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Insurance and
Reinsurance
Law Review
Fifth Edition

Editor
Peter Rogan

lawreviews
 Insurance and Reinsurance
the

Law Review

The Insurance and Reinsurance Law Review

Reproduced with permission from Law Business Research Ltd.

This article was first published in The Insurance and Reinsurance Law Review -
Edition 5
(published in April 2017 – editor Peter Rogan)

For further information please email

[email protected]
Insurance and
Reinsurance
Law Review
Fifth Edition

Editor
Peter Rogan

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 lawreviews
THE MERGERS AND ACQUISITIONS REVIEW

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 ACKNOWLEDGEMENTS

The publisher acknowledges and thanks the following law firms for their learned assistance
throughout the preparation of this book:

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i
 Acknowledgements

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ii
 CONTENTS

PREFACE��������������������������������������������������������������������������������������������������������������������������������������������������������� vii
Peter Rogan

Chapter 1 FRAUDULENT INSURANCE CLAIMS: WHERE ARE WE NOW?���������������������������1

Simon Cooper

Chapter 2 AUSTRALIA��������������������������������������������������������������������������������������������������������������������������7
David Gerber and Craig Hine

Chapter 3 AUSTRIA�����������������������������������������������������������������������������������������������������������������������������19
Ralph Hofmann-Credner

Chapter 4 BERMUDA�������������������������������������������������������������������������������������������������������������������������30
Christian Luthi and Michael Frith

Chapter 5 BRAZIL��������������������������������������������������������������������������������������������������������������������������������49
Bruno Balduccini and Diógenes Gonçalves

Chapter 6 CAMBODIA�����������������������������������������������������������������������������������������������������������������������60
Antoine Fontaine

Chapter 7 CAYMAN ISLANDS����������������������������������������������������������������������������������������������������������75

John Dykstra and Abraham Thoppil

Chapter 8 CHILE����������������������������������������������������������������������������������������������������������������������������������86
Ricardo Rozas

Chapter 9 CHINA��������������������������������������������������������������������������������������������������������������������������������97
Zhan Hao

Chapter 10 COLOMBIA����������������������������������������������������������������������������������������������������������������������109
Neil Beresford and Raquel Rubio

iii
 Contents

Chapter 11 DENMARK�����������������������������������������������������������������������������������������������������������������������131
Philip Graff

Chapter 12 ENGLAND AND WALES�����������������������������������������������������������������������������������������������142

Simon Cooper and Mona Patel

Chapter 13 GERMANY������������������������������������������������������������������������������������������������������������������������162
Markus Eichhorst

Chapter 14 GREECE����������������������������������������������������������������������������������������������������������������������������180
George Iatridis, Dimitris Kapsis, Dimitris Giomelakis and Nikolaos Mathiopoulos

Chapter 15 INDIA��������������������������������������������������������������������������������������������������������������������������������191
Neeraj Tuli and Celia Jenkins

Chapter 16 IRELAND��������������������������������������������������������������������������������������������������������������������������202
Sharon Daly, Darren Maher and April McClements

Chapter 17 ISRAEL������������������������������������������������������������������������������������������������������������������������������217
Harry Orad

Chapter 18 ITALY���������������������������������������������������������������������������������������������������������������������������������227
Alessandro P Giorgetti

Chapter 19 JAPAN��������������������������������������������������������������������������������������������������������������������������������246
Shinichi Takahashi, Keita Yamamoto, Yoshihide Matsushita and Takahiro Sato

Chapter 20 KOREA������������������������������������������������������������������������������������������������������������������������������263
S W Park and J H Shin

Chapter 21 LATIN AMERICA OVERVIEW�������������������������������������������������������������������������������������273

Duncan Strachan

Chapter 22 MEXICO���������������������������������������������������������������������������������������������������������������������������285
Yves Hayaux-du-Tilly

Chapter 23 NEW ZEALAND��������������������������������������������������������������������������������������������������������������298

Tom Hunt and Marika Eastwick-Field

iv
 Contents

Chapter 24 PORTUGAL����������������������������������������������������������������������������������������������������������������������310
Pedro Ferreira Malaquias and Hélder Frias

Chapter 25 SPAIN���������������������������������������������������������������������������������������������������������������������������������323
Jorge Angell

Chapter 26 SWITZERLAND��������������������������������������������������������������������������������������������������������������338
Lars Gerspacher and Roger Thalmann

Chapter 27 TURKEY����������������������������������������������������������������������������������������������������������������������������350
Pelin Baysal and Ilgaz Önder

Chapter 28 UNITED ARAB EMIRATES������������������������������������������������������������������������������������������363

Sam Wakerley, John Barlow and Josianne El Antoury

Chapter 29 UNITED STATES������������������������������������������������������������������������������������������������������������378

Michael T Carolan, Paul W Kalish, William C O’Neill and Thomas J Kinney

Appendix 1 ABOUT THE AUTHORS�����������������������������������������������������������������������������������������������397

Appendix 2 CONTRIBUTING LAW FIRMS’ CONTACT DETAILS������������������������������������������415

v
 PREFACE

It is hard to overstate the importance of insurance in personal and commercial life. It is

the key means by which individuals and businesses are able to reduce the financial impact
of a risk occurring. Reinsurance is equally significant; it protects insurers against very large
claims and helps to obtain an international spread of risk. Insurance and reinsurance play an
important role in the world economy. It is an increasingly global industry, with the emerging
markets of Brazil, Russia, India and China developing apace.
Given the expanding reach of the industry, there is a need for a source of reference that
analyses recent developments in the key jurisdictions on a comparative basis. This volume, to
which leading insurance and reinsurance practitioners around the world have made valuable
contributions, seeks to fulfil that need. I would like to thank all of the contributors for their
work in compiling this volume.
Looking back on the past year, market estimates suggest that total economic losses
from natural and man-made disasters will be at least US$158 billion, significantly higher
than the US$94 billion losses in 2015. Insured losses from 2016 will also be higher, at
around US$49 billion compared with US$37 billion in the previous year. Earthquakes (in
Taiwan, Japan, Ecuador, Italy and New Zealand), hail and thunderstorms and Hurricane
Matthew were responsible for the largest insurance losses, with the latter causing devastation
across the east Caribbean and south-eastern US. The US, Europe and Asia all experienced
heavy flooding, while wildfires sparked the biggest ever loss for Canada’s insurance industry.
Tragically, approximately 10,000 people lost their lives in disaster events in 2016.
Events such as these test not only insurers and reinsurers but also the rigour of the law.
Insurance and reinsurance disputes provide a never-ending array of complex legal issues and
new points for the courts and arbitral tribunals to consider. I hope that you find this fifth
edition of The Insurance and Reinsurance Law Review of use in seeking to understand them
and I would like once again to thank all the contributors.

Peter Rogan
Ince & Co
London
April 2017

vii
Chapter 1

FRAUDULENT INSURANCE
CLAIMS: WHERE ARE WE NOW?
Simon Cooper1

Dishonesty in general, and fraudulent claims in particular, cost the insurance market
considerable amounts each year. The legal consequences of dishonesty are not always the
same, however, and will depend on a number of factors, including how it manifests itself and
the point in the process at which it occurs.
During 2016, both the definition of a ‘fraudulent claim’ and the remedies available to
insurers battling against such claims, were radically reformed through a combination of new
legislation and new guidance from the highest court in the land.

i Dishonesty during the claims process

Historically, the courts have recognised three types of fraudulent insurance claim:
a wholly invented claims;
b fraudulently exaggerated claims; and
c genuine claims advanced by ‘fraudulent devices’.

Until very recently, the insurer’s remedy in respect of each of these categories was ‘forfeiture’
of the entire claim – the ‘fraudulent claims rule’. The essence of the rule is that, if an assured
presents a claim that is in whole, or in part, fraudulent, the assured will forfeit the entirety
of the claim. Since the Supreme Court’s 2016 decision in Versloot Dredging v. HDI-Gerling;
The DC Merwestone,2 however, genuine claims that are advanced by ‘fraudulent devices’ or
‘collateral lies’ are no longer classified as ‘fraudulent claims’ and so do not attract this remedy.
Under the Insurance Act 2015 (which came into effect on 12 August 2016), in the
event of a fraudulent claim, the insurer is also entitled to cancel the insurance from the date
of the fraud and to retain the premium in its entirety.
If a claim has come before the courts, acts of fraud or dishonesty by the assured during
the litigation will give rise to a different set of remedies that are governed by the rules of the
court. Similarly, the fraudulent claims rule and the Insurance Act remedies do not apply to
a fraudulent claim by a dishonest third party against an innocent assured who is entitled to
an indemnity from insurers, but the sanctions available under the court rules may be applied
against the third party in those circumstances.
These different types of fraud and the remedies available are discussed further below.

1 Simon Cooper is a partner at Ince & Co.

2 Versloot Dredging v. HDI-Gerling; The DC Merwestone [2016] UKSC 45.

1
 Fraudulent Insurance Claims: Where Are We Now?

Wholly invented claims

These are claims in respect of which the loss has either been deliberately brought about by the
assured’s own actions (e.g., scuttling a ship) or where the loss has been completely fabricated
(e.g., arising from a staged motor accident). The forfeiture rule applies to wholly invented
claims.

Exaggerated claims
Claims may arise where the loss itself is genuine but the value of the claim has been
deliberately exaggerated. The fact that a claim has been exaggerated does not of itself mean
that it is fraudulent. Judges are prepared to accept that a certain amount of ‘horse trading’
goes on between an assured and its insurer. The difficulty is in deciding where the line is to be
drawn between ‘acceptable’ exaggeration and fraud. Generally, the courts look at the degree
to which the claim has been inflated; the greater the exaggeration the easier it is to impute a
fraudulent intent.
In Orakpo v. Barclays Insurance Services,3 Lord Justice Hoffman stated that: ‘...one
should naturally not readily infer fraud from the fact that the Assured has made a doubtful
or even exaggerated claim.’
If, however, there is fraudulent exaggeration, Sir Roger Parker said: ‘If he is fraudulent,
at least to a substantial extent, he will recover nothing, even if his claim is in part good.’
In Danepoint Ltd v. Underwriting Insurance Ltd,4 an assured claimed for loss of rent in
relation to a property divided up into 13 flats, each of which had been sublet. The assured
claimed that all flats had been vacated following a fire at the property and his loss of rent
claim was based on all of the flats being unoccupied. This was untrue; a lot of the flats
remained occupied. In deciding whether the claim should be forfeit for fraud, the court
found that an exaggerated claim would be categorised as fraudulent where:
a the exaggeration was more than trivial;
b the assured was dishonest – exaggeration of itself did not establish dishonesty; there had
to be an intention to deceive the insurer, or recklessness; and
c the fraud must have been material, in that it would have had a decisive effect on the
readiness of the insurers to make payment.

On the facts of this case, it was not difficult for the court to conclude that all of these criteria
had been satisfied and that the evidence in favour of a finding of fraud was overwhelming.
If a claim for, say, loss of items by theft is partly genuine and partly fraudulent, the law
says the claim is not severable. Thus if the degree of fraud in relation to one part of the claim
is material, the entire claim will be forfeited. For example, in Galloway v. Guardian Royal
Exchange (UK) Ltd,5 Mr Galloway suffered a burglary and submitted a claim not just for the
probable true value of the loss (£16,133) but an additional £2,000 claim being the supposed
value of a computer. In fact there had been no theft of a computer as there had been no
computer at all. The Court of Appeal held that the degree of fraud was sufficient to render
the entire claim fraudulent.

3 Orakpo v. Barclays Insurance Services [1995] LRLR 443.

4 Danepoint Ltd v. Underwriting Insurance Ltd [2006] Lloyd’s Rep IR 429.
5 Galloway v. Guardian Royal Exchange (UK) Ltd [1999] Lloyd’s Rep IR 209.

2
 Fraudulent Insurance Claims: Where Are We Now?

Fraudulent devices
In Agapitos v. Agnew; The Aegeon,6 the Court of Appeal held that if an assured used a ‘fraudulent
device’ to support his or her claim or to better his or her chances of a favourable settlement
before litigation, then the insurer could rely on the common law defence of forfeiture. A
fraudulent device in this context meant a lie or other false evidence that was deployed in
support of a genuine claim.
This principle was approved and applied in subsequent cases by courts up to and
including the Privy Council.7
In its landmark 2016 decision in Versloot Dredging v. HDI-Gerling; The DC Merwestone,8
however, the Supreme Court (by a majority of 4–1, Lords Sumption, Toulson, Clarke and
Hughes, with Lord Mance dissenting) abolished the insurer’s remedy of forfeiture for the
assured’s use of a fraudulent device.
In doing so, it overturned the Court of Appeal’s judgment in the same case and decided
that the Court of Appeal had been wrong in The Aegeon in expressing the opinion that the
public policy objective of deterring fraud in the insurance claims context warranted the
forfeiture of a claim that had been promoted by fraudulent means, even though the claim
was in all other respects valid.
While upholding the fraudulent claim rule in respect of fraudulently exaggerated
claims, the majority considered it to be ‘a step too far’ and ‘disproportionately harsh’ to
deprive a claimant of his or her claim by reason of his or her fraudulent conduct if it turns
out that the fraud had been unnecessary because the claim was in fact always recoverable.
In reaching that decision, the majority considered there to be an important difference
between a fraudulently exaggerated claim and a legitimate claim supported by a fraudulent
statement or evidence. It was held that forfeiture is appropriate in the former case because
the assured will have been seeking to obtain something to which it was not entitled, but not
in the latter case because the fraud deployed would not have involved an attempt to obtain
anything more than the assured’s actual legal entitlement.
In a strong dissenting judgment, Lord Mance expressed the opinion that there was no
distinction to be drawn between the deployment of a fraudulent device and the pursuit of a
fraudulently exaggerated claim. In his view, forfeiture was proportionate in both cases, and
justified by the public policy objective of deterring fraud in the insurance claims context.
Lord Mance stated that the proposition that a lie told to promote a claim ‘is immaterial to
the parties’ rights and obligations’ [per Lord Toulson] simply because, perhaps years later
it can be seen that the lie was unnecessary and the claim good without it, appears to be a
‘charter for untruth’. He stated that this proposition overlooked both the ‘obvious imperative
of integrity on both sides in the claims process’ and ‘the obvious reality that lies are told for a
purpose, almost invariably as here to obtain an uncovenanted advantage of having the claim
considered and hopefully met on a false premise’.
The implications of this judgment are significant for insurers. Lord Mance put it thus:
‘Abolishing the fraudulent devices rule means that claimants pursuing a bad, exaggerated or
questionable claim can tell lies with virtual impunity.’

6 Agapitos v. Agnew; The Aegeon [2003] 3 WLR 616.

7 Equivalent to the Supreme Court, the Judicial Committee of the Privy Council is the court of final appeal
for the UK overseas territories and Crown dependencies, and for those Commonwealth countries that have
retained the appeal to Her Majesty in Council or, in the case of Republics, to the Judicial Council.
8 Versloot Dredging v. HDI-Gerling; The DC Merwestone [2016] Lloyd’s Rep IR 468.

3
 Fraudulent Insurance Claims: Where Are We Now?

ii Dishonesty during the litigation process

Different rules governing the consequences of fraudulent claims come into effect once legal
proceedings are commenced in respect of that claim.9 That does not mean that the assured
will receive no sanction for dishonesty during the legal process; simply that the court rules of
procedure now apply instead.
There is a very old rule that witnesses, even if malicious or dishonest, have absolute
immunity from civil suit for what they say in proceedings. However, immunity from civil suit
is not a complete answer to dishonesty in civil litigation. There has been a lot of attention in
recent years on the ways in which dishonesty in proceedings can be controlled.

Contempt of court
Since the introduction of the Civil Procedure Rules (CPR) in 1999, statements of case,
witness statements and disclosure lists must be verified by a ‘statement of truth’, putting them
almost on a par with sworn evidence. CPR 32.14 provides that ‘[P]roceedings for contempt
of court may be brought against a person if he makes, or causes to be made, a false statement
in a document verified by a statement of truth without an honest belief in its truth.’
In the 2004 case of Sony Computer Entertainment v. Ball,10 the judge suggested that the
court’s discretion to permit such proceedings should be exercised with caution: ‘the claimant
must satisfy the court that there is a strong case – and preferably an admitted case – that a
particular misrepresentation is untrue.’
Since then, however, the courts have become increasingly willing to penalise parties
who knowingly give false evidence. In the 2016 case of Aviva Insurance Ltd v. Randive,11 for
example, following a trial of a road traffic accident claim that was held to be fundamentally
dishonest, the court granted the defendant insurer permission to bring contempt proceedings
against the claimant for making false statements verified by a statement of truth. The court
noted that bringing a false claim in the courts was extremely serious, leading to a waste of
court time and resources. Although the claim in this case was small in financial terms and
contempt proceedings would be costly, in the interests of justice and the overriding objective
of the CPR (namely, to deal with cases justly and at proportionate cost), the court found that
it was appropriate to pursue them.

Striking out
The question for the Supreme Court in Fairclough Homes Ltd v. Summers12 was whether
the defendants were entitled to have an entire claim struck out in circumstances where
the claimant had put forward a grossly exaggerated and fraudulently maintained claim for
personal injuries. It held that while the court had jurisdiction to strike out such a claim, it
should only do so in very exceptional circumstances. The test in each case, it held, must be
what was ‘just and proportionate’.

9 Manifest Shipping Co Ltd v. Uni-Polaris Shipping Co Ltd; The Star Sea [2001] 2 WLR 170.
10 Sony Computer Entertainment v. Ball [2005] FSR 9.
11 Aviva Insurance Ltd v. Randive [2016] EWHC 3152 (QB).
12 Fairclough Homes Ltd v. Summers [2013] Lloyd’s Rep IR 159.

4
 Fraudulent Insurance Claims: Where Are We Now?

Adverse costs consequences

It is a long-established principle in England that a losing party usually pays the winning
party’s legal costs – the ‘costs follow the event’ rule. However, in deciding whether to make
a different order the court is entitled to take into account the conduct of the parties. The
courts have shown over recent years that they will express their disapproval of dishonest
claims in adverse costs orders. For example, in Sulaman v. Axa Insurance Plc,13 insurers sought
to recover sums paid before discovery of a fraud. After a three-month trial they succeeded
against most of the defendants but failed against Sulaman. Following her ‘victory’, Sulaman
applied for her costs but was awarded only one-third of them because the trial judge was
satisfied she had lied in two respects in her evidence. This decision was upheld on appeal.

Reopening a fraudulent settlement

In 2016, the Supreme Court gave a landmark judgment in Hayward v. Zurich Insurance
Company plc,14 holding that where an insurer suspected fraud but nonetheless chose to settle a
claim, it was entitled to set aside the settlement when new evidence of the fraud came to light.
Mr Hayward injured his back in an accident at work and sued his employer, which
was insured by Zurich. In the litigation Zurich contended that Mr Hayward had exaggerated
the consequences of his injury, relying on video surveillance evidence. Shortly before trial
the parties settled, Zurich agreeing to pay approximately £135,000. Two years later Mr
Hayward’s neighbours gave evidence to Zurich that Mr Hayward had entirely recovered
from his injuries at least a year before the settlement and that his claim to have suffered a
severe back injury was dishonest. Zurich commenced proceedings asking for the settlement
agreement to be set aside. The judge at first instance found in favour of Zurich, set aside the
settlement agreement and awarded Mr Hayward the much reduced sum of £14,720. Mr
Hayward appealed and the Court of Appeal unanimously allowed the appeal. The Supreme
Court, however, unanimously allowed Zurich’s appeal. It found that Zurich did as much as it
reasonably could do to investigate the position before entering into the settlement but it did
not know the extent of Mr Hayward’s misrepresentations until the neighbours came forward.
Qualified belief in a misrepresentation did not rule out the conclusion that the insurer was
induced by it.

iii Conclusion
There were two landmark Supreme Court decisions in 2016 in relation to fraudulent
insurance claims. Following those decisions, the common law remedy of forfeiture is still
available to insurers where the assured has:
a deliberately or recklessly caused a loss;
b fabricated a loss; or
c suffered a genuine loss but fraudulently exaggerated the value of the claim.

Following the decision in The DC Merwestone, however, forfeiture no longer applies to cases
where the assured has presented a genuine claim but used a fraudulent device – what was

13 Sulaman v. Axa Insurance Plc [2009] All ER (D) 116.

14 Hayward v. Zurich Insurance Company plc [2016] UKSC 48.

5
 Fraudulent Insurance Claims: Where Are We Now?

described in the judgment as a ‘collateral lie’ – in support of it; such claims are no longer
considered ‘fraudulent claims’. This represents a seismic shift, upsetting settled expectations
and assumptions as to the state of the law.
In a move that may provide some comfort to insurers, however, Section 12 of the
Insurance Act 2015 gives them the right to cancel an insurance from the date of a fraudulent
claim on the policy and to retain the entire premium.
Once legal proceedings are brought in respect of a claim, the sanctions for fraud are
governed by the courts’ procedural rules. These rules apply not only to fraudulent assureds
but also to dishonest third parties bringing claims against innocent assureds. A range of
penalties are available and the courts are increasingly willing to use them. Finally, in what
has been a dramatic year in the development of English law on fraud, the Supreme Court’s
decision in Hayward v. Zurich provides authority at the highest level that it is now open to an
insurer who suspects fraud, but has insufficient evidence to prove it, to reopen the settlement
should further evidence subsequently come to light.

6
Chapter 2

AUSTRALIA

David Gerber and Craig Hine1

I INTRODUCTION
Australia has a developed insurance market that is effectively divided between registered
life insurance and reinsurance companies, authorised general insurance and reinsurance
companies (including Lloyd’s underwriters), registered health insurers and insurance
intermediaries.
At the end of September 2016, there were 29 registered life companies (including
both direct insurers and reinsurers) in Australia with combined assets of A$225.5 billion2
and 109 authorised general insurers (including both direct insurers and reinsurers, but not
including Lloyd’s Australian operations) with combined assets of A$120.5 billion.3 There are
currently 38 registered health insurers in Australia.4
The Australian insurance market is highly regulated by statutes, delegated legislation,
guidelines and codes.

II REGULATION
i The insurance regulator
The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the
Australian financial services industry. It is also responsible for administering the Financial
Claims Scheme in the Insurance Act 1973 (the Insurance Act).5
The Australian Securities and Investments Commission (ASIC) is the corporate regulator
in Australia. It monitors and promotes market integrity in the Australian financial system.
ASIC also has functions and powers related to consumer protection that are conferred on it
by or under the Corporations Act 2001 (Corporations Act), the Australian Securities and
Investments Commission Act 2001, the Insurance Contracts Act 1984 (Insurance Contracts
Act) and the Life Insurance Act 1995 (Life Insurance Act).6

1 David Gerber is a partner and Craig Hine is a senior associate at Clayton Utz.
2 See www.apra.gov.au/lifs/Publications/Documents/1611_QLIPS-20160930.pdf.
3 See www.apra.gov.au/GI/Publications/Documents/1116%20-%20QGIPS-Sep-2016.pdf.
4 See www.privatehealth.gov.au/dynamic/healthfundlist.aspx.
5 Australian Prudential Regulation Authority Act 1998 (Cth), Section 8.
6 Australian Securities and Investments Commission Act 2001 (Cth), Section 12A.

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 Australia

ii Regulation and authorisation of general insurers and life insurers

The Insurance Act regulates general insurance business through a system of authorisation.
Subject to a few exceptions, it is an offence for a person or body corporate (other than
a Lloyd’s underwriter) to carry on ‘insurance business’ in Australia if the person or body
corporate is not an authorised general insurer.7
A body corporate may apply in writing to the APRA for authorisation to carry on
insurance business in Australia. Lloyd’s is specifically authorised to carry on insurance business
under, and to the extent specified in, Section 93 of the Insurance Act. General insurers
authorised to conduct insurance business in Australia must comply with the Insurance Act.
The Life Insurance Act regulates life insurance business through a system of registration.
A person other than a registered life company must not issue a life policy (which is a specified
type of contract of insurance relating to life insurance)8 or undertake liability under such a
policy.9
A body corporate may apply in writing to the APRA for registration to carry on life
insurance business in Australia. Companies registered under the Life Insurance Act must
comply with that Act.
Both general insurers and life insurers are subject to prudential supervision by the APRA
and must comply with applicable prudential standards. The APRA sets prudential standards
that deal with matters such as minimum capital requirements, reinsurance management, risk
management, outsourcing and governance.10
The Insurance Contracts Act regulates some, but not all, contracts of insurance and
proposed contracts of insurance in respect of both general and life insurance.11
The Corporations Act regulates the sale of certain general and life insurance products
by imposing uniform licensing, disclosure and conduct requirements. Those requirements are
found in Chapter 7 of the Corporations Act and associated regulations. Every person who
carries on a financial services business in Australia, which includes the business of insurance,
must hold an Australian financial services licence, be an authorised representative of an
Australian financial services licensee or fall within an exemption from the requirement to be
licensed.
There is other legislation that applies more specifically to certain types of insurance,
such as the Marine Insurance Act 1909, which regulates marine insurance.

iii Regulation and authorisation of health insurers

There is a substantial regulatory distinction in Australia between health insurance on the one
hand, and life and general insurance on the other. However, health insurers are also subject
to prudential supervision by the APRA.
The Private Health Insurance Act 2007 and Private Health Insurance (Prudential
Supervision) Act 2015 regulate private health insurance business in Australia. A body
corporate may apply to the APRA for registration as a private health insurer.12 The private

7 Insurance Act, Sections 9 and 10.

8 See Section 9 of the Life Insurance Act for what constitutes a ‘life policy’.
9 Life Insurance Act, Section 17.
10 See Section 32 of the Insurance Act and Section 230A of the Life Insurance Act.
11 See Section 9 of the Insurance Contracts Act, which excludes several types of contracts of insurance,
including contracts of reinsurance.
12 Private Health Insurance (Prudential Supervision) Act 2015 (Cth), Section 12.

8
 Australia

health insurance regime sits alongside and is closely linked to the government-funded
Medicare scheme. Medicare is a Commonwealth scheme administered by the Department of
Health in accordance with the National Health Act 1953.

iv Position of non-admitted insurers

General insurance
Foreign general insurers and reinsurers are subject to Australian licensing and regulatory
requirements by virtue of Section 10(1) of the Insurance Act. However, there are some
exemptions to the obligation to be authorised.
Generally speaking, an entity is prohibited from conducting insurance business in
Australia unless it is authorised. Under the Insurance Act, ‘carrying on insurance business
in Australia’ includes the insurance business of an insurer carrying on business outside of
Australia through an agent or broker in Australia, except where the insurance business of the
insurer is solely a business of reinsurance.13
There are exemptions from the need to be authorised for certain types of insurance
business. Part 2 of the Insurance Regulations 2002 specifies a number of types of insurance
contracts that do not constitute ‘insurance business’ where the insurer is a non-admitted
insurer. Those types of insurance contracts include:
a contracts for which the policyholder is a ‘high-value insured’ (as defined by the
regulations);
b contracts for specified atypical risks;
c contracts for other risks that cannot reasonably be placed in Australia; and
d contracts required to be issued by an insurer, or a kind of insurer, under a law of a
foreign country where they are authorised or permitted to do so.

Life insurance
Foreign life insurers and reinsurers may operate in Australia by establishing a locally
incorporated subsidiary to carry on life insurance business in Australia. Alternatively, they
may, if they are from a jurisdiction specified in the Life Insurance Regulations 1995, seek to
operate in Australia through a branch as an ‘eligible foreign life insurance company’. In either
case, there are a number of different prudential and other requirements that the foreign life
insurer will need to satisfy.

v Position of brokers
Brokers are regulated under Chapter 7 of the Corporations Act to the extent that they provide
a ‘financial service’. Brokers usually provide the financial services of dealing in a financial
product (which includes a contract of insurance) and providing financial product advice.
However, a broker may also provide other types of financial services. Brokers that carry on a
financial services business must hold an Australian financial services licence, unless they fall
within a relevant exemption.
Reinsurance brokers usually do not need to hold an Australian financial services licence
because reinsurance does not constitute a financial product under the Corporations Act.

13 Insurance Act, Sections 3(6) and 3(6A).

9
 Australia

vi Regulation of individuals employed by insurers

Individuals employed by an insurer that holds an Australian financial services licence are
exempt from the requirement to be licensed pursuant to Section 911A(2) of the Corporations
Act.

vii Compulsory insurance

There is some insurance that is compulsory for persons or entities based on their circumstances.
For example, employers who meet the relevant threshold in a state or territory are required
by the legislation in that jurisdiction to hold workers’ compensation insurance that meets
certain minimum requirements. Motorists are required to purchase compulsory third-party
personal injury insurance in order to be able to register a motor vehicle.

viii Compensation and dispute resolution regimes

The APRA administers the Financial Claims Scheme, the purpose of which is to protect
policyholders of general insurance companies from potential loss owing to failure of the
insurer. The scheme is structured so that an insurance claimant becomes entitled to be paid
by the APRA in place of the insurer if the insurer is insolvent. This entitlement is subject to
the rules in the Insurance Act and the regulations as to eligibility. The scheme also provides
for a month of continued policy coverage to give policyholders time to find alternative
insurance cover.
The Financial Ombudsman Service (FOS) is an independent body that resolves
disputes between its members, who are financial services providers across the spectrum of
the financial services industry, and consumers. Policyholders and other insurance consumers
can refer disputes related to certain life or general insurance contracts to the FOS. The FOS
has jurisdiction to resolve insurance disputes involving prescribed maximum amounts,
agreed by the insurance industry with the approval of the ASIC. For the general insurance
industry, the FOS administers and monitors compliance with the General Insurance Code
of Practice 2014 (the Code), which is applicable to general insurers writing certain domestic
and personal classes of insurance who are signatories to the Code.
The Superannuation Complaints Tribunal (SCT) is an independent tribunal established
to deal with complaints related to superannuation. Such complaints may relate to life
insurance acquired through superannuation. The SCT is required to act in accordance with
the Superannuation (Resolution of Complaints) Act 1993.

ix Other notable regulated aspects of the industry

The general and life insurance legislation deals with portfolio transfers between Australian
insurers. Under the Insurance Act, a general insurer may not transfer its rights and liabilities
under policies to another Australian regulated insurer, except under a scheme confirmed by
the Federal Court of Australia.14 Similarly, under the Life Insurance Act, a life company may
not transfer to, or amalgamate with, another life company its life insurance business, except
under a scheme confirmed by the Federal Court of Australia.15

14 Insurance Act, Division 3A.

15 Life Insurance Act, Section 190.

10
 Australia

For both general insurers and life insurers, portfolio transfers comprising 15 per cent or
more of an insurer’s book of unearned premiums are regulated by the Insurance Acquisitions
and Takeovers Act 1991 and require approval by the APRA.
There are also regulations that affect the acquisition of an Australian insurance company
more generally. Such acquisitions must be in accordance with provisions of various pieces of
legislation, including the Financial Sector (Shareholdings) Act 1998, the Foreign Acquisition
and Takeovers Act 1975 and, if applicable, the Insurance Acquisitions and Takeovers Act
1991.

III INSURANCE AND REINSURANCE LAW

i Sources of law
Insurance and reinsurance law in Australia derives from the general law of contract and
common law insurance principles, many of which originated in jurisprudence from the
UK. These principles are modified to some extent by the Insurance Contracts Act and other
legislation, but only in respect of insurance contracts to which the legislation applies.

ii Making the contract

Essential ingredients of an insurance contract
The characteristics of a contract of insurance are not defined in statute. There are a number of
judicial pronouncements that have identified several characteristics that ought to be present
for an agreement to be considered one of ‘insurance’. The essential ingredients of an insurance
contract are that:
a the insured must have a contractual right to be indemnified;16
b the insurer must be legally obliged to pay money (or its equivalent) to the insured in
the event of a specified event occurring;17
c it must be uncertain whether the specified event will occur, or the time at which it will
occur;18 and
d the contract must be for some consideration: usually, but not necessarily, periodical
payments called premiums.19

Traditionally, it was a requirement of ‘insurance’ that the insured have a legal or equitable
interest in the subject of the insurance. However, this requirement has essentially been removed
in relation to most contracts of general and life insurance by the Insurance Contracts Act.20
The principles governing the formation of an insurance contract are essentially the same
as the principles that govern the formation of ordinary contracts. However, the principles

16 See, for example, Department of Trade and Industry v. St Christopher Motorists Association Ltd [1974] 1 WLR
99, 102 and 103; Medical Defence Union v. Department of Trade [1980] Chapter 82; Bank of Nova Scotia v.
Hellenic Mutual War Risks Association (Bermuda) (the ‘Good Luck’) [1988] 1 Lloyd’s Rep 514, 545. As to the
extension to a statutory right to be indemnified, see R v. Cohen: Ex parte Motor Accidents Insurance Board
(1979) 27 ALR 263.
17 Medical Defence Union Ltd v. Department of Trade [1979] 2 All ER 421, 429.
18 Prudential Insurance Co v. Inland Revenue Commissioners (1904) 2 KB 658, 663.
19 Ibid.
20 Insurance Contracts Act, Sections 16 to 18.

11
 Australia

are modified by statute in some cases. For example, for contracts to which the Insurance
Contracts Act applies, the insurer must supply a variety of statutory notices to the insured
pursuant to Sections 22 and 37 of the Insurance Contracts Act.
The Insurance Contracts Act prescribes terms and conditions that certain consumer
contracts must provide, unless the insurer modifies the statutory standard cover in accordance
with the legislation.

Utmost good faith, disclosure and representations

There is a duty of utmost good faith in respect of both contracts of insurance and contracts
of reinsurance in Australia. For contracts of insurance that are subject to the Insurance
Contracts Act, there is also a duty implied by statute into those contracts of insurance under
Section 13(1) of the Insurance Contracts Act. The duty under the Insurance Contracts Act
is described as a duty requiring each party to act towards the other party, in respect of any
matter arising under or in relation to the contract of insurance, with the utmost good faith.
There is also a duty of disclosure. At common law, this duty requires the insured to
reveal all material facts of which it is aware in the negotiations leading up to the formation or
renewal of the contract.21 The duty of disclosure ends once the contract is concluded, unless
the parties specifically agree otherwise. Under the Insurance Contracts Act, the insured must
disclose matters it knows to be relevant to the decision of the insurer (or which a reasonable
person in the circumstances could be expected to know to be relevant) whether to accept the
risk and, if so, on what terms.22
The common law regarding misrepresentations is impacted by the Insurance Contracts
Act. Misrepresentations are treated differently depending on whether they are fraudulent
or innocent. A fraudulent misrepresentation is a false representation, made knowingly or
recklessly, without regard for its truth or falsity. The legislation restricts a general insurer’s right
to avoid a contract in the circumstances of an innocent misrepresentation by an insured.23
The Insurance Contracts Act also modifies the common law rights of life insurers in relation
to misrepresentations, non-disclosures24 and misstatements of age.25 A court may disregard
avoidance in certain circumstances.26

Recording the contract

Contracts of insurance and reinsurance are usually evidenced by a written policy. For contracts
of insurance to which the Insurance Contracts Act applies, an insurer is required to give to
the insured a statement in writing that sets out all the provisions of the contract upon written
request by the insured.27 Prudential standards issued by the APRA regulate the documenting
of contracts of reinsurance.

21 Carter v. Boehm (1766) 97 ER 1162.

22 Insurance Contracts Act, Section 21.
23 Insurance Contracts Act, Section 28(3).
24 Insurance Contracts Act, Section 29.
25 Insurance Contracts Act, Section 30.
26 Insurance Contracts Act, Section 31.
27 Insurance Contracts Act, Section 74.

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 Australia

iii Interpreting the contract

General rules of interpretation
The rules applying to the interpretation of contracts in general apply equally to insurance
contracts. The ordinary rules include that:
a words and phrases are to be given their ordinary and natural meaning unless they have
a technical meaning or the sense in which they are used suggests that such a meaning is
inappropriate;
b the context in which words appear is to be taken into account;
c the main object or commercial purpose of the contract is to be taken into account; and
d any ambiguity is to be resolved against the party who drafted the contract (the contra
proferentem rule).

Another rule relevant to the interpretation of insurance contracts is the parol evidence rule.
This dictates that evidence of a party’s intention extrinsic to the written document should
not be considered to explain or vary the written terms within it.28 The rule is subject to a
number of exceptions. For example, extrinsic evidence may be received to resolve inherent
ambiguity.29 Extrinsic evidence may also be adduced to prove that a policy does not express
what was clearly agreed by the parties to it30 or that there is a collateral contract that contains
a separate undertaking.31

Types of terms in insurance contracts

The terms ‘condition’ and ‘warranty’ can have different meanings in Australian insurance
law than in general contract law. They can both refer to clauses for which the insurer may
repudiate the contract for breach. Whether a term is in fact a condition or warranty is a
question of construction. The use of the word ‘condition’ or ‘warranty’ will not be conclusive.32
In construing the contract, the courts will seek to ascertain the intention of the parties.
The effect of breaching a condition or warranty may be impacted by Section 54 of the
Insurance Contracts Act. In summary, Section 54 restricts an insurer’s ability to refuse to pay
a claim, in whole or in part, by reason of a post-contractual act of the insured or some other
person. Section 54 provides that the act must reasonably be regarded as capable of causing
or contributing to a loss covered by the contract of insurance before the insurer may refuse
to pay the claim.33 If this is not the case, the insurer’s liability will be reduced by the amount
that fairly represents the extent to which the insurer was prejudiced as a result of the act.34

iv Intermediaries and the role of the broker

Conduct rules
Brokers and other intermediaries regulated under the Corporations Act are subject to the
various conduct requirements in Chapter 7 of the Corporations Act.

28 Codelfa Construction Pty Ltd v. State Rail Authority (NSW) (1982) 149 CLR 337, 340.
29 L & M Electrics Pty Ltd v. SGIC (Qld) (1985) 3 ANZ Ins Cas 60-641, 78, 946.
30 Griffiths v. Fleming [1909] 1 KB 805, 817.
31 Gates v. City Mutual Life Assurance Society Ltd [1982] 2 ANZ Ins Cas 60-485.
32 ANZ Banking Group Ltd v. Beneficial Finance Corp Ltd (1982) 57 ALJR 352.
33 Insurance Contracts Act, Section 54(2).
34 Insurance Contracts Act, Section 54(1).

13
 Australia

Insurance brokers who are members of the National Insurance Brokers Association
(NIBA) are also bound to comply with the Insurance Brokers Code of Practice. This is an
agreement between the NIBA and its members. Other brokers who are not members of the
NIBA may also subscribe to the NIBA’s code of practice. The NIBA’s code sets minimum
service standards that clients can expect from brokers, and outlines how complaints and
disputes regarding potential breaches of the Code can be resolved.

Agency and contracting

Brokers usually represent insureds. However, insurance intermediaries may act for either the
insurer or insured. In some cases, they operate under a binder that gives them the authority
to bind insurers by entering insurance contracts on their behalf.
Where intermediaries act on behalf of insurers, they typically do so as an authorised
representative or distributor of the insurer, and enter into formal written agreements that
record that arrangement.

v Claims
Notification
The requirement to notify insurers of a loss or claim is generally dictated by what is required
under the insurance or reinsurance contract. However, there is a statutory extension to the
notification rights of an insured.
Section 40(3) of the Insurance Contracts Act, which applies in respect of certain
contracts of liability insurance (essentially, claims made and notified insurance policies),35
has the effect of attaching coverage where an insured notifies circumstances within the policy
period.
If an insured fails to notify facts or circumstances to an insurer in accordance with
a contractual requirement (e.g., a circumstance notification or ‘deeming’ provision), such
failure may be remedied by Section 54 of the Insurance Contracts Act.

Good faith and claims

The statutory duty of utmost good faith applies in connection with claims. If an insurer
has failed to comply with the duty of utmost good faith implied under Section 13(1) of
the Insurance Contracts Act in the handling or settlement of a claim under a contract of
insurance, the ASIC is effectively empowered to treat the insurer as being in breach of the
conditions of its Australian financial services licence. In those circumstances, the ASIC may
exercise its powers of enforcement against the insurer. In sufficiently serious cases, the ASIC
has the power to vary, suspend or cancel an Australian financial services licence, and to ban
persons from providing financial services.

Dispute resolution clauses

Australian financial services licensees must have a dispute resolution system in place as a
condition of their licence. That system must meet the standards prescribed by the ASIC.
Accordingly, the dispute resolution clauses in many contracts of insurance are governed by
these standards.

35 Insurance Contracts Act, Section 40(1).

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 Australia

Some insurance policies, particularly professional indemnity and directors’ and officers’
liability policies, commonly have clauses that provide for expert determination by a senior
counsel or senior lawyer with relevant experience. These clauses typically apply to disputes
such as whether a third-party claim should be contested or settled, or the allocation of defence
costs between insured and uninsured parties.

IV DISPUTE RESOLUTION
i Jurisdiction, choice of law and arbitration clauses
It is common for parties to a contract of insurance or reinsurance to submit to the courts of
a selected jurisdiction and agree to be governed by its laws.
Jurisdiction clauses typically identify whether the nominated jurisdiction is an exclusive
or non-exclusive jurisdiction. If a jurisdiction clause identifies courts that are the natural
forum for a dispute, this is a factor that would support the clause being read as an exclusive
jurisdiction clause. In a contract of insurance, ambiguity as to the jurisdiction tends to be
interpreted in favour of the insured.36 Where a contract is subject to the Insurance Contracts
Act, any provision purporting to specify an alternative jurisdiction may be void under Section
52 of the Insurance Contracts Act, which prohibits contracting out of the Act.37
Parties may also agree that disputes are to be determined by arbitration. Under Section
43(1) of the Insurance Contracts Act, arbitration clauses in insurance contracts governed
by that legislation are void. This does not prevent parties from agreeing to arbitrate after a
dispute has arisen. Arbitration clauses in reinsurance contracts are generally enforceable in
Australia.
Jurisdiction, choice of law and arbitration clauses, where they may be used, need to be
drafted clearly to ensure that they are not unenforceable because of uncertainty.

ii Litigation
Litigation stages, including appeals
Litigation stages, including appeals, differ depending on the particular court in which the
litigation is taking place.
Typically, proceedings are conducted by an exchange of pleadings. Court rules may
allow, or one or more parties may seek orders for, discovery of documents. Discovery requires
the party that is subject to the order to undertake a search for particular documents that are
relevant to the issues in dispute, including those that may be adverse to their case. Following
discovery, parties will usually be required to exchange evidence in preparation for trial. The
final stage is a trial that usually involves evidence (including cross-examination) and legal
argument.
Depending on the relevant jurisdiction, the parties may agree to attend, or be ordered
by the court to attend, mediation at any stage of the proceedings.
An unsuccessful party at the trial may, subject to the rules applicable to the court,
appeal a judgment or order to a higher court. In some cases, this may require the leave of the
court.

36 See, for example, ACE Insurance Ltd v. Moose Enterprise Pty Ltd [2009] NSWSC 724 (Justice Brereton,
31 July 2009).
37 See, for example, Akai Pty Ltd v. The People’s Insurance Co Ltd (1996) 188 CLR 418.

15
 Australia

Evidence
Witness evidence usually takes the form of a signed statement recording the oral evidence to
be given at trial. For a party to rely on witness evidence, the witness must be called to give oral
evidence in court and may be cross-examined by the other parties. Witness evidence may also
include the evidence of an expert who has been asked to provide an opinion on one or more
particular issues relevant to the proceedings. Parties may also seek to rely on documentary
evidence, which in many cases is simply the business records of a party to the proceeding.
The rules of evidence differ depending on the court in which evidence is being adduced.

Costs
An order to pay costs usually follows an award, so that the unsuccessful party is required to
pay the reasonable costs incurred by its opponent. If the amount is not agreed, the costs are
assessed by the court. An award of costs may not cover the full amount actually incurred by
the successful party.

iii Arbitration
Format of insurance arbitrations
In Australia, the format of insurance arbitrations depends on whether the arbitration is an
international or domestic arbitration. There is a separate statutory regime for each. Domestic
arbitrations are regulated by mostly uniform state-based legislation. International arbitrations
are regulated by the International Arbitration Act 1974, which ensures that arbitration
practice in Australia complies with internationally accepted norms. The format of insurance
arbitrations generally does not differ from the format of other commercial arbitrations.
The Australian Centre for International Commercial Arbitration (ACICA) is a
leading international arbitration institution. It is common for parties to adopt, and conduct
arbitrations in accordance with, the ACICA Arbitration Rules or ACICA Expedited
Arbitration Rules.

Procedure and evidence

An arbitral tribunal is permitted under the ACICA Arbitration Rules to conduct an arbitration
in such manner as it considers appropriate. The procedure and evidence may be tailored to
meet the requirements of the parties. The procedure is bound only by the requirement to give
effect to the principles of procedural fairness and natural justice.
The role of witnesses may be limited by agreement of the parties. The process may be
similar to a court procedure, and allow for oral testimony of witnesses with the ability of the
other party to cross-examine each witness. Conversely, the parties may agree that only written
evidence is allowed. Similarly, sometimes oral submissions may be made or, as is the case
under the ACICA Expedited Rules, oral submissions may be prohibited.

Costs
In respect of both domestic and international arbitrations, the tribunal is empowered to
determine and award costs at its discretion, unless otherwise agreed by the parties. The
relevant legislation does not offer any guidance as to how a tribunal should exercise that
discretion. As a general rule, and consistent with the ACICA Arbitration Rules, in most cases
costs will generally follow the event.

16
 Australia

iv Mediation
Mediations are commonly used as a way for the parties to attempt to resolve disputes
without being bound by the decision of a third party such as a judge or arbitrator. In some
circumstances, mediation may be ordered by a court before court proceedings can continue
to trial. It is more common for parties to agree voluntarily to attend mediation.
For claims that meet the relevant criteria, insureds may have the option of pursuing the
claim through the FOS or the SCT.

V YEAR IN REVIEW
i Regulatory changes
Most of the recent regulatory changes have been in relation to life insurance as part of the
industry-wide reforms announced at the end of 2015. Those reforms were announced in
response to a report released in response to the Financial System Inquiry established by the
Commonwealth government.
Regulatory changes for the life insurance industry have most recently targeted:
a remuneration practices that may lead to poor consumer outcomes, in particular the
payment of upfront commissions and conflicted remuneration in connection with the
sale of life insurance – these remuneration practices are banned under the Corporations
Amendment (Life Insurance Remuneration Arrangements) Bill 2016, which passed the
Senate on 9 February 2017; and
b best practice standards, including in relation to the handling of claims, for life insurers
and others involved in the delivery of retail life insurance through the introduction of
a Life Insurance Code of Practice.

ii Key case
In CGU Insurance Ltd v. Blakeley & Ors38 the High Court of Australia cleared the way for
third-party claimants to directly pursue the insurer of insolvent or bankrupt defendants,
including by joining the insurer to a proceeding in the formative stages.
The appointed liquidators in the winding up of Akron Roads Pty Limited (Akron)
commenced proceedings against various directors of Akron for breaches of insolvent trading
provisions, including a company, Crewe Sharp Pty Limited (Crewe), which was alleged to
be a shadow director of Akron. One of the directors and Crewe sought, but were denied,
indemnity under a professional indemnity insurance policy Crewe held with CGU. The
liquidators sought to join CGU to the proceedings, notwithstanding that the liquidators and
Akron had no direct rights against CGU pursuant to the insurance policy. Ultimately, the
High Court was required to determine whether the first instance court had jurisdiction to
hear the claim and grant the relief sought by the liquidators against CGU.
As to whether the first instance court relevantly had jurisdiction, it was necessary for the
High Court to decide whether there was a ‘justiciable controversy’ between the liquidators
and CGU. The High Court decided that there was, on the basis that the proceeds of the
insurance policy would have ultimately become payable to them by operation of Section
562 of the Corporations Act and Section 117 of the Bankruptcy Act (which, in effect,
requires that insurance proceeds paid to an insolvent or bankrupt insured be paid to any

38 CGU Insurance Ltd v. Blakeley & Ors [2016] HCA 2.

17
 Australia

third-party claimant in respect of whom the proceeds have been received, in priority to other
creditors). The effect of these statutory provisions and CGU’s denial of indemnity was to
create a relevant ‘justiciable controversy’.
In light of this judgment, a party who has a claim against an insolvent or bankrupt
defendant where the defendant may be covered by insurance may pursue the claim against
the insurer directly, if the practical outcome is going to be that the party would ultimately
become the beneficiary of any insurance proceeds.

VI OUTLOOK AND CONCLUSIONS

The insurance industry in Australia is constantly adapting to regulatory and other changes.
Consumer protection through the regulation of both sales and claims conduct has been a
focus of insurance regulators in recent times and is likely to remain the focus of regulators in
the near future.

18
Chapter 3

AUSTRIA

Ralph Hofmann-Credner1

I INTRODUCTION
Austria accommodates large dominant local insurers with strong ties to the retail business,
as well as international specialist insurers who benefit from the geographical advantages of
Austria as a hub for the central-eastern Europe and south-eastern Europe markets. In a few
cases, insurers cover both North Africa and the Middle East from an Austrian office. The
perception and reality may indeed be that Austria serves not only as a local market, but also
as a gateway into larger insurance markets than itself.
On 11 March 2016, the Austrian Insurance Association (VVO) published its annual
report for 2015, which reflects a premium volume of €17.445 billion generated by Austrian
licensed insurers of local direct contractual insurance businesses, whereas insurance payments
for the same period amounted to €15.379 billion.2
The Austrian insurance industry employs 26,750 people, whereby the VVO3 represents
the interests of all private insurance companies active in Austria. The VVO is also registered
in the Austrian lobbying register.4 Membership in the VVO is voluntary and, according to
the homepage of the VVO, currently consists of 125 members.
In October 2002, insurers that are members of the VVO established a market terrorism
pool (Terrorpool) as a private scheme that covers risks with effect from 1 January 2003. It is
a mixed coinsurance and reinsurance pool, with no government participation. The primary
objective is to offer affordable property cover against risks arising from an insured event
triggered by terrorism. The Terrorpool acts as reinsurance, with the direct writing insurer
issuing a separate terrorism policy and then ceding the business to the Terrorpool. The pool
is open to insurers and reinsurers writing business in Austria. Participation in the pool is not
compulsory, and insurance of the terrorism risks covered by the scheme is voluntary. However,
the majority of the members of the VVO belong to the pool. A members’ share of the pool
is calculated in proportion to their market share in property insurance, and all property lines
(industrial, commercial and private) other than transport insurance are covered.

1 Ralph Hofmann-Credner is a counsel at Wolf Theiss Rechtsanwälte GmbH & Co KG.

2 The full annual report is available at the download area of the VVO: www.vvo.at/vvo/vvo.nsf/sysUNID/
xB605261887C09BC0C1257FA200404CD7.
3 www.vvo.at.
4 www.lobbyreg.justiz.gv.at/edikte/ir/iredi18.nsf/suche!OpenForm&subf=e.

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 Austria

II REGULATION
Conducting insurance and reinsurance business requires the holding of the respective licence.
Depending on whether it is a domestic company or a third-country insurer, the Austrian
Financial Market Authority (FMA)5 grants a licence upon application and fulfilment of
preconditions. A European Economic Area (EEA) insurance company holding a licence
and situated outside Austria does not require a further or domestic insurance licence. Such
EEA insurer may, upon notification of the competent supervisory body, conduct insurance
business in Austria on a freedom-of-services basis or on an establishment basis by opening a
local branch.
The ongoing supervision of the insurance and reinsurance market is also carried out by
the FMA.
After completion of the preparatory and implementation work for the transposition
of the Solvency II Directive6 the revised Insurance Supervision Act 2016 came into force on
1 January 2016 (VAG 2016).7

III INSURANCE AND REINSURANCE LAW

i Sources of law
The substantive insurance law is primarily governed by the Insurance Contract Act (VersVG).
In addition, certain advice and information obligations of insurers towards insureds are
stipulated in the VAG 2016. For certain insurance types (e.g., motor liability insurance),
special statutes exist. Where the insurance statutes do not provide for any special rules,
general civil law provisions of the Civil Code apply: for example, general rules regarding the
conclusion, interpretation and rescission of a contract.
The VersVG is based on the German Insurance Contract Act from 1908, which was
introduced in Austria in 1939 and reinstalled in 1958 as the VersVG 1958 with only minor
changes. As a result, the provisions of Austrian and German insurance contract law remained
almost identical for decades, and the Austrian courts and practitioners often resorted to
German case law and doctrine for advice. However, since an in-depth reform of the German
Insurance Contract Act in 2008, which introduced substantial changes that were not adopted
in Austria, the two legal systems have started to drift apart. This has caused new developments
in case law and doctrine in Austria. In future, these changes have to be borne in mind when
comparing Austrian and German case law and literature.
The VersVG is, in general, applicable both in consumer and non-consumer contracts
without distinction. It aims at protection of the insured as the weaker party, mainly by means
of various coercive provisions that cannot be deviated from to the detriment of the insured.
However, reinsurance does not fall within the scope of the VersVG; therefore, reinsurance
contracts are not subject to those restrictions, and may be concluded according to general
principles of contract law (the Civil Code and the Business Enterprise Code).

5 The homepage of the FMA is available in English. For a general overview on supervision of insurance
undertakings, licensing and notification and other special topics, see www.fma.gv.at/en/insurance.
6 Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the
taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) as amended by Directive
2014/51/EU.
7 An English translation of the VAG 2016 is available online: www.fma.gv.at/download.php?d=825.

20
 Austria

In addition, general insurance terms and conditions play a key role in Austrian
insurance law. Model insurance terms are published by the VVO,8 and although these are
not binding, they are usually adopted by insurers and incorporated into insurance contracts
with no, or only minor, changes. Interestingly, and unlike in Germany where the German
Insurance Federation has published model terms for directors and officers (D&O) liability
insurance, such model terms have not been published by the VVO. Therefore, one may come
across German D&O wordings that are simply adopted for Austrian law.
Although court judgments in Austria are, in general, only binding on the parties
involved in a dispute, case law plays an important role, especially in the interpretation of
provisions of the VersVG, and general terms and conditions. Furthermore, the courts of
lower instance have to observe and apply the judicature of courts of higher instance, such as
the courts of appeal and of the Supreme Court of Justice of the Republic of Austria (OGH),
which is the highest instance in civil and criminal matters.9

ii Making the contract

According to the general rules on the conclusion of contracts, the making of an insurance
contract requires an offer and an acceptance. If the insured places his or her offer via a standard
application form of an insurer, then such offer of the insured shall be binding for a maximum
period of six weeks unless a longer period has been individually negotiated between the
insurer and the insured.
In larger corporate insurance programmes, usually an intermediary or an in-house
broker is involved in negotiating the wording with the insurer. The negotiations sometimes
create a back-and-forth process between them.
The insurer is obliged to furnish the insured with a copy of the relevant terms and
conditions before application; provide the information required by the VAG 2016 (see
below); and hand out to the insured a copy of his or her application, and instruct him or her
that the failure of the insurer to provide these documents and information entitles him or her
to rescind the contract (within two weeks or one month after receipt of the documents and
information respectively).
The insurer may accept the offer of the insured simply by producing a policy that will
be handed over to the insured. If the policy differs from the offer (application) of the insured,
the insured is entitled to object to the deviations in writing within one month of the receipt
of the policy. The insurer is obliged to point out any deviations in the policy, and inform the
insured about his or her right to object. Provided that the insurer has informed the insured
properly, the law assumes that the insured accepts any deviation if he or she does not object.
The VersVG (Sections 16 et seq. of the VersVG) stipulates pre-contractual notification
obligations for the insured.
Thereby, before the conclusion of the contract (i.e., acceptance of the offer by the
insurer), the prospective insured is obliged to provide the insurer with full and complete
information on circumstances relevant for the assessment of the risk. The prospective insured
has to disclose all facts that are relevant for the risk assessment even if the insurer did not ask
for a specific piece of information. However, he or she is only obliged to reveal facts that he

8 Model insurance terms and conditions in German can be found on the homepage of the VVO: www.vvo.
at/vvo/vvo.nsf/sysPages/suche.html?OpenDocument&searchText=Musterbedingungen.
9 www.ogh.gv.at/en.

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 Austria

or she has actual knowledge of and that are substantial regarding the terms of the contract
(e.g., facts relevant for the calculation of the premium or the exclusion of certain risks).
Information that the insurer explicitly asked for in writing is presumed to be relevant by law.
If the insured fails to comply with his or her information obligations, then the insurer
is entitled to rescind the contract within one month after gaining knowledge of the violation
of the information obligation. However, the right of recession depends on various factors,
such as:
a the degree of fault of the insured;
b the relevance of the information;
c to what extent the information has been specifically asked for by the insurer; and
d whether the insurer was already familiar with or has waived his or her right to be
informed about the relevant circumstances.

However, the insurer is obliged to grant coverage to the insured in spite of recession of the
contract if and insofar as the information withheld by the insured did not have any influence
on the occurrence of the damage event or the amount of indemnification.

Information obligations of the insurer prior to the conclusion of the contract

According to the provisions of the VAG 2016, the insurer must provide the insured with
specific information in writing prior to the conclusion of the insurance contract, such as:
a the name, head office address and legal form of the insurance undertaking and, where
appropriate, the branch by which the contract will be concluded;
b the term of the insurance contract;
c the method of paying the premium and the duration of premium payments;
d the circumstances under which the insured is entitled to revoke or withdraw from the
contract; and
e if the prospective insured is a natural person:
• the law applicable to the contract or, when the parties are free to choose, the law
that the insurer proposes to use; and
• the name and address of the supervisory authority of the insurance undertaking
or of another body to which complaints about the insurance contract can be
addressed.

A failure of the insurer to comply with the information requirements under the VAG
2016 entitles the insured to rescind the contract (in general within two weeks after receipt
of the required information, the policy and a copy of the insurance conditions along with a
notification about the right of rescission of the contract).
In addition, the new provision in Section 252(8) stipulates a general prohibition on
misleading statements by an insurer. Under this provision, all information addressed to an
insured, or distributed by an insurer in such a way that an insured will gain knowledge
thereof, must be unambiguous, not misleading and provided bona fide. In addition, the name
of the supervisory authority must not be named in a way that indicates that the offered
insurance products or services have been authorised by that supervisory authority. This new
provision shall hinder misleading commercial practices, including distribution of misleading

22
 Austria

information in advertising.10 According to Section 252(9), the FMA is empowered to publish

a regulation with a non-exhaustive list of practices that are in any event considered to be
misleading.11

iii Interpreting the contract

Austrian law contains specific rules on the interpretation of a contract or a declaration of
intention of a party to an agreement.12 As regards the interpretation of general insurance
conditions, the OGH constantly rules that such an interpretation has to be aligned to the
understanding of an average prudent insured. Any clause limiting the covered risk shall be
ineffective to the extent that an insured would not be able to understand the scope without
any legal qualification.13 Finally, the burden of proof for the existence of an exclusion lies
with the insurer.14
An incorporation of terms of insurance follows the general rule of concluding an
agreement. Except where the law stipulates a written form or a higher degree of legal certainty
(e.g., a notary public confirming the identity of a party to an agreement), parties may freely
agree orally on certain provisions to a contract. Likewise, not all provisions that are contained
in a document, even if this is attached to an agreement, are deemed to be agreed upon by the
parties and be effective. It is the understanding of the OGH that general terms and conditions
shall be applicable if they have been sufficiently clearly agreed upon. It is insufficient to
simply refer to general terms and conditions in the offer signed by the customer and in the
policy. On the other hand, it is not necessary for a copy of the general terms and conditions
to be physically handed over to the customer or insured for the agreement to be effective.
The insured is simply granted the right to rescind from the insurance contract according
to Section 5b of the VersVG. There is no differentiation between consumer and business
contracts in this regard.15

iv Intermediaries and the role of the broker

In Austria, the activity of an independent insurance intermediary (both as direct and
reinsurance broker) is regulated under the Trade Regulation Act 1994 (GewO). An insurance
intermediary must hold a trade licence granted by the local trade regulation authority, and
must be registered in the register of intermediaries (i.e., the Commercial Information System
(GISA)) that replaced the former 14 local professional registers for insurance intermediaries.
A national list of registered intermediaries is available on the GISA website.16
To be registered as an insurance intermediary, the applicant must provide proof of
his or her professional competence (e.g., a proper educational background). In addition,
the insurance intermediary has to obtain compulsory professional indemnity for insurance
intermediaries (see Section 137c of the GewO) or an equivalent guarantee of coverage.

10 Explanatory notes to the draft of VAG 2016, 48/ME 25. GP Erläut 54.
11 So far, the FMA has not published such a regulation. The FMA’s website indicates which regulations have
been published to date: www.fma.gv.at/en/national/fma-regulations.
12 Section 914 et seq. Civil Code.
13 Legal Information System of the Republic of Austria (RIS) – Justiz RS0112256.
14 RIS – Justiz RS0107031.
15 OGH 22 April 2014, 7 Ob 20/14p.
16 www.gisa.gv.at/at.gv.wien.fshost-gisa-at/user/formular.aspx?pid=f3cbbd2e05c54d8d889b1bddcb648fa2&pn
=Bacc9a84823284ea099c0af9ff5837cda.

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 Austria

Intermediaries from EU or EEA Member States may do business in Austria on a freedom-of-

services basis upon notification of the Austrian trade authority. Intermediaries from EU or
EEA Member States that want to establish a branch in Austria on a freedom-of-establishment
basis must provide the Austrian authority with their registration documents from the state of
origin, and evidence of compulsory professional indemnity insurance.
Sections 137f to 137h of the GewO, which, inter alia, reflect the requirements set out
in the EU Insurance Mediation Directive, provide for specific conduct rules for the insurance
intermediary and specific obligations regarding pre-contractual disclosure. The information
must be provided to the customer on paper or in some other durable medium, in a clear and
accurate manner comprehensible to the customer, and in German or in another language
agreed by the parties.
In Austria, brokers play a key role in generating business for insurers. Co-insurance
(disclosed or hidden) is a common instrument as capacity or risk appetite may be limited.
Hidden co-insurance is also commonly used by the larger Austrian insurance companies. In
order to keep only a share of the risk in their books, they commonly consult other insurers
with respect to a certain risk (in general, if capacity for a certain risk is limited) but issue the
policy on their own letterhead.

v Claims
In cases where an insured event occurs, the insured is obliged to notify the insurer with
undue delay (see Section 33 of the VersVG). The burden of proof that a notification was not
timely lies on the insurer. A late notification may release the insurer from the obligation to
indemnify the insured, unless the insured proves that he or she is not at fault for breaching his
or her obligations, or that the late notification did not have any influence on the assessment
of the insured event or the amount of indemnification to be paid by the insurer.
The insured is obliged to provide the insurer with full, complete and correct information.
Providing false information intentionally could result in criminal liability of the insured for
insurance fraud. In practice, an insurer would investigate insurance fraud where indications
for incorrect information arise and a reasonable amount of a loss is concerned.
The insurer is due to pay a claim on completion of the necessary investigations (see
Section 11 of the VersVG). If investigations of the insured event are not completed within
two months after submission of the claim, the insured is entitled to request from the insurer
a statement outlining the reasons why the investigations had not been completed to date. If
the insurer fails to comply with such a request within one month, the payment of the claim
becomes due.
If coverage on the merits is undisputed, then the insured may claim instalment
payments from the insurer if the investigations are not completed within one month after
submission of the claim (see Section 11(3) of the VersVG). The provisions of Section 11 are
coercive and cannot be deviated from by agreement.
Insurance claims in general become time-barred in three years. However, if the insurer
denies coverage, he or she may impose on the insured the obligation to file a lawsuit within
a period of one year by declaring a ‘qualified denial of coverage’, otherwise the claim of the
insured expires (see Section 12(3) of the VersVG). A qualified denial requires a reasoned
denial of coverage by the insurer in writing, along with an express statement of the insurer
that a lawsuit must be filed within a period of one year and that otherwise the insured’s claim
will be time-barred.

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 Austria

IV DISPUTE RESOLUTION
i Jurisdiction, choice of law and arbitration clauses
Since Austria is a member of the EU, jurisdiction in international insurance disputes is
determined by the rules of Brussels I Regulation (recast).17 As a general rule (see Articles
11 to 14), the Regulation stipulates that an insurer may bring proceedings only in the courts
of the Member State in which the defendant (the policyholder, the insured or a beneficiary)
is domiciled. However, the insurer may be sued in the courts of the Member State in which
he or she is domiciled (including where he or she has a branch, agency or establishment); or
in the Member State where the claimant (the policyholder, the insured or a beneficiary) is
domiciled; or, if he or she is a co-insurer, in the courts of a Member State in which proceedings
are brought against the leading insurer. For liability insurance, the insurer may in addition be
sued in the courts of the place where the harmful event occurred and may in general be joined
in proceedings that the injured party has brought against the insured.
The Regulation sets extensive limits on the inclusion of choice of forum clauses in
insurance disputes (however, these clauses do not apply in insurance cases of large risks
and some other risks connected with shipping and aircrafts). In principle, the parties to an
insurance agreement may only depart from the provisions of the Regulation if the choice of
forum agreement:
a is entered into after the dispute has arisen;
b allows the policyholder, the insured or a beneficiary to sue other courts than those set
out by the Regulation;
c is concluded between a policyholder and an insurer domiciled in the same Member
State with the aim to conferring jurisdiction on the courts of that Member State for
damage events that occur abroad; or
d is concluded with a policyholder not domiciled in a Member State.

Regarding international insurance disputes falling within the scope of the Rome I Regulation,18
the choice of law is limited especially by the restrictions as listed in Article 7, Paragraph 3. For
contracts covering risks (other than large risks) that are situated in a Member State, the choice
of law is limited to the law of:
a the Member State where the risk is situated;
b the country where the policyholder has his or her habitual residence;
c in the case of life insurance, the Member State of which the policyholder is a national;
d for insurance contracts covering risks limited to events occurring in one Member State,
the law of that Member State; or
e where the policyholder pursues a commercial or industrial activity or a liberal profession,
and the insurance contract covers two or more risks that relate to those activities and are
situated in different Member States, the law of any of the Member States concerned or
the law of the country of habitual residence of the policyholder.

For compulsory insurance, special provisions apply.

17 Regulation (EU) No. 1215/2012 of the European Parliament and of the Council of 12 December 2012 on
jurisdiction and the recognition and enforcement of judgments in civil and commercial matters.
18 Regulation (EC) No. 593/2008 of the European Parliament and the Council of 17 June 2008 on the law
applicable to contractual obligations (Rome I).

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 Austria

In addition, Article 7 of the Rome I Regulation provides that if the parties would be
entitled to choose Austrian law, and Austrian law allows greater freedom on choice of law in
insurance contracts, then the parties are allowed to make use of this freedom. In Austria, this
is the case: according to the Statute on Private International Law (Article 35a), the parties
may choose any law as the law applicable to the insurance contract. However, if the insurer
carries out his or her business or otherwise directs his or her activities to the state of residence
of the insured, then by choice of law he or she may not be deprived of the rights granted
under mandatory provisions of the law that would be applicable in the absence of choice. In
consumer contracts, further limitations exist.
For arbitration clauses, the general norms of the Civil Procedure Code stipulate that
an arbitration agreement may be concluded between parties for both existing and future
civil claims that may arise out of or in connection with a defined legal relationship (certain
matters are excluded, e.g., family law and tenancy matters). The arbitration agreement must
be in writing and indicate the parties’ will to submit to arbitration. In consumer contracts,
stricter requirements exist.

ii Litigation
The state court system in civil proceedings consists of a maximum of three domestic stages
(i.e., without preliminary ruling procedures). A lawsuit is filed with the court of first instance
in which a case is heard in general by a single sitting judge. With the exception of minor
cases, an appeal may be raised in every case to the court of higher instance sitting as a court
of appeals with a bench of three professional judges (in some cases, such as employment law
cases, lay judges may sit in first instance). A further appeal may be filed with the OGH in
the event that the legal requirements are fulfilled. The interpretation of a contract (including
the interpretation of the scope of a clause in an insurance contract) in general does not allow
for filing an appeal to the Supreme Court, because the interpretation of a specific contract
has no influence beyond the specific case.19 The alternative is a clause in general terms and
conditions that needs to be interpreted and that is commonly used in a similar way.20
Evidence is taken by the court of first instance and encompasses the examination of
the parties or parties’ representatives in the event of a legal entity being the party, witness
examinations, obtaining the expertise of a court appointed third-party expert and analysing
any documents filed (in German language, or filed in another language other than German
together with a certified translation into German) as evidence in a proceeding. The judge is
free to take into consideration as evidence everything that is appropriate to prove a certain
fact. Therefore, there is no need to prove one’s legal position in court, but parties will try to
argue towards their legal position on a certain legal question that the courts shall ultimately
decide.
Austrian law recognises the (partial) reimbursement of legal fees by the (partial) losing
party towards the (partial) winning party. However, reimbursement of legal representation
fees and court fees is capped by, inter alia, the Attorneys Tariff Act irrespective of the fee
agreement between the winning party and its attorney. Certain types of litigation funding by
third parties exist, and taking out legal expense insurance is quite common for consumers.
However, profit sharing in the event of winning a case is not permissible for attorneys under
Austrian law.

19 RIS – Justiz RS0044358 (T45).

20 RIS – Justiz RS0044358 (T3).

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 Austria

iii Arbitration
Arbitration proceedings do not play a key role in Austrian insurance practice. One may
differentiate between arbitration and an expert procedure, which may be viewed as a kind of
arbitration, and which is rather common (see below).
If the parties do not stipulate a specific procedure (be it individually negotiated or by
reference to the rules of an arbitral institution), Austrian law contains a number of default
provisions regulating the most important procedural aspects. For example, Austrian law
foresees that where there is no agreement between the parties, the number of arbitrators shall
be three. Each party shall appoint one arbitrator, and the two party-appointed arbitrators
shall nominate the third arbitrator, who shall serve as the chair of the arbitral tribunal. Should
one of the parties fail to appoint an arbitrator, or the two party-appointed arbitrators fail to
appoint a chair, either party may file a request to the Supreme Court to make the necessary
appointment. Austrian law mandates that arbitrators be impartial and independent. The only
other restriction that parties must observe is that Austrian judges may not accept appointments
as arbitrators. Otherwise, the arbitrators may be freely chosen by the parties to the dispute.
The taking of evidence in arbitral proceedings is generally comparable to the taking of
evidence in court proceedings. However, in practice, there are certain differences. Witness
evidence is usually provided in the form of written witness statements. An increasingly
common practice is that the written witnesses’ statements are often tested by party-appointed
experts. The possibility to request documents from the opposing party is usually broader than
in Austrian state court proceedings.
Although there is no strict rule regarding the awarding of costs in arbitral proceedings,
arbitral tribunals usually follow the principle ‘costs follow the event’. The recovery of costs
for legal representation is not limited to a tariff, but is usually awarded based on reasonable
hourly fees. The costs of arbitral institutions are, as a general rule, determined based on a fee
schedule.

iv Alternative dispute resolution

The extent to which agreeing on an expert procedure in an insurance contract may be
admissible is stipulated in Section 64 of the VersVG. In practice, such a proceeding is
concluded by the parties within the framework of the general terms and conditions, which is
somehow harmonised within the several types of insurance because the VVO publishes model
conditions that are commonly used by insurers. Inter alia, the following general insurance
terms and conditions contain provisions for an expert procedure: non-life insurance,21 legal
expenses insurance22 and accident insurance.23
The general terms and conditions regarding contractual accident insurance contain
a clause that either the insured or the insurer, or both, may apply for a medical arbitrator
panel, which shall determine the indemnity in the event of disagreement on the type or the
scope of the consequences of an accident. According to a ruling by the Supreme Court, in
which a clause was deemed illegal because it was disadvantageous to the specifications for the
reimbursement of legal fees according to the Civil Procedure Code, an insured shall bear the
costs or parts of the costs of a medical arbitration that are unforeseeable for the insured.24 In

21 Article 8 of the General Conditions for Property Insurance (2012).

22 Article 9 of the General Conditions for Legal Expenses Insurance (2015).
23 Article 16 of the General Conditions for Accident Insurance (Version 02/2015).
24 OGH 10 September 2014, 7 Ob 113/14i.

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consequence, certain insurers have adapted this clause of the General Conditions for Accident
Insurance by including a maximum amount that the insured shall be obliged to pay in the
event of losing the case, and the insurer is obliged to notify the insured of the maximum
expense loading prior to the commencement of an expert procedure. The decision of an
expert procedure is binding on the parties to that procedure, except in accident insurance
cases if the decision apparently deviates from actual facts (see Section 184 of the VersVG).25
Another form of alternative dispute resolution was established by the trade association of
insurance intermediaries within the Austrian Economic Chambers. Thereby, an intermediary
can call a mediation body on behalf of one of its insureds who disagrees with a decision of
an insurer, most commonly if coverage has been partly denied.26 Whereas a conciliation
committee of five experts chaired by a former judge of a Higher Regional Court releases a
legal recommendation on the facts that are undisputed between insurer and insured, such
recommendation is not legally binding and is unenforceable.
Complaints from consumers (not commercial entities) may be referred to the Complaint
Management Department of the FMA unless they are complaints with respect to insurance
contracts written by an EEA insurer. Of course, the FMA could also handle such a complaint
on a voluntary basis. An online complaint form is available on the FMA website.27
The VVO has established its own permanent point of contact for complaints or legal
questions and concerns in relation to insurance contracts.28 If an email is sent describing the
facts at hand, the VVO will contact the insurer to enquire about the status of a claim.

v Mediation
Austrian courts recognise mediation proceedings. However, in practice, mediation does not
play a key role. As far as we are aware, mediation is commonly accepted by parties pursuing
an insurance claim. So far, Austrian law does not stipulate that a party must go through
mediation before filing a lawsuit in a contested insurance matter.

V YEAR IN REVIEW
Referring to a decision of the European Court of Justice,29 the OGH ruled in autumn
2015 that an insured may benefit from an unlimited right of withdrawal from a life insurance
contract in the event that the insurer did not inform the insured or only partly informed
him or her (e.g., by stating an incorrect period of time) to withdraw from the contract after
completion. While insurers wish to repay to such insureds only the surrender value of the
contract, the Austrian Consumer Protection Association commenced an in-depth analysis
of consumers in 2016 and consequently initiated test cases against Austrian life insurers
demanding the repayment of all premiums paid plus 4 per cent interest per annum.30

25 OGH 5 November 2014, 7 Ob 148/14m.

26 www.wko.at/Content.Node/branchen/oe/sparte_iuc/Versicherungsmakler-und-Berater-in-
Versicherungsangelegenheiten/Rechtsservice-_und_Schlichtungsstelle_(RSS).html.
27 www.fma.gv.at/beschwerden-ueber-beaufsichtigte-unternehmen-einbringen/beschwerde-ueber-ein-
versicherungsunternehmen.
28 www.vvo.at/vvo/vvo.nsf/sysPages/infostelle.html.
29 ECJ 19 December 2013 (C-209/12 [Walter Endress v. Allianz Lebensversicherungs AG]): http://eur-lex.
europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:62012CJ0209&qid=1444231569028&from=DE.
30 www.konsument.at/geld-recht/lebensversicherungen-vki-sammelaktion.

28
 Austria

VI OUTLOOK AND CONCLUSIONS

It is to be expected that during 2017 further court decisions dealing with the (re)payment
obligations of life insurers in the event of the right to withdraw from contracts will be released
and become final and binding, which will result in more legal clarity for insured consumers
as well as for life insurers.

29
Chapter 4

BERMUDA

Christian Luthi and Michael Frith1

I INTRODUCTION
Bermuda’s insurance market is characterised by innovation, with the island having led – and
continuing to lead – the development of many of the concepts and structures now central
to the industry worldwide. Its international insurance industry began in 1947 with the
founding by CV Starr of the American International Company Limited, and in the 1960s the
island created the concept of ‘captive insurers’. Throughout the 1960s and 1970s, Bermuda
continued to focus on the captive insurance industry, developing concepts such as group
captives, ‘rent-a-captives’,2 and segregated account companies,3 in addition to the traditional
single-parent captive. In the mid-1980s, the first of the excess liability insurers were formed
on the island, and in the early 1990s, the concepts of structured reinsurance were developed,
along with transformer4 vehicles, thus marking the beginning of the ‘convergence’ of the
capital and insurance markets. The development of the property catastrophe reinsurance
market followed, being particularly notable for the waves of capital flowing into the island
following the major insured events and capacity crises of 1993 (Hurricane Andrew), 2001
(World Trade Center terrorist attacks) and 2005 (Hurricanes Katrina, Rita and Wilma).
Throughout, the island has also seen the development of life insurers and reinsurers, and
a very diverse array of general business insurers outside the property catastrophe lines. The
overall result is a highly developed captive as well as commercial insurance and reinsurance
market, with a sophisticated and adaptable regulatory framework.
Most recently, Bermuda has seen particular growth in the development of ‘sidecar’
vehicles, catastrophe bonds (cat bonds) and other insurance-linked securities (ILS) products,5
along with a corresponding growth in the development of investment funds focusing on such
products. The creation in 2009 of a new class of special purpose insurer (SPI), designed to
accommodate sophisticated, fully funded insurance transactions, has provided the framework

1 Christian Luthi and Michael Frith are directors at Conyers Dill & Pearman Limited.
2 A ‘rent-a-captive’ is a captive insurance company established and licensed by a sponsor who then ‘rents’ its
capital, its insurance licence and its capacity to operate to various participants.
3 Segregated accounts companies are operated through ‘cells’ whose assets and liabilities are ring-fenced and
legally or contractually protected from the creditors of other cells and the general creditors of the company.
4 Insurance transformers are entities (typically, special purpose vehicles) that transform one type of financial
risk into another; for example, the transformation of risks under insurance or reinsurance contracts into
risks under credit derivative agreements and vice versa.
5 See Section VI, infra.

30
 Bermuda

for these highly sophisticated ILS structures to flourish, with SPIs now comprising a
substantial number of all new insurers on the island and rapidly becoming the predominant
vehicle of choice for the majority of global ILS issuances.6
The development – and maintenance – of each of these insurance and reinsurance
products has been supported by a characteristically risk-based regulatory approach from the
local insurance regulator, the Bermuda Monetary Authority (BMA), as well as the natural
development of a sophisticated service provider network and physical infrastructure. Speed
to market is one of the hallmarks of the island’s industry, with the BMA overseeing one of the
most efficient licensing processes of any major global insurance centre, and that advantage
has been preserved even throughout the most recent period of regulatory development driven
by the impact of the European Solvency II Directive (Solvency II) and Bermuda’s successful
bid for full Solvency II equivalence.
Beyond the regulatory environment, Bermuda enjoys a sophisticated legal system
based on English common law. Its court of first instance is the Supreme Court of Bermuda,
which adjudicates civil and commercial disputes with a value of over US$25,000. In
2006 a commercial division of the Supreme Court was established. The division’s jurisdiction
encompasses most commercial and corporate matters and expressly includes claims or
counterclaims relating to insurance and reinsurance and arbitration.7 Matters in the Supreme
Court will be determined by a single judge sitting alone. There are four commercial judges,
two permanent (including the Chief Justice), and two part-time who sit as acting puisne
judges. The first-tier appellate court is the Court of Appeal, a panel of three justices of appeal
who sit in quarterly sessions and hear appeals from the Supreme Court. The second and final
court of appeal is the Judicial Committee of the Privy Council, which is ordinarily composed
of a panel of five judges who are members of the Supreme Court of England and Wales or are
senior judges from Commonwealth jurisdictions.

II REGULATION
The insurance licensing and regulatory regime in Bermuda is primarily composed of the
Insurance Act 1978 and the regulations promulgated thereunder (the Insurance Act).8
The Insurance Act applies to any person carrying on insurance business in or from within
Bermuda. It does not generally distinguish between insurers and reinsurers; companies are
simply registered (licensed) under the Insurance Act as ‘insurers’. The Insurance Act uses the
defined term ‘insurance business’ to include reinsurance.
The Insurance Act distinguishes between three regulatory categories of insurance
business: long-term business, special purpose business and general business. Long-term
business consists of life, annuity, and accident and disability contracts. Special purpose
business can be any fully funded insurance business under which an insurer fully funds

6 SPIs comprised 20 of 64 total new insurer registrations for 2015. Source: Bermuda Monetary Authority
insurer registration statistics for year ended 31 December 2015.
7 Rules of the Supreme Court 1985, Order 72 Rule 1(2). In particular see Rule 1(2)(v) and (xi).
8 Provisions of the Companies Act 1981 are applicable to insurance and reinsurance companies and other
legislation such as the Segregated Accounts Companies Act 2000 will be applicable in the case of segregated
accounts companies and the Life Insurance Act 1978 will have application in connection with providers of
long-term business who write policies governed by Bermudian law.

31
 Bermuda

its liabilities to its insureds through the proceeds of a debt issuance, cash, time deposits
or another financing mechanism. General business is any insurance business that is not
long-term or special purpose business.9
The regulation of those matters pertaining to the Insurance Act is the responsibility
of the BMA. The nature of regulation under the Insurance Act is a combination of
self-regulation, filings of statutory financial statements and certifications as to compliance
with the applicable statutory requirements, together with review and investigation by the
BMA in specified circumstances.
All persons seeking to carry on insurance business in or from within Bermuda are
required to be registered (licensed) under the Insurance Act.10 In the usual course, a person
seeking to carry on insurance business in Bermuda will incorporate a Bermudian company to
write such business, and it is that company that is registered as an insurer. It is also possible
(although much less common), for an overseas insurer to form a branch operation to carry
on insurance business in Bermuda. In such a case, the overseas company will apply to be
licensed in the same way as a Bermuda-incorporated company, with the BMA imposing such
conditions as it sees fit on the licence issued to take account of the characteristics of that
branch operation.
When considering whether to approve an application, the BMA is bound by the
Insurance Act11 to consider whether the applicant and its directors and officers are fit and
proper persons to be engaged in ‘insurance business’ and, in particular, whether they have,
or have available to them, adequate knowledge and expertise. The BMA has the discretion
to approve or decline any registration application or to impose conditions if it feels it is
appropriate to do so, and is required to exercise its discretion in the public interest.
Applications for all new insurers are filed with the BMA and are considered within
one week of being filed. The application must include a brief business plan, setting out the
pertinent details of the proposed business, capital structure and management of the company,
along with five-year pro forma financial projections and other ancillary documents.12 The
same application process is applicable to all classes of insurer.13

i Classification of insurers
There are six classes of general business insurer (Classes 1, 2, 3, 3A, 3B and 4), and five classes
of long-term business insurer (Classes A, B, C, D and E). SPIs are not further divided by
class.14
The classification system reflects the risk-based regulatory approach of the Insurance Act.
Class 1 and Class A insurers are at one end of the regulatory scale, and are companies wholly
owned by one person and carrying on insurance business consisting only of insuring the risks
of that person or its affiliates (i.e., single-parent captives). Given those risk characteristics,
these insurers are subject to the least rigorous regulatory oversight of all the classes of general
and long-term business insurers.

9 Insurance Act 1978, Section 1(1).

10 Insurance Act 1978, Section 3.
11 Insurance Act 1978, Section 5 and Schedule, Minimum Criteria for Registration.
12 Insurance Act 1978, Sections 4(7), 4A(4) and 4EA(3).
13 Ibid.
14 Insurance Act 1978, Section 4(1)(d).

32
 Bermuda

Class 3B and Class 4 general business insurers are very large commercial insurers,
writing in excess of US$50 million of net premium. Classes C, D and E long-term business
insurers are also considered to be commercial insurers, with the class determined based on
value of the insurer’s total assets (the higher the value, the higher the class). In each case, these
companies are at the opposite end of the regulatory scale to the captive sector, and are subject
to the most rigorous regulatory oversight of all the classes of general and long-term business
insurers. We refer to such companies as ‘commercial insurers’.
SPIs are restricted to writing fully funded business and necessarily involve sophisticated
participants only, and they are regulated accordingly. As such, they are subject to less extensive
regulatory oversight.

ii Solvency and capital requirements

All insurers’ statutory assets must exceed their statutory liabilities by an amount greater than
or equal to a prescribed minimum solvency margin. This margin varies depending on the
class of their registration. For general business insurers it is calculated by reference to net
premiums written and loss reserves posted, while for long-term insurers it is calculated by
reference to the value of the insurer’s total assets. For SPIs, the solvency margin requirement
is simply that the insurer’s assets must exceed its liabilities.15
As part of the BMA’s successful effort to obtain full third-country equivalence for
Bermuda under the developing Solvency II regime in Europe, all commercial insurers are
also now required to maintain available statutory capital and surplus at a level equal to or
in excess of their enhanced capital requirement (ECR). The ECR applicable to qualifying
insurers is established by reference to either the appropriate Bermuda Solvency Capital
Requirement (BSCR) model (standard mathematical models used to determine an insurer’s
capital adequacy) or a BMA-approved internal capital model.
While not specifically set out in the Insurance Act, the BMA has also established a
target capital level (TCL) for each insurer subject to an ECR equal to 120 per cent of its
ECR. While qualifying insurers are not currently required to maintain their statutory capital
and surplus at this level, the TCL serves as an early warning tool for the BMA and failure
to maintain statutory capital at least equal to the TCL will likely result in increased BMA
regulatory oversight.16
For each insurer subject to an ECR, the BMA has introduced a three-tiered capital
system designed to assess the quality of capital resources that a company has available to meet
its capital requirements. The new system classifies all capital instruments into one of three
tiers based on their ‘loss absorbency’ characteristics. Highest quality capital is classified as Tier
I capital; lesser quality capital is classified as either Tier II capital or Tier III capital.
All general business insurers are also required to maintain an appropriate level of
liquidity to their assets, keeping the value of their ‘relevant assets’ at not less than 75 per cent
of the amount of their ‘relevant liabilities’. ‘Relevant assets’ will include items such as cash
and time deposits, quoted investments, unquoted bonds and debentures, investments in first
mortgage loans on real estate, investment income due and accrued, accounts and premiums
receivables, reinsurance balances receivable and funds held by ceding reinsurers. Other assets
not generally considered to be ‘relevant assets’ may nonetheless be approved as such by the

15 Insurance Returns and Solvency Regulations 1980.

16 Insurance (Prudential Standards) (Class 4 and Class 3B Solvency Requirement) Rules 2008; Insurance
(Prudential Standards) (Class 3A Solvency Requirement) Rules 2011.

33
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