Consumer Law and Insurance LawProtection of the weak partySamim Unan

ReferencesThis presentation is based mainly on three works

Prof. Helmut HEISS, Insurance Contract Law between Business Law and Consumer Protection (General Report prepared for the 18th International Congress on Comparative Law Rodney LESTER, Consumer Protection Insurance, Primer Series on Insurance Issue 7, August 2009

Dra. Andrea SIGNORINO BARBAT/ Dr. Antonio RABOSTO, Los Derechos del consumidor y el seguro,, XII Congreso Iberolationoamericano de Derecho de Seguros, Asuncion 2011

Need for consumer protection150 million new consumers of financial services each year. They are mostly in developing countries.Protection of the consumers seems more important in those countries that have moved from state planning to market economy

Need for consumer protectionThe need to protect the consumer arises from imbalance of powerinformation and resourcesbetween consumers and services providers, that leads to disadvantage the consumers.

Need for consumer protectionImbalances are observed especially where- the transaction in question is infrequent (mortgage on a personal residence)Entry or exit costs (to the profession) are low (the result: disreputable firms; such can be the case for intermediaries for example)The disadvantage appears only after years (for example in life assurance as a long term investment , performance cannot be evaluated at the beginning)

With what a financial sector should provide the consumer?

The insurance sector as a financial sector should provide the consumers withTransparencyChoiceRedressPrivacy

TransparencyInformation about the pricesTerms and conditionsof the product Information must be - full- plain- comparable

Choice

Fair, non-coercive and reasonable practices when - selling the product- collecting the payments

Redress

Inexpensive and speedy mechanisms

To address complaintsResolve disputes

PrivacyPersonal data to be kept confidentialprotected (when necessary) destroyed

Key risks related to misselling of insurance product to retail customers

Legal risk (successful legal actions leading to payment of compensation)Short term liquidity risk and long term solvency risk (if customers unfairly treated finally shun the insurer) Contagion risk (problems of one insurer spread to the whole sector)Effective consumer protection contribute to avoid the said risks

Examples of udesirable industry practices harmful to consumers

Unrealistic benefit illustrations Non disclosure of real costs of the productsMisleading advertisementsUnfair claims settlements practices (late payment of compensation in order to realize financial benefit)Selling tied to other products or services (white goods consumer credit +credit insurance) Not selling to identified needs

Consumer protection institutions in insurance

Consumer protection regime ContractsCodes of conduct Other arrangements Bundling and tying clauses

Consumer protection regime

Clear rules of law (both supervisory and contractual)Rules to encourage voluntary consumer protection organizations and self regulatory organizations.

Contract law

Ideal solution: separate insurance contract actAt least: a special contract section in the general law or contracts law.

Contract lawA good B2C contract regulationshould differentiate between material and non material non disclosureshould specify clearly the entry into force of the contract (also the cover notes)should specify when the underinsurance would justify a proportionate compensationshould require a notification obligation for the insurer when the insurer desires to cancel or alter a contract

Contract lawA good B2C contract regulation (suite)

Should indicate how contracts will be interpreted in case of disputeShould provide for the use of plain and accessible words and print sizeShould state clauses that can not be included (clauses such as warranty clauses, compulsory arbitration clauses)

Insurance contract lawBetween business law and consumer protection

Insurance contracts = commercial transactions as well as consumer transactions

Exception : reinsurance (always b2b)

Direct insuranceExamples of commercial insurance: hull insurance (transport vehicles), cargo insurance (goods in transit)Examples of consumer risk insurance: life assurance, private medical insuranceInsurance taken by the employer against death, injury etc. of the employees as a collective insurance?

Where the employees are in a position similar to the policyholder?The insured employee pays the premium (to the employer), chooses the product after being adviced and informedCollective insurance taken by the employer

Collective insurance taken by the employer

And where the employer undertakes the sale and administration of the collective insurance?The employer plays then the role of an insurance intermediary

Collective insurance taken by a financial institution The bank as policy holder takes out life insurance or accident insurance for its clients (borrowers)The aim of the insurance is to secure the banks credit But the money payable by the insurer relieves the insured/successors from debts

Direct insurance taken by a financial institution The lessor takes insurance for the subject matter of the lease contractThe insurance money payable by the insurer is aimed at covering the outstanding instalments.

Direct insurance taken by the consumer The borrower takes a loan from the bank to buy a new flat which is destroyed by a fire. The lendor has ex lege a right over the insurance money (to recover the outstanding indebtedness)The insured property is subsequently seized to secure the sums due by the policy holder as a result of a commercial transaction . The insurance money is ex lege a surrogat for the property seized

Insurance to the benefit of a third party

Insurance taken to protect the interest of a third party ?

Legislation on insuranceHistorical development: Early stages: Protection of the insurer (and also the so called community of insured people) Example: the duty to disclosure of the prospect policy holder, the prevention of fraudulent claimsThereafter: mitigation of the harsh results engendered by the protection of the insurerExample: requirement of fault or link of causation for breach of warranties (duties)

Legislation on insurance Historical development (after 1950s): - Consumer protection approach This protection is provided by means of mandatory provisions (setting the compulsory boundaries of the insurers to regulate the insurance relationship through general policy conditions)

Legislation on insurance Insurance is nowadays mostly regulated by special legislation. It is not part anymore of the general private (commercial) law.Insurance acts generally do not make any differentiation between consumer insurance contracts and commercial insurance contracts

Legislation on insuranceHoweverIn respect of the precontractual information duty special rules for consumersOut of court complaint mechanism specifically for consumers Special protection for small and medium sized businessare sometimes provided

Legislation on insurance General Consumer Law rules to the extent that they are also applicable to insurance contracts, contribute to the creation of insurance consumer law(especially rules about unfair terms or distance marketing of financial services)

Legislation on insuranceConsumerism: National laws on insurance absorb instruments of consumer protection to protect the weak party .The term weak party includes Policy holder,Consumers Small and medium sized entreprises

Consumer risk- commercial risk Demarcation between consumer risk and commercial riskIn general consumer law: it is linked with the definition of the consumerIn insurance law it is linked with the protection of the weak party Insurance law protects any policyholder (including the consumer) mandatorily, the large risks being the exception.

Consumer rights in insurance contractInsurance contract law is described as a monolithic branch of law (no difference between consumer and commercial contracts)However many principles of the consumer protection law have penetrated insurance contract law.

Consumer rights in insurance contract

Unfair terms (insurance contract being a contract of adhesion, judicial control of unfair terms in general policy conditions has an important impact on insurance products)Important problem: whether judicial control is possible also with regards to exclusions?Right to withdraw Right to obtain information and advice/warnings)Right to obtain contractual documents (in time and in writing)

Shift in perspective

(Protection of the insurer + the community of the insured persons against adverse risk selection) decreased(Protection of the individual policy holder against an adverse selection of the insurance product) increased.

Basic principles of the consumer lawDefinition of the consumerDuty to advice, duty to informUnfair terms Right to withdrawObligation to accept the offer of contracting made by the consumer

Definition of the consumerA person who does not buy goods or services for business related, professional or trade related purposes.

Insurance law notion of consumer (the weak party in insurance contract) is as said above- broader

Definition of the consumerIn general consumer law, the consumer is a disputed conceptEnterprizes never considered as consumer?Enterprizes acquiring for resale only not considered as consumer?Enterprizes considered as consumer when the acquisition is made for private sphereConsumer client End consumer (prevailing approach)

Duty to adviceDuty to advice (the duty to warn about the inconsistencies)

Duty to informIn the field of insurance, the information duty is not only provided for the precontractual stage but applies also during the contract period.

Duty to not mislead the customers by advertising and sales material

Advertising materials should be easily readable and understandable by the general public and accurate (insurers to be responsible for their public announcements)Regulatory limits to be placed on investment returns used in life insurance value projectionsA key-fact document (also known as IDD = Initial Disclosure Document) should be attached to all sales and contractual documents (key factors of the insurance product in large print)

Sales practices

Intermediaries (license, proof of licensing through the internet available to the public; sales personnel to have sufficient qualifications)

Sales intermediary should obtain sufficient information about the consumer in order to make an appropriate offer (KYC = know your customer = factfinding = sufficient information about a customers personal and financial situation before giving the advice)

The consumer should be made aware of whether the intermediary is acting for him or for the insurer

Sales practices If the intermediary is a broker, the consumer should be advised (at the first contact with the intermediary?) if the commission will be paid by the insurer.The consumer should have the right to require the amount of the commission? (in all insurances or in certain insurances only such as life assurance?).

Sales practices* An intermediary should not be allowed to be at the same time broker and agent for a given general class of insurances (life and disability, health, credit insurance .)Reasonable cooling- off period (also known as free look period) to struggle with eventual high pressure selling and misselling. Sanctions (fines, withdrawal of license for each of the above)

Unfair termsUnilaterally prepared and non negotiated contract terms not binding when they create an imbalance to the detriment of the consumer.This rule does not apply when the contract terms (general policy conditions) are prepared by the regulatory body (as they are not prepared by the insurer unilaterally).

Right of withdrawalIn insurance law, in general the right of withdrawal only provided in a limited extent (life assurance). However new texts such as German ICA 8 and PEICL Art. 2:303 allow it explicitly for any insurance contract (under certain circumstances)

Obligation of contractingGenerally the obligation of contracting is not specifically provided in insurance except for compulsory insurances whereas it is a basic rule in general consumer law.

How consumer law rules are put into effect in insurance?

Best solution: special provisions in insurance contract law + references to consumer law

Worse solution: recognition that general consumer law rules prevail over insurance law

Is insurance consumer law lex specialis vis-a-vis the general consumer law?

During CILA congress in Asuncion 2011 it was stated thatThe rules about the protection of the consumer must apply also to insurance contractOften the general rules aimed at protecting the consumer (consumer protection act) and the rules to protect the weak party in insurance contract (insurance contract act) coexistHowever, the rules protecting the weak party in insurance contract are lex specialis and should prevail over the general rules protecting the consumer

Is insurance consumer law lex specialis vis-a-vis the general consumer law?

This point of view is open to discussion, especiallyIf the general consumer law provides a wider protectionAnd if the aim of the legislator were not exempting the insurance from the scope of that wider protection (or to provide less protection for the weak party in insurance contract)

Resolution of conflicts between insurer and policy holder

Commercial courts Consumer courts (bad solution)Admiralty courts (not relevant)Arbitration ADR (Ombudsmen)Class action Complaints to supervisory authority

Dispute resolution mechanisms

Internal: Insurers to provide an internal avenue for claim and dispute resolution (contact points for the consumer accessible during business hours; statement in plain language of the main steps of the mechanism provided; fairness in handling the customer dispute; statement of the coordination with any Ombudsman or supervisory authority; avoidance of unreasonable cost)Insurer to designate employees who will handle retail policy holder complaintsInsurer to inform its customer of the internal dispute resolution proceduresThe supervisor to control whether the insurer complies with the internal dispute resolution procedures

Dispute resolution mechanismsExternal: A system allowing the consumer to seek affordable and efficient third party recourse (Ombudsman or tribunal)Ombudsman made publicOmbudsmans impartiality and independence from the appointing authorityThe enforcement mechanism to be made public.

Financial LiteracyConsumers should have access to sufficient resources to understand the products available to them.

Insurance account handlingConsumer to receive periodic statements in case of insurance savings and investment contracts.Insurers should be required to disclose the cash value of such a contract, upon demand (due to the selling costs, often life insurance products have no cash value for some years and insurers are not ready to disclose that fact) Renewal notices at least 30 days before the renewal date of non-life policies (non renewal desire/decision notified 30 days before effect)

Insurance account handlingIf non disclosure (discovered after the materialization of the risk = occurrence of the insured event) is not material to the proximate cause of the claim, insurer should not be allowed to deny cover. Adjustment however should be possible (proportionate to the premium perceived to the applicable premium, had the insurer known the accurate facts).

Codes of ConductA principles based Code of Conduct for insurers (and also for intermediaries)prepared in consultation with the insurers (intermediaries) and consumer protection associationsmonitored (and enforced at the last resort) by a statutory agencyaugmented by voluntary codes

Other Institutional ArrangementsThere must be a balance between prudential supervision and consumer protection Market conduct + prudential responsibilities (better to separate these roles?)Responsibility of insurers for their public announcements

Bundling and tying clausesWhen insurers contract with a credit grantor (i.e. banks and leasing companies) as distribution channel for their productsNo bundling (the sale of two goods together in a bundle), tying Without first having advised the consumer And without giving the consumer the right to opt out

(Bundling can increase pricing complexity and reduce market transparency and render price comparisons impossible)

Privacy and data protection Protection of the confidentiality and security of the customers personal dataUse of genetic (biometric) data for the acceptance or decline and rating of life related risks

Privacy and data protection Insurers shouldObtain and process information fairlyKeep it only for one or more specified explicit and lawful purposesUse and disclose it only in ways compatible with these purposesKeep it safe and secureKeep it accurate, complete and up to dateEnsure that it is adequate, relevant and non excessiveRetain it for no longer than is necessary for the purpose Give a copy of his/her personal data to that individual on request

Guarantee schemesThey are provided especially for mandatory insurances (motor vehicle liability insurance)

For life assurances (especially when used as loan collateral)?