In 2018 two awards of the Financial Arbiter1 and one judicial decision concerning the validity of life insurance contracts have raised alarm in the Czech insurance industry. The decisions have invalidated life insurance contracts of three significant players on the Czech insurance market – namely Česká pojišťovna, AXA and Česká spořitelna (ERSTE) on novel grounds. To add to the controversy, recently the Czech National Bank (“CNB”) imposed large fines on companies Kapitol (Kooperativa and Vienna Insurance Group) and Fincentrum. This article examines the impact of the three decisions upon the determination of validity of life insurance contracts moving forward.
In May 2012 the CNB issued an Official Announcement, where it put insurance companies under a strict obligation to inform clients of all aspects and circumstances which could influence the price of the insurance, i.e. most notably costs, when entering a life insurance contract. Practices in conflict with this obligation may be contrary to law.
Ceska pojišťovna arbitral award
In a recent ruling of the Financial Arbiter, it was found that the obligations as per the CNB’s Official Announcement were breached by Česká pojišťovna and the client was successful in challenging the validity of a Profi Life Invest insurance contract before the Financial Arbiter. The Financial Arbiter ruled in the clients favour on the basis that the insurance company did not negotiate the right to deduct fees and costs from the insurance and that certain passages on key costs, risk premiums and redemptions did not satisfy their obligation to provide sufficient information. As these passages form an essential part of the life insurance contract, the Financial Arbiter declared the contract invalid in its entirety.
The decision has raised some concern as similar or identical passages may have been regularly used in active life insurance contracts concluded between years 2005 and 2013. As a result, the arbitral award has the potential to affect hundreds of thousands of clients. Česká pojišťovna maintains that the Financial Arbiter's award only affects the single disputed contract on a specific product, and will challenge the ruling before court. One of the key reasons for their disagreement with the decision is that all clients are required to sign an affidavit which affirms they have been adequately informed about the product.
AXA arbitral award
On a related note, AXA also encountered a controversial ruling concerning the validity of a life insurance contract with the Financial Arbiter. According to the decision, an insurance contract concluded for saving with a zero sum insured constitutes a clear legal defect and is invalid. In the Financial Arbiter’s reasoning, without any insurance component the insurance company never assumes any insurance risk and therefore the contract is an investment contract as opposed to an insurance contract per se. This decision can, similarly to the aforementioned case, affect more than tens of thousands of contracts as well as other insurance companies. AXA will also be challenging the award.
Recent judgment in the Czech Republic
There is an absence of any clear legal precedent on the above issues from the Czech courts. However, the Municipal Court in Prague attracted attention when it recently invalidated a Flexi life insurance contract, issued by Česká spořitelna. The Court was particularly concerned that the client did not have sufficient information about the costs and fees underlying the contract. It was held that the characteristics of the fees affect the course of the entire insurance, including the amount of the indemnity in specified cases, and for this reason, an insurance contract is invalid in whole if the fees cannot be separated. Under the circumstances of the case, the invalidity primarily arose from the uncertainty of the contract (missing essential terms), but also because the Court found that the company´s decision to include the provisions on fees in the section of special insurance conditions was against good morals and deemed to form a concerted practice.
Recent penalties imposed by CNB
In a further indication of a marked shift towards enforcing stricter practices on insurance companies for consumer protection, in April 2018 the CNB imposed substantial fines on companies Kapitol and Fincentrum. The CNB punished Kapitol for not asking clients thoroughly about their investment experience and not revealing the true figures of their commission. Most importantly, the CNB noted that the advisors failed to keep records of the communication with clients for the purposes of monitoring the client´s decision-making process and that they often made their clients repeatedly retool their existing contracts. All of these elements form grounds for wrongful practice for which the CNB imposed a fine amounting to EUR 30,000. In addition to being penalised for not keeping records of client communication, Fincentrum was also fined for the failing to disclose cooperation with AXA and for a conflict of interest. The most severe wrongdoing was the advertisement of an investment product as a savings product. Fincentrum was ordered to pay EUR 60,000 for their wrongdoings.
The findings in these matters present significant matters of concern for insurance providers, and may result in many in the industry having to undertake a substantial review of well-established practices. The insurance companies involved have sought to limit the influence of the decisions and stated unanimously that they are binding only in each individual case, and do not form a precedent. However, the courts will be monitored closely to see if they reject the challenges of the insurance companies and/or they adopt similar reasoning of the Financial Arbiter in future cases. With respect to all of the above decisions, a final court decision in favour of a client could form a precedent and affect over 2 million life insurance contracts worth tens of billions of Czech crowns. However, the fate of such contracts would heavily depend on each client and their respective efforts to challenge the contracts (Czech law does not recognize class actions lawsuits, although this may change in the near future2).