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1 ID-Number: Comments Of the German Insurance Association on the Green Paper of the EU Commission on policy options for progress towards a European Contract Law for consumers and businesses (COM (2010) 348) Gesamtverband der Deutschen Versicherungswirtschaft e. V. German Insurance Association Wilhelmstraße 43 / 43 G, D Berlin PO Box , D Berlin Phone: Fax: , avenue de Cortenbergh B Brussels Phone: Fax: The German Insurance Association (GDV) is the umbrella organisation for all private insurers and reinsurers in Germany no matter what their legal status is. Its 464 member companies, with about employees and trainees, offer comprehensive coverage and provisions to private households, trade, industry and public institutions, trough more than 450 million insurance contracts. As a risk taker and major investor (with an investment portfolio of about billion EUR), the insurance industry has outstanding significance in connection with investments, growth and employment in our economy. Contact: Domenik Wendt d.wendt@gdv.de

2 Summary The German insurance industry supports the harmonization of the law of contractual obligations at European level by the European legislator. It recommends the provision of a supranational legal regime which may be chosen by the parties to the contract (opt-in) and which definitively and comprehensively regulates the legal relationships between the parties without any recourse to national law being required and without the rules being modified by overriding mandatory provisions (so-called optional instrument). The optional instrument should regulate contracts both between businesses and between businesses and consumers. It has to be available for mere domestic situations as well. Obviously, only the legal instrument of a European Regulation may be considered for this. The already existing Principles of European Insurance Contract Law (PEICL) do not yet constitute an adequate basis for the regulation of insurance contract law as an optional instrument, at least in their current version. They require comprehensive revision as regards form and content. Page 2 / 8

3 1. Introduction Work on harmonization of European law of contractual obligations at EU level has already been in progress for quite a number of years. The German insurance industry has observed, followed and also via the Comité Européen des Assurances (CEA) actively supported this work from the outset and with great interest and also seconded an expert to the support group having discussed the drafts on the DCFR with the academics. The special interest taken by the German insurance industry in harmonizing European contract law has the following background: Civil law constitutes one of the last important major fields of law in the European Union which has largely not been harmonized. In this area, harmonization has so far only taken place in (albeit absolutely important) marginal fields, which can generally be summarized under the heading of consumer protection (such as Consumer Sales Directive, Directive on unfair terms in consumer contracts, Doorstep Selling Directive, Distance Marketing Directive, Time Share Directive etc.). Meanwhile it has become globally accepted that the insurance industry, purely selling legal products, suffers to a very special degree from lack of harmonization of the contractual legal environment. Offering EU-wide uniform insurance products which are developed centrally based on a uniform legal framework is not possible, today. The supervisory environment of the insurance industry has been harmonized to a very large extent over the last 30 years. This does not apply to general and insurance contract law. Due to the dissimilarities between Member States general contractual terms (forming the core of insurance in contract law) have to be redeveloped from scratch and to be adjusted at great expense for each targeted market. Therefore, there is a need for specialists who possess indepth knowledge of the respective legal system targeted. This also applies to subsequent administration of contracts and claims handling. The actuarial-mathematical calculation of products is based on the legal construction of these products and thus, has to focus on this in each case, specifically. A choice-of-law agreement favouring the contract law applicable at the insurer domicile does not normally constitute a solution to this problem. Besides the fact that in the case of mass risks such an agreement is mostly not possible at all or very much restricted (cf. Art. 7 of the Rome I Regulation), it is hindered in practice mainly by psychological obstacles on the part of the policyholder. In the case of large risks the superior Page 3 / 8

4 bargaining power of the policyholder, for whom it is more comfortable to have his own law applied, oppose a choice-of-law-agreement. Moreover, any such agreement would only help if it was possible for the insurer to enforce it without exceptions. As this is the only way uniform calculation of the portfolio of policies becomes possible. This case seems rather unlikely. Even where choice of law is allowed and successfully stipulated, the creation of uniform European products is prevented by necessary interventions and alignments due to consumer protection regulations, mandatory international law and the ordré public proviso. The EU Commission itself has referred to this fact in the past (cf. Report from the Commission to the Council and the European Parliament on the state of the Internal Market for services of 30 July 2002 (COM (2002) 441 final 39)). Due to the circumstances described even 20 years after the start of the Single Market it works the following way in practice: Insurance providers with cross-border ambitions show a tendency to rather acquire an insurance company in the target market than offering their products crossborder by way of freedom to provide services. Though, the formerly existing administrative obstacles to this have been eliminated already in the early 1990s through implementation of the Insurance Directives. Therefore, the German insurance industry basically takes a positive stand on the harmonization of the law of contractual obligations. However, in this respect, certain safeguards have to be observed, which are explained in more detail in the relevant passages of the following detailed comments. But first of all we would like to point out that the German insurance industry takes great interest in the insurance contract, becoming part of a future harmonized law of contractual obligations of the European Union. However, the German insurance industry has considerable doubts as to whether the currently existing parts of the Principles of European Insurance Contract Law (PEICL) constitute a suitable basis for a chapter on insurance matters in a future European Civil Law. Page 4 / 8

5 2. Detailed comments The questions specifically raised by the Green Paper (from Chapter 4 Choosing the best instrument for European Contract Law ) will be addressed in more detail in the following statements. Ad 4.1 What should be the legal nature of the instrument of European Contract Law? The Commission puts up a number of options regarding the legal nature of the intended harmonization project for discussion. - The mere publication of work results of the Expert Group, hoping that the exemplarity of the rules developed would in the long term lead to an approximation of national laws in the Union on a voluntary basis, - toolbox, - Commission Recommendation on European Contract Law, - Regulation on a so-called optional instrument (also referred to as 28 th regime), - Directive, - Regulation, - Regulation on establishing a European Civil Code. The German insurance industry gives a favourable opinion on creating a Regulation on a so-called Optional Instrument (28 th regime). The German insurance industry believes that the optional instrument, as a supranational legal regime should replace national law for the respective legal transaction for which it has been chosen by the parties to contract. From the point of view of the German insurance industry, this would have two advantages: On the one hand, application would be voluntary (opt-in), so businesses would have to choose this instrument only if they may expect economic or administrative advantages. Hence companies may avoid unwanted or unprofitable investments for legal adjustments. On the other hand, this solution offers the possibility of switching to a uniform European law for cross-border contracts (and, depending on the design, also for national contracts). It would thus offer the possibility of designing, distributing and calculating insurance policies on a uniform European-wide basis. It is true that any such solution would lead to long-term duplication between national and EU contract law. However, if it should be possible to agree upon the optional instrument, as favoured by us, also for domestic situations, this duplication would have no impact on practice. Page 5 / 8

6 By contrast, we expect little of a toolbox. Although it represents a political minimum consensus, it is ultimately a repertoire of set pieces for the activity of the EU in the area of sectoral harmonization of civil law, only. Thus, it would have no direct effects for users of the law. In the long term, it would rather contribute little to an approximation of the different civil law systems in the European Union. Therefore, this instrument would be useless eliminating heterogeneity of civil law systems in the European Union which is the fundamental problem the insurance industry is faced with. The mere publication of work results of the Expert Group, hoping that the exemplarity of the developed rules will in the long term lead to an approximation of civil law systems in the European Union on a voluntary basis, we judge as much with scepticism as a Recommendation of the European Commission on contract law. There would be no obligation for Member States with respect to approximation. Therefore, the practical effects are likely to be unimportant. Especially, Member States with an insurance contract law having been reformed not very long ago and with a developed legal culture and strong national legal traditions would not tend to go ahead towards an approximation on this basis. Although, in the case of a Recommendation the ECJ would be authorized to interpret the work results of the Expert Group, unlike in the case of their mere publication, the European Union would not have any influence on the speed and the extent of the adoption of European civil law by Member States. The German insurance industry does not consider a recommendation to lead to the desired results, either. In fact, it could be used to subject the national civil law systems of Member States to minimum harmonization. However, due to the obligation of Member States to implement the Directive, there would foreseeably be (possibly even considerable) interventions into national civil law without real harmonization being achieved by this. Typically, every Member State would apply its own legal technique, diction, numbering of rules, etc. in the course of implementation. On the contrary, businesses would possibly have to make considerable investments for the adjustments in the area of contract law without these being offset by the advantages in cross-border legal relations as expected in the case of an optional instrument. Even in the case of minimum harmonized civil law in the European Union, civil law systems would continue to differ in parts, so that it would not be possible to design, distribute and calculate contracts in a uniform manner on a cross-border basis. Page 6 / 8

7 A Regulation on the introduction of European Contract Law would be directly applicable, thus leading to maximum harmonization in civil law. Questions concerning political consensus against the background of existing sensibilities in many Member States in the case of interventions into basic civil law are not to be addressed here. In any case, any such approach would lead to national contract laws being completely replaced by European law. Thus, unlike the optional instrument, even those providers which could not benefit from any unification of law as they are not international oriented would have to change all their sample contracts, procedures and calculations, which came along with immense costs. In our opinion, it would be premature to take such a radical step at this stage. A Regulation on the introduction of a European Civil Code would be exposed to the same reservations, and even to a much greater extent because it would differ from the option mentioned before as in addition to contractual obligations non-contractual obligations would be covered as well. Ad 4.2 What should be the scope of application of the instrument? The Commission asks whether the envisaged legal instrument should apply only to business-to-consumer contracts or to other contracts as well, which are referred to as business-to-business contracts. It seems appropriate that a (preferably optional) legal instrument not to be specifically limited to consumer contract law, but should regulate all contracts in B2B, B2C and C2C areas. It would be unsatisfactory if an optional instrument was made available for business-to-consumer contracts while business insurance contracts could not benefit from the harmonized civil law (even though the problem is less urgent here due to the more generous choice-of-law rules in applicable conflict of law rules). This issue is closely linked to the question whether the envisaged legal instrument should only apply to cross-border contracts or whether European civil law should be applicable to domestic contracts, as well. From our point of view, a restriction to cross-border situations makes little sense, at least if the European legislator decided to introduce an optional instrument. Rationalization effects, being of benefit to the sector and policyholders, are to be expected only if the same legal basis may be used for both domestic and cross-border contracts. Otherwise, businesses would have to hold available and practise different model contracts, distribution channels and calculations for two sets of rules. Page 7 / 8

8 Ad 4.3 What should be the material scope of the instrument? The Commission explicitly asks to what extent the envisaged harmonization should apply. In our judgment, it would be sufficient for the insurance industry to practise international contracts if the instrument covered the areas specified under From the German insurance industry s point of view, it is much more relevant what types of contracts would be covered by the instrument. This question is specifically asked by the Commission, as well. An optional instrument which is not applicable to insurance contracts would not be of any apparent use to the insurance industry. In this context, the Principles of European Insurance Contract Law (PEICL), which were drafted by a group of professors, are explicitly mentioned. Regardless of the fact that we basically endorse the inclusion of insurance contracts in the harmonized law of contractual obligations, we are sceptical about the use of the draft text of the PEICL. However, apart from the fact that to our knowledge the PEICL are still not completed and differ noticeably from the basic work (DCFR) in diction, numbering as well as technical details, our scepticism is mainly based on aspects regarding the content. We have examined the PEICL in detail and subjected them to comprehensive, intensive criticism. We have communicated this criticism in detail and justified it both to the academics involved and to the EU Commission. Apart from a number of technical shortcomings, the PEICL especially suffer from the fact that they are based on concept of a maximum policyholder protection which, is not known in the national legal system of any Member State in that radical form. However, an optional instrument can only be successful if its use results in a win-win situation. This means that the use of the optional instrument does not only have to be advantageous for one party to the contract, but for both parties. However, due to the shortcomings of the PEICL, which have been addressed, we doubt the optional instrument would be widely used as the attractiveness for the providers side (i.e. for the insurance industry) would be so small. Therefore, before insurance contract law is included, a textual basis would have to be created which is acceptable to the sector as well. It cannot be ruled out from the outset that such a basis ultimately results from the PEICL, but considerable revision is still required for this. If the Commission should be interested in our detailed criticism of the PEICL, we will be pleased to present it once again. Berlin, 27 January 2011 Page 8 / 8