The liability regime of the insurance intermediaries towards

The liability regime of the insurance intermediaries towards consumers according to Turkish law – A comparison to EU Law Samim Unan

General Remarks • Insurance law makes a distinction between large risks and mass risks in order to protect the “consumers”. • Consumers confronted to mass risks benefit of special provisions mandatorily applicable while in respect of large risks freedom of contracting prevails.

General Remarks • The concept of consumer in insurance law differs from that of consumer law. In the insurance area It is more appropriate to speak of “insurance consumers” • Insurance consumers include also medium size firms, taking out insurance for professional or business purposes.

General Remarks • National laws provide a certain number of rules destined to protect “consumers” (in the sense of insurance consumers) imposing duties or obligations on the insurer and/or insurance intermediaries. • In some cases duties/obligations are imposed on the insurer alone or on the intermediary alone whilst in some other instances they are imposed on the insurer and the intermediary.

PEICL and IMD • Although national laws are not identical in that respect, we can assume that PEICL represents generally accepted approaches and rules in Europe in the field of duties/obligations of the insurer. • Duties/obligations of the insurance intermediary are to be found in the IMD

PEICL • Although the protective rules are numerous, we will briefly examine only • Insurer’s pre contractual duties – Provision of the pre contractual documents – Duty to warn about inconsistencies in the cover (duty of assistance) – Duty to warn about commencement of cover • Insurer’s obligation to issue the insurance policy

Provision of pre contractual documents • Aim of the pre- contractual documents: effective protection of the consumers. • Pre contractual documents ensure transparency for the prospective policyholder: He can decide on whether to take out insurance being in possession of relevant information. • Thus, the insurer is under the duty to provide the applicant with pre contractual documents.

Provision of pre-contractual documents Pre-contractual documents include – A copy of the proposed contract terms – Document containing relevant information (name and address of the contracting parties; name and address of the insured and of the beneficiary; name and address of the insurance agent; subject matter of the insurance and risks covered; sum insured any deductibles; amount of the premium or the mode of calculating the premium; due date of the premium, place and mode of payment of the premium; contract period and period of cover; right to revoke the application and the right to avoid the contract; law applicable to the contract or the law proposed by the insurer; out of court and redress mechanisms; guarantee funds or other compensation arrangements, if any)

Provision of pre-contractual documents • Pre-contractual documents should be submitted to the applicant in due time (sufficiently in advance so as the applicant could consider taking out insurance) • Applicant should have the right to a copy of the application form or questionnaire provided by the insurer. • Form of the documents: Text form (durable medium, record readable by both parties, telegram, telex, fax, email).

Duty to warn about inconsistencies in the cover (duty of assistance) • A general pre-contractual duty imposed on the insurer, taking into account the inequality of knowledge and experience that exist between the applicant and the insurer. • Insurers are expert as to the evaluation of risks and as to the contents of the policy • Duty to warn (duty of assistance) concerns therefore the aspects of the proposed risks not covered.

Duty to warn about inconsistencies in the cover (duty of assistance) • The insurer is under the duty to warn the applicant of any inconsistencies between the cover offered and the applicant’s requirements of which – he is aware, or – he should be aware • In that regard all the circumstances of the concrete case would be taking into account when evaluating the scope of the duty.

Duty to warn about inconsistencies in the cover (duty of assistance) • Duty more extensive in case of face to face negotiations (In that case, the intermediary representing the insurer must specify the demands and needs of the applicant and any underlying reasons for any advice given) • If the applicant is assisted by a broker, normally no duty to warn for the insurer (in such case the insurer is entitled to suppose that the applicant is sufficiently advised by the broker)

Duty to warn about inconsistencies in the cover (duty of assistance) • The duty to warn of the insurer will be narrower when no face to face negotiations take place. In that case only routine assistance (general description of the cover). • Also limited scope of the duty when the mode of contracting does not entitle the applicant to expect assistance: For example insurance products sold on shelves in supermarkets. However, the complexity of the product – such as fund or unit linked life assurance policies with the possibility of losing the investment- may lead to a different conclusion.

Duty to warn about commencement of cover • Taking into account the (erroneous) belief that the cover begins when the application form is signed by the applicant, the duty is imposed on the insurer to warn that the commencement of cover will occur at an ulterior date. • The belief above is strengthened by the following facts – Insurers often grant preliminary cover – Insurer’s agent often assist the applicant in filling out the application form. The reticence of the agent upon request for preliminary cover is regarded by the applicants as acceptation.

Duty to warn about commencement of cover • The insurer who is or should be aware that the applicant mistakenly believes in the immediate commencement of the cover, is required to warn the applicant that cover will not begin – until the contract is concluded, or – until he premium (or the first part thereof) is paid

Issue of the insurance policy • The insurer must issue an insurance policy (together with the general contract terms) containing the information provided to the applicant before the conclusion of the contract in the context of the pre contractual information duty, with necessary amendments (at this stage it is no more question of revoking the application, nor of any proposition as to the choice of law).

Issue of the insurance policy • There is no rule requiring that the insurance contract be conform to the information given to the applicant at the beginning (in the context of pre- contractual information duty). • On the other hand, the policy may contain provisions which differ from the application form or from previous agreement. • The insurer will also be under certain duties if he issues a policy with different terms.

Duties related to the issue of the insurance policy with different terms • The insurer must first highlight the differences that exist between the policy and the application or prior agreement. • The insurer must secondly warn the policyholder that he will be deemed to have assented the highlighted changes if no objection is raised within one month from receipt of the policy.

Duties of the intermediaries • Generally speaking, intermediaries are under the following duties (engendering liabilities) towards the prospective policyholder : – Verification – Information – Advice – Warning – Placement – Assistance

Duty of verification • The intermediary must verify – The acceptation by the insurer of the application – The conformity of the insurance taken to the instructions, needs and requirements of the policyholder (if the insurance taken is not conform, the intermediary must inform the policyholder) – That the decisions taken by the policyholder (for example the decision to terminate the existing insurance contract in order to change the insurer) are appropriate (if not the intermediary must warn the policyholder) (No verification duty as to the accuracy of the declarations of the policyholder about the risk).

Duty of Information • Pre-contractual: – Personal data related to the intermediary (identity, address, registration number…. ) – Dependence or independence of the intermediary (financial tights with the insurer) – Exclusivity (whether the intermediary is working with only one insurer or with several insurers at the same time). – Market analysis opportunities – Commissions

Duty of information • Post-contractual (information duty to be accomplished at the renewal or amendment of the insurance contract mainly concerning the facts below) – Change of name – Purchase of the intermediary by another intermediary – Change of category – Abolishment or establishment of a complaint mechanism – Dependence or independence – Exclusivity

Duty of information • Form: On paper or durable medium available and accessible to the customer (durable medium: instrument enabling the storage of the information addressed personally in a way accessible for future reference for an adequate period of time, allowing the unchanged reproduction of the information stored – CD, DVD, hard drives of computers on which e-mail is stored etc. ) – Except: information provided orally is possible where the customer requests it or immediate cover is granted. In those cases information on paper or durable medium shall be provided immediately after the contract is concluded. – If it is question of telephone selling, conformity to the rules of distance marketing of consumer financial service (here too the information must be sent immediately after the conclusion of the contract) • • In clear and accurate manner, comprehensible In one of the official languages of the country concerned or in the language agreed by the parties

Duty to advise • First the prospective policyholder must provide information enabling the intermediary to determine the questions to be asked in order to ascertain the needs and desires of the prospective policyholder. • Thereafter the intermediary shall recommend a product appropriate to the needs and demands of the prospective policyholder.

Duty to warn • At the crossing of the duty to inform and duty to advise – First getting information on the eventual risks that the prospective policyholder faces with regards to an insurance operation – Thereafter giving a negative advice (warning)

Obligation of placement • The broker is under the duty of placing the insurance. • In this context, placement means the presentation of the risk to the insurer and making efforts in order to obtain cover. • The broker must also inform the prospective policyholder of the outcome of the placement

Obligation of assistance • The intermediary must assist the policyholder in operations concerning the conclusion or the performance of the insurance contract: – Assistance in the conclusion of the contract – Assistance in the declaration of the risks – Assistance in the performance of the contract (with regards to the fulfillment of both the insurer and the policyholder) – Assistance in the adaptation of the contract (to the new conditions appeared during the contract period) – Assistance with the renewal – Assistance for the delivery of certificates

German Law VVG 2008 • German law contains a combination of duties/obligations imposed on the insurers and/or intermediaries in respect of – Duty to advice – Duty to inform

German Law. Duty to advice of the insurer VVG § 6 • First the insurer must question the prospective policyholder about his desires and needs

German Law Duty to advice of the insurer VVG § 6 • Thereafter the insurer must advice the prospective policyholder • The duty to advice includes also – the communication of the “grounds” – The documentation (regard shall be given to the “complexity of the insurance offered”) Advice and grounds must be clear and comprehensible and in text form.

German Law Duty to advice VVG § 6 • Sanction in case of breach of the duty to advice = compensation • Duty to advice not applicable – to large risks, – when the insurance contract is entered into through a broker, – when it is question of a distant contract

German Law Duty to inform of the insurer VVG § 7 • The insurer must provide in text form the prospective policyholder before he expresses his consent for the insurance – with the contract stipulations (including the general conditions of insurance) and – the relevant information (as defined in the regulations by the Department of Justice).

German Law Duty to inform of the insurer VVG § 7 • The duty to inform does not apply in respect of “large risks”.

German Law- Duty to advice of the insurance intermediary VVG § 60 • The broker must base the advice he gives to the prospective policyholder on a sufficiently large numbers of insurance contracts available on the market, to enable him to make a recommendation, in accordance with professional criteria, regarding which insurance contract would be adequate to meet the policyholder’s needs. • The rule above shall not apply if the broker explicitly informs the prospective policyholder prior to the consent to the contract is expressed of the limited selection of insurers and contracts.

German Law- Duty to advice of the insurance intermediary VVG § 60 • An insurance agent or an insurance broker who warns the prospective policyholder about the limited selection, are under the duty to inform on which market and information basis they are providing their services. • They have to declare also the names of the insurers on the basis of which they are giving advice. The insurance agent must also declare the insurer on behalf of whom he is working and whether he is working exclusively for that insurer.

German Law- Duty to advice of the insurance intermediary VVG § 61 • The insurance intermediary must ask the prospective policyholder about his wishes and needs to the extent this is recommended having regard to – the difficulty of assessing the insurance being offered – the person of the policyholder – and his situation • The insurance intermediary must advise the prospective policyholder taking into account the time and effort spent in providing the advice and the premium to be paid by the policyholder.

German Law- Duty to advice of the insurance intermediary VVG § 60 • The insurance intermediary must also state the reasons for each advice given in respect of a particular insurance. • Further, he must document his advice taking account of the complexity of the contract of insurance being offered.

German Law. VVG § 63 - Liability of the intermediary • The insurance intermediary shall be liable to compensate for loss incurred by the policyholder as a result of a breach of one of the duties under VVG § 60 (basis of the advice) or VVG § 61 (Advising and documenting duty). • This rule shall not apply if the breach is not attributable to the insurance intermediary.

German Law. VVG § 67 - Mandatory Character • Agreements contrary to VVG §§ 60 to 66 (provisions on the basis of the advice, advice and documentation duty of the intermediary, form and time of the information, liability of the intermediary, POA given to the intermediary, mass risks) to the detriment of the policyholder are not valid

Turkish Law Types of insurance intermediaries • Insurance intermediaries include only “agents” and “brokers”. There is no other intermediary. • Any person assuming a role in the sale of insurance products (other than the insurer) must be either an agent (active for and on behalf of the insurer) or broker (presumably acting for and on behalf of the prospective policyholder).

Turkish Law-Scope of application of rules about insurance mediation • All activities of insurance mediation are subject to same rules. • There is no exception in Turkish law (for example in respect of the mediation activities carried out by persons whose principal activities are not the insurance mediation in connection of insurances complementary to products or services)

Turkish Law- Scope of application of rules about insurance mediation • In Turkish insurance law the concept of consumer is one of the broadest • All policyholders, including those confronted with large risks are equally protected as a simple car owner • All the protective (mandatory) rules apply also to large risks • The duty to inform and the duty to advise must be fulfilled also in case of large risks (contrary stipulations are not valid).

Turkish Law- Duties of the agent Pre -contractual information duty – The legal provision requires that all information about the contract to be concluded be provided to the prospective policyholder by the agent (Note that the term “all information” is very broad). – The law states further that information should be furnished on – the rights of the policyholder – the contractual provisions about which the policyholder should be especially careful

Turkish Law- Duties of the agent Pre- contractual information duty • The pre- contractual information duty must be acquitted “in writing”. An information form (in two copies) must be given to the prospective policyholder. • The information form is established for life and certain non-life insurances by the public authority.

Turkish Law- Duties of the agent Pre- contractual information duty • The prospective policyholder must return a signed copy of the information form to the insurer. • For the purposes of the information duty, respect of the written form is not necessary in case of distant contract. • The insurer has the burden of proving that the duty to inform was complied with (phone records are accepted as valid evidences in that respect).

Liability of the agents • The Turkish law does not prescribe explicitly any other specific duty for the agent. • However it is generally recognized that insurance agents must fulfil their commitments (exercise their professional activities) with utmost care and diligence. • The breach of that duty (of care shall give rise to the liability.

Liability of the agents In Turkish law, whether – The duty to warn about the inconsistencies of the cover, – the duty to warn about commencement of the cover exist and if yes what the basis may be seems discussable. (in my opinion they exist)

Liability of the agents • With regards to the policy issued with different terms, Turkish law stipulates that different terms of the policy are not valid to the extent that they are detrimental to the policyholder, insured or beneficiary. • Thus, there is no need to impose on the insurer the duty to highlight the differences and the duty to warn that the policyholder has the right to object to the changes.

Turkish Law- Liability of the agents • Insurance agents are liable towards the prospective policyholders, insured and beneficiaries on following grounds: – Culpa in contrahendo – Extra contractually pursuant to general provisions – Pursuant to the (Turkish) Consumer Protection Act – Pursuant to the (Turkish) legislation on insurance

Liability of the agents • The content of the pre-contractual information duty of the agent is the same as the insurers’ precontractual information duty. • As the breach (by the agent) of the said duty gives rise to the liability of both the agent and the insurer, policyholders often choose to sue the insurer only. • Turkish law does not impose any additional information duty on the agent (as this is the case in the IMD – information on personal status)

Liability of the agents • Specific legal provisions can also provide for liability of the intermediary: The Consumer Protection Act (generally thought to be applicable also to insurance contracts) holds liable the agents for their negligent and harmful acts.

Liability of the agents • However, the general rule of consumer law holding the agent liable to the customer for defective products delivered by the seller or defective services rendered by the provider does not apply to insurance • This exemption is provided in order to avoid that the financial burden created by insurance companies going bankrupt be on the shoulders of intermediaries.

Liability of the agents • There is no specific rule obliging the agents to declare the commissions they recieve. (Insurers must disclose the commission amounts only when it is question of life assurance).

Liability of the agents • Monies paid by the policyholder to the insurance agent authorized to collection are deemed to have been remitted to the insurer. • Monies paid to the agent by the insurer and intended for the policyholder are not regarded as having been paid to the policyholder until effective collection.

Liability of the agents • Insurance agents can sue and be sued on behalf of their principal. • Insurance agents can summon and be summoned on behalf of their principal.

Liability of the brokers • Broker is liable on the ground of the service providing contract he concluded with the policyholder

Liability of the brokers • Turkish insurance law rules do not impose on brokers any information duty before the conclusion of the insurance contract. Such duty is deduced from the general provisions and especially from the Art. 506(1) of the (Turkish) Code of Obligations – information duty is considered to be included within the general duty of care. • Insurers (who are not exempted of the duty to inform where the prospective policyholder has appointed a broker) are required to inform the broker only, when the broker is empowered to enter into the insurance contract on behalf of the policyholder.

Liability of the brokers • Premium amounts paid to the broker by the policyholder are treated as having been paid to the insurer, if the broker were authorized in that respect by the insurer. • Brokers must transfer the premium payments to the insurer through segregated clients accounts. Those accounts cannot be used to reimburse other creditors in case of bankruptcy. • Do we need the second when we have the first of the above?

Intermediaries acting as auxiliary person • In many cases the insurance agents and sometimes the brokers act as auxiliary person for the fulfillment of the obligations or duties incumbent on the insurer. • In such cases, the insurer who benefits from an agent’s or broker’s services, will respond for the losses caused by that agent or broker.

Intermediaries liable in addition to the insurer • As said above, In some cases national laws impose liability on both the insurer and intermediary. • This is the case for Turkey: Turkish law states that the pre-contractual information duty is incumbent on the insurer as well as on the agent. • Another example: German law provides that the duty to advise is incumbent not only on the insurer but also on the agent.

Intermediary or insurer solely liable • At this point it would be appropriate to underline that in German law the information duty (as imposed on the insurer) does not exist for the intermediary. Thus, in principle, the insurer will be liable alone for its breach • The duty to advise, however exist both for insurer and intermediary. But, if the contract is concluded by the intermediation of a broker, the insurer is exempted from the duty to advise and consequently not liable for the breach of the duty in question.

Overlaps? • In German law, the information duty in the context of the insurance contract to be concluded is imposed only on the insurer. The intermediary is not under such duty. • If the prospective policyholder is represented by a third party (for instance by a broker) it is sufficient to inform that third party.

Overlaps? • With regards to the duty to advise, the situation is different: That duty is imposed on both the insurer and the insurance intermediary. • But the duty to advise in question will be accomplished only once. • To bear in mind: If the contract is intermediated by a broker, the insurer is exempted from the duty to advise under German law.

Overlaps? • But when a contract is intermediated by an agent, he fulfills not only his own duty to advise but at the same time that of the insurer.

Overlaps under Turkish law • In Turkish law the situation is different: – The insurer and agent are both under the duty to inform – The insurer and the intermediary are both under the duty to advice (and warn) (personal opinion) – But when the prospective policyholder is represented by a broker, only the broker shall be informed and advised (and warned).