CIVIL LIABILITY OF REINSURANCE BROKERS

1. CIVIL LIABILITY OF REINSURANCE BROKERS JOINT MEETING OF AIDA AND CILA LIMA, OCTOBER 4th 2016 JORGE ANGELL

2. OVERVIEW • Concept of reinsurance broker • “Brokers are those who run and wander from one place to another, reuniting those willing to contract, and sell and buy”. HeviaBolaños, Juan: Labyrintho de comercioterrestre y naval. Lima, 1617, Libro I, Cap. V, núm. 1. • Legal requirements to act as reinsurance broker. The current Spanish legislation. Act 26/2006 on  Private Insurance and Reinsurance Intermediation of July 17. The EU Directive 2016/97 of January 20 on distribution of insurance. • Role of the reinsurance broker. Contract-making process. • Commercial-legal relations between the parties involved in the reinsurance.

3. DUTIES OF THE REINSURANCE BROKER Article 37 Intermediation Act “Obligations to third parties. 1. Reinsurance brokers shall highlight within every advertisement and trade document of reinsurance mediation their status of insurance brokers, along with their registration at the Registry pursuant to Article 52 of this Act, and have a liability insurance or any other guarantee, pursuant to Article 35.1. 2. A reinsurance broker shall inform the party wishing to obtain reinsurance about the conditions of the contract to be underwritten and shall ensure the requirements for its efficiency and full effectiveness are met. They shall be considered in all events depositary of the sums received from those they are acting for.” Large risks case

4. DUTIES OF THE REINSURANCE BROKER This would include: • Duty to obtain cover. • Degree of skill required. • Choice of reinsurers. • Placement of risk: disclosure of risk. • Drafting of reinsurance contract. • Advice during life of contract. • Handling of claims.

5. CONFLICT OF INTERESTS • Legal nature of the relation between the reinsurance broker and the cedant: mandate, mercantile commission, others. According to Article 29 of the Intermediation Act, supplementary application of the rules on commercial commission. • Conflicts in practice: servingtwo masters? • Case law

6. CIVIL LIABILITY • Applicable regime. • Events of liability. • Damages. • Determination and amount. • Contributory negligence. • Limitation of actions.

7. EUROPEAN OVERVIEW • Germany • France • The Netherlands • Italy

8. THE POSITION IN GERMANY • Concept and role In the context of negotiations between the cedant and the reinsurer, the reinsurance broker generally has to advise the cedant with regard to necessity, appropriateness and structure of the reinsurance cover. The reinsurance broker analyses the risk potential • Duties The reinsurance broker particularly has to fulfil the following duties and he may be liable for damages if he does not fulfil these duties properly:

9. Placement: The reinsurance broker must submit the information from the cedant to the reinsurer properly. He may only act within the frame of his power of attorney granted by the cedant. If expressly agreed, the reinsurance broker assesses the financial solidity of the reinsurer. ii. Collection of Premiums and claim Processing: The reinsurance broker generally has to forward premium payments to the reinsurer and claims payments to the cedant.

10. Civil Liability If said duties are not fulfilled properly, the reinsurance broker may be liable towards the cedant. Liability may be restricted to intentional breaches of duty by individual agreement. There are no specific legal provisions concerning the duties and the liability of the reinsurance broker. The Sections 59 et seq of the German Insurance Contract Act (Versicherungsvertragsgesetz, VVG) only apply to primary insurance intermediaries, and not to reinsurance brokers (see Section 209 VVG).

11. Vis-á-vis the cedant the reinsurance broker´s liability follows from the Section 662 BGB (German Civil Code) et seq. which are applicable to mandates in general, amended by certain aspects of the law of service contracts. Also the principles of banking liability (investment advisory) –such as “advantage of knowledge” (“Wissensvorsprung”), “non-disclosure of conflicts of interests”, specific rules on the burden of proof – should be applied accordingly to the liability of the reinsurance broker.

12. THE POSITION IN FRANCE • Concept With regard to French regulation, reinsurance brokers belong to the broad category of insurance and reinsurance intermediaries. • Roles and duties The reinsurance broker is the agent of its client and duties arise from this contractual relationship (like duties of information, best effort and/or result)

13. Conflicts of interest It arises from market practice as well as from contractual relationship that reinsurance brokers have a duty to check and avoid possible conflicts of interest. • Civil liability The breach of the abovementioned duties implies professional civil liability of the reinsurance broker (whether under contract or for tort or negligence, depending upon the relationship with the claimant).

14. THE POSITION IN THE NETHERLANDS • Role The re-insurance broker (just like the insurance broker) acts upon instruction of the (potential) re-insured. The re-insured instructs the re-insurance broker to take care of insuring its risks with a re-insurer or multiple re-insurers. This contractual relationship is based on art. 7:400 Dutch Civil Code (DCC):

15. “Art. 7:400- 1. A contract for services is a contract whereby one party, the provider of services, binds himself towards the other, the client, to perform, otherwise than on the basis of a contract of employment, work consisting of something other than the creation of a work of a tangible nature, the safekeeping of things, the publication of work, or the carriage or transportation of persons or things. - 2. Without prejudice to Article 413, Articles 401-412 apply, unless the law, the content or nature of the contract for services or another juridical actor usage otherwise requires.

16. In general, the re-insurance broker must observe the care of a good service provider, as is laid down in art. 7:401 DCC: “In the conduct of his work the provider of services must exercise the care of a good provider of services.” This general duty of care has been evolved and further specified in case law over the last twenty years.

17. Duties As to aforementioned case law is has become clear that the duty of care of the re-insurance broker at least includes the following: • Make sure that the risks of the re-insured are sufficiently insured. • Must inform and advise the re-insured of the consequences for the re-insurance contracts resulting from any information that is reasonably known or should reasonably be known to the re-insurance broker.

18. Must take care that the re-insurer knows everything about the risks in order to make a true assessment of the risk; the re-insurance broker must prevent that the re-insurer in case of claims is able to reject these claims based on concealing or hiding useful information from the re-insurer at the time of accepting the re-insurance contract. (You could compare this to the “duty of fair presentation” as is included in the English Insurance Act 2015 which became into force on 12 August this year.)

19. Must be pro-active as to maintaining sufficient insurance cover. This means contacting the re-insured on a regular basis in order to discuss the insurance contracts and possible changes in the situation of the insured that might influence the cover of the insurance contracts. The definition of “a regular basis” depends on the situation itself, however, in most case law “a regular basis” means at least once a year.

20. Must make sure that the re-insured truly understands what is advised. • Although this is not a strict obligation of the re-insurance broker, in many case law it becomes clear that one may expect a re-insurance broker to put down in writing the advices given and sent these written advices / summaries to the re-insured.

21. Important side note: The extent of the duty of care of the re-insurance broker depends on the re-insured itself. The more experienced and knowledgeable the re-insured is, the less extensive the duty of care becomes. Therefore, the duty of care of the re-insurance broker is less extensive than the duty of care of the insurance broker. After all, the re-insurance broker informs and advises an insurance company from who one may expect to have knowledge of and experience in the field of insurance, which is not necessarily the case with insurance brokers.

22. Conflicts of interest (serving two masters) Under Dutch law it is clear that the re-insurance broker acts upon the instructions of the re-insured. There can be conflicts of interest (e.g., when the broker drafts the conditions) but the broker should always keep the interest of the re-insured in mind. Case law has established that the acts of the re-insurance broker are ascribed to the re-insured.

23. In other words, a re-insured can never state that it didn’t know about certain insurance conditions in case the re-insurer did inform the re-insurance broker about them or in case one may expect that a re-insurance broker should have known about those insurance conditions.

24. Liability principles The liability of the reinsurance broker towards the re-insured is based on the contractual relationship governed by art. 7:400 DCC and further as well as on the general principles of contract law laid down in art. 6:74 DCC et seq. These principles are filled out with aforementioned duties based on the extensive case law on the duty of care of the re-insurance broker.

25. Besides that, the re-insured could also hold the re-insurance broker liable in tort. However, in that case the re-insured must evidence that the acts and neglects of the re-insurance broker result in wrongful misconduct. This is a heavy burden of proof and since it is easier to claim on the contractual basis, claims are hardly ever based on liability in tort.

26. THE POSITION IN ITALY • Article 106 Insurance Code • Introduce/propose products • Assistance and advice to the cedant • Assist in risk placement • Management and compliance, in the event of claims • Must avoid conflicts of interest that may damage the cedant • Independence when intermediating in insurance and reinsurance • Conflict: low commission for the direct insurance and high in the reinsurance • Liability for negligence: article 1176, 2 Civil Code

27. WITH SPECIAL THANKS TO OUR CONTRIBUTORS • Germany Dr. Herbert Palmberger, HEUKING KÜHN LÜER WOJTEK Georg - Glock - Strasse 4 D-40474  Düsseldorf E-Mail : h.palmberger@heuking.ch www.heuking.de • France Romain Schulz // Sarah Xerri-Hanote HMN & Partners 7, place d’Iéna 75116 PARIS Tel.: 33 (0) 1 53 57 50 22 Fax. 33 (0) 1 53 57 50 30 Mobile : + 33 (0) 6 14 16 37 55 E-mail : rschulz@hmn-partners.com/sxerri-hanote@hmn-partners.com www.hmn-partners.com

28. The Netherlands Martina Smit Van Steenderen MainportLawyers Zeemansstraat 13 3001 KL  Rotterdam  Tel.:+31102663206 Email: Martina.Smit@mainportlawyers.com www.mainportlawyers.com • Italy Carlo Galantini Galantini & Partners Studio Legale Associato Via Santa Sofia, 27 20122 Milano T.: +39 02 583 06 022 Email: carlo.galantini@galantinipartners.eu www.ghea.eu

29. JORGE ANGELL L.C. RODRIGO ABOGADOS CALLE LAGASCA 88, 4º 28001 MADRID jangell@rodrigoabogados.com www.rodrigoabogados.com