PEICL: the Principles of European Insurance Contract Law

This guide was last updated on 27th February 2008.

On 17th December 2007, a European project group published a draft set of Principles of European Insurance Contract Law (PEICL) that go further than the current proposals for insurance law reform put forward by the English and Scottish Law Commissions.

Harmonisation

The PEICL are the product of the Restatement of European Insurance Contract Law project, which aims to set up a voluntary insurance contract law regime across the EU. It is part of a wider programme for the creation of a common frame of reference for European general contract law.

Although there has been significant progress towards a single European insurance market, relatively little cross-border insurance business is actually being done outside the field of large commercial risks. Differences in national laws and regulations mean that insurers still need to tailor their wordings to meet local requirements.

The Restatement hopes to change this by allowing parties to opt out of national law regimes and agree that the insurance contract will be governed by the PEICL.

Once chosen, the PEICL would apply as a whole. There is some flexibility, however, in that any provision not designated mandatory can be derogated from, as long as it is not to the detriment of the insured. And in the case of certain risks (broadly, transport, credit and suretyship and commercial insureds over a certain size) derogation is allowed for the benefit of either party.

Scope

The principles cover a wide range of matters, many of which are outside the scope of the Law Commissions' review. They include a cooling off period, an opt-out system of automatic annual renewals and time limits on making claims under the policy.

They also cover issues the Commissions have not yet addressed, such as damages for additional losses arising from late payment of insurance claims.

Non-disclosure

Where the two projects overlap, the PEICL tend to go further. For instance, under PEICL insureds are only obliged to provide insurers with information in response to questions asked. The Law Commissions propose a similar approach for consumers but leave businesses with a duty to volunteer information.

In the case of negligent breach, the PEICL remedy would be proportionate. Provided the loss claimed under the policy was caused by an element of the risk which was the subject of the non-disclosure or misrepresentation, the insurer would be entitled to be put in the position it would have been in had it known the information.

For instance, if the insurer would have imposed a different premium or different terms, the claim will be payable proportionately or in accordance with those terms. If the insurer would not have written the risk at all, nothing will be payable.

The Law Commissions propose similar proportionate remedies for negligence but they do not suggest there should be a causal connection between breach and loss. 

Under both sets of proposals, innocent or inadvertent breach would give the insurer no remedy. In cases of fraud, however, the insurer would be entitled to avoid the contract.

Precautionary measures

The PEICL severely restrict insurers' remedies for breach of "precautionary measures" - clauses that require the insured to perform or not perform certain acts before an insured event occurs.

This includes certain types of conditions precedent (terms that expressly state that, if the insured fails to comply with the condition, the insurer will not be liable). It may also cover some warranties (conditions, often in the form of a promise to do or not do something which, under current English insurance law, must be strictly complied with or the insured automatically loses its cover).

Under the PEICL, a precautionary measures clause that allows the insurer to end the contract for breach will only be effective if the insured acted with intent to cause the loss or recklessly and with knowledge the loss would probably result.

If the clause provides the insurer will not be liable for all or part of the claim, it will only be effective to the extent the loss was caused by the non-compliance and the insured acted with intent or recklessly.

Again, although the Law Commissions’ proposals on warranties would require a causal connection between the breach and the loss, they do not go so far as requiring intent or recklessness on the part of the insured.

The Commissions are not proposing to look into conditions precedent. Under English law, the court will normally uphold a term that is a condition precedent to insurer’s liability if it is clearly expressed, whether or not the breach has caused prejudice to the insurer.

Notice of insured events

A common form of condition precedent is the requirement to notify a claim (or circumstances likely to give rise to a claim) within a certain period, failing which the insurer will not be liable to pay. 

Under the PEICL, breach of a notification clause will only entitle the insurer to reduce the claim and only to the extent it has suffered prejudice. 

In addition, notices under the PEICL generally do not have to be given in any particular form. Notice of an insured event will be effective on dispatch and can be given by another person. The policy may, however, specify a time limit as long as it is reasonable and not less than 5 days.

Abusive clauses

The PEICL also address the potential problem of insurers imposing unfair standard terms.

Abusive clauses (terms that have not been individually negotiated and which create a "significant imbalance") will not be binding on the insured. If the contract can carry on without the offending clause, it will do so. If not, the clause will be substituted by one "which reasonable parties would have agreed upon had they known the unfairness of the term". 

The Law Commissions' proposals take a slightly different approach. They would invalidate standard written terms in business insurance that give the insurer greater rights to avoid claims than it would have under the default regime, if this would defeat the insured's reasonable expectations of cover. Consumers would have the benefit of protections provided under the mandatory regime.

Insurers’ duties

Some aspects of the PEICL, such as what information should be set out in the insurance contract, have their closest equivalent in the UK’s regulatory regime.

The PEICL, for instance, impose a duty on insurers to warn the insured about any inconsistencies between the cover and the insured’s requirements. Insurers must also warn the insured when cover will start, if he mistakenly believes it will begin when he submits his application. A failure to warn in such circumstances could render the insurer liable for any losses caused by the breach.

In the UK, high-level principles in the Financial Services Authority's Handbook oblige insurers to treat customer fairly and there are guidance notes and rules in the Insurance Conduct of Business Sourcebook, about establishing the insured's demands and needs, eligibility and suitability and what product information must be given.

Where such requirements are expressed as a rule (rather than as guidance) the insured has the right to sue for damages for breach.

Next steps

The PEICL are still in their first draft. The final version should be ready by the end of 2008 and will be accompanied by a commentary expanding on the proposals.

Contact: Emily Bourne (emily.bourne@pinsentmason.com / 020 7418 7099)

See: Principles of European Insurance Contract Law (PEICL) (33-page / 177KB PDF)

See also: Proposals for insurance law reform: pre-contract information and warranties, an OUT-LAW guide