Internal Market (Insurance)
1. Treaty requirements and evolution
Under Art 26 TFEU/14 EC the European Community was to adopt appropriate measures with the aim of progressively establishing the European internal market by the end of 1992. The internal market is defined by Art 26(2) TFEU/14(2) EC as comprising ‘an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured’. This Article was only added to the Treaty by the Single European Act of 1986. But in substance, the Community institutions have had, from the very beginning, the duty to implement the basic freedoms and, thereby, to create a common market for all sectors of the economy: this has been a core component of the Treaty of Rome. In insurance, however, this mission has proven to be particularly difficult due to the many divergent interests involved. Just like in other sectors, the suppliers were afraid of losing traditional markets by the access of foreign competitors. In contrast to other markets, consumer interests have played a particular conservatory role, too. Moreover, the Member States have had their own interests in protecting their own insurance companies which have traditionally served as a collector and reservoir of funds and reliable lender to the public budget, a role that might be endangered by the opening of the insurance market. The unique harmony of interests directed against the integration of markets provides an explanation for the very slow progress made towards a common insurance market which still remains to be implemented.
The first steps towards that aim were made in the 1970s when two directives were adopted which implemented the freedom of establishment for non-life insurance (Dir 73/239) and later on for life assurance (Dir 79/267). These directives allowed insurers established in other Member States to start business operations in the domestic market through the establishment of a branch or agency. However, the insurance business as such was confined to the host state. Moreover, insurers were subject to the host state’s supervisory law and were put under an obligation to establish technical reserves matched by assets localized in the host state in accordance with the risks covered in that country.
As for transborder insurance business, the Commission proposals for the implementation of the freedom to provide services (free movement of services) met with fierce resistance which was finally broken by the European Court of Justice (ECJ) in an infringement proceeding in 1986 (ECJ Case 205/84 – Commission v Germany  ECR 3755). Most Member States made submissions in these proceedings, the Netherlands and the United Kingdom supporting the Commission from their traditional liberal background rooted in marine insurance, and most Member States, departing from their ‘alpine’ insurance tradition, in support of Germany. The Commission challenged two provisions of German law as being incompatible with Union law: the requirement of a special admission of foreign insurance companies to operations on the German market, and the need for a physical establishment in Germany. The Court of Justice approved the former and rejected the latter requirement. Given the lack of harmonization in areas such as equity and solvability, specification and evaluation of technical reserves and insurance conditions, the host state was said to be justified in requiring a special admission procedure which would ensure compliance with its mandatory provisions enacted in the general interest. On the other hand, the requirement of a physical establishment in Germany was held to be tantamount to the negation of the freedom to provide services. It was said to be compatible with the EC Treaty only where the objectives pursued by the Member State in the general interest cannot be achieved through a regime premised upon admission; however, that exceptional situation had not been proven (paras 52–5).
The opinion of the Court of Justice has pointed to the possibility of judicial enforcement of the freedom to provide services on the one hand, but also to the legitimate reservations of a Member State against the integration of insurance markets on the other. These reservations can only be overcome by an approximation of laws, ie by legislative measures. An important step forward in that direction was accomplished by the Insurance Directives of the second generation, which implemented the freedom to provide services for non-life insurance (Dir 88/357) and life assurance (Dir 90/619). An essential precondition was a wide array of harmonizing measures related to the solvability of insurance companies, to the control by supervisory authorities and to the improvement of information given to host states and policyholders.
The directives of the third generation introduced, separately for non-life insurance (Dir 92/ 49) and life assurance (Dir 92/96), the principle of home state control which concentrates the supervisory powers in the authorities of the Member State of origin of an insurance company. This required further substantial harmonization measures. Among them, the removal of any systematic control of insurance contract terms prior to their use in the market is of particular relevance for insurance contract law (insurance contracts; insurance contract law (international)), see Art 39 Dir 92/49 and Art 29 Dir 92/96. These directives of the third generation led to the regime of the internal insurance market which essentially is still in force. The three directives on life assurance have meanwhile been consolidated in Dir 2002/83. All these measures have had little impact on insurance contract law.
2. Effects on insurance contract law
The Commission realized at an early stage that national insurance contract law in many Member States which can be derogated from only to the benefit of the policyholder or not at all is one of the impediments for the establishment of the internal insurance market. Indeed national insurance contract laws differed substantially from one another already in those years, and the numerous legislative reforms enacted at the national level have not brought about much change in this respect. These differences, taken together with the mandatory character of many national provisions, do not allow the use of identical insurance conditions and forms in several Member States. Thus, while the efficiency of insurance operations can be increased by pooling large numbers of similar risks, such efficiency gains are practically excluded by the divergent contract law regimes of the Member States at the European level.
In the 1970s the Commission contemplated a dual solution for large risks including transport risks on the one hand and small and medium risks on the other. In respect of the former it proposed a conflict of laws approach, essentially abstaining from any approximation of substantive law: the Commission advocated the application of the insurer’s law in the absence of a choice of law agreement which the parties should be free to make (choice of law by the parties; contractual obligations (PIL)). As to small and medium risks, in particular consumer risks, the Commission wanted to exclude choice of law agreements, however, and instead apply the insurer’s national law. A substantial harmonization of national insurance contract laws was meant to foster the policyholder’s trust that his rights would not be impaired by subjecting the contract to a foreign law otherwise unknown to him (Schwartz-Dokument 112).
By the late 1970s, the view prevailed within the Commission that the time had not come yet for free choice of law in consumer insurance and that it was appropriate to connect the insurance contract rather to the location of the risk. Yet, the Commission nonetheless published a proposal for a directive on the harmonization of insurance contract law in 1979 which was amended in 1980. The approximation of substantive contract law was intended to provide a basis for extending choice of law agreements and thereby alleviate the unfavourable conditions for the transborder supply of insurance services. In a very fundamental critique, Ernst Steindorff pointed to the divergence of jurisdiction and applicable law that would result from the Commission proposals. Since the 1968 Brussels Convention attributed jurisdiction in insurance matters to the courts of the policyholder’s country almost without exception, these courts should be allowed to decide on the basis of the lex fori. Under the Commission’s conception the courts would however have to decide, far too frequently, on claims made by policyholders against foreign insurers under foreign law. Another problem related to the complicated relation between a harmonized insurance contract law and non-harmonized general contract law. Differences in general contract law would distort a uniform application of harmonized insurance contract law.
As the deadline for the implementation of the internal market in 1992 was approaching, the Commission came under increasing pressure and gave priority to the harmonization of supervisory law and market regulation. It is true that the Court of Justice had explicitly stated that the host state is justified, as far as insurance conditions are concerned, to insist on the application of its own provisions (ECJ Case 205/84 – Commission v Germany  ECR 3755 para 40); thus it had implicitly pointed out in 1986 that an approximation of insurance contract law would be desirable. However, in view of the difficulties of harmonization and the increasing time pressure, the Commission gave up substantive harmonization and withdrew its proposal in 1993. Instead, the directives of the second generation contain very few substantive rules on insurance contract law, setting forth in particular information duties and a right to cancel a life assurance contract. For the rest, they have created a conflict of laws regime and thus respect the substantive insurance contract law of the Member States.
3. The conflict of laws approach
The 1988 and 1992 Directives have created an utterly complex system of conflict rules. They apply only to risks located in the European Union. The location is defined by detailed provisions; generally speaking, it is determined by the policyholder’s habitual residence. Moreover, the directives only apply to contracts made by insurers established in the European Union, not to companies seated in third countries. Insurance contracts covering risks located outside the European Union were left to the Rome Convention on the law applicable to contractual obligations of 1980 (Art 1(3)). Insurance contracts made by insurers established in third states and covering risks located within the Union were governed neither by the directives nor by the Rome Convention, but by national conflict rules.
The Rome I Regulation (Reg 593/2008) now provides the common framework of a single instrument for all three groups of contracts, but it has led to an even greater fragmentation of the law (contractual obligations (PIL)). Certain insurance contracts related to the sickness or accidents of workers are totally excluded from the scope of application of Rome I, see Art 1(2)(j). Large risks including transport risks are governed by Art 7(2) irrespective of the location of the risk; small and medium risks are subject to Art 7(3) if the risk is located within the Union. If not, the general conflict rules of Rome I, ie Arts 3 and 4 will apply. As a consequence, there are now four different conflict of laws regimes which will, however, be reviewed by 2013 in accordance with Art 27. The conflict rules of the Rome I Regulation dealing with insurance contracts do not substantially differ from the previous law. As to large risks including transport risks, the free choice of law is permitted; in its absence the insurer’s law will apply. Insurance contracts dealing with small and medium risks located in the European Union will generally be subject to the law of the policyholder’s habitual residence. Choice of law agreements are permitted only in specified cases and only in a limited way. In some cases, a more generous permission of choice of law agreements pursuant to the conflict rules of the national law referred to by Art 7(3) still prevails (choice of law by the parties). As to compulsory insurance contracts, a Member State prescribing a duty to insure may require the application of its own contract law. With regard to insurance contracts covering small and medium risks located outside the Union, the applicable law may be chosen under the general provisions of Arts 3 and 6.
The conflict rules of the insurance directives which have now been transferred into Rome I are excessively complicated and inconsistent. Moreover, and except for large risks and transport risks, they cannot achieve their initial purpose, ie to contribute to the establishment of the internal insurance market. The need for insurers to conclude cross-border insurance contracts on small and medium risks within the internal market on the basis of the policyholder’s law results in disproportionate costs for insurance companies which do not want to set up a branch in the policyholder’s Member State. These costs are generated by the translation of the policy into the policyholder’s language and by the necessity to check carefully the compatibility of all contract terms with the mandatory provisions of the policyholder’s law. They amount to a major part of those costs which would be required for the establishment of a branch in the policyholder’s country. Under the 1986 judgment (ECJ Case 205/84 – Commission v Germany  ECR 3755), the freedom to provide services is meant to enable the insurer to engage in temporary activities which will generally result in lower profits than the operation of a permanent branch. It follows that the supply of cross-border services is only profitable if the costs caused by that service are conspicuously lower than the costs of a branch. As to small and medium risks, and also in respect of compulsory insurance, this is still not the case. In these areas the internal insurance market is still not being realized by the conflict rules of the directives and the Rome I Regulation.
See also in this context insurance contract law (international).
4. The Common Frame of Reference and insurance contract law
In the light of these considerations, a project group ‘Restatement of European Insurance Contract Law’ was set up at Innsbruck in 1999. Through the harmonization of substantive insurance contract law it planned to contribute to the establishment of the internal insurance market. In 2005, the group was included by the European Commission in the network on ‘Common Principles of European Contract Law (CoPECL)’. In 2007 and 2008, it published the Principles of European Insurance Contract Law (PEICL) which contain, along with a large number of rules on general insurance contract law, provisions dealing with indemnity insurance in general and the insurance of fixed sums in general.
The Commission contemplates including the PEICL into a Common Frame of Reference (CFR) on European Contract Law, together with rules on general contract law and possibly provisions on other topics. The CFR would be a non-binding set of rules which is essentially meant to serve the internal purposes of the European institutions, in particular the preparation of future legislation of the Union.
However, such a non-binding instrument would not suit the needs of insurance contract law and would be redundant. In this area of the law, which is characterized within the single Member States by a large number of mandatory provisions, the courts tend, when applying the law, to focus on the consistency of the national law; this objective prevails over the interpretation in the light of non-binding European rules. Since the Community has only enacted a limited number of provisions on substantive insurance contract law so far, a practical field of application of the PEICL is lacking also in this context. Finally, non-binding rules cannot overcome restrictions of the basic freedoms imposed by mandatory national provisions; thus, they cannot contribute to the establishment of the internal insurance market.
Therefore, the PEICL have been conceived as an optional instrument. The parties to an insurance contract shall be enabled to choose the PEICL as the applicable law replacing the national insurance contract law that would otherwise be applicable. Examples for such a conception can be found in the law of intellectual property, see in particular Reg 40/94 replaced by Reg 207/2009 on the Community trade mark, and in company law, see Reg 2157/2001 on the Statute of the European Company. The parties’ agreement on the PEICL would have the consequence that the national law otherwise applicable, including its mandatory provisions, would be derogated from and the contract would be exclusively governed by European provisions. Gaps in the PEICL would not be filled by the national law of Member States, but in accordance with Art 1:105 PEICL by the Principles of European Contract Law (PECL).
The PEICL could be used in areas such as standardized insurance products which are offered on the internet and which do not require an individual inquiry of the risk by the insurer. Other markets where the PEICL could prove useful would be border areas within the Union and the insurance protection of ‘euromobile’ policyholders who move from one Member State to another which would cause a change of the law applicable to their insurance contracts under the existing conflict rules. By contrast, the PEICL would offer a common and continuous set of rules once they are acknowledged in all Member States as a substitute for the national rules that would otherwise be applicable. Although the PEICL may be agreed upon for all kinds of policies, their mandatory effect is limited to small and medium risks. In this area the parties may avoid them altogether if they prefer national law being applied, but they are not allowed to derogate from single provisions unless that is explicitly permitted.
‘Schwartz-Dokument: Errichtung des Gemeinsamen Marktes für Schadensversicherungen’  Zeitschrift für die gesamte Versicherungswissenschaft 101; Ernst Steindorff, ‘Rechtsangleichung in der EG und Versicherungsvertrag’ (1980) 144 ZHR 447; Wulf-Henning Roth, Internationales Versicherungsvertragsrecht (1985); Fritz Reichert-Facilides and Hans Ulrich Jessurun d’Oliveira, International Insurance Contract Law in the EC (1993); Fritz Reichert-Facilides, ‘Europäisches Versicherungsvertragsrecht?’ in Festschrift Ulrich Drobnig (1998) 119; Jürgen Basedow, ‘The Case for a European Insurance Contract Code’  Journal of Business Law 569; Jürgen Basedow and Till Fock (eds), Europäisches Versicherungsvertragsrecht, vols 1–3 (2002 and 2003); Francesco Seatzu, Insurance in Private International Law (2003); Jürgen Basedow, ‘Insurance Contract Law as Part of an Optional European Contract Act’  LMCLQ 498; Helmut Heiss, ‘Europäischer Versicherungsvertrag’  Versicherungsrecht 1; Jürgen Basedow, ‘The Optional Application of the Principles of European Insurance Contract Law’ (2008) 9 ERA-Forum scripta iuris europaei 111.