to all pre-contractual negotiations for non-life insurance contracts.76 Non-life insurance therefore includes all short-term insurance under the STIA. For short-term insurance, the FAIS Act specifically distinguishes between personal lines and commercial lines.77 This distinction was refined by the IA as this statute contains a new classification of all types of insurance business. Although this classification is primarily aimed at compliance and can therefore be termed

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Rule 6.2. Before the enactment of the Insurance Act, short-term insurance meant “the business of providing or undertaking to provide policy benefits under short-term policies”, which included an engineering policy, guarantee policy, liability policy, miscellaneous policy, motor policy, accident and health policy, property policy or transportation policy or a contract comprising a combination of any of those policies; and includes a policy whereby any such contract is varied. All these policies are defined individually in greater detail in the Act (Sec. 1). These short-term contracts were (and still are) concluded to provide policy benefits for only a defined short term, mostly for 1 year or less and are usually renewable. 76 More specifically, as seen above, the LTIA also includes the following non-life insurance contracts, namely, assistance policies, disability policies, fund policies, health policies, sinking fund policies or contracts comprising a combination of any of those policies. 77 “Personal” or “personal use” refers to use of any insurable interest for private purposes only. For instance, a motor vehicle that is used for trips to and from work, shopping, holidays and social visits very clearly falls within the meaning of “personal use”. If the same vehicle is used by a sales representative for furthering his business, then the vehicle is also used for commercial purposes. “Commercial” means that the objective of the user of an insured object is to generate a profit, to use the property for industrial, trade, business or business-related activities. See also www.inseta.co.za, visited on 25 November 2015. 75

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“prudential”, it is also no doubt a consumer protection issue, as those who market and sell products must be well versed in the disclosure duties owed to consumers. Table 2 in the IA now provides for the following classes of non-life insurance, namely, motor, property, agriculture, engineering, marine, aviation, transport, legal expense, liability, consumer credit, trade credit, accident and health, travel, miscellaneous and reinsurance. Sub-categories exist for most of these kinds of insurance. The distinction between personal and commercial insurance, however, remains for some of the categories of insurance.78 As far as transparency is concerned, all the rules listed on Sect. 2.2.4 above that appear in the Policyholder Protection Rules for long-term insurance (Long-term “PPRs”) are also included in the Policyholder Protection Rules for short-term insurance (Short-term “PPRs”). In addition, the FAIS Act and GCC also apply to short-term (non-life) insurance.

2.2.6

Microinsurance

Microinsurance79 has taken a firm foothold mostly in Africa, especially in the form of funeral,80 agricultural, medical, life insurance, and to a lesser degree property and indemnity insurance. This type of cover requires cheaper products that are simple to understand,81 more readily accessible and do not depend on lengthy negotiations or extensive documentation. As the mass market is not necessarily financially literate, the microinsurer has to take on an additional burden to explain the product risks to the average microinsurance consumer. The smaller microinsurers might not be able to comply with extensive disclosure duties because of great distances between the insurer’s client service centres and the insured, and their lack of access to information. Novel distribution methods of microinsurance products just channel the product to the potential policyholder yet do not fully advise the insured personally in accordance with existing duties that apply to normal or macroinsurance. In most cases, mobile telephone networks provide for marketing and procurement of the product, the collection of payments and the claims processes.82 Technological innovation and its limitations do not exempt an insurer from the duty to disclose to the best of its ability.83 78

See Table 2 of the IA. See in general the South African National Treasury (2011) The South African Microinsurance Regulatory Framework, Policy Document, Cape Town, South Africa. 80 In accordance with the Policy Document, funeral insurance is by far the most popular in the country, as 45% of adults in the country are currently covered. 81 So-called ‘light products’. 82 Aggressive telemarketers who work in high-pressure environments are often motivated by set targets for sales and high commissions, which may very well lead them to manipulate the gullible insurance consumers. 83 However, those who undertake to advise clients on matters including an important legal component do so at their peril if they have not informed themselves sufficiently on the law. 79

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Although the product is simpler, the duties of transparency, care, skill and diligence should not be watered down to such an extent that they are substantially avoided. On the other hand, the duties should not be increased to such an extent that it prices the administration of the product out of the market in that the microinsurance business is not financially viable for insurers. Before the introduction of the IA, there was a lot of speculation as to how the legislature would strike the balance between access to financial products on the one hand and sound insurance principles that are sensitive to consumer protection on the other. It is therefore important to understand that one of the main aims of the IA is to achieve financial inclusion and to introduce microinsurance. The IA defines microinsurance business as follows: ‘microinsurance business’ means insurance business(a) conducted in respect of any of the following classes and sub-classes of insurance business set out in Schedule 2(i) life insurance business, classes 1, 3, 4 or 9; and (ii) non-life insurance business, in the sub-class personal lines in(aa) classes 1, 2, 3, 9, 11, 14 or 17; and (bb) class 10, but only to the extent that the insurance obligations directly relate to the classes referred to in item (aa); and (b) in the case of life insurance business and class 14 referred to in paragraph (a) (ii) (aa), in respect of which the aggregate value of the insurance obligations relating to each life insured under an insurance policy does not exceed the maximum amounts prescribed; and (c) in the case of non-life insurance business other than class 14 referred to in paragraph (a) (ii) (aa), in respect of which the aggregate value of the insurance obligations under an insurance policy does not exceed the maximum amounts prescribed; and (d) in respect of which the aggregate value of the insurance obligations under all insurance policies issued by the same insurer to the same policyholder does not exceed the maximum amounts prescribed under paragraphs (b) and (c);

Microinsurance is evidently not limited to only one kind of product (e.g., funeral business). The IA itself provides no further rules but the amendment to the 2018 Policyholder Protection Rules for long-term insurance (“PPRs”) on 1 October 2018 introduced a set of very detailed rules on microinsurance. The new Rule 2A entitled: Microinsurance Product Standards in the short-term PPRs (inserted by GN 996 of 28 September 2018 (with effect on 1 October 2018)) and Rule 2A entitled: Microinsurance and funeral policy product standards in the long-term PPRs (inserted by GN 997 of 28 September 2018 (with effect on 1 October 2018)) ensure that South Africa currently boasts a set of original, detailed rules on microinsurance. Interesting as these are, the details will not be included in this discussion, as many facets of Rule 2A in both the long-term PPRs and the short-term PPRs have nothing to do with transparency.84

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Rule 2A.4 of the short-term PPRs stipulates that a microinsurance policy may not have a contract terms of more than 12 months. In addition, the value of the policy may not exceed “the maximum amounts as prescribed by the Prudential Authority.” (Rule 2A.4.2). Furthermore, a microinsurance

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As far as transparency is concerned, Rule 2A.11 contains detailed stipulations on the way in which insurers must launch microinsurance products. Microinsurance products must be designed according to the strict rules set out in Rule 2A, and an insurance company must provide the Authority with a summary of the benefits, exclusions, terms and conditions forming part of the new product (Rule 2A.12.1(a)), the proposed commission payable for rendering services as intermediary relating to the new product as well as the intended structure of the commission payable (Rule 2A.12.1(b)) and all material intended to be used in advertisements relating to this new product (Rule 2A.12.1(c)). The Authority may, under Rule 2A12.3 object to any of the benefits and instruct the microinsurer to stop advertising and cease from offering the product. For long-term insurance, the structure of the rules are approximately the same but there is a difference that separate the rules provided for funeral policies, and microinsurance policies for credit life insurance are also provided for. It is abundantly clear that there are extensive provisions in place to safeguard against the abuse of consumers. In short-term insurance, for instance, principles of average may not apply to microinsurance and this definitely serves to simplify the products and make the procedures much easier at claim stage. The rules in the Policyholder Protection Rules for long-term insurance (“PPRs”) as quoted above pertaining to the structure of policy benefits and waiting periods have the best interests of consumers at heart. In addition, microinsurance products must be marketed and sold in accordance with the same high standards as is apparent elsewhere in the 2018 Policyholder Protection Rules for long-term insurance (“PPRs”), unless a higher standard is prescribed in Rule 2A. It goes without saying that the entire FAIS Act is also applicable.

2.2.7

Mandatory Insurance

For mandatory insurances, the question whether the FAIS Act applies will depend on whether the product in question is a “financial product” as defined under the FAIS Act. For instance, unemployment insurance and workmen’s compensation benefits are not regarded as financial products as they are fund-based and will not be governed by the FAIS Act. Credit insurance however may be classified as either short-term insurance (consumer credit and credit life insurance) or credit life insurance (long-term insurance), placing those particular product squarely under the rules described above.85

policy must, upon expiry of its contract term, either be automatically renewed or terminated under the requirements of Rule 2A. Rule 2A.4.4 stipulates that a microinsurance policy may not provide that any of the policy benefits thereunder is subject to the principle of average. Further stipulations pertain to the variation and renewal of a microinsurance policy (Rule 2A.5), waiting periods (Rule 2A.6), exclusions (Rule 2A.7), excesses (Rule 2A.8), claims (Rule 2A.9), reinstatement (Rule 2A.10) general provisions in Rule 2A.11 and extensive provisions on the reporting of a new product. 85 Tables 1 and 2 under the Insurance Act, 2017.

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Insurance Investment Products

Regardless of the underlying investment product, all endowment insurance is regulated under the LTIA, IA and the FAIS Act. Before the enactment of the IA, the only distinction that was made under this heading is the differentiation between whole life and endowment policies,86 where whole life insurance was a pure risk product, and the policy paid out only upon death.87 An endowment policy had a term and paid out upon death or upon a maturity date, provided no life cover and is in effect a savings policy.88 Both types of policies fell under long-term insurance. As was set out in Sect. 2.2.4 above, the IA contains several categories and sub-categories of insurance business and although the basic principles as mentioned here still apply, the IA provides a much more refined conceptual framework, mostly for purposes of prudential regulation (e.g., authorisation and compliance). The only additional disclosure requirements for insurance investment products are contained in the GCC, which stipulates that where a financial product with an investment component is marketed, concise details of the manner in which the value of the investment is determined, including concise details of any underlying assets or other financial instruments should be furnished.89 In addition, separate disclosure of any charges and fees to be levied against the product, including the amount and frequency thereof and, where the specific structure of the product entails other underlying financial products, in such a manner as to enable the client to determine the net investment amount ultimately invested for the benefit of the client.90 Furthermore, a provider must, if so requested by the client, provide information concerning the past investment performance of the product over periods and at intervals which are reasonable with regard to the type of product involved including a warning that past performances are not necessarily indicative of future performances.91 It is abundantly clear from the discussion in Sect. 2.2.4 above that the 2018 PPRs demand more extensive disclosures from insurance companies.

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Nienaber and Reinecke (2009), pp. 74–77. Nienaber and Reinecke (2009), pp. 73–74. 88 Nienaber and Reinecke (2009), pp. 75–77. 89 Sec. 7 of the GCC. 90 Sec. 7 of the GCC. 91 Sec. 7 of the GCC. 87

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Failure to Comply with Transparency Duties Common Law Remedies

Where it appears as if a contract has been concluded, the contract may only be set aside due to the presence of one or more of the following factors: (1) Where a party can prove a iustus error in that his mistake is both reasonable and material, real consensus will be absent and there will be no contractual obligation.92 Once the contract is held to be void ab initio due to the absence of consensus, a secondary basis for consensus may apply, namely, the reliance theory. In this case, where real or actual consensus is absent, the reasonable reliance that one party created in the mind of the other, may be deemed to be the basis of an agreement between them, and effect may be given to the contract created by and in accordance with the innocent party’s reasonable reliance. Where consensus is improperly obtained, the conduct to do so renders an insurance contract voidable.93 This includes conduct to or on the other to induce him to enter into a contract by ways of: (a) misrepresentation, (b) duress or (c) undue influence. Such a contract is valid yet voidable at the election of the innocent party induced into contracting by the improper conduct. The election to void the agreement requires an extra judicial process simply by ways of proper notice. The presence of fault (intent or negligence) is not a requirement. Once the election is exercised, restitutio in integrum has to occur. In addition to voiding the contract, a civil claim for damages may also be instituted, provided that the misrepresentation was intentional or negligent (fault was present).94 Once should, however, keep in mind that the FAIS Ombud, as dealt with below, may use ‘fairness’ as a criteria for setting aside a contract or a part of it, yet this is not an inherent jurisdiction of our courts of law.95 Under common law, patrimonial damages may be claimed for breach of contract where a continuous duty of disclosure during the existence of the contractual relationship is breached.96 Where a pre-contractual misrepresentation on the other hand causes loss, harm or damage to the insured, these damages may be claimed by a separate civil claim based on delict.97

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For the general discussion on error see Hutchison and Pretorius (2017), chap 3; Christie and Bradfield (2016), chap 9 on mistake. 93 For a general discussion see Hutchison and Pretorius (2017), chap 4; Christie and Bradfield (2016), Chaps. 7 and 8. 94 It is important to note the warning issued by our Supreme Court of Appeal in the case of Barkhuizen v. Napier that ‘intruding on apparently voluntarily concluded arrangements is a step that Judges should countenance with care, particularly when it requires them to impose their individual conceptions of fairness and justice on parties’ individual arrangements.’ 95 Moolman et al. (2012), p. 202. 96 See in general Christie and Bradfield (2016), pp. 565–588; also Hutchison and Pretorius (2017), chap 13, par 13.5. 97 For a general discussion of damages claims for delicts see Neethling and Potgieter (2015), chap 6. For clarity, it may be mentioned that in other jurisdictions wrongful acts are referred to as torts.

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Statutory Remedies

FAIS Act As explained above, the FAIS Act does not contain rules pertaining to insurance products as such. Rather, the Act prescribes the minimum standards of conduct, which binds all FSPs or representatives (including employees), and the conduct pertains to the way in which insurance contracts are negotiated.98 Where an FSP fails to comply with these minimum standards, the Ombud may find the contract or any provision thereof to be unenforceable. The FAIS Act contains the provisions on enforcement of the Act in Chapter VI, Part I and Part II. The complainant must refer a ‘complaint’99 to the Ombud in accordance with the provisions of Section 27(5) of the Act.100 Any contravention of the FAIS Act or the wilful or negligent rendering of financial services, or where a complainant is treated unfairly, the Ombud may adjudicate the complaint. The Ombud has the broadest possible powers in that the Ombud may make any other order, which a Court may make.101 In instances where a matter falls within the jurisdiction of the FAIS Ombud, the latter has extensive discretionary powers to award an amount as fair compensation for any “financial prejudice” or “damage” suffered.102 This is limited to a maximum amount of R 800,000.103 The general burden of proof rests in the complainant, applicant or plaintiff. It must be proven on balance of probabilities that damage or loss was suffered and a reasonable estimate provided to the Ombud or court of law or other determination tribunal or body. An award will be in the discretion of the Ombud or the presiding officer in the court of law or other determination tribunal. The FAIS Ombud is independent from the FSCA. A complainant does not have to make use of the Ombud. Courts still retain an inherent jurisdiction to determine issues of failure to comply with the relevant Acts and common law obligations If the issue at hand is conduct that is governed by the FAIS Act, the Act also contains specific sections on offences and the payment of penalties for contraventions.104 Rule 20 (part IX) provides for the payment of penalties where an insurer contravenes or fails to comply with any of the PPRs. The Registrar of the FSCA may The requirements for a delictual claim are briefly (a) conduct (an act or omission to act); wrongfulness; fault (intent or negligence, or none where a strict liability is imposed by law); causation (factual and legal) and damages. 98 See in particular Sec. 3 of the GCC. This aspect is discussed in more detail in Part B II 1(a)–(e). 99 Sec. 1(1)(a). 100 See in general Hattingh and Millard (2016), p. 167, par 4.2 for a summary of the referral of the complaint and requirements for its adjudication. 101 Sec. 28, which includes the right to order payment of interest at a rate and as from a date as determined by the Ombud. 102 Sec. 20. 103 Hattingh and Millard (2016), p. 164. 104 Hattingh and Millard (2016), pp. 181–198.

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impose these financial penalties on any FSP that does not comply with its statutory duties. This function is exercised by an Enforcement Committee, which is an administrative body established under the relevant legislation.105 This Committee is empowered to impose unlimited penalties, compensation orders and cost orders. Its determination is enforceable as if it were a judgment of a court of law.106 The FSCA may pursue a variety of enforcement actions.107 Section 14 (a) provides for the debarment of persons who no longer meet the personal characteristics or qualities of honesty and integrity or where such person contravenes any provisions of the FAIS Act. For instance, if a broker is found guilty of fraud in a criminal court, he no longer meets the Fit and Proper Requirements.108 The Registrar is entitled to suspend or withdraw any license of an FSP.109 This will also be a remedy where any FSP no longer meets the financial and procedural requirements for it to operate as an FSP.110 The FAIS Act also provides for voluntary sequestration, winding-up and closure of an FSP, which provides indirect protection to clients and insureds.111 The removal of directors facilitates the enforcement of the FAIS Act.112 Appeals regarding any administrative action taken by the Registrar may be made to the FSCA Appeal Board.113 The High Court has inherent jurisdiction to review any administrative action, including action taken by the Registrar. Actions by the FSCA as supervisory authority are mainly aimed at enforcing the relevant legislation, such as debarring a representative or winding up a financial services provider. These are not remedies that apply directly between a weaker party (an insured) and a stronger party (such as a broker or an insurer). Any such actions must be taken in accordance with the law and where it amounts to an administrative action, a judge of the High Court has the power to review the action. A “conflict of interest” is defined in the GCC and in addition, concepts such as “financial interest”, “ownership interest”, “immaterial financial interest” and “third party” are clearly defined.114 Ultimately, the behaviour that is outlawed is the failure to render an unbiased financial interest to the client.115 Every authorised financial 105

Sec. 10(a). Hattingh and Millard (2016), p. 172. 107 Hattingh and Millard (2016), pp. 181–198. 108 Moolman et al. (2012), pp. 28–31. 109 Sec. 9. 110 Sec. 8; see also Hattingh and Millard (2016), p. 181 for a general discussion on suspensions and withdrawals of licences. 111 Sec. 38. 112 Sec. 8(1). 113 Sec. 26; see also Hattingh and Millard (2016), p. 195 for a discussion on the appeals procedure. 114 See Cl 1 of the GCC, sv “conflict of interest” and see Vol II para 2.2. See also Moolman et al. (2012), pp. 168–169. 115 Cl 3A(1)(b)(iii) of the GCC contains some general prohibitions. First, a provider may not offer any financial interest to a representative of the provider for giving preference to the quantity of business that was secured by the representative “to the exclusion of the quality of the service 106

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services provider, other than a representative, must adopt, maintain and implement a conflict of interest management policy.116

2018 PPRs As has been stated, the 2018 Policyholder Protection Rules for long-term insurance (“PPRs”) are heralded as the ultimate market-conduct minimum standards on disclosure and other matters. These rules do not impose sanctions nor prescribe other consequences. In the final instance, it is submitted that breach of these rules may be construed as being unfair to consumers as Rule 1 very clearly incorporates TCF into the legislative fabric. It is however not sure what the effect of such unfairness will be on any civil obligation created by the insurance contract between an insurer and a policyholder. One may assume that it will have an effect, and may affect this relationship in the same manner that improper conduct by the one toward the other does under common law.

3 Conclusions The South African common law provides a flexible system and an excellent basis for the regulation of disclosures on various matters pertaining to insurance contracts. In addition, statutes supplement the common law to such an extent that there can be little doubt that transparency is a fundamental value of contract law in general, and more specifically insurance law. The extensive remedies provided for in both common law and by statute enforce the consumer’s ex lege and statutory right to information and provide adequate legal redress in cases of non-compliance.

rendered.” Second, a financial interest may not be offered for giving preference to a specific product supplier, where a representative may recommend more than one product supplier. In the final instance, it is forbidden for a provider to offer any financial interest to a representative of the provider for giving preference to a specific product of a product supplier where more than one product may be recommended. 116 Cl 3A(2)(a) of the GCC. Refer to Moolman et al. (2012), p. 170. This policy requires providers to identify and manage conflicts of interest and in addition, this policy should be brought to the attention of its employees, representatives and associates. This policy should be seen as a compass that guides all those involved in the area of conflicts of interest to ensure that they remain on the right side of the law. Furthermore, the policy should not be regarded as another document in the compliance file but as an honest and hard look at the dealings of a services provider. In addition, the all-important values of fairness and honesty should remain at the core of any of these policies to ensure that the policy serves the purpose as intended by the FAIS Act.

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References Books Cornelius SJ (2016) Principles of interpretation of contracts in South Africa, 3rd edn. LexisNexis Butterworths, Durban Christie RH, Bradfield G (2016) Christie’s the law of contract in South Africa, 7th edn. LexisNexis, Durban Hattingh W, Millard D (2016) The FAIS Act explained: a guide to understanding the Financial Advisory and Intermediaries Act 37 of 2002, 2nd edn. LexisNexis, Durban Hutchison D, Pretorius CJ (eds) (2017) The law of contract in South Africa, 3rd edn. Oxford University Press, Cape Town Moolman J, Pillai C, Bam N, Appasamy J (2012) Financial advisory and intermediary services guide, 1st edn. LexisNexis, Durban Nienaber PM, Reinecke MFB (2009) Life insurance in South Africa: a compendium. LexisNexis, Durban Neethling J, Potgieter JM (2015) Potgieter and Visser law of delict, 7th edn. LexisNexis, Durban Reinecke MFB, Van Niekerk JP, Nienaber PM (2013) South African insurance law. LexisNexis Butterworths, Durban

Journals Bennett TW (2011) Ubuntu: an African equity. Potchefstroom Electron Law J 14(4):29 Gade CBN (2011) The historical development of the written discourses on Ubuntu. South Afr J Philos 30:303 Milner MA (1957) Fraudulent non-disclosure. South Afr Law J 74:177

Web-Based Sources FSCA. Treating Customers Fairly: The Roadmap 31 March 2011 [accessed at www.FSCA.co.za on 11 August 2013]. FSCA. Treating Customers Fairly: A discussion paper prepared for the Financial Service Board 12 May 2010 [accessed at www.FSCA.co.za on 11 August 2013].

Case Law ABSA Bank Ltd v. Fouche 2003 1 SA 176 (SCA). Allen v. Sixteen Stirling Investments (Pty) Ltd 1974 (4) SA 164 (D). Bayer South Africa (Pty) Ltd v. Frost 1991 4 SA 559 (A). Barkhuizen v. Napier 2007 (5) SA 323 (CC). Brisley v. Drotsky 2002 (4) SA 1 (SCA). Brink v. Humphries & Jewell (Pty) Ltd 2005 2 SA 419 (SCA). Bruwer v. Nova Risk Partners Ltd [2010] ZAGPJHC.

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Durban’s Water Wonderland (Pty) Ltd v. Botha 1999 (1) SA 982 (SCA). Everfresh Market Virginia (Pty) Ltd 2012 (1) SA 256 (CC). Feinstein v. Nigli 1981 (2) SA 684 (A). Fedgen Insurance Ltd v. Leyds 1995 (3) SA 33 (A). Government of the Republic of South Africa v. Fibre Spinners & Weavers (Pty) Ltd 1978 (2) SA 794 (A). Iscor Pension Fund v. Marine and Trade Insurance Co Ltd 1961 1 SA 178 (T). Koyabe and Others v. Minister for Home Affairs and Others (Lawyers for Human Rights as Amicus Curiae) 2010 (4) SA 327 (CC). McCann v. Goodall Group Organisations (Pty) Ltd 1995 2 SA 718 (C). Mutual & Federal Insurance v. Oudtshoorn Municipality 1985 (1) SA 419 (A). Novick v. Comair Holdings Ltd 1979 2 SA 115 (W). S v Makwanyane and Another 1995 (3) SA 391 (CC). Schultz NO v. Meyerson 1933 WLD. South African Eagle Insurance Co Ltd v. Norman Welthagen Investments (Pty) Ltd 1994 (2) SA 122 (A).

Legislation Constitution of the Republic of South Africa 1996. Consumer Protection Act 68 of 2008. Financial Advisory and Intermediary Services Act 37 of 2002. Financial Services Board Act 87 of 2002. Insurance Act 18 of 2017. Long-term Insurance Act 52 of 1998. National Credit Act 34 of 2005. Policyholders Protection Rules for short-term insurance 2010. Policyholders Protection Rules for long-term insurance 2010. Short-term Insurance Act 53 of 1998.

Other South African National Treasury (2011) The South African Microinsurance Regulatory Framework, Policy document, Cape Town, South Africa.

Transparency in the Insurance Contract Law in the United States Aviva Abramovsky and Peter Kochenburger

1 A Perspective from the United States: Transparency and Insurance Contracts In the United States, a mix of government regulation and common law decisions govern insurance contracts, and “transparency” in this context does not have a fixed meaning. There are not the sharp distinctions between public and private law that exist in many other jurisdictions (particularly in civil law countries). This is especially true in insurance, where laws regulating insurance contracts are typically a mix of specific government interaction—statutes, regulations, and regulatory notices and bulletins— and the common (“judge-made”) law. For these reasons, transparency standards for insurance agreements are best understood as including both access to essential information about the contract—the cost, forms, terms, endorsements, etc.—and disclosure and other regulatory requirements that support actual knowledge by the parties entering into the insurance agreement and consumer certainty of what coverage is provided. Although all jurisdictions seek to ensure some degree of transparency in both contexts as a matter of regulation, legislation, and public policy, states vary significantly as to the blend of formal regulation articulated by statute and regulation, with common law jurisprudence. For example, the very large majority of states require insurers to demonstrate they have been “prejudiced” before they can deny policyholder claims based on late notice, regardless of any policy language to the contrary. Most states have done so as a matter of common law, where courts have added this

A. Abramovsky University at Buffalo School of Law, The State University of New York, Buffalo, NY, USA e-mail: [email protected] P. Kochenburger (*) University of Connecticut School of Law, Storrs, CT, USA e-mail: [email protected] © Springer Nature Switzerland AG 2019 P. Marano, K. Noussia (eds.), Transparency in Insurance Contract Law, AIDA Europe Research Series on Insurance Law and Regulation 2, https://doi.org/10.1007/978-3-030-31198-8_28

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requirement by applying traditional common law contract principles, such as the doctrine of “disproportionate forfeiture.”1 New York, in contrast, added this requirement by statute, after the New York Court of Appeals consistently refused to do so in its jurisprudence.2 As a general matter, state legislatures can override the common law, limited only by issues of state and federal constitutionality (which infrequently arise in insurance); but the states choose to legislate in the insurance contract transparency realm surprisingly rarely. This is not unusual as most jurisdictions have an articulated preference—explicit or tacit—to default the vast majority of substantive coverage questions to the courts for adjudication. That so many areas of insurance law that affect the insurance contract are still left to the courts is in part historical as traditional contract and tort law were developed through common law. It also partially reflects the legislature’s general view that the common law’s capacity to develop a comprehensive scheme of interpretative decisions, as needed, through the resolution of private litigation is more efficient than overly prescriptive regulations. “Regulation through litigation” allow legislators to act only when a particular issue rises to a level of perceived public need or a particular state policy demands the passage of formal laws or regulations. Working through how this multi-polar system affects or limits insurance transparency is therefore especially challenging in the United States, as described below.

2 Insurance Regulation in the United States While the United States remains the world’s largest national insurance market,3 the peculiar feature of U.S. insurance regulation is that, with the exception of health insurance,4 individual states rather than the federal government generally exercise

1 For occurrence-based policies. E.g., Aetna Casualty & Surety Co. v. Murphy, 538 A.2d 219 (Conn. 1988). The majority of states do not apply a prejudice requirement to claims-made policies. 2 N.Y. Insurance Law § 3420 (a)(5) (McKinney). 3 As of 2017, the U.S. accounted for 38.5% of the world’s premium volume; China has surpassed Japan and is now second with 9.5%. National Association of Insurance Commissioners, Financial Data Repository. http://www.naic.org/documents/cipr_stats_top_50_worldwide_insurance_mar kets.pdf. Accessed 27 April 2019. This amount includes health insurance premiums. 4 Although the federal government has played a major role in funding health insurance and health care since the 1960s with the creation of the Medicare and Medicaid programs, states have still been largely responsible for regulating health insurance, though with significant limitations over employer-provided health care insurance. The advent of the Affordable Care Act (Public Law 111-148 (2010) put the federal government into direct regulation of healthcare insurance and created an even more complex interplay between federal and state regulatory authority. Recent Congressional and Executive branch dismantling of many elements of the Affordable Care Act adds additional uncertainty to this area.

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regulatory control over the insurance industry within their jurisdiction.5 This means there are 56 regional insurance regulators in the U.S.—the 50 states, the District of Columbia, Commonwealth of Puerto Rico and four territories.6 In most states and territories, the insurance commissioner is selected by the state or territorial governor and serves at her pleasure; in eleven states, insurance commissioners are elected directly by the voters. Turnover is frequent with either system.7 With the exception of several national insurance programs such as the National Flood Insurance Plan and the Terrorism Risk Insurance Act, the federal government to date has minimal supervisory or regulatory authority over life and property-casualty insurance. The reasons for this structure are historical and political.8 Insurance regulation became prevalent in the second half of the nineteenth century when the federal government had yet to assume a major role in regulating financial institutions. By default, the states became the insurance regulators. Spurred by the industry’s growth and several significant insurance scandals, the states enlarged their regulatory role and in 1871 established the National Association of Insurance Commissioners (NAIC).9 State insurance regulation was set firmly in place by an 1868 U.S. Supreme Court decision holding that insurance was not considered “interstate commerce” and was therefore outside the federal government’s authority.10 In 1944, the Supreme Court came to a different conclusion and held that insurance was interstate commerce and within the federal government’s regulatory authority.11 Congress responded quickly, upon the urging of the National Association of Insurance Commissioners (NAIC), state regulators, producers, and insurers, and in 1945 passed the McCarran-Ferguson Act, 15 U.S.C. 1011, which grants insurers limited immunity to federal antitrust laws and, more significantly, reconfirmed an explicit preference for state insurance regulation.12 McCarran-Ferguson essentially establishes a rule of statutory construction that seeks to preserve state regulation over the “business of insurance” unless Congress has clearly indicated its intent to include 5

In this article, we focus on transparency in property-casualty and life insurance markets and will not review health insurance, which as noted, supra, has a different regulatory structure in the United States and overall is less relevant for international comparisons. 6 The territories of American Samoa, Guam, Northern Mariana Islands, and the U.S. Virgin Islands. 7 For example, as of March 2019, 15 of the 56 state (and territorial) insurance commissioners were new from the previous year. State insurance department personnel, including senior staff, are typically civil servants and often serve for many years. 8 See Schwarcz and Schwarcz (2014), pp. 1569, 1578–1580; Thomas (2010), pp. 773, 781–786. 9 See Randall (1999), p. 625; French (2019), p. 25. 10 Paul v. Virginia, 75 U.S. 168 (1868). In the United States, the federal government’s authority is not plenary but established and limited by the Constitution. Federal regulatory authority over commercial practices is typically located in the Commerce Clause, U.S.C.A. Const. art. I § 8, cl. 3. 11 U.S. v. South-Eastern Underwriters Association, 322 U.S. 533 (1944). 12 “No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance.” 15 U.S.C. § 1012 (b). The industry remains subject to state antitrust laws, many of which mirror their federal counterparts.

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insurance within the scope of the law at issue.13 Congress can still legislate so that the federal government will regulate insurance in specific areas or substitute an entire federal regulatory structure preempting much or all of state insurance regulation. The greatest threat—or promise of substantial federal involvement, depending upon one’s perspective—to state regulatory preeminence likely comes from international pressure rather than domestic politics. The rapid development of international insurance markets (e.g., China), desire by insurers to increase their international presence, and regulatory pressure for internationally accepted capital standards for insurers are forcing U.S. regulators to consider and likely accommodate in some manner international demands for consistency in regulating insurer solvency across borders.14 While the states have achieved a large amount of regulatory consistency in this area, thanks in part to the NAIC and domestic influences,15 states clearly lack the power to regulate or enforce consistency outside their borders—a function that only the federal government can provide.16 In an earlier article,17 we described the growth of federal involvement in insurance regulation through the Financial Stability Oversight Council (FSOC) and the Federal Reserve Board.18 This involvement has been significantly, although not necessarily permanently, reduced by changes made in Dodd-Frank after the 2016 presidential election. For example, as of March 2019, all the insurers FSOC designated as systemically significant have been removed from this list.19 The international pressures described above have not necessarily lessened, but the United States is currently less willing to make significant structural changes in insurance regulation in response to such efforts, or to promote a greater federal role. 13 Congress can remove all doubt as to its intent in specific legislation to regulate insurance simply by so indicating, as for example in the Terrorism Risk Insurance Act, codified as a note to 28 U.S.C. § 1610. 14 (2018) Selected International Insurance Issues in the 115th Congress. Congressional Research Service, R44820. https://fas.org/sgp/crs/misc/R44820.pdf. Accessed 27 April 2019. 15 NAIC accreditation standards focus on solvency regulation and has been effective in implementing these standards—all 50 states, Puerto Rico, and the District of Columbia are accredited. https://www.naic.org/cipr_topics/topic_accreditation.htm. Accessed 27 April 2019. In contrast, there are some significant differences among the states in market conduct regulation, rate and form review, and other non-solvency related areas. 16 For now, the Federal Insurance Office’s only regulatory authority is the ability to pre-empt state laws inconsistent with international treaty obligations related to solvency regulation—although only after completing a daunting administrative process. See 31 U.S.C. § 313. 17 Abramovsky and Kochenburger (2016). 18 Abramovsky and Kochenburger (2016), pp. 125–126. The Financial Stability Oversight Council (FSOC), another Dodd-Frank regulatory creation, reviews financial institutions—banks and “nonbank financial companies”—to determine if their failure could threaten national financial stability. The Federal Reserve Board has regulatory authority over holding companies FSOC deems systemically significant, along with insurance holding companies that include a federally-insured depository institution. Dodd-Frank Wall Street Reform and Consumer Protection Act. 12 USC 5301 § 113 (2010). 19 See U.S. Department of the Treasury. (2019) http://www.treasury.gov/initiatives/fsoc/designa tions/Pages/default.aspx. Accessed 27 April 2019.

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The United States is a common law country and in addition to formal regulation, there are tens of thousands of lawsuits filed each year by policyholders or their insurers. A substantial number of these suits involve disputes over policy language as applied to particular claims. This litigation generates an extensive body of case law interpreting specific insurance policy terms, and accordingly is an important source of transparency, at least within each state. However, contract law historically, and insurance contracts specifically, are typically left to the states, which means there are 50-plus common law jurisdictions with authority to rule on insurance policy terms, and no requirement that they harmonize interpretations when examining identical contract language.20 While not common, state legislatures may override judicial determinations because they have final authority over insurance policy terms and coverages (subject to constitutional restrictions and federal preemption).21

3 Regulatory Requirements and Contract Transparency 3.1

Policyholder Access to Policy Forms

Fundamental contract principles include a “meeting of minds”—the parties have freely and knowingly agreed to the essential terms of a bargain and that their written contract defines the scope of that agreement.22 The most obvious and literal definition of “insurance contract transparency” then, is the ability of insurance applicants to review the insurance contract before agreeing to it. Yet, historically in the United States, insurance applicants have had minimal access to the entirety of the insurance contract that would subsequently bind them.23 This is particularly true in property-casualty lines, especially in personal auto and homeowners insurance, where the full insurance policy may not be delivered for weeks or sometimes months after the policy incepts.24 Aside from some life 20 Legal treatises can play a major role in analyzing and attempting to harmonize the law in insurance, contracts, and many other areas dominated by state common law. 21 E.g., Arkansas Code § 23-79-155 (2011); South Carolina Code § 38-61-70 (2011) (held unconstitutional as to retroactive effect only, Harleysville Mutual Ins. Co. v. South Carolina Dept. of Insurance, 736 S.E.2d 651 (S.C. 2012)). 22 “[t]he formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration.” Restatement (Second) of Contracts, § 17. “The fundamental goal of interpreting an insurance policy, as in all contracts, is to carry out the intent of the contracting parties. To discern the parties’ intent, we begin with an examination of the insurance policy language.” Santos v. Metropolitan Property and Cas. Co., 201 A.3d 1243, 1247 (N.H. 2019). 23 Consumers would usually receive the declarations page at the time of contracting, which would identify the parties, the type of insurance purchased (e.g., homeowners), the policy limits, and a list of endorsements—by number, but not otherwise identified by name or limitations (additional exclusions). 24 See Abraham and Schwarcz (2015).

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insurance products (discussed later in this section), states usually do not require that insurance consumers be provided a copy of the policy form or even offered an opportunity to review it before agreeing to the policy terms.25 The NAIC’s model Unfair Trade Practices Act, which has been adopted by virtually every jurisdiction in the United States, includes specific prohibitions on making misleading, inaccurate, or false statements about insurance policy terms,26 but does not require that insurers or insurance producers make the actual policy available to insurance consumers before purchase. Nor, until very recently, would consumers have the ability to locate the correct policy forms from other sources, either online or in print.27 Certainly, even if the insurance policies were available, very few insurance consumers would proactively ask to see the policy and then actually read it. Moreover, if they did, they could not realistically have negotiated any of the contractual terms, other than the type of insurance purchased, available endorsements, and policy limits. Insurance policies share these characteristics with other consumer contracts, including credit card agreements, mortgages, and software purchase agreements, which are all forms of adhesion contracts.28 What is different, at least in the United States, is that in other transactions that utilize form contracts there is usually the ability to review contractual terms before agreeing to a transaction, even if few consumers actually do so.29 In many insurance transactions, even the pretense that both parties have read and consented to the policy terms is abandoned, as insurance consumers would have no ready ability to read their contract in advance should they even wish to. This is slowly changing, as web technology makes it relatively easy for companies to post their policy forms online, improving contract transparency, at least theoretically. Other financial services providers have provided online access for some time, but insurers are late to this game. In part, this may be because state regulators have not required or even encouraged insurers to do so; in contrast, for example, federal law requires credit card issuers to submit their card agreements to the Consumer

25 Nor is it clear that insurance producers—agents and brokers—would even have up-to-date and accurate copies of the various policy forms their clients are agreeing to (although now presumably at least available to the producer from the insurer’s online resources). 26 An Unfair Trade Practice includes “Misrepresentations and False Advertising of Insurance Policies . . . that misrepresents the benefits, advantages, conditions or terms of any policy.” NAIC Model Unfair Trade Practices Act § 4.A.(1). 27 National Association of Insurance Commissioners, https://www.naic.org/cipr_topics/topic_trans parency_readability.htm. Accessed 27 April 2019. 28 Randall (2007), pp. 107, 124–125; Century Surety Company v. Jim Hipner, LLC, 377 P.3d 784, 789 (Wyo. 2016). 29 E.g., the ubiquitous “do you accept the terms and conditions” box with a link to the agreement itself when purchasing/downloading media or other software. In some transactions, consumers have a limited right to cancel or rescind an agreement; for example, there is a three-day right to cancel for residential mortgage refinancing and door-to-door sales.

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Financial Protection Bureau, which then publishes them online.30 A few states now post on their department websites the policy forms and state-specific endorsements of the major homeowners and personal auto underwriters in their state,31 a practice consumer representatives have advocated for within the NAIC for years. Some insurers post their forms on their own websites.32 However, as of fall 2019, most states do not require insurers to provide consumers advance access to the insurance contracts that will subsequently bind them. Life insurers provide more contract transparency, at least in the sense that some types of life insurance policies are available for review before purchase. These include annuities and life insurance policies that have an investment component (as opposed to term life), which may be regulated as securities under federal law, as well as insurance products under state law. This classification triggers various federal disclosure requirements that must be provided to potential investors in advance. Virtually every state requires insurers writing certain life and annuity products to provide a ten-day (at a minimum) “cooling off” period allowing purchasers to rescind their policy without penalty.33 The sale of term life insurance policies, however, share some of the transparency problems as those in propertycasualty, and may not be available before purchase. In addition, insurers offering life insurance, annuities, long-term care, or disability insurance may seek approval for their products through the Interstate Insurance Product Regulation Compact (Compact), which serves as a voluntary standard setting and product review organization recognized by 46 jurisdictions and accounting for approximately 75% of nationwide premium in these lines.34 Participation is voluntary, but products submitted to the Compact must conform to specific policy form standards that are developed through a participatory process.35 In exchange,

30

Credit Card Agreement Database (2019) Consumer Financial Protection Bureau. https://www. consumerfinance.gov/credit-cards/agreements/. Accessed 27 April 2019; Truth in Lending Act, 15 U.S.C.A. §; 1632 (West); C.F.R. § 1026.58 (2019). 31 E.g., California, Maine, Missouri, Nevada, and Oklahoma. For examples, the Missouri Department of Insurance posts the policies for the top ten homeowners and personal automobile insurers: https://insurance.mo.gov/consumers/auto/auto_policies.php. Accessed 28 April 2019. 32 In contrast, many insurers allow existing policyholders to access their own documents online. See, e.g., Missouri Rev. Statute 379.011 (2014). 33 Investopedia. https://www.investopedia.com/terms/f/free-look-period.asp. Accessed 28 April 2019. 34 Compact (2019). https://insurancecompact.org/index.htm. Accessed 27 April 2019. California, Florida, and New York are not Compact members, although as of spring 2019, New York was considering legislation to join the Compact. 35 Specific standards are set out for each product, which in addition to specifying specific policy terms, such as limiting contestability provisions to a two-year maximum, may also restrict the use of certain provisions, such as requiring arbitration in the event of a dispute. See, e.g., Individual Whole Life Insurance Policy Standards: https://insurancecompact.org/rulemaking_records/141204_indi vidual_whole_life_insurance.pdf. Accessed 27 April 2019.

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insurers who file insurance products within these parameters will have a quicker review process and potential approval from all participating states.36 In 1998, the NAIC created SERFF (the System for Electronic Rates & Form Filing)37 to streamline and modernize rate and form filings. SERFF demonstrates both the potential and challenges to improve insurance contract transparency within a multi-jurisdictional regulatory system. While primarily designed for regulatory efficiency, over the last several years state regulators and the NAIC have encouraged greater public access to SERFF. This has significant potential as interested parties, including policyholders, theoretically have access to a large number of documents on a state-by-state basis, including rate and form filings, proposed risk classifications, and equally important, communications between regulators and insurers. However, SERFF has not been universally adopted for all policy lines by the states; similarly, third-party access to SERFF is uneven as states differ on the information available and how consumers can access it. Providing policyholders, or potential policyholders, access to regulatory filings and forms through SERFF is certainly an improvement over minimal or no public disclosure, but SERFF is designed primarily for insurers and regulators, and at best is a clumsy tool for new or infrequent users. Absent improvement, SERFF’s potential to enhance transparency may not be achieved and it could remain another difficult, opaque system for consumers to navigate.38

3.2

Readability Requirements and Consumer Information Tools

Perhaps equally important as access to insurance policy forms is the ability to understand the policy terms and conditions. In contrast to the generally lax regulatory attitude toward policyholder access to insurance policies, states often have specific requirements on how insurance policies should be written and organized.39 These include readability standards that require policy language to be written at a specific

36

Compact (2019). https://insurancecompact.org/about.htm. Accessed 27 April 2019. SERFF is a NAIC product administered by the Speed to Market Working Group; its separate advisory board is selected by the NAIC’s Executive Committee. See System for Electronic Rates and Form Filing (2019) About the SERFF. www.serff.com. Accessed 27 April 2019. 38 Consumers must first locate the SERFF portal on the state insurance department website, click through to SERFF and then select from a series of drop-down menus clearly designed for regulatory specialists rather than as a consumer interface. See SERFF (2019) SERFF Filing Access. www. serff.com/serff_filing_access.htm. Accessed 27 April 2019. 39 These standards typically apply to personal lines policies rather than those written for commercial entities, with significant state variation as to which lines of insurance and insurance products are included. 37

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grade level, typically analyzed through the Flesch scoring model.40 Minimum type or print size and policy form organization may also be mandated. While we doubt regulatory reliance on disclosure requirements sufficiently protects insurance consumers, they do have the virtue of relative simplicity in compliance and enforcement. In addition, market competition has moved many insurers, producers, and industry-sponsored associations to utilize their websites to provide detailed consumer information on how to shop for insurance, including definitions of important terms, insurance pricing, general areas of coverage (and what is not covered), and links to additional information.41 The NAIC has developed “shopping guides” for major personal lines products, including life, annuities, home, and auto insurance.42 These guides are made available to state insurance departments, which can brand them with their own names, update or revise information to make it more state specific, and provide written copies to individuals and groups.43 While this growing wealth of information adds to insurance transparency generally, it is unclear how many consumers access these websites, how they utilize the information (if at all), and whether the intended information and intent has been accurately conveyed and understood. Consumer advocates, for example, have urged the NAIC and state regulators to conduct consumer testing whenever developing consumer guides to improve the likelihood that these disclosures are effective. What is sure is that in the absence of mandatory disclosure and more realistic assent standards, many consumers are purchasing insurance with incomplete or entirely inadequate information. This remains true in insurance despite significant advancements in understanding how to improve the effectiveness of consumer disclosures for financial products. Over the last decade, these advancements include a more structured and deliberative process for designing and evaluating consumer disclosure documents and contracts. These include inviting participation from consumers, relevant industry groups, academics and other stakeholders, and rigorous consumer testing of draft disclosures to better ensure that the intent and purpose of the disclosure has been achieved in practice—measured by whether consumer understanding of the disclosure matches 40 See, e.g., Conn. Gen. Stat. Ann. § 38a-297, 298. The NAIC Life and Health Insurance Policy Language Simplification Model Act (MDL-575) has similar requirements. NAIC (2019) Products: Technology, Data, and Publications. https://www.naic.org/prod_serv_model_laws.htm. Accessed 27 April 2019. 41 See, e.g., https://www.insurance.ca.gov/01-consumers/ (California Department of Insurance); https://www.statefarm.com/insurance (State Farm); https://www.burnsandwilcox.com/personal/ (Burns & Wilcox agency based in Michigan); https://www.acli.com/Consumer-Info (American Council of Life insurers); https://www.iii.org/insurance-basics (Insurance Information Institute); http://www.uphelp.org/ (United Policyholders). 42 See NAIC (2019) Consumer Index. http://naic.org/index_consumer.htm. Accessed 27 April 2019. The NAIC also sponsors “Insure U,” which provides a variety of online resources, including videos, games, smart phone apps, and extensive links to additional information. Insure U (2019) http:// www.insureuonline.org/. Accessed 27 April 2019. 43 E.g., Wisconsin Office of the Commissioner of Insurance (2019), https://oci.wi.gov/Pages/Con sumers/ConsumerPublications.aspx. Accessed 27 April 2019.

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the drafter’s.44 Insurance regulators and insurers lag somewhat behind in adopting or requiring these practices in the life and property-casualty sectors, and insurance policy forms have not changed significantly in language or structure over the last several decades.45 The NAIC would appear to be an ideal entity to adopt and promote these practices because it is the primary developer of model laws, consumer insurance shopping tools, and similar material, and has the resources to develop and centralize expertise and best practices in this area. Consumer advocates have pressed the NAIC to serve in this role and consumer test documents being developed for consumer use; the NAIC has so far resisted this invitation.46 Another goal for improved transparency and consumer understanding is enhancing the ability to effectively shop for insurance, a product often notorious both for its complexity and general lack of consumer interest. Contract transparency supports both greater understanding of contracts governing the parties and a more competitive market as transparency allows consumers to comparison shop for the best contract terms (at least in theory).47 Many insurance markets in the United States, particularly in personal lines, are highly price-competitive,48 but it is far more difficult to create consumer-driven competition for better contracts, where insuring agreements, exclusions, and terms and conditions would also feature in a potential policyholder’s decision to select a particular insurer. The difficulty in creating such a market is not completely surprising, as even the most sophisticated purchaser hopes never to use the insurance products they shop for. There has been some formal movement by governments on the issue of disclosures. One method increasingly favored to enhance contract transparency is the use of “smart disclosures,” which are online tools that assist potential purchasers in quickly selecting and reviewing contract terms most important to them, and comparing them across multiple companies or competitors.49

For example, one of the first projects undertaken by the federal Consumer Financial Protection Bureau was to redesign required residential mortgage disclosure forms through this evaluation and testing process, resulting in disclosure forms significantly more likely to contain information consumers needed in more accessible language and format. Kennedy et al. (2012), pp. 1141, 1160–1167. 45 New entrants are addressing transparency issues in interesting ways; Lemonade Insurance is one example, discussed several paragraphs on. 46 For example, August 6, 2018 presentation by Birny Birnbaum, Professor Brenda Cude and Silvia Yee to the NAIC Consumer Liaison Committee: https://www.naic.org/meetings1811/cmte_ conliaison_2018_fall_nm_materials.pdf. Accessed 28 April 2019. 47 See Section II.4, infra, for a discussion on the utility of consumer disclosures. 48 https://www.jdpower.com/business/resource/jd-power-us-insurance-shopping-study. Accessed 28 April 2019. 49 “The term ‘smart disclosure’ refers to the timely release of complex information and data in standardized, machine readable formats in ways that enable consumers to make informed decisions. Smart disclosures will typically take the form of providing individual consumers of goods and services with direct access to relevant information and data sets. Such information might involve, for example, the range of costs associated with various products and services, including costs that 44

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Several state regulatory agencies provide smart disclosure tools for consumers in their state. The Texas Office of Public Insurance Counsel and the California Department of Insurance enable consumers to review the policy forms for virtually all homeowners insurers (and in Texas, auto insurers) writing in their states, select specific insurers and policy forms for comparison, and automatically generate a chart highlighting major coverages and differences in contract terms.50 Within the private sector, there are numerous options for insurance consumers to compare premiums and then request follow-up communications from selected insurers.51 Most insurers will provide online premium quotes (and some advance access to policy forms).52 However, these independent online comparison tools do not provide access to the insurance contracts themselves, and arguably, focusing just on the premium to the exclusion of the insurance contract itself diminishes rather than enhances effective review and therefore contract transparency.53 Private actors can also play a significant role in clarifying and defining terms in insurance contracts, even though their analysis and interpretations do not bind courts, legislatures, or the parties to an insurance dispute. The American Law Institute (ALI)54 may be the best known and its “Restatements of the Law” have helped define the common law throughout the United States in areas related to insurance, including Contracts and Torts.55 The ALI completed the Restatement of the Law, Liability Insurance in May 2018, which is its first project devoted to insurance contracts and disputes.56 The Restatement’s influence in defining the terms of insurance contracts will likely be determined over many years, depending on how courts utilize it. Other important sources of private interpretation include

might not otherwise be transparent.” https://www.data.gov/consumer/smart-disclosure-policyresources. Accessed 28 April 2019. But see Marotta-Wurgler (2014). 50 Texas: https://www.opic.texas.gov/residential-property/compare-policy-coverages/homeowners. Accessed 28 April 2019. This agency is independent from the Texas Department of Insurance. California: https://interactive.web.insurance.ca.gov/apex/f?p¼143:1. Accessed 28 April 2019. 51 E.g., Policygenius and Nerdwallet: https://www.policygenius.com/; https://www.nerdwallet.com/ blog/category/insurance/?trk¼nw_gn_4.0. Accessed 28 April 2019. 52 E.g., https://www.statefarm.com/insurance/quotes. Accessed 28 April 2019. 53 Industry and consumer organizations regularly caution individuals not to shop by price alone. https://www.iii.org/article/how-to-save-money-on-your-homeowners-insurance (Insurance Information Institute); https://www.consumerreports.org/car-insurance/10-tips-to-save-on-car-insur ance/ (Consumers Union). Accessed 28 April 2019. 54 Organized in 1923, the American Law Institute describes itself as “the leading independent organization in the United States producing scholarly work to clarify, modernize, and otherwise improve the law.” www.ali.org. The ALI is composed of judges, academics, and practicing attorneys through a membership nomination process. 55 For example, courts frequently cite the Restatement 2nd of Contracts in insurance contract disputes. 56 This Restatement provides an in-depth analysis of common law doctrines and principles in insurance, along with “black letter” rules that harmonize these various approaches. The Restatement has encountered significant industry opposition, which continues through the writing of our article.

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academic and professional treatises,57 legal encyclopedias,58 bar (attorney) association publications,59 and law review articles.60 The emergence of “InsurTech,” led by modern technology-based “disrupter” companies may change this status quo. The online homeowners and renters insurer Lemonade, for example, utilizes transparency as a marketing tool.61 In contrast to the general industry norm, Lemonade encourages applicants to review the specific policy forms before purchasing the insurance and makes these forms available online.62 However, the ease of familiar branding, snappy marketing campaigns, and access to friendly agents located in many a main street storefront limit the ability to disrupt an industry where product comfort and stability remains key.

4 Regulatory Review of Policy Forms and Coverage All regulatory jurisdictions in the United States require certain coverages and often specify the contractual language that must be used in the policy. Substantive areas include mandatory language in personal lines automobile policies,63 requirements to offer uninsured and underinsured motorist coverage (specific language sometimes mandated), life insurance premium grace periods, limitations and contestability provisions,64 and workers’ compensation policies, which are typically required to

57

For example, these three treatises are frequently cited: Stempel and Knutsen (2018); Ostrager and Newman (2018); Windt (2019 update). 58 Couch on Insurance, 3d (Thomson Reuters); New Appleman on Insurance Law (LexisNexis). 59 E.g., ABA Tort, Trial & Insurance Section, https://www.americanbar.org/groups/tort_trial_insur ance_practice/. Accessed 28 April 2019. 60 These articles are most easily accessed through SSRN, Westlaw, LexisNexis, or similar legal databases. See also https://library.law.uconn.edu/insurance-law; http://guides.ll.georgetown.edu/c. php?g¼363473&p¼2455742. 61 “Lemonade Insurance Company is a property and casualty insurance company that is transforming the very business model of insurance. By injecting technology and transparency into an industry that often lacks both, we’re creating an insurance experience that is fast, affordable and hassle free.” Lemonade (2019) Service FAQs. https://www.lemonade.com/faq#service. Accessed 27 April 2019. Also https://www.lemonade.com/transparency. 62 Lemonade (2019) Terms of Service. https://www.lemonade.com/terms-of-service. Accessed 27 April 2019. The transformation does not yet include their policy forms, which utilize standard ISO language. 63 E.g., Minimum Provisions for Automobile Liability Insurance, Connecticut Administrative Code §§ 38a-334-1 to 334-8. 64 E.g., Kansas Statutes Annotated 40-420 (2017): “No life insurance company authorized to transact the business of insurance in this state shall issue or deliver in this state any policy of life insurance other than industrial insurance, annuities and pure endowments with or without return of premiums or of premiums and interest unless the same shall contain in substance the following provisions:. . .”

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insure all of an employer’s liability under state workers’ compensation laws.65 Some states address claim issues by mandating specific policy language66; others by restricting or banning certain terms, such as mandatory arbitration requirements.67 If one purpose of contract transparency is coverage certainty, then these statutory mandates are an important part of the story in the United States. For example, starting in the 1880s, New York and then the other states mandated specific policy language for fire insurance coverage; some of these provisions still remain in force today and can protect insurance consumers from industry reductions in policy coverage.68 Additional attempts at transparency, at least insofar as the rollout of new rates and terms are concerned, is accomplished through form and rate review, a prominent feature of insurance regulation in the United States.69 Insurers or their statistical advisory agents70 have historically been required to file proposed policy forms and endorsements with state insurance regulators and wait for regulatory approval before introducing them into the state marketplace—typically called “prior approval.”71 While a time-consuming process (often notoriously so), prior approval allows regulators significant control over the insurance policies issued in their states. Although often assumed that “prior approval” remains the default regulatory requirement, there are in fact significant variations among the states by product line, premium size, and timing of regulatory approval. For example, states may have different requirements for property casualty and health insurance forms, commercial

65 E.g., Cal. Ins. Code § 11654 (2018): “Every such contract or policy shall contain a clause to the effect that the insurer will in all things be bound by and subject to the orders, findings, decisions or awards rendered against the employer under the provisions of the law imposing liability for compensation, subject to the provisions, conditions and limitations of the policy. The insurance contract shall govern as between the employer and insurer as to payments by either in discharge of the employer’s liability for compensation.” 66 E.g., New York Ins. Law § 3420(a) (McKinney’s). 67 E.g., GA law. In December 2018, the NAIC adopted an advisory bulletin prohibiting the use of pre-dispute mandatory arbitration clauses and choices of law and venue provisions in personal lines policies. NAIC (2019) Legal Bulletins. https://naic.org/legal_bulletins.htm. Accessed 27 April 2019. 68 E.g., New York Ins. Law § 3404 (McKinney’s). 69 In contrast to the European Union, regulating insurance rates is still a commonly used tool in the United States, particularly for residential and automobile insurance, health insurance, and for required insurance products such as workers’ compensation insurance. For individual state requirements, see NAIC (2019) Industry Rates Forms Filing Checklist. https://www.naic.org/industry_ rates_forms_filing_checklists.htm. Accessed 27 April 2019. In this article we focus on form rather than rate regulation. 70 Such as ISO, formerly known as the Insurance Services Office, and now part of Verisk: https:// www.verisk.com/. Accessed 27 April 2019. 71 E.g., Oregon Statute § 743.019—requires policy forms and endorsements to be filed with the Director, with the requirement that they be approved or disapproved within 30 days. This statute also includes numerous exceptions, largely for commercial insurance products.

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and personal lines, exemptions for certain commercial policyholders or specialized coverage areas (e.g., insurance for yachts). “Prior approval” requirements have slowly eroding over time, as many jurisdictions have substituted “file and use” or “use and file,” although states retain the authority to disallow forms or specific contractual language subsequent to their use even when they had not previously reviewed them.72 Transparency is therefore within the regulator’s purview in deciding whether a particular form or amendment is permissible, subject to legislative prerogatives. Although the necessity for such transparency and equity review by regulators is relatively well accepted in personal lines, efforts to reduce or eliminate regulatory filing requirements for large commercial policyholders (often termed “commercial lines deregulation”) have been ongoing for decades, with mixed success, varying— as usual—by state. Commercial lines insurers have stepped up these efforts in 2018 and 2019, as such protections are arguably less necessary for the more sophisticated, commercial insured.73 Mandating or prohibiting specific coverages and exclusions has obvious costs, particularly when state requirements in this area are often inconsistent. These include direct expenses, such as compliance costs, as well as market costs through limiting insurers’ ability to offer new insurance products or more specifically tailor policies to individual customer needs. For these reasons, transparency through minimum coverage requirements is often weighed against market efficiency with regulators consistently forced to examine the appropriateness of the “file and use” approach.

5 The Limits of Transparency and Disclosure The most difficult regulatory issue related to insurance transparency may be balancing the knowledge that very few consumers will read their insurance policies, with the necessity of still recognizing the legitimacy and enforceability of consumer form contracts. Our discussion on the importance of insurance policy language to contract transparency—access to policy forms, disclosure and readability requirements, and comparison shopping tools—assumes that they will make a difference. That is, consumers will read insurance policies when relevant (if we make them accessible and understandable) and use the information to guide their insurance transactions. Except, we know they rarely do.

A “file and use” system requires insurers to file policy forms with the state regulator concurrent with introducing them into the market, but does not require advance regulatory approval. “Use and file” allows insurers to utilize new forms prior to filing them with the regulator, though filing is still required. The Federal Insurance Office’s 2013 report “How to Modernize and Improve State Insurance Regulation in the United States,” discusses state rate and form regulation, pp. 48–55, available at https://www.treasury.gov/initiatives/fio/reports-and-notices/Pages/default.aspx. Accessed 6 May 2019. 73 “Commercial Lines Deregulation is having a Moment,” Insurance Journal, January 16, 2018. 72

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“It must be presumed, ordinarily, that persons are familiar with the terms of written contracts to which they are parties, and in the absence of fraud they are justly bound by the provisions therein, but the rule should not be strictly applied to insurance policies. It is a matter almost of common knowledge that a very small percentage of policyholders are actually cognizant of the provisions of their policies and many of them are ignorant of the names of the companies issuing the said policies.”74 This acknowledgement is likely more true now than in 1910 when the California Supreme Court made this observation, as we often enter into multiple contracts daily with the opportunity and legal expectation that we have read and consented to the terms and conditions of each of them.75 Therefore, if a central goal of contract transparency is creating a mutually shared and accurate understanding between insurers and the policyholders they contract with (mutual consent), then these tools are logical but of questionable value. Logical because we want to enable and encourage consumers to read their contracts and to understand the bargain they are entering into. Questionable because it very likely that consumers will not read insurance policies regardless of how they are written, and requiring more and better disclosure—whether through type size, page formatting, or specific reading level standards—will fall on blind eyes and may not lead to any measurable improvement. Nor is it feasible or desirable for courts and regulators not to enforce standardized consumer contracts, or to require parties to bargain over major terms in each contract. This issue of course is not unique to insurance and is a central dilemma in theorizing, drafting, and regulating consumer contracts. Insurance regulation in the United States does offer one partial remedy, which is mandating specific terms and conditions in policies while prohibiting others—a practice states continue today (see Section II.3, supra), though with persistent industry pressure to relax such requirements. Standardization of important policy terms and conditions will not make more consumers read their insurance policies, but through the drafting process (whether by statute or regulation) and subsequent use and enforcement, it can level at least some of the tilt in the disparate bargaining power between insurer and policyholder and create a common—and more accurate—understanding of the basic coverages

The Court continued “ . . .The policies are prepared by the experts of the companies, they are highly technical in their phraseology, they are complicated and voluminous—the one before us covering thirteen pages of the transcript—and in their numerous conditions and stipulations furnishing what sometimes may be veritable traps for the unwary. . . . The courts, while zealous to uphold legal contracts, should not sacrifice the spirit to the letter nor should they be slow to aid the confiding and innocent.” Raulet v. Northwestern Insurance Co., 107 P. 292, 298 (Cal. 1910). 75 “Even when the standard form contract is available, very few people read it. Empirical work is scant, perhaps because of the folk knowledge that no one reads boilerplate. Still, some direct as well as indirect evidence suggests that almost no consumers read boilerplate, even when it is fully and conspicuously disclosed.” Ben-Shahar and Schneider (2011), pp. 647, 671—the authors then describe one such study. See also, Schwarcz (2017), pp. 1457, 1458. 74

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and exclusions.76 This remains one of the benefits of the New York Standard Fire Policy, referenced in Section II.3.77 Yet, as discussed in our next section, the limits of disclosure by the insurance industry have not always been mirrored by forgiveness of the insured, should they misstate a fact or give incorrect information to their insurer at the time of purchase.

6 Warranties and Representations by Insureds: A Mostly Hidden Burden In a system where the majority of terms of the contract are often unavailable to the insured before purchase, the application of “warranties and representations” doctrine can be problematic in transparency terms. Unlike commercial sales, where we think of “warranties” as primarily serving a consumer protection function against the seller, the opposite has been historically true in insurance. In insurance, warranty is better understood as a statement made by the insured (the buyer) to the insurance company (the seller), the incorrectness of which will relieve the insurer of its obligation to pay.78 Historically, at common law, noncompliance with a warranty provision was a complete defense for the insurer regardless of the materiality of the breach.79 This is distinct from the common law treatment of mere “representations”.80 As opposed to “misrepresentations” where the state of mind of the insured

76 Professor Daniel Schwarcz has written persuasively on this issue. Id. See also Fung et al. (2004), pp. 13, 21, available at https://www.hks.harvard.edu/publications/political-economy-transparencywhat-makes-disclosure-policies-effective. 77 A 1905 treatise on the New York Standard Fire Insurance Policy stated, “The value of a Standard Form of Policy to the insured lies chiefly in the fact that now there is only one form of policy used in a state by all Companies, instead of numerous conflicting forms issued by many companies. Prior to the use of a standard form of policy it was difficult to determine when the property of the insured was protected and still more difficult to arrive at an adjustment in case of loss.” Darrach (1905). These requirements are litigated and upheld today. See, e.g., Streit v. Metropolitan Casualty Ins. Co., 864 F.3d 770, 773 (7th Cir. 2017) (“All policies written in the State of Illinois must conform to the requirements of the Standard Policy”). 78 Insurance Law, Sec. 6.6 Regulation of Defenses Based on Warranty, Representation, or Concealment in Keeton, Widiss and Fischer (2d Edition); ALPS Prop. & Cas. Ins. Co. v. McLean & McLean, PLLP, 425 P.3d 651, 657, reh’g denied (Sept. 18, 2018). 79 Insurance Law, Sec. 6.6 Regulation of Defenses Based on Warranty, Representation, or Concealment in Keeton, Widiss and Fischer (2d Edition); ALPS Prop. & Cas. Ins. Co. v. McLean & McLean, PLLP, 425 P.3d 651, 657, reh’g denied (Sept. 18, 2018). 80 Insurance Law, Sec. 6.6 Regulation of Defenses Based on Warranty, Representation, or Concealment in Keeton, Widiss and Fischer (2d Edition); ALPS Prop. & Cas. Ins. Co. v. McLean & McLean, PLLP, 425 P.3d 651, 657, reh’g denied (Sept. 18, 2018).

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is sometimes critical to the denial of coverage, treating a statement as a warranty was historically sufficient to avoid factual inquiry into the state of mind of the insured.81 There has always been little reason to believe that the insured, particularly in consumer lines, had the capacity to know that an incorrect statement to an insurer could have such disproportionate effect under insurance “warranty” provision. These type of terms, often found on the declarations page—the insurance version of Karl Llewellyn’s “dickered terms”82 would be subject to this strict warranty interpretation. Legislators recognized that insurer assertions of “technical” warranty defenses were being perceived as permitting them an unconscionable advantage.83 Thus, statutory provisions were promulgated to prevent the obviation of coverage when the fact was immaterial, the type of facts an untutored purchaser would be surprised to find relevant to the insurance coverage.84 This led to a slew of states passing statutes that provide generally, although with variations in detail, that no false representation or warranty shall defeat a claim for coverage, “. . . unless such breach materially increases the risk of loss, damage or injury within the coverage of the contract.”85 The state specific range of the applications of these statutes to the provision of particular claims of false representation or breach of warranty are complex and often jurisdiction specific, with additional states attempting to put uncertainty to rest in particular lines—such as health and life insurance—with the advent of

“For example, if the insured warrants as a condition of coverage that a certain fact exists, coverage may turn on the actual existence of that fact; on the other hand, if the statement is a representation not a warranty, coverage may turn not only on the accuracy of the representation but in addition, whether the insured ‘had no present knowledge of the facts sought or failed to appreciate the significance of the information related to him. . .’ such that the insured could not appreciate or know that the fact represented was incorrect.” Keaton, fn 230. 82 “Instead of thinking about ‘assent’ to boilerplate clauses, we can recognize that so far as concerns the specific, there is no assent at all. What has in fact been assented to, specifically, are the few dickered terms, and the broad type of the transaction, and but one [thing] more. That one thing more is a blanket assent (not a specific assent) to any not unreasonable or indecent terms the seller may have on his form, which do not alter or eviscerate the reasonable meaning of the dickered terms. The fine print which has not been read has no business to cut under the meaning of those dickered terms which constitute the dominant and only real expression of agreement, but much of it commonly belongs in.” Parton, 730 S.W.2d at 637(quoting K. Llewellyn, The Common Law Tradition: Deciding Appeals § 370 (1960) (emphasis in original). 83 Insurance Law, Sec. 6.6 Regulation of Defenses Based on Warranty, Representation, or Concealment in Keeton, Widiss and Fischer (2d Edition); ALPS Prop. & Cas. Ins. Co. v. McLean & McLean, PLLP, 425 P.3d 651, 657, reh’g denied (Sept. 18, 2018). 84 Insurance Law, Sec. 6.6 Regulation of Defenses Based on Warranty, Representation, or Concealment in Keeton, Widiss and Fischer (2d Edition); ALPS Prop. & Cas. Ins. Co. v. McLean & McLean, PLLP, 425 P.3d 651, 657, reh’g denied (Sept. 18, 2018). 85 N.Y. Ins. Law § 3106 (2019). See also Insurance Law, Sec. 6.6 Regulation of Defenses Based on Warranty, Representation, or Concealment in Keeton, Widiss and Fischer (2d Edition); ALPS Prop. & Cas. Ins. Co. v. McLean & McLean, PLLP, 425 P.3d 651, 657, reh’g denied (Sept. 18, 2018). 81

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incontestability clauses.86 Incontestability, which prohibits a warranty or misrepresentation defense to be raised after a sufficient period of time to review the factual assertions of the insured have succeeded in aligning insured expectations with insurer obligations to a greater or lesser extent where such statutory provisions exist. For issues of transparency, the crux is not so much the effectiveness of the various statutory efforts to ameliorate disproportionate effects of the common law of insurance warranty and representation, rather they highlight the consistency of the information deficit endemic to the insurance contracting process by the majority of insureds, which various transparency efforts have yet to significantly solve. Although jurisdictions continue to promulgate different solutions to this knowledge inequality, it may be fair to state that in the United States much of insurance law and policy terms and effects remain opaque to the average insured.

7 Big Data, Predictive Analytics, and Insurance Transparency Transparency in insurance contracts also includes the ability of policyholders, insurers, insurance intermediaries, and regulators to understand, at least at a basic level, how policies are underwritten and how risk factors are determined, evaluated, and applied in setting insurance rates. The much-heralded revolution of “Big Data” and associated rapid developments in predictive analytics applied to human behavior allow financial institutions and third-party data vendors the ability to collect vast amounts of personalized information and create greater risk precision and new predictive models to apply to a variety of the insurance functions, including underwriting and rate setting.87 These advances will undoubtedly benefit the insurance marketplace, but they also bring regulatory challenges and further stretch the ability of a state-based regulatory system to perform traditional regulatory functions. For example, one goal of insurance is to evaluate risk and associated actions and behaviors, and for insurers to provide incentives for policyholders to reduce their risk profile through risk-based pricing.88 For this to work, policyholders need the ability to understand how their behavior associates with risk, and what steps they can take to reduce both their risks and premium.

86 See, e.g., N.Y. Ins. Law § 3203(a)(3) (2019) (“All life insurance policies, except as otherwise stated herein, delivered or issued for delivery in this state, shall contain in substance the following provisions, or provisions which the superintendent deems to be more favorable to policyholders . . . that the policy shall be incontestable after being in force during the life of the insured for a period of two years from its date of issue . . . .”). 87 See NAIC’s Center for Insurance Policy Research, https://www.naic.org/cipr_topics/topic_big_ data.htm. Accessed 29 April 2019; Helfand (2017); Swedloff (2014), p. 339; Kochenburger (2018), available at https://www.insurancebusinessmag.com/us/opinion/the-dark-side-of-big-data-115234. aspx. 88 See generally Ericson et al. (2003) (explaining the regulatory roles of insurance).

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Historically, many of the risk factors insurers used presumably had a commonsense connection between a policyholder’s premium and their own actions or status. For example, life insurers have long considered applicants’ medical history and tobacco use in underwriting life policies, just as auto insurers consider drivers’ previous loss experience, age, and driving infractions. These classifications provide logical correlations between premium and risk. In many circumstances, they afford actionable information to policyholders on how to lower their rates and reduce claims (e.g., use of certain safety devices in a home), which benefits policyholders, insurers, and society in general. The dramatic expansion of the amount and type of individualized data available, and the analytical tools to evaluate it, creates hundreds, if not thousands, of possible risk classifications for underwriting personal and commercial lines insurance products. Even assuming these classifications are actuarially accurate, they can greatly weaken this nexus between insurance rates and policyholders’ understanding of risk, with an increasing gulf between correlation and causation—at least as understood by individuals who are not data scientists. The growing complexity of insurance underwriting and rate setting is making an area that is already difficult to comprehend even more impenetrable. Utilizing credit scores as a proxy for claim risk is one example of the challenges new risk classifications bring.89 Personal lines insurers make significant use of credit scores in underwriting insurance and the large majority of states allow its use, with some limitations.90 While the correlation between the use of credit and individual risk is generally (although not universally) accepted, the reasons why are still debated, and its appropriateness as an insurance underwriting classification still challenged, as states frequently consider legislation further regulating insurers’ use of credit scoring. Individuals can take actions to improve their credit score and therefore perhaps lower their insurance premiums. However, these actions appear unrelated to traditional risk mitigation strategies such as better driving, household maintenance, and use of safety devices (e.g., home smoke detectors). Yet, utilizing credit history in insurance underwriting appears almost antiquated today, as social media, shopping habits, expanded criminal history information, and other personal information have created thousands of new risk correlations. These developments bring additional transparency issues beyond the complexity of the models and associating behavior to risk. Consumers—potential

89 Employing credit scores as a risk classification is more properly described as “old big data,” as they have been used since the mid-1990s in personal lines policies. Nevertheless, it provides a good example of the issues that arise when risk correlation appears separated from “causation,”—at least in the public’s view. See Center for Economic Justice, The Challenges and Opportunities of Big Data: Reforming State-Based Insurance Regulation in the 21st Century, presentation to the Federal Advisory Committee on Insurance, January 5, 2017. Available at https://www.treasury.gov/initia tives/fio/Pages/faci.aspx. 90 For example, an individual’s credit score cannot be the sole factor used in underwriting the policy, e.g., Connecticut General Statutes § 38a-686 (regulatory bulletin PC-69 March 17, 2011). A small number of states ban its use in specific lines altogether, such as Hawaii (Haw. Rev. Stat. Ann. § 431:10C-207 (West)) and California (auto—California Code of Regulations 2360.0(b)).

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policyholders—are generally unaware of the vast amount of personal data that can be used to underwrite their insurance policies, do not have clear rights to request or demand this information,91 and consequently have minimal opportunity to evaluate and correct potentially inaccurate data. For regulators, Big Data tests their ability to fulfil a number of traditional supervisory functions, including evaluating insurance rate and underwriting plans, their likely effect on access and affordability, and enforcing laws against discrimination. As discussed earlier, the majority of states regulate insurance rates in some manner, and all states have general anti-discrimination laws, as well as specific insurance statutes regulating risk classifications.92 State insurance regulators need adequate access to the risk models insurers are using and the expertise to evaluate them. However, underwriting models are increasingly complex and opaque, because of both the nature of the models themselves and that many are developed by third parties over whom state regulators have uncertain authority. Individuals with the necessary skill sets to develop and analyze these models are in great demand, and with state government salaries likely near the bottom of the pay scales, it is difficult for them to attract and retain the necessary personnel who can adequately develop and review these models. Predictive analytics, artificial intelligence, and other aspects of Big Data have the potential to bring major benefits to insurers and policyholders—a point emphasized daily by its sponsors—as well as increasing transparency and policyholder understanding of their insurance needs and purchases. However, Big Data is also rapidly increasing the traditional gap between the expertise and capabilities of the insurance industry and those who regulate them.93 Absent rebalancing of regulatory expertise and authority to address these developments, these dramatic changes in data science may instead turn the insurance market and the insurance contract more opaque and further diminish trust between an essential industry and its consumers. Acknowledgement The authors thank research assistant Kimberly Wilson; Yan Hon, Director of Insurance Law Research at the University of Connecticut School of Law School; and Brendan Maher, Director of the Insurance Law Center at the University of Connecticut School of Law.

The Federal Fair Credit Reporting Act, 15 U.S.C.A. § 1681, governs creditor and insurer use of specific types of data, including credit reports, and includes consumer notification and correction rights. However, this Act does not apply to much of the information now utilized, such as data gleaned from social media use. 92 The NAIC’s Property and Casualty Model Rate and Policy Form Law Guideline (Guideline 1776) has been adopted—and often modified—by most jurisdictions in the United States. 93 “[R]egulators must rely upon insurers to present accurate and complete information on indicated rates and the adjustments to arrive at selected rates. Regulators do not currently have the data necessary for an independent evaluation of most of the insurer modeling and calculations.” NAIC’s Casualty Actuarial and Statistical (C) Task Force Price Optimization White Paper, p. 10 (adopted April 6, 2016), available at https://naic.org/cmte_c_catf.htm. Accessed 16 May 2019; Krafcheck (2016), available at http://www.milliman.com/insight/2016/Predicting-the-unpredictable-Consider ations-for-rate-filing-support-when-implementing-predictive-models/. Accessed 15 May 2019. 91

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References Abraham K, Schwarcz D (2015) Insurance law and regulation: cases and materials 38, 6th edn. Foundation Press Abramovsky A, Kochenburger P (2016) Insurance online: regulation and consumer protection in a Cyber World. In: Marano P, Rokas I, Kochenburger P (eds) The “dematerialized” insurance. Springer Ben-Shahar O, Schneider C (2011) The failure of mandated disclosure. Univ Pa Law Rev 159:647, 671 Darrach H (1905) The standard fire insurance policy. T & J Johnson & Co. Ericson R, Doyle A, Barry (2003) Insurance as governance. University of Toronto Press, Toronto French C (2019) Dual regulation of insurance. Villanova Law Rev 64:25 Fung A, Weil D, Graham M, Fagotto F (December 2004) The political economy of transparency: what makes disclosure policies effective? Ash Institute for Democratic Governance and Innovation, Harvard University, OP -03-04, pp 13, 21. Available at https://www.hks.harvard.edu/ publications/political-economy-transparency-what-makes-disclosure-policies-effective Helfand R (September 2017) Big data and insurance: what lawyers need to know and understand. J Internet Law Insurance Law, Sec. 6.6 regulation of defenses based on warranty, representation, or concealment (2017) Keeton, Widiss and Fischer, 2nd edn. West Academic Publishing Kennedy L, McCoy P, Bernstein E (2012) The consumer financial protection bureau: financial regulation for the 21st century. Cornell Law Rev 97:1141, 1160–1167 Kochenburger P (November 1, 2018) The dark side of Big Data. Insurance Business America. Available at https://www.insurancebusinessmag.com/us/opinion/the-dark-side-of-big-data115234.aspx Krafcheck E (June 30, 2016) Predicting the unpredictable: considerations for rate filing support when implementing predictive models. Milliman. Available at http://www.milliman.com/ insight/2016/Predicting-the-unpredictable-Considerations-for-rate-filing-support-whenimplementing-predictive-models/ Marotta-Wurgler F (2014) Even more than you wanted to know about the failures of disclosure. New York University Law and Economics Working Papers. Paper 394 Ostrager B, Newman Y (2018) Handbook of insurance coverage disputes, 19th edn. Wolters Kluwer Randall S (1999) Insurance regulation in the United States: regulatory federalism and the national association of insurance commissioners. Florida State Univ Law Rev 26:625 Randall S (2007) Freedom of contract in insurance. Connecticut Insur Law J 14:107, 124–125 Schwarcz D (2017) Coverage information in insurance law. Minnesota Law Rev 101:1457, 1458 Schwarcz D, Schwarcz S (2014) Regulating systemic risk in insurance. Univ Chicago Law Rev 81:1569, 1578–1580 Stempel J, Knutsen E (2018) Stempel and Knutsen on insurance coverage, 4th edn. Wolters Kluwer Swedloff R (2014) Risk classification’s Big Data (R) evolution. Connecticut Insur Law J 21:339 Thomas JE (2010) Insurance perspectives on federal financial regulatory reform: addressing misunderstandings and providing a view from a different paradigm. Villanova Law Rev 55:773, 781–786 Windt AD (2019) Insurance claims and disputes. Thompson Reuters

Comparative Analysis of Transparency in the Insurance Contract Law of the Common Law Jurisdictions Kyriaki Noussia

1 Introduction The notion of transparency in insurance contract law finds an elaboration within the standard terms contained in insurance contracts. Such terms need to be drafted in a “plain, intelligible language” and this is better achieved when transparency is also preserved as in this way the rights and obligations of the assured are better safe guarded. Transparency in insurance contracts is classified according to the group of policyholders to which it refers.1

2 Regulatory Framework: Transparency as a Notion in Insurance Contract law in the Common Law Jurisdictions In England, the Unfair Terms in Consumer Contracts Directive 93/13/EEC as transposed into English law via the Unfair Terms in Consumer Contracts Regulations 1994 as those have been amended. Transparency in consumer contracts is promoted by the fact that consumers themselves are able to challenge in court terms they consider unfair, with an 1

In England, as per the narrow approach, the transparency rule was only applied to consumer policyholders in accordance with Directive 93/13/EEC, however following the enactment of the Insurance Act 2015, the transparency rule has been further elaborated and its application is extended to all policyholders and in various cases and circumstances. K. Noussia (*) Law School, University of Exeter, Exeter, UK e-mail: [email protected] © Springer Nature Switzerland AG 2019 P. Marano, K. Noussia (eds.), Transparency in Insurance Contract Law, AIDA Europe Research Series on Insurance Law and Regulation 2, https://doi.org/10.1007/978-3-030-31198-8_29

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exemption concerning fairness as far as the adequacy of the price and goods or services provided in exchange are concerned. However, for the exemption to apply the term has to be proven as transparent, i.e., it needs have been drafted in plain, intelligible language. The wording of the term needs to be comprehensible to consumers and explain its relevance and effect to the rights and obligations of the parties under the contract. In Australia, whilst transparency is not directly used in the legislation governing insurance, the term appears in other Australian legislation dealing with unfair terms in consumer and small business contracts. In Singapore, issues related to transparency, and more specifically to an insured’s duty to disclose, have largely been regulated by the Marine Insurance Act (MIA), which is a carbon copy of the UK Marine Insurance Act of 1906. South African common law provides a good legal base to promote transparency and the regulation of disclosure in insurance contracts. Transparency plays a vital role in insurance because the common law duty not to misrepresent information remains its primary duty and foundation. In the USA and in the context of the insurance contract, “transparency” is defined as including both access to essential information about the contract, particularly before contracting, as well as actual understanding or certainty of what coverage is provided. Because a mix of government regulation and common law decisions governs USA insurance contracts, and because there are not the sharp distinctions between public and private law as in many other jurisdictions (particularly in civil law countries), “transparency” in the context of insurance law does not have a fixed meaning. More specifically, in insurance, where laws regulating insurance contracts are typically a mix of specific government interaction—statutes, regulations, and regulatory notices and bulletins—and the common (“judge made”) law, the very large majority of states require insurers to demonstrate they have been “prejudiced” before they can deny policyholder claims based on late notice. States differ significantly as to the balance of formal regulation with common law, although generally state legislation can override common law in this area, absent a constitutional issue under federal or state law. That so many areas of insurance law affecting the insurance contract are still left to the courts is in part historical but also a demonstration of the common law’s current vitality. Hence, overall it could be stated that insurance transparency is defined to include both the availability/visibility of the contract (policy) to insurance applicants and policyholders, and the sources of interpretations as to what the terms mean. Interpretation of an insurance contract is an important element in contract transparency. In litigation, contract interpretation is considered an issue of law and judges, however, contract law generally, and insurance contracts specifically, are typically left to the states, which means there are 56 common law jurisdictions with authority to rule on insurance policy terms, and no requirement that they harmonize interpretations when examining identical contract language.

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3 The Duties of Information from the Insurer’s and from the Assured’s Perspective in the Common Law Jurisdictions Transparency denotes and identifies the need to establish requirements in a way that the insurer has to comply with as well as the assured. In England, the Consumer Insurance (Disclosure and Representations) Act 2012 (CIDRA) has substantially contributed to the concept of transparency in insurance law. It has altered the obligation of the consumer in that it now imposes on the consumer a duty to take reasonable care not to make a misrepresentation as per an objective standard, i.e., that of the reasonable consumer taking into account all relevant circumstances. A number of important features of the Marine Insurance Act 1906 attracted the attention of the Law Commissions.2 Those features relate also to transparency. Whilst the eminence of transparency was maintained, the Insurance Act 2015 introduced a more balanced test and approach on the disclosure requirement for the assured, which is now termed as “fair representation” requirement. The test envisaged in the Marine Insurance Act 1906 was found to be obsolete as it required the assured to predict what a prudent insurer might find of interest (i.e., the prudent insurer test) and provided the ground for proof of materiality and inducement that sabotaged transparency whilst allowing the insurer to justify the avoidance of the entire policy. Hence, in relation to the duty of disclosure, the Law Commissions retained the obligation to volunteer relevant information for all insureds who are not consumers. However, the Insurance Act 2015 also includes new provisions relevant to the duty of disclosure. An insured does not have to disclose information if the insurer knows it, ought to know it, or is presumed to know it. The insurer knows what is actually known to its underwriter or their agent or what is presumed to be their knowledge. In addition, under the Insurance Act 2015, the parties should be free to contract out of the provisions of the Act, as per Section 16(2), subject to transparency safeguards as set out in Section 17. It follows that under English law, the legislator has sought to find balances between the insurer and the assured, and promote transparency. In Australia, one of the most significant provisions of the Insurance Contracts Act (ICA) is Section 13, which imposes duties of utmost good faith on each party to an insurance contract governed by the ICA. Furthermore, Section 14 of the ICA prevents parties to a contract of insurance from relying on a provision of the contract except in case that utmost good faith has been observed. The ICA includes a number of provisions requiring the insurer to notify the insured of both their obligations and of the scope of cover under policies before accepting an application for insurance. Firstly, before entering into a contract of insurance Section 22 requires that the insurer must clearly inform the insured in

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writing of the general nature and effect of the duty of disclosure. Secondly, for contracts of insurance, which are not prescribed as eligible contracts of insurance, Section 37 requires insurers to clearly notify insureds of unusual terms. Thirdly, for eligible contracts of insurance, Section 35 requires insurers to clearly inform the insured in writing of any derogation to the standard cover set out in the IC Regulations. However, in more recent years there have been changes to the insurer’s obligations to inform consumers about the coverage of their policies before insurance contracts are entered into. In relation to the obligations of an insured, once a policy comes into operation, the adoption of a causal connection test between an insured’s breach of a policy requirement and the loss claimed was recommended, and if satisfied it would allow insurers to refuse to pay claims. In cases where the causal connection test could not be satisfied, the adoption of a proportionality test was recommended enabling insurers to reduce their liability for a loss, by reference to the extent to the prejudice resulting from an insured’s breach of a policy requirement. The fourth quadrant of utmost good faith concerns the insurer’s post-contractual conduct. In recent years, there have been an increasing number of cases in which aggrieved clients have challenged the decision-making processes used by insurers to decline claims as transparency was believed to have been hindered in cases where the insurers were not open and frank in their dealings with the insureds, as per the ruling in CGU Insurance Ltd v. AMP Financial Planning Pty Ltd.3 Transparency is important for the Australian legislator. The ICA Section 13 imposes duties of utmost good faith on each party to an insurance contract governed by the ICA, whereas Section 14 of the ICA prevents parties to a contract of insurance from relying on a provision of the contract except in case that utmost good faith has been observed. Transparency has to be observed at the pre- and post-contractual stages, as well during the performance of the contract. In Singapore, under the Marine Insurance Act (MIA), Sections 18-19 of the MIA denote the duties of the assured and his agent in relation to disclosure, and demonstrate a high level of pertinence and adherence to transparency. The test of materiality is that of the prudent insurer. The assured is required to disclose all material information that may affect a prudential insurer to decide whether to issue a policy or to determine premiums before the policy is issued. If there is a breach of the duty, the insurer would avoid the policy if he can prove that it is induced by the non-disclosure to issue the policy, following Pan Atlantic Insurance Co Ltd v. Pine Top Insurance Co Ltd.4 Singapore adopts the common law position that an insurer owes no general duty in contract, tort law, or equity to disclose product information other than to forbear from making misrepresentations. On the question whether an insurer’s duty of utmost good faith requires an insurer to disclose product information or policy terms to a customer, there have been signs that the Singapore court may apply the

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(2007) 235 CLR 1; 14 ANZ Ins Cas 61-739; [2007] HCA 36). Pan Atlantic Insurance Co Ltd v. Pine Top Insurance Co Ltd [1995] 1 AC 501 (HL).

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duty of utmost good faith in a broader manner, as elaborated in Tay Eng Chuan v. Ace Insurance Ltd5 and in NTUC Co-operative Insurance Commonwealth Enterprises Ltd v. Chiang Soong Chee.6 In South Africa, transparency plays a vital role in insurance because the common law duty not to misrepresent information remains its primary duty and foundation. In the interests of full transparency during the entire lifespan and scope of an insurance relationship, disclosures on intermediary remuneration should be considered important in view also of the greater universal consumer protection drive and a need for compliance in line with international standards. In the USA, the fundamental principles of contract include a “meeting of minds,” i.e., that the parties have freely and knowingly agreed to the essential terms of a bargain—and that their written contract defines the scope of that agreement, and hence that “insurance contract transparency” reflects the ability of insurance applicants to review the insurance contract before agreeing to it. Yet, historically in the United States, insurance applicants have had minimal access to the entirety of the insurance contract that would subsequently bind them and this is particularly true in property-casualty lines, especially in personal auto and homeowners insurance, where the full insurance policy may not be delivered for weeks or sometimes months after the policy incepts. Aside from some life insurance products, states, in principle, do not require that before agreeing to the policy terms, insurance consumers must be either provided a copy of the policy form or at least asked whether they would like to review it. The NAIC’s model legislative instrument, the Unfair Trade Practices Act, which has been adopted by virtually every jurisdiction in the USA, includes specific prohibitions on making misleading, inaccurate, or false statements about insurance policy terms, but does not require that insurers or insurance producers make the actual policy available to insurance consumers before purchase. Nor, until very recently, would consumers have the ability to locate the correct policy forms from other sources, either online or in print. Certainly, even if the insurance policy had been available, it is likely that very few insurance consumers would ask to see the policy and actually read it. Moreover, if they did, they could not realistically have negotiated any of the contractual terms, other than the type of insurance purchased, available endorsements, and limits, as is common in all forms of adhesion contracts. What is different in insurance, in the USA, is that unlike in other transactions utilizing form/adhesion contracts where there is usually at least the ability to review contractual terms before agreeing to a transaction—even if few consumers actually do so—in insurance, even the pretence that both parties have read and consented to the policy terms is abandoned, as insurance consumers would have no ready ability to read their contract in advance should they even wish to. Such a trend is slowly changing, as web technology makes it relatively easy for companies to post their contracts form online. Life insurers provide more contract transparency, at least in

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Tay Eng Chuan v. Ace Insurance Ltd [2008] SGCA 26, [2008] 4 SLR(R) 95. NTUC Co-operative Insurance Commonwealth Enterprises Ltd v. Chiang Soong Chee [30]: [2007] SGHC 222.

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the sense that some types of life insurance policies are available for review before purchase. These include annuities and life insurance policies that have an investment component (as opposed to term life), which may be regulated as securities under federal law. This classification triggers various disclosure requirements that must be provided to potential investors in advance, as well as a certain amount of days as “cooling off” period allowing purchasers to rescind their policy without penalty. Concerning readability and the policy form requirements, perhaps equally important as access to insurance policy forms is the ability to understand the policy terms and conditions, and states often have specific requirements on how insurance policies should be written and organized to promote readability and ease of interpretation from the consumer assured. Such readability standards require policy language to be written at a specific grade level, minimum type or print size, and certain policy form organization. Nowadays, the assured can also resort to the insurers website for detailed consumer information on how to shop for insurance, including definitions of important terms, insurance pricing, general areas of coverage (and what is not covered), and links to additional information. In addition, from the assured perspective, over the last decade there have been significant advancements in understanding how to improve the effectiveness of consumer disclosures related to financial products, asking for a more structured and deliberative process for designing and evaluating consumer disclosure documents and contracts. Several state regulatory agencies provide smart disclosure tools for consumers in their state. In addition, as far as the regulation of the substance of the contract is concerned, in an effort to yet again promote transparency, all USA regulatory jurisdictions require certain coverages, sometimes specifying the contractual language that must be used in a mandatory way. Transparency in insurance contracts also includes the ability of policyholders, insurers, insurance intermediaries, and regulators to understand, at least at a basic level, how policies are underwritten and how risk factors are determined, evaluated, and applied in setting insurance rates. “Big Data” collection allows financial institutions and third-party data vendors the ability to collect vast amounts of personalized information, which will likely enhance the marketplace for consumers and insurers. Because one of the basic goals of insurance is to evaluate risk and associated actions and behaviors, and for insurers to provide incentives for policyholders to reduce their risk profile through risk-based pricing, policyholders must have the ability to understand how their behavior correlates with risk, and what steps they can take to reduce both their risks and premium. Of the most difficult regulatory issues related to insurance transparency is may be balancing the understanding that very few consumers will read their insurance policies with the necessity of still recognizing the legitimacy and enforceability of consumer form contracts. If a central goal of contract transparency is creating a mutually shared and accurate understanding between insurers and the policyholders they contract with (mutual consent), then these tools are logical but of questionable value. Insurance regulation in the United States does offer one partial remedy, which is mandating specific terms and conditions in policies while prohibiting others. Standardization of important policy terms and conditions will not make more consumers read their insurance policies, but through the drafting process (whether

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by statute or regulation) and subsequent use and enforcement, it can level at least some of the tilt in the disparate bargaining power between insurer and policyholder and create a common—and more accurate—understanding of the basic coverages and exclusions.7

4 Conclusion In England, transparency in insurance law is focal, and this is mirrored in the new Insurance Act 2015, which promotes and preserves the notion and principle of transparency. The reform of insurance law in England has advanced transparency in insurance law, most notably via the provisions on contracting out. In Australia, whilst transparency is not directly used in the insurance legislation it is present in other Australian legislation dealing with unfair terms in consumer and small business contracts. Transparency is enunciated via the existence of pre-contractual disclosure duties on the assured, as well as via analogous obligations imposed on the insurer. Notably, as per the ICA, Section 13 imposes duties of utmost good faith on each of the parties in an insurance contract, which is being governed by the ICA; whereas Section 14 of the ICA prevents parties to a contract of insurance from relying on a provision of the contract except in case that utmost good faith has been observed. Transparency also has to be observed at the pre- and post-contractual stages, as well during the performance of the contract. All of the above requirements set by law promote both fairness and transparency. It is submitted that the introduction of ‘standard cover’ for consumer forms of insurance, enhances and promotes transparency, as it addresses the difficulties previously encountered by assureds to understand and legally interpret the insurance policy. However, in more recent years there have been changes to the insurer’s obligations to inform consumers about the coverage of their policies before insurance contracts are entered into, by specifically defining it. Post the conclusion of the contract, transparency is imposed on the assured in that certain acts or omissions by insureds, e.g., failure to notify changes to the risks covered by a policy, can mean a contract may not be operating on a fully-informed basis. However, the jurisprudence has taken disperse views in adjudicating so far in relation to the above. Overall, the legislation and the jurisprudence aim in promoting both fairness and transparency in the contractual relationship between insurers and assureds and enhance transparency. In Singapore, although there is a tendency for financial advisers to enhance the protection of financial consumers, and this in effect promotes transparency, it is

7 Professor Daniel Schwarcz has written persuasively on this issue. Id. See also Fung et al. (2004), pp. 13, 21.

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submitted that there is still room for improvement. Consumer concerns around misspelling, suggest the need for the regulators to impose broader product disclosure rules to all kinds of insurance products or services and the provision of documents to the assured. The courts have lately taken a more modern and commercial approach promoting a wider interpretation of the context of the insurance contract. In particular, on the question whether an insurer’s duty of utmost good faith requires an insurer to disclose product information or policy terms to a customer, there have been signs that the Singapore court may apply the duty of utmost good faith in a broader manner, as elaborated in Tay Eng Chuan v. Ace Insurance Ltd8 and in NTUC Co-Operative Insurance Commonwealth Enterprises Ltd v. Chiang Soong Chee.9 In South Africa, the law provides a system for disclosure obligation that enhances transparency in insurance law. It is suggested that via the enactment of new legislation, regulations, and codes of conduct, the insurer’s duty of disclosure has steadily evolved into a more delineated duty and can continue to do so. There is a need to enhance transparency via the obligation to disclose core and onerous terms, in view also of the greater universal consumer protection drive, and for the sake of compliance in line with international standards and the proposed new global insurance law dispensation. Not least, it is notable that South African common law recognizes the need for greater transparency and disclosures on intermediary remuneration, as well as a convergence towards a maxim of non-hidden contractual terms. In the USA, although “transparency” in the context of insurance law does not have a fixed meaning, however, transparency, in the context of the insurance contract, is perceived as including both access to essential information about the contract, particularly before contracting, as well as actual understanding or certainty of what coverage is provided; and, to promote transparency, it is required that the very large majority of states require insurers to demonstrate they have been “prejudiced”. Interpretation of an insurance contract is an important element in contract transparency, and it is submitted that to a certain extent, that is achieved by identical contract language as well as—in litigation—through contract interpretation by the law and the judges. In addition, the fundamental principles of contract include a “meeting of minds” between insurer and assured, and a safeguard of transparency and its guarantee through the fact that the applicants have been able to review the insurance contract before agreeing to it. In the USA, in relation to standard form/adhesion contracts (such as the insurance contracts) it is rare that both parties will have read and will have consented to the policy terms—as insurance consumers would have no ready ability to read their contract in advance should they even wish to. However, such a trend is slowly changing, as web technology makes it relatively easy for companies to post their contracts form online. Life insurance

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Tay Eng Chuan v. Ace Insurance Ltd [2008] SGCA 26, [2008] 4 SLR(R) 95. NTUC Co-operative Insurance Commonwealth Enterprises Ltd v. Chiang Soong Chee [30]: [2007] SGHC 222.

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policies with an investment component are available for review before purchase, and law requires various disclosure requirements that must be provided to potential investors in advance, as well as a certain amount of days as “cooling off” period, allowing purchasers to rescind their policy without penalty. Hence, transparency is further promoted and enhanced, as well as via the readability and the policy form standards, as these are set by law, which requires certain policy language and certain policy form, all of which promote transparency. Transparency is important for the common law legislator. In that sense, it is apparent and plays a distinctive role in all common law jurisdictions.

References Fung A, Weil D, Graham M, Fagotto E (2004) The political economy of transparency: what makes disclosure policies effective? Ash Institute for Democratic Governance and Innovation, Harvard University, OP -03-04 (December 2004), pp 13, 21. Available at https://www.hks.harvard.edu/ publications/political-economy-transparency-what-makes-disclosure-policies-effective Merkin R, Gurses O (2015) The Insurance Act 2015: rebalancing the interests of insurer and assured. Mod Law Rev 78(6):1004–1027