INSURANCE AND FINANCIAL RISK NEWS

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1 The Lefèvre Pelletier & associés Insurance team would like to wish you a very happy New Year for 2009 and hope that you will enjoy reading this third Newsletter. Insurance General insurance matters Damage insurance: taking into account the value of the asset at the time of the loss event Court of Cassation, 2nd Civil Division, 11 September 2008, no In view of Article L of the Insurance Code relating to the principle of indemnity, the Court of Cassation noted that the value of the asset to be taken into account in determining the indemnity payable by the insurer was the value at the time of the loss event. Interruption of the term of limitation: proof of the sending of a registered letter with request for acknowledgment of receipt Court of Cassation, 2nd Civil Division, 10 July 2008, no Under Article L of the Insurance Code, the two-year time-limit will be interrupted by the sending of a registered letter with request for acknowledgment of receipt. If such acknowledgement cannot be produced, proof that this formality has been observed may be provided by the postal receipt. Subrogation: admissibility of the action undertaken by the insurer and time of payment Court of Cassation, 2nd Civil Division, 11 September 2008, nos and An insurer who has paid the insurance indemnity is subrogated, up to the sum of such indemnity, in the rights and legal actions of the insured against third parties who through their doings have caused the damage that has given rise to the insurer s liability. Full payment of the insurance indemnity must be made before the competent court rules on whether the legal action instigated by the insurer may be considered admissible. Exclusion clauses are to be strictly interpreted Court of Cassation, 2nd Civil Division, 10 July 2008, no Exclusion clauses are to be strictly interpreted. Thus, a list of non-guaranteed loss events appearing in a clause that is preceded by the expression notamment [in particular] must be regarded as being restrictive.

2 Exclusion clauses must be formal and limited Court of Cassation, 2nd Civil Division, 2 October 2008, no A clause excluding the guarantee in the event of a deliberate breach by the insured of the laws, regulations or standards to be observed when carrying on his business was not sufficiently limited such that the insured could be expected to know the exact extent of the guarantee cover, and as a consequence the clause could not be enforced against him. Intentional fault and risk Court of Cassation, 3rd Civil Division, 7 October 2008, no Where deliberate omissions on the part of the insured make damage unavoidable, this constitutes a fraudulent error, removing the random nature from the insurance contracts. Borrower s insurance The banker s obligation to inform the borrower on the appropriateness of the contract to his personal situation Court of Cassation, 2nd Civil Division, 2 October 2008, no and Two rulings by the Court of Cassation once more refer to the solution of principle adopted on 2 March 2007 at its Plenary Assembly, whereby a banker who proposes that a borrower should take out an insurance contract to guarantee his loan must inform the latter regarding the appropriateness of the risk covered by the contract to the personal situation of borrower. Handing over the notification of insurance, even where this is written in clear and precise terms, is not sufficient to meet this obligation. Indemnification of the policyholder where the underwriter fails in its duty to advise Court of Cassation, 1st Civil Division, 18 September 2008, no The Court of Cassation noted that where, in the sovereign judgement of the competent courts, a loss is suffered by the holder of a group contract for borrower s insurance and the underwriter has failed in its duty to advise on the extent of the guarantees to the contract taken out, such loss would be deemed a missed opportunity that could have been submitted to other insurers for a wider guarantee. Cessation of the guarantee without making use of the policyholder s exclusion procedure Court of Cassation, 2nd Civil Division, 10 July 2008, no Where there is a provision in the contract for the automatic cessation of the effects of the borrower s insurance contract in the event of non-payment of the loan instalments and insurance premiums, there is no necessity to make use of the exclusion procedure under Article L of the Insurance Code for a policyholder who would benefit from the group insurance contract.

3 Life assurance Application of Article L of the Insurance Code to group insurance contracts Court of Cassation, 2nd Civil Division, 10 July 2008, nos , and In three decisions, the Court of Cassation has specified that Article L of the Insurance Code is applicable to all life assurance contracts, including group insurance contracts. The Court consequently ruled that a policyholder with a group insurance contract can, within the time-limit indicated and at his discretion, make use of his option to waive the life assurance contract, benefiting from the extension of such time-limit until the insurer sends and receives acknowledgment of the information notification. The surrender of a contract by the insured involves waiving the waiver option Court of Cassation, 2nd Civil Division, 11 September 2008, no The exercise of the right to surrender a life assurance contract causes the contract to be closed and necessarily entails the waiving by the policyholder of his waiver option under Article L of the Insurance Code. Transfer of the benefit of a life assurance contract in the event of the death of the beneficiary after that of the insured Court of Cassation, 2nd Civil Division, 23 October 2008, no Court of Cassation, 1st Civil Division, 5 November 2008, no In the case of the holder of a life assurance contract who had designated two beneficiaries with equal shares, the Court of Cassation, overturning previous jurisprudence, recognised the existence of two distinct stipulations to the benefit of others and thus deduced that, in the event of the death of one of the beneficiaries before he could accept the benefit of the contract, the benefit of such life assurance contract would be transferred to his heirs. On the other hand, where the holder designates his or her spouse or, in the absence of children born or to be born or of any heirs, the benefit of the life assurance contract will not be transferred to the heirs of the first-named beneficiary unless the policyholder has expressly reserved their rights. Reinsurance Continuation of the transposition of the reinsurance directive Decree no of 7 November 2008 Order of 7 November 2008 Decree of 7 November 2008 relating to reinsurance continues the transposition into French law of the provisions of the European directive of 16 November 2005 relating to reinsurance, setting out the methods for obtaining the administrative approval that reinsurance companies must now have, as well as the prudential principles that must henceforth be observed relating to technical reserves.

4 An order of the same date specifies these rules, setting out the composition of the solvency margin and the distribution of the technical reserves that must be created. Towards the modernisation of the legislation applicable to reinsurance companies Law of 4 August 2008 (Law for the Modernisation of the Economy), Article 152 This law, by means of an ordinance, entitles the government to take the necessary measures to reform and modernise the rules that apply to both insurance and reinsurance companies in order to take better account of the specific nature of reinsurance, in particular as regards (i) the prior notification of the A.C.A.M. (the insurance company regulator) for the freedom to provide services, (ii) the sanctions applicable to reinsurance companies and (iii) the safeguard measures that may be applied by the A.C.A.M. Distribution of insurance products Publication of the 2007 annual report by O.R.I.A.S. In its report, O.R.I.A.S. (the insurance agents registration body) summarises its functions, the registration procedure and certain statistical data, then recommends the following for 2008: - better public information on the existence of the O.R.I.A.S. register, in collaboration with all players, public authorities, professional insurance bodies and consumer associations; - clarification by the public authorities of the rules in France governing agents established in third countries within the European Economic Area; - improvement of the checks made on the conditions for agents to register on the O.R.I.A.S. register. Codes of conduct and Conventions between insurance agents distributing life assurance contracts and insurance companies Ordinance of 5 December 2008 The ordinance of 5 December 2008, implemented following the Law for the Modernisation of the Economy of 4 August 2008, in particular Article 152 (3), creates a new Article L in the Insurance Code providing for the introduction of codes of conduct as regards the marketing of life assurance contracts, to be approved by the Minister for the Economy as necessary. The A.C.A.M. is responsible for ensuring that the companies it supervises adapt their means to the approved codes of conduct (see Article L of the Insurance Code, as amended). Moreover, this ordinance creates a new Article L in the Insurance Code, whereby the agent and the insurance company must, as of 1 January 2010, establish Conventions between each other that in particular set out the conditions for the establishment and availability of the marketing and advertising documents relating to the life assurance products being distributed.

5 Disciplinary power of the A.C.A.M. Conseil d Etat (Supreme Administrative Court), 24 November 2008, no This ruling illustrates the implementation of the disciplinary power of the A.C.A.M. which, on the basis of Article L of the Insurance Code, banned a broker from practising as an agent for five years and levied a fine of 30,000, as the broker had several times been in breach of the Insurance Code. Insurance companies The establishment of audit committees in insurance companies Ordinance no of 8 December 2008, Articles 14 and 15 Ordinance , which transposes the European directive of 17 May 2006 relating to auditors, requires that insurance and reinsurance companies, mutual insurance companies and pension institutions establish a committee of experts to monitor all questions relating to the drawing up and inspection of accounting and financial information. Entities associated with a parent company that is itself subject to this obligation are exempt from this obligation. Financial risks Responsibility of providers of online investment and market trading services Court of Cassation, 4 November 2008, no Where authorised providers of internet-based reception and transmission services themselves hold the cash and financial instrument accounts of their customers, they must have in place an automated system for blocking orders where reserves and cover are insufficient to meet the contractually determined limits. Responsibility of the investment services provider and evaluation of the loss suffered by the customer Paris Court of Appeal, 15th Division B, 30 October 2008, no. 06/19997 The evaluation of the loss resulting from non-observance of the management objective as defined in a mandate must take account of the losses generated by exceeding the accepted level of accepted risk, exposure time to the risk and the amount of the sums exposed. Responsibility of the banker and failure to issue a warning to the customer Paris Court of Appeal, 15th Division B, 30 October 2008, no. 06/20428 The bank is responsible where, aware of its customer s short-term investment objectives, it proposes a speculative investment without providing proper information or warning the customer of the risks inherent in short-term investments.

6 Contacts Thierry Bernard Partner Tél. : +33 (0) Marie-Christine Peyroux Partner mcpeyroux@lpalaw.com Tél. : +33 (0) Aurélie Hazard Associate ahazard@lpalaw.com Tél. : +33 (0) Anne-Sophie Pia Associate aspia@lpalaw.com Tél. : +33 (0) Lefèvre Pelletier & associés is one of France s leading law firm. With more than 150 lawyers, the firm has expertise in all areas of business law.