Committee Reports > List of Committees > Joint > 1980 > Committee on the Secondary Legislation of the European Communities > Report No. 68 - Insurance Contracts

REPORT

INTRODUCTION

1. The Joint Committee has examined the proposal made by the Commission in July last for a Council Directive on the co-ordination of laws, regulations and administrative provisions relating to insurance contracts (8144/79).

2. This proposal is related to the draft Second Non-Life Insurance Directive which was dealt with in the third report (Prl. 6923) of the Joint Committee. The latter which has not yet been adopted by the Council seeks inter alia to facilitate the effective exercise of the freedom to provide services in the field of non-life insurance. This would enable insurance companies to transact business across national frontiers without setting up a branch or agency in the Member State in which the risk covered is situated. This type of business necessarily gives rise to the question of what national law governs the insurance contracts and the draft Second Non-Life Directive contains rules governing the choice of applicable law. The proposal which is dealt with in this report has two objectives. Firstly, in regard to the insurance contracts covered by the proposal, it aims to guarantee the policyholder that, whatever the choice of applicable law is, he will receive identical protection as regards the essential points of the contract. Secondly, it seeks to eliminate as competition factors fundamental differences between national laws.

Scope of Proposal

3. The classes of insurance to which the proposed Directive is to apply are accident, sickness, damage to or loss of land vehicles, fire and natural forces, damage to property, motor vehicle liability, general liability, miscellaneous financial loss and legal expenses. It is not to apply to insurance relating to damage to or loss of railway rolling stock, aircraft, ships or goods in transit, liability arising from the use of aircraft or ships, credit and suretyship.

4. The proposed Directive seeks to harmonise the laws of the Member States governing the main elements of insurance contracts in so far as the classes of insurance indicated above are concerned. If the Directive is adopted, uniform rules will apply throughout the Community, irrespective of what national law governs the contract, to such essential elements as the information to be given in policy documents, the policyholder’s obligation to disclose material facts and the consequences of failure to do so, the commencement and termination of cover and the payment of premium and the consequences of non-payment.

Contracting Out

5. Article 12 of the draft Directive allows the parties to “agree on more favourable terms for the policyholder, insured person or injured third party than are provided for in this Directive”. This provision would seem by implication to prohibit contracting for terms more favourable to the insurer. The Joint Committee believes that this is the intention but considers that it may be advisable to provide so specifically in the Directive.

Disclosure of Information

6. Contracts of insurance in Irish law are contracts uberrimae fidei and the insured is required to disclose everything that is known to him that is material in fact even though he does not appreciate its materiality. The test applied seems to be whether the fact would have been material in influencing the mind of a prudent insurer and not whether loss has resulted from the undisclosed fact. Non-disclosure enables the insurer to avoid the contract.

7. The draft Directive provides that “the policyholder shall declare to the insurer any circumstances of which he is aware which may influence the insurer’s assessment or acceptance of the risk”. He would not be obliged to disclose circumstances which are either already known to the insured or common knowledge. Any questions asked by the insured would be deemed material in the absence of proof to the contrary.

8. Of those consulted by the Joint Committee the majority agreed that the Directive, if adopted, would modify the rules relating to disclosure of information in favour of the policyholder. They pointed to the fact that the proposed Directive would impose no obligation on the policyholder to disclose circumstances of which he ought to be aware. In this connection attention is directed to section 18 (1) of the Marine Insurance Act, 1906 which imposes a duty of disclosing “every material circumstance which is known to the assured” and provides that “the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him”.

9. A contrary view has, however, been expressed to the Joint Committee. It heard one learned opinion expressed that the duty of disclosure as set out in the draft Directive represents a reasonable statement of the law as it exists in this country.

10. The Joint Committee would see no objection to the duty of disclosure as defined by the doctrine of uberrima fides being mitigated in favour of the policyholder if such is necessary in the interests of harmonisation. It considers, however, that Article 3.1 of the proposed Directive is ambiguous as it stands. It is not clear whether it obliges a policyholder to disclose circumstances of which he is aware and which may influence the insurer whether he is aware that the circumstances could have that influence or not.

Effect of Non-Disclosure

11. As already indicated, under Irish law non-disclosure by a policyholder of a material fact entitles the insurer to avoid the contract. The proposed Directive would alter the law in this respect depending on whether the policyholder acted innocently, improperly or with the intention to deceive.

12. Where the policyholder had not acted improperly or with the intention to deceive, non-disclosure would give the right to the insurer to propose an amendment of the contract but not to terminate it. The policyholder could accept or reject the amendment within fifteen days. If he rejected it the insurer could terminate the contract within 8 days by giving 15 days notice. The Joint Committee sees no objection to this proposal but considers that the periods of “8 days” and “15 days” are too short.

13. If the policyholder had acted “improperly” in witholding information, the insurer would have the option of terminating the contract or proposing an amendment to it within two months of becoming aware of the facts. If he exercised the option of proposing an amendment the procedure would be similar to that followed in the case of innocent non-disclosure. The Joint Committee assumes that “improperly” may be given much the same meaning as “negligently” in our law. The provision of varying remedies depending on the degrees of fault of the policyholder would introduce a new element into our law. However, the Committee sees no serious objection to it though again it regards the periods of eight and fifteen days which would apply in the event of the insurer opting for amendment to be too short.

14. If the policyholder acted with an intention to deceive the insurer the latter could terminate the contract within two months of discovering the facts and would be allowed the premiums paid “by way of damages”. If the policyholder’s action were such as to amount to the tort of fraud at common law he could at present in addition to any other remedy available to him, recover damages in an action. Presumably it is not the intention to interfere with the law of tort as it operates in this country. However, it is possible that this may be the inadvertent effect of providing that premiums paid shall be retained “by way of damages”. This aspect needs to be specially examined.

15. “If circumstances which were unknown to both parties when the contract was concluded come to light subsequently” the draft Directive proposes that the insurer should have the same rights as he would have in the case of innocent non-disclosure. On the face of it this provision seems to the Joint Committee to be unfair to the policyholder. The insurer is in the business of selling protection against the risk of loss. It is by no means clear to the Committee why he should be allowed to mend his hand if subsequent to the contract, the risk appears greater because of some element unknown to either party when the contract was concluded.

Warranties

16. Article 4 of the proposed Directive would require a policyholder, after a contract has been concluded, to “declare to the insurer any new circumstances or changes in circumstances of which the insurer has requested notification in the contract.”. Failure by the policyholder to fulfil this obligation would have the same consequences as failure to disclose information originally or in other words they would depend on whether the policyholder acted innocently, improperly or with the intention to deceive the insurer.

17. The Irish Insurance Association raised with the Joint Committee the question of whether Article 4 would interfere with the practice of Irish insurers of including in insurance contracts conditions or terms which must be strictly complied with and breach of which may entitle the insurer to repudiate the contract. In insurance parlance these are known as “warranties”. The Committee would not have thought that Article 4 is intended to inhibit insurers from delineating in the contract the precise risk covered. It recommends, however, that the matter be specially examined.

Salvage

18. Article 8 of the draft Directive would oblige a policyholder to “take all reasonable steps to avoid or reduce the consequences”. Instructions from the insurer or specific contractual provisions on the point would be deemed to be reasonable. Any costs incurred by the policyholder would be borne by the insurer.

19. The Irish Insurance Association has expressed a fear that this provision may expose insurers to unlimited liability for costs. On the other hand it has been suggested to the Joint Committee that the liability for costs would in practice be limited by the requirement that the policyholder must act reasonably. It may be that some redrafting is necessary to ensure that where the policyholder acts outside instructions or specific provisions, the insurer would not be liable for costs if the policyholder’s action is unreasonable.

Acknowledgements

20. In examining this proposal the Joint Committee received considerable assistance from the Irish Insurance Association. It also had the benefit of the views of Mr. Niall Fennelly, S.C. and Mr. John Fish, Solicitor. The Committee wishes to express its sincere thanks for the help it received.

(Signed) ALEXIS FITZGERALD,

Chairman.

27th March, 1980.