Freedom of Services and General Liability Insurance
An Introductory Guide and Practical Underwriting, Claims and
Compliance Considerations
June 2016
A Report from the IUA Liability Underwriters’ Group
With thanks to the Working Party of the IUA Liability Underwriters’ Group
Carol Conquest
Allianz Global Corporate and Specialty
Peter Furby
Mark Gibson
SCOR UK Company
Sarah Hackford
QBE Insurance (Europe)
Joscha Hein
Tokio Marine Kiln
David James
Allianz Global Corporate and Specialty
Christopher Jones
IUA
Martin Leeks
Mitsui Sumitomo Syndicate 3210
Ed McCandless
Chubb
Christian Taylor
CNA Hardy
Massimo Vascotto
Assicurazioni Generali
With legal advice taken from: Kennedys LLP (Michael Walker, Partner)
This paper has been drafted for information purposes only and is strictly non-binding in nature. IUA
takes no responsibility for the accuracy of this information, which does not constitute legal advice. As
such, IUA members and other third parties should take legal advice as they deem appropriate on any
of the issues raised in the paper.
Reproduction of the information in this publication is permitted provided that this is accompanied by a
statement in the following form:
“Information taken from ‘Freedom of Services and General Liability Insurance’, International
Underwriting Association (2016)”
First Published: 2016
Copyright: International Underwriting Association of London Limited
Freedom of Services and General Liability Insurance
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CONTENTS (hyperlinked)
Key Legislation
1. Introduction – Freedom of Services (FOS) in the Insurance Context
 Freedom of Services – EU Framework
2. The IUA Liability Underwriters’ Group Freedom of Services Working Party
3. Market Analysis:
 What is and what is not Freedom of Services?
 Pros and Cons of FOS
 The Lloyd’s & Company Market – General Considerations and Binding Authorities
 FOS for liability policies and other classes of business
 Legal and compliance considerations
4. Issues for Practitioners in Providing Insurance on a FOS basis:
 Formation and drafting of insurance contracts
 Calculation of premium payment and taxation
 Claims and claims payments in a FOS setting
 Reporting

Pre-inception
 Renewals
5. Market Experience of Providing General Liability cover on a FOS basis
 How FOS policies are put together and general wording trends – a review of FOS
wordings
 Compulsory insurance cover
 Coinsurance and excess of loss
 Reinsurance
6. Conclusion
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ANNEXES (hyperlinked):
1.
Writing FOS risks – Insurer best practice checklist
2.
In-depth study on FOS risks and insurance scenarios
 Study 1: Excess/Residual/Contingent Employers’ Liability international programmes
 Study 2: Excess owned motor liability under FOS master liability insurance policy
 Case Study – writing FOS risks (combined General Liability and Motor Liability scenario)
3.
The EU, EEA, EFTA and FOS in Micro States
4.
EEA Liability Pools
5.
A Selection of FOS Clauses
6.
FOS – Introductory Legal Comments
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Key Legislation (hyperlinked)
The Single Market Directives:
The First Non-life Insurance Directive (73/239/EEC)
The Second Non-life Insurance Directive (88/357/EEC)
The Third Non-life Insurance Directive (92/49/EEC)
The Life Assurance Consolidation Directive (2002/83/EC)
The Insurance Mediation Directive (2002/92/EC) (IMD) - updated by the Insurance Distribution
Directive (which came into force on 22 February 2016 to be transposed into national laws by 23
February 2018).
The Reinsurance Directive (2005/68/EC)
The Alternative Investment Fund Managers Directive (2011/61/EU) (AIFM Directive or AIFMD)
The Markets in Financial Instruments Directive (2004/39/EC) (MiFID)
The CRD IV Directive (2013/36/EU) - repealed and recast the Banking Consolidation Directive
(2006/48/EC)
The UCITS IV Directive (2009/65/EC)
Solvency II - Directive 2009/138/EC - taking-up and pursuit of Insurance and Reinsurance
General Good - freedom to provide services in the insurance sector (2000/C 43/03)
EC Recommendation on FIN-NET - on principles applicable to bodies responsible for out-ofcourt settlement of consumer disputes. Members of FIN-NET
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1. Introduction – Freedom of Services in the Insurance Context
Freedom of services in respect of insurance business is the right to provide insurance or
reinsurance cover on a cross-border basis within the European Economic Area (EEA). Insurers
and Reinsurers established and authorised in one EEA Member State can conduct business, i.e.
cover risks located in other EEA Member States, under the prudential supervision of their ‘Home
State’ regulator, without requiring separate authorisation in those other ‘Host’ States.
The Agreement on the EEA, which entered into force on 1 January 1994, brings together the EU
Member States and three of the four European Free Trade Association (EFTA) States — Iceland,
Liechtenstein and Norway — into the EEA to create a single market, referred to as the ‘Internal
Market’. It is important to emphasise that Switzerland, the other Member of EFTA, is not a Member
of the EEA.
The EEA Agreement provides for the inclusion of EU legislation, including also the freedom to
provide services, throughout the EEA States. EEA-relevant EU acts are continuously incorporated
into the EEA Agreement. Whenever EU legislation refers to an EU Member State, the references
shall also be understood to refer to EEA States.1
Whenever the terms ‘Freedom of Services’ (FOS) or ‘Freedom to Provide Services’ (FOE) is used
in this paper, it is meant to refer to the provision of services by an insurance undertaking of an EEA
Member State into another EEA Member State. The clarification is necessary as some Regulators,
for example the Italian regulator, IVASS, refers to ‘freedom to provide services’ also in respect of
the provision of services in the territory of third States (i.e. non-EEA States).2 The same approach
was also taken by CEIOPS3 in their report on the responses to the Questionnaire on the Regulatory
Treatment of Third Country Reinsurance Undertakings and on Existing Equivalence Procedures,
dated 19 January 2009. In footnote 3 it stated ‘For the purposes of this report ‘freedom to provide
services’ describes the provision of services by a reinsurance undertaking, in circumstances where
the reinsurance undertaking has no permanent presence within the relevant jurisdiction (not
necessarily an EEA jurisdiction).’4
1
See Part 3 for a more detailed analysis of the authorisation and passport process.
2
IVASS Regulation N 10, Section II, Art. 26. Pursuit of business in the territory of third States. See also the
Italian Code of Private Insurance, legislative decree n. 209 of 7 September 2005, Art 22 (Business pursued in a
third State) and Art 29 (Prohibition to carry on business under the freedom of services).
3
The European Insurance and Occupational Pensions Authority (EIOPA) is an EU financial regulatory institution
that in 2011 replaced the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS).
4
The report in fact states: “The majority of Respondents stated that it was possible for third country reinsurers to
write reinsurance business on a freedom to provide services basis from/through:

their Home State (18 of the 25 Respondents);
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Freedom of Services – EU Framework
There are several options to facilitate cross border business. The most common are:
 To establish a local branch office in the other Member State (as allowed by EU FOE provisions;
 To write the business under a binding authority with the coverholder in the other Member State;
or
 To write the risk on a FOS basis.
It is this last method that forms the subject of this paper. It will primarily focus upon the underwriting
and processing of wholesale or ‘large’ (as defined in the EU 2nd Non-Life Insurance Directive
(88/357)) general liability insurance risks, i.e. contracts involving commercial Insureds usually with
the intervention of insurance Brokers.
The concept of FOS, whereby an Insurer in one EU Member State can write and issue policies in
other EU Member States on an admitted basis, is enshrined in the Third Non-Life Insurance
Directive (though this has been replaced by the Solvency II Directive5). In theory the EU Single
Market should simplify and, to an extent, harmonise the process of providing multi-EU Member
State insurance programmes.
There are limited up-to-date statistics on the volume of FOS business transacted and what is
available is by no means comprehensive. Cross-border insurance sales on the basis of freedom to
provide services and branches6 represented only 4.10% of total gross premiums written in the EU
in 2007. Further, in terms of gross written premiums, the volume of exported insurance products
written on a FOS/FOE basis in the EU amounted to 42.8 billion Euro in 2007. Of this, 33.2 billion
Euro accounted for life insurance and 9.6 billion Euro for non-life.7

their branches based in another EEA Member State (18 of the 25 Respondents) or a third country (15 of
the 25 Respondents); and

a Broker/intermediary established in the Respondent’s country (18 of the 25 Respondents); in another EEA
Member State (19 of the 25 Respondents); or in a third country (13 of the 25 Respondents).
This approach confirms that ‘Freedom of Services’ insurance applies, as a terminology, also to non EEA
States, but of course with different rules, as we will see.
5
The implementation date for Solvency II was 1 January 2016. The Directive consolidates a number of EU
legislative measures. For the purposes of this report the key EU legislation can be accessed HERE.
6
This statistic is taken from the Impact Assessment accompanying The White Paper on Insurance Guarantee
schemes, SEC 2010(828), p. 17. The reference to ‘branches’ is unclear and not qualified in the paper but is
taken to mean Freedom of Establishment.
7
See previous footnote for further details.
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The potential advantages and economies of scale to be gained from using policies on a FOS basis
have meant that there has been increasing demand for such products from risk managers, which
Insurers and Reinsurers have been quick to meet. However, there are continuing practical and
operational challenges that need to be carefully considered when providing cover on a FOS basis.
In certain cases these potentially hinder the underwriting of risks on a pure FOS basis.8
2.
The IUA Liability Underwriters’ Group Freedom of Services Working Party
The Freedom of Services Working Party was convened in 2013 to consider the technical and
practical issues around General Liability (GL) Insurers underwriting (re)insurance business9 from
the UK on a FOS basis within the EEA States.
The paper is primarily designed to be informative to the IUA London market community writing GL
business within the EEA on a FOS basis. However, the issues considered in this paper, and its
analysis of market practice and conclusions therein, will be relevant to any underwriting and claims
practitioners writing any class of business on a FOS basis from the UK. Equally, the analysis should
be of interest to the broking community, risk managers and compliance practitioners.
It was agreed at an early stage that this paper would primarily focus on the practical underwriting
and claims issues arising, with a view to:
 further understanding the implications of the FOS and local policy options; and
 evaluating how FOS policies work for Insureds, particularly multi-national ones, and meet
their insurance policy expectations.
The main body of the paper does not consider in detail the statutory and regulatory rules required
for compliance in specific Member States. There are service providers who supply this information
on an ongoing basis. It was agreed, though, for completeness and to add context to the discussion
on writing cross-border risks, to include a note on the relevant overarching EU legislation.
8
By ‘pure FOS’ we mean whereby the Insurer has no presence in the jurisdiction of the risk. This is as opposed
to using an established branch in the jurisdiction to assist with supporting activities.
9
We have, though, included references to other classes of business where beneficial to explain some of the
core points around the writing of FOS risks.
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3. Market Analysis
What is and what is not Freedom of Services?
One of the central pillars of the EU is the aim of creating a single market for goods and services,
free of trade barriers. In respect of non-life insurance this was enshrined in the European Union
Directive 92/49/EEC which introduced a single authorisation system where an insurance
undertaking in one EU Member State may open branches or carry on business in another State
under the supervision of its Home State regulatory authority.
As already highlighted, the process of opening branches or establishing a legal entity in another
EU Member State is known as freedom of establishment and providing insurance without
establishing a branch or representation is known as freedom of services. The Directive has also
been adopted by three non-EU States, Norway, Liechtenstein and Iceland, which together with the
28 EU States comprises the European Economic Area (EEA).
To undertake any class of business in another EEA State the Insurer10 must:
 be licensed to undertake that class of insurance in its Home State;
 notify the Home State regulatory body of its intention to carry on business in another Member
State, on a FOE or FOS basis;
 comply with any conditions on which, for reasons of the ‘General Good Provisions’, such
business must be conducted in the non-Home State (usually referred to as the ‘Host State’).
These generally apply to consumer insurance transactions rather than commercial contracts.
See below for further details on the operation of the General Good Provisions.
The Home State regulatory body is then required within one month to notify the Host State regulator
where the Insurer is intending to transact business. An Insurer whose head office is situated outside
the EEA is not able to transact business on a FOE or FOS basis, unless it has been authorised to
do so, in accordance with the rules set out in Title 3 (Articles 23-29) of the First Non-Life Directive
(as amended).11
Pros and Cons of FOS
An Insured may opt for a FOS insurance solution for a variety of reasons (outlined below), which
may be control, cost or ease of administration. Many of these objectives can also be achieved by
10
This should be distinguished from reinsurance, as an EEA Reinsurer may establish a branch in an EEA
jurisdiction and automatically qualifies for authorisation.
11
The First Non-life Insurance Directive (73/239/EEC).
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a global programme. Similarly, an Insurer may wish to offer a FOS solution for the same reasons
or, additionally, due to an Insured’s requirements and needs and/or Broker pressure or because
the Insurer does not have a local network.
Although FOS policies are a viable and lawful method of transacting insurance business, there are
a number of issues that Insureds and Insurers need to consider carefully when adopting this
solution. On a macro level, though FOS may provide a lawful basis for cover, the lack of legal and
fiscal harmonisation / integration within the EU means that a single insurance market is not yet a
reality. This can inhibit the smooth management of risks on a FOS basis.
Pros of FOS
 A single insurance contract in the named Insured’s predominant language (affording consistent
interpretation);
 Familiar scope of coverage;
 Consistency of claims handling and risk management procedures (all claims dealt with under
one policy with one office of the Insurer applying one market practice);
 Known body of law and operation / procedure of the jurisdiction;
 A wider choice of Insurers with adequate financial strength (e.g. the London market);
 A Broker network may not be needed;
 Centralised contacts (Broker / Insurer);
 Centralised negotiations;
 Optimal control of insurance expenses – reduced fronting costs;
 Consolidated control of information (e.g. loss ratio, locations, subsidiary names, extensions);
 No need for subsidiaries in other Member States to be involved in arranging local covers;
 Reduced administrative burden for the Insurer and Insured in view of the above.
Cons of FOS
 Local peculiarities cannot easily be catered for (e.g. different phraseology of local policy
language and legal nuances);
 Loss of good local standard coverages and common additions (for example tenant’s liability in
Belgium, R.C. Patronal in Spain);
 Insurance policy services often provided more easily locally;
 Administration / legal obstacles – i.e. different legal systems and laws which apply in each
Member State and regulate the basis on which insurance contracts are made. In some Member
States cover is mandatory for certain risks and cannot be simply ignored, thus presenting an
additional potential exposure (see Compulsory Cover section for further details);
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 Possible tax compliance disadvantages (for example, liability for the correct transfer of different
insurance taxes to local fiscal authorities);
 Claimants in third party liability are likely to bring their cases in the local jurisdiction and the
policy stipulates England and Wales as the governing jurisdiction and/or the applicable law
and English as the language of the policy. In such cases ambiguities or interpretation of the
policy may be held to the disadvantage of the Insurer (the contra proferentem rule);
 Potential communication difficulties due to language, market and cultural differences and likely
lack of face-to-face contact;
 FOS remains a largely untested area of insurance regulation and law – unexpected outcomes
may occur at the hands of individual regulators and national Courts;
 Claims administration may have to be handled centrally (i.e. in London) which can lead to
delays and misunderstandings and other frustrations in the event of a claim;
 Possible additional expenditure or administration (for example in collecting premiums internally
from subsidiaries);
 The Insured arguably carries greater currency risk in FOS contracts. This will depend on the
currency used in the policy and any currency conversion clause utilised;
 The entire insurance demand of the client(s) cannot be handled centrally (e.g. in Switzerland
or any other country outside the EEA);
 Subsidiaries will often have no local relationship with the Insurer or Broker;
 Possible loss of understanding, opportunity to provide input or flag up changes locally, or
receive local assistance in the local language;
 Subsidiaries of the Insured will need to be willing to accept centralised claims handling, risk
management and insurance arrangements;
 Access to local pools, understanding of local tax regulations and statutory levies may be lost.
The Lloyd’s & Company Market – General Considerations and Binding Authorities
There are some differences between the Company market and Lloyd’s in terms of how FOS
coverage is perceived and how it operates but in essence the same rules apply to placements
made with Lloyd’s Insurers as they do to business with non-Lloyd’s Insurers. Lloyd’s acts on behalf
of Managing Agents and where Lloyd’s seeks to trade on a cross-border basis within the EEA then
confirmation of the approval to trade is provided to all Managing Agents.
The Lloyd’s ‘Crystal’ system is populated with relevant information allowing each Managing Agent
the ability to understand what they can and cannot do in each EEA Member State, which classes
of business they are authorised to underwrite and, importantly, the taxes which will need to be
collected and any specific reporting requirement required by each Member State. The ‘General
Good’ Provisions (see below for further information) of each territory are also added to Crystal.
Company market insurers will utilise similar products to Crystal, either internally developed or
purchased from third party service providers.
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From both a Lloyd’s and Company market perspective FOS business consists of open market
business written from the UK (with or without the involvement of a local intermediary), business
written under a full binding authority where the coverholder is located in a different Member State
from where the risk is located and business that is written under a prior submit binding authority
agreement.
Lloyd’s Insurers also have the benefit of access to a General Representative in each Member State
where business is underwritten to enable a greater understanding of what may be necessary
requirements in each country and to provide advice on how to overcome some of the issues
highlighted under the ‘Cons of FOS’ section in this paper.
Common to both the Lloyd’s and Company market is the handling of business underwritten under
a binding authority agreement usually via a coverholder.12 Coverholders allow Lloyd’s syndicates
and other Insurers to operate in a region or country as if they were a local Insurer. This is achieved
by Insurers delegating their underwriting authority to coverholders.
A coverholder can have full or limited authority to underwrite on behalf of the Insurer. It will usually
issue the insurance documentation and in some instances will handle claims. The document setting
out the terms of the coverholders delegated authority is known as a binding authority.
This type of placement may be considered to be written on an FOS basis if the coverholder is based
within an EEA Member State although certain rules apply as to whether the business is
underwritten under the provisions of ‘the freedom to provide services’, or under ‘the right of
establishment’. Each individual coverholder is considered on its merits against (where applicable)
the Lloyd’s rules and a determination made at inception of the placement as to whether the
business is placed on an FOS basis or not.
In 2000, the European Commission set out that the main criterion for establishment business is
whether the underwriting activity happens in the same country as the location of the risk. For the
purposes of Lloyd’s structure and operations in the EEA, the risk is written on an establishment
basis where the coverholder or service company:
 is located in the same country in which the risk is located; and
 has authority to make an underwriting decision regarding that risk.
All other underwriting, including all open market business, is on a services basis.
12
A coverholder is a company or partnership authorised by a managing agent to enter into a contract or
contracts of insurance to be underwritten by the members of a syndicate managed by it in accordance with
the terms of a binding authority.
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Lloyd’s has, on behalf of Lloyd’s Insurers, carried out the establishment passporting procedure
under the Insurance Directives in relation to 17 EEA Member States and under the freedom to
provide services in relation to all 30 EEA Member States (excluding the UK).
FOS for Liability Policies and Other Classes of Business
Casualty-v-Property
Under the provisions of the Third Non-Life Directive, FOS policies are possible across the range of
industrial and commercial lines of business. The complexities and issues that need to be taken into
account when considering FOS general liability policies are common to other types of insurance
although access to insurance pools is, for example, a particular issue for property insurance
programmes that does not apply to liability in the same way. Examples of such pools are: France
(National Catastrophe and Terrorism), Spain (Major Catastrophes), Norway (Natural Catastrophes)
and Germany (Terrorism) – see Annex 4 for more details. For this reason, some may argue that a
FOS policy for property / business interruption risks is more complex than for liability and potentially
more difficult to put together. On the other hand, under property policies there isn’t the complication
of liability policies in dealing with third party claimants and in different legal environments. In fact,
property policies, apart from the administrative issues of cessions to local pools, are easier to
underwrite than liability policies on a FOS basis and are more commonly seen.
Partly this is due to the nature of the risks covered:
1. Property / Business Interruption cover a standard range of events (perils or all risks) at identified
locations for identified property. The risks insured are generally considered to have common or
identical characteristics which are largely unaffected by the specific jurisdiction concerned
(although exposure to natural catastrophes will vary). Differences in law may affect claims
settlement / adjustment (or policy interpretation) but generally would be considered as having
marginal impact.
While on the contrary:
2. A commercial liability policy will cover civil liability claims. By definition, the nature of the risk (i.e.
the nature of civil liability in each jurisdiction) will vary. Whether that liability arises from a civil
code, statute or common law it is arguable that there is a general similarity across the civil law
regimes of EU, even though in most countries civil liability is based on a general concept of
‘fault’ rather than nominate torts13, for example negligence and nuisance. Further, some liability
will now arise from European law (for example defective products).
13
Under English / Welsh law there is indeed a classification of torts: negligence, defamation, trespass, nuisance,
breach of copyright, although they may also be distinguished as intentional torts, negligent torts or strict liability.
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Nature of General Liability cover / wordings – issues to consider
A key advantage of a FOS policy (see above) is that it comprises a single form of contract but
clearly that advantage is undermined if the cover in the FOS policy for a particular country is not at
least as wide as the usual level of cover available from any local Insurer. The FOS underwriter
therefore needs to be aware of the covers usually available from any local Insurer. But in markets
where there are no controlled or mandated or filed wordings, what constitutes a ‘good local
standard’ wording is not always easy to define. For example, there may be extensions which are
commonly offered to reflect peculiarities of local law or market agreements between industrial
buyers and Insurers. Also, wordings in each State have developed in line with local law, reflecting
the law governing the issue of insurance contracts and the nature of liability risk itself.
The FOS underwriter therefore, in discussion with the Insured, needs to decide to what extent the
FOS policy needs to reflect any particular features of local country cover – either across all
territories or limited to those to which such an extension or aspect of cover traditionally applies.
In a more traditional multi-national programme where local ‘primary’ policies are issued, such
‘extended’ cover would continue to be offered in the local policy only; the underwriter therefore only
needs to decide whether to provide DIL (Difference in Limits14) cover for that particular aspect of
cover. Often such cover would be provided within local sub-limits only.
Some of the more apparent differences of local standard liability policies in the EEA (which may be
substantive or may simply be more apparent than real) between standard liability programme
concepts across the EU include:
1.
Scope of cover: whilst all local policies would provide cover against both public liability and
products liability risks, the extent to which a good local standard cover would also include some
form of environmental liability or employers’ liability varies. Further, most would exclude
product recall risks;
2.
Scope of indemnity: defence costs for justified and unjustified claims and payment of
compensation or damages for the legal harm suffered would be the base form in nearly all
States;
3.
Policy trigger: whilst ‘occurrence’ is probably the most common policy trigger, there are several
alternatives used, whether for the base form itself or certain aspects of policy cover: for
example, claims made, manifestation, acts committed, events caused;
14
DIL clauses are written into the Insured’s primary ‘master’ insurance policy and supplements the limits on a
locally issued policy in order to provide increased limits or the same limits as the primary insurance policy to
the extent of the Master Policy. Similarly, DIC (difference in conditions) clauses provide cover from the Master
Policy that closes gaps in the local policy cover or provides additional cover.
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4.
Policy duration: one year with tacit (i.e. automatic in the absence of activity) renewal (and
varying periods of cancellation notice) is common in several EU states (but not the UK);
5.
Products liability – is cover provided for all an Insured’s products in circulation or just those
sold or supplied after a particular date? The extent of product liability cover for the cost of
subsequent processing / dismantling / installation;
6.
Trigger events: ‘injury’ and ‘damage’ – but the meanings and definitions vary. For example, is
damage more than just physical damage? In some countries ‘loss of use’ where there is no
actual damage is included. Does injury include, for example, psychological trauma or stress
related conditions? A core part of the cover in any General Liability policy is liability for injury
and damage caused by products supplied by the Insured. But to what extent does cover apply
not just to the costs of injury and damage but also the costs of putting right the defective
products themselves - extended products cover in Germany and Austria for example?;
7.
How are loss mitigation expenses15 addressed?;
8.
Care, Custody and Control issues – this is a reasonably common exclusion but the extent to
which local policies provide some measure of write-back varies quite considerably across the
EU;
9.
Approaches to efficacy / loss of use / failure to supply;
10. Pure financial loss – can be interpreted as product guarantee in certain EU Member States;
11. Mixing and blending (the EU differences are more limited than sometimes thought)16;
12. How is contractual liability interpreted across the EU?;
13. Compulsory covers and compulsory conditions in policies; for example, the prescribed
approach to ‘claims made’ policies in France;
14. Excess non-owned and hired auto cover in Spain; excess owned / leased automobile cover –
see Annex 2;
15. Excess / residual / contingent EL – see Annex 2;
15
These are the costs arising from the reasonable steps taken to limit the losses that are incurred (and also to
avoid incurring unnecessary expenditure seeking to remedy a breach).
16
For example, Spanish “Union y mezcla” and German extended product liability cover.
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16. Application of policy exclusions can vary – e.g. asbestos, Employment Practices Liability
Insurance, mandatory insurances, aircraft, aircraft products, automobiles, expected or
intended claims, nuclear, offshore, terrorism / war, watercraft, Electro Magnetic Field (EMF),
genetic engineering, HIV / blood, mould, fines and penalties, pharmaceutical;
17. Aggregated single event cover compared to unaggregated (more typical in the UK market).
Combined Single Limit (CSL)17;
18. Extent of cover for quasi-criminal activities. For example, in certain jurisdictions serious or
gross negligence may be subject to criminal sanctions and raises the issue whether the cover
is limited only to civil liabilities;
19. Cover for criminal fines and penalties, which may be imposed by civil, as well as criminal,
Courts, e.g. the imposition of astreinte18 in France and Belgium, and the associated costs of
defending such actions or cover for punitive damages; and
20. Cover for regulatory damages.
Legal and Compliance Considerations
The starting point for any Insurer or Reinsurer wishing to underwrite insurance business on a crossborder basis in the EEA is to consider the basic legal provisions for doing so. This section briefly
outlines the relevant legislation and some practical compliance issues of which carriers need to be
aware of.
As a general point it is worth highlighting the significant increase in the attention of regulatory bodies
on compliance with regulatory rules and legislative requirements, and corporate governance in this
area over the past ten to fifteen years. This has been particularly evident in the enforcement of the
tax and licensing regimes.19 The 2001 ECJ decision in the case of Kvaerner20 is an example of this.
17
This is the maximum amount that the insurance company must pay for all damages arising out of a single incident.
The CSL generally is a single limit of protection for both bodily injury and/or property damage across types of cover.
18
An astreinte is a form of civil penalty, which a judge can impose on a reluctant defendant in order to compel it to
carry out its obligation. It can be applied as a fixed sum or on the basis of a daily rate over the period of default, or
per event of breach of obligation.
19
In December 2008 the IUA published an updated guidance note on the apportionment and allocation of Insurance
Premium Taxes and Para-fiscal charges in respect of multinational insurance policies. This is available from the IUA
secretariat upon request.
20
Kvaerner plc v Staatssecretaris van Financiën (Case C-191/99) [2001] STC 1007. In this case the ECJ held that a
tax authority of an EU Member State could levy a legal entity established in another EU Member State for premium
taxes due on a business establishment within its boundaries where the premium was paid to an Insurer based in
the EU.
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European Union Non-Life Insurance Directives
The objectives of the EU Single Market Directives21, in so far as the insurance industry is
concerned, are to specify the processes that Insurers need to follow when writing cross-border
business within the EEA. For General Liability and other non-life insurance purposes, the relevant
Directive to consider is the Third Council Directive 92/49/EEC on direct non-life insurance (‘the
Third Directive’) – now consolidated in the Solvency II Directive).
The main objective of the Third Directive, in respect of insurance activities, is to enable and
facilitate any Insurer authorised in an EEA Member State (the ‘Home State’) to carry on direct
insurance activities in any other EEA Member States (the ‘Host State’). This right exists regardless
of whether the carrier establishes a branch in the Host State in question or chooses to operate
on a FOS basis. The legislation is designed to function on the basis of the carrier in question
being ultimately supervised by its Home State regulator. This works well in theory, and has done
reasonably well in practice. There are, however, potential issues arising where EU legislation is
interpreted and implemented differently in different Member States. This can lead to concerns
that some regulators ‘gold-plate’ legislation, that is interpret and apply the EU legislation more
onerously than other Member States. This can hinder the operation of the EU single market and
lead to potential regulatory arbitrage22.
EU General Good Provisions
The General Good Provisions recognise the reality that EEA Member States often interpret EU
Directives in slightly different ways.23 Where the EU measures co-exist with existing national State
measures, these provisions allow a Host State to apply its national provisions to incoming FOS
Insurers so long as the provisions do not affect the operation of the single market. Thus, on the
one hand, the provisions protect the ability to underwrite business on a FOS basis, making clear
that the financial supervision of the business is only done via the Home State regulator. On the
other, they recognise that there will be local conditions with which the Insurer must comply for the
‘General Good’ in the Host State.
Each Member State regulator maintains a list of their own General Good Provisions, which need
to be considered by foreign Insurers writing FOS risks. These vary from Member State to Member
State and include for example:
21
Further details of the Single Market Directives can be accessed HERE.
22
A practice whereby firms capitalise on loopholes in regulatory systems in order to circumvent unfavourable
regulation.
23
A good example of this is how the limits for motor liability are expressed in EEA States.
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 A policy is written in the language of the Host State;
 Exclusion clauses must be printed in bold print in a prominent place on the policy (for example
in France);
 The imposition of standard terms and conditions or minimum insurance requirements;
 Specific complaints handling procedures; or
 Training requirements for insurance practitioners24.
It is important to note, however, that according to the European Commission General Good
Provisions’ paper that,
‘…insurance services involving large risks or sophisticated or professional policyholders (e.g.
professionals in the financial sector) should not be the subject of particular general-good rules
imposed by the host Member State, at least where the protection of policyholders is concerned.
The proportionality test would be especially difficult to satisfy in such cases.’25
Consequently, large corporate risks should, at least in theory, have far more contractual freedom
in their insurance arrangements.
Passporting from ‘Home’ to ‘Host’ State
For the basic rules and process on passporting into and out of the UK please see FCA Passporting
Rules. It is well established that the responsibility for the authorisation of the passporting Insurer
falls on the Home State regulator. The Home Supervisor has thirty days to forward the authorisation
application to the Host Supervisor and advise the applicant Insurer. The Host State is not permitted
to carry out their own checks on a firm or question the granting of such a license. However, the
Host Supervisor can raise issues concerning a lack of information or a need for any compliance
fulfilment. There is no set time frame for this, beyond a need to do so ‘immediately’.26 There are
also differing practical interpretations of the rules as briefly outlined below.
The authorisation timescales are dictated by the relevant EU Directive according to the activities
an Insurer is seeking to passport. If an Insurer wishes to undertake an activity in another EEA State
that is not covered by an EU Directive, then it must apply to the Host State regulator separately for
authorisation. The FCA document noted above also includes a list of EU Directives which confer
24
For example, in Italy. According to an IVASS regulation, as of 1 January 2015 insurance companies are
expected to organise the training activities of their intermediaries and call centre staff. This includes training on
the technical, actuarial and economic aspects of insurance activities.
25
See Page 43/19 of the EC Paper.
26
Per Article 2.1.4 of the Siena Protocol, the EU Protocol among Supervisors. See also Article 2.1.2.
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passporting rights according to the type of insurance granted and the associated timescales. The
Insurer needs only notify their Home State regulator. Once the relevant timescale has elapsed,
they will then be considered passported into the Host State(s) applied for.
The CEIOPS27 General Protocol relating to the collaboration of the insurance supervisory
authorities of the Member States of the European Union, published in 2008, helpfully outlines the
core documentation required by the Host State regulator from the Home State with regards to
passporting (see in particular Page 18 onwards in the EIOPA Protocol).
The Host State has no power to reject an application received from the Home State. In practice,
however, the Host State can in some cases require the passporting Insurer to comply with some
administrative or practical requirements. In the UK, for example, the Prudential Regulatory Authority
(PRA) may exercise powers of intervention at the request of, or with the purpose of, assisting
another EEA regulator if the incoming Insurer has or is likely to contravene existing PRA / Financial
Conduct Authority (FCA) requirements28. In some EU States, to write motor business (Class 10),
the Insurer must have available a network of garages to undertake any repairs covered by the
policy. There may also be the obligation to join a local insurance pool, such as the Motor Insurers’
Bureau in the UK. This may prove administratively difficult and/or expensive for a FOS Insurer. The
Host State can also require additional information or regular data reporting, which can also be
onerous. Consequently, the FOS Insurer may find it easier to write that business in other ways, for
example on a freedom of establishment basis.
FOS ‘Blanket Notifications’
It would perhaps be logical and administratively preferable from a compliance perspective for
Insurers to seek authorisation for the 18 recognised classes of insurance on a ‘just in case basis’,
i.e. where the Insurer applies for a FOS licence for all 18 classes but has no immediate intention to
actively write business in some of them. Ultimately, this will be up to each individual Insurer to
decide in recognition of its particular business model, including how it obtains its clients and
whether there is a real intention to conduct business in a particular EEA State. In this regard the
potential, ongoing reporting requirements of individual Host State regulators should also be
considered. Insurers may also be charged a fee by the Host State regulators.
Moreover, some regulators have specific provisions relating to ‘blanket’ notifications. In the UK the
FCA and PRA regulatory handbook, at SUP Appendix 3.3.14, discourages the practice of the Home
State regulator notifying all Host State regulators in respect of all activities regardless of any
genuine intention to carry on the activity. However, a firm may be carrying on activities in the UK
27
The EU regulatory body, CEIOPS (Committee of European Insurance and Occupational Pensions
Supervisors) was replaced by EIOPA (European Insurance and Occupational Pensions Authority) in 2011.
28
See Schedule 3 of the Financial Services & Markets Act 2000, HERE.
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or elsewhere in a way that necessarily gives rise to a real possibility of the provision of services in
other EEA States. In such cases, the firm should consider with its advisers whether it should notify
the relevant authorities and include that possibility in its business plan.
The Italian Regulator, IVASS, employs a slightly different approach. In one of its Regulations (Reg.
10, art. 24), IVASS states that:
An insurance undertaking with head office in the territory of the Italian Republic that proposes to
carry on business under the freedom to provide services in another Member State shall first notify
IVASS in compliance with article 18 of the decree and enclose a scheme of operations containing
the following information:
c) the nature of the risks and commitments which the undertaking proposes to cover;
d) the three-year forecasts pertaining to the costs and revenues in respect of each insurance class
it intends to pursue;
From the above Regulation it transpires that the Italian insurance undertaking wishing to carry out
business on a FOS basis must provide such detailed information about the risks it intends to write
that any blanket notification is clearly not acceptable.
Choice of Law and Jurisdiction Provisions
It should be remembered at the outset that the law governing a dispute determines not only
questions of liability (including any limitations and exemptions) but also the amount of
compensation and costs that can be awarded. It is consequently extremely important that choice
of law and jurisdiction contractual provisions are clear and that the parties to the contract are fully
aware of the EU rules in these areas, particularly where the Courts may be able to derogate from
the accepted principle of freedom of choice in contractual arrangements.
(i) Choice of Jurisdiction
The Brussels Regulation, recast in 2012, is the key EU legislative provision in respect of
establishing choice of jurisdiction for EU contracts. The general rule is that defendants are to be
sued in the Courts of Member States in which they are domiciled or, in the case of a company, this
is determined by the place where it has its statutory seat, or where it has its central administration
or its principal place of business. In cases of tort or delict29 a defendant may be sued in the place
where the harmful event occurred. In matters of contract the place of performance is relevant.
Where goods are supplied, this would be the place of sale or place of delivery; where services are
29
In civil law jurisdictions, ‘delict’ in the civil sense generally covers liability for unlawful acts committed without
the intention to harm but which cause damage to a third party which the author is obliged to compensate.
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provided, it would be the place where they were provided. There are however some exceptions to
these tort rules;
 Where parties domiciled in the EU agree a jurisdiction clause in the contract or where an EU
Court, taking into account all of the facts decides that it would be more appropriate for the case
to be tried in the Courts of another country. The recast Brussels Regulation further upholds
the recognition of jurisdiction clauses by clarifying that it is not necessary for any of the parties
to be domiciled in an EU Member State for such agreements to apply. Further, the law of the
Member State designated in the agreement will apply to consider the validity of any exclusive
jurisdiction clause;
 A claimant, who is a policyholder, Insured or beneficiary, may sue the Insurer in the Member
State where the claimant is domiciled;
 In cases of liability insurance, the Insurer can be sued in the Courts in the place where the
harmful event occurred. This also applies where the insurance relates to immovable property.
Also, in the case of liability insurance, if the law of the court allows, the Insurer can be joined
in proceedings which the injured party has brought against the Insured;
 Several jurisdictions in the EU permit an injured party to bring a direct action against the
wrongdoer’s Insurer. To the extent that such actions are permissible, such claimant can rely
on the exceptions referred to in the two preceding bullet points when suing the Insurer.
(ii) Choice of Law in Contractual Arrangements
Particularly in the business insurance context, choice of law provisions are almost universally
applied to insurance contracts. It is, though, worth briefly mentioning Regulation (Regulation (EC)
No 593/2008 on the law applicable to contractual obligations (Rome I).30 This applies to contractual
obligations in civil and commercial matters in the event of a conflict of laws.
For the purposes of ‘large risks’31, the parties have freedom under the Regulation to choose the
applicable law to the contract. That freedom, however, may not be recognised by the Courts if the
choice of law is aimed at circumventing the mandatory laws of a State or is deemed contrary to
public policy.
30
Rome I has not been adopted by Denmark.
31
‘Large risks’ are defined by Article 5(d) of the First Non-Life Directive (73/239) and may be summarised as
railway rolling stock, aircraft (and their liability), ships (and their liability), goods in transit, credit (where the
policyholder is engaged professionally in an industrial or commercial activity, or in one of the liberal
professions), or risks relating to fire and natural forces or other property damage, general liability or
miscellaneous financial (where certain financial criteria are met and the average number of employees in any
financial year is 250).
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In the absence of a specified choice, the applicable law will be that of the country of residence of
the Insurer. However, if the contract is more closely related to another jurisdiction, that jurisdiction’s
law will apply. Further, for ‘mass’ risks32, there is a presumption that the applicable law will be the
State where the risk is situated, not where the Insurer is situated, nor where the contract was
concluded.
(iii) Choice of Law in Non-Contractual Arrangements
Choice of law in relation to the non-contractual liability of the Insured under the policy (i.e. tort /
delictual liabilities, potentially including negligence actions and certain product liability and
environmental claims) is treated slightly differently.
Regulation (EC) No 864/2007 on the law applicable to non-contractual obligations, also known as
Rome II, came into force on 11 January 2009. This harmonises the way liabilities outside a
contractual relationship are dealt with. It provides that the applicable law for non-contractual
obligations will generally be determined by reference to where the damage actually occurs, or is
likely to occur. This is subject to a number of exceptions, including the possibility of the parties
agreeing in certain situations the applicable law for non-contractual obligations impacting the
provision of insurance.
As noted, the default intention of Rome II is that the law applying to the totality of a claim would be
that where the damage occurred. However, it should be stressed that matters of evidence and
procedure should be considered under the law of the jurisdiction where the claim is brought.
Insurers also need to be aware of the practical difficulties that might arise in choosing a law that is
not the law of the forum, for example an English / Welsh Court having jurisdiction to hear a claim
that is subject to German law. In such cases the English / Welsh Court would likely be obliged to
apply German remedies to the dispute (including the law on the assessment of damages – an
aspect of Rome II that overturned existing English / Welsh common law).
Overall, given the potential impact of Rome II, unless there are compelling reasons to do otherwise,
choice of law provisions in wholesale insurance contracts should make specific provision for the
treatment of any non-contractual claims that relate to or arise from the relevant insurance
agreement.
(iv) Recourse to National State Ombudsmen Services
It is difficult to be precise on the exact role and provisions of Ombudsmen services in each EU and
EEA Member State as there are differences both in terms of the structure of the Ombudsmen
services, their remit (usually in the form of upper financial limits to hear cases) and their
enforcement powers, particularly on having the ability to make binding decisions and to move
32
An official term used in EEA insurance regulation. It means any risk that is not a 'large risk'.
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beyond application of statutory provisions and look for ‘equitable’ solutions (as often evidenced in
the UK).
Specifically on cross-border disputes, there is also the EU Financial Dispute Resolution Network
(FIN-NET), a Europe-wide network of financial ombudsmen and consumer-complaints
organisations.33 Its purpose is to co-operate and provide certain minimum dispute resolution
standards so that consumers living in one EEA country are better able to bring complaints against
a financial services business based in a different EEA country. Any scheme or body within Europe
that deals with financial dispute-resolution can in theory become a member of FIN-NET, provided
it meets certain standards34.
Whilst it is true that the minimum standards provide a degree of certainty for all parties to the
insurance, for Insurers operating in other jurisdictions it is worth emphasising that there are key
differences in how Ombudsman operate across EU and EEA States and also that, although there
is co-operation and information sharing between FIN-NET Members, ultimately each Ombudsmen
operates with a large degree of autonomy. Consequently, it is important that Insurers operating on
a FOS basis are aware of the potential redress to local State Ombudsmen services, with the
potential repercussions and that this is reflected in the policy wording as appropriate.
Practical legal considerations for practitioners
We have considered the regulatory and legislative requirements in place for writing FOS risks.
However, whilst the parties to a contract generally have the freedom to choose their own applicable
law, insurance contract law can vary considerably between Member States. Such laws might, for
example, result in different burdens of proof, different policy triggers and presumptions for or
against Insurers where there is a dispute relating to the interpretation of a policy provision.
Further, procedural aspects of litigation in the various Member States mean that an Insured or
Insurer may, or may not, prefer a particular jurisdiction. Practical examples include the recovery of
lawyers’ fees, the accrual and award of interest and rules on disclosure of documents. More
practically, there are the potential administrative and travelling costs to attend hearings in another
State. Moreover, a particular jurisdiction may be favoured for the body of case law35 that has been
established over a long period and the certainty of outcome and expertise developed in the legal
system.
33
For more details on FIN-NET, including its Member Ombudsmen services click HERE. A useful note from the
UK Financial Ombudsman Service can also be found HERE.
34
See EC Recommendation 98/257/EC: Commission Recommendation of 30 March 1998 on the principles
applicable to the bodies responsible for out-of-court settlement of consumer disputes (Text with EEA relevance).
35
Although most European civil code systems do not formally recognise case law as a binding source of law, it
generally has persuasive effect which may assist judges in reaching a decision.
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The laws on legal costs provisions and recoveries, statutory interest, expert evidence and
disclosure of documents are all additional drivers for parties in the choice of a particular governing
jurisdiction or applicable law. This makes it even more important that a suitably clear and compliant
choice of jurisdiction and applicable law policy provision is adopted.
Probably the most important and frequent practical problem encountered by Insurers in writing FOS
and multi-jurisdiction liability risks is in establishing the correct location of the risk. This has a knockon effect on which ‘General Good Provisions’ apply and how any relevant taxation is levied or
allocated. Insurers and Reinsurers also need to be aware of the potential for differing dispute
resolution rules in any Member State (in particular the judicial approach or recourse to Alternative
Dispute Resolution mechanisms).
From a compliance perspective, it is likely that the Host State may have in place:
 reporting requirements (for example, premium and claims information, complaints);
 specific policy documentation requirements (for example requirements in France and Spain to
outline certain policy language in bold, to have certain contractual provisions signed separately
and provisions relating to the non-disclosure of risk details);
 ‘know your customer’ requirements;
 solvency provisions; and
 national rules relating to financial crime such as anti-money laundering rules, anti-bribery and
international sanctions.
Some Host State regulators are also expressing an increased interest in the production and specific
purpose of insurance products and are proving to be more willing to intervene at an early stage if
they are not content with a particular product or how it is being sold. Specifically on General Liability
risks, many Member States have specific rules in place in respect of compulsory classes of
business such as Employers’ Liability and national pools (see Section 5 on compulsory covers).
The underlying point is that, if there is no, or only a limited, resource ‘on the ground’, then
communication of new or regulatory requirements, and maintaining a consistent dialogue with the
Host State regulator, becomes more difficult. Further, as ever with compliance, maintaining an audit
trail of how risks are written, how premium and tax is allocated and remitted and how local
regulatory requirements are met, is essential.
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4. Practical considerations for Insurers when providing FOS cover
Formation and Drafting of Insurance Contracts
STEP ONE:
• Establish the basis of coverage being given and what needs to be dealt with by the wording:
-
If you have been asked to add a European subsidiary to a UK Policy, proceed to STEP TWO.
-
If you have been asked to issue from the UK a local standalone policy to a European
subsidiary (where you are also issuing a Master Policy to a UK parent company) which wants
its own policy wording, proceed to STEP THREE.
-
If you have been asked to underwrite from the UK, a non-UK entity, without any UK
involvement proceed to STEP THREE.
STEP TWO:
• Add the additional European subsidiary to the policy schedule of Insureds.
• Check the adequacy of the Policy Territorial Limits to ensure they are appropriate.
• Be aware that references to UK statutes may not, in the absence of an appropriate clause, be
extended to corresponding legislation in the country of the additional European subsidiary.
• Be aware that UK coverages may not align with local market coverages, and so the additional
European subsidiary may be receiving greater cover than under a local market policy (e.g. UK
liability vs. Bulgaria liability coverage), or more restrictive coverage (e.g. UK products and
pollution vs. German products and pollution coverage).
• Check the additional European subsidiary is not undertaking any activities which require
compulsory insurance. Such compulsory insurance if required is unlikely to be met by a UK
policy without due regard to reviewing the legal requirements in the particular Member State.
• Be aware that, in relation to the additional European subsidiary, the UK policy will usually retain
English / Welsh law and jurisdiction or English / Welsh based arbitration the basis for resolving
policy disputes.
STEP THREE: (A UK Master Policy with a separate policy issued to a European Subsidiary
or no UK policy being issued, the Master Policy is issued direct to a European entity)
• Issuing from the UK a local standalone policy to European entities / subsidiaries outside the UK
will necessitate full consideration of the General Good Provisions that implement local insurance
legislation for particular Member States. It is possible that the Insured or Broker will request that
the policy wording be subject to the law and jurisdiction of the Host State in which the standalone
policy is being issued; additionally, it may also be requested to be issued in the official
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language(s) of that Host State. However, it is not mandatory for commercial risks that a law and
jurisdiction other than English / Welsh be selected.
• You should consider a review of available guidance on local insurance legislation for that
country, such as AXCO or such similar market compliance systems.
• It is advisable:
-
if issuing a policy from the UK which will not be subject to UK law and jurisdiction, to utilise
a policy wording suitable for the risk which is in use in the local market and in accordance
with the Host State’s insurance regulation and its law and subject to its insurance law and
jurisdiction, possibly having a legal or technical advisor who is knowledgeable about the local
market review the policy wording. A possible source of wordings may be to request local
compliant polices from a branch or entity in the Host State if this route exists for you;
-
An alternative non-FOS option, if available, is to request a branch or office of your insurance
company in the Host State to arrange and issue the policy on your behalf. This may help
ensure compliance.
It is not advisable to issue a UK wording that has not been amended or adapted for use in the
intended local market if the law and jurisdiction is not English / Welsh. Even when it remains English
/ Welsh, a UK form may not offer the breadth of coverage required by the intended local market.
• You may also wish to consider the use of Master Policy clauses, such as difference in
conditions/limits where consistency of coverage between the local policy and the UK Master
Policy is required.
Premium Payment and Taxation
UK Insurance Premium Tax (IPT) does not apply to risks and exposures located outside of the UK,
but a substantial proportion of EU countries have equivalent premium tax charges and UK Insurers
that provide cover for overseas exposures must allocate an appropriate part of the premium to
those countries concerned and pay the appropriate premium taxes, where it is their responsibility
to do so.
When a UK Insurer applies for a FOS licence to write business in another European State, it should
also make arrangements to be able to pay the applicable local premium taxes (such as having
fiscal representation in those States in which they intend to provide cover on a FOS basis).
Occasionally, local market practice makes this unnecessary, for example in France it is usually the
primary Insurer who handles taxes for itself and any excess layer Insurers or Co-insurers. It is
beyond the scope of this paper to discuss in detail the various issues which arise in complying with
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individual EU country tax regimes but the IUA publishes for its members an annual spreadsheet on
applicable IPT and other relevant taxes in European States.36
Claims and Claims Payments in a FOS Setting
Pre-Claim
To avoid disputes when a claim is made under a FOS policy, reporting requirements and
procedures have to be defined when the policy is drafted. Claims that would normally be covered
by (or under) the Host State might still need to be investigated before the claim can be declined (or
before liability is repudiated).
If the insurance company or the Broker has branches or parent / sister companies in the Member
State(s) where the risk(s) being covered on a FOS basis are located, those entities will have more
local know-how and may be able to support the claims handling process. However, the extent of
support they are permitted to give may be restricted – i.e. from an Insurer’s perspective, the
following needs to be considered:
 Where the insurance company in the relevant Member State is a separate legal entity to the one
providing the cover on a FOS basis, providing non-insurance related services / activities on
behalf of the FOS Insurer may be prohibited (such as under VAG, the German insurance
supervisory law). What falls under non-insurance related activities needs to be defined on a
case by case basis depending on the Member State(s) involved;
 For the purpose of carrying on insurance business on a FOS basis, an Insurer can utilise the
services of a branch or representative office in the Member State where the Insured risk is
located for support activities (generally relating to ‘local support services’ and ‘administrative
matters’), and claims handling may be part of this. Support activities must not include any
process involved in the negotiation, conclusion and post-handling of insurance
contracts. Branch / representative offices are, therefore, not permitted to get involved in
negotiating the settlement of claims. They are, however, permitted to receive notices of specific
claims as long as these are then sent on to the FOS Insurer for decision making. Such offices
may also provide local claims support services such as a local expert to assess damage caused,
and local legal and medical services. A branch / representative office in one Member State must
not be regularly used or kept available for use by staff in another Member State, and its details
should not be used in any business communications;
 Permanent structures for administrative matters may be set up and used in one Member State
to support business being written on a FOS basis from another Member State. Such structures
would be similarly restricted as to the activities they could carry out, and from a claims handling
36
IUA members can access the tax information from the IUA website.
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perspective, this would generally be limited to receiving notices of claims relating to policies
concluded on a FOS basis for transmission to the Insurer and to managing files relating to FOS
claims (this may include, where appropriate, the payment of indemnities pursuant to the
instructions given by the FOS Insurer itself).
Coverage review and loss assessment
It might be necessary to appoint a surveyor to investigate and evaluate the incident giving rise to a
claim. Without local representation, the FOS insurance company might not have available a
suitable surveyor immediately after the incident. Furthermore, most EU Member States do not
recognise the effect of a reservation of rights in relation to policy coverage and impose a deadline
by which the Insurer must respond to the claim (once it has been provided with full particulars and
documentation by the Insured). The insurance company should therefore identify in advance –
ideally at the time that it notifies its Home State regulator of its intention to underwrite FOS business
- which surveyors it would appoint in the relevant Host States.
As outlined in Section 3 of this paper (Pros and Cons of FOS policies) a policy written on a FOS
basis could result in the coverage provided being narrower or broader than the equivalent standard
in the Host State. Claims that would be covered under the Host State standard and are not covered
under the FOS policy would possibly still need to be surveyed and evaluated before the coverage
can be declined. While a policy issued by a domiciled Insurer in the local market of the Host State
might be expected to meet a claim in full (in terms of coverage), the issue of a policy on a FOS
basis could lead to the situation where the claim is only partly covered. For example,
Resposabilidad Civil Patronal (Employers’ Liability) is a standard extension of cover under a
Spanish liability policy, which covers the liability of the employer for injury suffered by its employees
in the course of employment. A public liability policy written on a FOS basis for a Spanish insured
and based on a UK standard wording would not grant cover for injury to employees, leaving a
significant gap in cover.
Claims payments
Questions often arise in relation to whom an indemnity for a claim under a FOS policy should be
paid. In theory, four alternative recipients of the payment may be identified:
 In the case of a Master Policy, to the policyholder, ‘principal Insured’ or policy beneficiary in the
UK;
 In the case of a Master Policy to the EU subsidiary or branch of the policyholder, ‘principal
Insured’ or policy beneficiary in the UK;
 In the case of a FOS policy, to the Insured in the Host State;
 In the case of a Master Policy or a FOS policy, directly to the claimant.
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The Third Insurance Directive allows insurance companies to provide direct insurance services in
other EU Member States. To make a payment into another EEA Member State is the natural
consequence of this concept. It would be a strong restriction to the FOS concept if insurance
companies were only allowed to provide the coverage but not to settle a claim directly (not to
mention that in such circumstances if the Insured did not have representation outside its territory
then the claim payment would be impossible).
The focus of this paper is on the underwriting aspect and not specifically on the accounting issues
arising in delivering contracts on a FOS basis. However, a payment from a FOS insurance company
should have no influence on the profit and loss account of the payee. The payment of the FOS
insurance company and the claims expense in the FOS territory should offset each other. The claim
payment should not be regarded as generating a taxable profit.
Reporting
As outlined in the introduction to this paper, cross border insurance still plays a minor role in the
conduct of direct insurance activities within the EU Single Market. It is, however, worth briefly
considering how a FOS claim should be entered into the claim reporting software.
Usually a claim under a FOS policy would be allocated to the UK branch even if it has incurred in
a FOS Host State. The claimant’s details should be registered automatically but it might be helpful
to double check if a report on the country where the claims have incurred is necessary.
Pre-Inception
At pre-inception of the FOS insurance contract, the Insurer may need to consider the following,
particularly where the policy is subject to the law and jurisdiction of the Member State where the
insured risk is located:
 In most Member States, there is a requirement for certain mandatory pre-contractual information
to be provided to the Insured. In some Member States, it is the Insurer’s responsibility to provide
this (such as in Italy, where, for example, this must be provided in the form of an information
booklet for mass risks). In some circumstances, an independent insurance intermediary will
provide the required pre-contractual information to prospective Insureds on behalf of the Insurer.
However, this may not relieve the Insurer of its responsibility for ensuring that the requirements
are met. In some cases, there may also be a requirement to acquire the Insured’s written
declaration stating that the requirements have been fulfilled, prior to the conclusion of the
insurance contract.
 The duty of disclosure on the part of the Insured can vary by Member State. The Insurer will
need to be aware of what this is and take it into consideration when determining how and to
what extent information needs to be specifically requested, what reliance can be placed on any
information submitted by the Insured and where further requests for information need to be
made.
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Renewals
In addition to the above requirements relating to pre-inception of the insurance contract,
underwriters also need to consider the following from a renewal perspective when the policy is
subject to the law and jurisdiction of the Member State where the insured risk is located:
 Tacit renewal provisions apply to insurance contracts in a number of EU Member States and
may apply to some or all classes of business or types of insured (for example, the tacit renewal
period in Germany is three months other than for private motor policies where it is one month,
it is thirty days in Sweden and sixty days in France). Where there is tacit renewal, the insurance
contract will renew ‘automatically’ unless either the Insurer or the Insured issues notice of
cancellation or seeks to amend the terms in accordance with the relevant notice period (i.e. tacit
renewal period). As such, in Germany, notice of cancellation or intention to review the terms
must be given a minimum of three months in advance of the annual renewal date.
Where an Insurer is providing cover to a German Insured on a FOS basis under a pan-European
policy issued from the UK and subject to English / Welsh law and jurisdiction, cover will
automatically lapse at renewal date unless both parties have specifically agreed to renew the
contract/amend the terms or where specific conditions to the contrary have been incorporated
in the policy. However, if the Insurer is issuing a policy solely to a German Insured and cover is
subject to German law and jurisdiction, they could find that tacit renewal will apply to the
contract.
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5. Market Experience of Providing General Liability cover on a FOS basis
How FOS policies are structured – A Review of FOS wordings
Whilst there remains a generally held and valid view that from a licensing and compliance
perspective, underwriting on a FOS basis does not necessitate anything further than a clear
statement on the list of Insureds under the policy, detailing the Insured in the territory under which
FOS cover is being granted, nevertheless there remains some use of FOS clauses and
endorsements.
The LUG Working Group drafting this paper, reviewed a limited number of market wordings
providing cover on a FOS basis. Opinion was also sought from a key global broking house on this
issue. These investigations found that FOS cover is generally provided as follows:
 Most commonly, FOS cover is provided on the Insurer’s standard UK policy form either via a
clause incorporated in the wording or by endorsement stating that cover is being given in
accordance with the relevant Directive(s). Individual policies are not usually issued where more
than one Member State is being covered. Sometimes clauses simply restate that the risk is
being covered under FOS, perhaps to highlight that the Insurer is licensed to do so and has
registered appropriately, perhaps more for the reassurance of the Insured than anything else.
 Alternatively, as noted above, sometimes there is no specific reference to FOS in the policy or
in an endorsement, i.e. the names (and possibly addresses) of any EU locations to be covered
on a FOS basis, are simply listed as Additional Insureds on the Schedule. This could be
particularly relevant for Difference in Conditions (DIC) / Difference in Limits (DIL) cover.
 Where required and viable, some Insurers may issue a local market wording in local language
on a FOS basis although it is not clear whether this is sufficient to meet all the relevant ‘General
Good’ Provisions.
Where cover is provided under a UK policy via an incorporation clause or by endorsement, there
is little evident consistency of approach with regards to the scope or content of clauses or
endorsements in use:
 Some clauses specifically deal with remittance by the Insurer of local taxes (in some cases
limited to those taxes the Insurer is liable to pay). Where taxes are not specifically highlighted,
it can only be assumed that this is catered for elsewhere – for example on the Schedule or
cash invoice.
 Some clauses specifically state that any additional taxes, penalties or interest due as a result
of misdeclaration by the Insured shall be reimbursed to the Insurer by the Insured. Where this
is not specifically addressed, there is a potential credit risk to the Insurer.
 The clauses reviewed did not state whether cover would apply to compulsory covers or not.
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 Some clauses specifically list the Member States covered for a specific risk.
 Other than for tax, the clauses reviewed did not make specific reference to any other provisions
that could apply. One clause did state that it was extended to satisfy the minimum legal
requirements for the provision and operation of liability insurance in the Member State in which
the claim is made. It is not thought, however, that this would be sufficient to meet any such
obligations and is deemed to be poor practice. Where specific General Good Provisions apply,
it would not be sufficient just to state that these are satisfied as specific actions may be required
to ensure compliance.
It appears that most UK liability policies issued on a FOS basis are not being extended to provide
local coverages which would be available under a standard liability policy in some Member States.
However, many UK policies do include a residual and/or contingent and/or excess EL clause which
could, depending on the particular language used37, grant local coverages such as Faute
Inexcusable38 (France) or Responsabilidad Patronal39 (Spain).
On the subject of coverage, one clause in circulation specifically restricts cover for neighbours and
tenant’s liability where such cover is ordinarily provided under a local property policy. Cover would
only apply in excess of any local policy.
Compulsory Insurance Cover – issues arising
Compulsory cover for a particular exposure or activity may be a regulatory or statutory requirement
or may stem from professional organisations' practices in a particular Member State. Ordinarily, the
provision of compulsory covers on an FOS basis is permitted although it is strongly recommended
that underwriters check this for an individual territory and product (for example, ethics committees
in certain Member States may require clinical trial insurance to be placed with a locally registered
carrier). In any case, the provision of such coverage must be done in accordance with any specific
provisions relating to such compulsory insurance for the particular Host State or the Member State
imposing an obligation to take out insurance even where the risk is situated in another Member
State (such as for motor insurance).
37
See Annex 2, Case Study.
38
In France, in addition to State supplied workers compensation cover, an injured employee may sue their
employer under the Faute Inexcusable principle for an additional indemnity or enhanced compensation, where
the employers’ liability arises due to fault of exceptional gravity deriving from a deliberate act or awareness of
such act which the author must have had, or the absence of a justifiable cause for the act. The State can also
recover from the employer under this principle.
39
Patronal (seguro de responsabilidad patronal) covers the insured’s employers’ liability risk by extension to the
General Third Party Liability policy. See HERE for further details.
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Compulsory insurance requirements differ substantially from country to country and can be
numerous. This presents a number of challenges for Insurers providing cover on a FOS basis;
1. Specialist coverage such as Employers’ Liability (e.g. Cyprus) or Worker’s Compensation cover
provided by the insurance market (e.g. Belgium and Denmark). Underwriters may need to
develop specialist wordings to meet the necessary coverage requirements. Pricing may also
need to be actuarially calculated and will be dependent upon obtaining adequate claims
statistics.
2. Compulsory requirements may be specific to a particular activity or exposure which a standard
UK liability policy would or would not cover as a matter of course. Underwriters should, therefore,
consider whether coverage needs to be adapted to meet the compulsory requirements and/or
premium adjusted to cater for any potential increase in exposure such as not being able to rely
on certain coverage restrictions / exclusions or legal defences (for example, for some
compulsory insurance regarding civil liability the Insurer may not be able to rely on the same
defences against the third party). Customers purchasing cross-border coverage could also have
concerns regarding potential gaps in cover in view of the above.
Examples of compulsory requirements are as follows (this list is purely illustrative and by no
means exhaustive):
 Animal feed producers (third party liability, Germany).
 Carriage of dangerous goods (third party liability, Austria).
 Certain types of establishment (third party liability) - fire/explosion - establishments open to
the public, Belgium; managers of industrial parks, Portugal.
 Construction – third party liability for construction companies/designers/construction
supervisors/others (Latvia); ‘Dommages ouvrage’ for private dwellings (France).
 Cross-border services liability (Belgium).
 Decennial liability (France / Sweden); public works (Italy); private dwellings (Spain).
 Environmental liability (e.g. Belgium, Finland).
 Lifts and elevators liability (Italy).
 Pharmaceuticals – product liability – manufacturers (Austria); third party liability –
manufacturers (Germany); product liability – importers (Slovenia).
 Pipeline operators’ liability (Austria, Netherlands).
 Security firms - third party liability (Germany, Hungary, Latvia, Norway).
 Tenants' property damage liability (France).
 Spread of fire - third party liability (Slovenia).
3. The level of cover required may be strictly prescribed by product – for example specific contract
terms and conditions, minimum limits of indemnity, deductibles may either not be permitted or
have a set threshold, and certain exclusions may not be permitted. An example is Bulgaria
where an Insurer may have to cover intentional damages caused by the Insured. Rules on what
can be considered as negligence and what has to be considered as intentional can be divergent.
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In some Member States, gross negligence may be covered although the extent to which the
Insured is obliged to mitigate a possible damage can differ.
4. An Insurer may need to obtain membership of local insurance pools / schemes to be able to
provide suitable cover, and will need to ensure that any procedural requirements are followed
to facilitate recovery in the event of a claim. Examples of pools relevant to liability insurance are
the German Pharmapool and Assurpol (French pollution pool).
5. There may be certain other obligations which the Insurer has to meet in order to be able to offer
coverage, for example:
 join the relevant admitted market bodies (such as motor compensation bureau and motor
and work accident guarantee funds). For example, Insurers writing Danish Workers
Compensation and domiciled outside Denmark must be approved directly by Finanstilsynet);
 have a legal representative in the Host State to receive lawsuits (e.g. Denmark) or a special
local representative for claims management purposes (e.g. French Motor);
 notify the authority laid down in legislation specific to certain forms of compulsory insurance
(e.g. construction liability) of any cessation of cover or any lack of payment;
 communicate contractual conditions to the relevant supervisory authority prior to issuing
cover.
In some cases, whilst it may not actually be compulsory to purchase insurance cover, the level
of cover when purchased may, to a certain extent be mandated or restricted.
Additionally, underwriters should be aware that certain restrictions may apply around the provision
of ‘Claims Made’ cover – i.e. it may not be generally acceptable, particularly for certain compulsory
classes, or policies may have to meet certain criteria such as minimum reporting periods/retroactive
periods (e.g. Belgium and France).
Overall, Insurers will need to be able to adapt their policies and adjust premiums with the above
points in mind, according to the risk in question. Whilst there are rules that apply to all liability
insurance risks – for example, French liability insurance provisions are numerous and detailed, and
imply more standardised contract terms - for the most part, the underwriting considerations around
the provision of cover will generally be the same for compulsory and non-compulsory classes.
Co-insurance / Excess of Loss – issues arising?
It is important to remember in the context of co-insurance and excess of loss risks that the
provisions and application of the FOS licensing system does not permit one Insurer to take the
benefit of another Insurer’s FOS licence. As such, it remains the responsibility of any Co-insurer to
check that, where it follows or writes a risk on a subscription or co-insurance basis, that the
appropriate FOS licences and permissions are in place to enable individual Insurers to participate
in the direct insurance of such risks.
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The same applies to an excess of loss risk, which should be treated as a distinct direct insurance
rather than reinsurance. No ‘follow the lead’ position can be taken, nor can the individual excess of
loss Insurer adopt an underlying Insurer’s FOS authorisation/licence status.
The general principles of the severability of the subscribed participation continue to apply in the
circumstances of both co-insurance and excess of loss. It is therefore important that any Insurer
writing such cover forms its own view on the adequacy of the terms applying to the risk and the
basis on which it is being underwritten, including but not limited to its policy form. Reliance on a
lead Insurer setting compliant terms, without any additional check and verification, carries a degree
of unquantifiable risk of error that would apply equally to the Co-insurer or Insurer following such
terms on an excess of loss basis.
Risks which include DIC / DIL provisions also require FOS compliance to be considered on the
same basis as if the Insurer was writing the primary insurance in the territory to which DIC / DIL
cover is to apply. In such situations, it is always sensible to apply the same process as if coverage
was being underwritten on an excess of loss basis.
Reinsurance – issues arising?
Unlike with direct insurance, the Reinsurer does not need to demonstrate that they have the
necessary FOS authorisation / licenses other than for the UK as they are providing an indemnity to
the UK Insurer regardless of the actual location of the original risk. However, if a UK reinsurer wants
to provide reinsurance on a FOS basis to a carrier in another EU Member State, it will have to apply
to its Home State regulator for the necessary authorisations / permissions to provide reinsurance
coverage on a FOS basis in the required Host States, as per Directive 2005/68/EC of 16 November
2005, (the Reinsurance Directive). This has been superseded which by Directive 2009/138/EC, the
Solvency II Directive which took effect on 1 January 2016.
Where the reinsurance contract is issued to a UK Reinsured, UK law and regulation will govern the
placement and wording, unless agreed otherwise by the parties to the reinsurance contract and so
it will not be subject to any General Good Provisions pertaining to the original contract.
There are, however, a number of things that Insurers need to consider to ensure that their
reinsurance protections (whether treaty or facultative) are fully back-to-back with the original
placement(s), so that they will be able to make a full recovery in accordance with the limits
purchased. These include:
 Ensuring that the geographical scope and jurisdiction under any reinsurance coverage extends
to the EU and its’ Member States;
 Although generally more relevant to property insurance, underwriters should be aware of any
clauses under their reinsurance protections stating that cover will not apply where cover would
otherwise be available under a local pool or scheme (whether this is compulsory or not) and
ensure that the necessary pools / schemes are accessed;
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 Where underwriters are looking to extend the UK FOS policy to provide specific local coverage
extensions, it would be prudent to check whether there are any specific exclusions under their
reinsurance protections that may prevent a recovery – for example, a gradual pollution
exclusion, limited financial loss coverage.
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Conclusion
Throughout this analysis there have been a number of recurring themes that get to the crux of
writing FOS risks – the inherent operational, compliance and cultural challenges often competing
against the business opportunities and client demand for a flexible policy. We would highlight the
following take-away points from our review:
1.
Though FOS risks remain a relatively small portion of the total risks written across the EU our
perception is that it is growing in demand as a flexible option for Insureds. Though most
Insureds clearly still prefer to buy products from a locally established insurer, the underwriting
of risks on a FOS basis remain a useful and valued option, particularly where the local policy
is too expensive to issue and reinsure as part of a multinational programme. Even for
‘domestic’ risks, the FOS option can give Insureds’ the opportunity of extra capacity, more
competition and the provision of specialist type of cover that may be unavailable from local
Insurers.
2.
It is also clear that FOS has become a significant option for a certain limited number of
multinationals as a development of their more traditional global liability programme
arrangements. For such clients, the nature and size of their EU business is such that the FOS
route becomes an attractive and cost effective option. Their global programme therefore
integrates the more traditional Master Policy with DIC / DIL cover for those countries outside
the EEA (together with locally issued primary policies), with a single FOS policy for the EEA
countries. And of course the Insured and Insurer will have concluded that the cost of any
additional servicing and claims handling arrangements etc; (plus the other potential
disadvantages noted earlier in this report) do not outweigh the benefits of the FOS option.
Each client programme is likely to differ in the extent to which a FOS solution will be suitable,
but it is a reasonable prediction that for the majority of such multinationals the more traditional
arrangements are likely to continue.
3.
Identifying what is deemed to be FOS is undoubtedly a grey area and in day-to-day practice
can mean different things dependent upon the corporate set-up of the Insurer and Insured and
the type of business at hand. For example, FOS in one specific jurisdiction with a dedicated
wording in local language is very different from a DIC / DIL Master Policy in English giving
cover all over the EEA. Equally, there will almost always be differing levels of assistance from
Host State Insurers and service providers in putting together and providing the FOS policy.
Overall, it is important to understand the advantages and limitations of FOS products in
considering whether a FOS product best suits buyers of insurance.
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4.
Despite the concept of a European Single Market, the reality is that local legal, compliance
and operational challenges facing insurers providing FOS insurance products remain and are
not new. What has changed is that these concerns have gained in prominence as companies
become more cognisant of the issues involved in writing risks from another EEA State.
However, though the actions that parties cannot do (under local laws or regulations) tend to
be well established and embedded into business practice, more attention needs to be applied
to what the parties should not from a business practice perspective be doing, i.e. establishing
and applying some core best practices around the provision of FOS cover.
5.
Policy wordings vary widely, which reflects the differing understanding of FOS business by
Insurers and Brokers. It is evident from analysis that some Home State drafted wordings may
lead to ‘unbalanced’ cover by not taking into account local peculiarities or providing a standard
Home State based policy extension that may not be applicable or may inadvertently widen the
local cover. Conversely, we have seen wordings that target specific markets with a dedicated
wording.
6.
Equally important is the claims environment in a local jurisdiction. How will the local civil law
based Courts uphold a policy written under English / Welsh law guided by common law
principles? Will the Courts incorporate local policy requirements into the FOS policy? How will
claims payments be made to a local policyholder?
7.
The above points reflect the current legal and regulatory framework across the EU. It is not
clear, and beyond the scope of this paper, to speculate what may happen if the UK left the EU
and the likely impact on UK based companies being able to underwrite insurance on a FOS
basis.
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ANNEX 1: Writing FOS Risks – Insurer Best Practice Checklist
This is intended as a brief aide memoire of the various issues which Insurers and Brokers may
need to address when considering whether to place the General Liability risk on a FOS basis.
Questions:
(i)
What is the insurance risk?
(ii)
Where is it being placed?
(iii)
Does your company / syndicate have the relevant FOS license(s) for the relevant class(es)
and/or country/ies?
(iv)
Are there any local rules relevant to placing that business?
(v)
Is a local policy needed?
(vi)
Would a local policy be preferable? Meeting client expectations?
(vii)
What is the role of the Broker used? Do they have the necessary status to operate FOS?
(viii) What advice do Brokers provide to their clients in deciding to write a risk on a FOS basis?
(ix)
What pre-inception information is required to ensure that sufficient details are available on
the local risk, laws and compliance requirements? Consider this also upon renewals.
(x)
Where would a claim be paid? Is a local claims representative required?
(xi)
How is the premium tax allocated and paid, reporting requirements?
(xii)
Language barriers – need to have a policy in the local language? Are translations from the
Home to the Host State language binding?
(xiii) Access to local pools – membership required?
(xiv) Dispute Resolution – law and jurisdiction provisions – same across the board?
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Annex 2: In Depth Analysis and Insurance Scenarios
Study 1: Underwriting Excess / Residual / Contingent Employers’ Liability international
programmes on a FOS basis
Introduction
Multinational programmes almost invariably involve the issuance of a Master Policy in the territory
where the parent Insured’s head office is domiciled. UK multinational clients will therefore have a
policy issued in the UK to cover the UK operations, while the foreign locations will be covered under
local policies issued in those territories by a local insurance company. The UK Master Policy will
provide Difference in Conditions (DIC) and Difference in Limits (DIL) cover over these policies,
increasing the limit of indemnity and the scope of cover up to the level of protection afforded by the
UK Master Policy. When the foreign Insured’s locations are situated in the EEA, the Master Policy
is able to provide cover on a FOS basis for these locations.
The main underwriting question is: do I, as the underwriter, know exactly how much cover I am
giving under a DIC / DIL clause of the Master Policy in each territory, based on the scope of cover
of the local policy, the exposure of the local Insured and the local legal environment? This includes
the potential for reverse DIC / DIL cover for use in jurisdictions where a local law widens liability
beyond that contained in the ‘Home State’ Master policy. The reverse DIC / DIL provision
essentially imports the wider local cover back to the Master policy.
Apart from the general principle of the DIC / DIL cover, there are some common extensions to the
Master Policy which are expressly designed to extend the scope of cover to some types of foreign
risks which would otherwise be excluded. One of these extensions is the Excess / Residual /
Contingent Employers’ Liability (EL) in respect of Insured companies outside the UK.
The Extension Clause
The Excess / Residual / Contingent EL extension provides cover for bodily injury to overseas
employees. This extension does not apply to employees of the Insured in the UK, which are subject
to compulsory EL insurance in Great Britain and Northern Ireland. The definition of ‘Employee’ and
‘Insured’ plays an important role in this clause. In a multinational programme the foreign
subsidiaries of the parent Insured will fall within the definition of ‘Insured’, and the definition of
‘Employee’ would be drafted to include foreign employees so the liability of the Insured in respect
of bodily injury suffered by the Employees of the foreign subsidiaries would be covered under this
extension.
There are various versions of this clause in the UK market and each one has its implications. It is
however unclear whether these discrepancies arise from a genuine intention to grant different
levels of cover or if they stem from inaccurate drafting or lack of clarity about the operation of foreign
insurance markets and social security systems.
Cover would apply to employees which are insured or normally insured under a local EL, workers’
compensation or public liability (PL) policy, in excess of whichever limit is the highest among an
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amount specified under the residual EL clause in the Master Policy itself, the limit of indemnity
provided by such local policy or the minimum limit of indemnity required by law, if applicable. First
of all, this clause poses a challenge in respect of EL exposure in the EEA, as it normally puts all
local EL exposures on the same level in terms of scope of cover and attachment point and it grants
cover under a wording which is in fact a PL wording and not an EL wording issued in line with the
local practice in each foreign legal environment.
Even more challenging is the cover given by some of these EL clauses, providing cover for bodily
injury claims arising from the exercise of subrogation rights against the Insured by any State social
security or similar scheme. This cover is given as an alternative, and potentially in addition, to that
given above in excess of local existing EL cover. However, this cover is given without any provision
for a minimum attachment point. In Italy for example, where most EL (Responsabilita’ Civile Operai)
claims arise from a subrogation from the Social Security system (INAIL), this clause potentially
provides a vast amount of cover from the ground up (though a per-victim sub-limit can be provided).
The same happens in several other EEA countries (for example France and Austria) which have a
social security system which will indemnify the employee for some heads of damage and then
subrogate against the employer. In most EEA countries such risk is covered either by the PL policy
(e.g. Germany, France, with Faute Inexcusable cover, and Austria). For that portion of the claim
there would then be cover from the ground-up under a UK Master Policy with such provision. This
is of course a very difficult risk to underwrite and possibly the underwriter does not always
appreciate the extent of cover given. Local legislation and labour legislation may differ widely
among EEA countries. The proposal form and underwriting information would normally not convey
information needed to quote for an EL risk, as the submission is aimed at Public and Product
Liability risk. If the underwriter’s intention is to cover these risks, a full EL submission or proposal
form should be required and the underwriters should have detailed knowledge of the way the local
social security system operates, especially in respect of the type and amount of subrogated bodily
injury claims and the likelihood and frequency of the subrogation.
Where the underwriter wishes to avoid such ground-up claims, they could apply a provision stating
that in case of subrogation from the social security system, the policy will respond in excess of a
minimum limit. It is in fact legitimate to expect that claims up to a certain threshold are dealt with
under a local policy, as in fact the extension should be effectively only ‘residual or contingent’; it
should not be the aim of an Excess / Residual / Contingent Employers’ Liability clause under a UK
Master Policy to pick up such claims from the ground up.
Some clauses may have a weakness where they state that the extension is valid when local policies
in respect of employees are maintained in force where the policyholder is obliged to arrange
insurance or security by law. As in most EU Member States such policies are not compulsory, and
the Social Security scheme operates and subrogate in some cases against the Insured employer,
this formulation could expose the Insurer to EL claims from the ground up, depending on the
drafting of the whole clause.
A more restrictive approach would see a contingent / residual EL clause indicating that the Master
Policy operates in excess of any mandatory and/or existing coverage provided by a specific EL
insurance. This formulation restricts cover to cases where either there is compulsory EL in place
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or where there is already a local EL policy in place. It must be noted that EL in the EEA is
compulsory only in the Czech Republic and Cyprus (possibly because of its historical connections
with the British Empire, though curiously EL is not compulsory in Gibraltar, a British Overseas
Territory). It must however be considered that in the Czech Republic EL is administered by only
two authorised companies, Ceska Pojistovna and Kooperativa, but it is done on behalf of the
Ministry of Finance which bears all underwriting losses. Such an insurance structure may challenge
the operation of the contingent residual EL clause, as it may be seen as a Social Security cover in
disguise and trigger other provisions of the clause.
The above formulation is more prudent than with other clauses because it operates only in excess
of a specific EL policy and not a third party liability policy and does not cover subrogation from
social security, unless the amount of such subrogation has eroded the local EL limit and so the
excess cover under the Master Policy takes effect. What needs to be considered carefully by the
underwriter is the limit of any local EL policy, to avoid policies for symbolic limits being purchased
locally by the Insured with the intention to exploit cover under the Master Policy at an almost primary
level, which was not the original intention of the underwriter of the Master Policy when drafting the
clause. In such cases, introducing a minimum attachment point could be a reasonable solution,
although not all such clauses provide for that.
Under these contingent / residual EL extensions, it is also important to state whether occupational
diseases are covered or not. In cases where they are and the policy trigger is on a losses occurring
basis, the underwriter is assuming a very high risk, which should be subject to a thorough
underwriting and pricing assessment. Alternatively, the trigger of the cover granted by the extension
may need to be amended to limit the long-tail exposure.
It is important to make clear that the policy, which is a PL policy after all, will not operate on a DIC
basis over local EL / PL or WCA policies. To this end, some clauses expressly provide for the cover
of the Residual or Contingent XS EL to be on a ‘follow-form’ basis of the underlying policy. While it
may not always be easy to have a copy of the local policy and the interpretation may be challenging,
especially if the local policy is written in a not widely spoken local language, it is still better than
applying a UK PL wording on a DIC basis over an unknown policy. It is also important to make sure
no offshore EL risk is picked up by this extension.
Conclusions and Recommendation
The prudent approach is to collect underwriting information about the EL risk in every EEA
country, local requirements of cover and legal and insurance practice in respect of EL insurance
as well as a copy of the underlying policy. The policy should require such local policies to be
kept in force. Cover basis should be ‘follow-form’ the primary, not covering any deductible,
paying only after payment of the primary and excluding UK and offshore risk. The underwriter
must ensure the Master Policy has all other necessary exclusions, such as occupational
diseases, EMF, and asbestos, if it is not clear they are present in local policies which the Master
Policy grants cover in a ‘follow-form’ fashion.
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Study 2: Excess owned motor liability under FOS master liability insurance policy
Introduction
Excess motor liability insurance is often given as an extension of cover under a Public Liability
Master Policy. When a local non-UK Insured is based in another EEA State and its vehicles are
registered in that country, the cover granted under the Master Policy will be on a FOS basis.
The Clause
Many clauses currently used in the UK market provide cover in respect of liability arising out of the
ownership and use (though this is likely to be amended as a result of the ECJ decision in Vnuk),
either on a world-wide basis or with some geographical restrictions to EU (or EEA), of vehicles
owned by the Insured and its subsidiaries abroad in excess of the limit of indemnity of a local motor
policy, and applies to both third party property damage and bodily injury. The policy operates in
excess of either the local statutory limits, the current primary limits or a specified limit under the
policy, whichever is the greatest.
The following are typical exclusions:
1)
2)
3)
4)
5)
Deductibles or excesses under local motor policies;
Where the vehicle is used by an employee or director without the permission of the Insured;
Damage to the vehicles themselves and the contents of such vehicles;
Legal liability arising out of transportation of dangerous goods;
No-fault uninsured motorists or underinsured motorists or Personal Injury Protection Statute in
U.S.
Exclusions 1 and 2 are the most common. Exclusions 3 and 4 are not always present and exclusion
5 is rare and not relevant to FOS business as it applies to U.S. and not to EEA countries. However,
the latter may bring the attention of the underwriter to similar pools in force in EEA Member States.
Other provisions contained in some Motor XS liability clauses are the following:
a)
b)
c)
Cover is on a ‘follow-form’ basis of the local motor policy. The rationale behind this approach
would be to avoid any dispute between the scope of cover of the Master Policy, which is a
public liability policy, and the local policy which is a motor liability policy, with potential
differences in the policy wording.
The local motor liability policy must have paid or have been held liable to pay the full amount
of the indemnity.
The insurance granted under the extension shall not be interpreted as being provided to satisfy
the legal requirements in respect of compulsory motor liability insurance in any jurisdiction.
Motor liability insurance is subject in all EEA Member States to stringent regulation. This generally
includes the following;
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-
Authorisation to underwrite Motor Liability on a FOS Basis;
Appointment of a local claims representative;
Membership of any local pool or fund, e.g. for the protection of victims of uninsured or untraced
drivers;
Specific claims handling regulations;
Duty to display a certificate of insurance;
Additional levies;
Obligation to provide insurance cover;
Membership of the local Bureau;
Submitting the policy forms to the supervisory authority;
Knock-for-knock agreements (exceptions are accepted for FOS companies);
Direct action against the Insurer.
An Insurer operating to provide cover in another EEA State must take care to be compliant with all
the above requirements, where applicable. It is unlikely that an Insurer which does not normally
transact motor business on a FOS basis in a specific EEA Member State would go through the
costly and time consuming processes involved just to include an ancillary cover under their Master
Policy. Nonetheless, as we will see, this fact does not exempt him from such duty. It has also
become the position of at least one Supervisory Authority (IVASS in Italy) not to grant FOS licences
for all classes of business on a ‘just-in-case’ basis. Authorisation would therefore be granted only
upon presentation of a detailed business plan showing an intention to actively write that specific
class on business in a specific territory.
Additionally, unless the cover was provided as part of a floating/contingent cover, a separate
premium would need to be allocated to the motor liability portion of the risk and the relevant tax
paid through the tax representative. This point may be even more important in EEA Member States
where the amount of IPT on Motor Liability insurance (Class 10) is higher than that on General
Liability Insurance premiums (Class 13).
The key point is to establish whether, once another policy has already been issued to satisfy the
requirements of the local legislation, any other policy would be deemed, or not, to be subject to the
regulation of compulsory motor insurance. The limit of indemnity to be purchased by law is indicated
as a minimum amount under the EU Regulations, which implies that a policy with a higher amount
would still be subject to the law in respect of compulsory motor insurance. It would surely be seen
as a way to circumvent the provision to protect the victims and avoid contributing to the various
funds for the victims of untraced or uninsured drivers or contributions to the national health system
if Insurers were allowed to issue policies with just the minimum limit of indemnity and then issue a
separate policy to increase the limit. Motor liability is a compulsory class in every EEA country and
it has special requirements that need to be satisfied irrespective of the limit of indemnity. Not
showing a list of number plates in the policy seems less of an issue from the compliance point of
view, although it is an important underwriting point to know the motor fleet of a major Insured which
benefits from an XS motor policy.
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Conclusion
It seems therefore that motor XS liability must be written following the requirements of motor liability
on a FOS basis and that the Insurer granting such cover must be licensed in every EEA State
where it provides cover. It would also be interesting to see the position of the local regulators or of
the Courts in relation to the clause which states that the XS motor liability clause shall not be
interpreted as being provided to satisfy the legal requirements in respect of compulsory motor
liability insurance in any jurisdiction. Considering that motor liability is compulsory in every EEA
State and only minimum limits are prescribed, such provision may prevent the clause from granting
any cover.
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CASE STUDY
The following scenario is designed to illustrate the practical implications of drafting a multi-national
liability policy on a FOS basis. It assesses, in particular, the sorts of issues that may arise in drafting
a combined cover, in this case GL and motor contracts that fit with expectations of a multi-national
Insured and the underwriting, administrative, legal and compliance considerations that the Insurer
needs to consider when issuing a Master Policy dovetailing with multiple local policies. All stated
limits are correct at the time of writing and are obviously subject to future change.
__________
Facts
World Wood plc is a £1.5bn turnover Sheffield based wooden tiles flooring group, with several
subsidiary companies in Europe. World Wood insures its public and products liability risk under a
multinational programme with a Master Policy issued in the UK by Adventurous Insurance Group,
a UK based international insurance company with a vast network of subsidiaries in Europe. Local
policies are issued by Adventurous’ local subsidiaries in Europe. The Master Policy carries a limit
of £100mn, the local policies carry limits of €1mn. World Wood subsidiaries have several company
vans and cars in each territory used to deliver the products and carry the tools necessary for laying
the flooring at the clients’ premises. They also have cars to visit customers to provide estimates,
for sales people and senior management.
The risk manager of World Wood likes the idea of having a Master Policy which includes an XS
motor liability cover to top up the locally purchased compulsory motor liability policy limits. The
underwriter of Adventurous in the UK is happy and relaxed about providing this policy extension.
The clause has been used for decades, it has never caused a problem (as far he knows) and it is
included at no additional premium. The underwriter has no information about the number and type
of vehicles insured, and no loss history has been required. He does not have a copy of the local
motor liability policies, nor does he know the limits of liability purchased locally. He is not overly
concerned about his lack of knowledge; after all, a local compulsory motor liability policy has to be
purchased, his policy will just provide ‘sleep easy’ cover after the compulsory requirements have
been satisfied. There is no need to worry about risk exposure or any local regulation; it is a just a
minor extension of the Difference in Limits (DIL) element of the Master Policy cover. The taxes
have already been declared under the Difference in Conditions (DIC) / DIL portion of the premium
allocated to each applicable EU country. Meanwhile, across the Channel, events are unfolding …
FRANCE
World Wood France has purchased a motor fleet policy for their vehicles. According to French law,
third party bodily injury is covered for an unlimited amount, while property damage has to be insured
for the legal minimum limit established by the EU of €1.22mn per claim. Motor third party property
damage liability used to be covered for unlimited amounts by French insurers, but following the
high-profile cases of the fire in the Mont Blanc Tunnel and the UK Selby rail accident caused by a
motor vehicle, Reinsurers have decided to limit the available capacity to €100mn.
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The XS motor liability clause is, apparently, irrelevant in respect of bodily injury as there is unlimited
cover for bodily injury in France. However, there could be a potential concern for the underwriter
as direct action against the insurer is possible in France (where a third party can bring an action
directly against the Insurer for damage caused by the Insured). The UK underwriter should be
careful not to expose his company to potential unlimited liability for bodily injury if the Master Policy
is taken in front of a French Court. Apart from clarifying attachment points and that it should not be
considered as issued to satisfy the requirement for statutory cover, cover should be of a ‘contingent’
nature only; excluding vehicles owned or in the care, custody and control of the Insured and
covering the liability of the Insured as principal only.
Regarding property damage, as the motor liability property damage limit is stated as a minimum
limit, any cover in excess of such limit would still be seen as a statutory cover, subject to local
legislative requirements and authorisation to write motor liability business in France.
BELGIUM
The risk manager of World Wood head office is relaxed about the XS motor cover over the Belgian
subsidiary’s motor fleet. Historically, statutory third party motor insurance cover in Belgium has
been unlimited, but in 2007 a limited of €100mn was introduced as the minimum insurance limit in
respect of property damage. The current motor policies purchased by Wood World carry this limit
of €100mn for property damage, while bodily injury is unlimited. Although remote, there is potential
exposure for third party property damage under the Master Policy in case of a catastrophic
accident. A road accident involving a van owned by Wood World Belgium causing bodily injury to
the driver of a foreign vehicle ended up in Court. The judge asked to see all policies covering the
motor risk. A copy of the Master Policy was provided along with the local motor policy. The judge
questioned the XS owned motor liability clause under the Master Policy on the following grounds:
-
The UK Insurer did not join the ‘Fonds commun de garantie automobile’. This is an association
established by law with the role, among others, of a motor insurance guarantee fund and
information centre as defined by Directive 2009/103/EC;
-
The Insurer did not join the Belgian Motor Insurance Bureau. This association was set up to
offer compensation for damages caused by foreign vehicles;
-
The UK Insurer does not have a tax representative in Belgium;
-
The Insurer must have an approval number from the National Belgian Bank.
HUNGARY
The Hungarian subsidiary has a few cars and vans all insured as per local statutory requirements,
with the minimum limits of:
- HUF 500mn (€1.6mn) per event for property damage;
- HUF 1.6bn (€5.145mn) per event for personal injury.
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The central UK risk manager is slightly concerned about having limits which are the absolute
minimum required. He would like the local subsidiary to have a higher limit of cover. He has been
told by the local risk manager that any excess layer issued in Hungary as a motor third party liability
policy to cover the same vehicles is considered to be a void insurance contract. Higher motor third
party liability limits, above the statutory requirements must be provided under one single policy with
a higher limit, not under a second excess motor liability policy.
Generally, from a purely legal perspective, an XS liability clause is an acceptable solution to top up
a local motor liability policy. The XS motor cover under the Master Policy does not need to be in
line with the requirements of the local law, because primary local policies up to the statutory limits
are in force. Interestingly, in Hungary, a GL coverage (not a motor third party liability) in excess of
the local motor third party liability policy is a valid contract, while an actual XS motor liability policy
would be a void contract. The UK risk manager is therefore very pleased to have the XS motor
liability clause under the UK Master Policy to top up the local limits. The underwriter is equally
happy to have provided such an apparently useful solution to his client.
However, what the underwriter should check with his legal and compliance department is whether
his company, a UK based Insurer authorised by the FCA, is authorised in Hungary to provide such
cover. In fact, in order to offer this XS motor cover under a GL policy, Adventurous Insurance
Company must be registered with the Hungarian National Supervisory authority for the Lines of
Business No. 10. (vehicle liability not restricted to motor third party liability) and 13. (general
liability). This would also involve some administrative obligations such as having a local tax
representative, tax payment and administration.
GERMANY
In Germany minimum limits are prescribed for statutory motor third party liability:
€7.5mn for bodily injury;
€1.12mn for property damage
The market standard policy limits are much higher, between €50mn and €100mn. If the local
German subsidiary of Wood World has bought such limit, any XS motor liability clause under the
Master Policy carries a purely theoretical exposure. However, the UK Insurer (should the policy
end up in front of the local insurance authorities) would be considered in breach of the FOS rules
if it was not licensed to write motor business in Germany. The XS motor liability clause would be
considered as a motor liability cover. As German law requires a statutory policy with only a minimum
limit of indemnity, any policy with any limit, whether primary or excess, covering a motor liability
risk in line with statutory requirements would be considered to be a statutory cover. According to
the German law on motor liability, only an Insurer authorised to write motor liability in Germany can
insure motor liability risks. Adventurous Insurance Company would therefore need to be authorised
in Germany to write motor liability and have an appointed claims representative to provide cover
under the XS motor liability clause. Membership of the German fund for the compensation of
uninsured or untraced driver is voluntary, so there is no formal obligation for Adventurous to join.
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ITALY
The Italian subsidiary has purchased local motor policies for the minimum statutory limit of:
€6mn per event
€5mn for bodily injury
€1mn for property damage
Any type of policy providing cover for third party damages caused by vehicles on the public road
would be considered to be subject to the provision for compulsory motor third party liability
insurance (though this is likely to be amended as a result of the ECJ decision in Vnuk). The law
requires a minimum limit to be purchased, which means that any limit of cover provided is
considered as statutory motor third party liability. Therefore, any XS motor cover must be provided
under a motor third party liability policy issued by an authorised Insurer. Legislation is expected in
Italy to prevent the layering of motor liability insurance even when provided under an approved
Class 13 policy by an Insurer satisfying all other legal requirement. The aim is to have one single
motor policy, to make the cover more easily traceable by victims.
SPAIN
In Spain, the statutory limits for motor third party liability are:
€70mn for bodily injury
€15mn for property damage
(there are also Bail Bond requirements that need to be considered)
Any excess cover over such statutory limits must still be purchased under a motor policy. An XS
motor liability cover provided by an Insurer, either in Spain or in any EEA Country, not authorised
to write motor third party liability (Class 10) would be in breach of the local legislation. The only
exception where liability arising out of road accidents can be covered under a GL policy is for so
called ‘subsidiary’ (original Spanish ‘cobertura subsidiaria’), or residual / contingent liability cover.
It applies only to the occasional use of vehicles by the Insured provided that they are neither owned,
nor under the care, custody or control of the Insured. The driver, passengers and any employees
of the Insured are not considered as third parties. In any case, this cover operates in excess of the
statutory motor third party liability policy and of any voluntary additional motor third party liability
policy.
GREECE
In Greece, the Insurer providing cover under a XS motor liability clause must be authorised to write
motor third party liability insurance. Under a GL policy, only risks not covered under the statutory
motor third party liability can be included (e.g. driver's bodily injury, liability of goods being
transported).
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AUSTRIA
Austria has implemented the EU regulations on motor third party liability insurance establishing a
minimum limit of indemnity of €5.8mn for bodily injury and €1.2mn for property damage. Irrespective
of the limit purchased above the statutory limit, the policy granting such cover would be considered
a statutory cover for motor third party liability and the Insurer should be authorised to write motor
third party liability in Austria. There could be a potential exemption from authorisation to write motor
third party liability according to Austrian law, based on the XS motor liability clause under a GL
policy. An Insurer may in fact write a cover for which it has no licence if the cover is included in
another contract covering the main risk, for which the Insurer is authorised (e.g. GL), and the other
risk, for which the Insurer is not authorised (e.g. motor third party liability), and the cover is of
secondary (ancillary) importance to the main risk. It is highly questionable that an express cover in
respect of statutory motor third party liability could be interpreted to fall in such a category.
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Annex 3
The European Union, European Economic Area, European Free Trade Association and
Freedom of Services in Micro States
Monaco
Monaco is not part of the EU or the EEA and therefore the FOS rules do not automatically apply.
Insurance law and practice in Monaco is very similar to the one of neighbouring France. There are
a few differences - the Decennial Liability and Dommage Ouvrage cover is not compulsory in
Monaco and there is no social security insurance to cover accidents in the workplace and the
employer must take out a policy with an authorised Insurer through a local agent or Broker. The
levels of Insurance Premium Taxes are different between France and Monaco. Only insurance
companies authorised by the Monegasque authorities can conduct business in the Principality. To
transact business in Monaco, a foreign Insurer shall first be authorised to operate in France and
then file an application with the Monegasque authorities. Authorisations to write business with a
local establishment are known to have been agreed, but not to operate on a FOS basis. As a
general rule, the approval by non-EEA authorities is not automatic as within the EEA, and could
therefore be denied due to specific local provisions. Monaco registered vehicles are treated as
French registered vehicles.
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Andorra
Andorra is not a member of the EU or EEA, therefore the FOS rules do not automatically apply.
Insurance companies and intermediaries must be licensed locally to operate in Andorra. A foreign
Insurer wishing to write business in Andorra must set up a local branch.
Liechtenstein
Liechtenstein is not an EU Member State but is a member of the EEA. The FOS rules therefore
apply to risks located in Liechtenstein. Liechtenstein registered vehicles are treated as Swiss
registered vehicles.
Vatican State
The Vatican City State is neither an EU nor an EEA Member. To write insurance business in the
Vatican an Insurer must first approach its Home State regulator which in turn will contact the Host
State regulator. As a general rule, the approval by non-EEA authorities is not automatic as it is
within the EEA, and could therefore be denied due to specific local provisions. Insurance Premium
Tax is set at nil (at present). From anecdotal evidence, risks in the Vatican are usually written by
Italian insurers. There do not seem to be any Vatican-based Insurer or any local subsidiary of
foreign Insurers active within the Vatican. In respect of compulsory motor liability, the UCI (the
Italian Motor Insurance Bureau) also covers Vatican registered vehicles which are treated as Italian
registered vehicles, both when they circulate in the Vatican, in Italy or in other States.
Republic of San Marino
The Republic of San Marino is not a member of the EU or the EEA. Risks can be written either
locally via a San Marino domiciled Company or a non-domiciled company authorised to transact
insurance business in San Marino via an authorised local agent or Broker. As a general rule, the
approval by non-EEA authorities is not automatic as within the EEA, and could therefore be denied
due to specific local provisions.
In 2013, the authorities of San Marino introduced Insurance Premium Tax on non-life premiums.
The Insurer is responsible for collecting the IPT and paying it to the tax authorities. A tax
representative must be appointed by each Insurer authorised to transact business via a local agent
or Broker in San Marino.
The list of the foreign Insurers authorised to transact insurance business in San Marino (through a
local intermediary) is published on the website of the Central Bank of San Marino (Banca Centrale
della Repubblica di San Marino, HERE.
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British Crown Dependencies and Overseas Territories
Channel Islands and the Isle of Man
The EU Single Market Directives do not apply in these territories, even though they are Crown
dependencies. This means that firms based in these territories are treated in the same way as firms
based in a non-EEA State and do not have passporting rights under the FSMA Single Market
Directives.
Similarly, UK firms do not have passporting rights in relation to the Channel Islands and the Isle of
Man. As such, UK firms will have to apply direct to the relevant financial regulators in each territory
for permission to conduct business there. The FCA has no formal involvement in this process
(although the FCA would expect firms to keep supervisors here informed of their activities).40
Gibraltar
Gibraltar enjoys a separate status to the Channel Islands and Isle of Man and the Single Market
Directives apply to it in full. However, passporting rights apply only between EEA States and so
passporting rights between Gibraltar and the UK do not apply. Instead the UK and Gibraltar have
agreed special arrangements under the Gibraltar Order. Firms have to submit a notice of intention
to passport and the FCA, in turn, duly notify the Gibraltar regulators.
With thanks to:
Annalisa Pizziga
Group EU and International Affairs
Assicurazioni Generali S.p.A.
Trieste, Italy
40
Maria Teresa Tombini
Group EU and International Affairs
Assicurazioni Generali S.p.A.
Trieste, Italy
The Falkland Islands may be a slight anomaly in this case as it is thought that there may be areas where UK
authorised Insurers can operate without specific authorisation from that territory.
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Annex 4: EEA Liability Pools
In most EEA Member States there are insurance or reinsurance pools supporting the underwriting
of natural catastrophe perils, nuclear and terrorism risks as well as some type of motor liability risks.
These types of risks fall outside the scope of this paper, which focuses on GL policies.
We will list and very briefly describe the EEA Pools covering the following types of risk:



Workers’ Compensation
Professional liability of insurance Brokers/intermediaries
Pollution/Environmental

Medical/Pharmaceutical
Workers’ Compensation
a)
b)
c)
Belgium: cover for hard-to-place Workers’ Compensation risks
Finland:
o Cover for employees not otherwise covered by workers' compensation insurance
o Compulsory Employees' group life and statutory workers' compensation insurance Pool
Norway: a loss-sharing pool for those workers' compensation risks for which cover cannot be
obtained in the companies’ market.
Professional liability of insurance Brokers/intermediaries
a)
b)
c)
d)
Belgium: The Belgian professional liability pool - Cobelias (Consortium Belge pour
l'Assurance de la Responsabilite Professionnelle des Intermediaires d'Assurances) for
insurance intermediaries.
Cyprus: The Coinsurance Group for Intermediaries' Professional Indemnity Insurance
(OSEDA) offers statutory professional indemnity insurance to insurance agents, excluding
Brokers.
Slovenia: an insurance Brokers' professional indemnity pool which provides cover up to the
minimum limits required by the EU directive.
Spain: Brokers' Professional Indemnity Pool (Agrupacion del Convenio RC Corredores), for
Brokers registered in Spain.
Pollution/Environmental Pools
a)
Finland: The Environmental Damage Insurance Act (81/1998) imposes strict liability for
environmental damage. An insured with operations and processes with a serious risk of
environmental damages must insure against such risk through the Pool named
“Environmental Insurance Centre (Ymparistovakuutuskeskus)”.
b)
France: ASSURPOL is a reinsurance pool for environmental impairment liability policies, for
both sudden and accidental pollution and, under certain circumstances, gradual pollution. It
is not a compulsory pool and it also accepts foreign based risks of French Insureds/parent
companies.
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c)
Spain: Environmental Liability Risks Pool (Pool Espanol de Riesgos Medioambientales PERM), only for insured risks in Spain. Coverage is on a sudden and accidental basis.
d)
Italy: The Italian environmental liability pool (Pool per l'Assicurazione e la Riassicurazione
della Responsabilita Civile da Inquinamento). Gradual risks and known potential accidental
risks are ceded to the Pool, which provides cover for air, water or soil pollution, including first
clean-up costs and cover for environmental impairment liability as per the ELD EU Directive
2004/35/EC.
e)
Netherlands: The Pool gives cover for sudden and accidental pollution (for specific risks such
as oil storage) on a claims made basis, including clean-up costs and legal costs.
Medical / Pharmaceutical Pools
a)
Denmark: Private hospitals, clinics and specialists must insure their liability against
compensation for bodily injury caused to patients through this Pool run by the Patient
Insurance Association (Patientforsikringen).
b)
Germany: The German Pharmaceutical Pool covers the (strict) liability (for a minimum of
Euro 120mn) of manufacturers of pharmaceutical products, separately for domestic supply
and for products supplied abroad (at a reduced premium rate). Cover is granted on a claims
made basis. Only German registered insurers can have access to the pool.
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Annex 5 - A selection of FOS clauses
The examples given below are for information and no comment on their validity or appropriateness
should be taken. Appropriate legal advice should always be sought before placing reliance on any
such change or extension of policy terms.
EXAMPLE 1
European Coverage Endorsement- Freedom of Service Combined Liability Policy
In consideration of the premium paid, it is agreed as follows:
1. In respect of any claim made in xxx, yyy and zzz, the coverage provided by this POLICY as set
out in Page… shall extend to satisfy the minimum legal requirements for the provision and
operation of Combined Liability insurance in the country in which the claim is made; such
provisions to include but not be limited to termination of the POLICY, discovery period(s),
mediation, terrorism, claim handling and notification.
All other terms and conditions of the POLICY remain unchanged.
EXAMPLE 2
FOS Territories
This Policy subject to its terms and conditions provides Difference in Conditions and Difference in
Limits ("DIC/DIL") to the Specific Local Primary Policies issued to the Insured for the Freedom of
Services territories as listed in the Appendix below in accordance with the relevant European
insurance "Freedom of Services" directive(s) and regulations(s).
The premiums and taxes payable in respect of the above territories are expressed in Sterling and
are payable to the Insurers in the country where the Policy has been issued. The premium taxes
and any other charges collected by the Insurers are paid to the tax authorities in the countries
where the Insured is established.
The Insurer disclaims any liability for the payment of tax or duties in relation to this Policy in those
Freedom of Services countries where the Insured is obliged to pay those charges directly to the
authorities. Furthermore, the Insurer disclaim any liability for tax payments due in any European
Union country where the tax authorities do not accept the taxes and duties declared and paid to
them based on the premium allocated by the Insured to the individual countries.
Appendix: [Insert Countries]
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EXAMPLE 3
EUROPEAN UNION
The indemnity provided by this Policy shall apply without the need for a Local Underlying Policy (as
defined in the Difference in Conditions/Difference in Limits Clause) in respect of the Business
carried on by subsidiary companies or branch operations of the Named Insured domiciled in the
EU
Provided that
1. the Named Insured agrees to remit to the Company any tax payable by the Company to the
appropriate government authority in the relevant countries where such tax is due to be paid. In
the event that additional taxes and/or penalties shall become payable by the Company because
a government authority of a country in which the Business is located determines that the
premium applicable to such country has been misdeclared, the Named Insured shall reimburse
to the Company the amount of the additional tax, penalty and interest thereon to the extent that
such misdeclaration is due to a failure on the part of the Named Insured
2. this Section shall not apply to liability imposed on the Named Insured by the civil or commercial
code in any such countries in respect of loss of or damage to property
a. occupied by the Named Insured as a tenant
b. of neighbours and co-tenants caused by fire or explosion spreading from the Named
Insured's premises
c. of tenants or sub-tenants of the Named Insured as a result of construction defects or lack
of maintenance by the Named Insured as landlord
if the Named Insured are indemnified or paid or would but for the existence of this Policy be
indemnified or paid under any fire or property policy or similar policies provided that this exclusion
shall not apply in respect of any liability in a sum or sums beyond the amount paid or indemnified
under such other policy or policies.
3. where the Company is by law or circumstance outside its control prevented from indemnifying
the Named Insured locally all amounts for which the Company accepts liability under this Clause
will be paid in the country in which the Named Insured is domiciled.
EXAMPLE 4
European Union Coverage
The Insurance provided by Section 2 of this Policy shall apply without need for a local underlying
policy in respect of those parts of the Business carried on by
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a) subsidiary companies
b) branch operations
of the Insured domiciled in the following Member countries of the European Union:COUNTRY
Belgium, Bulgaria, France, Germany, Hungary, Ireland, Italy, Netherlands, Poland, Portugal, Spain,
Sweden
EXAMPLE 5
Applicable Extent of Cover
This policy is issued in the United Kingdom under the European Union's Freedom to Provide
Services Directive and provides indemnity on a non-admitted basis to the Insured's operations
domiciled in the following territories:
Austria Belgium Bulgaria Cyprus Czech Republic Denmark Estonia Finland France Germany
Greece Hungary Iceland Ireland Italy Latvia Liechtenstein Lithuania Luxembourg Malta
Netherlands Norway Poland Portugal Romania Slovakia Slovenia Spain and Sweden
Provided that the Insured has declared to the Insurer details of their operations in the abovementioned territories.
In circumstances where a local policy has been issued by a member of the Insurer’s group or by
appointed fronting partners thereof in the countries listed above and forming part of this Programme
the indemnity provided hereunder shall apply only on a Difference in Conditions or a Difference in
Limits basis as defined in Memoranda C: Basis of Cover Clause.
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ANNEX 6
FREEDOM OF SERVICES
(Legal Implications – Introductory Comments)
INTRODUCTION
A significant consideration in the context of underwriting liability insurance cover in the 31 Member
States of the European Economic Area on a FOS basis will be the operation of the law and the
legal procedures in the relevant Member State in which the Insured’s liability arises. Although
English / Welsh law may be the applicable law of the policy, local law is relevant as it will determine
the exposure of the Insured to legal liability towards the third party claimant and the ability of the
Insurer to recover an indemnity for, or contribution towards, the loss from any other party who may
be liable for the wrongful act. The legal procedures are relevant to the extent that they govern the
proceedings brought against the Insured and/or Insurer and any subrogation action against any
third party for indemnity or contribution.
It is outside the scope of this paper to undertake a detailed review of the law and court systems in
each of the 31 jurisdictions. However, the reader will be aware that most countries in continental
Europe adhere to a system of law generically described as ‘civil law’, as opposed to the AngloSaxon concept of “common law”.
The term ‘civil law’ in this context is used to describe a structure derived from Roman law in which
the principal source of law is set out in a code, or series of codes. This concept contrasts with
Anglo-Saxon ‘common law’, which has developed in an apparently ad hoc fashion through judicial
decisions, which acquire precedent authority through the seniority of the deciding court, and
statutes, i.e. Acts of Parliament. Civil law systems found their impetus in the modern era at the
beginning of the 19th century in the French Civil Code (often referred to as the Code Napoléon),
which was exported by its principal protagonist in his European campaigns. The format was
retained by many of the jurisdictions after Napoleon’s demise and was adopted at the birth of
modern European states such as Germany and Italy in the course of that century.
While having the same basic foundation, the codes adopted by the various European states are
not completely identical, as they have retained facets of their existing legal traditions and customs.
This is particularly the case with the Scandinavian countries. On the one hand, francophone and
Latin states, such as Belgium and Luxembourg, Spain and Italy are heavily influenced by the
French code. On the other, central European states have tended to be influenced in their
substantive law by the German form. This trend developed as new states emerged from the breakup of empires after the First World War and more recently on the demise of the Eastern bloc
following the collapse of the Soviet Union, from which eleven states have now been admitted as
Members of the European Union.
So far as the influence of common law is concerned, elements of that concept have been retained,
to varying degrees, in states which, historically, have had closer cultural ties with the United
Kingdom, i.e. Cyprus, Malta and the Republic of Ireland.
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Setting out this brief historical context demonstrates that the implementation of civil law systems in
continental Europe has not produced a ‘one size fits all’ European legal system. The European
Economic Area comprises a single market with a population of more than 400 million and directives
and regulations of the European Commission and the European Parliament, e.g. in relation to
defective products, are aimed at the harmonisation of laws of the Union’s Member States.
Nevertheless, each state retains its own legal and court system with its individual characteristics.
These can be the source of pitfalls for the unwary outsider.
The concept of civil law brings a different foundation to legal liability and a different dynamic to
dispute resolution. That said, the practical end result will more often than not be the same as the
one achieved by the application of common law rules and principles.
SOURCES OF LAW
Codes of Law
Subject to the overarching structure of European directives and regulations, the principal source of
substantive law in a civil law legal system is to be found in the codes. The sophistication and
complexity of modern society has multiplied the number of codes to be found in any given
jurisdiction. These, in turn, are supplemented by statutory measures in various forms in the same
way as acts of Parliament do for English / Welsh law.
The essential concept of rights and obligations, whether of a contractual or extra-contractual (i.e.
tortious) nature will usually be found in the civil code. Other codes, such as a commercial code
(dealing with the law of the business environment), an insurance code (which may often provide
an injured third party with a direct right of action against the wrongdoer’s Insurer), a road traffic
code, etc., provide a framework of rights and obligations in particular situations and relationships.
Frequently, a criminal code may provide for the compensation of a civil right infringed by a criminal
act.
The Role of Case Law
In civil law legal systems, substantive law is set out in the code or other statutory form. Only the
legislature can make law. The judiciary, as a matter of general principle, has no law-making function
and does not create binding precedent. The role of the judges is to interpret and apply the law to
the facts of the particular case. This approach may be perceived from a common law perspective
as fostering uncertainty in terms of the predictability of outcome, if judges are given a free rein.
Although case law is not generally regarded as a source of substantive law in civil law systems, its
function, described as “persuasive”, is intended to generate a cohesive influence to produce a
certain predictability of outcome in practice, without fettering the tribunal in its deliberation.
It should be borne in mind that the first layer of appeal in a civil law system usually hears appeals,
and issues rulings, on issues of fact as well as law – effectively conducting a re-hearing of the case.
The principal function of a supreme court in a civil law system is to ensure a consistent application
of the law. Instead of making a final determination, the court operates as a court of cassation, either
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endorsing or quashing the decision of the lower court. In the latter situation, it remits the case to
the original court for determination with directions on the application of the law. It can also be asked
to give an advisory ruling on a point of law. Thus, while not having full binding authority, case law
in civil law systems will normally have a persuasive influence in assisting judges in their
determinations. The inferior courts, in taking guidance from superior ones, will generally defer to
the precedent decision.
Looking broadly across Europe, Cyprus and the Irish Republic, which may be regarded as common
law jurisdictions, apply the principle of binding precedent in the absence of law made by the
legislature. Malta, whose legal history has been influenced by common law, does not apply this
principle fully, though judges do not as a general rule depart from well settled principles established
by case law of superior courts without good reason. Among the civil law systems, the Scandinavian
countries, Denmark, Finland, Norway, and Sweden attribute a greater importance to precedent
decisions as a source of law, without quite conferring the status which the principle of precedent
authority has in common law jurisdictions.
Looking beyond this broad, introductory analysis of the different legal systems within the EEA, it is
critical to understand the law and legal procedures of Member States in which an Insurer intends
to transact insurance business on a FOS basis. The following is a list of issues which are applied
and interpreted differently in many EEA States and, consequently, are important touchstones for
underwriters to consider in line with their expected potential exposures when writing FOS risks.

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The concept of third party liability;
Causation;
Assessment of damage;
The application of interest and costs;
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Limitation periods;
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The rules relation to evidence (including witnesses, experts);
The required burden and standard of proof;
The principle of contradiction – a concept fundamental to the implementation of the judicial
process in civil law jurisdictions, where the court can exert more control over the gathering
of the evidence;
Disclosure of documents;
Class actions;
Bringing civil claims in criminal proceedings – joining an existing criminal prosecution;
Subrogation;
Direct action against Insurers;

Alternative Dispute Resolution.
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International Underwriting Association
1 Minster Court
Mincing Lane
London
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020 7617 4444
[email protected]
www.iua.co.uk
@IUAofLondon
The International Underwriting Association of London (IUA) is the focal representative and market
organisation for non-Lloyd’s international and wholesale insurance and reinsurance companies
operating in the London Market. It exists to promote and enhance the business environment for
international insurance and reinsurance companies operating in or through London.
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