The Insurance Disputes Law Review: Sweden
In Sweden, insurance litigation is often related to issues regarding insurance coverage. Moreover, there are cases related to indemnity insurance. The insurance company instructs counsel to defend the insured in line with the terms under the policy. There are plenty of subrogation cases, namely when the insurer has indemnified the insured and exercises subrogated rights in a claim against a third party. These cases are often settled by arbitration. Recent cases before the Supreme Court have covered issues regarding interpretation of provisions in the policy, third-party claims and the application of time limitation provisions.
In this chapter, we will provide an overview of general principles of Swedish insurance law and illustrate the recent case law.
The legal framework
i Sources of insurance law and regulation, supervisory authority
The Insurance Contracts Act (ICA) covers the relationship between the insurer and the insured. This is the core piece of legislation related to insurance under Swedish law. The ICA covers both commercial insurance and consumer-related insurance. It covers, inter alia, requirements on the information to be provided by the insurer to the insured, the insurance policy, limitations of insurers' liability, the premium, insurance coverage, adjustment of claims under the policy and third-party rights under the policy.
The ICA contains no provisions covering the interpretation of insurance policies. In fact, there is no legislation covering interpretation of contracts in general in Sweden. In the absence of legislation concerning the interpretation of insurance policies, the principles of interpretation have instead evolved through legal doctrine and case law. The Supreme Court has created precedents on interpretation regarding, inter alia, exemption of liability clauses in insurance policies.
The Swedish Act on Insurance Distribution (AID) entered into force on 1 October 2018 implementing the EU Insurance Distribution Directive (IDD) into national law. The primary purpose of the IDD is to harmonise the rules for insurance and reinsurance distribution within the EU. The IDD also aims to achieve, when possible, equal competitive conditions and equal customer protection in respect of investments made directly in financial instruments compared to investments in life insurance (i.e., where the insurance premium is invested in financial instruments). The AID covers mediation of all types of insurance. The Swedish legislation goes beyond certain EU minimum rules in certain aspects. These include requirements for third-party remuneration and in relation to impartiality, as well as stricter rules on marketing.
The Insurance Business Act establishes the regulatory regime for insurance operations. The Swedish Financial Supervisory Authority (FI) is responsible for supervision, authorisation, sanction assessment, issuance of regulations, and reporting matters for the insurance industry. FI has developed regulations based on Swedish legislation. The regulations relate to, inter alia, issues regarding applications for underwriting permits, knowledge and competence requirements, employee compensation systems, and requirements related to the adjustment-of-loss process and impartiality. There are also special provisions on distribution of insurance-based investment products and certain kinds of pension insurance.
ii Insurable risk
According to Chapter 6 Section 1 and Chapter 8 Section 18 ICA, compensation may be made for any legal interest covered by the insurance.
According to mandatory law, illegal interests will not constitute a basis for entitlement to insurance compensation. Thus, the insurance must not cover loss of income that has arisen illegally. Moreover, the insurance policy cannot cover any payment obligation or loss arising from public sanctions decisions such as fines, environmental sanctions or confiscation of property. However, the insurance policy may provide for, inter alia, coverage of certain kinds of loss suffered by an employer caused by illegal actions by an employee against the employer.
Certain kinds of administrative fees, such as GDPR penalties, should probably be considered non-insurable interests, with insurance against these being unavailable. However, according to certain legal doctrine it has been suggested that such administrative fees can be covered by insurance. The issue is not covered by any Swedish case law. Thus, the legal position under Swedish law is not entirely clear in this respect.
Since there are several different and mutually exclusive kinds of Swedish financial sanctions, arguments could be made that the assessment as to whether the costs for a certain financial sanction are insurable or not should be made on a case-by-case basis, taking into account, inter alia, the reasons behind the sanction concerned and the actions of the insured.
The parties are free to agree to insure any interest other than that related to pure economic loss, actual damage or personal injury (e.g., insurance against moral damage). Moreover, there is no prohibition against the enrichment of the insured. However, another issue concerns whether the insurance policy should be interpreted as providing coverage that may give rise to such enrichment.
iii Fora and dispute resolution mechanisms
The ICA contains no provisions regarding disputes and litigation. Instead, litigation related to the determination and settlement of insurance indemnities is governed by the procedural rules for civil law cases laid down in the Swedish Code of Judicial Procedure.
The losing party can appeal Swedish court judgments in insurance litigation in the same way as in other civil proceedings. A judgment rendered by the district court (i.e., the court of first instance) may be appealed to the court of appeal within three weeks of the judgment being rendered. Leave to appeal is a requirement if the case is to be tried on its merits in the court of appeal. Leave to appeal shall be granted if, inter alia, there is reason to believe that the court of appeal would arrive at a different conclusion from the judgment rendered by the district court. There are certain applicable limitations preventing the parties from invoking new facts or evidence in proceedings before the court of appeal.
A judgment rendered by the court of appeal may be appealed to the Supreme Court. Leave to appeal should only be granted if a Supreme Court judgment could provide guidance for similar cases (i.e., if there is a need for a precedent). Thus, the requirements for leave to appeal to the Supreme Court are high and, in practice, the court of appeal is the highest instance in the majority of cases.
An insurance policy may stipulate that disputes between the insurer and the insured shall be settled by arbitration, depending on the kind of insurance in question. In Sweden, merger and acquisition (M&A) insurance and reinsurance policies are primarily referred to arbitration. Subrogation disputes (i.e., when the insurer has indemnified the insured and exercises subrogated rights against a third party) are sometimes settled through arbitration. This is often the case in, inter alia, disputes between the insurer and the insured's contractor in the field of construction. As a main principle, an arbitration clause between the insured and a contractor is also applicable to the insurer in a matter of subrogation.
i Insurance mediation; the Supreme Court cases T 2761-15 and T 25-16
In 2019, the Supreme Court rendered judgments regarding the definition and scope of insurance mediation.
In one of the cases, the question was whether financial advice regarding investment of capital provided in connection with entering into an insurance contract constituted insurance mediation.
The investor had invested in financial instruments within the framework of a capital insurance policy, following advice from a registered insurance mediation company. The investment certificate became worthless and the insured lost the entire amount invested. Initially, the insured made claims against the insurance mediation company; however, this company entered into bankruptcy. The insurance mediation company was insured as stipulated under Swedish law. The investor filed claims against the insurance company. The insurance company alleged that the insurance mediation company's advice did not cover the capital insurance policy. Instead, the insurer argued that the advice related to the investments in the financial instruments, which were placed in the capital insurance product. Therefore, according to the insurance company, it had not been a matter of insurance mediation but of advice on investing in financial instruments.
In the second case, an insurance company had issued a liability insurance policy to an insurance mediation company. A number of individuals had handed over money to the insurance mediation company to invest these amounts in corporate bond products, which would be placed in a capital insurance product. However, it later emerged that the managing director of the insurance mediation company had embezzled the amounts. The insurance mediation company entered into bankruptcy. The insurance company rejected the claims to compensate the individuals, alleging that the corporate bond products were fictitious, and thus the managing director's actions did not constitute insurance mediation.
The Supreme Court sought a preliminary ruling from European Court of Justice, which found in its judgment the following:
- financial advice covering placement of capital in the context of insurance mediation relating to the conclusion of a capital life insurance contract falls within the scope of the Insurance Mediation Directive and should not be considered investment advice under the Markets in Financial Instruments Directive, also known as MiFID II; and
- the concept of 'insurance mediation' includes work preparatory to the conclusion of an insurance contract, even in the absence of any intention on the part of the insurance intermediary concerned to mediate any actual insurance contract.
On the basis of the preliminary ruling of the European Court of Justice, the Supreme Court found – in both cases – that the actions concerned constituted insurance mediation.
Moreover, in the fraud case, the insurance company also alleged that the exception clause in the policy for damage caused by the insured intermediary intentionally or by gross negligence should apply to the individual suffering the loss.
However, the Supreme Court considered that the insurance mediation company was to be covered by liability insurance by statute. Therefore, there was reason to interpret the insurance policy to the benefit of the insurance mediation company's clients. In an overall assessment, the Supreme Court found that the exemption clause regarding damage caused intentionally or through gross negligence by the mediator did not apply to loss caused to the insurance mediation company's clients.
Thus, in both cases the insurance mediation company's clients were entitled to compensation under liability insurance issued to the insurance mediation company.
ii Interpretation of terms in a liability insurance; Supreme Court case NJA 2018 s. 834
A design company was commissioned by a contractor to produce design drawings for a school building. The design company's delivery was defective, which delayed the contractor's performance for the buyer. Therefore, the buyer was entitled to liquidated damages from the contractor. The contractor, in turn, claimed damages from the designer corresponding to the costs for those liquidated damages. The design company claimed reimbursement under its liability insurance. However, the insurance company alleged that the design company's claim was not covered by the policy. The insurance company referred to an exception in the terms stating that the policy did not cover liquidated damages, penalties and punitive damages.
The Supreme Court interpreted the policy primarily on the basis of its wording. The Supreme Court found that the exemption clause should be interpreted as it only covered liquidated damages paid out by the insured. When the insured is under an obligation to compensate its contractual party for costs related to liquidated damages paid by a contractor to a third party, this is considered a claim for damages against the insured. The Supreme Court did not accept the insurance company's argument that the purpose of the exemption clause was to cover any liquidated damages irrespective of which party paid out the liquidated damages. The main reason for the Supreme Court's interpretation was that the stated purpose did not follow from the wording of the policy. Nor was there any firm industry practice that could give guidance for the interpretation. In summary, the insured was entitled to insurance coverage under the policy.
iii Third-party claims under the policy in relation to the insured's bankruptcy; Supreme Court case NJA 2017 s. 601
A customer commissioned a service provider to carry out residential planning. The customer claimed compensation for design errors. The service provider, which entered into bankruptcy, was insured under a liability insurance policy.
According to Chapter 9 Section 7 ICA, a third party that has suffered damage may take direct action against the insurance company in the event of the insured's bankruptcy.
The insurance policy contained a provision stipulating that claims for compensation under the policy had to be reported to the insurance company within six months of the claim being made against the insured, otherwise the insurance company was not liable under the policy.
The service provider never filed a claim for compensation under the policy within the six-month period. Therefore, the insurance company rejected the customer's claims as a third-party claim under the policy. The customer alleged that his claim under the policy was not time-barred by the insured's failure to report the claim within the time limit.
The Supreme Court found that the six-month provision also applied to third-party claims under the policy. Thus, the Supreme Court concluded that, because of the service provider's failure to report the claim within the time limit, the customer was not entitled to compensation according to Chapter 9 Section 7 ICA.
iv The occurrence of damage under liability insurance; Supreme Court case NJA 2017 s. 237
During the period from 1 January 2002 to 31 December 2009, a municipality was covered by a liability insurance policy. Two claims for damages were made against the municipality. These claims are hereafter referred to as the 'building permit case' and the 'school case'. The municipality reported the two claims for damages under the insurance policy.
In the building permit case, the facts were the following. In September 2008, the municipality had granted building permits for the construction of a building. During construction consultations in October 2008, it was noted that construction would start as soon as possible. At an inspection in October 2009, it was found that the building was almost completed. In December 2009, the county administrative board revoked the building permit. The county administrative board's decision gained legal effect in September 2012. The property owner made a claim against the municipality for damages corresponding to the costs for the construction and demolition of the building.
In the school case, the municipality had in the autumn of 2002 decided to place a student in a certain school. The student's education started in 2005. In 2010, it was found that the education placement was not justified. The student, who completed the education programme in 2012, made claims against the municipality for damages for, inter alia, the amount of student loans or, alternatively, loss of income due to delayed entry into the labour market.
In both cases, the municipality's insurer disputed insurance coverage, alleging that the damage had occurred after the end of the insurance period. In the building permit case, the insurance company argued that the damage occurred when the decision to cancel the building permit gained legal effect, namely in 2012, and further argued that it was at this point that it first became clear that the building had to be demolished, with the resultant economic loss.
In the school case, the insurance company alleged that the damage first occurred in 2012; that is, when the student was granted student loans to supplement his studies or, alternatively, when the student's work income was unrelated to his supplementary studies.
The relevant issue in the Supreme Court was the question of when the damage had occurred, namely whether the damage had occurred during the term of the policy or not. Initially, the Supreme Court stated that damage – with respect to liability insurance – is related to the basis for the claim against the insured. Thus, the occurrence of the alleged damage suffered by the party claiming compensation from the insured should be decisive.
For the Supreme Court, it was clear that an expression such as 'when the damage occurs' may have different meanings in different contexts. Thus, the term had to be subject to interpretation. The Supreme Court made an overall assessment based on the wording of the term, industry practice and the purpose of the term. Moreover, the Supreme Court anticipated that the parties' intention was to achieve fair and reasonable provisions in the policy. Thus, the terms of the policy should be interpreted in a way that implements fair and reasonable provisions.
In summary, the Supreme Court concluded that the damage was covered by the policy. Thus, according to the Supreme Court, it was irrelevant that the damage was only discovered and first confirmed after the end of the insurance period.
iv Termination of insurance contract; Supreme Court case of 29 January 2020 in case T 481-19
In this case, the Supreme Court found that the insurance company was liable to the insured, when the insurance company terminated the insurance contract without a solid investigation if there was basis for the termination. The facts were the following. Criminal investigations were initiated against the insured regarding fraud based on alleged untrue information provided to the insurance company concerning a claim under the policy. The insured disputed the allegation of fraud and was at a later stage (i.e., after the termination) found not guilty by competent courts. Moreover, the insurance company did not give the insured any opportunity to provide explanations related to the insured's claim under the policy prior to termination. According to the Supreme Court, the relevant circumstances did not constitute a right for the insurance company to terminate the insurance contract. The termination, including the failure to provide for a solid investigation of relevant facts prior to termination, constituted negligence, and the insurance company was considered liable.
The international arena
Sweden is a party to the 1980 Rome Convention on the Law Applicable to Contractual Obligations (Rome I). With only some exceptions, Rome I governs all the applicable national law for insurance contracts. According to Rome I, the basic principle is that the law chosen by the parties shall govern a contract. However, Rome I contains some restrictive choice-of-law rules regarding insurance contracts.
Furthermore, Swedish courts normally respect the choice of jurisdiction in an insurance contract. As agreements on applicable law are subject to the provisions in Rome I, agreements on jurisdiction are subject to the provisions in Regulation (EU) 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters.
Arbitration clauses in insurance policies between insurance companies and consumers are invalid. However, arbitration clauses are legally enforceable in corporate insurance contracts and certain types of group insurance for consumers.
For a foreign judgment to be enforced in Sweden, a treaty on enforcement between Sweden and the foreign state is required. Such treaties exist between, among others, EU and EFTA member states. Sweden is a party to the Brussels Regulation, Brussels Convention and Lugano Conventions.
The main rule according to the Swedish Arbitration Act is that a foreign arbitral award based on an arbitration agreement must be recognised and enforced in Sweden. The Swedish Arbitration Act specifies certain exceptional cases in which enforcement would not be approved. The provisions of the Swedish Arbitration Act conform to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958, to which Sweden is a party.
Moreover, the Swedish courts have the right to refuse the application of foreign law in recognising or enforcing a foreign judgment if it would lead to a result that is manifestly incompatible with public policy in Sweden.
Trends and outlook
M&A insurance has increased significantly over the past few years. Any disputes under M&A insurance are always settled by arbitration in Sweden.
Moreover, the importance of directors and officers insurance has also increased. There has been a substantial amount of litigation against former board members and auditors in Sweden in connection to, inter alia, withdrawal of banking licences and damage caused by alleged fraud.
The number of professional liability cases seems also to have increased, and against law firms, among others. In the past, most cases were related to tax advice. Today, one can see an increased number of cases related to M&A advice in particular. This development may continue.
Furthermore, the concept of litigation funding is coming to Sweden and may increase further in the future, which may add to the number of insurance-related disputes.
Finally, there are ongoing cases before Swedish court regarding claims concerning damage caused by the covid-19 pandemic under, inter alia, epidemics insurance policies. However, no judgments pertaining to these claims have been rendered yet.