The European Free Trade Association (EFTA) Court has held that article 201(1)(a) of the Solvency II Directive (2009/138/EC) prohibits terms in a legal expenses insurance contract that would release an insurer from liability in circumstances where an insured, at the point in time when it would be entitled to make a claim under the policy, appoints a legal representative without the consent of the insurer.
[EFTA is an intergovernmental organisation of Iceland, Liechtenstein, Norway and Switzerland established for the promotion of free trade and economic integration between its members. The EFTA Court has jurisdiction over its member states largely corresponding to the jurisdiction which the European Court of Justice exercises over EU Member States. Its decisions are treated as advisory by the ECJ.]
The EFTA Court’s decision in Nobile v DAS Rechtsschutz-Versicherungs AG (Case E-21/16) concerned a legal expenses policy issued to Mr Nobile by DAS. The policy contained terms, among other things, requiring Mr Nobile to:
- leave the conduct of the case exclusively to DAS; and
- not to instruct any lawyer, nor commence any proceedings without DAS’ consent.
The policy also provided that “any culpable breach of contractual duties by the insured person shall entitle DAS to refuse its performance”.
In 2015, Mr Nobile was involved in a dispute with his landlady. Following a notification to DAS, he was able to recover part (but not all) of his deposit from the landlady. Subsequently, without informing DAS (in breach of the policy terms), Mr Nobile instructed a lawyer to assist with the recovery of the remainder of his deposit. When he sought to claim the costs of the legal proceedings from DAS, cover was declined on the basis that Mr Nobile had breached the terms of the policy by not leaving exclusive conduct of the claim to DAS.
The EFTA Court was asked to consider the question:
Does article 201(1)(a) of [the Solvency II Directive] preclude a contractual agreement between a legal expenses’ insurer and an insured person, according to which it is a breach of duty of the insured person, releasing the insurance company from its obligations, if the insured person mandates an attorney to represent his interests, without the consent of the provider of the legal expenses insurance, at a point in time when the insured person would be entitled to make a claim according to the legal expenses insurance contract?
Article 201(1)(a) of Solvency II provides:
Any contract of legal expenses insurance shall expressly provide that: (a) where recourse is had to a lawyer or other person appropriately qualified according to national law in order to defend, represent or serve the interests of the insured person in any inquiry or proceedings, that insured person shall be free to choose such lawyer or other person…
Having reviewed DAS’ general terms and conditions and article 201(1)(a) of Solvency II, the EFTA Court held that:
- an insured’s right under article 201(1)(a) freely to choose a lawyer cannot be made conditional on the prior consent of an insurer;
- the general objective of the Solvency II Directive militated against a restrictive interpretation of the term “inquiry or proceedings” – the rule has a general application and is not limited to judicial or administrative proceedings; and
- it is not for an insurer to deny coverage because it deemed such proceedings to be unnecessary, disproportionate and premature as this could have the effect of motivating insurers to reject coverage and thus deprive an insured of the very protection it should be afforded pursuant to a legal expenses insurance contract.
The EFTA Court therefore concluded that DAS’ terms were incompatible; an insured under a legal expenses policy is entitled to have recourse to a lawyer of his choice to defend, represent or serve his interests in any inquiry or proceedings and that any requirement of prior consent would be inconsistent with that freedom.
In light of this judgment, legal expenses insurers may consider it prudent to review their existing policy terms and conditions to determine whether they could be found to be incompatible with the EFTA Court’s interpretation of article 201(1)(a). The EFTA Court’s decision is not binding on EU Member States (as noted, EFTA decisions would only be considered as advisory by European Courts though it will be interesting to see how that changes for courts in the UK following Brexit). In any event, the judgment serves to illustrate a potential interpretation of Solvency II (and the UK implementing legislation “the Insurance Companies (Legal Expenses Insurance) Regulations 1990 (SI 1990/1159)”) which could have significant consequences for insurers.