An extract from The Insurance Disputes Law Review, 4th Edition
Recent casesi Insurance mediation; Supreme Court cases NJA 2019 s. 638 I and II
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 seeking compensation for 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 the European Court of Justice, which in its judgment found the following:2
- 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;3 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 7of the 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 of the 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.v Termination of insurance contract; Supreme Court case NJA 2020 s. 115
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.
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 also seems to have increased, and these 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, epidemic insurance policies.