European court decision on extra-contractual rules in motor insurance claims
The judgment of the Court of Justice of the European Union (CJEU) in AR & Others v PK SA & Others will be of interest to motor insurers in Ireland and the EU.
The case related to a referral to the CJEU from the courts of Poland, with the referring court seeking to ascertain whether certain provisions of the Motor Insurance Directive (Directive 2009/103/EC) (MID) precluded national law from laying down detailed rules concerning the exercise by injured parties of their rights to bring a direct action against the insurer of the person responsible for the damage.
The underlying claims which gave rise to the referral related to compensation for damage caused to vehicles as a result of road traffic accidents. The claimants, based on Polish case law, sought to assess their loss on the basis of repair costs corresponding to the estimate market value of the original parts and labour required to repair the vehicles (the ‘hypothetical‘ method), whereas the insurers contended that, based on Polish legislation, compensation should be limited to the amount of damage actually suffered, calculated as the difference between the value of the vehicle before it was damaged and the value of the vehicle in its damaged state (the ‘differential‘ method). The costs of the ‘hypothetical‘ method far exceeded the ‘differential‘ method, which gave rise to an argument that the claimants would be unjustly enriched if their claims were paid out based on the ‘hypothetical‘ method. A question also arose as to whether an insurer could refuse to pay out on such claims where the insured had already sold the damaged vehicle, as this meant the proceeds of a claim could not be used to repair the vehicle.
The CJEU held that the MID does not preclude national law from providing that the sole method of obtaining redress is payment by the insurer of monetary compensation (as opposed to repair/restoration of a damaged vehicle). In such circumstances, the injured party’s rights under the Directive allow it to invoke the insurance contract and claim against the insurance undertaking directly, in which case the insurer may be obliged to provide the benefit it would have had to pay to the insured party directly to the injured party, subject to the terms of the insurance contract.
The point which should be of particular interest to Irish and other EU motor insurers is the second part of the ruling of the CJEU in this case. While Member States remain free to determine what damage caused by vehicles must be compensated, the extent of such compensation and the persons entitled to it, national law cannot deprive the EU legislation of its effectiveness. On this basis, the CJEU held that the MID precludes extra-contractual rules for the calculation of compensation and conditions relating to its payment insofar as they would have the effect, in the context of a direct action brought against an insurer by an injured party under the MID, of excluding or limiting the insurer’s obligation to cover all the compensation which the insured must provide to the injured party.
The CJEU emphasised that the payment of the insured benefit to the injured party in such circumstances could only be subject to the conditions expressly laid down in the insurance policy. Other rules or conditions not set out in the contract (such as rules for calculation of compensation or conditions that the compensation is actually used to repair the vehicle) would not be permissible.
Motor insurers in Ireland and elsewhere may need to review their policy terms and conditions with this ruling in mind.