international comparative review of liability insurance law

International ComparativeReview of LiabilityInsurance Law

International ComparativeReview of LiabilityInsurance Law

produced in association with

insurance day

2 Contents

International Comparative Review of Liability Insurance Law – May 2007

Contents3 Comment

4 Introduction

6 � United Kingdom

10 � Germany

14 � Netherlands

18 � Spain

22 � France

26 � Italy

30 � Israel

34 � United States

38 � Canada

42 � Australia

46 Contacts

Comment 3

May 2007 – International Comparative Review of Liability Insurance Law

Comment

FEW industries encapsulate the old truism thatthe world is getting smaller better thaninsurance and reinsurance.

As the global footprint of clients gets everbigger, the number of jurisdictions in whichtheir risk carriers must take an interest alsowidens. And from the point of view of thebrokers and underwriters, the legalidiosyncracies of individual countries will rocketto the top of the agenda.

It is with these factors in mind that InsuranceDay presents – in association with legal giantBarlow Lyde & Gilbert LLP – this InternationalComparative Review of Liability Insurance Lawsupplement.

This booklet brings together legal experts from 10 different countries, each of whomoutlines the key legal perspectives of theirjurisdiction, allowing the reader to comparedifferent treatment of factors such as“Construction of a Commercial InsurancePolicy”, “Non-Disclosure or Misrepresentationof Information by an Insured at Inception ofRisk”, “Third-Party Rights Against Insurers”,“Cover in Respect of Fines and Penalties” and“Subrogation”.

We hope that you find it useful.

Richard BanksEditor, Insurance Day

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A world of legal difference

4 Introduction


WHAT consequences flow from the applicationof a foreign law to a contract of liabilityinsurance? The answer to this question should beof interest to all underwriters of internationalliability insurance. In certain cases, and as part ofa commercial bargain, underwriters may choosewillingly to surrender their own domestic law asthe governing law of the contract. In others,underwriters find themselves unwittingly in thecourts of a foreign jurisdiction battling with locallaws and procedures.

It could be that for public policy reasons, thecourts of a foreign country strike down a choice

of law clause.This might be the case for examplein Australia where the Insurance Contracts Act1984 (ICA) has this effect in some circumstances.Alternatively, it may happen because thejurisdiction in question deems the law which theparties have chosen, not to have a close enoughconnection either to the parties or to the dispute.In those countries such as France and Spainwhose laws allow direct claims by third partiesagainst insurers, the consequences of theapplication of a foreign law may be bothunwelcome and unexpected.

Questions of choice of law are closely linked tothose of choice of jurisdiction. Generally and forgood reason, parties to a contract (of insurance orotherwise) prefer to opt for the jurisdiction ofcourts of the same country as that whose laws arechosen to govern the contract. The problem isthat this choice is not always given effect by local courts. For example, as mentioned above,courts in the chosen jurisdiction may apply adifferent law from the one chosen by the parties. The jurisdiction chosen may also change - by way of example, within the EU,one party may be allowed to proceed in ajurisdiction other than that agreed, simply becausehis action was commenced first in time.This is because EU rules on jurisdiction generally require all other courts to respect thecontinuance of proceedings in the country of thecourt first seised so that the court can itselfdetermine the validity or otherwise of thejurisdiction agreement.

International Comparative RevHow it works in the United Kingdom, Germany, the Netherlan

Francis KeanBarlow Lyde & Gilbert LLP

Introduction 5


This change of jurisdiction may even occur ifthe parties have chosen to arbitrate in a particularjurisdiction. In the recent case of West Tankers Incv Ras Riunione Adriatica di Sicurta SpA & Ors(2007) the House of Lords referred to theEuropean Court of Justice the question ofwhether it may continue the use of anti-suitinjunctions which are commonly issued toprotect the jurisdiction chosen by the parties fortheir arbitration.

In those cases where no clear choice of law ismade by the parties, the applicable law will bedetermined by reference either to the ECInsurance Directives (where the risk is situatedwithin the EEA) or the Rome Convention(where the policy is one of reinsurance or wherethe risk is situated outside the EEA). In verygeneral terms, the Directives presume that theapplicable law is that of the country which hasthe closest connection to the contract. This ispresumed to be the EEA state in which the riskis situated. The Rome Convention alsodetermines the applicable law according to thecountry with which the contract is most closelyconnected but, unlike the Directives, presumesthis to be the country where the insurer’sprincipal place of business is or whereperformance under the contract is to take place.Different jurisdictions may also interpret theserules differently. Moreover, not all countries havesigned up to the Rome Convention. Themajority of countries (e.g. the United States,Canada and Australia) are not bound either by

the Directives or the Rome Convention whendeciding the law applicable to the contract.

The aim of this booklet is to provide someguidance as to the applicable insurance laws incertain key jurisdictions. It is a comparativereview of liability insurance law in the UnitedKingdom, Germany, the Netherlands, Spain,France, Italy, Israel, the United States,Canada, andAustralia. It should provide a useful guide tounderwriters in deciding which governing lawsthey prefer to apply to any disputes betweenthem and their prospective insureds (and thosewhich they might prefer to avoid!). It has beencompiled by Barlow Lyde & Gilbert LLP inconjunction with insurance law firms who areexperts in the field of liability insurance in eachof the ten countries covered.

The twin subjects of jurisdiction and applicablelaw are notoriously complex. A thorough analysisof them is well beyond the scope of this booklet.Nevertheless, the possibility that underwritersmay find themselves subject to the jurisdiction offoreign courts (and possibly to the application oflocal laws by those courts) is a very real one.Whilst no substitute for detailed legal advice, ifthis booklet succeeds in identifying at least someof the key differences between the liabilityinsurance laws of the 10 countries under review,its authors will be content.

Francis KeanBarlow Lyde & Gilbert LLP

view of Liability Insurance Lawnds, Spain, France, Italy, Israel, the US, Canada and Australia

6 English Law


Insurance policies are construed according to the principles of construction applicable to generalcommercial contracts. Thus the task of the court is to ascertain the intention of the parties whichis gathered from the wording of the policy itself and from any other documents which may beincorporated with it. In construing an insurance policy, a court will therefore:

‘… put on it the true meaning and the true meaning is the meaning which the party to whom the documentwas handed or who is relying on it would put on it as an ordinarily intelligent person construing the words inthe proper way in the light of the relevant circumstances’ (Investors Compensation Scheme Ltd v West BromwichBuilding Society (1998).

To interpret a contract, the court will consider judicial precedents, any relevant technicalmeanings, and the “ordinary” meaning of the terms. Exceptionally, courts may admit extrinsicevidence of pre-contractual negotiations, especially if dealing with an unusual expression that isotherwise not defined in the contract. In the case of a genuine ambiguity, the principle of contraproferentem (i.e. that the preferred meaning of the provision is that which operates against the partywho supplied it) may apply against the person who seeks to rely on an exclusion or conditionrestricting liability.

A contract of insurance is one of the utmost good faith.The rules relating to disclosure (which areparticularly onerous on insureds under English law) at the inception of the risk are a directconsequence of this.

The general position, applicable to all classes of commercial insurance, is that an insured mustdisclose to the insurer all facts material to an insurer’s appraisal of the risk which are known ordeemed to be known by the insured but are neither known nor deemed to be known by the

English Law

1. Construction of a Commercial Insurance Policy

2. Non-Disclosure or Misrepresentation of Information by an Insured at Inception of Risk

English Law 7


insurer.The common law test for materiality provides that ‘… every circumstance is material whichwould influence the judgment of a prudent insurer in fixing the premium or determining whether he will takethe risk’.

The opinion of the insured on the question of materiality is for most purposes irrelevant.Thesubjective opinion of the particular insurer is relevant as evidence that he would not havecontracted with the insured, but ultimately the question as to whether a particular fact is materialor not rests on the judge’s own appraisal of the relevance of the disputed fact to the subject matterof the insurance, often with reference to the evidence of expert underwriting opinion. Theremedy for non-disclosure is avoidance of the policy ab initio (“from the beginning”) i.e., thepolicy is treated as if it never existed. In the absence of fraud, avoidance of the policy is normallyaccompanied by the repayment of the premium to the insured. Questions put by insurers in theirproposal forms may either enlarge or limit the prospective insured’s duty of disclosure. As ageneral rule, the fact that particular questionsrelating to the risk are put to the proposer doesnot of itself relieve it of its independentobligation to disclose all material facts.

Although it also stems from the duty of goodfaith, misrepresentation is conceptually distinctfrom non-disclosure. It principally relates tostatements of fact, as opposed to statements ofexpectation or belief (the latter are notactionable, even if incorrect, if made in goodfaith). The misrepresentation must be materialto the underwriter’s assessment of the risk. Italso must have induced the underwriter to enterinto the particular contract on the terms agreed.The usual remedy is avoidance of the contract,although damages may be recoverable in certaincases under the Misrepresentation Act 1967.

Recent recommendations for law reform by the English and Scottish Law Commissions would,if implemented, fundamentally change the law in this area. Absent fraud, the test for materialitywould be what the “reasonable insured” would understand to be relevant to the insurer’s assessmentof the risk. Moreover, the nature of the remedy available to insurers would depend on their evidenceas to how they had altered their position by virtue of the non-disclosure. Avoidance will notgenerally be available.The Law Commissions’ proposals are influenced by the Australian system asto which see p42-45.

8 English Law


There is no common law right afforded to a third party, who has recovered damages against aninsured, to pursue any remedy or claim for indemnity against the insurers of that person.Whethersuch rights may exist pursuant to the Contracts (Rights of Third Parties) Act 1999 is unclear; inpractice insurers will generally avail themselves of their right to exclude the effect of this Act.

Otherwise, third parties only have rights where the conditions set out in the Third Parties (Rightsagainst Insurers) Act 1930 are satisfied. Firstly, the insured must be insolvent. Secondly, the insured’sliability to the third party must be ascertained either by a judgment or arbitration award (or possiblya binding settlement). Finally, the third party will have no more rights than the insured: so theinsurer can rely on any defence that it would have had against the insured.

In the case of composite contracts, i.e. a basket of separate contracts between the insurer and a group of individual insureds, it is possible that a successful judgment creditor against anindividual director for example would be able to take a statutory assignment of that director’s rightsunder the insurance, and access the policy limits by that route, even in circumstances where theinsured is not insolvent.

Criminal fines/penaltiesThere is a general principle of public policy (known as the Beresford principle) that an English court will refuse to enforce a claim by an insured against his insurer for an indemnity against a fine imposed by a criminal court, and also against other consequences flowing from thatcriminal conduct.

There are a number of qualifications to this principle:• in cases of vicarious liability, where there is liability without “culpability”, the English court will

enforce an indemnity;• non-intentional criminal liability (for negligent acts or on the basis of strict liability) – the courts

will apply a balancing act on the facts of each case to determine whether enforcing theindemnity would be contrary to public policy;

• defence costs in connection with criminal proceedings – it is unlikely a court would refuse toenforce indemnification of such costs.

4. Cover in Respect of Fines and Penalties

3. Third-Party Rights Against Insurers

Civil fines/penaltiesThere are no recognised civil fines and penalties under English law. As a matter of public policy,there is no express prohibition against insuring in relation to civil liabilities which serve to deterwrongful conduct such as punitive or exemplary damages. However, insurability will depend uponthe underlying conduct of the insured and thesame principles will apply to restrictenforcement of indemnities against civilliabilities resulting from intentional/dishonestwrongdoing in the same way as for criminalliabilities. In the case of civil liability, it is easierto draw a clearer distinction betweenintentional wrongdoing (including recklessness)and conduct falling short of that - the latter islikely to be insurable without any need for thebalancing exercise necessary in the case of non-intentional criminal liability.

Regulatory fines/penaltiesRegulatory fines and penalties will fall to be dealt with for the purpose of public policy in the sameway as criminal liabilities.A number of regulators prohibit insurance recoveries for regulatory fines,or exercise pressure in any settlement not to claim such recovery. For example, the Financial ServicesAuthority Handbook provides that no authorised person and no member of Lloyd’s will be able to“… enter into, arrange, claim on or make a payment under a contract of insurance that is intended to have, orhas or would have, the effect of indemnifying any person against all or part of a financial penalty”.

The insurer is entitled as a matter of common law to exercise in the name of the insured whateverrights the insured possesses to seek compensation for loss from third parties. So for example in thecontext of a D&O policy, if a director were to enjoy indemnity from another source, there wouldbe nothing to prevent the D&O insurers from stepping into the shoes of that director and pursuinghis claim for indemnity. On the other hand, if a director enjoys an indemnity from the company orfrom any of the companies within the group, insurers should be prevented from pursuing their rightsof subrogation provided that the relevant companies are co-insured under the D&O policy. This isunder the so-called doctrine of circuity of action.

Barlow Lyde & Gilbert LLP

5. Subrogation

English Law 9


10 German Law


German insurance law is set out in the Insurance Contract Act (Versicherungsvertragsgesetz – VVG) of1908 (as amended). Driven by European consumer protection legislation, substantial amendmentsare underway which will come into force on 1 January 2008. These amendments will mainly affect the mode of the conclusion of insurance contracts; the abolition of the all-or-nothingprinciple; and the introduction of certain (continuous) information obligations on the insurer andthe intermediary prior to the inception and for the duration of the insurance contract.

Insurance contracts are construed in accordance with the understanding of the average insured(without any specialist insurance knowledge) in the particular line of insurance concerned, having(i) considered the policy wording in detail, and (ii) appreciated sensibly the interests of all partiesconcerned as well as the context. In terms of taking into account the interests of the insurer, onlythose interests that are - at least partially – apparent from the policy wording will be relevant. It ishowever assumed that an average insured is aware of the possibility that policy terms may not alwaysbe perfectly drafted. Therefore, terms will be construed in light of commercial usage in theinsurance industry, subject to the general contra proferentem rule applicable to standard terms.

In the case of insurance typically taken for the account of another pursuant to ss. 74 et seq.VVG(Versicherung für fremde Rechnung), such as D&O insurance, for example, generally the understandingof both the policyholder and the insured will berelevant in interpreting the policy wording.

Additionally, the courts will apply the generallegal principles relating to the interpretation ofstandard form contracts and stipulated in ss. 305et seq. of the German Civil Code (BürgerlichesGesetzbuch – BGB). Such rules, which relate totransparency, can be onerous and apply to bothconsumer and commercial contracts.

German case-law has established that foreign-language standard wordings commonly used in

German Law


German Law 11


their jurisdiction of origin are to be construed in accordance with their meaning in the foreignjurisdiction, irrespective of a choice-of-law-clause in favour of German law. German privateinternational law allows a “partial” choice of law, which distinguishes between the governing law ofthe insurance contract and the law governing the construction of the wording. Against thisbackground, the courts have held that, in the absence of express stipulations to the contrary, by usingforeign-language standard wordings the parties intended the law of the foreign jurisdiction togovern the construction of such wordings. Foreign insurers active in Germany using their standardwordings in their language of origin are advised to bear this in mind when drafting the respectivechoice-of-law-clause.

Pursuant to s. 16 VVG the insured is required, at the time of the inception of the policy, to discloseto the insurer all circumstances known to the insured that are material to the risk. Circumstanceswill be material to the risk if they may have an influence on the insurer’s decision whether to enterinto the contract and upon what terms. A circumstance that is expressly mentioned by the insurerin the proposal form will be deemed to be material.

Against this background, the drafting of the proposal form is of vital importance as the insured isonly obliged to volunteer information where it is closely related either to questions raised explicitly(in the proposal form) or if its relevance is obvious.

In practice, it may be difficult to determine whose knowledge is relevant when considering issuesof non-disclosure. In particular this may be problematic in relation to insurance contracts taken outby legal entities, for example D&O insurance or product liability insurance. In any event, it isrecognised that the knowledge of the person signing the application will be attributed to thepolicyholder.Where insurance is taken out for the benefit of another, the knowledge of the insuredperson is attributable to the policyholder pursuant to s. 79 VVG to the extent that the insured personknew that the insurance was entered into for its benefit.

The proposed amendments to the German Insurance Contract Act will substantially affect thelaw of non-disclosure. The Bill envisages the insured’s obligation to provide such materialinformation which the insurer has asked for explicitly in writing. Only where there has beendeliberate violation of these disclosure obligations will the insurer be entitled to rescind thecontract ab initio - where the insured has merely been negligent the insurer will have the right


12 German Law


to terminate the contract within a period of one month. In both cases the insurer will only beable to rescind/terminate where it has informed the insured in writing in separatecorrespondence of the consequences of non-compliance with the obligations.

German insurance law does not provide for third party rights against the insurer that are notexpressly stipulated. The only law currently providing for such direct action is the Act onCompulsory Insurance for Motor Vehicles (Pflichtversicherungsgesetz – PflVG).

However, the proposed amendments to theGerman Insurance Contract Act provide for theintroduction of a right of direct action againstthe insurer in all cases of compulsory insurance.The aim is to foster the rights of the injuredthird party. German law stipulates that insuranceis compulsory in a wide range of circumstances,for example, the work of professionals and in anumber of industries such as the aviation andpharmaceutical industries.

Under the current law, third parties can exercise certain rights where the insured has becomeinsolvent. Pursuant to s. 157 VVG a third party is entitled to preferred payment of its claims againstthe insured out of the latter’s insurance proceeds. Where the policyholder has taken out theinsurance contract for the benefit of another, the insolvency proceedings must have beencommenced against the insured. In practice, the third party will approach the administrator who inturn will refer the third party to the insurer against whom the third party will then have a directclaim in its own right. Hence, the rights under s. 157 VVG work in practice as a direct right againstthe insurer.

Criminal fines/penaltiesThe question of the insurability of criminal fines/penalties is not conclusively settled by Germanjurisprudence. Indeed, both published case law and doctrine is rather scarce in this area. It is however



German Law 13


understood that public policy will be triggered only in limited circumstances in order not to hamperunduly the insurance industry in the conduct of its business, namely with regards to thedevelopment of new insurance products.

In relation to criminal fines/penalties, leading commentators hold contradictory views:Bruck/Möller is of the opinion that such fines can be included in the coverage offered by third partyliability insurance, apparently relying on the intent of the parties. By contrast, Armbrüster and Präveboth suggest that these fines are not insurable as otherwise the aim of such fines/penalties would beendangered.

Irrespective of the question of insurability, most insurances used in the German market will notrespond due to the applicable exclusion language, such as those for intentional acts.

Civil fines/penaltiesIn principle, German law does not provide for civil fines or penalties. It is however recognised thatdamages for pain and suffering (Schmerzensgeld) awarded for the violation of contractual obligationsor in tort include a certain penal element intended to deter wrongful conduct.

In principle, damages for pain and suffering are part of the insured’s general liability andtherefore covered. Case law suggests that such insurance coverage may be taken into accountin the calculation of damages leading to higher awards (ultimately to the detriment of theinsurer).Against this background, certain insurance wordings exclude coverage for damages forpain and suffering.

Regulatory fines/penaltiesRelying on the convincing view held by Armbrüster/Präve, it appears that regulatory fines/penaltieswould not be insurable due to the public policy considerations referred to above.

S. 67 VVG provides for insurer subrogation rights by operation of law (cessio legis) in cases where theinsured has a claim against a third party, to the extent that the insurer indemnifies the insured. Suchtransfer of rights may however not be relied upon to the insured’s detriment. Further, if the insuredwaives or otherwise prejudices its claim against the third party, the insurer will be relieved from itsobligation to indemnify to the extent that it could have obtained reimbursement from the claim.

Bach Langheid & Dallmayr

5. Subrogation

Insurance policies are construed by determining the intention of the parties.The intention of theparties must be ascertained not only from the wording of the policy itself but also from “thereasonable interpretation or understanding by a party of the other party’s declarations and conduct, and theexpectations a party can reasonably infer from this” (Dutch Supreme Court 13 maart 1981,“Haviltex”).Thisis the principle of construction applicable to any general commercial contract.

Furthermore, according to Dutch law, the legal consequences of an agreement are not onlydetermined by what the parties have agreed, but also by general standards of reasonableness and fairness. If, however, these standards produce a result which in the view of the courts isunacceptable, the courts can determine that a particular provision is not binding upon the parties.

14 Dutch Law


Dutch Law


Dutch Law 15


In general an insured must disclose to the insurer all facts that are known or should be known bythe insured. This only relates to facts which the insured knows or is deemed to know are ofimportance to an insurer’s appraisal of the risk.

Questions put by insurers in their proposal forms limit the prospective insured’s duty ofdisclosure. The insurer therefore has no scope to argue that questions have not been answeredproperly or that facts other than those asked for on the proposal form should have been disclosedby a prospective insured.This will not apply in circumstances where the insurer proves a deliberateact by the prospective insured.Where the insured is not a private person, the insurance contract mayimpose alternative disclosure obligations.

If the insurer discovers that the non-disclosurerequirements have not been fulfilled before theconclusion of the contract, the consequences setout below may only be invoked if the insurernotifies the insured within two months of thediscovery of the non-disclosure.

If the insured acted with the intention ofmisleading the insurer or if the insurer wouldnot have concluded the insurance contract if ithad been aware of the true state of affairs, theinsurer has the right to terminate the contractwith immediate effect within two months ofthe discovery of the non-disclosure.

In cases where the insurer discovers the non-disclosure after the loss has occurred, theinsurer’s obligation to pay will depend on whatthe position would have been had the insurer been aware of the true state of affairs. If the insurerwould have insisted on a higher premium or would have concluded the insurance for a lowerinsured sum, the payment will be reduced in proportion to the amount the premium would haveincreased or the sum insured reduced. If the insurer, had it been aware of the true state of affairs,


‘The insurer has noscope for arguing thatquestions have notbeen answeredproperly or that factsother than those askedfor on the proposalform should have beendisclosed by aprospective insured’

16 Dutch Law


would have stipulated other terms and conditions, payment will only be due on the basis that theseterms and conditions are taken to have been inserted into the contract.

If the insurer would not have concluded the insurance contract, had it been aware of the truestate of affairs, no payment will be due.The same will apply if the policyholder or insured has actedwith the intention of misleading the insurer. Finally, if the insured has failed to fulfil the disclosurerequirements in respect of a third party, with the intention of misleading the insurer, no paymentwill be due to that third party.

Under Dutch law third parties can only have direct rights of action against an insurer if they havesuffered damages resulting from death or personal injury (article 7: 954 Dutch Civil Code).

In the new Dutch Insurance Act of 1 January 2006, a limited form of direct action wasintroduced.This direct action, laid down in article 7:954 of the Dutch Civil Code, does not amountto an independent right of injured third parties. A consequence of an independent right (amongothers) is that the insurer is unable to invokecoverage issues against the injured party.

So far, an “independent right” has only beenestablished under limited specific laws (such asthat relating to liability for motor vehicles).According to these specific laws, insurance forthe liabilities concerned is compulsory. Wherethis is the case, article 7:954 of the Dutch CivilCode provides that the injured third party isentitled to directly claim from the insurerwhatever the insured could claim. This alsomeans that all possible coverage issues can beinvoked against an injured party.

One of the conditions included in article7:954 of the Dutch Civil Code is that theinsured has notified its insurer of the claimissued by the injured party. Once this iscomplied with the insured has the option of


Dutch Law 17


directly settling the claim with the injured party, without the involvement of the insurer. Thisprovision thus reflects the freedom of the insured to invoke insurance coverage for a specific loss.

The direct action introduced by article 7:954 only applies to damages resulting from personalinjury or death. Consequently, there is no scope for direct action against insurers by injured partiessuffering material or financial damages.

Section 5 of article 7:954 of the Dutch Civil Code contains provisions which apply where thedamage suffered by several injured parties exceeds the sum insured. In principle in suchcircumstances, the rights of the injured parties will be reduced pro rata. However, in the event thatan insurer is unaware of the existence of other injured parties, he may in good faith pay an injuredparty without being liable for any share that would be due to the injured parties on a pro rata basis.

Criminal fines/penaltiesUnder Dutch law an insured may not recover under a policy of insurance in respect of lossintentionally caused by his own criminal or tortuous act.

Civil/regulatory fines/penaltiesIt is not clear whether there would be any bar on the purchase of insurance in respect of an exposureto civil and regulatory fines and penalties in respect of which it is not necessary to establish anycriminal, dishonest or deliberate conduct on the insured’s part. Where the fine or penalty resultsfrom a negligent act of an insured it may be possible to effect insurance.

Article 7: 962 of the Dutch Civil Code provides for subrogation of the insurer to the possible rightsof its insured against third parties, other than rights based on insurance contracts. Subrogation willalso occur if compensation paid by the insurer was not “mandatory”, for example, an ex gratiapayment.According to section 3 of article 7: 962 of the Dutch Civil Code, it is not possible for aninsurer to assume rights of subrogation against the policyholder, other insured or certain personsthat are in a special relationship with an insured such as spouses or employers.

Houthoff Buruma


5. Subrogation

18 Spanish Law


The general principle applying to the interpretation of insurance contracts (as well as any othercontract) is good faith. Rights must be exercised in accordance with this principle (Article 57Commerce Code,Article 7, Civil Code).The parties are bound by the express terms of the contractand all the consequences that are derived from the principle of good faith, commercial usage andthe law.The contract must be construed literally, provided the terms of the contract are clear andleave no doubt as to the intention of the parties (Article 1281 Civil Code and related case law).

If the contractual words appear to contradict the evident intention of the parties, the intention will prevail over the wording in the contract.The intention of the parties is established bylooking principally at the actions of the parties before, during and after the execution of the contract (Article 1282 Civil Code and related case law). The courts can apply the contraproferentem rule with qualifications depending on whether the contract involves a “mass” (i.e.consumer) risk or a large risk. If it is a mass risk, normally deemed to be “contracts of adhesion” (standard form), the court is likely to resolve any ambiguity in favour of the insured.

If it is a large risk, where the parties are not subject to the otherwise mandatory provisions

of the InsuranceContract Act 1980,and assuming theyhave negotiated onan equal footing,then in the event of obscure orambiguous clausesthe court will not favour theparty that draftedthe clause inquestion, whetherit is the insurer or

the insured.

Spanish Law


Spanish Law 19


The insured is not under a unilateral duty to disclose all material facts that may have a bearing onthe evaluation of the risk, only those he is asked about by the insurer in the proposal form. The duty of disclosure is confined to the questions raised in the proposal form which must not be eithertoo broad or too general.

Any “inaccuracies” or “reservations” in the information provided by the insured when completingthe proposal form will entitle the insurer to rescind the contract within one month of obtainingknowledge of the misrepresentation or reservation, with effect from the date when the basis of therescission was discovered. In these circumstances, the insurer may retain the premium for the periodthe contract was in force, unless he has acted in bad faith or with gross negligence.

However, if the loss occurs before the rescission is notified, the insurer will be only released fromhis obligation to indemnify if he proves that the insured acted in bad faith or with gross negligence.Otherwise the insurer is required to indemnify the insured, but only in the same proportion as thedifference between the premium actually collected and the premium that would have been chargedhad the true information been disclosed.This “proportionality” rule is intended to protect insureds.

“Inaccuracies” has a broad meaning, encompassing simple errors and false statements of factwhich could fall within the definition of misrepresentations. “Reservations” include theconcealment or withholding of information, i.e., non-disclosure of information relevant to theevaluation of the risk.

Rules also exist which deal with the aggravation of the risk during the policy period and the dutyof the insured to notify the insurer, and with the consequences of the notification or theconsequences in the event of a failure to notify.

In the context of third-party liability insurance a third party who has been injured by the insuredhas direct rights of action against the insurer.The insurer cannot raise against the third party any“personal” defences that the insurer may have against the insured, for example, default on payment



20 Spanish Law


of premium.The insurer, however, may raise against the third party any “objective” exclusions setout in the policy or implied by law provided that such exclusions have a direct relation to, or are asignificant factor in, the loss.

It should be borne in mind that certain personal defences, even if expressed as exclusions in therelevant policy, may not be raised against the injured third party. The precise scope of the insuring clause will also be crucial since it will also affect the injured third party: the insurer isentitled to challenge the third party’s claim if, objectively, it falls outside the ambit of the insuringclause. Lastly, it should be noted that the exclusion based on the bad faith of the insured which isincluded in all policies may not necessarily be valid against the third party. In these circumstances itis open to an insurer which is compelled to indemnify the third party under the direct action toseek recovery from the insured if the insured has acted in bad faith.

Criminal fines/penaltiesAs a general rule, section 19 of the Insurance Contract Act 1980 excludes from cover losses causedby the insured acting in bad faith.This is also the first standard exclusion in all insurance policies(see above).

A criminal penalty for an offence (whether minor or serious, or deliberate ornot) may take the form of a fine.The punitivenature or character of such fines in principlemakes their cover by insurance contrary topublic policy. The same applies, in theory, tothe principle of “individuality” of penalties,i.e. that they cannot be “passed on” to another person (this is a matter of debate). Onthis analysis, fines for deliberate acts aretherefore uninsurable.

Although not settled as a matter of law, finesfor offences arising out of recklessness, i.e., non-deliberate acts or omissions, could arguablyconstitute an exception to this generalprinciple.


‘It is difficult tounderstand how theinsurance of anyregulatory fines evenwhen applied tonegligent rather thandeliberate conduct can be deemed not to be contrary to public policy’

Spanish Law 21


Civil fines/penaltiesCivil fines may be imposed by courts in the course of civil proceedings in a variety of situations,the common purpose being to punish and deter conduct which is incompatible with good faith.The “public policy” element may possibly prevent their insurability.

Regulatory fines/penaltiesGenerally, the same principles which apply to criminal fines and penalties apply in this context. Consequently, in principle, regulatory fines will be uninsurable. However, the principle of proportionality requires the authorities to take into consideration the existence ordegree of intent involved in the administrative wrongdoing at the time it was committed.Thissuggests that fines may be applied to negligent, as opposed to intentional, behaviour in aregulatory context. If so, there is some basis for suggesting these types of fines may be insurable,and, in practice, some insurers do provide coverage for this type of fine. The issue howeverremains uncertain: It is difficult to understand how the insurance of any regulatory fines evenwhen applied to negligent rather than deliberate conduct can be deemed not to be contrary topublic policy.

Subrogation is available by operation of the law, hence it does not need to be explicitly set out inthe insurance contract. It is also possible to waive subrogation rights.

On condition that it has paid the indemnity to the insured, an insurer may exercise any rights and claims that would have been available to the insured against the third party liable for the loss,up to the limit of the indemnity paid.

The insurer can bring the action in its own name against the third party.The insurer may nothowever exercise its rights of subrogation to the detriment of the insured.Additionally, the insuredwill be responsible for any damage or prejudice he may cause to the insurer’s subrogation rights.

The insurer may not be subrogated either against any of the persons whose actions or omissions mayhave caused the loss, if they are either persons for whom the insured has responsibility (e.g. employees,dependants) or are a close relative of the insured.This rule will not operate if responsibility arises out offraud or if it is covered by an insurance contract covering that person. In the latter event the scope ofthe subrogation will be limited to the extent of the cover afforded by the contract.

L.C. Rodrigo Abogados

5. Subrogation

22 French Law


Insurance contracts are construed pursuant to ordinary principles of contract interpretation.Construction is a question of fact left to the “sovereign” determination of the lower courts,save in cases of gross misinterpretation.The basic principle is that contracts must not be interpretedwhere they are clear and unambiguous.The Civil Code (CC) provides for non-mandatory guidelines(art. 1156 to 1164), the main principle being that courts must seek to determine the commonintention of the parties. Other guidelines take an objective approach, providing that contract clausesmust be interpreted (i) in favour of the party bound by the obligation concerned, (ii) so as to give theambiguous clause a practical application (as opposed to a meaningless one), (iii) in accordance withthe general purpose of the contract, (iv) so as to make the clause coherent with the other clauses ofthe contract, and (v) in accordance with what is customary in similar circumstances.

Guideline (i) above has been interpreted in the case-law to mean that a contract must beinterpreted against the party who drafted it. Standard terms and conditions imposed by the insurerwill therefore be construed in favour of the insured.This rule does not apply to insurance contractsnegotiated at arm’s length, although lower courts sometimes wrongly take the view that allinsurance contracts must be interpreted in favour of the insured. Ambiguous contract clauses mustalways be construed in favour of the insured where: (i) the insured is a consumer; and (ii) theambiguous clause is a coverage exclusion, in which case it shall be deemed null and void.

Insurance contracts may be rescinded where there has been misrepresentation by the insured, inaccordance with the general rules provided in the Civil Code. Some specific rules applying to insurancecontracts are provided by the Insurance Code (art. L.113-8 and L.113-9). In terms of disclosureobligations, the insured is only required to respond to specific questions regarding the risk that are setout in the underwriting questionnaire; the insured cannot be sanctioned for having failed to volunteersome information, albeit relevant, that was not expressly requested by the insurer or for having provided

French Law



French Law 23


an ambiguous response to a question that was itselfdrafted in vague or ambiguous terms.

Avoidance of the contract is only available wherethe insured/policyholder acted in bad faith, with theknowledge that the information provided was false ormisleading (art. L.113-8 IC). Good faith is alwayspresumed and the burden of proof lies with theinsurer.Where false information deliberately providedby the insured is discovered in connection with a loss,avoidance is available even if that false informationbears no relation to that loss.The insurer is entitled tokeep all the premiums already collected and claimpayment of all further premiums which have fallen due and payable as damages (except in relationto life insurance).

Where the insured/policyholder has provided inaccurate information in good faith, avoidance isnot available (art. L.113-9). If the inaccuracy is discovered prior to the occurrence of any loss, theinsurer may either terminate the contract or choose to continue it, subject to an increased premium.Where the inaccurate information is discovered after the occurrence of a loss, under the rule ofproportionality the insurer is entitled to reduce the indemnity by applying a ratio equal to (i) thepremium rate applied in the contract divided by (ii) the premium rate which should have beenapplied had the insured accurately declared the risk. Similar principles apply where the insured failsto inform the insurer of circumstances occurring whilst the insurance contract is in force, or which aggravate the risk covered or give rise to new risks, so as to render the replies made in theunderwriting questionnaire inaccurate or no longer valid (art. L.113-2 and L.113-4 IC).

A third-party “victim” who has suffered damage is entitled to bring a direct action against theliability insurer of the party liable for that damage (art. L.124-3 IC) by showing that (i) the insuredis liable to compensate his loss and (ii) the damage suffered is covered by the policy.While the directaction in essence depends on the insurance contract, there are specific rules applying to how suchactions may be both pursued and defended, making it to some extent “autonomous” from theunderlying insurance contract. Thus, the insurer may defend the direct action by raising all thedefences that it would be entitled to raise against the insured, except (i) the statutory two-year


24 French Law


limitation period applying to the insured’s action, or (ii) any forfeiture of the policy based on theinsured’s conduct after the damage occurred.

The “autonomy” of the victim’s direct action is illustrated in several ways by case law (i) wherethe insured is placed in bankruptcy, direct action against the insurer remains available to the victim(subject to the deductible) including where the third party victim has failed to file his liability claimwith the trustee in the insured’s bankruptcy, (ii) the victim may take legal action against the insurerwithout naming the insured as a defendant, (iii) a direct action may in some cases be exercisedagainst the insured’s liability insurer, even though the insured himself enjoys some legal orcontractual immunity vis-à-vis the victim, (iv) in international litigation, the admissibility of thedirect action (according to the French courts) is governed by the law of the place where the damageoccurred, not by the law of the contract, thus in the French courts a direct action will be heldadmissible whenever the damage occurs in France, even though the law governing the policy maynot permit this.

Criminal fines/penaltiesCriminal fines are uninsurable under French law as a matter of public policy (art.6 CC), therationale being that passing the burden of criminal sanctions on to an insurer would frustrate thedeterrent purpose of criminal law. This also applies to pecuniary sanctions imposed by criminalcourts in customs or taxation matters.

Civil fines/penaltiesIt is also generally considered that no insurance coverage may be validly taken out in respect of“civil” fines, namely pecuniary sanctions imposed by civil courts in the event of violations of somecivil statutes (chiefly rules of civil procedure, for example, failing to give assistance in establishingthe truth in a civil action; the failure of a witness to appear in a civil court; abuse of civil process;abusing the right to appeal; wrongly challenging a magistrate or a court-appointed expert; etc.).

The question is more uncertain as regards (i) punitive, treble or exemplary damages (such as thosegranted by some US courts in civil matters) in relation to the portion of the damages exceeding thecompensation of the actual damage.A significant reform of the sections of the Civil Code dealingwith contractual and tort obligations is currently under discussion. It proposes the introduction ofsome notion of punitive damages into French law and provides that these punitive damages will beuninsurable; and (ii) certain pecuniary sanctions applicable to the directors of a company placed incompulsory liquidation (art. L.652-1 of the Commercial Code).


French Law 25


Regulatory fines/penaltiesFines imposed by administrative authorities (notably in stock exchange and anti-trust matters) seekto achieve the same objective as criminal fines and are therefore similarly uninsurable.

After paying the insurance indemnity the insurer is, by operation of law, subrogated to the insured’srights and actions against the third parties who caused the damage (art. L 121-12 IC). Statutorysubrogation only applies where payment of the indemnity was legally due under the insurancecontract (a commercial payment may only give rise to “contractual” subrogation by the insured,pursuant to the Civil Code). Subrogation vests the insurer with the same rights and actions as theinsured himself enjoyed vis-à-vis the third party (and/or its own liability insurer), subject to the samelimitations (jurisdiction clauses, statute oflimitation, etc. and, more generally, all thedefences the liable third party could have raisedagainst the insured).

The insurer may be released from itsobligation to indemnify where, by reason of theinsured’s conduct, the insurer’s subrogation rightsare lost or prejudiced (art. L.122-12, 2nd para.).

Where the insurer has only indemnified theinsured for part of its loss, the insured is entitledto seek the balance from the liable third partyand enjoys a priority over the insurer on anydamages awarded.

No subrogation may take place in favour of the insurer against, inter alia, the insured’s employeesor servants, except in cases of malevolent wrongful act. However, the subrogated insurer is entitledto bring a direct action against the liability insurer of these employees.The same restrictions applyto contractual immunity i.e. where the parties have waived any and all rights of action against oneanother, unless specifically provided to the contrary.

Subrogation does not apply to life insurance.

Bernard Hertz Béjot

5. Subrogation

‘The insurer may bereleased from itsobligation to indemnifywhere, by reason of the insured’sconduct, the insurer’ssubrogation rights arelost or prejudiced (art.L.122-12, 2nd para.)’

26 Italian Law


Insurance policies are construed according to the principles applicable to general contracts. Undersection 1362 of the Italian Civil Code, a contract must be construed according to the commonintention of the parties, even if such interpretation requires going beyond the literal meaning of thewords used. The common intention of the parties must be assessed in the light of the generalconduct of the parties, including conduct after the execution of the contract.

If ambiguity exists, any general contractual provisions drafted by one of the parties withoutnegotiation with the other party are construed in favour of the party who did not draft theprovisions.

Where different interpretations are possible, contractual provisions are to be interpreted in orderto render them valid and effective rather than void and ineffective (the “conservation rule”).

Italian Law


Italian Law 27


Under section 1892 of the Civil Code, if the insured wilfully or with gross negligence presents theinsurer with incorrect or false declarations, or fails to disclose circumstances affecting the risk, theinsurer is entitled to terminate the insurance contract within three months from the date the insurerfirst becomes aware of the false representations or omissions.

If, before the expiry of this three-month period, the insurer fails to inform the insured in writingthat he intends to terminate the insurance contract, then the insurer’s rights to terminate for non-disclosure or misrepresentation will be time-barred.

However, if the event triggering coverage (i.e. the notification of a claim in case of a claims-madepolicy) occurs before the insurer gains knowledge of the non-disclosure/misrepresentation or beforethe three-month deadline expires, then theinsurer is entitled to decline indemnity, and isnot required to terminate the policy.

If the misrepresentation is not wilful orgrossly negligent, the indemnity due under thepolicy will be reduced in the same proportion asthe difference between the premium paid andthe premium which would have been appliedhad the insurer been correctly presented withthe relevant circumstances.

Many court decisions have stated that thecircumstances which the insured has to discloseto the insurer are those which would increasethe likelihood that the insured event will occur.

These principles do not apply if theinformation which the insured fails to declareor has declared incorrectly were either knownby the insurer or could have been discovered byexercising ordinary diligence.


28 Italian Law


There is no general right afforded to athird party, who has suffered damage as a consequence of the insured’s errors oromissions, to pursue any remedy or claimfor indemnity against the insurer.

However, the insurer may decide tocompensate the damaged party/claimantdirectly, and must do so if required by theinsured.

In certain sectors of regulated insurancelaw and under specific statutoryprovisions, the party who suffers thedamage is entitled to seek to recover itslosses directly from the insurer of theperson who caused the damage. In thesecircumstances the insurer is normallyprevented from raising any objectionconcerning the policy with the third party,excepting any defences concerning theexistence of the insurance cover itself.The third party will then be entitled torecover from the insured any amountwhich is not payable under the policy.

Criminal and administrative fines/penaltiesThere is a general principle in Italian law that losses arising from criminal and administrative finesand penalties cannot be validly insured, as this would imply an assignment of the “punishment” fromthe party committing the wrong to a third party, the insurer.Any insurance contract purporting tocover criminal and administrative fines and penalties would be therefore void and ineffective.



Italian Law 29


This principle has been confirmed by a decision of the Supreme Court of Cassation (though notbinding on lower courts) and by the ISVAP (the Italian Regulatory Authority on Insurance)guidelines.

Civil fines/penaltiesThere are no recognised civil fines or punitive damages under Italian law.

Losses – including civil liabilities – resulting from fraudulent/intentional misconduct of theinsured cannot be validly insured under section 1900 of the Civil Code.

Regulatory fines/penaltiesThe principles applying to criminal and administrative fines set out above also apply to fines issuedby regulatory authorities.

An insurer who has paid an indemnity under an insurance contract is entitled to exercise theinsured’s rights to seek compensation from third parties, up to a cap of the amount of the indemnitypaid to the insured. The right of subrogation can be validly waived by the insurer.

Negri-Clementi,Toffoletto, Montironi & Soci

5. Subrogation

‘There is a general principle in Italian law thatlosses arising from criminal and administrativefines and penalties cannot be validly insured,as this would imply an assignment of the“punishment” from the party committing the wrong to a third party, the insurer.Any insurance contract purporting to cover criminal and administrative fines andpenalties would be therefore void and ineffective’

30 Israeli Law


Insurance policies are subject to the general rules of contract construction.The basic rule providesthat the contract must be construed according to the intention of the parties, and the commonobjectives, aims and interests that the parties sought to achieve. The intention of the parties is to be construed not only from contract wording itself, but also from external sources, including pre-contractual negotiations, the behaviour of the parties following formation of the contract,commercial usage as between the parties, other contractual relations between them and any othersource which may indicate the parties’ intention. Israeli courts have ruled that a consideration of theparties’ intention should be determined by the specific circumstances of each case (C.A. 4628/93The State of Israel v.Appropim, PDI 49 (2) 265).

A fundamental principle of Israeli jurisprudence is the principle of good faith which has also beenadopted in the construction of insurance policies.

Israeli Law


Israeli Law 31


In view of the inequality between the parties toan insurance contract, Israeli courts havedeveloped additional rules of construction whichinvariably favour the insured. These include giving effect to the expectations of the partieswith an emphasis on the insured’s reasonableexpectations, as well as the “contra proferentem”rule. Given that the policy has been drafted by theinsurer, this rule is almost always applied toconstrue the policy in favour of the insured.Another important rule of construction is thatthe policy provisions should always be construedin a manner which gives them force and effect.Where ambiguity exists, the courts will prefer aconstruction that affords policy coverage.

The proposal form, documents attached thereto (such as financial statements of the company inD&O insurance) or any other documents exchanged between the parties prior to inception of thepolicy, are deemed to be an integral part of the policy. Any contradicting provisions in any one ofthese documents and the policy itself will always be construed in favour of the insured.

Under Israeli law, the insured’s duty to disclosure information on its own initiative is minimal. Section 6(a) of the Insurance Contract Law 1981 provides that an insured has a duty torespond to a question raised by the insurer in the proposal form regarding a material matter in a truthful and complete manner. A question regarding a material matter is defined as a question regarding a matter that may affect the decision of a reasonable insurer to enter into theinsurance contract or may affect the decision of a reasonable insurer regarding the terms of theinsurance contract.

Section 7 sets out the consequences of non-disclosure. If the insured event has already occurred,insurers may rely on non-disclosure to fully repudiate liability only if they can prove that (i) thenon-disclosure was made with fraudulent intent; or (ii) no reasonable insurer would have acceptedthe risk even for a higher premium. In all other cases, the consequence of non-disclosure is that


‘In view of theinequality between the parties to aninsurance contract,Israeli courts havedeveloped additionalrules of constructionwhich invariably favour the insured’

32 Israeli Law


insurers will only be liable for a proportionate payment of insurance benefits, calculated at thepremium rate that should have been charged had full disclosure been made: for example if insurerscan show that they would have charged twice the premium had they been aware of the true natureof the risk, they will only be liable to pay 50% of the loss.

The burden of proof which insurers must bear in order to prove that they were defrauded by theinsured is higher than the usual burden of proof which applies in civil cases.

In the absence of a proposal form the insured does not have a duty to initiate disclosure, unlessthe decision not to disclose is made with fraudulent intent.

Wide-ranging questions which place an unfair burden on the insured are not allowed.

Section 68 of the Insurance Contract Law 1981 creates direct privity between a liability insurer and a third party who has sustained loss as a result of the insured’s wrongdoing. Notwithstandingthis provision, the courts have ruled that the policy should not be deemed a contract in favour of athird party. Therefore the insured may object to the third party’s demand for enforcement of the policy, so long as his objection is raised in good faith and is based on legitimate reasons. In anyevent, the insurer may raise against the third party any defence which it was open to him to raiseagainst the insured.

In the event of bankruptcy or liquidation of the insured, the policy will be deemed a contract infavour of a third party. The insurance benefits will not constitute part of the estate and the thirdparty will be entitled to recover directly from insurers, pursuant to the policy terms and conditions.

If insurers have accepted the risk is covered under the policy, they are precluded from agreeingsettlement with a third party unless the insured’s prior written consent has been obtained.

Criminal fines/penaltiesThere is no legal provision precluding general liability insurers from indemnifying an insured inrespect of fines and penalties. Practically all policies include a relevant exclusion. Therefore, there



Israeli Law 33


are very few court precedents in this area. In those few cases where this issue has been consideredthe courts have tended to question the validity of the insurance on the grounds of public policy.However, these judgments were generally qualified with the comment that each case should bedetermined according to the specific circumstances. In cases where indemnification was sought forminor offences, which did not require criminal intent or negligence (namely, strict liability), thecourts did not completely rule out the possibility of indemnification by insurers.

Civil and regulatory fines/penaltiesPublic policy considerations are also applicable to the question of the insurability of civil andregulatory fines. It would appear that public policy may not necessarily prohibit insurance of finesrelating to minor breaches, which are technical by nature, and are not carried out intentionally.

D&O policies are subject to the Companies Law 1999 which includes strict provisions regardinginsurance of fines and penalties.

Section 62 of the Insurance Contract Law 1981 affords insurers subrogation rights to the extent thatinsurers have indemnified the insured. Insurers’ rights of subrogation are created by law and therefore noassignment of the insured’s rights is required.

Insurers step into the insured’s shoes and therefore any defence which the third party has against theinsured will preclude recovery against him by insurers.

Insurers are prohibited from exercising their subrogation rights in a manner which may prejudice theinsured. In view of this provision, the insured will be allowed to sue for any sum not recovered frominsurers.Where a third party has limited financial capabilities, the insured should have preferential rightsto collect from the third party’s limited resources.The insured is prohibited fromprejudicing insurer’s subrogation rights, therefore if the insured settles with thethird party or waives his rights against him, he may be liable to compensate hisinsurers for inability to recover from the third party. Insurers are precluded fromexercising their right of subrogation against a third party who enjoys a specialrelationship with the insured, such as employer/employee relations or afamily member, provided the third party has not caused the damageintentionally.

Gross, Orad, Schlimoff & Co

5. Subrogation

34 US Law


The ordinary rules of contractual interpretation apply to insurance policies. If the contract languageis clear and explicit, it governs. If it is ambiguous, the courts will interpret the language to give effectto the reasonable expectation of the insured. Some jurisdictions will not defer to the insured’sexpectations when the policy has not been drafted by an insurer, or when an insured hassophisticated knowledge of insurance and is familiar with terms of art in the industry.

Typically, when a contract provision is found to be ambiguous, the courts will allow the admissionof extrinsic evidence/parol evidence to assist in the explanation of the provision. The burden ofproof, however, will be on the drafter of the contract. In certain jurisdictions the courts are lessrestrictive in their application of the parol evidence rule, allowing the introduction of parol evidenceeven if the policy language is unambiguous.

US Law


US Law 35


Parol evidence cannot generally be used to create ambiguity in the provision in the first place; however, if the issue is one of mutual mistake by the parties, the court will need to considerextrinsic evidence.

Courts in various jurisdictions have held that an insured has a duty to provide the insurer only withthe information the insurer has specifically requested in its proposal (“application”). Although thecourts have not clearly articulated a rationale for the rule, it appears that the rule is derived fromthe notion that an insurer, who has the requisite knowledge and expertise to assess risks, should bearthe burden of requesting specific information. Moreover, one underlying rationale is that ifinformation is not requested by the insurer, it is necessarily immaterial.The general rule regardingnon-disclosure does not always apply, however. For example, the court may void the policy wherethe insured fraudulently conceals material information, regardless of whether the insurer hasrequested it. In order to establish fraudulent concealment, it must be shown that there exists a wilfulintent to defraud and not a mere mistake or oversight.

Because of the lack of privity between a third party and an insurer, a third party does not have acommon law right to bring a direct action against an insurer.

Some jurisdictions, through “direct action statutes,” allow for third parties to bring actions againstan insurer. States and territories in which direct action statutes exist are: Connecticut; Georgia;Guam; Iowa; Kansas; Louisiana; Nebraska; New Jersey; Puerto Rico; Rhode Island; and Wisconsin.In those jurisdictions, the statutory right is premised on the idea that a third party can only recoverfrom the insurer by virtue of the contract existing between the insurer and the insured. Direct actionstatutes do not enlarge the coverage afforded by a policy. Thus, if an insurer has a valid coveragedefence the third party’s rights against the insurer would likewise be extinguished.

Illinois is one example of a jurisdiction which does not have a direct action statute; however, itspublic policy dictates that third parties have a substantial interest in how insurance questions areresolved.The Illinois Supreme Court has held that “this interest is best protected by having the claimants



36 US Law


participate directly in the litigation between the insurance carrier and the insured, rather than by allowing theclaimants to sue the carrier independently.” (Hapag-Lloyd (America), Inc. v. Home Ins. Co., (2000)).

Under New York law, insurers cannot be sued by a third party, unless that third party has secureda judgment against an insured. Even then, there is an argument that there would be no right ofaction against the insurer unless the underlying matter involved bodily injury or property damage.

Criminal fines/penaltiesAlthough there is limited case law discussing the insurability of criminal fines and penalties, the caselaw which does exist appears to be consistent throughout the various jurisdictions. It is presumedthat one of the reasons why there is little case law regarding this issue is because of the policyexclusions that clearly exclude such fines and penalties. The courts which have addressed this issue have found that insuring criminal fines and penalties violates public policy. The underlyingpublic policy is to discourage the commission of wilful torts or criminal acts and consequently, therationale appears to be that the deterrent effect of such fines and penalties should not be transferredto the insurer.

Civil fines/penaltiesIt is unclear whether civil fines and penalties are insurable. However, it appears that if the purposeof a civil fine or penalty is punitive in nature, some jurisdictions, in an effort to promote deterrence,


US Law 37


may not allow the wrongdoer to shift liability to an insurer because this will result in a failure topunish the wrongdoer.

The law throughout the various jurisdictions is split onthe issue of whether punitive damages that are directlyassessed against an insured for its wrongful conductare insurable. Some jurisdictions have found thatpunitive damages arising from vicarious liabilityare insurable. By contrast, the New York Courtshold that vicarious liability for punitive damagesis not insurable.

Regulatory fines/penaltiesRegulatory fines and penalties such as thosesought by the SEC and the IRS are treated similarlyto civil fines and penalties.As a result, courts would belikely to use an analysis similar to that set out above.Thekey issue would appear to be whether the fine or penalty isintended to punish and deter.

The United States recognises two types of subrogation: conventional and equitable.Conventional subrogation is created by an agreement or contract between parties granting theright to pursue reimbursement from a third party in exchange for payment of a loss. Equitablesubrogation does not depend upon a contract but arises by implication in equity to prevent an injustice.

Courts in several jurisdictions have developed anti-subrogation rules, whereby an insurer hasno right of subrogation against its own insured for a claim arising from the very risk for whichthe insured was covered and for which the insurer accepted premiums, and thus prevent aninsurer from passing its loss to the insured. Such rules also prevent insurers from having a conflictof interest that might deprive an insured of a vigorous defence. It is important to note that somejurisdictions have developed an exception to the anti-subrogation rule applying to an insurer, assubrogee, bringing an action against an insured based on the insured’s fraudulent acts.

Kissel Pesce Hirsch & Wilmer LLP

5. Subrogation

38 Canadian Law


Generally, ordinary rules of contractualconstruction apply, but with a few significantexceptions.The contract will be given whatevermeaning is required for it to be commerciallyreasonable. Any ambiguity will be construedagainst the person who drafted the contract: ifthe policy is in standard form rather thanindividually drafted, doubt will be resolved infavour of the insured. In addition, eachprovince’s statutes may contain mandatoryclauses that will be read into any contractdeemed governed by the law of that province.For example, in Quebec (the province with therules most favourable to insureds):• if there is a discrepancy between the

proposal and the policy, the proposal willprevail, unless the insured was advised of thedifference in a separate document.

• Liability insurers are required to take up theinsured’s defence and pay for costs and interestin addition to limits.This has been interpretedas imposing a nil defence costs deductible.

• An insurer may decline cover for late notice only if it proves that it has suffered prejudice.• A clause must be inserted in any English language policy indicating that the parties have

expressly requested that it is not drafted in French.

In common law provinces, generally the statutes direct the courts to apply discretion, on a balanceof equities, to determine whether the insured should be relieved from forfeiture of his rights forfailure to adhere strictly to conditions regarding proof of loss and other statutory conditions. Thus,late notice is often forgiven (even if it is a condition precedent), but failure to co-operate in one’s owndefence is not. Drafting conditions either as triggers for coverage or as exclusions can be helpful.

Canadian Law


Canadian Law 39


Canadian courts tend to prefer results that favour insureds at the insurers’ expense, often resortingto contorted interpretation to do so. For example:• an insured will not be left without cover even if on a literal interpretation of the attachment

requirements under consecutive policies, the claim would not attach to either policy.• “Other insurance” clauses will not be interpreted so as to leave the insured without any cover.

Non-disclosure and misrepresentation are generally treated in a way similar to English law. Thestandard rule is uberrimae fides, but the scope of duty is circumscribed by what information areasonable insurer requires to reach a decision to underwrite the risk (and on what terms).Questions on the “proposal” (“application form”) are strong evidence of that, but the questions arenot necessarily conclusive. In some cases, expert opinion evidence is admissible on this point.Remedies vary by province, by the terms of the proposal, the language of the policy, and the gravityof non-disclosure.

Quebec has a rule of proportionality where the non-disclosure or misrepresentation would not be of a nature to have caused the underwriter to decline the risk, but merely to have adjusted thepremium, and where the insured was in good faith. For example, if the underwriter would have doubled the premium, he pays only half the indemnity. If the insurer proves that a reasonable insurerwould not have underwritten the risk at all,or that the insured was in bad faith, the policy may be avoided.

The insured need only disclose facts which the underwriter does not already know, such as factsof which the insured has special knowledge and are not notorious. This has given rise to theconcept of a “reasonable underwriter”, who is required to be knowledgeable about the risk andbe current with industry characteristics (e.g., health risks of asbestos – Canadian Indemnity Co. vCanadian Johns-Manville Co. (1990) and information in his own files – The Coronation InsuranceCo. Ltd. v Taku Air Transport Ltd (1991)).

Two situations are possible. First, throughout Canada, the third party can seek execution of ajudgment against the insurer by means of seizure after judgment. If the insured owes money to the



40 Canadian Law


third party victim, and the insurer owes an indemnity to the insured, the third party victim canclaim the indemnity directly from the insurer. In this scenario, all coverage defences areavailable.The insurer can resist the seizure by demonstrating that he does not owe an indemnity.

Second, uniquely in Quebec, the third party “victim” has a direct right of action pursuant toArticle 2501 of the Civil Code of Quebec against the liability insurer either instead of, or as aco-defendant with, the insured in any liability matter. Moreover, the insurer may not invokepost-loss events against the third party, although it can then seek to recover damages from theinsured. Therefore, denials of cover based on late notice and failure to co-operate can bemeaningless in Quebec.Also, any attempt to circumvent the insurer’s statutory obligation to paydefence costs in Quebec can be undermined if the third party sues the insurer, as the insurerwill defend itself from the first dollar and without regard to limits. Side agreements betweeninsured and insurer may be useful, although none have ever been tested.

On the issue of who is entitled to the insurance funds where there are insufficient limits topay all claims, the general rule is “first past the post”. This is seen as the best method ofencouraging speedy settlements.

Criminal fines/penaltiesThere is no statutory prohibition againstcovering fines and penalties. However, statutelaw across Canada forbids an insurer fromindemnifying an insured for deliberatelyinflicted damage. The concept of “courtingthe risk” may also apply to situations wherefines and penalties are usually levied. In otherwords, the underlying behaviour that attractspunitive damages and criminal offences thatrequire mens rea (i.e. an intentional state ofmind) would often prevent the insurability ofthe entire claim. Despite the fact that there isno difficulty in excluding defence costs, somepolicies cover them. (This can in fact beadvisable as it will allow the insurer to controlevidence).


‘There is no statutoryprohibition againstcovering fines andpenalties. However,statute law acrossCanada forbids aninsurer fromindemnifying aninsured for deliberatelyinflicted damage’

Canadian Law 41


Civil and regulatory fines/penaltiesThe same rules apply, but as civil and regulatory fines and penalties are sometimes levied without the need to demonstrate intent, the results may differ, so policy language is required toexclude them.

In theory, Canadian law is similar to English law on this point. However, if there are numerous ‘jointinsureds’ under the same policy (such as in a wrap-up situation), or in situations where it can beshown that a third party paid a portion of the premium (i.e. in commercial shopping centres wherethe lease obliges the tenants to pay a proportionate share of the insurance on the building), then theinsurer will generally be deemed to have waived its rights of subrogation against those joint insuredsor deemed beneficiaries, unless there is clear language to the contrary in the relevant contract.

Nicholl Paskell-Mede

5. Subrogation

42 Australian Law


A series of authorities in Australia, includingcases from the High Court, have outlined theapproach taken to the construction of aninsurance policy. The courts treat insurancepolicies as a species of commercial contract.They seek to give the words used in a policytheir ordinary meaning, having regard to thecommercial purposes of an insurance policy.Attention is often focused on the contraproferentem rule of interpretation which involvesconstruction of a policy by favouring aninterpretation that would benefit the party whodid not prepare the document (invariably theinsured in the context of insurance policies) if the meaning is not otherwise clear. This principlehas not prevailed as significantly in recent years, particularly in relation to insurance policiesissued in a commercial context, for example to large financial institutions or D&O policiescovering directors of large companies who possess a degree of commercial sophistication.

The Insurance Contracts Act 1984 (Cth) (ICA) significantly modifies the previously existingcommon law position. Section 21 of the ICA provides that an insured has a duty to disclose to theinsurer, before the relevant contract of insurance is entered into, every matter known to the insuredthat the insured knows to be relevant to the insurer’s decision whether to accept the risk and, if so,on what terms, or that a reasonable person in the same circumstances could be expected to knowto be a relevant matter. In other words, while there is a subjective limb to the test of what ought be disclosed, there is also an objective limb adjudged by reference to the “reasonable person”. The

Australian Law



Australian Law 43


test is relevance rather than materiality but the determining factors are very similar.

Section 21 also sets out certain matters that do not need to be disclosed: matters that diminishthe risk; matters of common knowledge; matters of which the insurer knows or ought to know; ormatters for which the duty of disclosure is waived.

The ICA also provides that an insurer shall, before a contract of insurance is entered into, clearlyinform the insured in writing of the general nature and effect of the duty of disclosure (section 22).

The remedies for non-disclosure are set out in section 28. An insurer can only avoid the policyin the event of fraudulent non-disclosure. Otherwise the insurer’s remedy is limited to reducing itsliability in respect of a claim to the amount that would place the insurer in the position it wouldhave been in if the non-disclosure had not occurred.

Section 31 of the ICA allows the court, when considering a particular claim, to disregard anavoidance that has been made for non-disclosure where not doing so would be harsh and unfair,provided the insurer has suffered no prejudice.

These provisions of the ICA relating to non-disclosure are currently under review by the FederalGovernment.

At common law, a third-party claimant with a claim against an insured cannot recover money inrespect of the insured’s liability directly from the insurer. However, there are a number of statutoryrights given to such claimants.

Firstly, under section 51 of the ICA, a third party claimant may recover directly from a liabilityinsurer where the insured has died or cannot, after reasonable enquiry, be found.

Secondly, section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) (there aresome similar provisions in other jurisdictions in Australia) provides for a statutory charge overinsurance moneys applying to the liability of an insured. The charge is enforceable by way of direct action against the insurer in the same way as if the action were an action to recover damagesor compensation from the insured. However, leave of the court is required. Leave will not be grantedwhere an insurer is entitled under the terms of the contract of insurance to disclaim liability andproceedings necessary to establish this right have been commenced.


44 Australian Law


Thirdly, in circumstances where a company has been deregistered (usually, though not always,because it has gone into liquidation), section 601AG of the Corporations Act 2001 (Cth) creates ineffect a new cause of action. It permits a person to recover from the insurer of a deregisteredcompany an amount that was payable to the company under the insurance contract if the company had a liability to that person and the insurance contract covered that liability immediatelybefore deregistration.

Criminal fines/penaltiesUnder the Australian common law, insurancepolicies can be found to be illegal, void orunenforceable on the basis that they are contraryto public policy. The test applied in relation tothe public policy rule is whether the contractoffends widely accepted community standards.

It is a general principle of the law of liabilityinsurance that courts will refuse on the groundsof public policy to enforce a policy whichpromises to indemnify an insured againstliability for damage or injury which is the foreseeable result of an intended criminal act, or in respectof a fine or other punishment.

Not all contracts to indemnify a criminal liability will be illegal or unenforceable. In the law ofinsurance, the courts have often drawn a line between criminal acts which are intentional andcriminal acts which are inadvertent and therefore insurable. For example in the case of a strictliability offence, the court may allow a person to be indemnified where it is satisfied that thedefendant was “morally” innocent.

It is unlikely that cover for defence costs relating to criminal proceedings will be contrary to publicpolicy and for example,many D&O policies provide such cover under advancement of costs provisions.

Civil fines/penaltiesTraditionally, civil penalties have been excluded on the basis that they fulfil the same function ascriminal penalties but without the same degree of stigma. However, in more recent times there hasbeen a move to cover civil penalties including pecuniary penalties.


‘The courts have oftendrawn a line betweencriminal acts which are intentional andcriminal acts which are inadvertent andtherefore insurable’

Australian Law 45


If cover is provided, it is common for it to be offered by way of an extension and to be phrasedalong the lines that cover is provided for fines and penalties provided that the insurer is notprohibited from paying the pecuniary penalties.

Cover for fines and penalties is particularly relevant in the D&O context: sections 199A and 199Bof the Corporations Act 2001 (Cth) restrict the circumstances in which a company can indemnify an“officer” and also pay an insurance premium on his or her behalf. For example, a company isprohibited from indemnifying an officer for a liability for a pecuniary penalty order or a compensationorder under the Corporations Act or a liability which did not arise out of conduct in good faith.

Regulatory fines/penaltiesRegulatory fines and penalties can be criminal or civil.The question of insurability will thereforebe determined by the principles set out above, depending on whether the fines are criminal or civil.

The common law in Australia is similar to the English position; an insurer, once it has extendedindemnity to the insured, is entitled to exercise rights against third parties in the insured’s name.

The right of subrogation at common law is subject to the ICA, which contains a number ofprovisions relating to subrogation. In summary:• under section 56 of the ICA the insurer does not have a right of subrogation where the third party

stands in a family or other personal relationship with the insured and various other conditions are met;• section 66 of the ICA removes the insurer’s right of subrogation to an employer’s rights against

an employee where the conduct of the employee that gave rise to the loss occurred in thecourse of employment and was not serious or wilful misconduct;

• section 67 of the ICA entitles an insurer to keep any amount it recovers in excess of an insured’sactual loss (under the common law any ‘windfall’ received in a recovery action had to be paidto the insured).This section of the ICA is subject to the express terms of the policy and can bevaried by agreement after the loss has occurred;

• section 68 of the ICA provides that an insurer cannot rely on a provision in a policy whichexpressly excludes or limits the insurer’s liability in the event that an insured, by agreement witha third party, has excluded or limited its rights to recover damages from that third party (therebyremoving any right of subrogation), unless it clearly informs the insured in writing of the effectof the provision before the policy is entered into.

Ebsworth & Ebsworth

5. Subrogation

46 Contacts


ContactsBarlow Lyde & Gilbert LLPFrancis Kean Colin Crolyemail: [email protected] email: [email protected]: www.blg.co.uk�England

�Germany

�Netherlands

�Spain

�France

�Italy

�Israel

�United States

�Canada

�Australia

Bach Langheid & DallmayrDr Reinhard Dallmayremail: [email protected]:www.bld.de

Houthoff BurumaHans Londonck Sluijkemail: [email protected]:www.houthoff.com

L.C. Rodrigo AbogadosJorge Angellemail: [email protected]:www.rodrigoabogados.com

Bernard Hertz BéjotSylvain Rieuneauemail: [email protected]:www.bhbfrance.com

Negri-Clementi,Toffoletto, Montironi & SociGiorgio Corbettaemail: [email protected]:www.nctm.it

Gross, Orad, Schlimoff & Co.Harry Orademail: [email protected]:www.grosslaw.co.il

Kissel Pesce Hirsch & Wilmer LLPRichard Kisselemail: [email protected]:www.kphwlaw.com

Nicholl Paskell-MedeMindy Paskell-Medeemail:[email protected]:www.npm.ca

Ebsworth & EbsworthTricia Hobsonemail: [email protected]:www.ebsworth.com.au

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International Comparative Review ofLiability Insurance Law

international comparative review of liability insurance law

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