by Robert Koch
1. Subject and purpose
Compulsory insurance means insurance required by the law (statute, ordinance, EU regulation). In contrast to (public) social insurance schemes that are also required by law or administered by the state, (private) compulsory insurance is not based on a statutory but on a contractual relationship between the policyholder and the insurer, and the general principles of contract law apply to the contract of compulsory insurance with respect to its formation. The antonym to compulsory insurance is voluntary insurance. All insurable risks can be the subject of compulsory insurance (eg life, disability, health, accident, property damage, natural/man-made catastrophes).
If the policyholder is only contractually required to take out insurance, eg if the supplier agreed with the manufacturer to provide product liability coverage, this does not count as compulsory insurance. There is also no compulsory insurance where the policyholder entered into the insurance contract on the demand of authorities or ethical rules of professional bodies or due to collective agreements. If the law requires some kind of financial security for the debt of an undertaking and it is left to the private decision of that undertaking whether it will provide the security by an insurance or by other means such as a collateral (ie optional compulsory insurance schemes), it depends on the applicable law whether the insurance contract then concluded is subject to the rules governing compulsory insurance.
The purpose of compulsory insurance differs to some extent depending on the risk insured. Compulsory property insurance serves the interest of the insured as well as the interest of adversely affected persons in the case of an insured event. This is illustrated by the compulsory fire insurance on buildings, which dates back to the 16th century and can still be found in some European countries (eg Portugal, Switzerland and England). This kind of insurance has the purpose of protecting the insured owner of the premises as well as the mortgagee since it assures the latter that, even if the building is damaged or destroyed, he can still recover its value from the insurer (see book IX – Art 5:201(3) Draft Common Frame of Reference (DCFR)). Compulsory first party property insurance therefore serves as further collateral for the lender and avoids a restriction of loans that, in turn, supports the banking system, the micro-economy and the macro-economy as it improves the environment for credit supply.
The objective of compulsory liability insurance is primarily the protection of the injured party. It constitutes a guarantee for the fulfilment of the latter’s claim for compensation against the insured for bodily injury, property damage or financial loss. With regard to bodily injury, compulsory liability insurance helps the public social insurance system, which ultimately would have to shoulder the costs, eg for medical treatment of the injured party. The same effect is achieved by compulsory personal insurance that is focused on the protection of the insured party against the consequences of, for example, sickness, disability and accidents. Where compulsory insurance extends the coverage to third parties (insurance of third party interests), it also serves their protection.
The insurer benefits from compulsory insurance because of the so-called ‘law of large numbers’. According to that rule the larger the number of units exposed to loss, the greater the probability that actual loss will equal expected loss. Moreover, since all insured risks, both good and bad, are covered, the insurer’s risk of loss arising out of adverse risk selection is minimized and ultimately leads to lower premiums for the benefit of the insured. Compulsory insurance, on the other hand, limits the insured party’s freedom of contract and, if the insurer is equally obligated to contract by law, also of the insurer. Where insurance is a precondition for providing services (eg for attorneys or notaries), to run a business or to operate, eg power plants, the free movement of services as well as property rights of the persons concerned might be affected. According to the OECD Insurance Guidelines for Economies in Transition, the introduction of compulsory insurance is only justified (1) in respect of certain forms of social protection, or (2) in such areas where the risks covered are particularly serious, or (3) where premium payments should be divided on an equitable basis among the group of people under consideration. Where coverage is not available on the market because the (re-) insurer considers the risks as not insurable (eg catastrophic risks, gene technology-risks, nanotechnology-risks) or where coverage is not affordable, no private compulsory insurance, but only public social insurance schemes can be introduced.
2. Legal developments
The number of compulsory insurance schemes varies significantly between European states. According to answers to the questionnaire of the EU Commission Insurance Committee on Motor Insurance and other Compulsory Insurance, there are more than 100 types of compulsory insurance in France, Italy and Portugal. In Belgium, there are about 70 compulsory insurances, and in Germany more than 30 federal statutes require compulsory insurance. In Ireland, there is no compulsory insurance other than third party automobile liability insurance, and in the United Kingdom there are three other compulsory insurances (employers’ liability, nuclear and riding). The significant spread in number suggests different approaches to introducing compulsory insurance, and it seems that legal and economic traditions as well as socio-political considerations are the major factors behind these differences.
In many European legal systems, compulsory insurance law provides for a direct claim against the insurer (eg Greece, Spain, Belgium, Luxembourg, France). In some states, the right to a direct claim is limited to such instances as required by EU or international law. In Germany, for example, where EU or international law does not provide a direct action, the injured party has such right only if the insured has been declared insolvent or filed for insolvency or if the whereabouts of the insured are not known. In France, there is a compulsory coverage extension of voluntarily subscribed property insurance contracts. For example, all individuals who voluntarily purchase first party property insurance must pay an extra premium for a mandatory coverage of natural disasters.
It is only in exceptional cases that the insurer is obligated to conclude a contract in the sense that he cannot reject the applicant’s offer for compulsory insurance (Kontrahierungszwang). It is important to note, however, that the obligation to accept an application is limited in that the insurer must provide insurance coverage on such terms as generally available to all similarly situated applicants subject to such relevant factors as, for instance, health in regard of personal insurance. The insurers thus have the right to modify terms and premiums depending on the individual seeking coverage, and they are not forced to agree on such uncommercial terms committing them to the risk of future losses. An obligation to contract, in that sense, is widespread in the area of third party motor vehicle liability insurance. In Denmark, there is such an obligation for dog liability insurers if the applicant has accepted the insurer’s standard contract terms. In other EU countries, the fire insurer is obligated to contract insurance. German law provides an obligation to contract for health insurers und nursing care insurers. Under the new Swedish Insurance Contracts Act 2005, any person—and not limited to cases of compulsory insurance—except a businessperson has a right to insurance subject to the aforementioned limitations.
Compulsory insurance is widespread in the area of third party risks, particularly, but not limited to strict liability. Apart from motor vehicle insurance, insurance against liability is required, for example, for owners of dogs and horses; for hunters; for operators of aircraft and private railways; for operators of power plants or other plants posing a hazard to the environment; for owners of ships; for professional indemnity of attorneys, notaries, auditors, insurance intermediaries etc. Compulsory property insurance exists, for example, for the owner of buildings or of objects of interest for the general public. Instances where personal insurance is compulsory mostly concern insurance coverage for sickness and accidents.
It is to be expected that the number of compulsory insurances will continue to grow, particularly for professional indemnity, environmental risks and damage to property resulting from natural catastrophes. The position taken by the European Insurance and Reinsurance Federation (CEA) against the inclusion of a requirement for compulsory insurance into the environmental liability directive and into the directive on the geological storage of carbon dioxide, however, shows that the insurance sector has strong reservations against the introduction of compulsory insurance. Governments, on the other hand, want to avoid additional financial burdens on their industries. Whenever appropriate, legislatures will therefore presumably give preference to optional compulsory insurance schemes, thereby leaving the decision whether or not to seek protection against liability by insurance or alternative financial guarantees to the party exposed to (strict) liability risks.
3. Elements characterizing compulsory insurance
Compulsory insurance can only meet its ends if, first, the coverage is prescribed with regard to the nature and extent of the risk to be insured, the minimum thresholds for the insured sum, and the limits on exclusions from the insurance cover. Secondly, the law must provide that the insurer cannot invoke non-compliance of the insured with policy terms or statutory duties towards the injured party (compulsory liability insurance) or the beneficiary (compulsory property damage). Where the insurer would have been entitled to deny or limit coverage had there not been compulsory insurance, the insured is liable (under the applicable insurance law) or by way of subrogation (of the injured party’s rights against the insured) towards the insurer for the compensation paid out by the insurer to the injured party. Thirdly, there must be a supervisory system controlling whether compulsory insurance is actually taken out and kept. For that purpose, insurers are required to hand out an insurance certificate attesting that insurance is in force in accordance with the legal requirements and to notify the competent authorities in case of termination of the insurance contract.
Compulsory liability insurance schemes often provide the right of a direct claim against the insurer and set up financial mechanisms such as guarantee funds to cover claims in case of winding-up of the insurer. These funds also often provide compensation for the injured party where the tortfeasor is not insured or unknown. For instance, automobile compensation funds cover claims of victims of uninsured, untraced or ‘hit and run’ drivers.
4. Uniform law
a) International law
At the international law level, the European Convention on Compulsory Insurance against Civil Liability in respect of Motor Vehicles of 1959 provides for the introduction of compulsory liability insurance and a direct claim against the insurer. The insurance must cover the civil liability of the owner and of any driver or person in charge of the insured vehicle. According to the Montreal Convention for the Unification of Certain Rules for International Carriage by Air of 1999, carriers are required to maintain adequate insurance covering their liability to third parties under the Convention and to provide evidence for that insurance on demand of the state in which the carrier wants to operate.
Optional compulsory insurance is required by most of the international treaties on maritime liability (marine pollution (compensation); eg Convention on Civil Liability for Bunker Oil Pollution Damage of 2001; Convention on Liability and Compensation for Damage in Connection with the Carriage of Hazardous and Noxious Substances by Sea of 1996 (HNS Convention); Protocol of 2002 to the Athens Convention relating to the Carriage of Passengers and their Luggage by Sea of 1974; Nairobi International Convention on the Removal of Wrecks of 2007), on liability for damages arising out of transportation in general (eg Convention on Civil Liability for Damage Caused during Carriage of Dangerous Goods by Road, Rail and Inland Navigation Vessels of 1989), or high risk activities such as the extraction of hydrocarbons (eg Convention on Civil Liability for Oil Pollution Damage resulting from Exploration for and Exploitation of Seabed Mineral Resources of 1977), the disposal or transportation of waste (eg Basel Protocol on Liability and Compensation for Damage of 1999), and the use and production of nuclear energy (eg Paris Convention on Third Party Liability in the Field of Nuclear Energy of 1960, Vienna convention on Civil Liability for Nuclear damage of 1963).
Most of these conventions recognize a right to a direct claim against the insurer. The defences the insurer is entitled to invoke against the injured party are not limited as regards the liability of the insured and any legal limitation of liability granted to the insured. The insurer can thus assert all the defences which the insured would have been entitled to raise against the damage claim of the injured party. The insurer, too, benefits from the limits of liability where international conventions or national laws allow the insured to do so even if the insured, in the case in question, would not be entitled to limitation. The insurer, however, cannot invoke defences based on the insurance contract other than the defence that the damage resulted from the wilful misconduct of the insured. The conventions expressly provide that the insurer has the right to require the insured to be joined in the proceedings of the injured party against him. The conventions keep silent on questions of whether or not the injured party can assign the direct claim against the insurer to another party, the insurer and the insured are jointly liable towards the injured party, the insurer has the right to set-off against the injured party’s claim, and whether or not the injured party has duties towards the insurer. The conventions, moreover, do not deal with the limitation period for the direct claim or the question under what circumstances an act or omission of the insured qualifies as ‘wilful misconduct’.
b) EU law
At the EU level, Regulation 785/2004 on Insurance Requirements for Air Carriers and Aircraft Operators introduces compulsory insurance covering their aviation-specific liability in respect of passengers, baggage, cargo and third parties. The insured risks must include acts of war, terrorism, hijacking, acts of sabotage, unlawful seizure of aircraft and civil commotion. Regulation 1371/ 2007 on Rail Passengers’ Rights and Obligations requires a railway undertaking to be adequately insured or to make equivalent arrangements for cover of its liabilities with regard to passengers and their luggage. Regulation 259/93 Regarding Transboundary Shipments of Waste, too, provides for optional compulsory insurance.
In road transport, there are the five directives on compulsory insurance cover for motor vehicles (Dirs 72/166, 84/5, 90/232, 2000/26 and 2005/14) that have been consolidated into a single instrument by Dir 2009/103. Directive 2002/92 on Insurance Intermediation requires all insurance intermediaries to obtain professional indemnification insurance as a precondition to be able to provide services. According to Dir 2004/114 on the Conditions of Admission of Third-Country Nationals for the Purposes of Studies, Pupil Exchange, Unremunerated Training or Voluntary Service, a third-country national who applies to be admitted for the purpose of study must have health insurance in respect of all risks normally covered for its own nationals in the Member State concerned. Directive 2002/96 on Waste Electrical and Electronic Equipment also provides for optional compulsory insurance schemes. None of these regulations and directives other than Dir 2009/103 provides for a direct right of action of the injured party against the insurer (Art 18). Directive 2009/103 also deals with the effect of certain exclusion clauses regarding claims by the injured party: any contractual clause is void which excludes from insurance the use or driving of cars by non-authorized persons, or persons who do not hold a driving licence, or persons who are in breach of the statutory technical requirements concerning the condition and safety of the car concerned (Art 13). Directive 2009/103 further provides that the insurer cannot rely on deductibles imposed against the injured party to an accident (Art 17).
The original plans of the European Commission to introduce a compulsory insurance scheme covering the liability risks of companies arising out of the Environmental Liability Directive 2004/35 were not realized due to objections of the insurance sector, which fundamentally opposed compulsory insurance because the economic cost of damage would be impossible to evaluate. The insurers argued that for these risks too little statistical data would be available to estimate losses and compensation. Incidentally, similar arguments were used against Art 8 of Draft Regulation 183/2005 laying down Requirements for Feed Hygiene that required feed business operators to take out a financial guarantee, such as insurance, for the costs of the withdrawal from the market, treatment and/or destruction of any feed and food produced therefrom. Directive 2006/123 on services in the internal market does not require, but only recommends the introduction of professional liability insurance or another form of guarantee which is equivalent or comparable for operators providing services involving a direct and particular health, safety, or financial risk for the recipient or a third person. Recital 99 expressly states that there should be no statutory obligation of appropriate insurance.
The project group Restatement of European Insurance Contract Law published the Principles of European Insurance Contract Law (PEICL) in 2009. So far, the PEICL do not yet contain rules on compulsory insurance.
At the level of private international law, the Rome I Regulation (Reg 593/2008) that applies to all insurance contracts concluded after 17 December 2009 permits Member States to introduce compulsory insurance. In that case, the contract of insurance must comply with the statutory requirements. Where the law of the Member State in which the risk is situated and the law of the Member State imposing the obligation to take out insurance contradict each other, the latter shall prevail. A Member State may lay down that the insurance contract shall be governed by the law of the Member State that imposes the obligation to take out insurance. Rome I does not provide a definition of what elements constitute compulsory insurance.
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