Comparing English and German Insurance Law - Part 2: A Third Party’s Right to Claim Directly Against Insurers
Insurers have deep pockets, while the average person on the street is incapable of paying claims for significant damages. That makes insurers, in most cases, a far more attractive target to claim against compared to the person that caused the damage. This article will give an overview of the different positions in England and Germany with respect to a third party’s right to claim directly against insurers. It focuses on the direct rights which result from statutory law, and does not cover the possibilities to claim against an insurer following a contractually agreed assignment of rights from the insured to the third party.
Insurance and Third Parties
In considering this issue, it is worth looking at the aim of an insurance contract. Typically, insurance is taken out by a policyholder to avoid a situation where it cannot afford to make good what was lost. For example, fire insurance is purchased because the insured wants the insurer to provide the money that is needed to rebuild the home that was burnt down. A doctor takes out professional indemnity insurance to be protected from the financial ruin which would follow if they had to pay compensation for a serious error.
The latter example is different from the former. In the first example, the only parties affected by the insurance contract are the insurer and the homeowner. In the second example, there is another person who has an interest that insurance is taken out: the patient, i.e., the third party.
Thus, depending on the nature of the insurance contract, there might be more than just the insured who has an interest that there is insurance in place. Therefore, it can be said that in some cases, in addition to the obvious purpose of protecting the policyholder from financial ruin, the insurance contract is also meant to provide protection for a third party. This is why in some cases the legislature has decided to make insurance compulsory, with motor insurance being the prime example.
The relevant legislation
There are essentially two pieces of legislation in England which are relevant to this issue: The Third Parties (Rights against Insurers) Act 2010 and the European Communities (Rights against Insurers) Regulations 2002. The latter remains in force following Brexit.
In Germany, the relevant provision is § 115 Versicherungsvertragsgesetz (VVG, “Insurance Contract Act”).
Motor insurance
In both England and Germany, the law provides the victim of a motor accident with a right to claim directly against the liable person’s insurer.
In England, a victim of a motor accident has a direct claim against the driver’s insurers pursuant to regulation 3(2) of the European Communities (Rights against Insurers) Regulations 2002. The right arises when the conditions of the regulations are met. Importantly, the victim must be a resident of one of the EEA states (regulation 2(1)) and the accident must have happened on a road or public place in the UK. Furthermore, the vehicle must be insured according to the requirements of section 145 of the Road Traffic Act 1988 as well as normally based in the UK (regulation 2). As a result, the third party has the exact same rights against the insurers as the insured itself.
The position is in essence the same under German law. Pursuant to § 115 I 1 Nr. 1 VVG, an injured person can directly claim against the liable person’s insurer.
Other liability insurance
For liability insurance other than motor, the laws of both countries differ fundamentally.
England
In England, the relevant Act for other liability policies is the Third Parties (Rights against Insurers) Act 2010. Prior to this Act’s predecessor (the similarly named 1930 Act), it was seen as unjust that a third party that had a valid claim against the insured was left in a vulnerable position in cases where the insured became insolvent: in these instances, any insurance monies went into the general pool for the insured’s general creditors,[i] and often the third party was left without any remedy. The 1930 Act provided, as does the 2010 Act, that the insured’s rights against its liability insurers are transferred to the third party.
The sole trigger for the direct claim against the insurer is that the insured becomes a “relevant person” pursuant to section 1 of the 2010 Act. This term is defined in the Act, but it essentially applies when the insured becomes insolvent. Consequently, in England, a person that suffered loss through the conduct of an insured that has valid liability insurance cover in place can directly claim against the insurers if the insured is insolvent.
Germany
Pursuant to § 115 I 1 Nr. 2 and Nr. 3 VVG, a third party may sue the insurer directly in two additional cases.
First, where the insured is insolvent (Nr. 2) and, secondly, where the insured’s whereabouts are unknown (Nr. 3). However, and this is crucial, § 115 VVG only applies to compulsory liability insurance. A prime example of this in Germany is professional indemnity insurance for lawyers, architects, notaries and doctors. However, there is no obligation to take out PI insurance for construction companies, for example.
As a consequence, a third party that is injured by an insured cannot claim directly against the insurer if the insurance is not compulsory. This differs considerably from English law, where the third party can claim against any liability insurer.
Conclusion
Obviously, the English position is significantly more advantageous to third parties than the German one. The English law is understandable from the point of view of fairness towards injured third parties. Where insurance is in place, why should the third party not be able to assert its claim for damages just because the insurance was not compulsory?
On the other hand, the German position is understandable from a plainly legal perspective: the reason for granting a direct claim reflects the fact that compulsory insurance is ordered for reasons of victim protection. It secures the injured third party a debtor who is willing to negotiate and pay and who is largely insolvency-proof.[ii] Outside of compulsory insurance, the German legislature saw no reason to establish a direct claim by the injured party because a non-compulsory liability insurance policy is taken out by the policyholder solely to protect his own assets in the event that claims for damages are made against him.[iii]
Isabel Becker is a Foreign Qualified Lawyer at Fenchurch Law
[i] Rob Merkin, Lowry, Rawlings and Merkin’s Insurance Law: Doctrine and Principles (4th edn, Hart 2022), 415.
[ii] Official justification of the Federal Government's draft bill on the Insurance Contract Reform Act of 20 December 2006, Bundestagsdrucksache 16/3945, pp. 50, 88 f.; see also Regional Court of Nuremberg-Fürth, judgement of 21.08.2010, 4 O 2987/09.
[iii] Rüffer/Halbach/Schimikowski, commentary on the VVG, § 115 Rn. 1.
Comparing German and English Insurance Law – A Series
Introduction
Germany and England have two fundamentally different legal systems – Civil Law, which is based on codified provisions, and Common Law, where court judgments create legally binding precedent to be followed by lower courts in subsequent cases. Does this automatically lead to fundamentally different insurance laws? Or will we be surprised by many similarities? This article will be the first of a series where some peculiarities of English insurance law shall be compared to German insurance law.
The most relevant Acts for private insurance contract law in Germany are the Versicherungsvertragsgesetz (VVG), which can be translated to Insurance Contract Act, and the Bürgerliches Gesetzbuch (BGB), which contains the central provisions of German private law.
English insurance law was codified by several pieces of legislation, such as the Marine Insurance Act 1906 (MIA), the Insurance Act 2015 (IA) as well as the Consumer Insurance (Disclosure and Representations) Act 2012 (CIDRA). Additionally, English insurance law is supplemented by a wide variety of case law.
This first article will look at the difference in provisions dealing with the pre-contractual presentation of the risk by a prospective business insured under the new law. English insurance law was significantly reformed by the IA in 2015. The German VVG was amended in 2008. These changes were made with the intention to make the respective laws, amongst other things, more policyholder-friendly.
The Provisions
Under English law, a prospective business insured must, before it enters into a contract of insurance, make a fair presentation of the risk to the insurer, s.3(1) IA – it has a “duty of fair presentation”. The scope of the duty is set out in the following subsections of the Act and requires, in principle, that the prospective insured discloses every material circumstance which it knows or ought to know. Alternatively, it must disclose in a way which gives the prudent insurer sufficient information to put it on notice that it has to make further enquiries. The disclosure has to be made in a reasonably clear and accessible manner, and every material representation has to be substantially correct, while an expectation or belief has to be made in good faith. There is a “fresh” duty of fair presentation when the contract is renewed or amended.
Importantly, this means that prospective business insureds have to disclose material facts even where the insurer has not expressly asked questions, unless it concerns a circumstance which diminishes the risk, a circumstance which the insurer knows, ought to know or is presumed to know, or where the insurer waives the requirement to disclose information (s.3(5) IA). In substance, the legislator decided that prospective business insureds require less protection as compared to prospective consumer insureds, to which s.3(1) IA is not applicable. Prospective business insureds are therefore burdened with the responsibility to decide which information they have to disclose.
This is – at least for so called “non-large risks” – different under German law. According to § 19 I 1 VVG, which is applicable to both business and consumer insureds, the prospective policyholder must notify the insurer of the circumstances known to it which are material for the insurer's decision to conclude the contract – if the insurer asked about it in writing. The provision is applicable to business insureds which do not fall under the scope of the provision of § 210 VVG, which ensures that insurance sectors dealing with so-called “large risks”, mainly transport, credit and indemnity insurance, are granted wider contractual freedom.
Both English law and German law utilised the same arguments for their respective amendments: the old law did not sufficiently take into account the legitimate interests of prospective policyholders because they were burdened with the responsibility of having to disclose all known relevant circumstances, as well as with the difficult assessment of what was material to the risk. In England, the duty to disclose information where the prospective insured had not been asked was, in light of the consequences of a possible breach, seen as a potential trap (at least for consumers). The German legislator decided to remove this burden from both consumer and business insureds, while the English approach makes a clear distinction between the two. Under German law, the risk of misjudging whether a circumstance is relevant to the risk therefore no longer lies with the prospective policyholder. The German provision mirrors the English provision applicable to consumer insureds under s.2 CIDRA, which imposes a duty on consumer policyholders to take reasonable care not to make a misrepresentation to the insurer.
It is worth noting that German courts are reluctant to accept questions by the insurer that require an assessment by the prospective policyholder, e.g. the question whether there were any “anomalies”. German insurers are therefore prevented from relying on any alleged mis-statement by the policyholder in relation to such questions and cannot decline cover on these grounds. Moreover, insurers can only ask for information that is material to the risk.
According to the explanatory notes to § 19 VVG, the situation differs where the prospective policyholder acts in bad faith: then, the insurer can contest the contract even when he has not asked for the information. However, the German courts set high expectations by requiring evidence of circumstances obviously relevant to the risk which must be so unusual that a question aimed at the circumstances cannot be expected. As a consequence, the number of cases where insurers can actually contest the contract on the grounds of bad faith are significantly limited.
Another noteworthy difference arises with regards to the scope of the duty. Under German law, the prospective policyholder only has to reveal material circumstances of which it actually knows. When the prospective policyholder has forgotten facts, it is obligated to attempt to recall them. The provision does however not indicate that the policyholder must reveal what it should have known, based on a reasonable search (including information held by agents), as required under English law.
Conclusion
Regarding non-consumer insureds, the German provision differs considerably to the law as set out under the IA (while the provisions applicable to consumer-insureds show great similarity). In this respect, Germany’s law can be regarded as more policyholder-friendly than the provision applicable to business insureds under English law. The rationale behind the requirement of having to ask the policyholder in writing is to decrease the risk of misunderstanding as well as to give the policyholder the opportunity to read the enquiries made by the insurers. Obviously, the written requirement also serves as evidence. It is made very clear to the prospective insured what is material to the insurer and what must be done to fulfil obligations. Moreover, the scope of the duty is smaller than under English law, where the prospective insured also has to disclose deemed knowledge.
Isabel Becker is a Foreign Qualified Lawyer at Fenchurch Law