The legal requirements of the recent Insurance Distribution Directive (IDD) have put Insurance distribution under the spotlight. Attention is mainly focused on the relationship between distributors and insured parties and the greater responsibilities imposed upon distributors.
In contrast, other aspects of insurance distribution - particularly the relationship between mediators and insurers – fell under the radar and were not addressed by the IDD. This raises important questions, which are handled differently across member states, and in some cases have not received a satisfactory answer so far.
One question concerns the right to indemnity or compensation conferred to insurance agents after their agency contract with the insurer is terminated.
In contrast, other aspects of insurance distribution - particularly the relationship between mediators and insurers – fell under the radar and were not addressed by the IDD. This raises important questions, which are handled differently across member states, and in some cases have not received a satisfactory answer so far.
One question concerns the right to indemnity or compensation conferred to insurance agents after their agency contract with the insurer is terminated.
The Agency Directive (Council Directive 86/653/EEC 18 December 1986) handled this issue in regard of commercial agents with authority to negotiate the sale or purchase of goods on behalf of the principal (art. 1). Under its provisions, member states must put in force a system that protects commercial agents after termination, either granting them a right to indemnity or a right to compensation (art. 17). The Agency Directive does not apply to contracts for the distribution of services and therefore leaves out the relationship between insurers and their agents.
Nevertheless, some member states specifically use the framework of the Agency Directive to regulate the insurance agency contract but adopt differing interpretations. This is the case of Portuguese and German Law, where both opt for an indemnity system, but set it out in quite different terms.
In Portugal, the issue is handled by the Insurance Mediation Act, which decrees that ‘the insurance agent is entitled to an indemnity if and to the extent to which s/he brought new customers to the insurer or significantly increased the volume of business with existing customers, and the insurer benefits from this activity after termination of the contract’ (art. 45.º). The same term is included in the proposed Insurance Distribution Act, that will transpose the IDD (art. 55.º). This criterion is exactly the one set out in the Agency Directive, art. 17.2.
The German norms are part of the provisions of the Commercial Code on commercial agents (§89b HGB), adapting the criterion set out in the Agency Directive as follows ‘where insurance agency is at stake, the insurance agent is entitled to an indemnity if and to the extent to which s/he brought, instead of new customers, new insurance contracts to the principal-insurer or enlarged the scope of an existing insurance contract in such an extent, that it is economically equivalent to the procurement of a new insurance contract, and the principal retrieves relevant benefits from this activity after termination of the contract’ (§89b,(5) HGB).
The difference between these terms is very telling in the clarification of the goodwill an insurance agent can provide to his/her principal, after termination of the insurance contract.
The German norms are part of the provisions of the Commercial Code on commercial agents (§89b HGB), adapting the criterion set out in the Agency Directive as follows ‘where insurance agency is at stake, the insurance agent is entitled to an indemnity if and to the extent to which s/he brought, instead of new customers, new insurance contracts to the principal-insurer or enlarged the scope of an existing insurance contract in such an extent, that it is economically equivalent to the procurement of a new insurance contract, and the principal retrieves relevant benefits from this activity after termination of the contract’ (§89b,(5) HGB).
The difference between these terms is very telling in the clarification of the goodwill an insurance agent can provide to his/her principal, after termination of the insurance contract.
In fact, where the sale or purchase of goods is at stake, the economic gains brought by the agent rely on the acquisition of new customers, since it is expected someone who has become a customer of the principal, will in the future repeatedly purchase those goods from the same provider.
This economic rationale cannot, however, extend to the procurement of insurance contracts, since in this case a new customer cannot be expected to repeatedly enter into different insurance contracts with the principal-insurer in the future. On the contrary, in this context, the closure of each new insurance contract with the same customer demands the same amount of effort as any previous insurance contract entered into with the same customer. The goodwill generated by the insurance agent does not rest upon new customer acquisitions, but on new contracts acquired (or eventually upon the broadening of the scope
of existing contracts), even with insured parties that were already customers of the insurer. The goodwill from which the insurer benefits after termination of the agency contract consists of the future insurance premiums paid under insurance contracts acquired by the agent.
It logically follows that to apply the terms of a Directive for the procurement of goods does not do justice to an agent that procures insurance contracts. The point is the acquisition of new contracts, not of new customers. The German norm, mentioned above, provides a satisfactory criterion to access the continuing benefits to the principal after termination of the agency contract, as a result of the agent's work.
The Portuguese legislator, regretfully, is less keen to profit from the revision of the insurance distribution framework brought about by the IDD in order to establish a satisfactory criterion in this matter. The inertia probably comes from a lack of awareness of this subject, which probably also explains the state of affairs in other member states. It is my expectation that this short notice helps to strike some of the needed discussion.
Maria Inês Martins
Is a Law professor at the University of Coimbra’s LawFaculty. She is a member of theInstitute for Legal Researchat the University and a legal consultant in Portugal and Brazil. Maria is aprofessor for several postgraduate courses in Insurance Law and Medical Law,has spoken at conferences in different countries and written numerousarticles covering Contract Law (in general and specifically Insurance Law), Tort Law and Commercial Law.
The Portuguese legislator, regretfully, is less keen to profit from the revision of the insurance distribution framework brought about by the IDD in order to establish a satisfactory criterion in this matter. The inertia probably comes from a lack of awareness of this subject, which probably also explains the state of affairs in other member states. It is my expectation that this short notice helps to strike some of the needed discussion.
Maria Inês Martins
Is a Law professor at the University of Coimbra’s LawFaculty. She is a member of theInstitute for Legal Researchat the University and a legal consultant in Portugal and Brazil. Maria is aprofessor for several postgraduate courses in Insurance Law and Medical Law,has spoken at conferences in different countries and written numerousarticles covering Contract Law (in general and specifically Insurance Law), Tort Law and Commercial Law.
