On 1 January 2006, a new Insurance Contract Act (SFS 2005:104), came into force in Sweden. The new act, which replaces the Insurance Contract Act of 1927 and the Consumer Insurance Act of 1980, is the result of one of Sweden’s most extensive legislative projects ever – a project that has been going on since the early 1970s.

The purpose of the new Act:
It is stated that the act’s main purpose is to bring legislation up to date, to introduce the same consumer protection in life insurance as in non-life (previously regulated by the Consumer Insurance Act) and to regulate collective insurance, group insurance and insurance based on collective agreements. The Swedish insurance industry had for a long time endeavoured to have the legislative process speeded up. It therefore came as a surprise when the Swedish Insurance Federation – a body representing insurers – in the final stages spared no efforts to stop the project! The Federation basically stated that the proposed new act would already at the outset be out of date. Therefore the ongoing work in the European Union on a harmonised insurance contract law should be awaited. The legislator was, however, not too impressed by these arguments which were quite summarily dismissed. The reform of the 1927 Act was said to be a matter of high priority, not least because the other Nordic countries had either already enacted new legislation (Norway and Finland) or were about to do so (Denmark).

Applicability:
The new act is a single code applicable – with few exceptions – to all insurance contracts. The act is divided into three main sections, covering non-life, life and collective insurance. There are no longer specific provisions for various classes of business. One exception is liability insurance, where claimants have a limited right of direct action against the insurer in certain situations, basically in case of mandatory insurance, where the insured is bankrupt or is a dissolved legal entity.

Separate acts governing special types of insurance e g traffic insurance and patient injury insurance, remain in force.

It does not come as a surprise that the new act, as its predecessor, does not apply to reinsurance contracts.

Provisions basically mandatory:
A specific, and perhaps somewhat surprising, feature of the new act is that it is generally focused on consumer insurance. This means that where the insured is a consumer, derogation from the provisions to the detriment of the insured is not permitted.

Although most provisions regulating commercial insurance are still subject to freedom of contract, the sanctions stipulated for breach of duty to disclose and for neglecting to notify increase of risk are mandatory to the benefit of the policyholder. Thus more severe sanctions are not enforceable.

Derogation is always permitted in respect of i.a. marine, credit insurance and collective insurance (provided the agreement is entered into between employers’ and employees’ unions.

Right to insurance:
Under the new act – as previously under the Consumer Insurance Act 1980 - consumers have, in principle, a right to insurance. The insurance company does not have any right to decline insurance on such terms as generally on offer to the public. Instead insurers’ scope to modify terms and premiums in relation to the individual risk factors at hand is fairly extensive. It is said in the preparatory works that the intention is not to force insurers into uncommercial terms.

It is a well known fact that also some smaller businesses, such as jeweller’s or watchmaker’s shops, at least in some areas have significant problems finding insurance against theft and robbery. And there were calls for introducing a statutory obligation for insurers to insure minor and medium-sized companies. But this has, at least for the time being, been put on ice, after a government committee found the reasons in favour of a duty to contract are not compelling enough. Insurers cannot be forced to take on risks that due to continuous adverse claims experience are economically uninsurable. And a duty to contract in respect of commercial insurance is “unknown in foreign law”.

Information to insureds:
Insurers are in principle free to decide the scope of the cover they wish to provide. In 2000 the Financial Supervisory Authority’s control of the reasonableness of policy wordings were abolished and policy wordings are becoming increasingly diversified, which renders a comparison between insurers’ products more difficult. As a consequence, the new act focuses on the policyholders’ right of information. Not only consumers but also companies are now entitled to information before, as well as after, entering into an insurance contract. The insurance company is obliged, in a written confirmation of the insurance agreement, to call particular attention to conditions that constitute an “unexpected and material” limitation of coverage. This extended duty to inform is the result of the legislator’s awareness that commercial insurance contracts are often quite complicated. But while the sanction for lack of information in respect of consumer insurance is severe under the new Act – the condition may not be invoked by the insurer - the sanction is more “toothless” when it comes to commercial insurance. The commercial insurer may simply be ordered to provide information – poor consolation for a company finding itself lacking the insurance protection intended! There remains though a possibility for the company to claim compensation in tort provided it can prove that the insurer acted negligently during the negotiations leading to the insurance contract by realising but not highlighting that the insured to be would not get the coverage intended.

Duty to disclose:
As to consumer insurance the duty to disclose means the policyholder must correctly and completely answer questions posed by the insurer. But there is no duty to voluntarily account for circumstances even if they are material to the insurer unless, the policyholder is aware the insurer was given wrong or insufficient information previously.

If the policyholder is guilty of fraud, the policy is null and void. Otherwise there is a risk of the indemnity being reduced as deemed reasonable.

In respect of commercial insurance the policyholder is obliged to volunteer information to the insurer although the obligation has been narrowed down to circumstances that evidently are of importance to the insurer’s risk assessment. This duty applies when an insurance agreement is first entered into but also when the agreement is extended or upon renewal.

In case of fraudulent breach of the duty, the contract is null and void. Otherwise the sanctions are, as can be expected, harsher in respect of commercial insurance than consumer insurance. Where the breach is intentional although not fraudulent, or negligent, the insurer can choose between the so called pro-rata rule or the causality rule.

The pro-rata rule means the insurer is free from liability for claims if it is proved it would not have issued the policy had it known the true circumstances. If the insurer can prove that it, due to the incorrect information or lack of information, issued the policy at a higher premium and on other less favourable conditions, liability is limited to what corresponds to the premium and the conditions that have in fact been agreed.

If the insurer has chosen the causality rule in the policy conditions, it is liable only to the extent it can be proven that the incorrect information had no effect on the loss occurring or the size of the loss.

No dramatic changes:
In summary, the new act does not entail any dramatic changes. It is a great disappointment that it does not deal with one of the main practical problems – the time bar. Time bar issues are frequent and was generally considered as most urgently in need of a thorough review and clarifications. It seems, however, as if the present uncertainty will now remain for the foreseeable future.

It is still early days to draw conclusions what impact the new legislation will have on the Swedish insurance industry. It does not seem likely that any significant increase in exposure can be expected. But insurers have no doubt had substantial costs for redrafting of policy wordings, for production of information material in order to comply with the extended obligations - not least in respect of commercial insurance - and also of course for educating staff. It remains to be seen how long it will take before we may see any result of the efforts in the European Union to produce a harmonised insurance contract law. Maybe the fact that Sweden like the other Nordic countries already have acts in force which provide strong protection for consumers will prove advantageous when the EU work gains pace and that the resources now spent will then prove fruitful.

This Special item appeared in issue 108 of JTW News - September 2006

Author: Rose-Marie Lundström - Wistrand Advokatbyrå