Consumer Law and

Insurance Law
Protection of the weak
party
Samim Unan

References
This presentation is based mainly on
three works
Prof. Helmut HEISS, Insurance Contract Law between Business Law
and Consumer Protection (General Report prepared for the 18 th
International Congress on Comparative Law
Rodney LESTER, Consumer Protection Insurance, Primer Series on
Insurance Issue 7, August 2009
Dra. Andrea SIGNORINO BARBAT/ Dr. Antonio RABOSTO, Los Derechos
del consumidor y el seguro,, XII Congreso Iberolationoamericano de
Derecho de Seguros, Asuncion 2011

Need for consumer

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

Need for consumer

protection
The need to protect the consumer arises
from
imbalance of
- power
- information and
- resources
between consumers and services
providers, that leads to disadvantage the
consumers.

Need for consumer

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

With what a financial sector

should provide the
consumer?
The insurance sector as a financial
sector should provide the consumers
with
- Transparency
- Choice
- Redress
- Privacy

Transparency
Information
about
the prices
Terms and conditions

of the product

Information must be
- full
- plain
- comparable

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

Redress
Inexpensive
and speedy mechanisms
To address complaints
Resolve disputes

Privacy
Personal data to be
kept confidential
protected
(when necessary) destroyed

Key risks related to misselling of

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

Examples of udesirable
industry practices harmful to
consumers

Unrealistic benefit illustrations

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

Consumer protection
institutions in insurance

Consumer protection regime

Contracts
Codes of conduct
Other arrangements
Bundling and tying clauses

Consumer protection regime

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

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

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

Contract law
A good B2C contract regulation (suite)
Should indicate how contracts will be
interpreted in case of dispute
Should provide for the use of plain and
accessible words and print size
Should state clauses that can not be
included (clauses such as warranty
clauses, compulsory arbitration clauses)

Insurance contract law

Between business law and consumer
protection
Insurance contracts = commercial
transactions as well as consumer
transactions
Exception : reinsurance (always b2b)

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

Collective insurance taken

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

Collective insurance taken

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

Collective insurance taken

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

Direct insurance taken by a

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

Direct insurance taken by

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

Insurance to the benefit of a

third party
Insurance taken to protect the
interest of a third party ?

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

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

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

Legislation on insurance
However
- In respect of the precontractual
information duty special rules for
consumers
- Out of court complaint mechanism
specifically for consumers
- Special protection for small and medium
sized business
are sometimes provided

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

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

Consumer risk- commercial

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

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

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

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

Basic principles of the

consumer law

Definition of the consumer

Duty to advice, duty to inform
Unfair terms
Right to withdraw
Obligation to accept the offer of
contracting made by the consumer

Definition of the consumer

A person who does not buy goods or
services for business related,
professional or trade related
purposes.
Insurance law notion of consumer
(the weak party in insurance
contract) is as said above- broader

Definition of the consumer

In general consumer law, the consumer
is a disputed concept
Enterprizes never considered as consumer?
Enterprizes acquiring for resale only not
considered as consumer?
Enterprizes considered as consumer when
the acquisition is made for private sphere
Consumer client
End consumer (prevailing approach)

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

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

Duty to not mislead the

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

Sales practices

Intermediaries (license, proof of licensing through the

internet available to the public; sales personnel to have
sufficient qualifications)

Sales intermediary should obtain sufficient information

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

The consumer should be made aware of whether the

intermediary is acting for him or for the insurer

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

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

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

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

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

How consumer law rules are

put into effect in insurance?
Best solution: special provisions in
insurance contract law + references
to consumer law
Worse solution: recognition that
general consumer law rules prevail
over insurance law

Is insurance consumer law lex

specialis vis-a-vis the general
consumer law?
During CILA congress in Asuncion
2011 it was stated that
The rules about the protection of the consumer must
apply also to insurance contract
Often the general rules aimed at protecting the consumer
(consumer protection act) and the rules to protect the
weak party in insurance contract (insurance contract act)
coexist
However, the rules protecting the weak party in insurance
contract are lex specialis and should prevail over the
general rules protecting the consumer

Is insurance consumer law lex

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

Resolution of conflicts
between insurer and policy
holder

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

Dispute resolution
mechanisms
Internal:
Insurers to provide an internal avenue for claim and dispute
resolution (contact points for the consumer accessible during business
hours; statement in plain language of the main steps of the mechanism
provided; fairness in handling the customer dispute; statement of the
coordination with any Ombudsman or supervisory authority; avoidance
of unreasonable cost)

Insurer to designate employees who will handle retail policy

holder complaints
Insurer to inform its customer of the internal dispute resolution
procedures
The supervisor to control whether the insurer complies with the
internal dispute resolution procedures

Dispute resolution
mechanisms
External:
A system allowing the consumer to seek
affordable and efficient third party recourse
(Ombudsman or tribunal)
Ombudsman made public
Ombudsmans impartiality and
independence from the appointing authority
The enforcement mechanism to be made
public.

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

Insurance account handling

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

Insurance account handling

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

Codes of Conduct
A principles based Code of Conduct
for insurers (and also for
intermediaries)
- prepared in consultation with the
insurers (intermediaries) and consumer
protection associations
- monitored (and enforced at the last
resort) by a statutory agency
- augmented by voluntary codes

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

Bundling and tying clauses

When insurers contract with a credit
grantor (i.e. banks and leasing companies)
as distribution channel for their products
No bundling (the sale of two goods together in a bundle), tying
Without first having advised the consumer
And without giving the consumer the right to opt out

(Bundling can increase pricing complexity and

reduce market transparency and render price
comparisons impossible)

Privacy and data protection

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

Privacy and data protection

Insurers should
Obtain and process information fairly
Keep it only for one or more specified explicit and lawful
purposes
Use and disclose it only in ways compatible with these
purposes
Keep it safe and secure
Keep it accurate, complete and up to date
Ensure that it is adequate, relevant and non excessive
Retain it for no longer than is necessary for the purpose
Give a copy of his/her personal data to that individual on
request

Guarantee schemes
They are provided especially for
mandatory insurances (motor vehicle
liability insurance)
For life assurances (especially when
used as loan collateral)?