Following the entry into force of the Act on Insurance Distribution (1 October 2018) and based on discussions held in the European Insurance and Occupational Pensions Authority, the FIN-FSA has reviewed the contractual terms and conditions of indemnity insurance for insurance brokers. Based on the findings of this review, the FIN-FSA wishes to draw the attention of insurance companies and insurance brokers to the following.
Terms and conditions of indemnity insurance
The indemnity insurance of an insurance broker must always fulfil the conditions relating to its minimum monetary amount and other requirements (Act on Insurance Distribution, section 58):
- the indemnity insurance shall be valid throughout the European Economic Area (EEA);
- the indemnity insurance shall end no earlier than two months after the FIN-FSA has received from the insurer notification of the ending of the indemnity insurance;
- if the indemnity insurance includes an excess, the insurer shall indemnify the party who has incurred loss or damage without deducting the excess;
- the insurer shall be domiciled in an EEA state;
- the indemnity insurance shall cover loss or damage caused as a result of an act or omission that occurred during the term of the policy and for which a written claim has been made to the insurance broker, the ancillary insurance broker or the insurer during the term of validity of the indemnity insurance or within three years of its ending.
All conditions unambiguously arising from the Act must be fulfilled for the FIN-FSA to enter an insurance broker in the register of insurance intermediaries. An insurance broker must also fulfil all of the conditions of registration continuously after registration.
Broker’s liability, and terms of limitation of insurance policies
An insurance broker must have insurance to cover the damage or loss caused by professional errors for which an insurance broker is liable under the Act on Insurance Distribution. An insurance broker’s liability for loss or damage is prescribed in section 74 of the Act. It is evident from the Act and its rationale (HE 172/2017vp) that a broker’s liability is, in principle, broad and that it covers damage or loss caused by a breach of both the Act on Insurance Distribution and the service agreement between the broker and the customer, particularly when the customer is a consumer or a party equivalent to a consumer. Insurance distribution practised by a broker may include a wide range of activities, such as preparing insurance policies, making policies, and assisting in managing and fulfilling policies.
According to the FIN-FSA’s findings, the terms and conditions of insurance brokers’ indemnity insurance policies generally include terms of limitation typical to indemnity insurance. These include, for example, loss or damage caused by miscalculations or by neglecting to transfer a payment.
Brokers’ indemnity insurance is prescribed in law as mandatory for those engaged in such activity, and its purpose is to safeguard the position of a broker’s customers and other parties who have incurred loss or damage. Taking this and the scope of liability into account, it is important that insurers do not, through terms of limitation, reduce the liability that brokers’ indemnity insurance should cover.
Conditions relating to causing an insured event through gross negligence
The terms and conditions of brokers’ special indemnity insurance often include the type of conditions that categorically exclude from the scope of coverability, for example, loss or damage that the policyholder has caused through gross negligence. In this respect, the set of terms and conditions of indemnity insurance formed by special and general terms and conditions of insurance may also include contradictory provisions.
Under section 30, subsection 2 of the Insurance Contracts Act, if the insured has caused an insured event through gross negligence, the compensation due to the insured may be reduced or withheld. Under subsection 4, however, in respect of indemnity insurance, the insurer is required to pay to a natural person who has incurred loss or damage the portion of compensation that the person in question has not been able to recover from the insured. In addition, in brokers’ mandatory indemnity insurance, a party who has incurred loss or damage has the right under section 67 of the Insurance Contracts Act to demand compensation directly from the insurance company.
Under section 3, subsection 1 of the Insurance Contracts Act, a contractual term or condition that deviates from the provisions of the Act to the detriment of an insured person or a person entitled to compensation other than the policyholder shall be null and void. From the peremptory nature of the provisions of the Insurance Contracts Act, it follows that the insurer must not apply terms and conditions of insurance insofar as they weaken the security prescribed for the good of a party who has incurred loss or damage.
Responsibility for the legality of terms and conditions of insurance, and updating of terms and conditions
Insurance companies must ensure that indemnity insurance provided to brokers for that activity fulfils the requirements set for such insurance. Terms and conditions of insurance should be reviewed in the light of the factors presented in this release, and the required changes made to them, no later than the stage when the amendments to the Insurance Distribution Directive and the Act on Insurance Distribution relating to the change in the minimum euro amounts for indemnity insurance enter into force (projected to be in spring 2020). Attention should also be paid to the clarity of the set of terms and conditions.
One of the prerequisites for the registration of an insurance broker is that the applicant has indemnity insurance or comparable guarantee that fulfils the conditions prescribed by law (Act on Insurance Distribution, section 58). Under section 58, subsection 3 of the Act on Insurance Distribution, an insurance broker or ancillary insurance broker must submit to the FIN-FSA, at the latest one month before the commencement of the validity of new indemnity insurance, a statement on its terms and conditions and monetary amounts.
The Financial Supervisory Authority considers that the insurer must ensure the legal coverage of terms and conditions when providing mandatory indemnity insurance to a broker. Similarly, an insurance broker, as an insurance sector expert, must be familiar with his or her indemnity insurance and also assess the terms and conditions of new indemnity insurance provided to him or her as well as the legality of these terms and conditions.
For further information, please contact:
Antti Lampinen, Market Supervisor, tel. +358 9 183 5518 or email antti.lampinen(at)fiva.fi