Choice of Law for Insurance Contracts: History of Article 7 of Rome I, Particularly Regarding the Relationship with Directives 88/357 and 90/619 in Light of Directive 2009/138

Regulation (EC) no 593/2008 on the law applicable to contractual obligations (Rome I) applies to insurance contracts, but does so in a rather complicated manner, by establishing – in effect – three sets of rules. Article 7 on insurance contracts expressly provides choice of law rules for two groups of insurance contracts, namely those covering ‘large risks’ regardless of where the risks they cover are situated, and other contracts covering risks situated inside the territory of an EU Member State. That leaves a third group, covering risks that are not ‘large’ and are situated outside the territory of the EU. As Rome I does not make any exception for these contracts, this means that choice of law for this third group is regulated by the general rules of the Regulation.

The EU choice of law rules for insurance contracts were first introduced in the so-called second generation insurance directives, Article 7 and 8 of Directive 88/357 on non-life insurance and Article 4 of Directive 90/619 on life insurance. They were slightly amended by the third generation directives, Directives 92/49 and 92/96. After that, the rules were transferred, without any substantive changes, but in a somewhat simplified – but still quite complicated – form to Rome I.¹

The Rome Convention, dating from 1980, stated in Article 1 paragraph 3 that it did not apply to insurance contracts that covered risks situated in the territories of the Member States. This was in anticipation of the on-going work of establishing an internal market for the insurance industry through the insurance directives. Conversely, as the Convention did apply to insurance contracts covering risks outside the EU, its general rules were applicable to them. However, Article 20 gave precedence to any choice-of-law rules pertaining to particular matters that were or would be contained in EU legislation. That made it possible to regulate choice-of-law rules for ‘large risks’ situated outside the EU in the directives.

With the benefit of hindsight, the Rome Convention went a bit further than necessary by completely excluding insurance contracts covering risks situated within the EU from its scope of application. The insurance directives did not regulate choice of law exhaustively and still needed to be complemented by rules pertaining to consent, material and formal validity of the contract, scope of the law applicable etc., matters that were regulated by the Rome Convention. Presumably, most Member States applied the rules of the Convention to these questions anyway. Today, the rules on these matters contained in Rome I also apply to insurance contracts.

Article 1 paragraph 3 of the Rome Convention left it to the national law of each Member State to regulate the question of where a risk would be deemed to be situated. The insurance directives contained their own rules on this – which meant that henceforth, national rules in this field would be harmonised. Rome I makes a direct reference to the rules on this in Directives 88/357 and 2002/83 – the latter being the consolidated life insurance directive in force from 2008 – rather than referring to national law, but the result is the same.

The concept of ‘large risk’ is also defined by Rome I through a reference to a directive on non-life insurance, the first generation Directive 73/239.²

Rome I does not apply to Denmark; see recital 46 of the preamble to the Regulation. According to Recital 45, the UK signalled its intention to opt out. In the end, the UK opted in. However, Article 178 of the present consolidated insurance directive, Directive 2009/138, also referred to as ‘Solvency II’, provides that the choice-of-law rules of Rome I shall apply to any Member State not subject to the application of Rome I ‘in order to determine the law applicable to insurance contracts falling within the scope of Article 7 of that Regulation’. This means that for Denmark, the Regulation does apply – indirectly – for insurance contracts relating to risks inside the EU. For risks outside the EU, the Rome Convention still applies to Denmark.³

This means that substantively, nothing really changed with the enactment of Rome I and Solvency II.

For ‘large risks’, paragraph 2 of Article 7 of Rome I sets out straightforward rules: The parties to the contract may agree on the applicable law. If they have not, the law of the country where the insurer has his habitual residence applies, unless the contract is manifestly more closely connected with another country.

For other risks situated within the EU, Article 7 is considerably more complicated. The main rule is that the applicable law is the law of the country where the risk is situated at the conclusion of the contract.⁴ It follows from paragraph 6 of Article 7, referring to Directives 88/357 and 2002/83, that both for life insurance and non-life insurance, this as the main rule is the country where the policyholder has his or her habitual residence or, if the policyholder is a legal person, the country of that person’s establishment to which the contract relates. For non-life insurance, there are special rules for immovable property (where the property is situated), vehicle insurance (country of registration), and travel insurance for maximum four months (where the policyholder took out the policy).

There is a limited possibility for the parties to agree on another applicable law. For life insurance, the country of which the policyholder is a national may be chosen.⁵ For non-life insurance, there are several alternatives to the main rule.⁶

For insurance covering risks limited to events occurring in one Member State other than the one in which the risk is situated, the parties may choose the law of that other State.⁷ If the policyholder pursues a commercial or industrial activity or a liberal profession, and the insurance covers two or more risks that relate to those activities and are situated in different Member States, the parties may also choose the law of any of the Member States concerned.⁸ Furthermore, to the extent the risk is situated in another country than the country in which the policyholder has his or her habitual residence – as could be the case, typically for immovable property, vehicles and travels – the parties can choose between the law of the country in which the risk is situated and the law of the country in which the policyholder resides.⁹ However, to add one further layer of complication, the Member States whose law may be chosen under the two last rules mentioned above may grant greater freedom of choice to the parties.

For obligatory insurances, Article 7 lays down special rules to prevent the circumvention of the obligation to take out insurance.

As already mentioned, the ‘normal’ rules of Rome I apply to ‘non-large’ risks situated outside the EU. Contracts relating to these risks do not fall under Article 7. I will not go into the content of these rules.¹⁰

One may ask why this has become so complicated. The answer is probably a combination of two objectives that work in the same direction: one to shield domestic mass markets from competition from abroad, the other to protect the policyholders. By declaring the country in which the policyholder resides or has its relevant establishment to be the country in which the risk is situated, and by limiting the freedom of Member States to let the parties choose the law of another country, Article 7 forces insurance providers from other Member States to adjust their contracts – in essence their products – to each and every new export market. By adding costs, this is a disincentive to go abroad, and in any case it gives an advantage to the insurance providers already established in that market. This goes against the main principle of free movement in the internal market. That principle provides that a product that is lawful in its country of origin should be lawful in all other Member States as well without any adjustments.

It appears that the national experts charged with drafting the insurance directives were convinced that rules on insurance contracts were untouched by the principles of free movement pertaining to what constitutes unlawful restrictions on trade.¹¹ As we know, however, the Member States in their capacity as host Member States – import markets – may, barring any harmonisation, insist on their own more stringent rules in order to protect legitimate policy objectives such as protecting consumers, as long as these measures fulfil the requirements of proportionality. This would be lawful restriction on free movement. The restrictions on the right to agree on the choice of law for insurance contracts could certainly also be seen in this light, as a means of host State protection of the policyholders as the presumed weaker party. It is mostly the insurance providers, not the policyholders, who formulate the terms of the insurance products.

However, this being so, the possibility for Member States to provide for a wider possibility to choose applicable law than follows from Article 7 for ‘non-large risk’ insurance contracts is not really there to protect the policyholders. It is tempting to assume that the willingness of Member States to allow greater freedom of choice will depend on whether they deem their own insurance industry to be internationally competitive. Thus, Article 7 is a kind of compromise between Member States nervous about their own insurance industry’s ability to compete on its traditional home market with insurance providers from other Member States, and Member States eager to provide export opportunities for their insurance providers.

In this light, it does not matter that the general rules of Rome I provide for a greater possibility for the parties to insurance contracts covering risks outside the EU to agree on the choice of law. Such risks do not constitute traditional ‘home markets’ for the insurance industry inside the EU. Nevertheless, even if the thinking behind the rules on choice of law for insurance contracts may have been a bit dubious in light of the general principles of the internal market, they are now unlikely to change.