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7. Legal Developments
CZECH REPUBLIC - HARMONISATION
OF LEGAL REGULATION OF INSURANCE AND INSURANCE INDUSTRY - THE FINALISATION
OF THE CONTRACT ON ENTRY TO EU
1 INTRODUCTION
The Czech Republic is a candidate country with its
entry into the EU planned for May 1, 2004. The country is therefore
fulfilling intensively its obligations assumed during the entry
negotiations.
At the present time, harmonisation of the legal regulation
of insurance and the insurance industry is being finalised. The
formal and legal liability of the harmony of the drafts of Laws
with the EU-Directives is supervised by the state, and in particular
by the Ministry of Finance of the Czech Republic. A certain extent
of "control" of preservation of harmony of the draft laws
with the directives of EU belongs to the Czech Association of Insurance
Companies, the association representing the interests of the insurance
companies. Our AIDA Section is an associated member and our members
take an active part in the above work.
2 RECENT DEVELOPMENTS
By the end of the year 2002 the Government of
the Czech republic negotiated the following "package"
of drafts of legal rules from the areas of insurance (private-legal
sphere) and insurance industry (public-legal sphere):
- The amendment of the Law No. 363/1999 Coll.,
on insurance industry
- New Law on insurance mediators as well as independent claims
settlers
- New law on Insurance Contract
- Amendment of the Law No. 168/1999 Coll. on Insurance of Liability
for damage caused by performance of motor vehicle
- Amendment of the Law No. 42/1994 Coll. on Additional Pension
Insurance with State Contribution
3 VERIFICATION OF HARMONY
The objective is to achieve a real harmony
between the EU-directives and the new legal norms, under the conditions
of preservation of the Article 249 of the Contract on establishment
of the European Community.
However, we meet situations, when - no matter if intentionally
or by failure - there is a certain contradiction between the detailed
regulation in the drafts of harmonisation norms and the directives.
We know that the basic condition for real verification
of the harmony of the Law with the directive is, above everything,
the valid text of the Directive of the European Parliament, with
which the Draft of the Law is compared. Such a text is not always
available in Czech. We have to face not only the problems of translation,
but also the problems of interpretation and as such we try
to contribute to constitution of obligatory terminology.
Concrete example: Law on mediators
The Law on Mediators is an example of the above stated problems.
The shortcomings of the first draft of Law were of such an importance
that the government of the Czech Republic decided to revise it.
The problems were such as that of registration, competence of supervision,
probity and credibility, categorisation of mediators etc., which
were transformed very imprecisely.
Many drawbacks are repeated in the Draft of Law on Insurance industry.
4 OUR LEGISLATION IS MOVING INDEED
The "package" of stated laws should
be negotiated by the Parliament of the Czech Republic in the April
Session. The following legal norms of principal importance are included
into the legislative plan of work of the Government of the Czech
Republic:
June 2003:
- Draft of Law on the employees' additional
pension insurance, which is to come into force on the day of entering
into the EU
- Draft of the material intention of the Labour Code, which is
to be in force from January 2005
- Draft of the Civil Law, which is to be in force from January
2005
- Draft of the Commercial Law, which is to be in force from January
2005
- Draft of the Criminal Law, which is to be in force from January
2005.
December 2003
- Draft of the Material Intention of the Law
on Accident Insurance,
A Note of Thanks
We would like to thank, for the special help
in connection with this work, professor Fontaine who we have consulted
on particular questions.
DEVELOPMENTS SINCE THE
COMMENCEMENT OF THE US TERRORISM RISK INSURANCE ACT 2002 (TRIA)
AND EFFECTS ON REINSURANCE
By Simon Cooper and Carmel Walsh, Barlow Lyde
& Gilbert
Since the US Terrorism Risk Insurance Act ("TRIA")
came into force on 26 November 2002, there has been uncertainty
as to its application and interpretation. The speed with which the
legislation was drafted and signed into law, and the immediate effect
of TRIA has meant that these difficulties are being ironed out whilst
compliance periods are running. The deadline for the first disclosure
notices of terrorism cover which each qualifying insurer under TRIA
must send out to policy holders, offering statutory terrorism coverage,
is 24 February 2003. Failure to comply with this requirement prevents
the insurer from participating in the compensation programme, though
it is still required to provide TRIA coverage to the insured.
Without restating the precise provisions of TRIA,
in very general terms, any insurer providing primary or excess insurance
in a US State is required to offer coverage in its property and
casualty insurance policies for losses from acts of terrorism in
the US, on the same terms as those applying to losses from other
risks. Any existing terrorism exclusions in relevant policies are
nullified. The insurer may charge additional premium. If the insurer
has complied with TRIA's requirements, particularly in relation
to the disclosure notices, it is eligible for compensation under
the federal terrorism insurance programme. This programme will provide
a 90% quota share reinsurance cover for TRIA terrorism losses in
excess of the insurer's deductibles. The deductibles are expressed
as an increasing annual percentage of the insurer's directly earned
premium from the prior year. The deductible is 1% of 2001 premiums
for the balance of 2002, 7% of 2002 premiums for 2003, 10% of 2003
premiums for 2004 and 15% of 2004 premiums for 2005.
Aside from other defining factors, an act is only an act of terrorism
under TRIA if, in the aggregate, it causes damage of $5million or
more. Losses insured under TRIA are capped at an annual aggregate
of $100 billion. Although participation is mandatory, an insurer
can reinstate terrorism exclusions if the policy holder declines
the additional cover offered to it, or fails to pay the additional
premium set out in the notice within 30 days.
TRIA remains in force until 31 December 2004 and can
be extended for a further year.
To assist in the introduction of TRIA, the US Department
of Treasury has released a number of Notices which give interim
guidance on TRIA and remain in effect until superceded by regulations
or subsequent notice. The guidance Notices state that they can be
relied on by insurers in complying with those provisions of TRIA
to which each Notice relates. The National Association of Insurance
Commissioners (NAIC) membership has adopted a model bulletin and
disclosure notices. A number of Lloyd's Market Bulletins have also
been issued on TRIA.
Even with such guidance, there is still disquiet arising
from the effects of a hasty solution to a new and difficult insurance
problem.
Disclosure - in order
to comply with TRIA in relation to existing policies, insurers must
notify each policy holder that terrorism coverage is offered. Lloyd's,
the ISO and NAIC have drafted model disclosure notices for current
policies, and for future renewals. It is important to note that
coverage applies immediately from the date TRIA comes into force,
and only if the policy holder fails to make payment of the additional
premium within 30 days of receiving the disclosure notice (or agrees
to the exclusion of terrorism cover) is any terrorism exclusion
reinstated. Lloyd's has stated that any reinstated exclusion is
retroactive and will, therefore, cover the 30 day offer period where
terrorism cover is not taken up. In order to minimize the time that
insurers are deemed on cover for terrorism risks, therefore, each
insurer should act promptly to issue its disclosure notices.
Disclosure through broker/Leader
- Although the US Treasury has stated that disclosures can be communicated
through the channels, methods and forms normally used to communicate
similar policy information, (broker or leader) ultimately each insurer
will be responsible for such notification and the consequences of
any failure to notify. Lloyd's has noted that Market Supervision
will be monitoring this risk and managing agents' systems must record
evidence of disclosure notification.
Additional premium -
The insurer is entitled to charge additional premium for TRIA coverage.
Although under TRIA premium rates remain subject to regulatory review
which can determine a rate is excessive, inadequate or unfairly
discriminatory, there is no initial guidance given to insurers of
what will be deemed excessive or inadequate. Perhaps TRIA requirements
that terrorism coverage is offered on terms that do not differ materially
from the terms, amounts and other coverage limitations applicable
to losses arising from events other than acts of terrorism, will
be a guide to setting the additional premium. Nevertheless, as TRIA
specifically identifies in its opening section, there is an absence
of information on which estimates of the probability and cost of
future attacks in the US can be made. There may be a corresponding
lack of experience in rating such risks. New terrorism pricing models
may be of limited assistance also.
Further, any insurer charging an elevated premium
for TRIA terrorism cover may be subject to an unwanted knock on
effect the following year. This is because TRIA premium is included
in the total premium earned by the insurer, which is used to calculate
the insurer's deductible for the following year under the compensation
programme. Accordingly an elevated premium charged to the insured
will produce a corresponding increase in the deductible the insurer
faces on any insured loss the next year.
Aside from difficulties in setting rates, a problem
has been identified in that the additional premium may cause some
Lloyd's Syndicates to exceed their premium income limit. Lloyd's
and the FSA are in discussions on this point but have not yet commented
on its resolution.
One Insurer/Deductible
- an early Lloyd's Market bulletin notes that although several syndicates
subscribe to a risk the deductible is calculated and applied to
each Syndicate individually.
In their aggregate, such deductibles will constitute
a substantial exposure to US terrorism losses for the London market.
It remains to be seen whether there is reinsurance available for
these deductibles, either across the board or in respect of risks
centred predominantly in the major US cities.
According to US Treasury guidance, a Parent company,
its affiliates and subsidiaries, (where they meet the requirements
of the TRIA definition of insurer), are deemed to be one
insurer. In these circumstances, the deductible is calculated on
the premium received by the entire group. It follows that a small
insurer which is part of a larger group of companies which are all
within the TRIA definition may be facing an enormous deductible
which has been calculated across the group, resulting in serious
exposure to terrorism losses.
Captives - When TRIA
came into force, it was not certain whether Captive insurers were
included. US Treasury guidance subsequently stated that Captives
were included and that Regulations dealing specifically with Captives
would be forthcoming. No such Regulations have yet been issued.
It is understood that Captives are unhappy at being included in
TRIA and have sought to lobby for Regulation which allows them to
"opt in" to the arrangements.
Reinsurance - Reinsurers
are excluded from the effect of TRIA, (and are not eligible for
the compensation). However given the deductibles and the 10% of
losses which insurers will have to carry under the government compensation
programme, insurers are likely to require additional reinsurance.
This is especially problematic for insurers and reinsurers of policies
which were in existence and subject to TRIA when it came into force.
Reinsurers can rely upon, or continue to insert terrorism
exclusions into their contracts. Should reinsurers wish to match
the TRIA terrorism cover of underlying contracts, they will not
be subject to the same restrictions, in setting high premium levels,
with which insurers are faced. This may lead reinsurance of these
risks to be too expensive for insurers and, even if the reinsurance
markets have capacity to underwrite TRIA insurance, selective underwriting
may follow so that high risk geographical areas are left without
adequate reinsurance.
In considering whether existing reinsurances will
respond to TRIA exposures on an underlying insurance, it will be
necessary to analyse each reinsurance contract individually to determine
whether it contains specific provision for a change in the law or
nature of the underlying exposures, or whether general wordings
(incorporation clauses, follow the settlements/fortunes) will be
sufficiently wide to include TRIA coverage. This may be a particular
issue for the many fronting arrangements which exist between the
US and London markets.
The guidance that various agencies have provided goes
some way to smoothing the introduction of TRIA. However, the fundamental
operation of TRIA remains unchanged and may cause serious difficulty
for insurers who find that they are required to offer cover for
terrorism at potentially restricted rates, while the US government
compensation for 90% loss only applies after each insurer's hefty
deductibles for which no reinsurance or only expensive reinsurance
cover is available. Any attempt to raise the premium to deal adequately
with the risk, if not deemed excessive, will increase the following
year's deductible.
While TRIA is an attempt to aid the US economy
which was said to be hampered by the introduction of terrorism exclusions,
such help is largely at the expense of the insurance industry. In
an environment in which raising taxes is politically unpalatable,
the US government has shied away from a scheme in which compensation
is more generously centrally funded, and has forced the insurance
industry into a position which is likely to place serious strain
on its resources, and ultimately, its solvency.
DAMAGES AND PRACTICAL
DIFFICULTIES RESULTING FROM THE WAY IN WHICH THE LAW REGULATES THE
FORMATION OF A CONTRACT OF INSURANCE -
ADVISABILITY OF EXCLUDING THE POLICY
By Héctor Miguel SOTO, Argentina
THE FORMATION OF THE CONTRACT OF INSURANCE
- The mechanism for the formation
of the contract of insurance, as it is stated in the Argentinean
legislation, is complex.
The mutual assent of the parties, is produced as if it were a
contract made between two absent people.
Therefore, unless the parties have expressed their contractual
wish in a single act, and the assent takes place simultaneously,
the rules that regulate the formation of assent in the contract
of insurance are those that, included in the Civil Code, correspond
to the making of contracts between absent people, with the modifications
made by commercial law and insurance law.
- This mechanism of the formation
of a contract of insurance becomes complex, or rather, becomes
confusing, since, once the contract is finalised, the insurer
is obliged by law to create a document called a policy.
- By applying the general legislation
that regulates the formation of the contractual assent between
absent people -applicable to the contract of insurance-, the proponent
can revoke his proposal before the insurance company sends its
acceptance or before it actually knows of it.
In turn, the insurance company can annul its acceptance before
the proponent (or his agent or representative) learns of it, even
if the policy has already been issued.
UNCERTAINTY OF THE PARTIES DURING THE FORMATION
OF THE CONTRACT
- The formation of assent in the
contract of insurance has certain characteristics that generate
uncertainty, not only for those who wish to be insured but also
for the insurance companies.
Next, we will mention the circumstances that cause this situation:
a) With the insurance proposal made, the
proponent does not know whether it will be accepted or rejected;
in fact, he cannot even know whether the insurance company
will consider it.
During that period, of unknown duration, the proponent has
to continue to offer his proposal if he wishes to be accepted,
even without being certain that his offer will be accepted
and without knowing if is worth waiting or not.
b) The contract of insurance that has already been made can
be annulled by the insurance company, revoking its acceptance,
until the acceptance is notified to the proponent, or the
policyholder (or his agent or representative) is aware of
the insurer's express or implied acceptance.
This precariousness in the contract of insurance causes insecurity
but it is also favourable for situations that may take place
in bad faith, especially on the supposition of an accident.
c) Since the policy form is usually
issued and delivered to the proponent after the formation
of the contract of insurance , the proponent does not have
the ability to prove, before that delivery, that a contract
already exists betwen the parties.
d) Likewise, when the insurance proposal is verbal, the insurance
company lacks appropriate evidence to enable it to prove the
existence of such proposal and, thus, to prove the existence
of the contract itself, if the proposal is rejected by the
policyholder.
e) The law states that the contract of insurance exists by
agreement and that the parties' "rights and responsibilities"
begin with that agreement even before the policy is issued.
This statement can create in the mind of the proponent, who
is usually uninformed on legal matters, a false sense of security,
since he may believe himself to be insured even before the
policy has been issued, when maybe he is not because of the
rejection of his proposal.
As a result of the above position,
there is a widespread but false belief amongst those seeking
insurance that the sole, even verbal proposal 'to be insured',
is enough.
- Thus, we see that the system created by the law
of insurance, as regards the formation of contractual assent,
is full of uncertainties and insecurities, which can be briefly
summarised as follows:
a) Undesirable doubts as regards the existence of the contract
itself, its legal content and its conclusion.
b) Precariousness of the contract of insurance already made,
which can be annulled by the insurer before the proponent
(or his agent or representative) knows about its acceptance.
DEFICIENT REGULATION OF THE "INSURANCE PROPOSAL"
AND INSURER'S "ACCEPTANCE"
- The law of insurance states
that the contract of insurance must be evidenced in writing. However,
it allows the proposal form, the basis for the contract between
the parties, to be formulated orally.
- The law of insurance emphasises the regulation
of the content and formalities of the policy, but does not directly
establish any provision regarding the proposal's content and form,
the acceptance of the proposal and its notification.
This is incongruous since it is in the proposal form, and not
in its acceptance, that the contractual conditions are established.
In every contract of consecutive formation, it is always the offer
that contains the terms of the agreement, while the acceptance
is just a simple manifestation of the agreement with the offered
terms.
The insurer's acceptance becomes, like the acceptance of any contractual
offer, a simple, pure and uncomplicated manifestation of agreement
with the proposal form.
Given this, it is incongruous to insist on the policy including
the terms of a contract that have been, or should have been, stated
in the proposal.
The demands of the law as regards the policy content, requirements
and form, become incongruous with the mechanism for the formation
of assent in the contract of insurance.
The form and content requirements that the law lays down with
respect to the writing of the policy, should, in fact, be applied
to the proposal form, or in any case, to the document that serves
as an instrument for the will of the parties, when the assent
originated by the contract is of consecutive formation.
INCONVENIENCES GENERATED BY THE OBLIGATION
TO ISSUE A POLICY OF INSURANCE.
- The Law requires the correct use and application
of its own technical vocabulary.
The practice, as well as legal analysis, are only possible if
precise and correct concepts are used.
The inappropriate use of concepts and the misconception of the
true nature of certain documents make the management of the legal
process confusing, if not erroneous.
In the ambit of insurance we are able to detect, with alarming
frequency and intensity, this situation of conceptual confusion
which is largely due to the maintenance of the insurance policy
as a document provided and accepted by law.
- The policy has turned, in practice, into a deceptive
document that appears to prove everything, and that, without any
basis, assumes the role of the source of the parties' obligations
and rights of the contract of insurance. In fact, it should
not be anything but the exact reproduction of that already set
out by those parties.
The unnecessary obligation to issue a policy after the making
of the contract of insurance, has generated, in practice, a false
appreciation of the legal nature of that document, and confusion
as to which is the source of the parties' obligations and rights.
Such terms as "cancellation of the policy" or "issuance
of the policy" are generally used, although not very suitably,
as equivalent to "rescission of the contract" or "making
of the contract".
The policy itself is wrongly pointed to as the source of the parties'
obligations and rights instead of the contract made between them,
which is a serious mistake and an unacceptable legal distortion.
It is usual for many people related to the field of insurance
to state that the insurers, instead of "making" contracts
of insurance, "issue" policies.
The insurance companies behave, in practice, as if the interested
party in being insured "bought" a certain policy, which
they call "product", from which the parties' obligations
and rights emerge.
This generates the false belief that the parties' rights and obligations
originate from the policy, and not from the terms of the contract
agreed prior to the issuance of the policy.
The emphasis is on the content of a document, subsequent to the
contract, and not in the content of the "proposal form"
and of its " acceptance."
ADVISABLE MODIFICATIONS IN RELATION TO THE FORMATION
OF THE CONTRACT OF INSURANCE
- We think that the proposal form should be drafted
for the acceptance of the proposal and for the receipt of the
confirmation of acceptance; this as a condition of the validity
of such acts.
- We believe it is inconvenient to admit any other
proof of the contract of insurance that is not the one emerging
from the written form required in each case.
The fact that a contractual "form" is solemn does not
necessarily imply that is complicated, expensive or difficult
to carry out or acquire.
The idea of solemnity that refers to the "form" of the
legal acts is usually associated with complicated ceremonials,
witnesses and public officials' participation.
The "form" that we solemnly use for the making of the
contract of insurance is simple, without any special cost, and
easy to produce and follow.
- It does not seem useful to
tie the proponent to its "proposal form" if this is
not written: if the proponent is interested in being insured,
writing his proposal will not be any obstacle.
The same thing can be said regarding the acceptance by the insurance
company: if is interested in accepting the "proposal form",
expressing acceptance in writing cannot be an obstacle.
Those who can state their own contractual will precisely and clearly,
or can ask the other party to state their own intentious precisely
and clearly, and do not do so, are acting imprudently, if not
in bad faith.
There is no disadvantage, to demanding a written form, to reflect
the contractual intentions of the parties. This grants certainty
and legal security to its grantors and addressees.
- The prohibition of any other means of evidence
other than the written form would not adversely affect the rights
or interests of any person who pretends to enter into a contract
of insurance adjusting to those conditions.
As for the rest, if the proponent knows that the "proposal
form" will only be valid when this one is in writing, and
that the contract will only be perfected when the "acceptance"
of the insurance company is produced and notified in writing,
he will not make the mistake of thinking that he is insured by
the single presentation of a "proposal form", which
is in many cases, merely verbal.
- The speed of the insurance is not a convincing
argument against adopting written forms.
In the current system this speed is deceptive, since the insurance
company is interested in considering the contract of insurance
concluded if there is no loss, and in receiving the premium, but
logically, there is not the same interest in covering a loss that
took place before the policy was issued.
On the other hand, if the intention of the insurance company is
to provide an immediate coverage, a "temporary certificate
of coverage" could be issued, which could have the nature
of a unilateral legal act that is binding on the insurance company
without the necessity of the insured's acceptance.
- The requirement of the written form in the cases
already mentioned, as a condition of validity for them would undoubtedly
have, the effect of correcting the defects in the contract that
at present prevail as regards insurance.
When the constituent
acts of the assent that are not in a written form are deprived
of all legal validity, the insurance companies themselves,
the intermediaries and the interested parties buying an
insurance would have no other alternative but to consider evidencing
their intentions in writing.
We believe that the proposed modifications would produce a radical
change with respect to the transparency in the formation of the
contract, with the consequent benefit of providing greater security
to the parties. Evidently, many defects, errors and deceits would
be eradicated.
Nowadays, more often than is realised, people are "insured"
by an insurance company they did not choose. Those "closing
of portfolios", the massive transfers of insured people without
their knowledge, and insurer manipulation are abhorrent practices
that would not occur if the modifications that we propose were
adopted.
- In brief, we can assert that the imposition of
the written form, of a solemn kind,
to the expression of the contractual will of the parties in the
making of the contract of insurance, offers these advantages:
a) It constitutes the most effective and simple means of
proving the parties' will even in its slightest details.
b) It prevents one from falling into confusing situations,
imposing on the parties the duty of expressing themselves
clearly in writing, if they intend to put one another under
an obligation.
c) It protects the proponents, making them truly understand
what they are proposing, and who they are making a contract
with
- The written form that we propose
does not have any relationship with the formalism of those legislations
that require the issuance and delivery of a policy in order to
perfect a contract.
Our proposal has nothing in common with these systems. Moreover,
as we will see next, we consider that the policy should be excluded.
ADVISABILITY OF EXCLUDING THE POLICY AND DETERMINING
THE DEMANDABLE MINIMUM CONTENT OF THE PROPOSAL FORM
- It is advisable to exclude the policy of insurance,
at least in the way and with the functions established at present
in the law of insurance.
Such a document would become unnecessary and superfluous if the
written form is imposed on the proposal form, to the acceptance
on the past of the proposal, and to the notification of the acceptance
on the part of the insurance company.
As we have already seen, it is a document that, apart from being
unnecessary and superfluous, is deceptive and usually generates
confusion.
The possibility that the proposal form be formulated verbally
opens up the possibility for the insurance company to be the one,
when issuing the policy, to unilaterally fix the terms of the
insurance thereby disregarding the policyholder's will.
- In the same way that at present the law of insurance
establishes the minimum content of the policy of insurance, so
the law should establish the minimum content that the proposal
form should contain in order to be considered valid as such.
That would turn the proposal form into what it should really be:
the real basis of the contract of insurance.
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