Transnational e-insurance, conflict of laws and IPG
Article by Katarzyna Malinowska
The text below is not just about insurance, although it is so suggested by the title. This is also meant to demonstrate how useful our IPG network can be in our daily professional practice, apart from just for making contacts and having a good time at conferences. Time and again I have experienced its usefulness, whenever I need support in my legal research, both for clients’ or for academic purposes, and having asked for help, I’ve been never ignored by IPG members. The same happened recently, while analysing foreign laws on specific aspects of insurance contracts for a book, I got truly expert help from my IPG friends with respect to their respective national legislation. As you will see from the considerations below, it’s almost impossible nowadays to run a legal practice without support from colleagues being familiar with various systems of law. This inspired me to write a few words on cross-border insurance for our IPG newsletter and take this opportunity to say: “thank you”. For sure I will ask you for more.
Although the issues mentioned below will be considered from a perspective of a European lawyer, they go far beyond our safe European legal reality, where different kinds of regulations are present in every aspect of our life, protecting us against ourselves, sometimes also against our will. The European protective umbrella does not however work worldwide, in particular, when we sit at our PC and start living our virtual life, taking more and more of the reality we experience. This concerns both our own private lives, when we act as consumers, and the situations of doing business. Although we may be unaware of that, sitting in our European armchair and buying insurance for our holiday, we may suddenly find ourselves in Chinese legal reality, where the protective arms of the European Commission have no power. Such a scenario becomes even more likely if we act on behalf of our corporate client. And this may seriously affect ours or our clients’ “non-virtual” reality.
What is the specific nature of e-insurance (called also on-line insurance)? Is it something very different from the traditional insurance we used to conclude via an insurance agent?
The qualification of insurance as a kind of financial service by the DMD Directive (2002/65/EC) does not make any distinction between traditional insurance and on-line insurance. The fact that it is a kind of a service determines the way it is distributed. Although we usually talk about selling or buying insurance (policy), it’s obvious that from the legal point of view, that there is no product with a common meaning, even if the insurance policy takes a form of a document. Rendering insurance service means in fact the promise made by an insurer of covering the losses resulting from the risks included in the policy. Thus Insurance products in legal sense can be rather described as terms and conditions of such insurance coverage, i.e. the wording of the insurance contract (Die Versicherung als Rechtprodukt).
What is more, there is no definition of e-insurance or on-line insurance at all. This means that it is not treated separately from traditional insurance. Such a definition can only be derived from the European instruments concerning “information society”, for example E-commerce directive (2000/31/EC), DMD Directive, and from European Commission reports. They refer to “on-line services” as services provided at a distance, electronically, at the request of the person who is the recipient of the services, in return for payment. E-commerce, having broad meaning, encompasses sale of goods and services, but also social networks, distance learning, etc. The basic criterion of e-commerce is the way of performing the activity, i.e. at distance, electronically, via internet. Accordingly, e-insurance may be defined as insurance services rendered on-line, at distance, electronically. However in the light of the above mentioned nature of insurance services, it’s clear that e-insurance shall only mean concluding insurance contracts on-line and not the performance thereof. If we accept such definition of e-insurance, we have to admit that most of the insurance transactions worldwide are concluded on-line. I cannot imagine the whole process of concluding the insurance contract without the use of internet and this is related to a greater degree to the business relations, including global insurance programs, than it is to consumer contracts.
What then is the influence of the internet on insurance in EU? The most expected consequence is the increase of the cross-border transactions in insurance, which is correlated with idea of the internal market and the contribution to the growth in GDP. Therefore, if by nature, insurance is a transnational service; its distribution by internet makes this feature even more dominant. However, on the other hand, it is a source of some additional risks, being faced now by the European legislature, related to the highly probable conflict of laws that may arise in cross-border transactions, lack of private law integration in EU and worldwide as well as needs of consumers being more and more dominant in the EU policy.
E-insurance and conflict of laws
The main consequence of contracting on-line is that the on-line contract takes place in the internet, at least during the stage of its conclusion. That does not eliminate the need of legal assessment of the parties’ rights and obligations resulting thereof. The difficulty related to the on-line contract results from the fact that most of the conflict of laws rules are based on territorial factors and on-line relations are ‘extra-territorial’. They are located solely in an electronic network liaising between the electronic devices of its users. This network has no borders or simple tangible relations with the countries where the users are located. The electronic impulse, being the medium carrying the statement of will - the only required legal source of contracts concluded solo consensus (such as insurance), can run through the whole world until it reaches the addressee. Therefore, it could be said that the immanent feature of on-line contracts is their international character, but the medium being international seems not to be sufficient to state that the contract itself is international. Thus, the decisive relevance shall belong to the legal environment of the parties (domicile, seat, etc.) or the place where legal or factual effect of the on-line contract arises and these factors should be used to assess whether there is a need to apply conflict of laws rules.
What about insurance in these circumstances? Insurance is one of the first branches of industry that has been subject to legal integration in the EU. That process began in the 1970’s of the 20th century, parallel to that of banking services. The European Union recognized then, that insurance services easily can cross the borders of member states, if only basic freedoms are applied, first freedom of capital movement, then freedom to provide services. Obviously the cross border nature of insurance was not invented by EU and is a result of a long history of insurance, beginning 4000 years B.C., when it covered caravans in the Middle East or sea perils, when ships covered by insurance were crossing several sea borders, transporting cargos or citizens of different countries. In consequence, one can note that the insurance, even taking into account the particularities of national legal systems of EU member states, is governed by more or less the same principles. From the time when the insurance industry was subject to first integration attempts (I generation of insurance directives), EU started also to face the beginnings of consumer protection movement, which soon, starting from supplementary status, came to dominate the politics and strategy of legal integration in EU. This movement had also a decisive power in taking the direction of contracts’ law integration.
The same happened to insurance in view of the fact that, what is really “sold” is the terms and conditions of the risk coverage, included in an insurance contract. And these, even if similar, did not ensure the same level of protection to the policyholders across Europe. In consequence, one of two solutions had to be adopted: (1) regulation of the conflict of laws issues in a way protecting the insured, or (2) unification of the provisions of the insurance contract on the EU level. While the latter proved to be impossible at that stage of European integration (a draft of a relevant directive drafted in 1979 was finally withdrawn in 1993) due to lack of political will to interfere into the national systems of insurance private law, the first one resolved the problem in quite a superfluous way. As a result, the legal aspects of conflict of laws in insurance do not ease the daily life of both insurers, policyholders and beneficiaries, but give much work to lawyers. The supplementary actions, like harmonization of particular consumer rights cannot substitute the first solution, whereas such harmonization usually has a minimal character, leading sometimes to even more discrepancies in internal legal systems of EU member states. This also results in the idea of unifying insurance contract law not being totally abandoned and becoming increasingly vivid. Works on Restatement of Principles of European Insurance Contract Law are ongoing, performed by academic circles and will probably soon be presented as an official EU document for optional application, being in line with general tendency on unifying European private law by means of soft instruments.
Where are we now? Analyzing, which law applies to a particular insurance contract concluded cross-border (with an international element), we can feel sometimes as trying to understand a double personality of a schizophrenic, with a difference that there might be 27 personalities, adding some sub-personalities and external personalities of legal systems outside Europe. Even if you think you catch it, you can easily lose that feeling in an instant. Suffice to say that the same contract can be subject to different laws, depending on who is the policyholder, who is the insured (not necessarily the same), what is the size of the insured’s enterprise (certain risks are ‘large’ or not depending on the size of the insured), where the insured has its usual seat, what risks are covered and where they are located. Why is it still so problematic, as EU legislators put so much effort to synchronize the choice of law rules, adopting the Regulation No 593/2008 on the law applicable to contractual obligations (“Rome I”) applying directly in Member States and relating also to insurance contracts? The Purpose of Rome I was to replace variety of sources regulating the conflict of laws and unify it in one document. In insurance those rules were mainly included in the directives of 2nd and 3rd generation. We must be aware however, that unified source of law regulating choice of law in insurance, has not created by any means any unified legal system for insurance. Quite the opposite.
The current legal regime for cross-border insurance seems to be quite simple, and is based on a single provision of Rome I (Article 7). However that impression proves to be false when we come to details. First of all, Article 7 of Rome I do not apply to all insurance contracts, but only to ‘large risks’ insurance and such ‘mass risks’ insurance which are located in the EU. In consequence, the other types of insurance will be governed, as concerns the choice of law, by general provisions of Rome I, i.e. mainly Article 3 (general rule on freedom of choice of law), Article 4 (determination of the law applicable in case of lack of choice) and Article 6 (limits of freedom of choice of law in consumer contracts). The mere regulation of Article 7 creates three regimes of choice of law, separate for ‘large risks’, ‘mass risks’ and obligatory insurance. As can be expected, the majority of freedom is given to parties to ‘large risks’ insurance contracts, it is more limited in mass risks insurance, and no freedom exists in case of obligatory insurance. When we want to determine the law applicable to insurance of ‘mass risks’, which are situated outside EU, we should analyse Articles 3 and 4 and possibly Article 6 of Rome I, yet it should be remembered that distinction between ‘large’ and ‘mass’ risks insurance does not correlate with the distinction between consumer and non-consumer insurance, i.e. insurance concluded by a professional in relation to his/her business activity will not be a consumer insurance, although it might be not a ‘large risk’ insurance. As regards the obligatory insurance, there are two possibilities (sub-personalities), as the Regulation enabled the Member States to regulate this issue internally in a more or less strict way. Basically, the more freedom of choice is awarded by Rome I, the more probable it is that the law applicable will be that of insurer seat or its branch in other states, EU member or not. In turn, in ‘mass risk’ insurance it is a common and burdensome practice that insurers have to prepare insurance terms compliant with a particular legal system of EU member, where they want to offer insurance (27 kinds of insurance terms and conditions for the same risk?).
We should add to that the specifics of third party liability insurance and possibility of claiming compensation directly from the insurer (action directa), where liability itself can be governed by a legal system other than the system governing insurance contract. In fact, it happens quite often to be necessary to analyse the insurance coverage on the basis of several legal systems, like in case of a liability of Swiss insurer for defects of food products made in Poland under a label of a French producer, designated to Norwegian market and transported by a German company, where the defect was a result of defective wrapping and faulty conditions of transport. Or a case where a ship registered in Panama, but owned by US owner, holding insurance policy issued by Lloyd’s (UK) for cargo, Casco and liability risks, lost a cargo of a Dutch company in a Chinese sea.
What should we say in a case where the insurance contract covering one of these claims was concluded in co-insurance of insurers with seats in different countries and constituted a global insurance program for a holding company with subsidiaries and assets located worldwide, included various kinds of risks (which caused treating it as separate contracts for each type of risk), where only part of these risks might be treated as ‘large risks’ or were ‘large’ only to some of the subsidiaries. Additionally some of the countries make the risks obligatory insurable (France is a leader in that). Another difference in stating which law is applicable to the claim and consequently if it’s justified or not could be in situation when there are more policyholders to one contracts, each of subsidiaries joining the insurance program voluntarily and paying their own premiums.
Depending on the above and many other small details, various claims made under the same insurance contract may be governed by different legal systems, resulting in completely contradictory results. One insurance policy gains a multiple personality’.
Is there really a reason to make it so complicated or is it ‘much ado about nothing’? Whatever. This is our daily reality of lawyers and that is why I like and need IPG.