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, the difficulties seen in cases where an international insurer is the defendant to a claim for coverage and the scope of liability for an insurance broker in case of a breach of duty towards a policyholder.
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. In addition, certain advice and information obligations of insurers towards insureds are stipulated in the Insurance Supervision Act 2016. 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 both in consumer and non-consumer contracts without distinction and also to large risks. It aims at protection of the insured as the weaker party, 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 under the scope of the Insurance Contract Act at all (reinsurance and marine insurance), or are not subject to its restrictions (transport insurance of goods, credit 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). Recently, a legislative change concerned a simplification of the several rights of withdrawal from insurance agreements.
In addition, general insurance terms and conditions play a key role. The model insurance terms are developed and published by the Austrian Insurance Association (VVO), 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 in 2018 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 or a directors' and officers' liability insurance, rarely exists. Although court judgments in Austria are, in general, only binding on the parties involved in a dispute, case law plays an important role. Furthermore, the courts of lower instance have to observe and apply the judicature of courts of higher instance, such as the courts of appeal and the Supreme Court of Justice of the Republic of Austria, which is the highest instance in civil and criminal matters. Within the Supreme Court of Justice, a specific senate (i.e., the seventh senate as specialist senate) handles disputed insurance contract cases.
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 respective licence. Depending on whether the applicant is a domestic company or a third-country insurer, the Austrian Financial Market Authority (FMA) 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 supervisory body, conduct insurance business in Austria on a freedom-of-services basis or freedom-of-establishment basis 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 Code and the Rules of Professional Conduct for Insurance Mediation, which have been published on 17 June 2019 in consequence of transposing the last part of the IDD in Austria.
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, 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 a replacement agreement is made after the offence has been committed.
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 a policy. 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. As at 11 August 2020, in the database of the Legal Information System of the Republic of Austria there are nine judgments of the Supreme Court of Justice and one judgment of the highest appellate court in Germany for civil and criminal cases, between the years 1938 and 2013, that relate to Section 68 of the Insurance Contract Act, and this reflects that this statutory provision is not highly disputed in 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. Even though arbitration proceedings are recognised, it does not play a key role in Austrian insurance 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. As stated in Section II.i, the highest instance in contested insurance matters is typically the seventh senate of the Supreme Court of Justice.
But wordings can contain a stipulation for the parties to go through an expert procedure. The extent to which agreeing on an expert procedure in an insurance contract may be admissible is stipulated in Section 64 of the Insurance Contract Act. In practice, such a 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. The following general insurance terms and conditions contain provisions, inter alia, for an expert procedure: property insurance, legal expenses insurance and accident insurance.
The decision of an expert procedure shall be binding on the parties, except if the decision obviously deviates from actual facts.
In the last edition of The Insurance Disputes Law Review different cases of general importance to insurer and insurance litigation have been presented. This year it is a mix of cases that relate 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 in case of taking out double insurance and why an insurer has to defend a claim in lengthy court proceedings while the policyholder previously never presented the claim under the policy.
In the first case, the courts had to determine whether or not a breach of duty exists if a broker did not clearly and insistently clarifies that the insurer's obligation to pay benefits is still in dispute, and, therefore, the policyholder must take independent steps to avert damage in order to maintain insurance coverage.
In the affirmative, the broker would be liable for all damage arising from his or her breach of duty within the scope of the protective purpose of the duty. Contrary to that, the insurance broker argued that its liability for damage shall be limited to the extent of cover for the individual claim under the insurance contract. On this aspect, the Supreme Court of Justice reminded the broker that the interests covered by the protective purpose of the contractual relationship between the policyholder and the insurance broker are decisive. Since the insurance broker should have contributed to the clarification of the scope of cover and should have pointed out the necessity of independent legal action by the policyholder, the legal assessment of the lower courts that the avoidance of damage resulting from breaches of duty as a whole is covered by the protective purpose of the contractual relationship between the policyholder and the broker is not objectionable. The assessment of a breach of duty on the part of the broker is to be made in each individual case, taking into account the interests of the policyholder as identified by the broker.
This ruling reminds broker and policyholder that an insurance broker shall be liable as an expert in the meaning of Section 1299 of the Austrian Civil Code, and, therefore, the broker must identify relevant problems and provide correct information. Insurance brokers are obliged to support the policyholder in the handling of the insurance relationship before and after the occurrence of the insured event. This support may relate to notification and information duties, but also to obligations and to clarifying the scope of insurance cover.
A second case (7 Ob 112/19z) of the Supreme Court of Justice, which was made public in January 2020, concerned the relationship between Section 58 et seq. of the Insurance Contract Act and the duty of disclosure under Section 16 of the Insurance Contract Act. A question that is of significance beyond the individual case and to which no sufficient case law existed.
In answering this question, the court ruled that in non-life insurance the obligation of a policyholder to notify all insurer of any double insurance (Section 58 of the Insurance Contact Act) does not supersede the separate pre-contractual notification obligations according to Section 16 of the Insurance Contract Act (violating the latter give an insurer the right to withdraw from a contract). In fact, both obligations exist independently of each other and, therefore, Section 58 Paragraph 1 of the Insurance Contract Act does not affect the notification obligations under Section 16 et seq. of the Insurance Contract Act.
The key facts of the case dealt with a policyholder who concluded in 2012 legal expenses insurance without disclosing, prior to making the contract and upon a question of the insurer, that legal expenses insurance had already been taken out. The insurer first obtained a concrete indication of the existence of another legal expenses insurance contract of the policyholder in February 2017 and it declared withdrawal from the contract due to the multiple insurance policies.
The policyholder sought for a declaratory judgement that (1) the legal expenses insurance remains in force, (2) its termination by the insurer is invalid, and (3) the insurer's confirmation to cover legal expenses for civil proceedings initiated by the policyholder is still valid.
The Supreme Court of Justice affirmed that the burden of proof for the lack of fault for the breach of a pre-contractual duty of disclosure is generally on the policyholder and when the policyholder answers individual facts about which he or she can only provide information from his or her own knowledge, the policyholder is already to be blamed for signing the form filled out incorrectly or incompletely by the insurance agent without having previously checked it for correctness. According to doctrine and existing precedent, very considerable demands are to be made on the care to be exercised by the policyholder in fulfilling its pre-contractual duty of disclosure, especially if the questions asked concern individual facts.
Finally, an unpublished appeal decision of the Higher Regional Court in Innsbruck (1 R 187/19p) dated 9 January 2020 should remind everyone involved in insurance litigation that legal questions of civil procedure law may have a substantial impact on a coverage dispute.
In relation to an amendment of claim more than two years after initiating civil proceedings, the court of first instance had taken into account, that at the time of the application for a continuation of the proceedings and the amendment of claim made on that occasion, no taking of evidence had yet taken place and that the dispute was not yet ripe for decision, even with regard to the originally established claim. Although it was originally planned to utilise the expert opinion results from a parallel proceedings, the policyholder objected against an utilisation of the evidence results obtained in the parallel proceedings, in particular against the utilisation of a medical expert opinion. Since the parties in the parallel proceedings are not identical with the parties in the present legal dispute, exploitation within the meaning of the provision of Section 281a of the Code of Civil Procedure against the expressly declared will of the plaintiff cannot be considered. On the basis of this, however, there is no reason to fear that the hearing in the present proceedings will be made more difficult or delayed if the amendment of claim made by the policyholder is admitted, because in any case the obtaining of an expert opinion and further hearings of evidence are unavoidable. In this respect, the constellation also differs substantially from that in parallel proceedings, in which the amendment of claim was only made at a point in time when the original request was ripe for decision.
Section 235 Paragraph 2 of the Code of Civil Procedure stipulates that the consent of the opponent is required to an amendment of claim after the dispute has become pending. However, according to its Paragraph 3, the court may allow an amendment of claim even after the dispute has become pending and irrespective of the opponent's objections, if the amendment does not exceed the jurisdiction of the court and if it does not cause a considerable aggravation or delay of the hearing. According to existing precedent, an amendment of claim is to be permitted as far as possible, especially if it avoids a new proceeding and the aim of the proceeding is to achieve a final and exhaustive settlement of the dispute. The amendment of claim shall be permitted whenever it prevents a second trial without unreasonably complicate or delay the first one.
While all of those legal arguments have been applied correctly by the Court of Appels, it remained silent on the insurers' argument that allowing an amendment of claim, by which a policyholder raises for the first time in a pending civil proceeding a specific claim under an insurance agreement, would expose the insurer to a court proceeding before having been in a position to decide on coverage and this would circumvent the entire notification procedure in insurance. Unfortunately, the decision by the Court of Appeals could not be appealed and became legally binding.
The international arena
The local standard may be most accurately described as having three principal characteristics: an Austrian insured would expect (1) the policy 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.
However, 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 bring much surprise or 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.
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. This procedure is not necessary for German law, as the official language is identical in both countries and both insurance contract acts are rather similar. However, if the foreign law cannot be determined within a reasonable period despite detailed efforts, Austrian law shall apply. If there is a lack of determination of the foreign law by the lower courts, which according to Section 4 Paragraph 1 of the Private International Law has to be carried out ex officio, then, according to the Supreme Court of Justice, this constitutes a procedural deficiency of a special kind, which has to be imputed to the ground of appeal of the incorrect legal assessment and leads to the revocation of the decisions of the lower courts.
Furthermore, it should be mentioned that lawsuits against international 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 defendant being named. In fact, if the affected insurer gains knowledge of such a situation, it depends on its defence strategy on whether it clarifies the shortcoming and commonly agrees with the parties to the insurance dispute to change (the name of) the defendant, or if it lets the wrong defendant defend the case with the argument that the defendant is not the risk carrier and therefore the claim is to 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). 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 leading 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, the choice of law is limited especially 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 first half of 2020, the specialist senate for insurance matters of the Supreme Court of Justice handed down 122 rulings. It handed down 114 rulings in the same period of the previous year. However, this year a fair amount of the rulings relate only to the discussion of the legal consequences if a life insurer informed an insured party incorrectly of its withdrawal right under the Insurance Contract Act, and it can be expected that a life insurer with an Austrian book of business will get more legal clarity on this specific legal question until the end of 2020 (for more details on this specific topic that affects only life-insurers, see the two previous editions of The Insurance Disputes Law Review).
According to information published by the Austrian Ministry of Justice, only 10 per cent of all civil proceedings are 'contentious' (i.e., in which the parties take different legal standpoints and 'dispute' these in oral hearings). The average duration of disputed civil proceedings in 2016 was six months for district courts and 13 months for regional courts. Around half of the approximately 45,300 civil proceedings at district courts lasted less than six months. Only 2.3 per cent of the contentious proceedings lasted longer than three years. It is believed that these are good values in international comparisons for the duration of civil proceedings.
Finally and bearing in mind the covid-19 spread, which also affected Austria, and a lockdown from 16 March 2020, one may have expected that insurance disputes related to obtaining compensation for loss resulting from business closure would increase. However, business closure insurance products were not common in Austria, and the usual wording of a business interruption policy would not include a pandemic. Therefore, a situation comparable to Germany, where the first court rulings on the compensation for loss resulting from business closures are available (as at August 2020), or in the UK, where the FCA started a test case on business interruption insurance coverage in pandemic-related losses, will keep Austrian courts not busy.
If this will prove true for potential claims against a broker for advising customers in their best interests concerning pandemic risk remains to be seen.