Applicable law under Rome I: insurance contracts
This guide was last updated on 14th August 2008.
The Rome I regulation standardises rules that govern the law
applying to cross-border contracts in the EU. In
particular, it defines the extent to which the parties
are free to choose the applicable law. The new regime
will apply from 17th December 2009.
The UK Government opted out of Rome I in 2006, but
following a consultation exercise earlier this year,
the Ministry of Justice (MoJ) announced on 28th July 2008 that
the UK is applying to opt back in (see UK signs up to Rome I rules on cross-border contract
disputes, OUT-LAW News, 11/08/08).
Rome I includes specific provisions for insurance
contracts which consolidate current choice of law rules.
Reinsurance, however, remains outside its scope.
Current insurance rules
The choice of law rules for insurance are notoriously complex.
Which rules apply vary according to the type of insurance and where
the risk is situated.
For insurance risks situated in an EEA state (any EU state,
Iceland, Liechtenstein or Norway), the Consolidated Life Insurance
Directive or the Second Non-Life Insurance Directive apply, both of
which are implemented in the UK by the Financial Services and
Markets Act (Law Applicable to Contracts of Insurance) Regulations
2001.
Where the risk is outside the EEA, applicable law is dealt with
under the Rome Convention 1980. Reinsurance polices, whether the
risk is inside or outside the EEA, fall within the Rome
Convention.
Broadly speaking, the Rome Convention preserves the parties'
freedom to choose the applicable law, although there are provisions
to ensure consumers do not lose the protection of mandatory rules
in the country of their habitual residence.
The Directives are more complicated. The Non-Life Directive
distinguishes between "large risks", where freedom of choice is
preserved, and other risks, where that freedom is limited by
convoluted rules depending on the place of the policyholder's
habitual residence / central administration, where the risk is
situated and whether the law of either of those EEA states permits
a wider choice.
Large risks include transport (aircraft, ships etc) and (where
the policyholder carries on a business over a certain size) motor
insurance and motor liability, damage to property and general
liability insurance.
In life insurance, the parties have a choice only if such choice
is allowed by the EEA state of the "commitment" - the state in
which the policyholder habitually resides or (if not an individual)
the state in which it has an establishment to which the policy
relates.
Insurance under Rome I
The provisions for insurance contracts under Rome I appear
more closely related to the Directives than the relatively simple
regime of the Rome Convention.
The regulation applies to all insurance covering large
risks (whether or not situated in an EU member state) and to all
other insurance contracts where the risk is in an EU member state.
But it does not apply to reinsurance.
The parties to an insurance of a large risk retain freedom to
choose the applicable law. Parties to other insurance contracts
have a limited choice based on where the risk is situated or the
policyholder's habitual residence.
In the case of commercial or professional insurance covering
risks situated on two or more member states, the parties can choose
the law of any of them, or the law of the policyholder's habitual
residence.
In all the above cases, member states can grant greater freedom
of choice.
For life insurance, however, the applicable law has to be
the law of the member state of which the policyholder is a
national.
For insurance contracts covering risks limited to events
occurring in one member state (other than the member state where
the risk is situated) the choice is restricted to the law of
that member state.
Additional rules apply for compulsory insurance. The
contract must comply with the requirements of the member state
imposing the obligation to insure. In any conflict between the law
of that state and the law where the risk is situated, the law of
the member state imposing the obligation prevails.
Impact
At first sight, the new regime does not appear much less
complicated than the current patchwork of rules. Reinsurance is
not covered so remains under the Rome Convention.
For large insurance risks, however, the new rules apply whether
or not the risk is situated in the EU. This addresses the
problem posed by large risks that are partly inside and partly
outside EU territory.
Other than this, the regulation is mainly an exercise in
consolidation, although there is an advantage in having the rules
all in one place. The MoJ believes this is a "satisfactory
outcome".
But the new regime is likely to bring about transitional
costs for insurers. And without any cost benefit analysis or any
real pressure for change, this may seem quite a high price to pay
for a tidying-up operation.
Next steps
In Europe, the final text of the regulation was published
in the Official Journal on 4th July 2008 and will apply to
contracts concluded after 17th December 2009.
The UK is currently seeking the Commission's consent to opt back
into the regulation so that it can be implemented in the UK at the
same time as in other member states.
Contact: Fiona Heyes (fiona.heyes@pinsentmasons.com
/ 020 7667 0243)
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