Response of the International Association of Legal Expenses Insurance (RIAD) to the European Commission’ s Report on certain issues relating to Motor Insurance and Legal Expenses
Brussels, December 2007
In June 2007 the European Commission published the results of an analysis it conducted in response to a request by the European Parliament: during the second reading of the 5th Motor Insurance Directive the Parliament had discussed how to include all necessary and appropriate legal costs borne by victims of road accidents in the scope of cover of the motor third party liability (MTPL) insurance. The reason why the European Parliament raised this issue was that, according to the European Motor Insurance Directives, MTPL insurance must cover damages to property and personal injuries and the Parliament had been concerned that non-resident victims of road accidents would risk paying their own litigation costs in case the law applicable in the event of a cross-border accident would not foresee the compensation of legal expenses.
Subsequently, the Commission examined two questions: firstly; the availability of voluntary legal expenses insurance in the Member States and, secondly, the impact on the costs of MTPL insurance premiums if victims' legal expenses were to be obligatorily covered by the MTPL insurance of the liable party. RIAD, as the representative body of legal expenses insurers, would like to take this opportunity to respond to the Commission’s findings and answer some of the questions raised in the report.
RIAD’s key findings:
- While legal protection insurance is broadly available in the old EU Member States the markets of the new Member States still need time to develop and depend on the establishment and defence of a healthy legal environment which stimulates entrepreneurial initiative. (see III. and IV.)
- Neither the inclusion of legal costs in the damage covered by the MTPL insurance of the liable party nor the introduction of obligatory legal protection insurance are a sound solution for better protecting victims of road traffic accidents. (see V. and VI.)
- Before taking any further action it must be ascertained that problems actually exist to an extent which calls for further European (legal) initiatives. (see VII.)
- The soundness and justification of national “general good” rules must be scrutinised in order to prevent that markets are sealed off for certain providers of services. (see III. 2.)
RIAD is the International Association of Legal Expenses Insurance representing approx. 60 insurers from 18 countries. Its members are specialised in legal expenses insurance and are therefore directly concerned by the issues related to litigation costs of victims of road traffic accidents in the context of motor insurance. As stakeholders and specialists in this area we address some of the key aspects and believe that the following information and comments will help adding some substance to the ongoing discussions.
II. The role of Legal Protection Insurance
Legal protection insurers are acknowledged as valuable partners of their policy holders who, in conformity with the European Motor Insurance Directives, do their utmost to ensure a rapid settlement of claims. The report rightly recognises that legal protection insurers do not only bear the costs of legal proceedings but support the insured by all means, i.e. by providing the required and necessary services, giving legal advice and defending or representing the insured persons out-of-court or in-court.
Subsequently, RIAD Members would like to stress that the protection they provide goes far beyond the simple transfer of a risk but that they are capable of standing as potent partners by the insured person’s side and thus protecting him against all eventualities. For the benefit of their policy holders and for the well functioning of the markets legal protection insurers therefore depend on a legal environment which does not implement undue and unnecessary restrictions but creates a level playing field for all providers of similar services.
III. Availability of and demand for voluntary legal expenses insurance
The European Commission evaluated the current spread of voluntary legal protection insurance covering road traffic accident claims in order to judge the availability of legal expenses insurance. From the existing data the Commission was able to deduce that voluntary legal protection insurance is generally offered and broadly available throughout the EU that, however, the spread of as well as the demand for legal protection insurance regarding road traffic accidents is relatively low in the new Member States. The Commission therefore recommends a better promotion to increase the spread of voluntary legal protection contracts and, subsequently, pave the way for a higher level of protection in these markets.
RIAD Members would like to pin point the reasons for this situation and would also like to present their views how the markets are likely to develop at least at a mid-term perspective.
1. The situation of the insurance markets in the new Member States
First, it should be noted that in the new Member States sales of legal protection insurance have been increasing rapidly over the past years and that there are numerous private suppliers of legal protection insurance. In Poland, for example, premium income from legal protection insurance increased in 2006 by 48% and in 2005 by 31%, in Hungary the increase was 24% in 2006 and 33% in 2005. Other markets have seen more moderate growth rates recently but have been growing constantly over the past years:
Table 1: growth rates according to local currencies (Sources: D.A.S. Germany and CEA)
These figures show that the markets of the new Member States are in motion and will most likely continue to grow. Considering that they started from zero only a couple of years ago it is not surprising that the demand for legal protection is still low in comparison to the old Member States. Legal protection insurers would naturally favour a quick proliferation of legal protection insurance since this would generate more business for them. But accelerating market growth artificially would probably be without effect or – in the worst case - could even affect these new markets adversely.
The reasons for this scepticism is that insurance markets need time for tailoring products to meet users’ requirements and calculate sufficient tariffs. In the new Members States we find the extraordinary situation that under the new constitutional law a culture of constructive controversy (“Streitkultur”) is still emerging and is implemented only slowly in parallel with the changing mentality of the people and public institutions. Under these circumstances it is impossible to simply transfer existing legal protection products and tariffs to one of the new Member States. It must rather be assured that bespoke incentives for active risk management are put in place (e.g. legal education or constructive claims settlement). This again is very sensible and needs lengthy fine-tuning but is an absolute prerequisite if one wants to avoid negative consequences like overburdening the judicial systems or producing excessive costs for the economy.
Also, distribution routes are decisive for the spread of a product. Beforehand, markets of the new Member States used to be served by a single insurer who did not need any particular marketing or sales strategy but could directly sell his products, for which he held a monopoly, to the consumers. The east European markets are now mostly served by tied agents and work generally still without well established and functioning broker networks or other adequate distribution channels. But the development and establishment of these kinds of networks are essential for the diffusion of legal protection insurance and for making the product popular among consumers. In-depth explanations of sales people are essential for showing the consumer the need of legal protection and for passing on a comprehensive understanding of the product. Presently, the new Member States have only started into this process whereas RIAD Members know from experience that it takes a lot of time to raise awareness with consumers and make legal protection insurance well known to the public. Continuous efforts of insurance providers to inform consumers effectively about the advantages and to promote the product will be the best way to convince consumers of the immediate benefits for them.
Moreover, the growth of a market is also determined by the purchasing power of an economy. The income level and purchasing power are crucial for the acceptance of certain products and the willingness to spend money on them. To start with, for the majority of people underwriting legal protection insurance is certainly not the first priority. On the contrary, legal protection insurance must be considered as a traditional niche product where the issue of the costs compared to individual wealth is fundamental. It must be accepted that each consumer must decide for himself what this specific protection is worth and what he is ready to pay for it. Consequently, keeping in mind the economic situation in the new EU Member States, it is commonsense that the spread of and the demand for legal protection insurance must be much lower than in EU-15 where the markets have been able to mature over the past 40 to 50 years and the purchasing power of the individual is much higher compared to the new Member States.
2. The way forward
From RIAD’s point of view direct interventions by public authorities are not the right way to accelerate the processes described above. Crude intrusions rather jeopardise a balanced growth of long-term insurance solutions in the new Member States and could thus lead to structural distortions.
This does not mean that there is nothing to be done. Quite the opposite, if the European Commission is concerned about the security and the protection of consumers in the new Member States it must assure the creation and the defence of a legal environment in which market-oriented commercial activities can boost. The only sustainable and satisfying solution is to put into place a legal framework which stimulates entrepreneurial initiative, allows the demand for legal expenses insurance to develop slowly and grow at its own pace while implementing effective mechanisms to protect the market against perilous turbulences.
In this respect, legal protection insurers strongly support the European Commission’s approach as set out in its “Green Paper on Retail Financial Services” and its recent Communication “A single market for 21st century Europe”: a key aspect for making legal protection insurance attractive as well as affordable for consumers is to prevent distortions and oppressions of competition between the different insurance providers but also between different providers of legal services and to ensure that the services meet high quality standards.
A precondition from the insurers’ perspective is avoiding needless, unjustified and costly regulation which Member States introduce under the cover of the “general good”. Many of these restrictions deserve close scrutiny since they do not meet the proportionality test but rather serve to keep certain providers out of a market. In this respect, legal protection insurers are specifically affected by national constraints which exclude them from the provision of certain kinds of legal services. Legal protection insurers are thus compelled to entrust third parties – as a rule lawyers – with certain tasks instead of providing themselves the whole range of possible services to their policy holders. Since these services would be delivered through well educated staff members - as a rule qualified jurists – the outsourcing of these services is only necessary in exceptional situations, i.e. exclusively if a case requires specific knowledge and expertise. Even more, some surveys have shown that the delegation to third parties is not necessarily in the interest of the insured persons who would often prefer to have their own insurer as only contact, assisting them, giving advice and handling their claims. If necessary or if the insured prefers to do so he is always free to contact an attorney to get specialised legal assistance. However, the fact that legal protection insurers are prohibited to provide certain services obviously reduces competition in these areas and the consumer does not have the choice what kind and whose services he would rather call on. The other side of this coin is that the possibility for insurers to settle claims in-house is a decisive factor for rendering the product “legal protection insurance” affordable and keeping costs low, thus again benefiting consumers.
Subsequently, RIAD Members appeal to the European Commission, firstly, to examine the soundness of those national rules which have as effect the exclusion of certain service providers from certain markets, secondly, to try to bring about a legal environment which truly enhances competition and choice for consumers and, thirdly, to supervise that the provisions of the legal expenses insurance directive are respected which safeguard the interest of persons having legal protection cover.
3. Accessible Data
As a preliminary remark, we would like to make clear that until now RIAD has not collected data about the spread of legal protection cover specifically in the area of road traffic accidents. As a matter of fact, to RIAD’s knowledge, the European Commission has conducted this kind of targeted survey for the first time on a European level; traditional surveys so far have been conducted on national levels to be merged afterwards in order to present the European situation. The fact that the European Commission had to merge data which had been collected on national levels without prior alignment of the aims, underlying questions and comprehensive figures was the main difficulty for presenting comprehensive data on the spread of legal protection cover in the area of road traffic accidents. Consequently, after a consolidation of the targets, the comprised data and the scope of such a survey on a European level it should be able to obtain exact and comprehensive information about the spread of legal protection cover of road traffic accidents in Member States. Legal protection insurers are now aware of the demand for this kind of information and would readily assist the European Commission in its future efforts.
IV. Cross-border provision of legal protection insurance
The European Commission has repeatedly expressed its worries about the fact that insurance products are generally not provided cross-border and efforts to increase cross-border activities have not shown much effect. Additionally, there seem to be hopes that increasing cross-border trafficking of legal protection insurance to the new Member States could possibly help developing those markets.
Firstly, RIAD would like to stress that cross-border cases are of course covered by legal protection contracts: traffic claims are generally covered throughout the EU. This cover is incorporated in the policy which is sold within one Member State. Additionally, cross-border issues are covered for consumers if a problem arises during their vacation and in some countries, depending on the demand, cross-border labour disputes are covered as well.
Secondly, it is true that selling legal protection insurance from one Member State into another is not common. However, insurers monitor the markets very closely and find that, on one hand side, a demand for cross-border sales of legal protection insurance is difficult to detect and that, on the other hand side, the characteristics of legal protection insurance make it extremely difficult to sell this product cross-border. To start with, legal protection is a mass product which is targeted at consumers and SMEs; it depends entirely on the knowledge of the respective national legal framework and mentality. Providers of legal protection insurance need to be familiar and have experience with the national law in order to appraise the prospects of success of a claim and legal proceedings. Besides procedural law, it is necessary to have an idea of plain judicial customs in order to decide how to approach a problem strategically. Prices and fees of lawyers and court proceedings as well as knowing the readiness of people in general to litigate are essential for assessing clients’ needs and claims’ frequency (a prerequisite for actuarial calculations of premiums). Furthermore, in order to design adequate products it is important to identify the risk-taking behaviour respectively the need for security of people in a national market. And last but not least, without the existence of efficient distribution channels and without mastering the language of the country perfectly, any provider is doomed to fail.
It is evident that legal protection products are very specific for one country while, however, it is logically not impossible to get access to all the necessary knowledge and expertise. Nevertheless, until now, legal protection insurers have opted for the less burdensome cross-border activities of establishing local companies (subsidiary or branch office) that put their products on the local markets.
V. Inclusion of legal costs in the damage covered by the MTPL insurance of the liable party
Legal protection insurers strongly support the Commission’s findings that the compulsory inclusion of legal costs in the scope of cover of the MTPL insurance would not bring any benefits. In this respect, we would like to refer to our position paper of June 2006 where it was pointed out that such a harmonisation on EU level would be detrimental to some underpinning national legal systems since it would risk jeopardising the equilibrium of historically and legally grown mechanisms.
VI. Obligatory legal protection insurance schemes
RIAD would like to refer to another aspect which has been brought up in this context, i.e. the option of making legal protection insurance mandatory. From RIAD’s members’ point of view it is obvious that burdening EU citizens with the obligation to conclude yet another insurance policy would not solve the problems identified by the European Parliament: abolishing national disparities of the scope of MTPL coverage and thus ensuring a minimum level of protection for victims of road traffic accidents.
Moreover, EU legislators ought to acknowledge that mandatory insurance schemes should only be considered as a last resort since they are rigid and universal. A mandatory insurance scheme would force consumers to pay into a mutualised fund, even if they do not travel abroad or have no intention to do so. Freedom and the ability to make own decisions are held in high esteem by consumer protection law and this should also be done in this case: consumers want to decide on their own which security level they want and what they want to pay for it. Obligatory insurance schemes would also prevent the identification of improper customers who tend to burden the collective with inappropriate disputes. Furthermore they do not leave space for tailor made insurance products which fit the needs of the individual policy holder. Also, obligatory legal protection insurance linked to MTPL insurance would only protect drivers of motor vehicles, but obviously they are not the only victims of road accidents. Legal protection insurers have been aware of this problem and therefore offer products which protect also other victims than drivers.
Consequently, in many cases, mandatory insurances do not offer enough coverage or lead to an excessive insurance cover which, eventually, is burdened on the policy holder or, in the adverse case, might put the insured in jeopardy since it does not sufficiently cover the individual risk. Therefore, obligatory insurance should only be introduced in cases where third parties’ vital interests are at stake. This is the case where certain, not fully controllable behaviour or actions of the insured bear severe risks for third parties and might cause substantial damages to third parties which exceed the financial capacities of the individual policy holder. These prerequisites apply to MTPL insurance but, under no circumstances, do they account for legal protection insurance which is underwritten by the policy holder for his own protection and not for protecting others.
VII. Other options for assuring full compensation of victims of cross-border road traffic accidents
Meanwhile, the search for a solution how to provide full compensation of victims of cross-border road traffic accidents continues and evolves from different issues: in the context of the 5th MTPL insurance directive, CEPS (Centre for European Policy Studies) completed in July 2007 upon the request of the European Parliament a study presenting and examining different options how full compensation of victims of cross-border road traffic accidents could be guaranteed; in its conclusions CEPS expressed its preference for two solutions based on MTPL insurance policies. Secondly, with regard to the Rome II Regulation, the European Commission committed itself to examine the specific problems arising from cross-border road traffic accidents and to present all possible options for improving the position of victims. The Commission’s commitment also includes scrutinising the different practices of treating foreign law in the different EU jurisdictions and publishing a horizontal study on the application of foreign law in civil and commercial matters by the courts of the Member States. The former study will be available before the end of 2008 whereas the latter will explore the application of the Rome II Regulation in the Members States and is thus not to be expected before August 2011.
Neither RIAD Members, nor the European Parliament, nor the European Commission is presently capable of knowing into which direction future initiatives should go. What's more, from RIAD’s point of view it is not evident that the problem is really severe enough for the most restrictive intervention, i.e. a legal initiative on European level. The data produced by CEPS are not convincing enough to make an EU-wide initiative inescapable especially since the problem seems to focus on only four Member States (Spain, Greece, Cyprus and Austria). Moreover, the Commission’s report concludes that the legislation of at least 22 Member States provide for the coverage of legal expenses.
Therefore, RIAD welcomes the Commission’s decision to first analyse “the specific problems resulting for EU residents involved in road traffic accidents in a Member State other than the Member State of their habitual residence” before determining any further steps. Although the compensation of legal expenses is only of minor importance in the context of undercompensation of victims for material and more importantly for bodily damages, legal protection insurers are at the Commission’s disposal to support its efforts.
 Sources: D.A.S. Germany and CEA publication “European Insurance in Figures”
 See OECD publication of 21 November 2007 “New comparison of GDP and consumption based on purchasing power parities for the year 2005”: the real GDP per head in Poland and Romania is between 25% and 49% of the OECD average, in Hungary, the Czech and Slovak Republic this amounts to 50% to 74% while, however, all the old EU Member States have a real GDP per head at least between 100% and 124% of OECD average.
 COM(2007)226 of 30/04/2007
 COM(2007)724 of 20/11/2007
 see Article 3 of Directive 87/344/EEC of 22/06/1987 on the coordination of laws, regulations and administrative provisions relating to legal expenses insurance, OJ L 185/77 of 04/07/1987
 for more details please see RIAD Position Paper of 2 June 2006: www.riad-online.eu
 in the UK for instance, after the event (ATE) insurance will be available for passengers or other victims where a case has reasonable prospects and, in the event of the victim being struck or involved with an uninsured driver, then the ATE policy will pursue the Motorists Insurance Bureau for the relevant redress
 “Full Compensation of Victims of cross-border Road Traffic Accidents in the EU: the Economic Impact of Selected Options”, European Parliament reference number: PE.378.304
 Regulation (EC) No 864/2007 on the law applicable to non-contractual obligations (Rome II), OJ L199/40 of 31/07/2007