Committee Reports::Report No. 03 - Council Directives Relating to Credit Suretyship and Legal Expenses Insurance::20 January, 1988::Report




(20 January, 1988.)


Directives Examined

1.The Joint Committee has examined two Council Directives on the coordination of laws, regulations and administrative provisions, namely, 87/343/EEC and 87/344/EEC of 22nd June, 1987 which deal respectively with (a) credit insurance and suretyship insurance and (b) legal expenses insurance. These two Directives amplify and amend Council Directive 73/239/EEC of 24th July, 1973 which obliges Member States to require undertakings transacting non-life insurance to acquire official authorisation in respect of the particular class or classes of insurance carried on by them. The various classes of insurance are set out in the Annex to the 1973 Directive and three of these classes are credit, suretyship and legal expenses insurance. The 1973 Directive was implemented in Ireland by the European Communities (Non-Life Insurance) Regulations, 1976.

2.Directives are binding on Member States “as to the result to be achieved” and accordingly in considering the aforementioned Directives the Joint Committee was confined to considering how the Directives should be implemented and how the options available to Member States should be exercised in this country. However in the course of examining Council Directive 87/343/EEC it was brought to the attention of the Joint Committee that there is an uncertainty as to the scope of suretyship insurance in this country which gives rise to problems particularly in banking business and the Joint Committee considers that this situation should be brought to the attention of both Houses.

Examination by Sub-Committee

3.A detailed examination of the two Directives was carried out for the Joint Committee by a Sub-Committee under the chairmanship of Senator Mary Robinson. The Joint Committee wishes to express its appreciation of the considerable work of Senator Robinson and her colleagues.

Submissions Received

4.In considering the Directives the Joint Committee had the benefit of written submissions from the Department of Industry and Commerce and the Irish Insurance Federation and in addition Mr. John Gleeson of the Department and Mr. M. Kemp of the Federation attended a meeting of Senator Robinson’s sub-committee to elaborate on the views expressed in the submissions. As the problems associated with suretyship insurance impinge on banking business the Joint Committee also consulted the Irish Banks Standing Committee and Mr. Parry Mandall, Group Legal Adviser, Bank of Ireland attended a meeting of Senator Robinson’s sub-committee to put the banks’ point of view. The Joint Committee is deeply indebted to these bodies and their representatives and wishes to thank them for the invaluable assistance which it received.


Use of Statutory Instruments

5.The Department of Industry and Commerce has indicated that it is the intention to implement both Directives by a statutory instrument made under the European Communities Act, 1972. While the Joint Committee accepts that this course of action is open to the Minister it does not consider it satisfactory that the main statutory provisions regulating the conduct of the insurance business should be found in subordinate legislation which haill never been considered by the Houses of the Oireachtas. This position has come about in particular by the implementation of EEC Directives by the European Communities (Non-Life Insurance) Regulations, 1976 and the European Communities (Life Assurance) Regulations, 1984. A previous Joint Committee recommended that these Regulations be replaced by an Act of the Oireachtas when opportunity offered but this opportunity has not been availed of in the Insurance Bill, 1987 currently before the Seanad. The Joint Committee is informed that at one time it was hoped that this Bill would be a consolidating measure but that the resources available within the Department were inadequate for the task.

6.The Joint Committee is informed that further EEC legislation on the provisions of insurance services in the Community is anticipated and presumably this will entail a further amendment. The Joint Committee recommends that when this legislation is in place further consideration be given to the consolidation of insurance legislation. While the Committee appreciates the difficulties caused for the Department by financial constraints it remains of the opinion that the statutory law on insurance is particularly in need of consolidation.


Council Directive 84/373/EEC

7.Council Directive 73/239/EEC allowed the Federal Republic of Germany “pending further coordination” to maintain a provision “prohibiting the simultaneous undertaking in its territory of health insurance, credit and suretyship insurance or insurance in respect of recourse against third parties and legal defence either with one and another or with other classes”. The purpose of Council Directive 87/343 is to end the German specialisation requirement as regards credit and suretyship insurance. As a corollary the Directive obliges all Member States to require the maintenance of an equalisation reserve in the case of credit insurance but permits a Member State at its option to exempt an undertaking where premiums for such insurance do not exceed 4 per cent of the total received by the insurance undertaking and are less than 2,500,000 ECU (approx. IR£1,940,000). Where the latter exemption is not applicable the Directives requires also an increase in the guarantee fund maintainable by an insurance undertaking in respect of credit insurance. State export credit insurance continues to be exempt from the requirements of the Community Directives and there are no additional requirements for suretyship insurance.

Views of Department and Insurers

8.The Department points out that the Directive has little significance for Ireland where credit and suretyship insurance form a small part of the insurance market though it may give Irish insurers freer access to the German market. The Irish Insurance Federation points out that this type of insurance is predominently written by only two Irish companies whose premium income is below the threshold indicated in the preceding paragraph. The Department indicates that it is proposed to avail of the exemption referred to in the preceding paragraph which will have effect of relieving Irish insurers of the additional obligation of maintaining an equalisation reserve and this is in line with the wishes of the Federation.

Scope of Suretyship Insurance

9.A distinction in law has been drawn by both the Irish and English courts between (i) a contract of insurance whereby one party (the insurer) in return for a money consideration (the premium) promises to pay the other party (the assured) a sum of money or provide him ith some other benefit upon the occurrence of one or more specified events and (ii) a contract of guarantee whereby one person (the surety) undertakes to a second person (the creditor) to be answerable to him for the debt, default or miscarriage of a third (the principal debtor). Guarantees bear a close affinity to some forms of insurance and the distinction may be difficult to draw but important legal consequences follow from how the contract is categorised. As in other contracts the intention of parties is all important but in determining that intention objectively the court will pay particular regard to the means of knowledge of the risk. In insurance the insurer will be relying on the assured to appraise him of the risk while a surety is usually fully aware of the risk he is undertaking or at least is in as good a position as the creditor to inform himself on the matter.

10.One of the classes of insurance for which an authorisation is required from the Minister for Industry and Commerce under the European Communities (Non-Life Insurance) Regulations, 1976 (implementing Council Directive 73/239/EEC) is


- suretyship (direct)

- suretyship (indirect)”.

The 1976 Regulations provides that this class of insurance corresponds with guarantee insurance business licensed under the Insurance Act, 1936 which defines guarantee insurance to include “the business of issuing bonds and contracts of insurance” The business of suretyship insurance would appear, therefore, to comprehend not merely fidelity insurance and the insurance by sureties of risks undertaken but also contracts of guarantee which are not contracts of insurance. It was apparently to mitigate the effect of these provisions that the Insurance (Amendment) Act, 1978, as amended by section 3 of the Insurance Act, 1981 was enacted to exclude from the prohibitions of the Insurance Acts certain guarantees given by banks. The Insurance Bill, 1987 (section 24) now before the Seanad proposes to grant similar exemptions in the case of certain bonds and contracts of guarantee given or made by the Industrial Credit Corporation and Foir Teoranta.

11.Article 4(1) of the 1976 Regulations prohibits an insurance undertaking from carrying on non-life insurance business in the State unless it is the holder of the appropriate authorisation and Article 4(5) provides that section 9 of the Insurance Act, 1936 shall apply to such an authorisation. Section 9 of the 1936 Act makes it unlawful for a person (save in the course of re-insurance) to effect or endeavour to effect a contract of insurance with an unlicensed insurer. The effect of these provisions, it is thought, is to make a contract of insurance effected with an unauthorised insurer illegal and therefore unenforceable. By virtue of the definition of guarantee insurance business in the 1936 Act therefore it may be that some contracts of guarantee entered into in the course of business by undertakings such as banks which are not authorised insurers which might not be regarded by the Courts as contracts of insurance at all may be rendered illegal. For example a bank might be regarded as entitled to guarantee payment of a rental under a leasing of equipment agreement because empowered to do so by the 1978 Act but not the performance of other clauses in the lease.

12.Judging by the Department’s memorandum this situation has not been brought about by any positive policy decision but arises from a provision in the 1936 Act the effect of which is not clear. Nevertheless it has been thought necessary to deal with it not by amending the 1936 Act so as to exclude banking business from the provisions of the Act but by enacting legislation exempting certain specified contracts of guarantee from the provisions of the Insurance Acts. The Joint Committee is informed that in the United Kingdom such contracts entered into in the course of banking business are exempt from the requirements of the legislation implementing EEC law on insurance. It can hardly have been the intention of Council Directive 73/239/EEC that the scope of suretyship insurance should vary between Member States.

Views of Banks and Insurers

13.Mr. Mandall informed Senator Robinson’s sub-committee that doubts as to the scope of suretyship insurance have been constantly creating difficulties for Irish banks. It is continually necessary to refer back to the 1978 Act to see if a service requested by a customer can be reconciled with the wording of the Act. There are doubts about the legality of business banks are expected to transact for the benefit of the State e.g., guarantees for deferred payment of customs duties. Moreover where in an international transaction an Irish firm is required to provide a guarantee by a foreign bank (for which exchange control approval is forthcoming) it must incur the additional expense of involving an Irish bank in the transaction. Mr. Mandall urged that Irish banks should be placed in the same position as their British counterparts and that legislation along the British lines should be enacted in this country. Mr. Kemp informed the sub-committee that he did not think that the Federation would object to the banks’ request being met provided Irish insurers continued to be allowed to write the suretyship business now being undertaken.

Views of Joint Committee

14.As far as Council Directive 84/373/EEC is concerned the Joint Committee agrees that it is reasonable to exempt Irish insurers from the requirement to maintain a separate equalisation fund for credit insurance and it recommends that this option is exercised.

15.As regards the scope of suretyship insurance the Joint Committee finds the case made by Mr. Mandall to Senator Robinson’s sub-committee convincing. It seems to the Joint Committee that problems caused for banks are attributable solely to the uncertainty as to the scope of the definition in the 1936 Act and that no interest is being served by allowing these problems to continue. The Joint Committee accordingly, recommends that the law be changed, whether by amendment of the Insurance Bill, 1987 or otherwise, to provide that banking business is exempt from the authorisation provisions applicable to insurance companies.>


Council Directive 87/344/EEC

16.Legal expenses insurance is defined as insurance covering the cost of legal proceedings and services employed to secure compensation for loss, damage or injury by settlement or proceedings and the cost of defending the insured in criminal, civil or administrative proceedings. Excluded are legal expenses arising from disputes or risks connected with the use of sea-going vessels and civil liability cover for an activity pursued in the insurer’s interest. Member States have the option of excluding also insurance covering such expenses which arises from foreign travel.

17.The Directive ends the specialisation requirement which has been in force in the Federal Republic of Germany as regards this class of insurance and lays down a number of rules applicable in all Member States. Legal expenses insurance is to be the subject of a separate contract or section of a policy specifying the cover and, if the Member State so requires, the premium. It shall provide that the insured person shall have the right to choose the lawyer or other qualified person to represent him in any enquiry or proceedings or where a conflict of interests arise. A Member State may, however, grant an exemption from this requirement in the case of insurance covering the use of or accidents to motor vehicles, or where the insurer does not carry liability insurance or where independent counsel are employed and the dispute involves parties insured by the same insurer. A contract of insurance must include provision for an arbitration procedure.

18.One of three safeguards must be adopted by an insurer handling legal expenses insurance and the Member State may prescribe which one or leave the choice to the insurer. The safeguards are (1) separate staff handling claims or giving legal advice, (2) separate legal entity to eal with the insurance or (3) choice of lawyer to defend his interests from the moment a claim arises to lie with the insured person. Risks included in legal expenses insurance may not be regarded as ancillary to any other class of non life insurance though exceptions may be permitted in the case of marine and travel insurance.

Views of Department and Insurers

19.Both the Department and the Irish Insurance Federation agree that very little specialised legal expenses business is written in Ireland. The legal expenses cover provided in connection with motor insurance is apparently excluded from the scope of the Directive. It would also appear that similar cover in general liability policies is also outside the Directive.

20.The Department makes the point that the Directive will facilitate Irish insurers in carrying on specialised legal expenses insurance business in the Federal Republic of Germany but thinks that none are likely to avail of the opportunity.

21.The main issues for this country are how the various options permitted by the Directive are to be exercised. The Federation is particularly insiste nt that where legal expenses insurance is set out in a separate section of a single policy, disclosure of the relevant premium should not be required and the Department seems prepared to go along with this view.

22.The Federation is anxious that the industry itself be free to choose which of the three methods of claims management referred to in paragraph 16 above should be opted. The Department apparently would like it to be left to the Minister to decide whether this option should be permitted.

23.The Federation thinks the other options of less importance. The Department appears to favour excluding tourist assistance insurance from the proposed provisions and granting a limited exemption from free choice of lawyer for motoring associations.

Views of the Joint Committee

24.The Joint Committee does not see why, where legal expenses insurance is set out in a separate section of a policy, the proportion of the premium attributable to that insurance should not be made known to the assured. It recommends therefore, that the Irish Regulations should require the separate premium to be shown. As far as the options referred to in paragraph 16 above are concerned the Joint Committee favours the third, namely, leaving the choice of lawyer to the insured person and it recommends that provision be made accordingly. As far as the other options are concerned the Joint Committee is prepared to endorse the proposals of the Department.



Gemma Hussey T.D.

Chairperson of the Joint Committee


20 January 1988