Applicable law under Rome I: insurance contracts

Out-Law Guide | 21 Mar 2008 | 2:20 pm | 6 min. read

This guide was last updated on 1st December 2009. The Rome I regulation standardises rules that govern the law applying to cross-border contracts in the EU and defines the extent to which the parti...

This guide was last updated on 1st December 2009.

The Rome I regulation standardises rules that govern the law applying to cross-border contracts in the EU and defines the extent to which the parties are free to choose the applicable law.

The regulation also includes specific provisions for insurance contracts which consolidate current choice of law rules. Reinsurance, however, remains outside its scope.

The UK Government opted out of Rome I in 2006, but in July 2008 applied to the European Commission to be allowed to opt back in after changes to the text addressed its main concerns. On 22nd December 2008, the Commission agreed to extend the regulation's scope to include the UK.

The new regime will apply in all member states (except Denmark) on 17th December 2009.

In the UK, the insurance provisions will be implemented by the Financial Services and Markets Act 2000 (Law Applicable to Contracts of Insurance) Regulations 2009, which will apply to insurance contracts entered into on or after 17th December 2009.

The 2009 regulations also extend the scope of Rome I to conflicts between the laws of England and Wales, Scotland and Northern Ireland, or between any of them and Gibraltar.

The Directives

For insurance risks situated in an EEA state (any EU state, Iceland, Liechtenstein or Norway), the choice of law rules have until now been governed by the Consolidated Life Insurance Directive or the Second Non-Life Insurance Directive, both of which were implemented in the UK by the Financial Services and Markets Act (Law Applicable to Contracts of Insurance) Regulations 2001.

The Non-Life Directive distinguishes between "large risks", where freedom of choice is preserved, and other risks, where that freedom is limited by rules that depend on the place of the policyholder's habitual residence or central administration, where the risk is situated and whether the law of either of those EEA states permits a wider choice.

Large risks include transport (aircraft, ships, rail and goods in transit) and other risks where the policyholder carries on a business over a certain size (see Article 5(d) of the First Non-Life Directive 72/239/EEC).

In life insurance, the parties have had a choice of law only if such choice is allowed by the EEA state of the "commitment" – meaning the state in which the policyholder habitually resides or (if not an individual) the state in which it has an establishment to which the policy relates.

This regime and the 2001 regulations will continue to apply to insurance contracts entered into before 17th December 2009.

Outside the EEA and reinsurance

Where the risk is outside the EEA, applicable law is dealt with under the Rome Convention 1980.

Reinsurance policies, whether the risk is inside or outside the EEA, also fall within the Rome Convention.

Broadly speaking, the Rome Convention preserves the parties' freedom to choose the applicable law, although there are provisions to ensure consumers do not lose the protection of mandatory rules in the country of their habitual residence.

The Rome I regime

The provisions for insurance contracts in Rome I do not substantially change the substance of the law set out in the Directives.

The regulation applies to all insurance covering large risks (whether or not situated in an EU member state) and to all other insurance contracts where the risk is in an EU member state. It does not apply to reinsurance.

Large risks

The parties to an insurance of a large risk retain freedom to choose the applicable law (Article 7.2).

The same definition of large risks applies as before. It includes transport (aircraft, ships, rail and goods in transit) and other risks where the policyholder carries on a business over a certain size (see Article 5(d) of the First Non-Life Directive 72/239/EEC).

Unlike the old regime, however, the new rules apply whether or not the large risk is situated in a member state. This addresses the problem posed by large risks that are partly inside and partly outside EU territory.

The choice of law must either be made expressly or clearly demonstrated by the terms of the contract or the circumstances of the case (Article 3). The only restriction in Article 3 is that the choice of law of a different country from where the elements of the contract are situated, or of a non-member state, will not prejudice the application of any compulsory provisions in the law of the relevant country, or of Community law as implemented in the member state.

If no choice of law is made, the insurance contract for a large risk will be governed by the law where the insurer has its habitual residence. But if it is clear from all the circumstances that the contract is manifestly more closely connected with another country, the law of that country will apply (Article 7.2)

Other insurance contracts

The parties to all other insurance contracts have a more limited choice of law (Article 7.3). They can choose (a) the law of any member state where the risk is situated at the time the contract is entered into, or (b) the law of the country where the policyholder has his habitual residence.

In the case of commercial or professional insurance covering risks situated in two or more member states, the parties can choose the law of any of them, or the law of the policyholder's habitual residence (7.2(e)).

In the above three cases, member states can choose to grant greater freedom of choice.

The UK has chosen to take advantage of this in the 2009 regulations. These provide that, where the law referred to is a law of any part of the UK, the parties to the contract may choose the law of another country or of another part of the UK (regulation 4). This is subject to the choice being clearly made in accordance with Article 3 and to the protections for consumers in Article 6 that generally favour the law of the place of the consumer's habitual residence.

For life insurance only under Rome 1, the applicable law may also be the law of the member state of which the policyholder is a national (7.2(c)).

And for insurance contracts covering risks limited to events occurring in one member state other than the member state where the risk is situated, the choice is restricted to the law of that member state (7.2(d)).

Where no choice of law is made, the contract will be governed by the law of the member state in which the risk is situated at the time of the conclusion of the contract.

In the case of life insurance, the risk will be situated in the place where the policyholder has his habitual residence (see the Consolidated Life Directive 2002/83/EC, Article 1(1)(g)).

For non-life insurance, Article 2(d) of the Second Non-Life Directive 88/357/EEC applies. In most cases, the risk will be situated in the member state where the policyholder has his habitual residence, but in cases of building and contents insurance, it will be where the building is situated and, for motor, where the vehicle is registered. For travel policies of less than four months, it is the member state where the policy was taken out.

Compulsory insurance

Additional rules apply under Rome I for compulsory insurance (Article 7.4).

The contract must comply with the requirements of the member state imposing the obligation to insure. In any conflict between the law of that state and the law where the risk is situated, the law of the member state imposing the obligation will prevail.

Member states may also provide that the contract will be governed by the law of the member state imposing the insurance obligation.

Habitual residence

For companies and other bodies, the habitual residence is the centre of administration. For natural persons acting in the course of their business activity, it is their principal place of business.

Where the contract is concluded by a branch or agency that will be responsible for performing the contract, the place where the branch or agency is located is the place of habitual residence (Article 19).

Contact: Fiona Heyes ([email protected] / 020 7667 0243)

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