Hugo Keulers, Lydian
This article discusses two important features of the direction action against liability insurers under Belgian law. First, the Belgian Supreme Court has rendered an important decision regarding a discussion on the interpretation and application of the sunset clause in article 142 of the Insurance Act of 4 April 2014. Second, the Belgian direct action system is also much broader than the direct action that is allowed against indemnity/liability insurers in other EU jurisdictions. However, the application of the Belgian direct action in an international context has been challenged in Belgian case law.
The mechanism for coverage over time is governed by article 78 of the Law of 25 June 1992 on Non-Marine Insurance Contracts (WLVO), currently article 142 of the Insurance Act.
Under the first paragraph of article 142, the insurance cover relates to damage that occurs during the policy period and extends to claims introduced against the insured party after the policy period (loss occurrence system). For certain general civil liability policies, the second paragraph of article 142 stipulates that parties may, however, agree that the insurance cover only applies to claims introduced against the insured party or the insurer during the policy period for damage that occurred during the policy period (claims-made system). The exceptions in which the claims-made cover is allowed usually relate to industrial risk and financial lines insurance policies.
The application of the claims-made system in practice may have important consequences for the insured party, such as the non-coverage of future claims in the case of successive liability insurance policies. After termination of the insurance policy, no claim will be covered, even if it relates to damage that occurred during the policy period. Despite this disadvantage for the insured party, the claims-made system is most commonly used by insurance companies for professional liability insurance in order to avoid claims for damage that occurred many years beforehand (long-tail liability).
In order to mitigate the consequences of the claims-made system for the insured party, the Belgian legislator added an additional paragraph to the former article 78 WLVO: the “sunset clause”. This clause obliges the insurer, in case of a claims-made policy, to provide mandatory coverage for certain future claims against the insured party or the insurer within 36 months after termination of the insurance policy, when they relate to:
- damage that occurred during the policy period if, upon the expiry of that policy, the risk is not covered by another insurer;
- circumstances that might lead to damage and that occurred during the policy period and were reported to the insurer.
The sunset clause has given rise to uncertainties and discussions in the Belgian legal doctrine and case law since the Belgian legislator did not define the notion “risk”.
This notion can be interpreted in two different ways: either it can refer to the risk of professional liability in general or the notion can be interpreted as the damage event itself. An architect who terminates his or her professional liability insurance with insurer A, and subsequently concludes a new policy with insurer B, is not entitled to coverage from insurer A according to the first interpretation because the risk of his or her professional liability in abstracto is covered by insurer B. This interpretation does not take into account whether the damage is actually covered by the new insurer B.
The second interpretation will only release insurer A when the damage event in concreto is actually covered by insurer B.
The Belgian Supreme Court finally rendered a decision regarding this discussion in its judgment of 16 January 2015 after differing judgments rendered by the lower courts. In 2010, the Court of First Instance in Dendermonde ruled that the notion risk must be interpreted in concreto.
However, this did not prevent the Court of First Instance of Ghent, two years later, from rendering a judgment where the notion ‘risk’ was interpreted in abstracto. Both parties appealed the judgments and the two cases were brought before the Court of Appeal in Ghent in 2014, which decided that an interpretation in favour of the insured party prevails and that therefore the notion of risk has to be interpreted in concreto.
Eventually, the Belgian Supreme Court also decided, in a concise judgment, that the notion of risk refers to the actual damage and not to the professional liability in general.
There is no doubt that with this interpretation, the Court favours protection of the insured party in concreto. The important consequence of this judgment for insurance companies is the obligation to cover claims for three years after termination of the policy for damage that occurred during the policy period, except if the new insurer actually covers the specific damage.
This judgment of the Belgian Supreme Court is in line with its judgments on other provisions of the Insurance Act that were also in favour of policyholders and insured parties.
Although this judgment has taken away some uncertainties, it did not resolve all issues regarding the application of the sunset clause.
One of the remaining issues for the interpretation in concreto is whether the new insurer needs to provide coverage under the same conditions as the previous insurer.
The direct action of the victim against the insurer of the liable party was introduced by article 86 of the WLVO. The direct action applies to all liability insurance contracts (eg, professional liability, D&O liability, product liability, public liability) except for marine and transport insurance. This legislative direct action system has been incorporated into the Insurance Act of 4 April 2014 without any changes. Because the direct action is introduced to offer protection to the policyholder and/or the insured party, this legislation is mandatory. The Belgian direct action system is much broader than the direct action that is allowed against indemnity/liability insurers in other EU jurisdictions. In the Netherlands, for instance, direct actions are only allowed against motor liability insurers solely for bodily injury claims.
However, the application of the Belgian direct action in an international context has been challenged in Belgian case law.
Two possible scenarios could occur:
The first scenario is the situation where foreign victims take direct action against a Belgian liability insurer and the policy is governed by Belgian law. In this scenario, Belgian courts will have jurisdiction and the direct action is allowed. Any other solution would constitute illegal discrimination.
In the second scenario, Belgian victims take direct action against foreign liability insurers and the policy is governed by foreign law that does not provide for a similar direct action system.
The same two important questions arise in this second scenario: “Which courts have jurisdiction?” and “Is the direct action allowed?”
The answer to the first question can be found in the European Regulation 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters. Belgian courts have jurisdiction but only “if the direct action is possible and allowed”.
A case regarding the second question was brought before the Court of First instance in Turnhout. In this case, a Belgian insurance company subrogated to the rights of the victim took direct action against a Dutch insurance company. In order to decide whether the direct action is possible given the non-existence of the direct action under Dutch law for this particular insurance policy, the court refers to article 106 of the Private International Law Code to determine the applicable law. Article 106 stipulates that the applicable law is the law that applies to the claim of the victim against the liable party or, if that law does not allow the direct action, the law of the insurance contract.
In the case pending before the Court of First Instance in Turnhout, the liability of the Dutch company for which the insurance contract with the Dutch insurer was established was a contractual liability that was governed by Dutch law with exclusion of the United Nations Convention on Contracts for the International Sale of Goods. The insurance contract was also governed by Dutch law. Given the non-existence of the direct action under Dutch law, the direct action against the foreign (Dutch) insurer was, therefore, not possible and was dismissed.
This judgment was confirmed by the Antwerp Court of Appeal in its judgment of 17 February 2016 where the Court rejected the new argument that the direct action would constitute an ‘international procedural rule’, which would be governed by the law applicable to the court proceedings (ie, Belgian law).
Hence, if a Belgian victim cannot rely on Belgian law for its liability claim against a party that is insured under an indemnity insurance contract governed by foreign law, and if the foreign law does not provide for a direct action system, the direct action against the foreign insurer will not be allowed, even by a Belgian court.