Insurance Contract Law (International)
by Helmut Heiss
1. Subject matter and relevance
International insurance contract law, defined narrowly, consists of all the rules that determine the law applicable to insurance contracts involving a foreign element. Together with the laws on international jurisdiction in insurance matters as well as on the recognition and enforcement of judgments in this area, it forms the private international law of insurance contracts in its broader sense.
The real significance of the conflict of law rules in the context of insurance law depends on the actual frequency of cross-border contracts being concluded. For this purpose, the regulatory framework is crucial and of benefit to both the providers and the consumers of insurance cover in the international insurance business. Within the European Union and the European Economic Area, contracts concluded across national borders in principle benefit from the guarantee of free movement of services (see Arts 56 ff TFEU/49 ff EC) as well as from the principle of single licensing as established by the directives on insurance law (see Art 5(1) of the Consolidated Life Assurance Directive (Dir 2002/83); Art 7(1) of the First Non-Life Insurance Directive (Dir 73/239); both to be replaced by Art 15 Dir 2009/138). In contrast, the conclusion of contracts between policyholders whose place of habitual residence or establishment is in the EU or EEA and insurers from third countries is more or less impeded due to the requirement imposed on the latter to be established in the EU or EEA (see Art 51(2)(b) of the Consolidated Life Assurance Directive; Art 23(2)(b) of the First Non-Life Insurance Directive; both to be replaced by Art 162(2)(b) Dir 2009/138). This applies especially to insurance policies covering small and medium-sized risks. Against this background, the importance of international insurance contract law has clearly increased as a consequence of the deregulation of the European internal market.
2. The internal market and protection of policyholders
The guiding principles of general international contract law are a free choice of law and an objective connection to the establishment of the provider rendering the characteristic performance of the contract in question. These principles are only on occasion departed from, particularly in the context of consumer contracts (consumers and consumer protection law). However, these exceptions to the general principles have arguably not been sufficient to meet the required standard of customer protection on the liberalized European insurance market. For this reason, the European legislature has extended consumer protection as part of the special framework for conflict rules relating to insurance contracts. Now, it is no longer only private consumers who are protected, but also any policyholder who concludes an insurance contract in an entrepreneurial capacity. This special form of protection will only be inapplicable in cases where insurance is taken out for so-called ‘large risks’, as defined in Art 5(d) of the First Non-Life Insurance Directive (to be replaced by Art 13(27) Dir 2009/138).
3. Legal sources
The conflict of law rules concerning insurance contracts have, to a large extent, been adapted and harmonized across the European Union. The legal situation before the coming into force of Reg 593/2008 of 17 June 2008 on the law applicable to contractual obligations (Rome I) (contractual obligations (PIL)) on 17 December 2009 was characterized by a multiplicity of sources of law. The Rome Convention only applied to any reinsurance as well as direct insurance of risks situated outside the Member States (cf the exclusion of other insurance in Art 1(3) with the reverse exclusion of reinsurance in Art 1(4) of the Rome Convention). The remaining gap was largely filled by the directives on insurance law, which harmonized international insurance contract law for contracts relating to risks situated in the Member States by means of special conflict rules (see especially Art 32 of the Consolidated Life Assurance Directive; Arts 7 and 8 of the Second Non-Life Insurance Directive (Dir 88/ 357)). Pursuant to previously existing European law, the only types of insurance policies to remain unregulated were those taken out from insurers in third countries covering risks situated within Member States. In this respect, the European legislature may simply have overlooked the fact that the relevant directives only applied to insurers established in one of the Member States (see Art 2 of the Consolidated Life Assurance Directive; Art 1(1) of the First Non-Life Insurance Directive).
This diversity of sources in the previously existing European international insurance contract law had been the subject of fierce criticism. The European legislature took up this criticism inasmuch as it dealt with conflict of law provisions applicable to all contracts of insurance in Rome I. For insurance contracts concluded after 17 December 2009 (see Art 28 of Rome I), Rome I has replaced the conflict of law provisions previously applicable with regard to insurance contracts. In addition, individual rules of relevance to insurance law are contained in Rome II (Reg 864/ 2007), which was enacted before Rome I and which applies to events giving rise to damages occurring at any point on or after 11 January 2009 (non-contractual obligations (PIL)). In this context, the conflict rules on the right of recourse accorded to the insurer (Art 19 of Rome II) and the right of direct action accorded to the injured party (Art 18 of Rome II) are of special importance. However, a glance at the content of the rules in Rome I quickly reveals that the European legislature’s multi-track approach to conflict of laws rules in this area remains unchanged. Thus, reinsurance contracts will be subjected to the general conflict of laws provisions (Arts 3 and 4 of Rome I), whereas insurance contracts covering large risks will be dealt with by the rules in Art 7(2) of Rome I. For the remaining areas of direct insurance, however, distinctions must be made: the general rules of conflict, in particular Arts 3, 4 and 6 of Rome I, will apply to insurance contracts covering risks not situated in a Member State; in contrast, insurance contracts covering risks situated in a Member State will be subject to the special rules of conflict contained in Art 7(3) to (5) of Rome I.
4. Points of criticism concerning the old conflict of laws regime relating to insurance contracts and Rome I
The various sources of European insurance conflict of law rules used to diverge sharply from one another in terms of content. The Rome Convention recognized the principle of free choice of law for those insurance contracts governed by it. Where the parties had not chosen a law, Art 4 of the Rome Convention provided for the law of the country in which the insurer was established to be applied for the purpose of the objective connection. The impact of a choice of law made by parties to a consumer insurance contract was restricted by Art 5 of the Rome Convention and, in the event of no such choice having been made, a connection to the habitual residence of the consumer was stipulated. This conflict rule relating to consumers was further supplemented by the aforementioned conflict rules contained in the directives concerning consumers, eg by Art 6(2) of the Unfair Contract Terms Directive (Dir 93/13). By contrast, from the perspective of insurance companies, the regulatory approach towards conflict of law rules in the directives was the exact opposite. The free choice of law principle was not assumed for non-life insurance or for life assurance policies. Instead, the directives provided for the insurance contract to be an objective connection, which could only be superseded by a choice of law made on the basis of a set of options that were limited from the start. In the context of this objective connection, the directives frequently referred to the habitual residence or the establishment of the policyholder, as the case may have been, even when not pertaining to consumer contracts. It is clear that the conflict-of-law regime for insurance contracts contained in the Rome Convention and in the directives could hardly have been formulated more antithetically. This antithesis has been retained, as illustrated by Rome I.
The directives on insurance law contained a rather incomplete harmonization of conflict of laws. At several junctures, decisions regarding the use of the choice of law option by the parties and regarding the determination of the objective connection were left to national legislatures. This was for example the case with regard to Art 7(1)(a)(2), (d), (i), and Art 8(4)(c) of the Second Non-Life Insurance Directive. The same applies to Art 32(1)(2), (3)(ii), and (4)(2) of the Consolidated Life Assurance Directive. These regulatory options have also essentially been retained by Art 7 of Rome I.
Furthermore, legal scholars also criticized considerable legal shortcomings found in the directives. It was asserted that their regulatory structure alone prevented an ordinary reader from being able to understand the content of the provisions immediately. The wording, complexity and diversity of the provisions further increased their degree of obscurity. National legislatures tasked with implementing the directives in question and, in particular, those institutions tasked with applying the law were confronted with many difficulties. At the end of the day, these difficulties posed a burden for the contracting parties: contracts of insurance are, in most cases, transactions concerning risks spread out over a long period of time. The parties involved in such transactions, therefore, require a legal framework which grants them certainty when planning ahead. This task could not be performed adequately by the conflict of laws provisions in the previously existing directives on insurance law. A significant breakthrough has also not been achieved by Rome I. The wording of Art 7 of Rome I, which is based on the previously existing directives, has already been exposed to the same criticism.
Even before the adoption of conflict of law rules in the directives, legal academics had indicated that the adoption of such rules did not seem to be an appropriate measure for realizing the European internal market. Despite the fact that this prognosis was subsequently disregarded by the European Commission, it has arguably proven true. EEA insurers wishing to insure mass risks situated outside of the country in which they are established, often set up a subsidiary or a branch office in the country targeted for the service in question. In contrast, the provision of cross-border insurance services is of a statistically marginal nature. This last point criticizing the conflict of law rules contained in the directives must, of course, be put into perspective. Criticism should focus solely on the fact that the European Commission simply ignored the warnings of academics who indicated that a harmonization of conflict of law rules would not be sufficient to complete the internal market. Yet, even a successful statutory harmonization of international insurance contract law would itself only have facilitated the cross-border provision of insurance services. It would not have been able to completely realize the internal market.
5. Main features of the connection of insurance policies pursuant to Rome I
Contracts of reinsurance are subject to the principle of freedom of choice (Art 3 of Rome I). In the absence of a choice of law, reinsurance contracts should, according to conventional and prevailing doctrine, be governed by the law of the country in which the direct insurer is based. This is justified by reference to several different arguments. Some assert that the direct insurer provides the characteristic service (see Art 4(1)(b) of Rome I) while others draw upon the opt-out clause (Art 4(3) of Rome I). Ultimately, the issue remains contentious, even though it is of little practical relevance since reinsurance contracts often expressly specify the law applicable.
Due to the reference in Art 7(2) of Rome I, the freedom of choice pursuant to Art 3 of Rome I also applies to insurance contracts covering large risks. In the absence of a choice of law, insurance contracts covering large risks should, due to their flexible connection as a matter of principle, be subject to the law of the country in which the insurer is established for the purpose of the relevant contract (Art 7(2) together with Art 19 of Rome I). For the purposes of defining ‘large risk’, Art 7(2) of Rome I refers to Art 5(d) of the First Non-Life Insurance Directive (to be replaced by Art 13(27) Dir 2009/138).
Direct insurance contracts are to be distinguished depending on whether they cover risks situated in or outside of Member States. For this purpose, Art 7(6) refers to the definitions in the directives (Art 2(d) of the Second Non-Life Directive as well as Art 1(1)(g) of the Consolidated Life Assurance Directive; both to be replaced by Art 13(13)-(14) Dir 2009/138) to determine the location of the risk.
Likewise, the principle of freedom of choice (Art 3 of Rome I) applies to direct insurance contracts covering risks which are situated outside of the Member States. In the absence of a choice of law, the law applicable is that of the country in which the insurer’s establishment which concluded the contract is located (Art 4(1)(b) in conjunction with Art 19 of Rome I). These basic principles of connection have, however, been derogated from in the context of consumer insurance contracts. Thus, Art 6(2)2 of Rome I restricts the validity of a choice of law agreement made with consumers to the provisions of the chosen law that are more favourable than the mandatory consumer law in the domestic Member State that would otherwise apply. If a choice of law is not made, the insurance contract is governed by the law of the country where the policyholder has his habitual residence (Art 6(1) of Rome I).
The regime for direct insurance contracts covering risks situated inside of Member States has been devised in a completely contradictory manner. Article 7(3) of Rome I provides a list of limited choice of law options. These determine the situations in which the policyholder requires an option to choose the applicable law. There is, however, no option favouring a choice of law by a policyholder actively seeking a cross-border contract. Thus, Art 7 of Rome I, if nothing else, derogates from the protection provided to consumers by the conflict of laws in Art 6(1) of Rome I. This derogation is very problematic, particularly as a choice of law would actually enable an ‘active’ policyholder to look abroad for insurance cover not obtainable on his home market. Another negative aspect is that Member States are at a liberty to augment existing choice of law options. Consequently, there is no unified regime of conflict of law rules among the Member States.
In the absence of a choice of law, the location of the risk proves decisive for the connection. In accordance with the definition contained in the directives, the location of the risk is frequently determined according to the habitual residence of the policyholder. Thus, the law of the policyholder’s environment is applied in most cases. Excluded from this general principle are the following three instances: insurance contracts covering real property are governed by the lex rei sitae; insurance contracts covering registered vehicles are governed by the law under which the vehicle is registered; insurance contracts covering short-term holiday risks are governed by the law of the country in which the contractual statement was submitted by the policyholder.
Article 7(4) of Rome I deals with compulsory insurance separately. According to this provision, an insurance contract only meets the specifications of the insurance obligation if it complies with the provisions of the Member State imposing the obligation to take out insurance. Article 7(4) of Rome I grants Member States the option of applying the law of the country which imposes the obligation to take out insurance to such contracts as a whole. The regulation of compulsory insurance contracts also applies to large risk insurance contracts.
6. Findings and prospects
From a legal perspective, the European conflict of law regime relating to insurance contracts has failed. It was and still is characterized by an unnecessary multiplicity of sources (at least prior to the coming into force of Rome I), a vastly diverging regime of connection with regard to content, lack of uniformity due to the various different regulatory options available to Member States, a regulation of the choice of law that can only be described as unsatisfactory, a high degree of complexity and statutory deficiencies (eg internal references to directives). There are consequently a number of proposals for a revised regulation in legal literature, which have hitherto, however, been largely ignored by the European legislature. However, Art 27, Rome I contains a review clause, according to which the Commission must submit a report concerning the application of the regulation to the European Parliament, the Council and the European Economic and Social Committee by 17 June 2013. This report must, in particular, also contain comments pertaining to international insurance contract law. With regard to this review clause, it is legitimate to argue that there is already much to be said for a prompt review of Art 7 of Rome I.
Fritz Reichert-Facilides and Hans Ulrich Jessurun d’Oliveira (eds), International Insurance Contract Law in the EC (1993); Francesco Seatzu, Insurance in Private International Law (2003); Raymond Cox, Louise Merrett and Marcus Smith, Private International Law of Reinsurance and Insurance (2006); Max Planck Institute for Comparative and International Private Law, ‘Comments on the European Commission’s Proposal for a Regulation of the European Parliament and the Council on the law applicable to contractual obligations (Rome I)’ (2007) 71 RabelsZ 225; Xandra E Kramer, ‘Conflict of Laws on Insurance Contracts in Europe. The Rome I proposal—Towards Uniform Conflict Rules for Insurance Contracts?’ in Marc L Hendrikse and Jacque GJ Rinkes, Insurance and Europe (2007) 85; Helmut Heiss, ‘Insurance Contracts in Rome I: Another recent failure of the European legislator’ (2008) 10 Yearbook of Private International Law 261 =  EJCCL 61; Urs Peter Gruber, ‘Insurance Contracts’ in Stefan Leible and Franco Ferrari (eds), Rome I Regulation (2009) 109.