*by Peter Schramm, actuary and Johannes Fiala, lawyer
The magazine Finanztest (issue 09/2005, p.38 f.) reports that with British policies there is ‘no protection against bankruptcy’ because the money of German customers is ‘not protected in the event of insolvency’. Respected lawyers in the service of British insurers are also damaging sales by making the incorrect blanket statement ‘no deposit protection’. Here are the details: Already under the Policy Protection Act 1975, policyholders worldwide enjoyed protection against the loss of their claims as customers of British insurers. Following the Scher & Ackman ./. PPB case of 1993 (1993, 3 A II E.R. 384; A II E.R. 840), the Policy Protection Act 1997 restricted the scope of insured risks. The aforementioned decision was based on a case in which American lawyers, auditors and doctors had successfully sued for compensation before the Policy Protection Board (PPB). The direct applicability to German insureds also results from the reference to the Insurace Companies Act 1982, cf. Section 1, Schedule 1 and 2. In 2000, the Financial Services and Markets Act (FSMA) came into force: on its basis, the Policy Protection Act was modified by the Financial Services Compensation Scheme (FSCS) with effect from 1 December 2001. If you want to make sure, the FSCS refers you to the regulation in the FSA Handbook according to “Section 5.4, protected contracts of insurance”: There you will find a reference to policies “issued ? through an establishment in ? United Kingdom ? other EEA State …”. In the same direction goes a confirmation of the FSCS in which it says: ?…I can confirm that if a policy is issued by a UK insurer through an establishment in the UK, a policyholder in an EEA state (such as Germany) will be protected if the risk/commitment is located in Germany. However, if the policy is issued by a UK insurer through an establishment in Germany, it is only protected if the risk/commitment is in the UK. ?? The British side points out a risk: If the policy is not issued in England and the risk (e.g. the insured person) is not located in England, the protection will not apply. does not apply. In essence, a German investor will have to rely on the fact that the issuing of “British policies” with the name of the British insurer is also attributable to the British company, even if the issuing was carried out by a branch office on the mainland. This is because a branch office is not independent, i.e. it is not a separate company with separate assets, it is not a different legal entity, but it has the same management and the same bodies as the British company itself.
This system of deposit protection has already worked in numerous cases, i.e. it has been tried and tested in practice. In the vast majority of cases, the insurance business was properly handled after the suspension of payments (cf. among others Insurance Security Watch, 2000, issue no. 12 of 28.02.2000). At sales training courses, the FSA is falsely praised as the supervisory authority and presented as the guarantor of the insurer’s security. It is true that the liberal attitude to business makes numerous collapses of insurers possible ? in contrast, distributors are much more strictly supervised. In case of doubt, however, an investor will have to sue, as in the case of ?Scher & Ackman ./. PPB? Which the magazine financial test conceals however, is the double requirement basis and the connected national adhesion: a) The legal regulation since 2001 can be interpreted quite investor-friendly, so that also Policen in the hands of German investors can be deposit-secured. Prior to the compensation case, a liquidator will be appointed for an insolvent company ? as is usually the case. The crux of the matter here is that in practice the deposit guarantee authority will initially refer to the liquidator, according to the motto ‘why don’t you come to an agreement with the liquidator, because you don’t know whether we will later establish a compensation case and an obligation to pay? In practice, the FSA has so far refused, for example in the case of Equitable Life, to comment at all in such winding-up proceedings outside insolvency on whether certain contracts are protected in case of doubt. And in recommendations to clients on voluntary settlements to avoid insolvency, such as the waiver or voluntary reduction of guarantees, the liquidators, accountants and actuaries have also pointed to the uncertainties of deposit protection which make a voluntary settlement appear more favourable.
An investor-friendly interpretation of the British legal situation since 2001 is supported by an EU directive of 19 March 2001 on deposit protection (so-called indirect effect prior to the transposition of an EU directive): even before the transposition deadline, directives have legal effects to the extent that the national legal norms are to be interpreted by way of an “interpretation in conformity with European law”, as far as possible taking into account the requirements of the directive, in order to avoid collisions between European law requirements and national law (so-called conflict-of-law rules). b) In Directive 2001/17/EC of 19 March 2001, the European Union required the Member States to ensure creditor protection throughout Europe in the event of the reorganisation and liquidation of insurance undertakings in the EU: The deadline for national implementation expired on 20.04.2003. Since the expiry of a further two years (i.e. since 20.04.2005), the consumer (in the absence of transposition into national law) has been able to invoke the Directive directly if he suffers damage.
In Germany, for example, state liability has been ruled out for late transposition of the directive on the protection of package tourists (lack of security note). The Commission of the European Communities is already suing the United Kingdom for delay in transposition (Case C164/04), as the usual transposition period of two years has already expired. According to European law, failure to transpose regularly results in a direct claim for damages for the consumer. Prior to transposition, the EU Directive may have direct effect: However, it does not create any entitlements or obligations that act directly for or against the individual in the relationship between private parties. Exceptionally, however, citizens may nevertheless directly invoke a directive, namely if a member state has not transposed the directive into national law in due time or has not done so properly and the directive contains provisions that are formulated in such concrete terms that the individual’s rights can be clearly derived from them. In the absence of such concretisation, if an individual suffers detriment after the deadline for transposition as a result of the lack of transposition or defective transposition, he may be able to claim damages from the State by way of State liability. However, for reasons of legal certainty, directives that have not been transposed cannot have direct effect between private parties (horizontal direct effect), but only between private parties and the state if the private party thereby benefits (vertical direct effect). According to the case law of the ECJ, citizens should not suffer any damage from the non-implementation of the directive. Recently, the ECJ extended the application of state liability In its judgment of 30 September 2003 (Case C-224/01), the European Court of Justice extended the scope of state liability of member states. The development of state liability, which is not regulated in the Community Treaties, goes back to the “Francovich” decision of 1991. In that judgment, the ECJ held that a Member State which infringes Community law and thereby violates an individual’s rights must pay compensation. In its current ruling, the Court now clarifies that Member States are also liable for damages caused by a court of last instance. The court must have committed a manifest breach of Community law.
One of the points of attack would be that the FSCS, if interpreted restrictively to the detriment of citizens resident in Germany, could violate the free movement of persons, services and capital under the EU Constitution. Further on ? as in the above case ? for example, the prohibition of discrimination under European law may be affected.
c) The security of British life insurance policies follows not only from the deposit guarantee, but also from the fact that the consumer can sue his insurance company under the rules of private international law not only in Germany, but also in England. In particular, the insurance covers consumers who have concluded an insurance contract with a UK insurance company authorised by the Financial Services Authority (FSA). Policies must have been issued in England for deposit protection, in some cases in the European Economic Area, the Channel Islands or the Isle of Man.
The protection initially covers 100% of the first 2,000 English pounds, and for all claims beyond that 90%. Claims does not, however, mean so-called non-binding projections, nor does it mean compensation for losses in value due to inflation or, for example, compensation for fallen stock market prices. In this respect, the terms and conditions of the contract are decisive, as are the binding annual commitments or guarantees that a company may periodically make or have made. Anything that has not been bindingly promised in previous years is up for grabs ? and in the case of UK life insurance policies with traditionally low guarantees and high terminal bonuses that are not fixed until the end, this is a large proportion of the potential benefit. It is therefore possible that the value of the policy is frozen at today’s level and that after many years ? after the scheduled expiry of the policy ? only exactly this value is paid out without any further growth. If necessary, the policyholder may have to wait even longer until the modalities of the payment of the compensation are determined, without being given the possibility of an early surrender. Since in the case of British policies there is generally no guaranteed surrender value, there is also no possibility of surrendering the policy prematurely in such a case without having to pay a considerable sum in solvency proceedings ? despite deposit protection. Despite the deposit guarantee, there is no possibility of returning the policy early in such a case without risking a considerable loss of value, unless every surrender and every other payout is temporarily excluded anyway. If, on the other hand, higher guarantees have exceptionally been given in the policy, this will not save the situation either. This is because the FSCS provides that, on the basis of an actuary’s report, such ‘excessive’ guarantees and thus the value of the policy can be reduced. This is because the FSCS provides that, on the basis of an actuary’s report, such ‘excessive’ guarantees, and hence the value of the policy, can be reduced to an acceptable level before the other normal rules (e.g. the 90% limit) of the FSCS even kick in. FSA-approved financial advisers, i.e. financial intermediaries, are also insured. For a distributor in Germany it is essential to make sure that the company is licensed by the FSA within the framework of the strict liability (plausibility check by the intermediary in accordance with the BGH ruling of 13.01.2000) and that any necessary distribution licence has been obtained from the BaFin. The safest way for the consumer is if the insurance policy is issued in England and the contracting party (insurer) has its registered office there. However, due to the limited performance of the FSCS, no intermediary should rely on this alone and offer policies without pointing out the considerable loss potential that still exists. Ratings, financial strength and earning power remain decisive, because this makes insolvency, which in any case cannot be survived without damage, less likely. The idea of spreading assets rather than concentrating them with one insurer alone is also quite obvious, as with any other asset investment. More probable than an insolvency of the life insurer and hardly less unpleasant in terms of consequences is a long-term deterioration in the financial and earnings situation, which forces the insurer in advance to take drastic measures to avoid insolvency. It cannot even be ruled out that the customer would have fared better in the event of a genuine insolvency and the occurrence of the FSCS. Status: 03.11.2005
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About the author
Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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