International Comparative Review of Liability

Transcription

insurance day
International Comparative
Review of Liability
Insurance Law
produced in association with
2 Contents
Contents
3
Comment
4
Introduction
6
United Kingdom
10
Germany
14
Netherlands
18
Spain
22 France
26 Italy
30 Israel
34 United States
38 Canada
42 Australia
46 Contacts
International Comparative Review of Liability Insurance Law – May 2007
Comment 3
Comment
A world of legal difference
FEW industries encapsulate the old truism that
the world is getting smaller better than
insurance and reinsurance.
As the global footprint of clients gets ever
bigger, the number of jurisdictions in which
their risk carriers must take an interest also
widens. And from the point of view of the
brokers and underwriters, the legal
idiosyncracies of individual countries will rocket
to the top of the agenda.
It is with these factors in mind that Insurance
Day presents – in association with legal giant
Barlow Lyde & Gilbert LLP – this International
Comparative Review of Liability Insurance Law
supplement.
This booklet brings together legal experts
from 10 different countries, each of whom
outlines the key legal perspectives of their
jurisdiction, allowing the reader to compare
different treatment of factors such as
“Construction of a Commercial Insurance
Policy”, “Non-Disclosure or Misrepresentation
of Information by an Insured at Inception of
Risk”, “Third-Party Rights Against Insurers”,
“Cover in Respect of Fines and Penalties” and
“Subrogation”.
We hope that you find it useful.
Richard Banks
Editor, Insurance Day
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May 2007 – International Comparative Review of Liability Insurance Law
4 Introduction
International Comparative Rev
How it works in the United Kingdom, Germany, the Netherlan
of law clause.This might be the case for example
in Australia where the Insurance Contracts Act
1984 (ICA) has this effect in some circumstances.
Alternatively, it may happen because the
jurisdiction in question deems the law which the
parties have chosen, not to have a close enough
connection either to the parties or to the dispute.
In those countries such as France and Spain
whose laws allow direct claims by third parties
against insurers, the consequences of the
application of a foreign law may be both
unwelcome and unexpected.
Francis Kean
Barlow Lyde & Gilbert LLP
WHAT consequences flow from the application
of a foreign law to a contract of liability
insurance? The answer to this question should be
of interest to all underwriters of international
liability insurance. In certain cases, and as part of
a commercial bargain, underwriters may choose
willingly to surrender their own domestic law as
the governing law of the contract. In others,
underwriters find themselves unwittingly in the
courts of a foreign jurisdiction battling with local
laws and procedures.
It could be that for public policy reasons, the
courts of a foreign country strike down a choice
Questions of choice of law are closely linked to
those of choice of jurisdiction. Generally and for
good reason, parties to a contract (of insurance or
otherwise) prefer to opt for the jurisdiction of
courts of the same country as that whose laws are
chosen to govern the contract. The problem is
that this choice is not always given effect by
local courts. For example, as mentioned above,
courts in the chosen jurisdiction may apply a
different law from the one chosen by the
parties. The jurisdiction chosen may also
change - by way of example, within the EU,
one party may be allowed to proceed in a
jurisdiction other than that agreed, simply because
his action was commenced first in time.
This is because EU rules on jurisdiction
generally require all other courts to respect the
continuance of proceedings in the country of the
court first seised so that the court can itself
determine the validity or otherwise of the
jurisdiction agreement.
Introduction 5
view of Liability Insurance Law
nds, Spain, France, Italy, Israel, the US, Canada and Australia
This change of jurisdiction may even occur if
the parties have chosen to arbitrate in a particular
jurisdiction. In the recent case of West Tankers Inc
v Ras Riunione Adriatica di Sicurta SpA & Ors
(2007) the House of Lords referred to the
European Court of Justice the question of
whether it may continue the use of anti-suit
injunctions which are commonly issued to
protect the jurisdiction chosen by the parties for
their arbitration.
In those cases where no clear choice of law is
made by the parties, the applicable law will be
determined by reference either to the EC
Insurance Directives (where the risk is situated
within the EEA) or the Rome Convention
(where the policy is one of reinsurance or where
the risk is situated outside the EEA). In very
general terms, the Directives presume that the
applicable law is that of the country which has
the closest connection to the contract. This is
presumed to be the EEA state in which the risk
is situated. The Rome Convention also
determines the applicable law according to the
country with which the contract is most closely
connected but, unlike the Directives, presumes
this to be the country where the insurer’s
principal place of business is or where
performance under the contract is to take place.
Different jurisdictions may also interpret these
rules differently. Moreover, not all countries have
signed up to the Rome Convention. The
majority of countries (e.g. the United States,
Canada and Australia) are not bound either by
the Directives or the Rome Convention when
deciding the law applicable to the contract.
The aim of this booklet is to provide some
guidance as to the applicable insurance laws in
certain key jurisdictions. It is a comparative
review of liability insurance law in the United
Kingdom, Germany, the Netherlands, Spain,
France, Italy, Israel, the United States, Canada, and
Australia. It should provide a useful guide to
underwriters in deciding which governing laws
they prefer to apply to any disputes between
them and their prospective insureds (and those
which they might prefer to avoid!). It has been
compiled by Barlow Lyde & Gilbert LLP in
conjunction with insurance law firms who are
experts in the field of liability insurance in each
of the ten countries covered.
The twin subjects of jurisdiction and applicable
law are notoriously complex. A thorough analysis
of them is well beyond the scope of this booklet.
Nevertheless, the possibility that underwriters
may find themselves subject to the jurisdiction of
foreign courts (and possibly to the application of
local laws by those courts) is a very real one.
Whilst no substitute for detailed legal advice, if
this booklet succeeds in identifying at least some
of the key differences between the liability
insurance laws of the 10 countries under review,
its authors will be content.
Francis Kean
6 English Law
English Law
1. Construction of a Commercial Insurance Policy
Insurance policies are construed according to the principles of construction applicable to general
commercial contracts. Thus the task of the court is to ascertain the intention of the parties which
is gathered from the wording of the policy itself and from any other documents which may be
incorporated with it. In construing an insurance policy, a court will therefore:
‘… put on it the true meaning and the true meaning is the meaning which the party to whom the document
was handed or who is relying on it would put on it as an ordinarily intelligent person construing the words in
the proper way in the light of the relevant circumstances’ (Investors Compensation Scheme Ltd v West Bromwich
Building Society (1998).
To interpret a contract, the court will consider judicial precedents, any relevant technical
meanings, and the “ordinary” meaning of the terms. Exceptionally, courts may admit extrinsic
evidence of pre-contractual negotiations, especially if dealing with an unusual expression that is
otherwise not defined in the contract. In the case of a genuine ambiguity, the principle of contra
proferentem (i.e. that the preferred meaning of the provision is that which operates against the party
who supplied it) may apply against the person who seeks to rely on an exclusion or condition
restricting liability.
2. Non-Disclosure or Misrepresentation of
Information by an Insured at Inception of Risk
A contract of insurance is one of the utmost good faith.The rules relating to disclosure (which are
particularly onerous on insureds under English law) at the inception of the risk are a direct
consequence of this.
The general position, applicable to all classes of commercial insurance, is that an insured must
disclose to the insurer all facts material to an insurer’s appraisal of the risk which are known or
deemed to be known by the insured but are neither known nor deemed to be known by the
English Law 7
insurer. The common law test for materiality provides that ‘… every circumstance is material which
would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take
the risk’.
The opinion of the insured on the question of materiality is for most purposes irrelevant.The
subjective opinion of the particular insurer is relevant as evidence that he would not have
contracted with the insured, but ultimately the question as to whether a particular fact is material
or not rests on the judge’s own appraisal of the relevance of the disputed fact to the subject matter
of the insurance, often with reference to the evidence of expert underwriting opinion. The
remedy for non-disclosure is avoidance of the policy ab initio (“from the beginning”) i.e., the
policy is treated as if it never existed. In the absence of fraud, avoidance of the policy is normally
accompanied by the repayment of the premium to the insured. Questions put by insurers in their
proposal forms may either enlarge or limit the prospective insured’s duty of disclosure. As a
general rule, the fact that particular questions
relating to the risk are put to the proposer does
not of itself relieve it of its independent
obligation to disclose all material facts.
Although it also stems from the duty of good
faith, misrepresentation is conceptually distinct
from non-disclosure. It principally relates to
statements of fact, as opposed to statements of
expectation or belief (the latter are not
actionable, even if incorrect, if made in good
faith). The misrepresentation must be material
to the underwriter’s assessment of the risk. It
also must have induced the underwriter to enter
into the particular contract on the terms agreed.
The usual remedy is avoidance of the contract,
although damages may be recoverable in certain
cases under the Misrepresentation Act 1967.
Recent recommendations for law reform by the English and Scottish Law Commissions would,
if implemented, fundamentally change the law in this area. Absent fraud, the test for materiality
would be what the “reasonable insured” would understand to be relevant to the insurer’s assessment
of the risk. Moreover, the nature of the remedy available to insurers would depend on their evidence
as to how they had altered their position by virtue of the non-disclosure. Avoidance will not
generally be available. The Law Commissions’ proposals are influenced by the Australian system as
to which see p42-45.
8 English Law
3. Third-Party Rights Against Insurers
There is no common law right afforded to a third party, who has recovered damages against an
insured, to pursue any remedy or claim for indemnity against the insurers of that person.Whether
such rights may exist pursuant to the Contracts (Rights of Third Parties) Act 1999 is unclear; in
practice insurers will generally avail themselves of their right to exclude the effect of this Act.
Otherwise, third parties only have rights where the conditions set out in the Third Parties (Rights
against Insurers) Act 1930 are satisfied. Firstly, the insured must be insolvent. Secondly, the insured’s
liability to the third party must be ascertained either by a judgment or arbitration award (or possibly
a binding settlement). Finally, the third party will have no more rights than the insured: so the
insurer can rely on any defence that it would have had against the insured.
In the case of composite contracts, i.e. a basket of separate contracts between the insurer
and a group of individual insureds, it is possible that a successful judgment creditor against an
individual director for example would be able to take a statutory assignment of that director’s rights
under the insurance, and access the policy limits by that route, even in circumstances where the
insured is not insolvent.
4. Cover in Respect of Fines and Penalties
Criminal fines/penalties
There is a general principle of public policy (known as the Beresford principle) that an
English court will refuse to enforce a claim by an insured against his insurer for an indemnity
against a fine imposed by a criminal court, and also against other consequences flowing from that
criminal conduct.
There are a number of qualifications to this principle:
in cases of vicarious liability, where there is liability without “culpability”, the English court will
enforce an indemnity;
• non-intentional criminal liability (for negligent acts or on the basis of strict liability) – the courts
will apply a balancing act on the facts of each case to determine whether enforcing the
indemnity would be contrary to public policy;
• defence costs in connection with criminal proceedings – it is unlikely a court would refuse to
enforce indemnification of such costs.
•
English Law 9
Civil fines/penalties
There are no recognised civil fines and penalties under English law. As a matter of public policy,
there is no express prohibition against insuring in relation to civil liabilities which serve to deter
wrongful conduct such as punitive or exemplary damages. However, insurability will depend upon
the underlying conduct of the insured and the
same principles will apply to restrict
enforcement of indemnities against civil
liabilities resulting from intentional/dishonest
wrongdoing in the same way as for criminal
liabilities. In the case of civil liability, it is easier
to draw a clearer distinction between
intentional wrongdoing (including recklessness)
and conduct falling short of that - the latter is
likely to be insurable without any need for the
balancing exercise necessary in the case of nonintentional criminal liability.
Regulatory fines/penalties
Regulatory fines and penalties will fall to be dealt with for the purpose of public policy in the same
way as criminal liabilities. A number of regulators prohibit insurance recoveries for regulatory fines,
or exercise pressure in any settlement not to claim such recovery. For example, the Financial Services
Authority Handbook provides that no authorised person and no member of Lloyd’s will be able to
“… enter into, arrange, claim on or make a payment under a contract of insurance that is intended to have, or
has or would have, the effect of indemnifying any person against all or part of a financial penalty”.
5. Subrogation
The insurer is entitled as a matter of common law to exercise in the name of the insured whatever
rights the insured possesses to seek compensation for loss from third parties. So for example in the
context of a D&O policy, if a director were to enjoy indemnity from another source, there would
be nothing to prevent the D&O insurers from stepping into the shoes of that director and pursuing
his claim for indemnity. On the other hand, if a director enjoys an indemnity from the company or
from any of the companies within the group, insurers should be prevented from pursuing their rights
of subrogation provided that the relevant companies are co-insured under the D&O policy. This is
under the so-called doctrine of circuity of action.
10 German Law
German Law
German insurance law is set out in the Insurance Contract Act (Versicherungsvertragsgesetz – VVG) of
1908 (as amended). Driven by European consumer protection legislation, substantial amendments
are underway which will come into force on 1 January 2008. These amendments will mainly
affect the mode of the conclusion of insurance contracts; the abolition of the all-or-nothing
principle; and the introduction of certain (continuous) information obligations on the insurer and
the intermediary prior to the inception and for the duration of the insurance contract.
Insurance contracts are construed in accordance with the understanding of the average insured
(without any specialist insurance knowledge) in the particular line of insurance concerned, having
(i) considered the policy wording in detail, and (ii) appreciated sensibly the interests of all parties
concerned as well as the context. In terms of taking into account the interests of the insurer, only
those interests that are - at least partially – apparent from the policy wording will be relevant. It is
however assumed that an average insured is aware of the possibility that policy terms may not always
be perfectly drafted. Therefore, terms will be construed in light of commercial usage in the
insurance industry, subject to the general contra proferentem rule applicable to standard terms.
In the case of insurance typically taken for the account of another pursuant to ss. 74 et seq.VVG
(Versicherung für fremde Rechnung), such as D&O insurance, for example, generally the understanding
of both the policyholder and the insured will be
relevant in interpreting the policy wording.
Additionally, the courts will apply the general
legal principles relating to the interpretation of
standard form contracts and stipulated in ss. 305
et seq. of the German Civil Code (Bürgerliches
Gesetzbuch – BGB). Such rules, which relate to
transparency, can be onerous and apply to both
consumer and commercial contracts.
German case-law has established that foreignlanguage standard wordings commonly used in
German Law 11
their jurisdiction of origin are to be construed in accordance with their meaning in the foreign
jurisdiction, irrespective of a choice-of-law-clause in favour of German law. German private
international law allows a “partial” choice of law, which distinguishes between the governing law of
the insurance contract and the law governing the construction of the wording. Against this
background, the courts have held that, in the absence of express stipulations to the contrary, by using
foreign-language standard wordings the parties intended the law of the foreign jurisdiction to
govern the construction of such wordings. Foreign insurers active in Germany using their standard
wordings in their language of origin are advised to bear this in mind when drafting the respective
choice-of-law-clause.
Pursuant to s. 16 VVG the insured is required, at the time of the inception of the policy, to disclose
to the insurer all circumstances known to the insured that are material to the risk. Circumstances
will be material to the risk if they may have an influence on the insurer’s decision whether to enter
into the contract and upon what terms. A circumstance that is expressly mentioned by the insurer
in the proposal form will be deemed to be material.
Against this background, the drafting of the proposal form is of vital importance as the insured is
only obliged to volunteer information where it is closely related either to questions raised explicitly
(in the proposal form) or if its relevance is obvious.
In practice, it may be difficult to determine whose knowledge is relevant when considering issues
of non-disclosure. In particular this may be problematic in relation to insurance contracts taken out
by legal entities, for example D&O insurance or product liability insurance. In any event, it is
recognised that the knowledge of the person signing the application will be attributed to the
policyholder.Where insurance is taken out for the benefit of another, the knowledge of the insured
person is attributable to the policyholder pursuant to s. 79 VVG to the extent that the insured person
knew that the insurance was entered into for its benefit.
The proposed amendments to the German Insurance Contract Act will substantially affect the
law of non-disclosure. The Bill envisages the insured’s obligation to provide such material
information which the insurer has asked for explicitly in writing. Only where there has been
deliberate violation of these disclosure obligations will the insurer be entitled to rescind the
contract ab initio - where the insured has merely been negligent the insurer will have the right
12 German Law
to terminate the contract within a period of one month. In both cases the insurer will only be
able to rescind/terminate where it has informed the insured in writing in separate
correspondence of the consequences of non-compliance with the obligations.
German insurance law does not provide for third party rights against the insurer that are not
expressly stipulated. The only law currently providing for such direct action is the Act on
Compulsory Insurance for Motor Vehicles (Pflichtversicherungsgesetz – PflVG).
However, the proposed amendments to the
German Insurance Contract Act provide for the
introduction of a right of direct action against
the insurer in all cases of compulsory insurance.
The aim is to foster the rights of the injured
third party. German law stipulates that insurance
is compulsory in a wide range of circumstances,
for example, the work of professionals and in a
number of industries such as the aviation and
pharmaceutical industries.
Under the current law, third parties can exercise certain rights where the insured has become
insolvent. Pursuant to s. 157 VVG a third party is entitled to preferred payment of its claims against
the insured out of the latter’s insurance proceeds. Where the policyholder has taken out the
insurance contract for the benefit of another, the insolvency proceedings must have been
commenced against the insured. In practice, the third party will approach the administrator who in
turn will refer the third party to the insurer against whom the third party will then have a direct
claim in its own right. Hence, the rights under s. 157 VVG work in practice as a direct right against
the insurer.
The question of the insurability of criminal fines/penalties is not conclusively settled by German
jurisprudence. Indeed, both published case law and doctrine is rather scarce in this area. It is however
German Law 13
understood that public policy will be triggered only in limited circumstances in order not to hamper
unduly the insurance industry in the conduct of its business, namely with regards to the
development of new insurance products.
In relation to criminal fines/penalties, leading commentators hold contradictory views:
Bruck/Möller is of the opinion that such fines can be included in the coverage offered by third party
liability insurance, apparently relying on the intent of the parties. By contrast, Armbrüster and Präve
both suggest that these fines are not insurable as otherwise the aim of such fines/penalties would be
endangered.
Irrespective of the question of insurability, most insurances used in the German market will not
respond due to the applicable exclusion language, such as those for intentional acts.
In principle, German law does not provide for civil fines or penalties. It is however recognised that
damages for pain and suffering (Schmerzensgeld) awarded for the violation of contractual obligations
or in tort include a certain penal element intended to deter wrongful conduct.
In principle, damages for pain and suffering are part of the insured’s general liability and
therefore covered. Case law suggests that such insurance coverage may be taken into account
in the calculation of damages leading to higher awards (ultimately to the detriment of the
insurer). Against this background, certain insurance wordings exclude coverage for damages for
pain and suffering.
Relying on the convincing view held by Armbrüster/Präve, it appears that regulatory fines/penalties
would not be insurable due to the public policy considerations referred to above.
5. Subrogation
S. 67 VVG provides for insurer subrogation rights by operation of law (cessio legis) in cases where the
insured has a claim against a third party, to the extent that the insurer indemnifies the insured. Such
transfer of rights may however not be relied upon to the insured’s detriment. Further, if the insured
waives or otherwise prejudices its claim against the third party, the insurer will be relieved from its
obligation to indemnify to the extent that it could have obtained reimbursement from the claim.
Bach Langheid & Dallmayr
14 Dutch Law
Dutch Law
Insurance policies are construed by determining the intention of the parties. The intention of the
parties must be ascertained not only from the wording of the policy itself but also from “the
reasonable interpretation or understanding by a party of the other party’s declarations and conduct, and the
expectations a party can reasonably infer from this” (Dutch Supreme Court 13 maart 1981,“Haviltex”).This
is the principle of construction applicable to any general commercial contract.
Furthermore, according to Dutch law, the legal consequences of an agreement are not only
determined by what the parties have agreed, but also by general standards of reasonableness
and fairness. If, however, these standards produce a result which in the view of the courts is
unacceptable, the courts can determine that a particular provision is not binding upon
the parties.
Dutch Law 15
In general an insured must disclose to the insurer all facts that are known or should be known by
the insured. This only relates to facts which the insured knows or is deemed to know are of
importance to an insurer’s appraisal of the risk.
Questions put by insurers in their proposal forms limit the prospective insured’s duty of
disclosure. The insurer therefore has no scope to argue that questions have not been answered
properly or that facts other than those asked for on the proposal form should have been disclosed
by a prospective insured.This will not apply in circumstances where the insurer proves a deliberate
act by the prospective insured.Where the insured is not a private person, the insurance contract may
impose alternative disclosure obligations.
If the insurer discovers that the non-disclosure
requirements have not been fulfilled before the
conclusion of the contract, the consequences set
out below may only be invoked if the insurer
notifies the insured within two months of the
discovery of the non-disclosure.
If the insured acted with the intention of
misleading the insurer or if the insurer would
not have concluded the insurance contract if it
had been aware of the true state of affairs, the
insurer has the right to terminate the contract
with immediate effect within two months of
the discovery of the non-disclosure.
‘The insurer has no
scope for arguing that
questions have not
been answered
properly or that facts
other than those asked
for on the proposal
form should have been
disclosed by a
prospective insured’
In cases where the insurer discovers the nondisclosure after the loss has occurred, the
insurer’s obligation to pay will depend on what
the position would have been had the insurer been aware of the true state of affairs. If the insurer
would have insisted on a higher premium or would have concluded the insurance for a lower
insured sum, the payment will be reduced in proportion to the amount the premium would have
increased or the sum insured reduced. If the insurer, had it been aware of the true state of affairs,
16 Dutch Law
would have stipulated other terms and conditions, payment will only be due on the basis that these
terms and conditions are taken to have been inserted into the contract.
If the insurer would not have concluded the insurance contract, had it been aware of the true
state of affairs, no payment will be due.The same will apply if the policyholder or insured has acted
with the intention of misleading the insurer. Finally, if the insured has failed to fulfil the disclosure
requirements in respect of a third party, with the intention of misleading the insurer, no payment
will be due to that third party.
Under Dutch law third parties can only have direct rights of action against an insurer if they have
suffered damages resulting from death or personal injury (article 7: 954 Dutch Civil Code).
In the new Dutch Insurance Act of 1 January 2006, a limited form of direct action was
introduced.This direct action, laid down in article 7:954 of the Dutch Civil Code, does not amount
to an independent right of injured third parties. A consequence of an independent right (among
others) is that the insurer is unable to invoke
coverage issues against the injured party.
So far, an “independent right” has only been
established under limited specific laws (such as
that relating to liability for motor vehicles).
According to these specific laws, insurance for
the liabilities concerned is compulsory. Where
this is the case, article 7:954 of the Dutch Civil
Code provides that the injured third party is
entitled to directly claim from the insurer
whatever the insured could claim. This also
means that all possible coverage issues can be
invoked against an injured party.
One of the conditions included in article
7:954 of the Dutch Civil Code is that the
insured has notified its insurer of the claim
issued by the injured party. Once this is
complied with the insured has the option of
Dutch Law 17
directly settling the claim with the injured party, without the involvement of the insurer. This
provision thus reflects the freedom of the insured to invoke insurance coverage for a specific loss.
The direct action introduced by article 7:954 only applies to damages resulting from personal
injury or death. Consequently, there is no scope for direct action against insurers by injured parties
suffering material or financial damages.
Section 5 of article 7:954 of the Dutch Civil Code contains provisions which apply where the
damage suffered by several injured parties exceeds the sum insured. In principle in such
circumstances, the rights of the injured parties will be reduced pro rata. However, in the event that
an insurer is unaware of the existence of other injured parties, he may in good faith pay an injured
party without being liable for any share that would be due to the injured parties on a pro rata basis.
Under Dutch law an insured may not recover under a policy of insurance in respect of loss
intentionally caused by his own criminal or tortuous act.
Civil/regulatory fines/penalties
It is not clear whether there would be any bar on the purchase of insurance in respect of an exposure
to civil and regulatory fines and penalties in respect of which it is not necessary to establish any
criminal, dishonest or deliberate conduct on the insured’s part. Where the fine or penalty results
from a negligent act of an insured it may be possible to effect insurance.
5. Subrogation
Article 7: 962 of the Dutch Civil Code provides for subrogation of the insurer to the possible rights
of its insured against third parties, other than rights based on insurance contracts. Subrogation will
also occur if compensation paid by the insurer was not “mandatory”, for example, an ex gratia
payment. According to section 3 of article 7: 962 of the Dutch Civil Code, it is not possible for an
insurer to assume rights of subrogation against the policyholder, other insured or certain persons
that are in a special relationship with an insured such as spouses or employers.
Houthoff Buruma
18 Spanish Law
Spanish Law
The general principle applying to the interpretation of insurance contracts (as well as any other
contract) is good faith. Rights must be exercised in accordance with this principle (Article 57
Commerce Code,Article 7, Civil Code).The parties are bound by the express terms of the contract
and all the consequences that are derived from the principle of good faith, commercial usage and
the law. The contract must be construed literally, provided the terms of the contract are clear and
leave no doubt as to the intention of the parties (Article 1281 Civil Code and related case law).
If the contractual words appear to contradict the evident intention of the parties, the
intention will prevail over the wording in the contract.The intention of the parties is established by
looking principally at the actions of the parties before, during and after the execution of
the contract (Article 1282 Civil Code and related case law). The courts can apply the contra
proferentem rule with qualifications depending on whether the contract involves a “mass” (i.e.
consumer) risk or a large risk. If it is a mass risk, normally deemed to be “contracts of
adhesion” (standard form), the court is likely to resolve any ambiguity in favour of the insured.
If it is a large risk, where the parties are not subject to the otherwise
mandatory provisions
of the Insurance
Contract Act 1980,
and assuming they
have negotiated on
an equal footing,
then in the event
of obscure or
ambiguous clauses
the court will
not favour the
party that drafted
the clause in
question, whether
it is the insurer or
the insured.
Spanish Law 19
The insured is not under a unilateral duty to disclose all material facts that may have a bearing on
the evaluation of the risk, only those he is asked about by the insurer in the proposal form. The
duty of disclosure is confined to the questions raised in the proposal form which must not be either
too broad or too general.
Any “inaccuracies” or “reservations” in the information provided by the insured when completing
the proposal form will entitle the insurer to rescind the contract within one month of obtaining
knowledge of the misrepresentation or reservation, with effect from the date when the basis of the
rescission was discovered. In these circumstances, the insurer may retain the premium for the period
the contract was in force, unless he has acted in bad faith or with gross negligence.
However, if the loss occurs before the rescission is notified, the insurer will be only released from
his obligation to indemnify if he proves that the insured acted in bad faith or with gross negligence.
Otherwise the insurer is required to indemnify the insured, but only in the same proportion as the
difference between the premium actually collected and the premium that would have been charged
had the true information been disclosed.This “proportionality” rule is intended to protect insureds.
“Inaccuracies” has a broad meaning, encompassing simple errors and false statements of fact
which could fall within the definition of misrepresentations. “Reservations” include the
concealment or withholding of information, i.e., non-disclosure of information relevant to the
evaluation of the risk.
Rules also exist which deal with the aggravation of the risk during the policy period and the duty
of the insured to notify the insurer, and with the consequences of the notification or the
consequences in the event of a failure to notify.
In the context of third-party liability insurance a third party who has been injured by the insured
has direct rights of action against the insurer. The insurer cannot raise against the third party any
“personal” defences that the insurer may have against the insured, for example, default on payment
20 Spanish Law
of premium. The insurer, however, may raise against the third party any “objective” exclusions set
out in the policy or implied by law provided that such exclusions have a direct relation to, or are a
significant factor in, the loss.
It should be borne in mind that certain personal defences, even if expressed as exclusions in the
relevant policy, may not be raised against the injured third party. The precise scope of the
insuring clause will also be crucial since it will also affect the injured third party: the insurer is
entitled to challenge the third party’s claim if, objectively, it falls outside the ambit of the insuring
clause. Lastly, it should be noted that the exclusion based on the bad faith of the insured which is
included in all policies may not necessarily be valid against the third party. In these circumstances it
is open to an insurer which is compelled to indemnify the third party under the direct action to
seek recovery from the insured if the insured has acted in bad faith.
As a general rule, section 19 of the Insurance Contract Act 1980 excludes from cover losses caused
by the insured acting in bad faith. This is also the first standard exclusion in all insurance policies
(see above).
A criminal penalty for an offence
(whether minor or serious, or deliberate or
not) may take the form of a fine.The punitive
nature or character of such fines in principle
makes their cover by insurance contrary to
public policy. The same applies, in theory, to
the principle of “individuality” of penalties,
i.e. that they cannot be “passed on” to
another person (this is a matter of debate). On
this analysis, fines for deliberate acts are
therefore uninsurable.
Although not settled as a matter of law, fines
for offences arising out of recklessness, i.e., nondeliberate acts or omissions, could arguably
constitute an exception to this general
principle.
‘It is difficult to
understand how the
insurance of any
regulatory fines even
when applied to
negligent rather than
deliberate conduct
can be deemed not
to be contrary to
public policy’
Spanish Law 21
Civil fines may be imposed by courts in the course of civil proceedings in a variety of situations,
the common purpose being to punish and deter conduct which is incompatible with good faith.
The “public policy” element may possibly prevent their insurability.
Generally, the same principles which apply to criminal fines and penalties apply in this
context. Consequently, in principle, regulatory fines will be uninsurable. However, the
principle of proportionality requires the authorities to take into consideration the existence or
degree of intent involved in the administrative wrongdoing at the time it was committed. This
suggests that fines may be applied to negligent, as opposed to intentional, behaviour in a
regulatory context. If so, there is some basis for suggesting these types of fines may be insurable,
and, in practice, some insurers do provide coverage for this type of fine. The issue however
remains uncertain: It is difficult to understand how the insurance of any regulatory fines even
when applied to negligent rather than deliberate conduct can be deemed not to be contrary to
public policy.
5. Subrogation
Subrogation is available by operation of the law, hence it does not need to be explicitly set out in
the insurance contract. It is also possible to waive subrogation rights.
On condition that it has paid the indemnity to the insured, an insurer may exercise any rights
and claims that would have been available to the insured against the third party liable for the loss,
up to the limit of the indemnity paid.
The insurer can bring the action in its own name against the third party. The insurer may not
however exercise its rights of subrogation to the detriment of the insured. Additionally, the insured
will be responsible for any damage or prejudice he may cause to the insurer’s subrogation rights.
The insurer may not be subrogated either against any of the persons whose actions or omissions may
have caused the loss, if they are either persons for whom the insured has responsibility (e.g. employees,
dependants) or are a close relative of the insured.This rule will not operate if responsibility arises out of
fraud or if it is covered by an insurance contract covering that person. In the latter event the scope of
the subrogation will be limited to the extent of the cover afforded by the contract.
L.C. Rodrigo Abogados
22 French Law
French Law
Insurance contracts are construed pursuant to ordinary principles of contract interpretation.
Construction is a question of fact left to the “sovereign” determination of the lower courts,
save in cases of gross misinterpretation.The basic principle is that contracts must not be interpreted
where they are clear and unambiguous.The Civil Code (CC) provides for non-mandatory guidelines
(art. 1156 to 1164), the main principle being that courts must seek to determine the common
intention of the parties. Other guidelines take an objective approach, providing that contract clauses
must be interpreted (i) in favour of the party bound by the obligation concerned, (ii) so as to give the
ambiguous clause a practical application (as opposed to a meaningless one), (iii) in accordance with
the general purpose of the contract, (iv) so as to make the clause coherent with the other clauses of
the contract, and (v) in accordance with what is customary in similar circumstances.
Guideline (i) above has been interpreted in the case-law to mean that a contract must be
interpreted against the party who drafted it. Standard terms and conditions imposed by the insurer
will therefore be construed in favour of the insured.This rule does not apply to insurance contracts
negotiated at arm’s length, although lower courts sometimes wrongly take the view that all
insurance contracts must be interpreted in favour of the insured. Ambiguous contract clauses must
always be construed in favour of the insured where: (i) the insured is a consumer; and (ii) the
ambiguous clause is a coverage exclusion, in which case it shall be deemed null and void.
Insurance contracts may be rescinded where there has been misrepresentation by the insured, in
accordance with the general rules provided in the Civil Code. Some specific rules applying to insurance
contracts are provided by the Insurance Code (art. L.113-8 and L.113-9). In terms of disclosure
obligations, the insured is only required to respond to specific questions regarding the risk that are set
out in the underwriting questionnaire; the insured cannot be sanctioned for having failed to volunteer
some information, albeit relevant, that was not expressly requested by the insurer or for having provided
French Law 23
an ambiguous response to a question that was itself
drafted in vague or ambiguous terms.
Avoidance of the contract is only available where
the insured/policyholder acted in bad faith, with the
knowledge that the information provided was false or
misleading (art. L.113-8 IC). Good faith is always
presumed and the burden of proof lies with the
insurer.Where false information deliberately provided
by the insured is discovered in connection with a loss,
avoidance is available even if that false information
bears no relation to that loss.The insurer is entitled to
keep all the premiums already collected and claim
payment of all further premiums which have
fallen due and payable as damages (except in relation
to life insurance).
Where the insured/policyholder has provided inaccurate information in good faith, avoidance is
not available (art. L.113-9). If the inaccuracy is discovered prior to the occurrence of any loss, the
insurer may either terminate the contract or choose to continue it, subject to an increased premium.
Where the inaccurate information is discovered after the occurrence of a loss, under the rule of
proportionality the insurer is entitled to reduce the indemnity by applying a ratio equal to (i) the
premium rate applied in the contract divided by (ii) the premium rate which should have been
applied had the insured accurately declared the risk. Similar principles apply where the insured fails
to inform the insurer of circumstances occurring whilst the insurance contract is in force, or
which aggravate the risk covered or give rise to new risks, so as to render the replies made in the
underwriting questionnaire inaccurate or no longer valid (art. L.113-2 and L.113-4 IC).
A third-party “victim” who has suffered damage is entitled to bring a direct action against the
liability insurer of the party liable for that damage (art. L.124-3 IC) by showing that (i) the insured
is liable to compensate his loss and (ii) the damage suffered is covered by the policy.While the direct
action in essence depends on the insurance contract, there are specific rules applying to how such
actions may be both pursued and defended, making it to some extent “autonomous” from the
underlying insurance contract. Thus, the insurer may defend the direct action by raising all the
defences that it would be entitled to raise against the insured, except (i) the statutory two-year
24 French Law
limitation period applying to the insured’s action, or (ii) any forfeiture of the policy based on the
insured’s conduct after the damage occurred.
The “autonomy” of the victim’s direct action is illustrated in several ways by case law (i) where
the insured is placed in bankruptcy, direct action against the insurer remains available to the victim
(subject to the deductible) including where the third party victim has failed to file his liability claim
with the trustee in the insured’s bankruptcy, (ii) the victim may take legal action against the insurer
without naming the insured as a defendant, (iii) a direct action may in some cases be exercised
against the insured’s liability insurer, even though the insured himself enjoys some legal or
contractual immunity vis-à-vis the victim, (iv) in international litigation, the admissibility of the
direct action (according to the French courts) is governed by the law of the place where the damage
occurred, not by the law of the contract, thus in the French courts a direct action will be held
admissible whenever the damage occurs in France, even though the law governing the policy may
not permit this.
Criminal fines are uninsurable under French law as a matter of public policy (art.6 CC), the
rationale being that passing the burden of criminal sanctions on to an insurer would frustrate the
deterrent purpose of criminal law. This also applies to pecuniary sanctions imposed by criminal
courts in customs or taxation matters.
It is also generally considered that no insurance coverage may be validly taken out in respect of
“civil” fines, namely pecuniary sanctions imposed by civil courts in the event of violations of some
civil statutes (chiefly rules of civil procedure, for example, failing to give assistance in establishing
the truth in a civil action; the failure of a witness to appear in a civil court; abuse of civil process;
abusing the right to appeal; wrongly challenging a magistrate or a court-appointed expert; etc.).
The question is more uncertain as regards (i) punitive, treble or exemplary damages (such as those
granted by some US courts in civil matters) in relation to the portion of the damages exceeding the
compensation of the actual damage. A significant reform of the sections of the Civil Code dealing
with contractual and tort obligations is currently under discussion. It proposes the introduction of
some notion of punitive damages into French law and provides that these punitive damages will be
uninsurable; and (ii) certain pecuniary sanctions applicable to the directors of a company placed in
compulsory liquidation (art. L.652-1 of the Commercial Code).
French Law 25
Fines imposed by administrative authorities (notably in stock exchange and anti-trust matters) seek
to achieve the same objective as criminal fines and are therefore similarly uninsurable.
5. Subrogation
After paying the insurance indemnity the insurer is, by operation of law, subrogated to the insured’s
rights and actions against the third parties who caused the damage (art. L 121-12 IC). Statutory
subrogation only applies where payment of the indemnity was legally due under the insurance
contract (a commercial payment may only give rise to “contractual” subrogation by the insured,
pursuant to the Civil Code). Subrogation vests the insurer with the same rights and actions as the
insured himself enjoyed vis-à-vis the third party (and/or its own liability insurer), subject to the same
limitations (jurisdiction clauses, statute of
limitation, etc. and, more generally, all the
defences the liable third party could have raised
against the insured).
The insurer may be released from its
obligation to indemnify where, by reason of the
insured’s conduct, the insurer’s subrogation rights
are lost or prejudiced (art. L.122-12, 2nd para.).
Where the insurer has only indemnified the
insured for part of its loss, the insured is entitled
to seek the balance from the liable third party
and enjoys a priority over the insurer on any
damages awarded.
‘The insurer may be
released from its
obligation to indemnify
where, by reason
of the insured’s
conduct, the insurer’s
subrogation rights are
lost or prejudiced (art.
L.122-12, 2nd para.)’
No subrogation may take place in favour of the insurer against, inter alia, the insured’s employees
or servants, except in cases of malevolent wrongful act. However, the subrogated insurer is entitled
to bring a direct action against the liability insurer of these employees.The same restrictions apply
to contractual immunity i.e. where the parties have waived any and all rights of action against one
another, unless specifically provided to the contrary.
Subrogation does not apply to life insurance.
Bernard Hertz Béjot
26 Italian Law
Italian Law
Insurance policies are construed according to the principles applicable to general contracts. Under
section 1362 of the Italian Civil Code, a contract must be construed according to the common
intention of the parties, even if such interpretation requires going beyond the literal meaning of the
words used. The common intention of the parties must be assessed in the light of the general
conduct of the parties, including conduct after the execution of the contract.
If ambiguity exists, any general contractual provisions drafted by one of the parties without
negotiation with the other party are construed in favour of the party who did not draft the
provisions.
Where different interpretations are possible, contractual provisions are to be interpreted in order
to render them valid and effective rather than void and ineffective (the “conservation rule”).
Italian Law 27
Under section 1892 of the Civil Code, if the insured wilfully or with gross negligence presents the
insurer with incorrect or false declarations, or fails to disclose circumstances affecting the risk, the
insurer is entitled to terminate the insurance contract within three months from the date the insurer
first becomes aware of the false representations or omissions.
If, before the expiry of this three-month period, the insurer fails to inform the insured in writing
that he intends to terminate the insurance contract, then the insurer’s rights to terminate for nondisclosure or misrepresentation will be time-barred.
However, if the event triggering coverage (i.e. the notification of a claim in case of a claims-made
policy) occurs before the insurer gains knowledge of the non-disclosure/misrepresentation or before
the three-month deadline expires, then the
insurer is entitled to decline indemnity, and is
not required to terminate the policy.
If the misrepresentation is not wilful or
grossly negligent, the indemnity due under the
policy will be reduced in the same proportion as
the difference between the premium paid and
the premium which would have been applied
had the insurer been correctly presented with
the relevant circumstances.
Many court decisions have stated that the
circumstances which the insured has to disclose
to the insurer are those which would increase
the likelihood that the insured event will occur.
These principles do not apply if the
information which the insured fails to declare
or has declared incorrectly were either known
by the insurer or could have been discovered by
exercising ordinary diligence.
28 Italian Law
There is no general right afforded to a
third party, who has suffered damage as
a consequence of the insured’s errors or
omissions, to pursue any remedy or claim
for indemnity against the insurer.
However, the insurer may decide to
compensate the damaged party/claimant
directly, and must do so if required by the
insured.
In certain sectors of regulated insurance
law and under specific statutory
provisions, the party who suffers the
damage is entitled to seek to recover its
losses directly from the insurer of the
person who caused the damage. In these
circumstances the insurer is normally
prevented from raising any objection
concerning the policy with the third party,
excepting any defences concerning the
existence of the insurance cover itself.
The third party will then be entitled to
recover from the insured any amount
which is not payable under the policy.
Criminal and administrative fines/penalties
There is a general principle in Italian law that losses arising from criminal and administrative fines
and penalties cannot be validly insured, as this would imply an assignment of the “punishment” from
the party committing the wrong to a third party, the insurer. Any insurance contract purporting to
cover criminal and administrative fines and penalties would be therefore void and ineffective.
Italian Law 29
‘There is a general principle in Italian law that
losses arising from criminal and administrative
fines and penalties cannot be validly insured,
as this would imply an assignment of the
“punishment” from the party committing
the wrong to a third party, the insurer.
Any insurance contract purporting to
cover criminal and administrative fines and
penalties would be therefore void and ineffective’
This principle has been confirmed by a decision of the Supreme Court of Cassation (though not
binding on lower courts) and by the ISVAP (the Italian Regulatory Authority on Insurance)
guidelines.
There are no recognised civil fines or punitive damages under Italian law.
Losses – including civil liabilities – resulting from fraudulent/intentional misconduct of the
insured cannot be validly insured under section 1900 of the Civil Code.
The principles applying to criminal and administrative fines set out above also apply to fines issued
by regulatory authorities.
5. Subrogation
An insurer who has paid an indemnity under an insurance contract is entitled to exercise the
insured’s rights to seek compensation from third parties, up to a cap of the amount of the indemnity
paid to the insured. The right of subrogation can be validly waived by the insurer.
Negri-Clementi,Toffoletto, Montironi & Soci
30 Israeli Law
Israeli Law
Insurance policies are subject to the general rules of contract construction.The basic rule provides
that the contract must be construed according to the intention of the parties, and the common
objectives, aims and interests that the parties sought to achieve. The intention of the parties is to
be construed not only from contract wording itself, but also from external sources, including precontractual negotiations, the behaviour of the parties following formation of the contract,
commercial usage as between the parties, other contractual relations between them and any other
source which may indicate the parties’ intention. Israeli courts have ruled that a consideration of the
parties’ intention should be determined by the specific circumstances of each case (C.A. 4628/93
The State of Israel v. Appropim, PDI 49 (2) 265).
A fundamental principle of Israeli jurisprudence is the principle of good faith which has also been
adopted in the construction of insurance policies.
Israeli Law 31
In view of the inequality between the parties to
an insurance contract, Israeli courts have
developed additional rules of construction which
invariably favour the insured. These include
giving effect to the expectations of the parties
with an emphasis on the insured’s reasonable
expectations, as well as the “contra proferentem”
rule. Given that the policy has been drafted by the
insurer, this rule is almost always applied to
construe the policy in favour of the insured.
Another important rule of construction is that
the policy provisions should always be construed
in a manner which gives them force and effect.
Where ambiguity exists, the courts will prefer a
construction that affords policy coverage.
‘In view of the
inequality between
the parties to an
insurance contract,
Israeli courts have
developed additional
rules of construction
which invariably
favour the insured’
The proposal form, documents attached thereto (such as financial statements of the company in
D&O insurance) or any other documents exchanged between the parties prior to inception of the
policy, are deemed to be an integral part of the policy. Any contradicting provisions in any one of
these documents and the policy itself will always be construed in favour of the insured.
Under Israeli law, the insured’s duty to disclosure information on its own initiative is
minimal. Section 6(a) of the Insurance Contract Law 1981 provides that an insured has a duty to
respond to a question raised by the insurer in the proposal form regarding a material matter
in a truthful and complete manner. A question regarding a material matter is defined as a
question regarding a matter that may affect the decision of a reasonable insurer to enter into the
insurance contract or may affect the decision of a reasonable insurer regarding the terms of the
insurance contract.
Section 7 sets out the consequences of non-disclosure. If the insured event has already occurred,
insurers may rely on non-disclosure to fully repudiate liability only if they can prove that (i) the
non-disclosure was made with fraudulent intent; or (ii) no reasonable insurer would have accepted
the risk even for a higher premium. In all other cases, the consequence of non-disclosure is that
32 Israeli Law
insurers will only be liable for a proportionate payment of insurance benefits, calculated at the
premium rate that should have been charged had full disclosure been made: for example if insurers
can show that they would have charged twice the premium had they been aware of the true nature
of the risk, they will only be liable to pay 50% of the loss.
The burden of proof which insurers must bear in order to prove that they were defrauded by the
insured is higher than the usual burden of proof which applies in civil cases.
In the absence of a proposal form the insured does not have a duty to initiate disclosure, unless
the decision not to disclose is made with fraudulent intent.
Wide-ranging questions which place an unfair burden on the insured are not allowed.
Section 68 of the Insurance Contract Law 1981 creates direct privity between a liability insurer
and a third party who has sustained loss as a result of the insured’s wrongdoing. Notwithstanding
this provision, the courts have ruled that the policy should not be deemed a contract in favour of a
third party. Therefore the insured may object to the third party’s demand for enforcement of
the policy, so long as his objection is raised in good faith and is based on legitimate reasons. In any
event, the insurer may raise against the third party any defence which it was open to him to raise
against the insured.
In the event of bankruptcy or liquidation of the insured, the policy will be deemed a contract in
favour of a third party. The insurance benefits will not constitute part of the estate and the third
party will be entitled to recover directly from insurers, pursuant to the policy terms and conditions.
If insurers have accepted the risk is covered under the policy, they are precluded from agreeing
settlement with a third party unless the insured’s prior written consent has been obtained.
There is no legal provision precluding general liability insurers from indemnifying an insured in
respect of fines and penalties. Practically all policies include a relevant exclusion. Therefore, there
Israeli Law 33
are very few court precedents in this area. In those few cases where this issue has been considered
the courts have tended to question the validity of the insurance on the grounds of public policy.
However, these judgments were generally qualified with the comment that each case should be
determined according to the specific circumstances. In cases where indemnification was sought for
minor offences, which did not require criminal intent or negligence (namely, strict liability), the
courts did not completely rule out the possibility of indemnification by insurers.
Civil and regulatory fines/penalties
Public policy considerations are also applicable to the question of the insurability of civil and
regulatory fines. It would appear that public policy may not necessarily prohibit insurance of fines
relating to minor breaches, which are technical by nature, and are not carried out intentionally.
D&O policies are subject to the Companies Law 1999 which includes strict provisions regarding
insurance of fines and penalties.
5. Subrogation
Section 62 of the Insurance Contract Law 1981 affords insurers subrogation rights to the extent that
insurers have indemnified the insured. Insurers’ rights of subrogation are created by law and therefore no
assignment of the insured’s rights is required.
Insurers step into the insured’s shoes and therefore any defence which the third party has against the
insured will preclude recovery against him by insurers.
Insurers are prohibited from exercising their subrogation rights in a manner which may prejudice the
insured. In view of this provision, the insured will be allowed to sue for any sum not recovered from
insurers.Where a third party has limited financial capabilities, the insured should have preferential rights
to collect from the third party’s limited resources.The insured is prohibited from
prejudicing insurer’s subrogation rights, therefore if the insured settles with the
third party or waives his rights against him, he may be liable to compensate his
insurers for inability to recover from the third party. Insurers are precluded from
exercising their right of subrogation against a third party who enjoys a special
relationship with the insured, such as employer/employee relations or a
family member, provided the third party has not caused the damage
intentionally.
Gross, Orad, Schlimoff & Co
34 US Law
US Law
The ordinary rules of contractual interpretation apply to insurance policies. If the contract language
is clear and explicit, it governs. If it is ambiguous, the courts will interpret the language to give effect
to the reasonable expectation of the insured. Some jurisdictions will not defer to the insured’s
expectations when the policy has not been drafted by an insurer, or when an insured has
sophisticated knowledge of insurance and is familiar with terms of art in the industry.
Typically, when a contract provision is found to be ambiguous, the courts will allow the admission
of extrinsic evidence/parol evidence to assist in the explanation of the provision. The burden of
proof, however, will be on the drafter of the contract. In certain jurisdictions the courts are less
restrictive in their application of the parol evidence rule, allowing the introduction of parol evidence
even if the policy language is unambiguous.
US Law 35
Parol evidence cannot generally be used to create ambiguity in the provision in the first
place; however, if the issue is one of mutual mistake by the parties, the court will need to consider
extrinsic evidence.
Courts in various jurisdictions have held that an insured has a duty to provide the insurer only with
the information the insurer has specifically requested in its proposal (“application”). Although the
courts have not clearly articulated a rationale for the rule, it appears that the rule is derived from
the notion that an insurer, who has the requisite knowledge and expertise to assess risks, should bear
the burden of requesting specific information. Moreover, one underlying rationale is that if
information is not requested by the insurer, it is necessarily immaterial.The general rule regarding
non-disclosure does not always apply, however. For example, the court may void the policy where
the insured fraudulently conceals material information, regardless of whether the insurer has
requested it. In order to establish fraudulent concealment, it must be shown that there exists a wilful
intent to defraud and not a mere mistake or oversight.
Because of the lack of privity between a third party and an insurer, a third party does not have a
common law right to bring a direct action against an insurer.
Some jurisdictions, through “direct action statutes,” allow for third parties to bring actions against
an insurer. States and territories in which direct action statutes exist are: Connecticut; Georgia;
Guam; Iowa; Kansas; Louisiana; Nebraska; New Jersey; Puerto Rico; Rhode Island; and Wisconsin.
In those jurisdictions, the statutory right is premised on the idea that a third party can only recover
from the insurer by virtue of the contract existing between the insurer and the insured. Direct action
statutes do not enlarge the coverage afforded by a policy. Thus, if an insurer has a valid coverage
defence the third party’s rights against the insurer would likewise be extinguished.
Illinois is one example of a jurisdiction which does not have a direct action statute; however, its
public policy dictates that third parties have a substantial interest in how insurance questions are
resolved.The Illinois Supreme Court has held that “this interest is best protected by having the claimants
36 US Law
participate directly in the litigation between the insurance carrier and the insured, rather than by allowing the
claimants to sue the carrier independently.” (Hapag-Lloyd (America), Inc. v. Home Ins. Co., (2000)).
Under New York law, insurers cannot be sued by a third party, unless that third party has secured
a judgment against an insured. Even then, there is an argument that there would be no right of
action against the insurer unless the underlying matter involved bodily injury or property damage.
Although there is limited case law discussing the insurability of criminal fines and penalties, the case
law which does exist appears to be consistent throughout the various jurisdictions. It is presumed
that one of the reasons why there is little case law regarding this issue is because of the policy
exclusions that clearly exclude such fines and penalties. The courts which have addressed this
issue have found that insuring criminal fines and penalties violates public policy. The underlying
public policy is to discourage the commission of wilful torts or criminal acts and consequently, the
rationale appears to be that the deterrent effect of such fines and penalties should not be transferred
to the insurer.
It is unclear whether civil fines and penalties are insurable. However, it appears that if the purpose
of a civil fine or penalty is punitive in nature, some jurisdictions, in an effort to promote deterrence,
US Law 37
may not allow the wrongdoer to shift liability to an insurer because this will result in a failure to
punish the wrongdoer.
The law throughout the various jurisdictions is split on
the issue of whether punitive damages that are directly
assessed against an insured for its wrongful conduct
are insurable. Some jurisdictions have found that
punitive damages arising from vicarious liability
are insurable. By contrast, the New York Courts
hold that vicarious liability for punitive damages
is not insurable.
Regulatory fines and penalties such as those
sought by the SEC and the IRS are treated similarly
to civil fines and penalties. As a result, courts would be
likely to use an analysis similar to that set out above. The
key issue would appear to be whether the fine or penalty is
intended to punish and deter.
5. Subrogation
The United States recognises two types of subrogation: conventional and equitable.
Conventional subrogation is created by an agreement or contract between parties granting the
right to pursue reimbursement from a third party in exchange for payment of a loss. Equitable
subrogation does not depend upon a contract but arises by implication in equity to prevent
an injustice.
Courts in several jurisdictions have developed anti-subrogation rules, whereby an insurer has
no right of subrogation against its own insured for a claim arising from the very risk for which
the insured was covered and for which the insurer accepted premiums, and thus prevent an
insurer from passing its loss to the insured. Such rules also prevent insurers from having a conflict
of interest that might deprive an insured of a vigorous defence. It is important to note that some
jurisdictions have developed an exception to the anti-subrogation rule applying to an insurer, as
subrogee, bringing an action against an insured based on the insured’s fraudulent acts.
Kissel Pesce Hirsch & Wilmer LLP
38 Canadian Law
Canadian Law
Generally, ordinary rules of contractual
construction apply, but with a few significant
exceptions. The contract will be given whatever
meaning is required for it to be commercially
reasonable. Any ambiguity will be construed
against the person who drafted the contract: if
the policy is in standard form rather than
individually drafted, doubt will be resolved in
favour of the insured. In addition, each
province’s statutes may contain mandatory
clauses that will be read into any contract
deemed governed by the law of that province.
For example, in Quebec (the province with the
rules most favourable to insureds):
• if there is a discrepancy between the
proposal and the policy, the proposal will
prevail, unless the insured was advised of the
difference in a separate document.
• Liability insurers are required to take up the
insured’s defence and pay for costs and interest
in addition to limits.This has been interpreted
as imposing a nil defence costs deductible.
• An insurer may decline cover for late notice only if it proves that it has suffered prejudice.
• A clause must be inserted in any English language policy indicating that the parties have
expressly requested that it is not drafted in French.
In common law provinces, generally the statutes direct the courts to apply discretion, on a balance
of equities, to determine whether the insured should be relieved from forfeiture of his rights for
failure to adhere strictly to conditions regarding proof of loss and other statutory conditions. Thus,
late notice is often forgiven (even if it is a condition precedent), but failure to co-operate in one’s own
defence is not. Drafting conditions either as triggers for coverage or as exclusions can be helpful.
Canadian Law 39
Canadian courts tend to prefer results that favour insureds at the insurers’ expense, often resorting
to contorted interpretation to do so. For example:
• an insured will not be left without cover even if on a literal interpretation of the attachment
requirements under consecutive policies, the claim would not attach to either policy.
• “Other insurance” clauses will not be interpreted so as to leave the insured without any cover.
Non-disclosure and misrepresentation are generally treated in a way similar to English law. The
standard rule is uberrimae fides, but the scope of duty is circumscribed by what information a
reasonable insurer requires to reach a decision to underwrite the risk (and on what terms).
Questions on the “proposal” (“application form”) are strong evidence of that, but the questions are
not necessarily conclusive. In some cases, expert opinion evidence is admissible on this point.
Remedies vary by province, by the terms of the proposal, the language of the policy, and the gravity
of non-disclosure.
Quebec has a rule of proportionality where the non-disclosure or misrepresentation would
not be of a nature to have caused the underwriter to decline the risk, but merely to have adjusted the
premium, and where the insured was in good faith. For example, if the underwriter would
have doubled the premium, he pays only half the indemnity. If the insurer proves that a reasonable insurer
would not have underwritten the risk at all, or that the insured was in bad faith, the policy may be avoided.
The insured need only disclose facts which the underwriter does not already know, such as facts
of which the insured has special knowledge and are not notorious. This has given rise to the
concept of a “reasonable underwriter”, who is required to be knowledgeable about the risk and
be current with industry characteristics (e.g., health risks of asbestos – Canadian Indemnity Co. v
Canadian Johns-Manville Co. (1990) and information in his own files – The Coronation Insurance
Co. Ltd. v Taku Air Transport Ltd (1991)).
Two situations are possible. First, throughout Canada, the third party can seek execution of a
judgment against the insurer by means of seizure after judgment. If the insured owes money to the
40 Canadian Law
third party victim, and the insurer owes an indemnity to the insured, the third party victim can
claim the indemnity directly from the insurer. In this scenario, all coverage defences are
available.The insurer can resist the seizure by demonstrating that he does not owe an indemnity.
Second, uniquely in Quebec, the third party “victim” has a direct right of action pursuant to
Article 2501 of the Civil Code of Quebec against the liability insurer either instead of, or as a
co-defendant with, the insured in any liability matter. Moreover, the insurer may not invoke
post-loss events against the third party, although it can then seek to recover damages from the
insured. Therefore, denials of cover based on late notice and failure to co-operate can be
meaningless in Quebec. Also, any attempt to circumvent the insurer’s statutory obligation to pay
defence costs in Quebec can be undermined if the third party sues the insurer, as the insurer
will defend itself from the first dollar and without regard to limits. Side agreements between
insured and insurer may be useful, although none have ever been tested.
On the issue of who is entitled to the insurance funds where there are insufficient limits to
pay all claims, the general rule is “first past the post”. This is seen as the best method of
encouraging speedy settlements.
There is no statutory prohibition against
covering fines and penalties. However, statute
law across Canada forbids an insurer from
indemnifying an insured for deliberately
inflicted damage. The concept of “courting
the risk” may also apply to situations where
fines and penalties are usually levied. In other
words, the underlying behaviour that attracts
punitive damages and criminal offences that
require mens rea (i.e. an intentional state of
mind) would often prevent the insurability of
the entire claim. Despite the fact that there is
no difficulty in excluding defence costs, some
policies cover them. (This can in fact be
advisable as it will allow the insurer to control
evidence).
‘There is no statutory
prohibition against
covering fines and
penalties. However,
statute law across
Canada forbids an
insurer from
indemnifying an
insured for deliberately
inflicted damage’
Canadian Law 41
Civil and regulatory fines/penalties
The same rules apply, but as civil and regulatory fines and penalties are sometimes levied
without the need to demonstrate intent, the results may differ, so policy language is required to
exclude them.
5. Subrogation
In theory, Canadian law is similar to English law on this point. However, if there are numerous ‘joint
insureds’ under the same policy (such as in a wrap-up situation), or in situations where it can be
shown that a third party paid a portion of the premium (i.e. in commercial shopping centres where
the lease obliges the tenants to pay a proportionate share of the insurance on the building), then the
insurer will generally be deemed to have waived its rights of subrogation against those joint insureds
or deemed beneficiaries, unless there is clear language to the contrary in the relevant contract.
Nicholl Paskell-Mede
42 Australian Law
Australian Law
A series of authorities in Australia, including
cases from the High Court, have outlined the
approach taken to the construction of an
insurance policy. The courts treat insurance
policies as a species of commercial contract.
They seek to give the words used in a policy
their ordinary meaning, having regard to the
commercial purposes of an insurance policy.
Attention is often focused on the contra
proferentem rule of interpretation which involves
construction of a policy by favouring an
interpretation that would benefit the party who
did not prepare the document (invariably the
insured in the context of insurance policies) if the meaning is not otherwise clear. This principle
has not prevailed as significantly in recent years, particularly in relation to insurance policies
issued in a commercial context, for example to large financial institutions or D&O policies
covering directors of large companies who possess a degree of commercial sophistication.
The Insurance Contracts Act 1984 (Cth) (ICA) significantly modifies the previously existing
common law position. Section 21 of the ICA provides that an insured has a duty to disclose to the
insurer, before the relevant contract of insurance is entered into, every matter known to the insured
that the insured knows to be relevant to the insurer’s decision whether to accept the risk and, if so,
on what terms, or that a reasonable person in the same circumstances could be expected to know
to be a relevant matter. In other words, while there is a subjective limb to the test of what ought
be disclosed, there is also an objective limb adjudged by reference to the “reasonable person”. The
Australian Law 43
test is relevance rather than materiality but the determining factors are very similar.
Section 21 also sets out certain matters that do not need to be disclosed: matters that diminish
the risk; matters of common knowledge; matters of which the insurer knows or ought to know; or
matters for which the duty of disclosure is waived.
The ICA also provides that an insurer shall, before a contract of insurance is entered into, clearly
inform the insured in writing of the general nature and effect of the duty of disclosure (section 22).
The remedies for non-disclosure are set out in section 28. An insurer can only avoid the policy
in the event of fraudulent non-disclosure. Otherwise the insurer’s remedy is limited to reducing its
liability in respect of a claim to the amount that would place the insurer in the position it would
have been in if the non-disclosure had not occurred.
Section 31 of the ICA allows the court, when considering a particular claim, to disregard an
avoidance that has been made for non-disclosure where not doing so would be harsh and unfair,
provided the insurer has suffered no prejudice.
These provisions of the ICA relating to non-disclosure are currently under review by the Federal
Government.
At common law, a third-party claimant with a claim against an insured cannot recover money in
respect of the insured’s liability directly from the insurer. However, there are a number of statutory
rights given to such claimants.
Firstly, under section 51 of the ICA, a third party claimant may recover directly from a liability
insurer where the insured has died or cannot, after reasonable enquiry, be found.
Secondly, section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) (there are
some similar provisions in other jurisdictions in Australia) provides for a statutory charge over
insurance moneys applying to the liability of an insured. The charge is enforceable by way of
direct action against the insurer in the same way as if the action were an action to recover damages
or compensation from the insured. However, leave of the court is required. Leave will not be granted
where an insurer is entitled under the terms of the contract of insurance to disclaim liability and
proceedings necessary to establish this right have been commenced.
44 Australian Law
Thirdly, in circumstances where a company has been deregistered (usually, though not always,
because it has gone into liquidation), section 601AG of the Corporations Act 2001 (Cth) creates in
effect a new cause of action. It permits a person to recover from the insurer of a deregistered
company an amount that was payable to the company under the insurance contract if the
company had a liability to that person and the insurance contract covered that liability immediately
before deregistration.
Under the Australian common law, insurance
policies can be found to be illegal, void or
unenforceable on the basis that they are contrary
to public policy. The test applied in relation to
the public policy rule is whether the contract
offends widely accepted community standards.
‘The courts have often
drawn a line between
criminal acts which
are intentional and
criminal acts which
are inadvertent and
therefore insurable’
It is a general principle of the law of liability
insurance that courts will refuse on the grounds
of public policy to enforce a policy which
promises to indemnify an insured against
liability for damage or injury which is the foreseeable result of an intended criminal act, or in respect
of a fine or other punishment.
Not all contracts to indemnify a criminal liability will be illegal or unenforceable. In the law of
insurance, the courts have often drawn a line between criminal acts which are intentional and
criminal acts which are inadvertent and therefore insurable. For example in the case of a strict
liability offence, the court may allow a person to be indemnified where it is satisfied that the
defendant was “morally” innocent.
It is unlikely that cover for defence costs relating to criminal proceedings will be contrary to public
policy and for example, many D&O policies provide such cover under advancement of costs provisions.
Traditionally, civil penalties have been excluded on the basis that they fulfil the same function as
criminal penalties but without the same degree of stigma. However, in more recent times there has
been a move to cover civil penalties including pecuniary penalties.
Australian Law 45
If cover is provided, it is common for it to be offered by way of an extension and to be phrased
along the lines that cover is provided for fines and penalties provided that the insurer is not
prohibited from paying the pecuniary penalties.
Cover for fines and penalties is particularly relevant in the D&O context: sections 199A and 199B
of the Corporations Act 2001 (Cth) restrict the circumstances in which a company can indemnify an
“officer” and also pay an insurance premium on his or her behalf. For example, a company is
prohibited from indemnifying an officer for a liability for a pecuniary penalty order or a compensation
order under the Corporations Act or a liability which did not arise out of conduct in good faith.
Regulatory fines and penalties can be criminal or civil. The question of insurability will therefore
be determined by the principles set out above, depending on whether the fines are criminal or civil.
5. Subrogation
The common law in Australia is similar to the English position; an insurer, once it has extended
indemnity to the insured, is entitled to exercise rights against third parties in the insured’s name.
The right of subrogation at common law is subject to the ICA, which contains a number of
provisions relating to subrogation. In summary:
• under section 56 of the ICA the insurer does not have a right of subrogation where the third party
stands in a family or other personal relationship with the insured and various other conditions are met;
• section 66 of the ICA removes the insurer’s right of subrogation to an employer’s rights against
an employee where the conduct of the employee that gave rise to the loss occurred in the
course of employment and was not serious or wilful misconduct;
• section 67 of the ICA entitles an insurer to keep any amount it recovers in excess of an insured’s
actual loss (under the common law any ‘windfall’ received in a recovery action had to be paid
to the insured).This section of the ICA is subject to the express terms of the policy and can be
varied by agreement after the loss has occurred;
• section 68 of the ICA provides that an insurer cannot rely on a provision in a policy which
expressly excludes or limits the insurer’s liability in the event that an insured, by agreement with
a third party, has excluded or limited its rights to recover damages from that third party (thereby
removing any right of subrogation), unless it clearly informs the insured in writing of the effect
of the provision before the policy is entered into.
Ebsworth & Ebsworth
46 Contacts
Contacts
England
Francis Kean
Colin Croly
email: [email protected]
website: www.blg.co.uk
Germany
Bach Langheid & Dallmayr
Dr Reinhard Dallmayr
website: www.bld.de
Netherlands
Houthoff Buruma
Hans Londonck Sluijk
website: www.houthoff.com
Spain
L.C. Rodrigo Abogados
Jorge Angell
website: www.rodrigoabogados.com
France
Bernard Hertz Béjot
Sylvain Rieuneau
website: www.bhbfrance.com
Italy
Negri-Clementi,Toffoletto, Montironi & Soci
Giorgio Corbetta
website: www.nctm.it
Israel
Gross, Orad, Schlimoff & Co.
Harry Orad
website: www.grosslaw.co.il
United States
Kissel Pesce Hirsch & Wilmer LLP
Richard Kissel
website: www.kphwlaw.com
Canada
Nicholl Paskell-Mede
Mindy Paskell-Mede
website: www.npm.ca
Australia
Ebsworth & Ebsworth
Tricia Hobson
website: www.ebsworth.com.au
International Comparative Review of
Liability Insurance Law
Produced in association with

International Comparative Review of Liability

Transcription

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