The Insurance Disputes Law Review: Austria
This chapter provides insight into the legal sources that Austrian courts apply in cases of insurance litigation, the legal framework of the law applicable to insurance agreements and recently published insurance litigation rulings of the Austrian Supreme Court that may add value to specialists involved in brokerage, claims management, underwriting and taking out insurance coverage.
The legal framework
i Sources of insurance law and regulation
The three main sources of law are legislation, broadly acknowledged templates of general terms and conditions, and precedents.
The substantive insurance law is primarily governed by the Insurance Contract Act.2 In addition, certain advice and information obligations of insurers towards insureds are stipulated in the Insurance Supervision Act 2016.3 For certain types of insurance (e.g., motor liability insurance), special statutes exist. Where the insurance statutes do not provide for any special rules, general civil law provisions of the Civil Code apply.
The Insurance Contract Act is, in general, applicable to both consumer and non-consumer contracts without distinction, and also to large risks. It aims at protection of the insured (considered the weaker party to an insurance agreement compared with the professional insurer), mainly by means of various coercive provisions that cannot be deviated from to the detriment of the insured. However, specific types of insurance either do not fall within the scope of the Insurance Contract Act at all (reinsurance and marine insurance)4 or are not subject to its restrictions (transport insurance of goods, credit risk insurance, insurance against exchange loss and continuous insurance, which is defined as an indemnity insurance taken out in such a way that the insured interests at the time of the conclusion of the contract are designated only in terms of class and are not given up to the insurer individually until after they have arisen).5
In addition, general insurance terms and conditions play a key role. The model terms are developed and published by the Austrian Insurance Association (VVO),6 and although these are not binding, they are regularly adopted by Austrian insurance companies and incorporated into insurance contracts with minor changes. The most recent model terms developed by the VVO, published in January 2019, cover cyber risks.
For these reasons, Austrian case law on insurance agreements predominantly deals with legal questions related to the model insurance terms, while case law related to wordings that have an international background, such as warranty and indemnity, tax liability, cyber risk, directors and officers (D&O) liability, clinical trial insurance or prospectus liability insurance, rarely exists.7 Although court judgments in Austria are, in general, only binding on the parties involved in the specific civil proceeding, case law plays an important role and has a knock-on effect because the courts of lower instance have to observe and apply the jurisprudence of courts of higher instance, such as the courts of appeal and the Supreme Court of Justice, which is the highest instance in civil and criminal matters. Within the Supreme Court of Justice, as a specialist senate, the seventh senate handles disputed private insurance contract cases.8
As far as insurance regulation is concerned, the Insurance Supervision Act 2016 is the primary source of law, and conducting insurance business in Austria requires the holding of a licence. Depending on whether the applicant is a domestic company or a third-country insurer, the Austrian Financial Market Authority (FMA)9 grants a licence upon application and fulfilment of preconditions. An European Economic Area (EEA) insurance company holding a licence and situated outside Austria does not require a further or domestic insurance licence. The EEA insurer may, upon notification of its home state regulator, conduct insurance business in Austria on a freedom-of-services basis or freedom-of-establishment basis, the latter through a local branch. The ongoing supervision of the insurance market in Austria is also carried out by the FMA.
The relevant sources of law for insurance intermediaries (agents and broker) are the Austrian Commercial Code10 and the Rules of Professional Conduct for Insurance Mediation,11 which have been amended following the transposition of the final part of the Insurance Distribution Directive in Austria.12
ii Insurable risk
Austrian law does not define the term 'insurable risk', but international legislative developments such as the Foreign Account Tax Compliance Act and the General Data Protection Regulation have posed again the question of whether insurance can be taken out against a specific (e.g., administrative) fine. The unchanged answer under Austrian law, which dates back to a ruling of the Supreme Court of Justice of 23 January 1917,13 is that such fines are deemed to be uninsurable because any agreement between a tortfeasor and a third party concluded before an infringement whereby the third party shall be obliged to compensate the tortfeasor for any future penalty, is an immoral contract; however, it is different if such an agreement is made after the offence has been committed.14
Furthermore, Section 68 of the Insurance Contract Act contains a provision that deals with cases the facts of which are that either no insured interest existed from the beginning or that an insurable interest ceased to exist during the term of an insurance agreement. The relationship between the insured and the insured asset is such an interest. An insured interest does not exist if either (1) no insured who carries such an interest exists, or (2) the insured asset or the relationship to this asset does not exist at the outset of the insurance agreement, or it certainly will not exist in the future.15 As at 2 September 2021, between the years 1938 and 2013, the database of the Legal Information System of the Republic of Austria16 recorded nine judgments of the Supreme Court of Justice and one judgment of the highest appellate court in Germany for civil and criminal cases in relation to Section 68 of the Insurance Contract Act, and this reflects that this statutory provision is not highly disputed in the courts.
iii Fora and dispute resolution mechanisms
Insurance disputes (i.e., disputes over the content or scope of a private insurance agreement), are typically heard by the state courts. Although arbitration proceedings in Austria, and particularly Vienna as a seat of arbitration, are well recognised, arbitration does not play a key role in Austrian insurance dispute practice. The same is true for mediation proceedings, which are recognised by Austrian courts, but it is not mandatory for a party to go through mediation before filing a lawsuit in a contested insurance matter.17 Moreover, inter alia, in the event of a denial of coverage by an insurer, the broker can apply on behalf of its client (the policyholder) to a specific commission consisting of four experts to issue a legal recommendation, which is legally non-binding but has factual weight in out-of-court negotiations because of the professional standing of the commissions' members.18 In any case, as stated in Section II.i, the highest state court instance in contested insurance matters is typically the seventh senate of the Supreme Court of Justice.
However, wordings can contain a stipulation that the parties must go through an expert procedure. The extent to which agreeing on an expert procedure in an insurance agreement may be admissible is stipulated in Section 64 of the Insurance Contract Act. In practice, the expert procedure is concluded by the parties within the framework of the general terms and conditions, and this is harmonised within the several types of insurance through the VVO model conditions. Examples of general insurance terms and conditions that contain provisions for an expert procedure are those applicable in property,19 legal expenses20 and accident insurance.21
The decision of an expert procedure shall be binding on the parties, unless the decision obviously deviates from actual facts.22
In the third edition of The Insurance Disputes Law Review, we presented cases that related to the liability of an insurance broker in advising the policyholder after an insured event occurred, the obligation of an insured to inform the insurer adequately if taking out double insurance, and why an insurer had to defend a claim in lengthy court proceedings although the policyholder never previously presented the claim under the policy.
In this edition, we present insurance dispute cases dealing with (1) a change of precedent in general liability insurance, (2) admissibility to file a direct action in Austria against a foreign insurer, (3) the interpretation of a claims series clause, and (4) the first ruling in history of the Supreme Court of Justice on public offering of securities insurance.23
The first of these cases was published in June 2021 and dealt with general liability insurance – a product that is and will continue to be disputed regularly in Austria. In the case at hand, the Supreme Court changed existing case law by amending the test to identify a 'supervisor in operation', which affects the usual exclusion in liability wordings of 'work-related accident' clauses. The Court did not uphold its earlier view that a permanent assignment is required to qualify as a supervisor in operation and benefit from inclusion in insurance coverage.24 Rather, the position of a supervisor in operation pursuant to Section 333 Subsection 4 of the General Social Insurance Act, and therefore an authority to issue instructions in individual cases, is deemed sufficient.25
Another important insurance dispute established the precedent that Austrian courts have no international jurisdiction if the requirements of Articles 9 and 11 of the Lugano Convention 2007 are not met26 (i.e., the applicable national law must provide for a direct action). The key facts of this professional indemnity claim included a Swiss lawyer who was insured in Switzerland and an Austrian citizen's unsettled legally binding claim for damages. The Austrian citizen filed a lawsuit against the lawyer's Swiss insurer in the Austrian courts by invoking the courts' competence on the basis of the Convention.
Both the court of first instance and the court of appeals denied their competence in the matter, but the latter allowed a further appeal to the Supreme Court in the absence of an Austrian precedent on the question whether an injured party as a beneficiary within the meaning of the Convention could directly sue a foreign liability insurer of a tortfeasor. The Supreme Court of Justice ultimately concluded that the Austrian courts have no international jurisdiction for a direct action by the injured against the professional liability insurer situated in Switzerland as long as the national law applicable does not grant a direct action against the insurer. Notably, in this regard, Austrian law in general does permit a direct action by an injured party against the insurer of the tortfeasor responsible, but only in very limited cases (such as motor vehicle third-party liability).27 Following this judgment, an international insurer that becomes a defendant in civil proceedings issued by a third party in Austria (and where the applicable law does not allow for a direct action against the insurer) may now argue more comfortably against the Austrian courts' competence to hear a claim of this kind.
As in the previous case, the third this year deals with a professional indemnity claim, but related to legal expenses insurance: a policyholder who initiated three lawsuits in parallel against his former lawyers and a court-appointed expert sought coverage for each of the three court proceedings from his legal expenses insurer. The insurer did not provide the sum insured three times, arguing instead for joint and several liability in the event that the policyholder should prevail against the alleged injuring parties with his – in each case identical – claims for damages.
The Supreme Court of Justice held that even if the policyholder had accused his former lawyers and the court expert of independent breaches of duty, he would nevertheless assert one and the same claim for damages against them. The three insured events all resulted from the same medical malpractice case, could not be separated from each other and causally built on each other. According to the Court, with reference to German literature, the same result would be reached regardless of whether the risk of the insured events was increased as a result of the occurrence of the first insured event or because of a circumstance that preceded it, and therefore the coincidence of the insured events represented the realisation of the special risk associated with a particular circumstance (the domino or knock-on effect).
The starting point would then also be the allegedly incorrect expertise provided by the court-appointed expert, to which the policyholder's former lawyers allegedly did not respond properly. The Court looked at the claims series clauses as a uniform life event or realisation of the special danger associated with a particular circumstance,28 and ultimately it found in favour of the insurer.
The final case concerned the Supreme Court of Justice's first-ever decision related to a wording granting professional indemnity insurance for prospectus liability. The ruling was published in August 2021 and deals with the questions of incorrect and incomplete securities prospectuses.29 The Court explains in the ruling the concept of prospectus liability and the resulting scope of coverage of this special insurance product, but it could not finally resolve the legal question at hand as to whether the policyholder had fulfilled its pre-contractual duty of disclosure under Section 16 of the Insurance Contract Act. Therefore, the Supreme Court had to remand the case to the court of first instance to clarify whether the issuer's management boards had suspected that the prospectuses might have been or become incorrect or incomplete because of a deterioration of the financial situation. This had been argued by the defendant insurer, which denied coverage on the grounds that the issuer's executive bodies had not fulfilled their obligations to disclose risk-related circumstances prior to the conclusion of the contract. The claimant was an insolvency administrator, acting on behalf of an insolvent bond issuer who had been sued by bond subscribers because the base prospectus and supplementary prospectuses proved to have been incorrect and incomplete. Given the many decisions in Austrian law regarding the insured's duty of pre-contractual disclosure, it seems unlikely that this case will go up to the Supreme Court of Justice again.
The international arena
The local standard may be most accurately described as having three principal characteristics: an Austrian insured would expect (1) the insurance wording to be in German or, in the case of a bilingual special insurance wording, the German wording prevails, (2) that no arbitration clause exists, and (3) that Austrian law applies.
Nonetheless, international insurers serving the Austrian and German market sometimes apply German law to their insurance agreements with Austrian insureds. For insurance intermediaries and the Austrian courts, this does not cause any surprise or present complications in the application of the law because the Austrian Insurance Contract Act historically stems from the German Insurance Contract Act, with minor linguistic variation. However, a major recast of the German Insurance Contract Act in 2008 was not followed by a similar recast in Austria, and precedent and literature have since started to diverge.
If foreign law applies and Austrian courts have to decide a dispute under foreign law, then the judge would appoint a foreign law expert to gain an understanding of how the legal question would be answered under that foreign law.30 This procedure is not necessary for German law as the official language is identical in both jurisdictions and both insurance contract acts are rather similar. However, if a foreign law cannot be determined within a reasonable period despite detailed efforts, Austrian law shall apply.31 The determination of the foreign law by the lower courts has to be carried out ex officio, pursuant to Section 4 Paragraph 1 of the Private International Law. According to the Supreme Court of Justice, lack of determination of the foreign law by the lower courts constitutes a procedural deficiency of a special kind, constituting grounds for appeal on the basis of incorrect legal assessment, and leads to the revocation of the lower court decisions.32
Furthermore, lawsuits against foreign insurers are on occasion filed incorrectly against a party that is not the risk carrier (e.g., especially if the insurer had delegated underwriting authority or the policy was not issued by the insurer). These situations have resulted in confusion and the wrong person being named as the defendant. In fact, if the affected insurer gains knowledge of such a situation, it may, depending on its defence strategy, clarify the shortcoming and mutually agree with the parties to the litigation to change (the name of) the defendant, or it may let the wrong defendant defend the case with the argument that it is not the risk carrier and therefore the claim should be dismissed. If, however, the claimant only misspelled or wrongly named the correct insurer, the court is entitled to adjust the naming of the defendant, according to Section 235 Subsection 5 of the Code of Civil Procedure.
Since Austria is a member of the EU, jurisdiction in international insurance disputes is determined by the rules of Brussels I Regulation (recast).33 As a general rule (see Articles 11 to 14), the Regulation stipulates that an insurer may bring proceedings only in the courts of the Member State in which the defendant (the policyholder, the insured or a beneficiary) is domiciled. However, the insurer may be sued in the courts of the Member State in which it is domiciled (including where it has a branch, agency or establishment); or in the Member State where the claimant (the policyholder, the insured or a beneficiary) is domiciled; or, if it is a co-insurer, in the courts of a Member State in which proceedings are brought against the lead insurer. For liability insurance, the insurer may, in addition, be sued in the courts of the place where the harmful event occurred and may, in general, be joined in proceedings that the injured party has brought against the insured.
Regarding international insurance litigation falling within the scope of the Rome I Regulation,34 the choice of law is limited in particular by the restrictions listed in Article 7 Paragraph 3. For contracts covering risks (other than large risks) that are situated in a Member State, the choice of law is limited to:
- the law of the Member State where the risk is situated;
- the law of the country where the policyholder has his or her habitual residence;
- in the case of life insurance, the law of the Member State of which the policyholder is a national;
- for insurance contracts covering risks limited to events occurring in one Member State, the law of that Member State; or
- where the policyholder pursues a commercial or industrial activity or a liberal profession and the insurance contract covers two or more risks that relate to those activities and are situated in different Member States, the law of any of the Member States concerned or the law of the country of habitual residence of the policyholder.
For compulsory insurance, special provisions apply.
Article 7 of the Rome I Regulation provides that if the parties would be entitled to choose Austrian law and Austrian law allows greater freedom on choice of law in insurance contracts, then the parties are allowed to make use of this freedom. (This is the case in Austria, where, pursuant to Section 35a of the Private International Law, the parties may choose any law as the law applicable to the insurance contract.) However, if the insurer carries out its business or otherwise directs its activities to the state of residence of the insured, then by choice of law the insured may not be deprived of the rights granted under mandatory provisions of the law that would be applicable in the absence of choice. In consumer contracts, further limitations exist.
For arbitration clauses, the general norms of the Code of Civil Procedure stipulate that an arbitration agreement may be concluded between parties for both existing and future civil claims that may arise out of or in connection with a defined legal relationship (insurance matters are not excluded). The arbitration agreement must be in writing and indicate the parties' will to submit to arbitration. In consumer contracts, however, stricter requirements exist.
Trends and outlook
In the previous edition of The Insurance Disputes Law Review, we explained why we did not expect to see in Austria an increase in insurance disputes related to obtaining compensation for losses resulting from business closure in light of the covid-19 pandemic from early 2020 onwards. Our view then was that it remained to be seen whether this would trigger an increase in damages claims against insurance brokers for advice to customers that was improper or inadequate in relation to insurance coverage for a business closure or interruption in the event of a pandemic situation.
In fact, two rulings published in March and May 2021 were the only rulings of the Supreme Court of Justice related to covid-19 claims under business interruption policies of an Austrian insurer published up until September 2021. Both decisions explain why a policyholder does not have the benefit of coverage: simply speaking, according to the Supreme Court, the risk of a mere de facto closure of a business as a side effect of an order prohibiting entry under the Covid-19 Measures Act shall not be covered because a business closure due to the Epidemics Act is a qualitative and quantitative change in risk compared with a business interruption due to the Covid-19 Measures Act.35 As this jurisprudence on covid-19 coverage was only published recently, we repeat that it remains to be seen whether the pandemic will trigger increased damages claims by policyholders against their brokers for inaccurate advice.
Another important area of law in Austria is environmental, social and governance (ESG) matters. Very recently, illegal plastic waste exports from Austria to Turkey were uncovered and made public, with an Austrian company having exported a total of 950 tonnes of contaminated plastic waste to Turkey. Another company has been found to have illegally exported approximately 300 tonnes of plastic waste to Serbia since January 2021 and a third company was discovered to have illegally exported around 320 tonnes of plastic waste to Germany.36 We expect that D&O insurers will see an increase in claim notifications resulting from ESG violations as more are discovered.
1 Ralph Hofmann-Credner is the founder and owner of Hofmann-Credner Rechtsanwalts GmbH.
2 Versicherungsvertragsgesetz – VersVG.
4 Section 186 of the Insurance Contract Act.
5 Section 187 Subsection 1 of the Insurance Contract Act.
6 Model insurance terms and conditions in German language are published on the website of the VVO: https://www.vvo.at/vvo/vvo.nsf/sysPages/Musterbedingungen_Sachsparten.html.
7 As at 2 September 2021, the Legal Information System of the Republic of Austria website (see footnote 16) had published seven decisions of the Supreme Court of Justice dealing with directors and officers insurance between 2015 and 2021 and one ruling each on clinical trial insurance and on public offering of securities insurance but no decisions pertaining to warranty and indemnity, tax liability or cyber insurance.
8 The scope of the several senates within the Supreme Court of Justice can be accessed here: www.ogh.gv.at/der-oberste-gerichtshof/geschaeftsverteilung/.
9 The homepage of the FMA is available in English. For a general overview on supervision of insurance undertakings, licensing and notification and other special topics, see www.fma.gv.at/en/insurance.
10 Gewerbeordnung – GewO.
11 Verordnung der Bundesministerin für Digitalisierung und Wirtschaftsstandort über Standes- und Ausübungsregeln für Gewerbetreibende, die die Tätigkeit der Versicherungsvermittlung ausüben (Standesregeln für Versicherungsvermittlung).
12 Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution (recast).
13 ZBl 1918/348.
14 RIS – Justiz RS0016830.
15 Burtscher/Ertl in Fenyves/Perner/Reidler (Editor), VersVG (7. Lfg 2021) § 68 Rz 10.
16 The Legal Information System of the Republic of Austria is a platform and database providing information on Austrian law.
17 According to information from 2014 on the website of the Austrian Federal Association for Mediation, a pilot project of court-based mediation proceedings was initiated at the Vienna Commercial Court. It was seen as a success because only a few of the 40 to 50 cases referred to mediation by the Commercial Court were returned to the Court (https://www.oebm.at/aktuelle-news-details/mediation-am-wiener-
handelsgericht.html; last retrieved on 12 September 2021).
18 Further information regarding the Legal Service and Conciliation Board (RSS) can be found on the website of the Austrian chamber of commerce (https://www.wko.at/branchen/information-consulting/versicherungsmakler-berater-versicherungsangelegenheiten/rechtsservice-und-schlichtungsstelle-rss.html).
19 Article 8 of the General Conditions for Property Insurance (ABS 2012).
20 Article 9 of the General Conditions for Legal Expenses Insurance (ARB 2015).
21 Article 16 of the General Conditions for Accident Insurance (AUVB 2008, Version 06/2017).
22 Section 64 Subsection 2 and Section 184 Subsection 2 of the Insurance Contract Act.
23 Usually called public offering of securities insurance, or POSI.
24 Supreme Court of Justice 31 October 2018, 7 Ob 8/18d (ECLI:AT:OGH0002:2018:0070OB00008.18D.1031.000).
25 Supreme Court of Justice 28 April 2021, 7 Ob 52/21d (ECLI:AT:OGH0002:2021:0070OB00052.21D.0428.000).
26 Supreme Court of Justice 28 April 2021, 7 Ob 65/21s (ECLI:AT:OGH0002:2021:0070OB00065.21S.0428.000).
27 Explicitly provided for in Section 26 of the Motor Third Party Liability Insurance Act 1994 (Kraftfahrzeug-Haftpflichtversicherungsgesetz 1994 – KHVG 1994).
28 Supreme Court of Justice 28 April 2021, 7 Ob 68/21g (ECLI:AT:OGH0002:2021:0070OB00068.21G.0428.000).
29 Supreme Court of Justice 30 June 2021, 7 Ob 216/20w (ECLI:AT:OGH0002:2021:0070OB00216.20W.0630.000).
30 Section 4 of the Private International Law (Internationales Privatrecht – IPR–Gesetz).
31 Section 4 Paragraph 2 of the Private International Law.
32 RIS-Justiz RS0116580.
33 Regulation (EU) No. 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters.
34 Regulation (EC) No. 593/2008 of the European Parliament and the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I).
35 RIS Justiz RS0133467 (ECLI:AT:OGH0002:2021:RS0133467).
36 This is a link to one of the media articles: https://kurier.at/wirtschaft/illegale-plastikmuellexporte-von-oesterreich-in-die-tuerkei-aufgedeckt/401729562 (last retrieved on 11 September 2021).