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Legal Developments
BRAZIL
Brazil takes steps to open up its reinsurance market
Brazil is South America’s largest insurance market. While the local insurance market was open to foreign insurers, the reinsurance market has been the monopoly of the Istituto de Resseguros de Brasil (IRB) - until now.
During the last few years, the Brazilian government has come under increasing pressure to open Brazil’s reinsurance market to foreign reinsurers. The World Trade Organisation (WTO) made a formal statement highlighting those sectors in the Brazilian economy that are closed to world commerce, including the reinsurance sector. The British government has also sought to bring pressure for reform, with the prime minister personally raising the specific need to open the Brazilian reinsurance market with the Brazilian president. These pressures have finally produced results.
The new policy of risk placement abroad issued by the IRB through Circular PRESI-011/2005 is not an opening per se but it promotes a certain level of freedom to local insurers and international reinsurers, finally allowing for the execution of direct reinsurance contracts.
Local insurers are now allowed to get quotation and reinsurance support from the international market for risks that are not supported by IRB’s automatic contracts. This means that, in practice, insurers are free to prepare their reinsurance plans, with their preferred reinsurer, for risks in which IRB does not have automatic contracts available. There is, however, an obligation to notify IRB so that IRB can authorise the operation. However it will no longer necessarily retain the risk retention in its own portfolio. The new law also establishes some objective criteria for the section of reinsurers.
Thus, for example, the IRB can only authorise reinsurance plans in which the selected reinsurance companies have a minimum rating, pursuant to the classification performed by one of the following risk classification companies: Standard & Poor’s (S&P); Moody’s; and AM Best. In addition to the rating requirement, there is also a collateral requirement: the international reinsurance company must have net assets equivalent to $100m.
It appears from these restrictions that there is a clear attempt to avoid opening the Brazilian reinsurance market to smaller overseas reinsurance companies. On one hand, this protects the national insurance companies from exposure to higher risks, however, on the other hand, this law clearly favours the largest reinsurance conglomerates by giving them the opportunity to get to know the local market. They will be offering the lowest premiums and use the opportunity to analyse the market for the future. As one knows, this is one of the best ways to gain good economic results as a reinsurance company.
To enable captives to function in the Brazilian reinsurance market, Circular PRESI 011 establishes that if these companies present a rating recognised by the above mentioned rating agencies, they may be able to participate in the reinsurance market, provided the controlling company offers guarantees to IRB. The continuity of reinsurance that multinational companies require is permitted. They do not have to present other data, aside from a "comfort letter", in which the reinsurance company guarantees economic support to the national reinsurance company.
One of the immediate effects of these reforms has been the opening of offices in Brazil by a number of overseas reinsurance companies. In accordance with the second paragraph of article 4 of the Circular PRESI 011, preference will be given to reinsurance companies who have representation offices in Brazil.
From the business practicality point of view, the new law allows for some welcome liberalisation for the contracting parties (Brazilian insurance company and international reinsurance company). In article 6, the law defines the basic parameters for risk acceptance documents and permits the use of a slip, cover note or any other kind of document issued by the outside reinsurance company, recognising the practices and procedures of the international reinsurance business.
The only exception is that such contractual instruments must not be contrary to Brazilian law and the "interests" of IRB. It seems obvious and reasonable to restrict the use of contractual clauses in reinsurance contracts, which would be contrary to Brazilian law, especially in contracts derived from the new Civil Code. However, it may not be reasonable to include subjective provisions such as that of safeguarding the named, although not explained, "interests" of IRB, because it places a restriction on the parties’ freedom to contract - a right which is, by the way, protected by the Brazilian Constitution.
The objective of this provision seems, in fact, to be that of keeping control, albeit by means of information, of the risk subscriptions and the regulation over casualties, no more. Anyway, the local market has tried to maintain discussions with the state reinsurance company and, thus, smooth the path for the approval of its direct reinsurance operations.
Circular PRESI 011 also allows for retrocession contracts between IRB and outside reinsurance companies.
Article 7 stipulates certain mandatory provisions that must be included in reinsurance contracts. Brazilian law has leaned towards the US approach to follow settlements. The new law stipulates that the fortunes clauses must be followed in accordance with which the reinsurer follows the fortune of IRB - Brazil in all of the occurrences derived from the operations relative to the proportional assignments, must be included.
Claims co-operation clauses are also mandatory, by means of which the widest co-operation between IRB and the reinsurer is established, so as to inhibit the use of claims control clauses. However, it is established that the claims co-operation clause applies to risk assignments whose IRB’s participation is equal to or above 50% or to those in which IRB is the lead participant.
Another mandatory clause has to do with legislation and forum, under which it must be provided that any dispute originated from the contracts, will be subject to Brazilian law and jurisdiction.
Disputes can be heard either by the country’s courts, or in arbitration which, will be subject to the same provisions. Therefore Brazilian law and jurisdiction including arbitration, mandatorily will apply to all Brazilian contracts of reinsurance.
As mentioned above the Brazilian government has adopted measures to facilitate reinsurance operations in our country by foreign companies as a result of the pressure international bodies and under the influence of the governments of countries with which Brazil has strong business ties.
The initiative is useful as it enables the domestic market to begin working with overseas reinsurers and forces local businessmen into sophisticated and mature business practices, enabling them to acquire knowledge which will have a positive influence on the success of the Brazilian insurance companies in the near future.
In the course of the next few years, we hope to see further measures to increase the direct reinsurance contracts in our country. There is no reason why the reinsurance companies interested in operating in Brazil should delay. The experience acquired now will be crucial for the success of future businesses.
By Sergio Barroso De Mello, Pellon & Associados, Rio de Janeiro. First published in Insurance Day, 14 July 2006
GREECE
Legislative initiative for the introduction of P&I Clubs in Greece
Recent press releases have revealed the intention of the Greek Ministry of Merchant Shipping to introduce to the Greek parliament a legislative proposal which, when adopted, will facilitate the incorporation and establishment of Protection and Indemnity Pools, the well known P&I Clubs of the international marine community, in Greece.
The proposal reflects the first official attempt to correct existing legislative impediments which have hindered so far the incorporation and establishment of P&I Clubs in Greece, the first-ranked merchant marine country worldwide. The current state of legislation has been proved insufficient to meet the particular features of such specialized mutual marine insurance undertakings, since it demands the adoption of the legal type of civil "cooperative" as the exclusive legal vehicle in Greece. "Cooperatives" have been proven adequate in other areas of economic activity, but not at all within insurance and therefore mutual insurance in Greece is in a germinal state. The legislative proposal, while maintaining the requirement for the adoption of the legal type of a civil "cooperative" for mutual marine insurance business in Greece, introduces however significant derogations from the general legislation on civil "cooperatives" in an effort to soften the "interpersonal" characteristics and enhance the "corporate" features of such undertakings. Thus, for example, it will be defined that contrary to general legislation, mutual marine insurance undertakings will operate under limited liability. No personal liability will be allocated to their members; also, the legislative proposal entitles the board of directors of such undertakings to assign part of their responsibilities to third parties in an effort to enhance the efficient and professional management of their business.
Antonis Roussos, I. K. Rokas & Partners, Athens
GERMANY
German class actions rise
Germany is not yet a class action jurisdiction. So far the legislator has not introduced class actions rules for constitutional reasons - everyone has the right to a day in court. But, as with many other legal concepts stemming from the US, class actions may find their way to Germany and in time to the insurance sector.
The following developments may indicate such movement: in August 2005 the Kapitalanleger-Musterverfahrensgesetz (KapMuG [Act on Exemplary Proceedings in Capital Market Disputes]) came into force.
The aim of KapMuG is to improve protection of investors against infringements of certain named capital market obligations, such as the correct contents of prospectuses for initial public offerings (IPOs) or regulated investments, information given in shareholder meetings of public companies or annual reports.
Declatory Judgement
In such cases the plaintiff can file an exemplary action for a declaratory judgment published in an electronic claims register. If within four months at least nine further plaintiffs file similarly aligned actions the first instance court will ask the court of appeal to publish the exemplary or representative proceedings in the claims register.
Thereafter, all pending actions are halted until the representative exemplary action has finished. All parties to the halted proceedings have to receive third-party summonses either individually or by public announcement in the electronic claims registry. This enables them to participate in the representative proceedings. They also have the right to submit arguments and evidence.
The decision of the court of appeal in the representative action is binding on each individual action pending or filed by participants in all courts.
So far, two large representative actions are known, one in connection with the IPO of Deutsche Telekom, where it is argued that property had been over-valued in the balance sheet.
In September 2005, the Company Act was altered, allowing a minority of shareholders an actio pro socio (which means that the minority shareholders have the right to assert the rights and duties of all the shareholders).
This could have a dramatic impact on directors’ & officers’ insurance in Germany where internal claims [of the company against its directors and officers] are usually covered. Before September 2005, the Act allowed for the possibility of naming specially appointed examiners concerning - inter alia - the circumstances of the management, only with the votes of the majority of the shareholders at a meeting.
In order to claim damages against members of the management board (vorstand) or supervisory board (aufsichtsrat) for breach of management duties, at least 10% of the votes of the shareholders’ meeting were required. In the case of suspected dishonesty or gross infringement of the law or the articles of association, at least 20% of the votes, or at least votes which reached E500,000 ($660,000) nominal capital, were needed.
This quorum has now been drastically reduced and shareholders who represent 1% or E100,000 of the nominal share capital have the right to apply for specially appointed supervisors if there is a suspicion of dishonesty or gross infringement by the management or supervisory board members, or if the company claims damages for breach of management duties from the board members.
In Germany, recognised consumer protection organisations, which in most cases are funded by public money, have wide powers to sue companies, particularly for infringement of binding rules in their standard form contracts and for breaking the laws on unfair competition.
Claims against insurers for infringing binding rules in standard for contracts have been successful on a number of occasions in recent years (the most important instances concerning life insurance contracts).
In November 2006, the highest appeals court in Germany, the Bundesgerichtshof (BGH), extended in last instance the scope of the rights for action of such consumer organisations to bring actions. The Verbraucherschutzverein Nordrhein-Westfalen sued a bank by way of an assignment of claims of customers of the bank for compensation in connection with the wrongful use of stolen Maestro cards. The main aim of the action was to shift the burden of proof to the bank to prove that the customers did not negligently allow their bank cards and PIN numbers to be stolen.
The dispute was based on the Act on Legal Advice (Rechtsberatungsgesetz), which demands a licence for the business-like collection of claims for third parties. The court held that the plaintiff acted in a business-like manner because it planned to permanently repeat the collection, regardless that it acted free of charge.
Consumer Protection
However, in the opinion of the BGH, the exemption from this rule applied according to which publicly funded agencies were entitled to such claims collections if this was in the interests of consumer protection. Whereas there was no precedent as to when such required interest was given the opinions in the legal literature were rather different.
The BGH made clear that, on one side, the exemption should offer the possibility of allowing class and exemplary actions for payment but, on the other side, only in exceptional situations.
Such situations exist when the action serves collective consumer interests and the consumer organisation can enforce this collective interest more efficiently than a single consumer. This exemption applies if the single claim is marginal, the litigation costs would be substantial or the legal or technical issues created are complex and create a substantial litigation risk.
The BGH answered the question in this case in the affirmative since the question of whether the bank’s code system was safe enough had to be clarified by expensive expert evidence. The costs of that would be uneconomical for the single plaintiff in comparison to his claim, which only amounted to between E500 and E1,000.
Furthermore, the BGH foresaw difficulties in respect of the single claimant’s ability to substantiate security gaps in the bank’s code system. Such difficulties could be overcome more effectively by a collective action.
Last, but not least, a class action-styled lawsuit of 24 plaintiffs against their life insurer is pending at the Landgericht Aachen, assisted by the Bund der Versicherten (German association of insureds).
They argue that, although the single claim does not reach the permissible amount at the Landgericht, all claims are so similar that they are so-called joint litigants in accordance with the Act on Civil Procedure. The consequence is that the amount of their claims have to be added, thus exceeding the required value of the matter.
In two preliminary orders the court informed the parties that it would not allow the joint litigation for a number of reasons: the single claims are based on nine different types of contracts; within the contracts two different factual situations have to be distinguished. There are so many different issues among the single claims that the subject matter of the proceedings are not of the same kind and are not based on almost identical factual and legal grounds.
In addition, the multitude of litigants and legal and factual issues could create confusion so that the claims have to be split.
After the BGH decision was published the plaintiffs announced they would assign their claims to a consumer organisation which would continue the litigation on their behalf. The court replied that it does not see sufficient similarity to the situation which was the basis of the proceedings before the BGH; the fact would remain that there are multiple factual and legal issues in this case which do not allow for a joint action.
Single Consumer Chance
Although the above examples are not directly comparable to class actions in other jurisdictions, one can see a tendency among courts and parliament to create the possibilities of handling identical or related litigation more efficiently and cost-effectively, thereby granting the single consumer a chance to pursue a claim he might otherwise have to abandon. That is, in many cases, to allow him the opportunity to pursue his claim at all. It would seem to follow the pressure of such actions against insurers will increase in the near future.By Dr Reinhard Dallmayr of Bach Langheid & Dallmayr, Munich. First published in Insurance Day, 5 January 2007)
UK
An update on the Law Commissions' ProposalsThe English and Scottish Law Commissions’ plans to review insurance contract law were announced in January 2006. Recommendations will be published in 2007. Prior to that, a series of issues papers are being published to promote debate at open seminars organised by the Commissions. Papers on non-disclosure/misrepresentation (September 2006) and warranties (November 2006) have now been published.
Non-disclosure/misrepresentation
Existing Law
All insurance contracts are based on the duty of utmost good faith. The applicability of the principle as regards disclosure of material circumstances and the making of material misrepresentations is set out in the Marine Insurance Act 1906. A circumstance is deemed to be "material" if it is one that would affect the judgment of the (re)insurer in assessing the risk even if, ultimately, it would not have a decisive effect on the (re)insurer’s acceptance of the risk or on the amount of premium charged. The remedy for breach of the duty is avoidance of the contract, irrespective of whether the breach was made innocently, negligently or fraudulently. However, before a (re)insurer can avoid, it must be shown that the non-disclosure/ misrepresentation actually induced the underwriter to accept the contract on the relevant terms.
Proposed reform - consumer contracts
The most significant proposal is that the test of materiality be re-defined. In addition to proving actual inducement, the insurer should be required to demonstrate that:
1. the insured appreciated that the fact in question would be relevant to the insurer (in the sense that it would have an effect on the insurer’s mind in assessing the risk); or, if not,
2. a reasonable insured in the circumstances would have appreciated that the fact would be relevant to the insurer. It is also proposed that the applicable remedy should depend on the proposer’s state of mind. Where he has acted fraudulently, the insurer should be entitled to avoid; where negligently, both parties should be put into the position they would have been in had the insurer known the true facts; where innocently, he should not be penalised.
Proposed reform - business contracts
The Commissions suggest that the duty of disclosure should continue to apply to business insurance contracts but that the "reasonable insured" test, set out above, should apply. They also propose that the same remedies as are proposed in the consumer context should apply for fraudulent and innocent non-disclosure/misrepresentation. In the case of negligence, they query whether the insured should be required to demonstrate that it did not know what a person in its position would be expected to know, or that it would not know why an inaccurate response to a clear question was material. The Commissions’ proposals raise numerous questions: who is the reasonable insured? How can this be determined when insureds vary so dramatically in terms of size, resources and familiarity with the product in question? How would the test work in the context of reinsurance?
However, in their warranties issues paper, they have revised the approach to business contracts, recommending that any new rules on misrepresentation/non-disclosure should be compulsory for business as well as consumer contracts. The rationale for this change was that if (re)insurers could treat statements of fact as misrepresentations rather than warranties and stipulate in the policy the remedies available for misrepresentation, this would enable them to side-step the Commissions’ proposed new rules on warranties. Whilst this makes sense from a legal perspective, it increases the potential significance of the Commissions’ proposals on misrepresentation/non-disclosure for the market.
Warranties
Existing law
There are two broad categories of warranty in (re)insurance contracts - warranties about past or present facts at the time when the contract is entered into and warranties about the insured’s future conduct during the contract period. It is a question of interpretation whether or not any particular term is a warranty. It is well established that a breach of warranty, however minor, automatically discharges the (re)insurer from any further liability under the policy as from the time of the breach - regardless of whether the (re)insured acted fraudulently, negligently or innocently, and regardless of whether or not the breach was subsequently remedied. The Law Commissions believe that because of the strict consequences which flow from a breach of warranty, the current law has potential to cause considerable unfairness to policyholders, particularly in the consumer market, where policyholders are unlikely to understand the significance of warranties. Few policyholders would expect (re)insurers to be entitled to reject a claim because of a breach of warranty which has no causal connection with the claim. Their tentative proposals distinguish between warranties as to past or existing facts, and warranties as to future conduct.
Proposed reform - warranties as to past or existing facts
The Commissions recommend that, for consumer contracts, all statements of existing fact should be treated as representations rather than warranties and should be subject to the proposed new rules on misrepresentation. In relation to business contracts, they propose either that the position should be the same as for consumer contracts, or that (re)insurers should only be entitled to rely on a breach of warranty as a defence to a claim if:
(a) the warranty has been set out clearly in a written statement provided to the (re)insured; and
(b) the claim is causally connected with the breach.
Proposed reform - warranties of future conduct
The Commissions propose that (re)insurers should only be entitled to refuse a claim for breach of warranty if:
(a) the warranty is set out in writing and included or referred to in the policy and, for consumer contracts, if the insurer has taken sufficient steps to bring it to the policyholder’s attention; and
(b) the breach caused or contributed to the loss. The Commissions ask whether (re)insurers should be entitled to contract out of the causal connection rule for business contracts, and whether the same rules should apply not only to warranties, but to any term which purports to exclude or limit a (re)insurer’s liability for matters which increase the risk of loss (for example clauses limiting the scope of cover, or excluding certain activities from cover). The Commissions also recommend that for both consumer and business contracts, a breach of warranty should no longer automatically discharge a (re)insurer from liability under the policy. Instead, they suggest that (re)insurers should be entitled to terminate cover for the future against pro rata refund of premium, but should remain on risk unless and until they have given notice of termination to the (re)insured.
‘Basis of the contract’ clauses
In a ‘basis of the contract’ clause, the applicant warrants the accuracy of the answers given in the proposal form and usually agrees that those answers form the basis of the contract. Their effect is to elevate statements in proposal forms into contractual warranties. There has been widespread criticism of such clauses because of the potential severity of the consequence of giving an inaccurate answer in a proposal form. In their latest proposals, the Commissions have renewed the call for these clauses to be abolished.
By Tim Hardy, Katy-Marie Wilson, Tim Kenefick and Tracey Anderson of Barlow Lyde & Gilbert, London.
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