ČLANCI / ARTICLES THE EU REGULATORY FRAMEWORK ON BANCASSURANCE: WORK IN PROGRESS ON WHAT? Abstract

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1 ČLANCI / ARTICLES Prof. dr Pierpaolo MARANO THE EU REGULATORY FRAMEWORK ON BANCASSURANCE: WORK IN PROGRESS ON WHAT? Abstract The ongoing process to amend the EU Directive on insurance mediation is an opportunity to address certain issues that have arisen with respect to so-called bancassurance operators. The essay wants to expose these issues, compare with what has been found in EU documents suggesting possible solutions or highlighting gaps that require further investigation. Key words: bancassurance, intermediaries, tied agents, disclosure, conflict of interest. According to Whereas n. 9 of the Directive 2002/92/EC on insurance mediation (hereinafter: IMD), various types of persons or institutions, such as agents, brokers and "bancassurance" operators, can distribute insurance products because equality of treatment between operators and customer protection requires that all these persons or institutions be covered by the IMD. Under this principle bancassurance operators have the right to have access to insurance mediation by acquiring the status of insurance intermediaries like other full time operators such as agents and brokers. In this way, the IMD exceeds the resistance to the eligibility of such operators as insurance intermediaries, which had emerged in several Member States under the previous Directive 77/92/EEC. Therefore, Member States cannot reasonably be prevented these operators from carrying out the insurance mediation as defined in the IMD, nor prohibit pursuing this activity in their territories to operators established in other Member States. The IMD, however, gives no definition of "bancassurance operators in accordance with the decision to focus the definition of "insurance intermediary without providing definitions of various categories of intermediaries. Therefore these operators are defined differently by each Member State, which may include or exclude certain financial intermediaries. Although the IMD requires all natural or legal persons who carry out insurance mediation to its rules except for specific exclusions, domestic legislations may always exclude some of them the ability to carry it out. Moreover, IMD allows to bancassurance operators to gain a dual capacity because they add to their typical activities (e.g. banking, investment services) insurance mediation. Under this dual capacity, these operators might pursue the insurance mediation abroad by way of establishment or provision of services, without carrying out their typical activities in the host Facoltà di Scienze Bancarie, Finanziarie e Assicurative Università Cattolica del Sacro Cuore, Milano. 1

2 Member State. This possibility, however, may be excluded if an operator is not permitted by the EU law or its own domestic law to pursuing its main activity in other States. From the foregoing, IMD allows bancassurance operators as defined by the Member States to pursue the insurance mediation fulfilling the rules laid down by the Directive. Because these operators carry out a principal professional activity other than insurance, professional qualifications required might be different from the other full time intermediaries. According to Article 4 of the IMD, home Member States may adjust the required conditions with regard to knowledge and ability in line with the activity of insurance mediation and the products distributed, particularly if the principal professional activity of the intermediary is other than insurance mediation. In such cases, that intermediary may pursue an activity of insurance mediation only if an insurance intermediary fulfilling the conditions of that Article or an insurance undertaking assumes full responsibility for his actions. Unlike professional requirements, the IMD makes no distinction between intermediaries from the requirements information to customers. Therefore, Articles 12 and 13 shall apply also with respect to bancassurance operators. The regulatory framework described above shows that agents, brokers and "bancassurance" operators should receive equal treatment by the Member States. Professional qualifications required of bancassurance operators could be more loose than full time intermediaries, while requirements information to customers is the same. Such a regulatory framework could be explained as follows with regards to bancassurance operators. Possible differences in the professional qualifications are justified because these operators are already subject to the rules of their own core business (e.g. banking, investment services), while the requirements information are the same because the same are the relationships that can arise with customers by bancassurance operators and full time intermediaries. Both of these explanations do not fully persuade. With regard to professional qualifications, employees of the bancassurance operators know the products related to the principal professional activity carried out. Therefore, they may know the characteristics of those life insurance products in which the component of financial investment is prevalent on the insurance, but their knowledge could not exist if compared with non-life insurance products. Undoubtedly, the bancassurance channel has grown by distributing life insurance products. However, the emerging trend is to use this distribution channel also for non-life products. If equality of treatment between intermediaries requires that bancansurance operators be covered by the IMD, customer protection needs of skilled professionals in all various classes of insurance in which they operate. When the insurance offer is moving away from investment products, professional qualifications must be the same for all intermediaries. Therefore, the above-mentioned provision of Article 4 of IMD on intermediaries whose principal professional activity is other than insurance mediation should be not applied to bancassurance operators. In addition, these operators are sometime the controlling shareholders of the insurers whose products they distribute, while other times they are among the main shareholders. Therefore, it might be a little useful to provide that they may pursue an activity of insurance mediation, if an insurance undertaking assumes full responsibility for his actions. It would be like saying that these operators are responsible for themselves because the deterrent effect of insurer s responsibility which requires the control of the insurer on the intermediary - is likely to disappear or fade. 2

3 The conclusion is that upcoming amendments to IMD should be ruled out that the professional qualifications of bancassurance operators are different because their principal activity is other than insurance. With reference to requirements information, the principle of equal treatment between full time intermediaries and those of bancassurance assumes that all such intermediaries are able to establish the same relationship with the customer, i.e. that the latter has no other dealings with intermediaries outside of insurance. However, a bank which acts as an insurance intermediary may also grant a loan and distribute an insurance coverage for the risk that affects the ability of the borrower/policyholder to repay the loan to the bank, or the guarantee provided to the bank. In these cases the bank may require the customer to purchase the insurance product, making the granting of credit for that purchase. Moreover, the bank could also be a direct beneficiary of the insurance benefit arising under the coverage distributed in this way. Does this scenario bring out conflicts of interest for the bank? Does bank share this conflict with the other insurance intermediaries? IMD doesn t provide answers to these questions because a rule is missing on the conflict of interest. Whereas n. 19 states that IMD should specify the obligations which insurance intermediaries should have in providing information to customers, while Article 12 lays down a list of such information which is only functional to make known whether the insurance intermediary has a holding, direct or indirect, representing more than 10 % of the voting rights or of the capital in the insurance undertaking, or vice versa. However, a Member State may in this area maintain or adopt more stringent provisions which may be imposed on insurance intermediaries independently of their place of residence where they are pursuing mediation activities on its territory provided that any such more stringent provisions comply with Community law. Therefore a conflict of interest rule is left to each Member State, so that such regulation is only possible and may differ within the European Union. The lack of a conflict of interest rule applies to all insurance intermediaries, not only the bancassurance operators. The forthcoming amendments to IMD probably also introduce harmonized rules on conflict of interest. The Consultation document on the Review of the Insurance Mediation Directive (IMD) prepared by the Commission Staff points out that, from one hand, one of the objectives of the revision of the IMD should be to adopt clear and effective rules on conflicts of interests and transparency which affect the distribution of all insurance products, so that insurance intermediaries should be obliged to act honestly, professionally and in line with the interests of their customers. From the other hand, another objective of the revision of the IMD should be to establish a more robust EU disclosure framework which should lead to a higher degree of harmonisation. This is certainly welcome and necessary to achieve an effective Single market. However, those just reported are conflicts that seem specific to bancassurance operators. The new IMD should take them into account by providing a rule that can neutralize even these specific conflicts. Unfortunately, the above Consultation document does not mention anything about such conflicts. It only states that cconflict of interests can arise both in the relationship between a broker and an insurance company and between a broker and third parties, such as asset managers. Therefore such conflicts of interests may compromise the objectivity of the advice given to customers. Considering the fact that these sellers are often engaged in the provision of 3

4 advice or other personalised services, these conflicts of interests can have a direct impact on the quality of the service, leading to policy holders buying unsuitable and overpriced products and leading also to less competitive markets. The analysis provided by the Commission Staff is acceptable. However, failure to address the specific conditions related to the position of the bank to clients may be in conflict with the objective of ensuring a level playing field for all intermediaries, as well as being detrimental to their clients. The conflict of interest noted above does not exhaust the critical issues arising from bancassurance operators. As far as transparency is concerned, the current IMD does not contain any provisions on remuneration and Member States are therefore free to impose their own remuneration requirements on sellers of insurance products. On the suggestion of the investigation initiated by the State of New York Public Prosecutor Elliot Spitzer, the debate on the eligibility of contingent commissions has also begun in Europe. EU Commission issued a Sector Inquiry on business insurance in 2007 where this aspect has been examined limited to brokers, to conclude that the solutions adopted in this regard in the Markets in Financial Instruments Directive (hereinafter: MiFID) are a benchmark for future amendments to the IMD. The Consultation document of the Commission Staff suggests that the application of the high level principles concerning conflicts of interest and transparency both to insurance intermediaries and insurance undertakings could be considered. In this context, one option could be to use the MiFID Level 1 regime as a starting point for the management of conflicts of interest, notably with regard to remuneration. In view of the Commission Staff, the sophisticated MiFID regime for the identification, management and disclosure of conflicts of interest provides undertakings with some flexibility to determine the appropriate approach for their business, depending on its nature, size and complexity. 1 The solutions provided by the MiFID, however, don t seem totally helpful compared to the bancassurance operators. These intermediaries, in fact, are often in a tied relationship with respect to insurers because they hold controlling shares in their capital or vice versa. 2 This could lead to the conclusion that a such distribution channel is owned by the insurer, so resulting in a failure to apply rules based on incentives paid to intermediaries by third parties as is set by 1 Here is Article 18 of MiFID level 1 related to the conflicts of interest. 1. Member States shall require investment firms to take all reasonable steps to identify conflicts of interest between themselves, including their managers, employees and tied agents, or any person directly or indirectly linked to them by control and their clients or between one client and another that arise in the course of providing any investment and ancillary services, or combinations thereof. 2. Where organisational or administrative arrangements made by the investment firm in accordance with Article 13(3) to manage conflicts of interest are not sufficient to ensure, with reasonable confidence, that risks of damage to client interests will be prevented, the investment firm shall clearly disclose the general nature and/or sources of conflicts of interest to the client before undertaking business on its behalf. 3. In order to take account of technical developments on financial markets and to ensure uniform application of paragraphs 1 and 2, the Commission shall adopt, in accordance with the procedure referred to in Article 64(2), implementing measures to: (a) define the steps that investment firms might reasonably be expected to take to identify, prevent, manage and/or disclose conflicts of interest when providing various investment and ancillary services and combinations thereof; (b) establish appropriate criteria for determining the types of conflict of interest whose existence may damage the interests of the clients or potential clients of the investment firm. 2 According to Article 2 n. 25) of MiFID level 1,"Tied agent" means a natural or legal person who, under the full and unconditional responsibility of only one investment firm on whose behalf it acts, promotes investment and/or ancillary services to clients or prospective clients, receives and transmits instructions or orders from the client in respect of investment services or financial instruments, places financial instruments and/or provides advice to clients or prospective clients in respect of those financial instruments or services. 4

5 MiFID, at least in the interpretation given by the former committee CESR. The goal of leveling the playing field between insurance intermediaries and to protect clients can be reached taking into account also that the incentives paid to proprietary networks, including bancassurance operators, may have the same effect on the independence of their advice of those paid by or to third parties. Therefore, the upcoming amendments to the IMD, as the MiFID should not neglect this issue. Finally, reference to the solutions adopted by MiFID for the future regulation of the insurance mediation suggests paying attention to the following three questions: the investments packaged as life insurance policies, the definition of client and the outsourcing. They concern above all the bancassurance operators, although in principle also for other insurance intermediaries. With regard to the first question, bancassurance operators have historically been used as a distribution channel for life insurance products in which the financial investment was most prevalent. According to Article 12, par. 3 of the IMD, prior to the conclusion of any specific contract, the insurance intermediary shall at least specify, in particular on the basis of information provided by the customer, the demands and the needs of that customer as well as the underlying reasons for any advice given to the customer on a given insurance product. These details shall be modulated according to the complexity of the insurance contract being proposed. The Consultation document noted above considers that this provision does not deal adequately with the risk that insurance intermediaries doesn t act honestly, fairly and professionally in accordance with the best interests of their clients, when they are distributing investments packaged as life insurance policies. In view of the Commission Staff, in the context of tied agents, the responsibility to act in the best interest of the client would remain with the insurance undertaking. It s unclear, however, if bancassurance operators are considered as a tied agents when they are part of the same group (: financial conglomerate) of the insurer, while responsibility likely to be little useful for as mentioned above. Moreover, amendments to IMD need to ensure that the client receives information as regards the remuneration of the sellers, making clear the difference between the premium paid and the actual invested part of the premium. The Consultation document adds that remuneration structures should not be such that they materially impact on the ability of the intermediary to act in the best interest of the client and should be structured in a way that effectively avoid or manage any conflicts of interest that may arise. These statements are acceptable. However, remuneration may not be the only factor that influences the bancassurance operator, especially if it acts within a financial conglomerate which includes the insurer. It s also acceptable the other statement of the Consultation document. When providing investment advice for investments packaged as life insurance policies, the insurance intermediary should obtain the necessary information regarding the client s or potential client's knowledge and experience in the investment field relevant to the specific type of product or service, his financial situation and his investment objectives. This information should be obtained so as to enable the firm to recommend to the client or potential client the investment services and financial instruments that are suitable for that client or potential client. However, there is also a need for extra warning when such policies are sold by banks. This is because customers don t often realise that they buy insurance together with the investment, and they rely on the fact that the bank would safeguard their interests. 5

6 The issue related to the information is strictly connected to the second question arising from the reference to MiFID, i.e. the definition of client. IMD doesn t provide a definition of client. Whereas n. 21 states that there is less of a need to require that such information be disclosed when the customer is a company seeking reinsurance or insurance cover for commercial and industrial risks, while Article 12 par. 4 says that the information requirements referred to in the previous paragraphs need not be given when the insurance intermediary mediates in the insurance of large risks, nor in the case of mediation by reinsurance intermediaries. Therefore IMD makes a distinction taking into account the type of risk faced by a person (large risks v. mass risks), instead of the kind of person or the purposes for which a person may seek insurance coverage. Otherwise, MiFID introduces a classification of clients in three categories of investors - retail, professional and counterparties according to their experience, knowledge and expertise to make its own investment decisions and properly assess the risks that it incurs, and the clients classified as retailers may apply to be considered as professional, and vice versa, as provided in Annex II to MiFID. The two Directives have adopted different criteria to classify clients and MiFID allows mobility between retail and professional investors, unlike the IMD compared to policyholders. In addition, both Directives do not distinguish between clients and consumers. However, Directive 2002/65/EC concerning the distance marketing of consumer financial services covers both insurance products and investment services that are offered to the consumer, which is defined as any natural person who, in distance contracts covered by this Directive, is acting for purposes which are outside his trade, business or profession. Therefore, it would be highly desirable that the EU Commission should consider whether these distinctions are still useful or are they also to be harmonized (i.e. coordinates). The last question raised by the reference to MiFID concerns the regulation of the outsourcing. IMD doesn t provide any rule related to it, so his eligibility as its discipline is left to each Member State for all insurance intermediaries. An exception might perhaps be considered the situation envisaged by Article 4, par. 4, which regulates the inability of the insurance intermediary to transfer the premium to the insurance undertaking or to transfer the amount of claim or return premium to the insured, where such activities are carried out by a broker. However, a bancassurance operator is also subject to MiFID, which allows outsourcing and requires that outsourcing of important operational functions may not be undertaken in such a way as to impair materially the quality of its internal control and the ability of the supervisor to monitor the firm's compliance with all obligations (see Article 13 par.5). In addition, Directive 2009/138/EC (so called Solvency II), provides a definition of outsourcing 3 and regulates the use by insurers, while the above-mentioned Directive 2002/65/EC makes a distinction between supplier, who is the contractual provider of services subject to distance contracts, and supplier of a means of distance communication, which means any public or private, natural or legal person whose trade, business or profession involves making one or more means of distance communication available to suppliers. 3 Article 13 n 28): "outsourcing" means an arrangement of any form between an insurance or reinsurance undertaking and a service provider, whether a supervised entity or not, by which that service provider performs a process, a service or an activity, whether directly or by sub-outsourcing, which would otherwise be performed by the insurance or reinsurance undertaking itself. 6

7 Equal treatment between intermediaries and the need for clear rules and conforming to the principle of proportionality seems to require the Commission to propose amendments to the IMD on this profile. SUMMARY The analysis should have highlighted some shortcomings in the current European Union rules on operators of bancassurance. Equal treatment between insurance intermediaries cannot be reached on detriment of the protection of their clients. The leveling of the playing field cannot operate for the exclusive benefit of the bancassurance operators, but requires that they have adequate skills. The reference to MiFID repeatedly expressed by the EU Commission must also be functional to coordinate certain Community provisions, but cannot be uncritically extended to the whole insurance industry. Slavko ĐORĐEVIĆ, LLD Ass. professor at the Faculty of Law, University Kragujevac PRINCIPLES OF THE EUROPEAN INSURANCE CONTRACT LAW FUTURE OPTIONAL INSTRUMENT OF EU LAW? SUMMARY The Principles of European Insurance Contract Law (PEICL) were published in September 2009 as result of ten years work of Insurance Group ( The Project Group on Restatement of European Insurance Contract Law ). Drafting PEICL began in 1999 as a standalone project, but in 2005 it has been transformed into a part of the "CoPECL Network of Excellence", forming a specific part of Common Frame of Reference (CFR). The main characteristic of the CFR and PEICL is their non-binding nature. However, the possibility of adoption of these documents in a form of so called optional instrument of EC law has been expressed more than once in European Commission's Action Plan in 2003 and Communication on European Contract Law in An optional instrument of European Contract Law can be defined as a legal act of EC law which application depends on a choice by the parties to the contract. Its main purpose is to provide the parties with an alternative regime of contract law. In this paper author examined the suitability of the PEICL as an optional instrument for European Insurance Contract Law. 7

8 Angelo BORSELLI, LLM * UNFAIR TERMS IN INSURANCE CONTRACTS Abstract The paper deals with the issue of unfair terms in regard to insurance contracts in the European context. It focuses in particular on Council Directive 93/13/EEC and on Article 2:304 of the Principles of European Insurance Contract Law. A list of abusive clauses in insurance contracts will also be analyzed. Key words: Insurance, abusive clauses, unfair terms, Directive, consumer contracts, PEICL, principles, Europe 1. INTRODUCTION Consumer contracts not individually negotiated are more and more common. Those contracts, concluded between parties of different economic strength, should be subject to scrutiny in order to set aside unfair terms included by imposition rather than by agreement. 4 The purpose of this paper is to address the issue of unfair terms with regard to insurance contracts in the European context. The paper will focus on Council Directive 93/13/EEC dealing with unfair terms in consumer contracts 5 and on Article 2:304 of the Principles of European * PhD Candidate in Business and Commercial Law, Università Bocconi, Italy. angeloborselli@alice.it. 4 See Eggers, Peter Macdonald et al. Good Faith and Insurance Contracts, Informa Professional, London, 2004, p Council Directive 93/13, 1993 O.J. (L095) 29 [hereinafter Directive]. With regard to the Directive 93/13, see Bruder, Florian Burden of Proof and the Unfair Terms in Consumer Contracts Directive, European Review of Private Law, Vol. 15, 2007, p. 205; Alpa, Guido A Glance at Unfair Terms in Italy and the United Kingdom (What an Italian Lawyer Can Learn from the English Experience), European Business Law Review, Vol. 15, 2004, p. 1123; Macdonald, Elizabeth Scope and Fairness of the Unfair Terms in Consumer Contracts Regulations: Director General of Fair Trading v First National Bank, The Modern Law Review, Vol. 65, 2002, p. 763; Dean, Meryll Defining Unfair Terms in Consumer Contracts Crystal Ball Gazing? Director General of Fair Trading v First National Bank plc, The Modern Law Review. Vol. 65, 2002, p. 773; MacMillan, Catharine Evolution or Revolution? Unfair Terms in Consumer Contracts, The Cambridge Law Journal, Vol. 61, 2002, p. 22; Reich, Norbert The Implementation of Directive 93/13/EEC on Unfair Terms in Consumer Contracts in Germany, European Review of Private Law, Vol. 5, 1997, p. 165; Tenreiro, Mario The Community Directive on Unfair Terms and National Legal Systems The Principle of Good Faith and Remedies for Unfair Terms, European Review of Private Law, Vol. 3, 1995, p. 273; Dean, Meryll Unfair Contract Terms: The European Approach, The Modern Law Review, Vol. 56, 1993, p. 581; Joerges, Christian The Europeanisation of Private Law as a Rationalisation Process and as a Contest of Disciplines an Analysis of the Directive on Unfair Terms in Consumer Contracts, European Review of Private Law, Vol. 3, 1995, p. 175; De Nova, Giorgio Italian Contract Law and the European Directive on Unfair Terms in Consumer Contracts, European Review of Private Law, Vol. 3, 1995, p. 221; De Moor, Anne Common and Civil Law Conceptions of Contract and a European Law of Contract: the Case of the Directive on Unfair Terms in Consumer Contracts, European Review of Private Law, Vol. 3, 1995, p. 257; Hondius, Ewoud The Reception of the Directive on Unfair Terms in Consumer Contracts by Member States, European Review of Private Law, Vol. 3, 1995, p. 241; Weatherill, Stephen Prospects for the Development of European Private Law Through Europeanisation in the European Court the Case of the Directive on Unfair Terms in Consumer Contracts, European Review of Private Law, Vol. 3, 1995, p

9 Insurance Contract Law (PEICL). 6 A list of abusive clauses in insurance contracts will also be examined. 2. DIRECTIVE 93/13/EEC AND ARTICLE 2:304 OF THE PEICL Because of disparities in the laws of Member States that address unfair terms of consumer contracts, the European Union adopted Directive 93/13/EEC on April 5, 1993 in order to protect consumers within the European Union from unfair contractual terms 7. The Directive is one of the measures intended to establish the internal market 8. The Preamble of the Directive emphasizes the need to remove unfair terms from contracts between the seller of goods or supplier of services and the consumer of them, so that sellers of goods and suppliers of services will be helped in their commercial activities, both in their home State and throughout the internal market. 9 The rules introduced by the Directive apply only to contracts concluded between sellers or suppliers and consumers 10 after 31 December According to Article 2 of the Directive, a consumer is any natural or legal person who [... ] is acting for purposes which are outside his trade, business or profession 12 and a seller or supplier is any natural or legal person who [... ] is acting for purposes relating to his trade, business or profession. 13 If neither party is a consumer, the Directive does not apply. Insurance contracts concluded between insurers and consumers are subject to the Directive. The Directive does not apply to terms that have been individually negotiated. 14 Article 3.2 provides that a term is considered not individually negotiated where it has been drafted in advance and the consumer has not been able to influence the substance of the term, especially in case of a pre-formulated standard contract. Even if a term has been individually negotiated, the rules set out by the Directive cover the rest of the contract if, following an overall assessment, the contract is a pre-formulated standard one 15. The burden of proof is on the seller or supplier to show that a standard term has been individually negotiated. An insurer, therefore, has to prove that the contract was individually negotiated. Simply having the choice of few terms or sets of terms is not equivalent to negotiation. 16 A term not individually negotiated is unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties rights and obligations arising under the contract, to the detriment of the consumer. 17 Paragraph 19 of the Preamble and article 4.2, however, specify that an assessment of the unfair nature of the terms will not apply to the main subject matter of the contract or to the 6 The text of the Principles of European Insurance Contract Law (PEICL) is available at: 7 See paragraph 2, 3 and 10 of the Preamble and Article 1 of the Directive. 8 See paragraph 1 of the Preamble. 9 See paragraph 6 and 7 of the Preamble. 10 See paragraph 10 of the Preamble and Article 1 of the Directive. 11 See Article See Article 2(b). 13 See Article 2(c). 14 See paragraph 12 of the Preamble and Article 3 of the Directive. 15 See Article 3.2 of the Directive. 16 See Clarke, A. Malcom. The Law of Insurance Contracts, Informa Law, London, 2006, p Article 3.1 of the Directive. 9

10 adequacy of the price and remuneration of the goods or services supplied in exchange 18, provided these terms are in plain intelligible language. 19 Thus, terms relating to the subject matter or the price for goods or services can be assessed as being unfair if they are not intelligible. With regard to insurance contracts, it follows that the terms which clearly define or circumscribe the insured risk and the insurer s liability are not subject to the fairness assessment because these restrictions are taken into account in calculating the premium paid by the consumer. 20 Nevertheless, it is not easy to establish whether a term excluding a risk from insurance coverage falls within the subject matter of the contract, thereby avoiding coverage by the Directive s rules, or whether it simply waives liability, in which case it is subject to the assessment of the unfair nature. In this respect, it can be argued that an exclusion clause to be valid should be express and clear. Doubt has been expressed, however, about whether insurance policies can be drafted in language plain and intelligible to the man in the pub. 21 In general, exceptions and warranties or terms which describe the insured risk or the circumstances in which the insurer will have to indemnify the assured should not be subject to assessment as unfair terms. 22 In any case, the main subject matter of the contract and the price/quality ratio may be taken into account in assessing the fairness of other terms. 23 As to the standard of good faith, according to paragraph 16 of the Preamble, it should be intended as a means that permits an overall evaluation of the different interests involved. In considering good faith, regard shall be given to the strength of the bargaining position of the parties and to the fact that the consumer had an inducement to accept the term. 24 The fact that goods or services were sold or supplied to the special order of the consumer is also relevant. 25 The seller or supplier that deals fairly and equitably with the consumer and that takes the consumers legitimate interests into consideration may satisfy the requirement of good faith. 26 Further, Article 4.1 sets out other standards to be considered in assessing the unfair nature of a term. Such standards include consideration of the nature of the goods and services 27 for which the contract was concluded and all the circumstances attending such conclusion and all the other terms of the contract or of another contract upon which it is dependent. In the case of written consumer contracts, the terms must be drafted in plain and intelligible language. Otherwise, if there is doubt about the meaning of a term, the interpretation most favourable to the consumer will prevail. 28 With regard to remedies that are available in the event of unfair terms, Article 6.1 of the Directive sets out that Member States have to provide, under their national law, that unfair terms 18 See Clarke, A. M. Ibidem, p. 591 that defines core provisions in insurance contracts those terms dealing with premium and cover. 19 Anyway, it has to be noticed that according to the Annex 1(l) terms that do not give the consumer the right to cancel the contract if the final price is too high in relation to the price agreed when the contract was concluded may be regarded as unfair (emphasis added). 20 See paragraph 19 of the Preamble. See also Workshop 1, The Scope of the Directive: Non-negotiated Terms in Consumer Contracts (Art. 1 1, 3 1, 4 2), at 97, available at: where it is highlighted that low standards insurance should warn the consumer about this low standard and should be cheaper!. 21 Clarke, A. M. Ibidem, p See Eggers, Peter Macdonald et al. Ibidem, p. 123; Clarke, A. M. Ibidem, p See paragraph 19 of the Preamble. 24 See paragraph 16 of the Preamble. 25 See Ibidem. 26 See Ibidem. 27 See also paragraph 18 of the Preamble. 28 See Article 5 of the Directive and paragraph 20 of the Preamble. 10

11 shall not be binding on the consumer. If the rest of the contract can continue in existence without the unfair terms, then it will remain in force and bind the parties upon the other terms. 29 Member States also have to ensure that the consumer does not lose the protection provided by the Directive if the law chosen to govern the contract is that of a non-member country, so long as the contract has a close connection with the territory of a Member State. 30 Moreover, Article 7 of the Directive requires Member States to have adequate and effective means to prevent the continued use of unfair terms in consumer contracts. Paragraph 2 of the above-mentioned Article requires Member States to have provisions that enable persons or organizations having a legitimate interest under national law in protecting consumers, to bring an action according to the national law concerned before a court or an administrative authority for a decision as to whether contractual terms drawn up for general use are unfair. 31 Individuals or organizations may take action separately or jointly against a number of sellers or suppliers from the same economic sector or their associations which use or recommend the use of the same general contractual terms or similar terms. 32 Article 8 gives Member States the option of adopting or retaining provisions more stringent than those of the Directive in order to afford consumers a maximum degree of protection. 33 Having analyzed the rules introduced by the Directive, it is worthwhile examining those set out in Article 2:304 of the Principles of European Insurance Contract Law (PEICL) on abusive clauses that are specific to insurance contracts. 34 This Article is modeled on Articles 3, 4 and 6 of Directive 93/13/EEC. It does not contemplate application of the rules to the general category of consumers but to the policyholder, the insured or the beneficiary. Likewise the Directive, Article 2:304(1) PEICL provides that a contract not individually negotiated shall not be binding on the policyholder, the insured or the beneficiary, if, contrary to the requirements of good faith and fair dealing, it causes a significant imbalance in his rights and obligations arising under the contract to his detriment. In evaluating the unfair nature of a term consideration must be given to the nature of the insurance contract, all the other terms of the contract and the time the contract was concluded. According to the third paragraph of the Article, the assessment could not concern the adequacy in value of the cover and the premium, or terms that state the essential description of 29 See also paragraph 21 of the Preamble. 30 See Article 6.2 of the Directive and paragraph 22 of the Preamble. 31 See also paragraph 23 of the Preamble. 32 Article 7.3 of the Directive. 33 See also paragraph 12 of the Preamble. 34 According to Article 1:102, the PEICL shall apply when the parties, notwithstanding any limitations of choice of law under private international law, have agreed that their contract shall be governed by them. With regard to the PEICL, see Basedow, Jürgen et al. Principles of European Contract Law (PEICL), Sellier European Law Publishers, Munich, 2009; Heiss, Helmut. The Common Frame of Reference (CFR) of European Insurance Contract Law, in Common Frame of Reference and Existing EC Contract Law, Reiner Schulze ed., Munich, 2008, pp. 229, 242; Hinchliffe, Peter Review of Principles of European Insurance Law, Era Forum, 2008, available at: Basedow, Jürgen Insurance Contract Law as Part of an Optional European Contract Act, Lloyd s Maritime and Commercial Law Quarterly, Vol. 498, 2003; Basedow, Jürgen Transjurisdictional Codification, Tulane Law Review, Vol. 83, 2009, pp ; Storme E. Matthias, An Optional Instrument for Insurance Contract Law: the Point of View of Legal Practice, European Parliament, Policy Department, 2010, available at: Castle, Jacquetta The Principles of European Insurance Contract Law: Towards a European Insurance Contract?, Inversion, Nr. 7/2009, pp , available at: 11

12 the cover granted or the premium agreed, unless these terms are not in plain and intelligible language. The contract shall remain in force and bind the parties if it is capable of continuing in existence without the unfair term. Otherwise, the unfair term shall be substituted by a term which reasonable parties would have agreed upon had they known the unfairness of the term. 35 The rules defining a contract not individually negotiated, governing the assessment of the unfairness of contracts with some terms individually negotiated and regulating the burden of proof of the contract s negotiation are identical to those of the Directive. Finally, the Annex of the Directive contains an indicative and non-exhaustive 36 list of terms that may be considered unfair. Not all of these terms are relevant to insurance contracts; therefore, it is worth drawing up a more specific list. Unfair terms in insurance contracts may be: - [t]erms that mislead the insured consumer about the contract. 37 This category may include terms with which the consumer had no real opportunity of becoming acquainted before the conclusion of the contract 38, terms hidden in long documents, with small print (so called unfair surprises ) 39 and terms limiting the insurer s obligation to respect commitments undertaken by his agents or making his commitments subject to compliance with a particular formality [t]erms that excuse improper performance of contractual obligations. 41 Among other things this category refers to terms excluding or limiting liability for delay in handling and paying claims. 42 In general, terms that inappropriately exclude or limit the legal rights of the insured with respect the insurer in the event of total or partial non-performance or inadequate performance by the insurer of any of the contractual obligations 43 fall within this category. The category also includes terms that oblige the insured to fulfill all his obligations even when the insurer does not perform his [t]erms erecting barriers to redress. 45 This category may include terms that exclude or hinder the insured s right to take legal action or exercise any other legal remedy 46, terms enabling the insurer to put forth a technical defense 47, terms that require proof satisfactory to the insurer and that permits the insurer to make unfair demands on the claimant insured. 48 Also clauses that reverse the burden of proof against the insured should be assessed as unfair. 49 Attention should also be given to an arbitration clause since the insured may be at a disadvantage compared to the insurer in an arbitration Article 2:304(2) PEICL. 36 Article 3.3 of the Directive. 37 Clarke, A. M. Ibidem, p Annex 1(i) of the Directive. 39 See Clarke, A. M. Ibidem, p Annex 1(n) of the Directive. See also Clarke, A. M. Ibidem, p. 598, making reference to the following clause: [a]ll terms of the contract of insurance are contained in this policy. 41 Clarke, A. M. Ibidem, p Ibidem, p See Annex 1(b) of the Directive. 44 See Annex 1(o) of the Directive. 45 Clarke, A. M. Ibidem, p See Annex 1(q) of the Directive. 47 Clarke, A. M. Ibidem, p. 598, referring to a term that requires notice of loss in an unduly short period of time. 48 Ibidem, p See Ibidem, p See Ibidem, p

13 - terms giving the insurer the right to dissolve the contract ad libitum where the same right is not granted to the consumer, or terms that permit the insurer to retain the sums paid for services not yet supplied by him, if it is the insurer himself who dissolves the insurance contract terms that enable the insurer to terminate the contract without reasonable notice unless there are serious grounds for doing so. 52 In such a case it is likely that the insured would be unable to find alternative insurance coverage terms that permit the insurer to vary the terms of the insurance contract unilaterally without a valid reason specified in the contract. 54 This category may also include premium increases during the term of the policy. - terms that require an insured who breaches the contract to pay a disproportionately high sum in compensation. 55 Unfairness may also result from the vagueness of certain terms or from the fact that the insurance policy is silent on some points. 56 In addition, it should be noted that the Commission Regulations No 3932/92 of 21 December and No 358/2003 of 27 February provided a list of clauses in standard policy conditions to which the exemption from article 81(1) of the Treaty 59 did not apply because they impose undue restrictions on the parties. 60 These regulations expired on 31 March 2003 and on 31 March 2010 respectively See Annex 1(f) of the Directive. 52 See Annex 1(g) of the Directive. 53 See Clarke, A. M. Ibidem, p See Annex 1(j) of the Directive. See also Clarke, A. M. Ibidem, p. 599, making reference to terms enabling the insurer to vary the premium unilaterally or to assign the contract to another insurer. 55 See Annex 1(e) of the Directive 56 See Report from the Commission on the Implementation of Council Directive 93/13/EEC of 5 April 1993 on Unfair Terms in Consumer Contracts, p. 24, available at: giving the example of a contract silent or vague as to the obligations to pay the premium, so that the policyholder may not know how to fulfill his obligations and the consequences for their insurance coverage if he fails to pay the premium. 57 Commission Regulation 3932/92 of 21 December 1992 on the application of Article 85(3) of the Treaty to certain categories of agreements, decisions and concerted practices in the insurance sector, 1992 O.J. (L 398) Commission Regulation 358/2003 of 27 February 2003 on the application of Article 81(3) of the Treaty to certain categories of agreements, decisions and concerted practices in the insurance sector, 2003 O.J. (L 053) See Article 101 of the Treaty on the Functioning of the European Union (formerly Article 81 of the Treaty establishing the European Community). Article 101(1) prohibits all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition. As an exception to this rule, Article 101(3) provides that the provisions contained in Article 101(1) may be declared inapplicable in case of agreements which contribute to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefits, and which do not impose restrictions which are not indispensable to the attainment of these objectives and do not afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products concerned. 60 See paragraph 5 of the Preamble of the Commission Regulation 3932/ The new insurance Block Exemption Regulation [Commission Regulation 267/2010, 2010 O.J. (L 83) 1, on the application of Article 101(3) of the Treaty on the Functioning of the European Union to certain categories of agreements, decisions and concerted practices in the insurance sector] was adopted on 24 March 2010 and it will expire on 31 March The new Regulation renews the exemptions for two of the four categories of agreements exempted in the previous Block Exemption Regulation, namely those on joint compilations, tables and studies and those on common coverage of certain types of risks (pools). Access to past statistical data is essential in order to technically price risks and therefore the Commission considered the cooperation in this area necessary. As to the common coverage of certain types of risks, the Commission, taking into account that individual insurers may be unwilling or unable to insure the entire risk alone, considered that risk sharing for these types of risks is necessary in order to ensure insurance coverage. On the contrary, agreements on standard policy conditions and security devices have not been renewed by 13

14 In particular, according to Article 7 of the Commission Regulation 3932/92 and to Article 6 of the Commission Regulation 358/2003, the exemption did not apply in case of standard policy conditions with clauses: - permitting the insurer to maintain the policy if he cancels part of the cover, increases the premium without the risk or the scope of the cover being changed, or otherwise alters the policy conditions without the express consent of the policyholders; - permitting the insurer to modify the term of the policy without the express consent of the policyholder; - imposing on the policyholder in the non-life insurance sector a contract period longer than three years; - imposing a renewal period of more than one year in case the policy is automatically renewed unless notice with warning is given; - requiring the policyholder to accept the reinstatement of an insurance policy which has been suspended because of the disappearance of the insured risk, if he is again exposed to a risk of the same nature; - requiring the policyholder to obtain coverage from the same insurer for risks different from the one insured; - requiring the policyholder, in case of disposal of the object of insurance, to make the acquirer take over the insurance policy; - excluding or limiting the cover of a risk if the policyholder uses security devices, or installation or maintenance undertakings not approved in conformity with the relevant specifications agreed by associations of insurance in one or several other Member States or at the European level. 62 Moreover, the Commission had the power to withdraw the benefit of the exemption if the standard policy conditions contain clauses different from those listed above, which create, to the detriment of the policyholder, a significant imbalance between the right and obligations arising from the contract. 63 Further, Annex I of Directive 2005/29/EC of the European Parliament and of the Council on unfair business-to-consumer commercial practices in the internal market 64 sets out some the new Insurance Block Exemption Regulation. In particular, according to paragraph 3 of the Preamble, the new Regulation does not grant an exemption for the establishment of standard policy conditions and the testing and acceptance of security devices because the Commission s review of the functioning of Regulation 358/2003 revealed that it was no longer necessary to include such agreements in a sector specific block exemption regulation. Since they are not specific to the insurance sector, their inclusion would have resulted in unjustified discrimination against other sectors which do not benefit from a block exemption regulation. Further, the Review highlighted that they can also give rise to certain competition concerns. Therefore self-assessment has been regarded as more appropriate. 62 See Article 6(1)(k) of the Commission Regulation 358/ See Commission Regulation 3932/92, art. 17 and paragraph 19 of the Preamble; Commission Regulation 358/2003, art. 10(b) and paragraph 26 of the Preamble. 64 European Parliament and Council Directive 2005/29, 2005 O.J. (L 149) 22. With regard to the Directive 2005/29, see Bernitz, Ulf et Weatherill, Stephen. The Regulation of Unfair Commercial Practices Under EC Directive 2005/29: New Rules and New Techniques, Hart Publishing, Oxford, 2007; Howells, Geraint et al. European Fair Trading Law: The Unfair Commercial Practices Directive, Ashgate, Hampshire, 2006; Willet, Chris Fairness and Consumer Decision Making Under the Unfair Commercial Practices Directive, Journal of Consumer Policy, Vol. 33, 2010, p. 247; Anagnostaras, Georgios The Unfair Commercial Practices Directive in Context: From Legal Disparity to Legal Complexity? Common Market Law Review, Vol. 47, 2010, p. 147; Collins, Hugh Harmonisation by Example: European Laws Against Unfair Commercial Practices, The Modern Law Review, Vol. 73, 2010, p. 89; Keirsbilck, Bert Towards a Single Regulatory Framework on Unfair Commercial Practices, European Business Law Review, Vol. 20, 2009, p. 507; Tesauro, Claudio et Russo, Francesco Unfair Commercial Practices and Misleading and Comparative 14