Principles of European Insurance Contract Law (PEICL)
by Helmut Heiss
After the European Commission’s proposal for a directive to harmonize insurance law of 1979/ 1980 was finally shelved, attempts to codify the substantive rules of insurance contract law throughout the European Union were abandoned for many years. Instead, the so-called second and third generation directives on insurance law concentrated on establishing the principle of ‘home country control’. This helped to develop the single market by stipulating that an insurance company would be regulated exclusively in its home country, even when it did cross-border business. The second and third generation directives on insurance also harmonized the rules of conflict of laws concerning insurance, following the introduction of a special regime concerning jurisdiction in insurance matters by the Brussels Convention of 1968, which has now been replaced by the Brussels I Regulation (Reg 44/2001). Despite the fact that these acts created a regulatory framework for the cross-border sale of insurance products, the effects of mandatory rules of national insurance contract law, which restrict the internal market, could not be avoided by means of this regulatory framework or by harmonizing the conflict of law rules concerning insurance. These measures failed to bring about an effective single market for insurance within the EU. Since the market remained fragmented along national lines, a new initiative, instigated by academics, to standardize European insurance contract law was launched. In September 1999, the ‘Restatement of European Insurance Contract Law’ Project Group was founded in Innsbruck by Fritz Reichert-Facilides. Today, this project group has nineteen members from fourteen EU (European Union) Member States and Switzerland.
The project group has drafted its Principles of European Insurance Contract Law (PEICL) along the lines employed by the American Law Institute in drafting its Restatements of the Law. This is at least true of the structure of the work. There are rules which set out the Project Group’s recommendations, as Principles of European Insurance Contract Law, in statutory language. The individual rules are followed by comments. These provide explanations for and illustrations of each rule. Finally, there are notes which provide details about the current state of insurance contract law in the individual Member States. As with the American restatements, the project group has attempted to formulate its rules by undertaking a comparative analysis (comparative law) of the solutions contained in national laws. However, the PEICL are not merely a compilation of the principles that can be found in the individual national legal systems. The project group is instead working on a model law which is suited to the requirements of the internal market and which takes account of the needs of all those with a significant interest in the insurance bargain (insurers, policyholders and insurance intermediaries).
The work of the project group first received political attention in the context of an opinion given by the European Economic and Social Committee on the subject of ‘The European Insurance Contract’ in 2004. The Committee drew upon the project group’s work, substantially adopted its internal-market-orientated approach and invited the European Commission to deliberate on the harmonization of European insurance contract law in line with the PEICL.
The project has also been met with interest from the European Commission. In a broad-ranging initiative, the Commission established a European research network (Network of Excellence: Common Principles of European Contract Law, CoPECL) in 2005. As a member of this research network, the project group was assigned the task of drafting a Common Frame of Reference for European Insurance Contract Law. This was to consist of definitions and rules, each accompanied by comments and notes. The rules concerning insurance contract law form an integral part of the entire Common Frame of Reference on European Contract Law which is being drafted by the Study Group on a European Civil Code and the Research Group on EC Private Law (Acquis Group).
The PEICL have also served as a model for the opinion given by the European Economic and Social Committee (EESC) on the subject of ‘The 28th regime’ on 27 May 2010, pleading for the creation of an optional instrument of European contract law. The proposals of the EESC have been set out as ‘Option 4’ in the European Commission’s green paper of 1 July 2010 on policy options for progress towards a European contract law for consumers and businesses. Finally and most recently, the European Parliament resolution of 8 June 2011 on policy options for progress towards a European contract law for consumers and businesses openly calls for an optional European contract law including rules of insurance contract law based on the model of the PEICL.
The project group completed the general part of the PEICL in 2008 and published it in 2009 under the title ‘Principles of European Insurance Contract Law (PEICL)’. The PEICL were also submitted to the European Commission as a draft of the Common Frame of Reference on Insurance Contract Law in 2009.
The PEICL, as published in 2009, comprise three main sections. Part one encompasses general rules which apply to all types of insurance contracts (with the exception of reinsurance, which is expressly excluded by Art 1:101(2) of the PEICL). Part two contains rules which apply to all types of indemnity insurance. Part three incorporates rules which relate to all types of insurance of fixed sums. The current version still lacks specialized rules which would regulate certain specified types (classes) of insurance contract (eg rules concerning life assurance). The project group is currently working on rules concerning liability insurance and life assurance.
A significant feature of the PEICL is the mandatory character of its provisions pursuant to Art 1:103 of the PEICL. The project group has refrained from including principles of insurance contract law which are optional. There are several reasons for this decision. First, the Project Group was aware that optional provisions of insurance contract law are often excluded by an insurer’s standard terms and conditions in practice. Moreover, new insurance products are developed by insurers amending their standard policy terms to provide new forms of cover or to include new conditions rather than by the passage of legislation which specifies optional principles that apply to a class of insurance business. Second, the Project Group was influenced by Jürgen Basedow’s analysis, which suggests that optional rules do not significantly restrict either the internal market or the freedom to provide services in the insurance sector. This is because optional provisions can be excluded, at least as far as derogation from such provisions is permissible when judged by the criteria used to review the fairness of the insurance contract. Thus policies which have been drawn up in accordance with the contract law of the insurer’s home country may still be legally effective in their original form in other EU (European Union) or EEA Member States, even where default optional rules exist. This is obviously not the case where the law contains mandatory rules. According to existing principles of European private international law, mandatory rules of the host Member States will in most instances apply to insurance policies sold cross-border. First of all, Article 9(1)(b) of the Brussels I Regulation provides that the courts of the country where the policyholder is domiciled will have jurisdiction over any dispute concerning the insurance contract. The harmonized rules of conflict of laws, which are set out in the directives on insurance law, limit the parties’ ability to select the law applicable by means of choice-of-law clauses (choice of law by the parties). The application of these rules normally leads to the law of the country where the policyholder is habitually resident being applied (insurance contract law (international)). Therefore, proceedings in insurance matters are in most cases held in the policyholder’s home country and in accordance with that country’s domestic law. Insurers must therefore adapt their products to take account of the mandatory contract law of the country where the policy is to be sold. The need to make a policy conform to differing national insurance laws may have a significant impact on the design of the insurance product. This serves as a deterrent to insurers who might otherwise be interested in developing opportunities across the single market. Statistics show that the cross-border sale of insurance services is thereby severely limited. On the demand side, this means that policyholders have little opportunity to purchase foreign insurance products in their domestic markets. Furthermore, the cross-border activities of insurance intermediaries are also severely restricted. This analysis illustrates that to make the single internal market effective, as regards insurance, a uniform regime of mandatory insurance contract law is required. These considerations also underpin the decision to restrict the scope of the Principles to mandatory regulations. The mandatory character of the PEICL can be waived by the parties only in respect of the insurance of large risks (Art 1:103(2)2 of the PEICL).
The acquis communautaire currently applicable to insurance contract law forms an important element of the PEICL. Thus, the PEICL implement information duties and rights of revocation, which are set out not only in directives concerning insurance law, but also in the consumer protection directives (consumers and consumer protection). Of particular note are the information duties embodied in Art 36 of the Consolidated Life Assurance Directive (Dir 2002/83) and Arts 3 to 5 of the Distance Marketing Directive (Dir 2002/65), which are implemented in the PEICL by Art 2:201. Article 35 of Dir 2002/83 and Art 6 of the Dir 2002/65 were the inspiration for the provision on revocation (Art 2:303 of the PEICL). Furthermore, the Unfair Contract Terms Directive (Dir 93/13; see Art 2:301 of the PEICL), the Injunctions Directive (Dir 98/27; see Art 1:301 of the PEICL), and the Gender Directive (Dir 2004/113; see Art 1:207 of the PEICL) have also been implemented.
The PEICL were drafted in English and English legal terminology has generally been used. However, the project group did not always employ language which has a technical legal meaning in English national law. On the contrary, different phrases were consciously chosen at several points to avoid giving the false impression that a particular provision had simply codified a concept of English common law. Consequently, the PEICL refer, for instance, not to ‘promissory warranties’, but to ‘precautionary measures’. At the same time, the project group endeavoured to draw upon the international legal terminology available. The group made particular use of the terminology of the PECL as well as of the existing acquis communautaire. The language of the transport conventions was also employed. Thus, for example, the wording used in the Montreal Convention 1999, ‘with intent to cause damage or recklessly and with knowledge that damage would probably result’, can be found (in a slightly adapted form) at several points in the PEICL. Moreover, the PEICL define key terms in Arts 1:201 and 1:202. Finally, the PEICL set out the criteria to be used in interpreting the principles, thereby fulfilling the need for uniform interpretation (Art 1:104).
Rights which beneficiaries, the insured and policyholders enjoy by virtue of the PEICL must be enforced, if necessary, by means of individual legal actions. The PEICL do not provide for out-of-court complaints and/or collective legal redress procedures. However, Art 1:302 expressly permits access to existing national out-of-court mechanisms for dispute resolution, such as ombudsman services. Furthermore, pursuant to Arts 2:201(1)(k) and 2:501(k) of the PEICL, the insurer is subject to a duty to inform the policyholder that such services are available. Moreover, the PEICL entitle qualified entities to bring proceedings before a competent national court or national administrative authority to seek an order prohibiting infringements of the PEICL or requiring the cessation of such an infringement. A ‘qualified entity’ is defined by reference to the list drawn up by the European Commission pursuant to Art 4 of the Injunctions Directive (98/27).
The PEICL (still) do not deal with all of the questions which arise in insurance contract law. In particular, new rules have not been drafted to address questions which have already been satisfactorily dealt with in the Lando Commission’s Principles of European Contract Law (PECL). ‘Satisfactorily’ means that the provisions in the PECL, which are normally only of an optional character, do not have to be mandatorily imposed in connection with insurance contract law. Insofar as this is the case, the PEICL refer, in Art 1:105(2) and in other provisions, to the PECL as its lex generalis. Where neither the PECL nor the PEICL answer a certain question, reference may be made to the general principles common to the laws of the Member States as a source of last resort. Where a rule of the PECL must have mandatory application in the context of insurance law, the terminology of the corresponding provisions have been adapted and they have been adopted into the PEICL. By virtue of Art 1:103 of the PEICL, they become mandatory in character.
At present, the PEICL are also incomplete because they do not yet contain any specialized provisions concerning the different classes of insurance business. However, in many of these classes (life assurance, health insurance, third-party liability insurance, etc), national laws lay down mandatory provisions to protect the policyholder or third parties. As long as the Principles do not provide adequate protection, they will not supersede any national provisions relating to those specific classes of insurance contract. Article 1:105(1)2 of the PEICL makes this clear. It provides that national rules concerning classes of insurance business apply so long as the Principles do not contain a replacement rule.
3. A model law for an optional instrument?
The Common Frame of Reference is not binding. Thus, it cannot solve the problems which mandatory provisions in national regimes of insurance contract law pose for a European internal insurance market, in particular with regard to the freedom to provide services (free movement of services). Thus, it will be for the European legislature, even after the completion of the Common Frame of Reference, to create a European insurance contract law. This might be achieved by introducing a regulation harmonizing the laws of the Member States. Such a course of action is, however, not particularly desirable for two reasons. First, the probability of such an approach being politically acceptable to Member States is questionable, since it would involve the virtual elimination of national insurance laws. Second, all of the European providers and consumers would be compelled to frame their insurance contracts in accordance with the new European contract law. It would be expensive to make the adjustments necessary. In its communications concerning European contract law, the Commission has therefore considered the possibility of an optional European contract law. Such an optional instrument would effectively resolve the current fragmentation of the internal market without imposing any unwanted changes or expenses on market participants. The Principles have consequently been drafted as a model law which could be used in any future optional instrument. Pursuant to Art 1:102 of the PEICL, the Principles are only to be applied when the parties so agree in the insurance contract (opt-in model). The parties are always free to choose the PEICL where the law of a Member State is applicable. In particular, there is no need for a foreign element; the PEICL can also be chosen by the parties where the transaction is carried out within a single Member State. Where the parties choose to apply the PEICL, the relevant national law is replaced completely by the optional instrument. National mandatory norms are wholly superseded. Thus, the PEICL are not merely a European minimum standard. Where a contract is governed by the optional instrument, national law can no longer stipulate a higher standard of protection for the policyholder. This protection must be provided exclusively by the terms of the PEICL. Conversely, the parties can only agree to apply the PEICL either in their entirety or not at all. A partial choice is not permissible, since this would probably result in insurers picking and mixing the provisions most favourable to them from national law and the PEICL as clauses in their standard terms and conditions of insurance.
Fritz Reichert-Facilides, ‘Europäisches Versicherungsvertragsrecht?’ in Festschrift Ulrich Drobnig (1998) 119; Fritz Reichert-Facilides and Anton K Schnyder (eds), Versicherungsrecht in Europa—Kernperspektiven am Ende des 20. Jahrhunderts (2000); Jürgen Basedow and Till Fock (eds), Europäisches Versicherungsvertragsrecht, vols 1 & 2 (2002) and vol 3 (2003); Jürgen Basedow, ‘Insurance Contract Law as Part of an Optional European Contract Act’  LMCLQ 498; Malcolm Clarke and Helmut Heiss, ‘Towards a European Insurance Contract Law? Recent Developments in Brussels’  JBL 600; Helmut Heiss, ‘The Common Frame of Reference (CFR) of European Insurance Contract Law’ in Reiner Schulze (ed), Common Frame of Reference and Existing EC Contract Law (2nd edn, 2009) 235; Helmut Heiss, ‘Introduction’ in Jürgen Basedow, John Birds, Malcolm Clarke, Herman Cousy and Helmut Heiss (eds), Principles of European Insurance Contract Law (PEICL) (2009) xlix; Jürgen Basedow, ‘The case for a European insurance contract code’ in Arthur S Hartkamp and others (eds), Towards a European Civil Code (4th edn, 2011) 735.