Transcript Consumer Law and Insurance Law

Consumer Law and Insurance
Law
Protection of the weak party
Samim Unan
References
This 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 protection
• 150 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 protection
• The need to protect the consumer arises from
imbalance of
- power
- information and
- resources
between consumers and services providers, that
leads to disadvantage the consumers.
Need for consumer protection
• Imbalances 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 with
- Transparency
- Choice
- Redress
- Privacy
Transparency
Information
about
– the prices
– Terms and conditions
of 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 complaints
– Resolve disputes
Privacy
Personal data to be
•kept confidential
•protected
•(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 products
Misleading advertisements
Unfair 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
Contracts
Codes 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 act
• At least: a special contract section in the
general law or contracts law.
Contract law
• A good B2C contract regulation
– should differentiate between material and non material
non disclosure
– should specify clearly the entry into force of the contract
(also the cover notes)
– should specify when the underinsurance would justify a
proportionate compensation
– should require a notification obligation for the insurer
when the insurer desires to cancel or alter a contract
Contract law
• A good B2C contract regulation (suite)
– Should indicate how contracts will be interpreted
in case of dispute
– Should provide for the use of plain and accessible
words and print size
– Should state clauses that can not be included
(clauses such as warranty clauses, compulsory
arbitration clauses)
Insurance contract law
Between business law and consumer protection
Insurance contracts = commercial transactions
as well as consumer transactions
Exception : reinsurance (always b2b)
Direct insurance
• Examples of commercial insurance: hull
insurance (transport vehicles), cargo insurance
(goods in transit)
• Examples of consumer risk insurance: life
assurance, private medical insurance
• Insurance taken by the employer against
death, injury etc. of the employees as a
collective insurance?
Collective insurance taken by the
employer
• 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 informed
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 bank’s
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 contract
• The 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 insurance
• Historical 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 claims
- Thereafter: mitigation of the harsh results
engendered by the protection of the insurer
Example: requirement of fault or link of causation
for breach of warranties (duties)
Legislation on insurance
• Historical development (after 1950’s):
- 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 insurance
• However
- In respect of the precontractual information duty
special rules for consumers
- Out of court complaint mechanism specifically for
consumers
- Special protection for small and medium sized
business
are 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 insurance
• “Consumerism”: 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 risk
– In general consumer law: it is linked with the
definition of the “consumer”
– In 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
contract
• Insurance 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 law
•
•
•
•
•
Definition of the consumer
Duty to advice, duty to inform
Unfair terms
Right to withdraw
Obligation to accept the offer of contracting
made by the consumer
Definition of the consumer
• A 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 abovebroader
Definition of the consumer
• In general consumer law, the consumer is a
disputed concept
– Enterprizes never considered as consumer?
– Enterprizes acquiring for resale only not
considered as consumer?
– Enterprizes considered as consumer when the
acquisition is made for private sphere
– Consumer “client”
– “End consumer” (prevailing approach)
Duty to advice
• Duty to advice (the duty to warn about the
inconsistencies)
Duty to inform
• In 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 projections
• A 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 customer’s
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 terms
• Unilaterally 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 withdrawal
• In 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 contracting
• Generally 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 that
– The rules about the protection of the consumer must apply also to
insurance contract
– Often 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) coexist
– However, 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,
especially
– If the general consumer law provides a wider
protection
– And 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
complaints
• Insurer to inform its customer of the internal dispute resolution
procedures
• The supervisor to control whether the insurer complies with the internal
dispute resolution procedures
Dispute resolution mechanisms
External:
• A system allowing the consumer to seek affordable
and efficient third party recourse (Ombudsman or
tribunal)
• Ombudsman made public
• Ombudsman’s impartiality and independence from
the appointing authority
• The enforcement mechanism to be made public.
Financial Literacy
• Consumers should have access to sufficient
resources to understand the products
available to them.
Insurance account handling
• Consumer 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 handling
• If 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 Conduct
• A principles based Code of Conduct for
insurers (and also for intermediaries)
- prepared in consultation with the insurers
(intermediaries) and consumer protection
associations
- monitored (and enforced at the last resort) by a
statutory agency
- augmented by voluntary codes
Other Institutional Arrangements
• There 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 clauses
• When insurers contract with a credit grantor
(i.e. banks and leasing companies) as
distribution channel for their products
– No 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 data
• Use of genetic (biometric) data for the
acceptance or decline and rating of life related
risks
Privacy and data protection
• Insurers should
–
–
–
–
–
–
–
–
Obtain and process information fairly
Keep it only for one or more specified explicit and lawful purposes
Use and disclose it only in ways compatible with these purposes
Keep it safe and secure
Keep it accurate, complete and up to date
Ensure that it is adequate, relevant and non excessive
Retain it for no longer than is necessary for the purpose
Give a copy of his/her personal data to that individual on request
Guarantee schemes
• They are provided especially for mandatory
insurances (motor vehicle liability insurance)
• For life assurances (especially when used as
loan collateral)?