Group insurance contracts and unfair terms: the group policyholder center stage

Recently, on 20 April 2023, the European Court of Justice delivered a judgment in the area of unfair terms in consumer contracts, in casu a group insurance contract. A month later the Commission proposed its Retail Investment Strategy (RIS). Case C-263/22 merits attention, not only because it highlights the obligations of group policyholders but also because the RIS contains provisions which streamline the pre- and post-contractual disclosures. The Portuguese supreme court asked for a preliminary ruling on a case brought before them between a Portuguese life insurer, Ocidental-Companhia Portuguesa de Seguros de Vida SA (“Ocidental”) and a retail consumer, LP. The case concerned the refusal by Ocidental to make loan repayments following the permanent invalidity of LP. LP and her spouse entered into a loan agreement with Banco de Investimento Imobiliário SA (“the bank”) and by doing so, they became party to a group insurance contract (“the insurance contract”), agreed between the bank and Ocidental. LP was the insured person. The insurance contract was a payment protection insurance contract, under which Ocidental would be required to make the loan repayments in the event of LP’s permanent incapacity. The policyholder was the bank. The reason was the alleged nullity or inapplicability of the insurance contract between Ocidental and the bank to which LP became a party.

Ocidental refused to pay out because
• the incorrect and/or incomplete declarations concerning LP’s state of health at the time when LP became party to the insurance contract (non-disclosure of a prior medical condition) which made the contract void;
• cover against the risk of permanent incapacity of the insured person resulting from illness prior to the conclusion of that insurance contract was excluded.

According to the information set out in the request for a preliminary ruling, LP argued, in support of her application, “that the medical information contained in the proposal to become party to the insurance contract had been completed by the bank employee who had presented that contract to her for signature, that she did not complete any questionnaire concerning her state of health and that she signed that proposal to become party to the insurance contract.” LP also claimed that nobody read or explained any clause concerning the potential exclusion of cover against the insured risk at the time she was simply asked to sign. Accordingly, she argued, the exclusion clauses should be regarded as not written and devoid of legal effect.

Portuguese case law not being clear, the Portuguese supreme court referred the 2 questions to the ECJ. The ECJ ruled as follows:
• Article 4(2) and Article 5 of Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts, read in the light of the 20th recital of that directive must be interpreted as meaning that a consumer must always be afforded the opportunity to become acquainted with all contractual terms, before the conclusion of a contract;
• Article 3(1) and Articles 4 to 6 of Directive 93/13/EEC must be interpreted as follows: “where a term of an insurance contract relating to the exclusion or limitation of cover against the insured risk, with which the consumer concerned could not have become acquainted prior to the conclusion of that contract, is found to be unfair by the national court, that court is required to exclude the application of that term in order that it may not produce binding effects with regard to that consumer.”

With other words, LP had no opportunity to become acquainted with the exclusion or limitation clauses when the contract was concluded. It was thus unfair to exclude or limit cover. Prior
acquaintance with the terms is essential prior to the conclusion of a contract, as Article 3 of that directive provides:
(1) A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer.
(3) The Annex shall contain an indicative and non-exhaustive list of the terms which may be regarded as unfair.’ One of such unfair terms relates to a term which is irrevocably binding the consumer to that term if he had no real opportunity of becoming acquainted with that term before the conclusion of the contract.

It should be noted that the ECJ also ruled that “the unenforceability of such a contractual term classified as unfair with regard to the consumer is, however, without prejudice to the possible consequences, in respect of the policyholder’s civil liability vis-à-vis the insurer, of the fact that the policyholder failed to notify the consumer of that term.” The group policyholder, in casu the bank, must ensure that its customers which become part of the bank’s group payment protection insurance, must be informed of all exclusions and limitations before requiring a signature.

Please note that in another recent ECJ case, C-633/20 of 29 September 2022, the advocate-general recommended and the ECJ held that the concept of an insurance intermediary or insurance distributor also includes a legal person who sells voluntary membership in a group insurance policy and where the legal person is the policyholder, who receives a remuneration from the members for the acquired coverage. Selling membership to a group insurance policy as policyholder to end customers in return for a payment will be deemed as insurance distribution activity, which will mean that the policyholder will be an “insurance distributor”. Whether the legal entity offering to join the group insurance contract is itself a party to the group insurance contract as a policyholder is irrelevant.

With other words, the group policyholder may be held liable under civil law – contract law vis à vis the consumer in case of unfair terms not individually negotiated, vis à vis the insurer under civil liability law, and under prudential/financial law as, according to the Commission, the insurance distribution directive “aims to ensure that distributors take responsibility for consumer outcomes and that the products sold meet consumers’ needs.”