Dr Nicholas Bevan

Dr Nicholas Bevan

Wednesday, 4 October 2017


Fidelidade-Companhia de Seguros SA v Caisse Suisse de Compensation 2017 

New Law Journal article: Inception Deception

Link to transcript of judgment: (Case C-287/16)

  • s152(2) Road Traffic Act 1988 is rendered obsolete 
  • European Court of Justice ruling effectively abolishes a staple defence commonly invoked by insurers 
  • EU law mandates the creation of a separate inviolate guarantee: one that obliges an insurer to meet a third-party claim arising out of an actionable loss resulting from its use.  
  • The Court of Appeal's reasoning in EUI v Bristol Alliance  and Sahin v Havard is impossible to reconcile with the Court of Justice's judgment in Fidelidade

Published in the NLJ on 1 September 2017


Can a motor insurer invoke its policyholder’s fraud to defend a third-party claim?

‘Yes’ according to the Court of Appeal’s approach to interpreting Part VI of the Road Traffic Act 1988 (RTA) in both EUI Ltd v Bristol Alliance Ltd Partnership [2012] EWCA Civ 1267 and Sahin v Havard & anor [2016] EWCA Civ 120’.  According to this line of unanimous rulings, even the statutory guarantee imposed by Section 151 RTA can be circumvented by contractual exclusions and restrictions in cover. 

However, this orthodoxy was tuned on its head by the European Court of Justice (ECJ) on 20 July 2017.  

The ECJ has ruled that a national laws that permit motor insurers to deny a third-party claim on the ground that the policyholder’s misrepresentation render it void ab itio conflict with EU law.

The pervasive nature of fraud

Fraud poses an obvious threat to insurers and increases the cost of premiums.  Despite savage cuts to recoverable legal costs, motor premiums continue to rise inexorably and they are already unaffordable for some consumers.  Automatic number plate recognition and related technologies discourage overtly uninsured vehicles.  Unfortunately, all that has achieved is to shift the problem elsewhere.   

One tactic employed by unscrupulous drivers is to induce insurers to offer cover, or to do so on better terms, by making misleading or false representations: whether concerning the ownership of the vehicle, the identity of its main driver or a host of other matters relevant to the decision to offer cover or its pricing.  In Cameron v Hussain [2017] EWCA Civ 366 a credulous insurer issued cover to a phantom policyholder.  Claims against uninsured drivers are ultimately borne by law abiding motorists who fund the Motor Insurers’ Bureau (MIB) through their premiums.

New European ruling on motor insurance

In (Case C-287/16) Fidelidade-Companhia de Seguros SA v Caisse Suisse de Compensation 2017 the Court held that a motor policy, once issued, must meet the assured’s civil liability to third parties even where the contractual rights were vitiated at the inception of the policy by the policyholder’s fraudulent misrepresentations. 

The case facts

The facts in Fidelidade are not recounted in detail but it appears that Mr Seemann, a Swiss domiciled motorcyclist, was killed in a motor accident in Portugal 13 years ago.  The vehicle responsible was driven by a Mr Pereira and it was insured with Fidelidade-Companhia de Seguros (Fidelidade), a Portuguese insurer. 

The deceased estate’s claim was met by the Swiss National Guarantee Fund (Swiss NGF) for EUR 285,980.54.   The fund appears to have been acting under the terms of a reciprocal arrangement with its Portuguese counterpart, the Fundo de Garantia Automóvel (FGA) whose terms replicate much of Articles 20 to 25 of Directive 2009/103/EC that govern cross border motor claims within the EU.  Under this scheme, a victim’s local compensating body is entitled to recoup its outlay from the foreign compensating body of the responsible party.  However, when the Swiss NGF sought to recover its outlay from the FGA and the vehicle’s owner, they argued the claim was coved by Fidelidade’s policy.  

When Fidelidade were joined in the proceedings they contended that their policy had been induced by fraud due to the policyholder’s false statements at its inception: concerning the vehicle’s ownership and the usual driver.  They argued that under Portuguese law such a policy was null and void ab initio.

Portuguese law

Fidelidade relied on Title XV of the Portuguese Commercial Code on insurance.  Article 428 provides that a policy is null and void if the assured does not have an interest in the property insured, and where the policy is not stated to be on behalf of someone other than the policyholder, it is deemed to be taken out on behalf of the contracting party.  Article 429 renders null and void a policy where the policyholder has made an inaccurate statement or deliberate non-disclosure that might influence the terms or the existence of the contract. 

The ruling

The Portuguese Supreme Court referred the question whether this law was consistent with the Motor Insurance Directives to the ECJ.

The ECJ reaffirmed that the dual aim of the directives is first to ensure the free movement of vehicles and people and secondly to guarantee that accident victims receive comparable treatment; irrespective of where in the EU the accident occurred.  In (Case C-162/13) Damijan Vnuk v Zavarovalnica Triglav d. d. [2014] All ER (D) 121 (Sep) the ECJ decreed that these objectives were of equal importance.  The Court rehearsed a consistent line of earlier rulings including (Case C-442/10) Churchill v Wilkinson and Evans [2013] 1 W.L.R. 1776 and confirmed that member states have no discretion to permit motor insurers to rely on statutory provisions or contractual clauses to enable them to avoid their liability to meet third party claims, save where expressly permitted by the Motor Insurance Directives.  It also ruled:
‘27      Accordingly, it must be held that the fact that the insurance company has concluded that contract on the basis of omissions or false statements on the part of the policyholder does not enable the company to rely on statutory provisions regarding the nullity of the contract or to invoke that nullity against a third-party victim so as to be released from its obligation under Article 3(1) of the First [Motor Insurance] Directive to compensate that victim for an accident caused by the insured vehicle.
28      The same is true regarding the fact that the policyholder is not the usual driver of the vehicle.  …’

The Court acknowledged that whilst the construction of an insurance contract is governed by the domestic law, not EU law, it reaffirmed two well established principles: that member states must exercise their powers consistently with EU law and that national laws must not deprive the Motor Insurance Directives of their effectiveness.

It concluded by ruling that the Motor Insurance Directives precluded legislation that has the effect of nullifying their protection where a policyholder has made false statements as to the identity of the owner; the usual driver or whether the assured has any economic interest in the vehicle.

Autonomous quality of the protection

It is clear from Fidelidade that once an insurer certifies that a vehicle is covered for these purposes, EU law mandates the creation of a separate inviolate guarantee: one that obliges an insurer to meet a third-party claim arising out of an actionable loss resulting from its use.  The existence of a motor policy is merely a contiguous factor that triggers this protection. 

A third-party victim’s entitlement is impervious to any contractual limitation, exclusion or restriction that bind the policyholder and the insurer inter se, save where expressly permitted by the directives . This is consistent with a line of ECJ rulings from (Case C-129/94) Ruiz Bernaldez 1996 to Damijan Vnuk in 2014.  This social policy imperative strikes a chord with Gloster VP and Lloyd Jones LJ’s observations on to the Parliamentary intention of the RTA in their majority decision in Cameron v Hussain

UK provision on policyholder misrepresentations
Our national provision in this area was recently reformed and codified within the Consumer Insurance (Disclosure and Representations) Act 2012.  The old common law principles are substituted by a new statutory obligation to act honestly and reasonably.  Section 2 (2) imposes a duty to on consumers to ‘take reasonable care not to make a misrepresentation to the insurer’.  Section 3 prescribes an objective standard of reasonable care. 

The Act imposes a broad dichotomy between inadvertent misrepresentations and deliberate or reckless misrepresentations.  In the former case, an insurer can only avoid the policy if it can prove that it would not otherwise have offered cover on any terms; otherwise it is entitled to reduce its contractual indemnity to its policyholder, applying a formula set out in Schedule 1 Part 1.8 of the Act.  Whereas, in the latter case, it is entitled to avoid the policy if it can establish that the consumer either knew or did not care that the misrepresentation was (i) untrue or misleading and (ii) that it concerned a matter that was relevant to the insurer (i.e. the it was a material misrepresentation), regardless of whether it might have been prepared to offer cover on different terms, see Section 5(2) and Schedule 1 Part 1 (2) of the Act.  Commercial policies are regulated separately under the Insurance Act 2015.

These provisions are incorporated into Section 152 (2) of the RTA.  Accordingly, the sanction of revocation ab initio is primarily now restricted under Section 152 to inadvertent misrepresentations of material facts that are instrumental to the motor insurer’s decision to offer cover, or to fraudulent misrepresentations of material facts.

Motor insurers have relied increasingly on Section 152 (2) RTA in recent years, particularly I high value claims.  It is a uniformly accepted convention that once a court declaration under Section 152 (2) is made, the insurer is released from any direct liability to meet a third-party claim, whether contractually or statutorily imposed (i.e. under either Section 151 of the 1988 Act or Regulation 3 of the Rights Against Insurers Regulations 2002).  The claim is then treated as one against an uninsured party and so handled under the less advantageous terms of one or other of the MIB Uninsured Drivers Agreements or 2015 as amended.  This author first criticised this approach for being inconsistent with the protective purpose of the Directives in his JPIL commentary on Delaney v Pickett [2011] EWCA Civ 1532 and again in this journal on 8 February 2013 in On the right road? (Part II). Fidelidade has vindicated an opinion was hitherto perceived as an unorthodox.

Implications for UK insurers

The legacy of Churchill v Wilkinson, (Case C 409/11) Gábor Csonka v Magyar Állam [2014] 1 CMLR 14, Vnuk and now Fidelidade is to provide legal certainty for accident victims and insurers alike.  Once a certificate of motor cover is issued it should be good for any third-party claim arising out of the use of motor vehicle on land that is consistent with its normal function; regardless of whether it was induced by fraud; regardless of any contractual restrictions or exclusions of liability that are inconsistent with the holistic nature of of the protection prescribed under EU law.  The only exception being the single exclusion of liability permitted by Article 13.2 of the sixth Motor Insurance Directive 2009/103/EC which applies to passengers who know their vehicle is stolen.  The policyholder’s liability to the insurer remains.

Section 152 (2) must be construed consistently with Fideledade, with the result it is effectively made otiose, at least for all claims arising out of an accident predating the UK’s official secession from the EU. 

The financial implications for motor insurers will be modest, as they already meet these claims in their capacity as Article 75 insurers.  The most significant impact will be to third party victims who are spared the rigmarole of their claim being misallocated as an uninsured claim.

Future uncertainty

The UK’s implementation of these directives is systemically defective and the government’s July 2016 consultation on Vnuk amounts to a partial admission of this.  It is also the subject of a wide-ranging judicial review initiated by RoadPeace.  Whether Fidelidade will have any enduring legacy beyond Brexit remains to be seen.  Lord Neuberger’s interview with the BBC on 8 August emphasises the need for much greater clarity than is provided within the Repeal Bill.

Reproduced with kind permission of the New Law Journal.

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