May 4th, 2010

Continental European Legislative and Judicial Trends: Recent Developments Regarding Legal Expenses Insurance

Posted at 1:00 AM ET

2010_legislative_thumb-21David Lewin, Managing Director
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Austrian Supreme Court Confirms Free Choice of Attorney in Mass Claim Actions

Most Austrian insurers include a clause in their general conditions applicable to legal expenses insurance “that entitles the insurer, where the interests of several insured persons are directed against the same opponents, to limit its performance to the bringing of test cases, or where appropriate, to collective redress or other ways of asserting legal interests by legal representatives selected by it. (1)” This type of clause was developed in response to the risks arising from mass claim actions. It is therefore referred to as the “Mass Claim Clause.”

In a recent decision dated October 28, 2009, the Austrian Supreme Court (namely the
division responsible for insurance law, 7. Senat) ruled that clauses stipulating the
insurer’s right to select a legal representative with regard to mass claim actions are
invalid.

The ruling in question was based on a preliminary decision of the European Court of Justice (”ECJ”). The relevant proceedings were initiated by the Austrian Supreme
Court. This ruling may create a need for amendments to the Austrian Law on
Insurance Contracts (”VersVG”) and may have a corresponding impact on insurance
terms and conditions applicable to legal expenses insurance. To date, no changes or
amendments have been made to the law.

It is not yet possible to know how extensively the latest ruling will affect Austria’s
insurance market. However, it is very likely that insurance claims payments will rise,
at least for the insurers involved, because the “Mass Claim Clause” allowed insurers
to limit their costs (e.g. by means of collective proceedings).

1. The Case (2)

Mr. Eschig, an Austrian citizen and holder of a legal expenses insurance policy, lost
money that he had invested due to the collapse of a financial syndicate. Besides Mr.
Eschig, thousands of others were involved, some of them insured by the same insurance company as Mr. Eschig.

Mr. Eschig started civil proceedings in Austria against various parties that he
considered responsible for his losses (including the Austrian authorities) and
consequently instructed a law firm that he chose, to represent him in the
proceedings. His legal expenses insurer refused to cover certain lawyers’ fees,
relying on the above-mentioned “Mass Claim Clause.”

In response to this denial of cover, Mr. Eschig took action to have the lawyers’ fees
covered and declare invalid the respective clause in the general conditions applicable
to legal expenses insurance that limited his right to use a lawyer of his choice.

2. Underlying Austrian Legal Background

2.1 The “Mass Claim Clause”

The Austrian Insurance Association (”VVO”) provides sample policy general conditions for various insurance classes. Austrian insurance companies generally use
these, sometimes (slightly) adapted, in their business.

The sample policy general conditions applicable to legal expenses insurance
contain a clause stipulating that the insurer is entitled to limit its performance
under the policy to the bringing of test cases, or to collective redress or other
ways of asserting legal interests by legal representatives chosen by it. (3)  As a rule,
this clause has been adopted by Austrian insurance companies and used in their
general conditions applicable for legal expenses insurance.

The reasoning behind developing such a clause and using it in business was the
increased frequency of collective actions over recent years, the length and expensive
nature of such proceedings (4) and the difficulties in coordinating different
lawyers.

2.2 Article 158 k VersVG

Article 158 k VersVG provides that policyholders are free to select a lawyer of their
choice in court and administrative proceedings. Outside of such proceedings, the
policyholder only has free choice of lawyer if there is a conflict of interest on the
insurer’s side.

The free choice of lawyer principle set out in Article 158 k VersVG serves to implement
Article 4 of Council Directive 87/344 on the coordination of laws, regulations
and administrative provisions relating to legal expenses insurance (4) which sets out
that “Any contract of legal expenses insurance shall expressly recognize that: where recourse to a lawyer or other person appropriately qualified according to national law in order to defend, represent or serve the interests of the insured person in any inquiry or proceedings, that insured person shall be free to choose a lawyer or other person.”

Article 158 k VersVG, implementing the respective provision, is compulsory in favor
of the policyholder.

3. The Rulings

With the decision dated October 28, 2009, the Austrian Supreme Court ruled that
the “Mass Claim Clause” (described above) restricts the principle of free choice of a
lawyer set out in Article 4 of Directive 87/344, which is implemented in Austria by
Article 158 k VersVG; accordingly the clause is invalid as a consequence. This ruling
is inconsistent with prior rulings of the Austrian Supreme Court, which held the
“Mass Claim Clause” to be valid. (5)

The ruling of the Austrian Supreme Court follows a preliminary ruling of the ECJ,
which was based on the question of whether Article 4 of Directive 87/344 is to be
interpreted as entitling the legal expenses insurer to reserve the right, where a large
number of insured persons suffer losses as a result of the same event, itself to select
a legal representative for all the insured persons concerned. (6)

In answering, the ECJ stressed that when interpreting a provision of Community law,
it is necessary to consider not only the wording but also the context in which it
occurs and the objects of the rules of which it is a part. In this case, the Directive’s
main goal is protection of the insured person’s interests, in particular - but not only -
by removing any potential conflict of interest. In this regard the ECJ referred to
Article 3 of the Directive, in which certain organizational and contractual measures
are set out, allowing the insurer to employ separate staff within the same undertaking
or to subcontract the claims management in order to avoid conflicts of interest.
Moreover, the Directive implements the insured person’s freedom to choose a lawyer
in legal and administrative procedures as a general principle. According to the ECJ,
the Directive’s provisions set out the minimum level of freedom that must be granted
to a policyholder.

The ECJ did not follow the contrary interpretation of the Directive proposed by the
insurance company involved and the Commission. Their interpretation was that the
Directive’s principle of free choice of a lawyer must only be granted where a conflict
Recent Legislative and Judicial Developments in Continental Europe Guy Carpenter 6
of interest arises. Rather, the ECJ held that such a principle has to be granted in
general, and not be limited to the occurrence of a conflict of interest. It is restricted
to legal and administrative procedures.

Consequently, the ECJ found that Article 4 of the Directive “must be interpreted as
not permitting the legal expenses insurer to reserve the right, where a large number
of insured persons suffer loss as a result of the same event, itself to select the legal
representative of all the insured persons concerned.” (7)

4. Implications

Following this decision, various journalists and lawyers have stressed that such rulings
necessitate a modification of the provisions of the Austrian Law on Insurance
Contracts and the relevant general conditions applicable to legal expenses insurance.

At least with regard to Article 158 k VersVG, there is, in our opinion, no need for
change. Its wording, setting out the freedom to choose a representative in legal court
proceedings, is quite clear and in accordance with the provisions of the Directive.

With respect to the general conditions applicable to legal expenses insurance, however, the ruling’s impact is the subject of lively discussion all over Austria. The “Mass Claim Clause” contains provisions covering both extrajudicial actions and court proceedings.

Following the ruling of the ECJ and the Austrian Supreme Court, the latter clause,
which limits the freedom to choose a legal representative with regard to administrative
and court proceedings in case of mass claim actions, should be dropped.

As far as we know, the VVO has already established a special task force to work on the clause in its guidelines that provide sample general conditions applicable to legal
expenses insurance. The result of the task force’s work is awaited with eager anticipation, since there is a huge financial interest on behalf of the insurance business inlimiting legal expenses costs with regard to mass claim actions. Lack of such a provision might lead to higher insurance premiums for legal expenses insurance or even to the designing of new insurance products. The products may omit situations of
mass claim occurrences from the standard legal expenses insurance product as it is
now known, a consequence that would not be in the interest of the insureds.

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Footnotes:

1 ECJ 10.9.2009, C-199/08, Eschig v Uniqa.

2 OGH 28.10.2009, 7 Ob 68/09i.

3 ARB 6.7.3.

4 Univ.-Prof. Dr. Martin Schauer, Freie Anwaltswahl in der Rechtsschutzversicherung, Der Fall Eschig/Uniqa vor dem EuGH, RdW 2009/714, 702.

5 Cf. OGH 128/08i.

6 ECJ 10.9.2009, C-199/08, Eschig v Uniqa.

7 ECJ 10.9.2009, C-199/08, Eschig v Uniqa.

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