Demands and needs: distributor liability and quasi-cover

A customer asks for "all risks" home insurance, but the policy does not cover flood. A company insures its building, but nobody suggests liability cover for ice falling from the roof onto a passer-by. A contractor asks for contractors' all risks cover, but the policy does not cover the existing structure. When the loss occurs, the insurer is entitled to decline because the risk was not covered. Is the customer left empty-handed, or is someone liable for not recommending the right insurance? This post is based on an article by Olavi-Jüri Luik and Kadi Saluste published in Juridica in 2025.¹

The statutory duty

Under § 5(3) of the Insurance Activities Act (kindlustustegevuse seadus, KindlTS), insurance distributors are the insurer, the insurance broker and the insurance agent.² All are subject to a duty deriving from the Insurance Distribution Directive (IDD, Directive (EU) 2016/97).

Under KindlTS § 221(1), before every contract is concluded (and, where a need is identifiable, before amendment) the insurer must, on the basis of information from the customer, identify the customer's demands and needs, recommend the most suitable contract it offers and give explanations sufficient for the contract's complexity and the type of customer, so the customer can make an informed decision.² The agent's duty is in KindlTS § 198(2), and the broker's duty is likewise in the KindlTS.

Two important exceptions: under KindlTS § 221(2) the insurer's duty does not apply where the contract is concluded through a broker (the duty then lies with the broker), nor to the contracts referred to in § 427(2) and (3) of the Law of Obligations Act (võlaõigusseadus, VÕS), i.e. large risks and transport risks (see Large risks under Estonian law).²

What the duty involves

The demands-and-needs duty has three parts:

1. Duty to enquire: the distributor must ask relevant questions about the customer's situation and wishes.
2. Duty to advise: the distributor must recommend the product that best meets the need.
3. Duty to give reasons: the distributor must explain why the recommended product meets the need.

All three depend on information provided by the customer. That raises a boundary question: where does the distributor's duty end and the customer's duty to inform begin? A baker need not ask a customer about gluten intolerance. Insurance, however, is a financial service, and the law protects customers against overly complex products, so the distributor's duty is considerably wider.

Questionable situations in practice include:

• accident or liability insurance with too low a sum insured, although the insurer offers higher limits;
• buildings insurance without recommending liability cover;
• insuring a building in a flood-prone area without flood cover;
• recommending a narrow policy where the customer asked for "everything covered" and a broader product was available.

"Responsible insurance" or quasi-cover?

Estonian commentary on the VÕS has suggested that, at least for brokers, the demands-and-needs duty is comparable to a lender's responsible lending duty. In the article we preferred a term known in German law: quasi-cover (Quasideckung).

The German Insurance Contract Act (VVG) provides for the insurer's duty to advise (§ 6), the intermediary's duty to advise (§ 61) and the intermediary's liability for breach (§ 63).³ German literature and case law have developed the principle that a distributor in breach of the duty to advise must put the customer in the position they would have been in had they received correct advice. If correct advice would have led to a policy covering the loss, the distributor is in substance liable as if it were the insurer: it pays the loss within the scope of that policy. Hence "quasi-cover".

We consider that Estonian distributors are likewise liable on a quasi-cover basis where they breach the duty to help the policyholder make an informed decision. The legal basis differs by distributor: for the insurer, breach of the pre-contractual information duty (VÕS § 14); for the broker, breach of advisory and care duties under the brokerage contract; and for the agent, non-contractual liability.⁴

Case law and proof

Estonian case law on this issue is sparse. Lower courts have found brokers liable, for example, for underinsurance and where the correct need was not identified from the customer's information (contractors' all risks cover that did not include the existing structure). The Supreme Court has emphasised proof of causation in such cases.

Causation is indeed the central difficulty of a quasi-cover claim. The customer must prove that:

1. the distributor breached its duty (did not ask, recommend or explain);
2. with correct advice the customer would have concluded a different contract;
3. such a contract was available on the market and would have covered the loss.

International practice shows the same. In Australia, for example, a court found that a broker breached its duty of care by failing to warn of an exclusion, but the claim failed because the customer did not prove that, if informed, they would have obtained a policy covering the loss.

The key lesson for distributors is documentation. If the distributor has recorded in writing which questions were asked, what the customer answered and why a product was recommended, it is in a strong position. In Germany the duty to document is statutory. In Estonia, the expectation that the whole advisory conversation be documented derives in substance from the Financial Supervision Authority's advisory guidelines on insurance distribution and the Estonian Insurance Association's good practice document: no statute imposes a general duty to keep a full record of the advice conversation. Statutory documentation and form requirements do exist in specific cases, however: for insurance-based investment products, the circumstances of the suitability and appropriateness assessment must be documented and kept until the related claims become time-barred (Insurance Activities Act (kindlustustegevuse seadus, KindlTS) § 222 lg 10), and pre-contractual information must be provided in compliance with the form requirements of VÕS § 430 (KindlTS § 221 lg 1¹).

A proposal to the legislator

In the article we proposed regulating the distributor's duty to support an informed decision, and liability for its breach, in the VÕS, as in Germany, together with a precise duty to document. The current position, where the duty sits in the regulatory KindlTS but the basis of liability must be derived from general provisions, does not protect policyholders adequately.

A special case: MGAs and cross-border intermediaries

The KindlTS does not recognise the concept of a managing general agent (MGA), yet MGAs operate in Estonia on a cross-border basis. An MGA typically holds the insurer's authority to price and bind risks and often to handle claims. From the customer's point of view it matters whether they deal with an insurer, an agent or a broker, because that determines who bears the demands-and-needs duty and against whom a claim lies. Foreign insurers and MGAs distributing into Estonia should map these duties in their distribution agreements.

Practical checklist

For customers before conclusion:

1. Describe your situation as precisely as possible: location and use of property, business activity, previous losses, third parties you might harm.
2. Ask the distributor in writing which risks are covered and which excluded, especially flood, liability, business interruption and adequacy of the sum insured.
3. If you want broad cover, say so expressly and ask for a comparison of several products.
4. Keep all correspondence and quotes.

For distributors:

1. Use a structured questionnaire adapted to the customer type (consumer, SME, large company).
2. Record the customer's answers and your recommendation with reasons.
3. If the customer declines recommended cover (for example liability insurance or a higher sum insured), document the refusal.
4. Explain the main exclusions and limitations in plain language, not merely by reference to the wording.

This is not bureaucracy. It protects the customer against being underinsured and the distributor against later claims.

Conclusion

The demands-and-needs assessment is not a formality. A distributor that fails to ask, recommend and explain may be liable to the customer as if the correct policy had been concluded. For customers, this means that after a declinature it is worth checking whether they were properly advised at inception. For distributors, it means documenting the advice process carefully.

Based on: O.-J. Luik, K. Saluste, "Kas kindlustusõiguses eksisteerib vastutustundliku kindlustamise põhimõte?", Juridica 2025/3, pp. 174–184. Rewritten for the web and updated as of November 2026.

Related pages

• Insurance distribution (IDD) in Estonia
• Supreme Court: distribution and broker liability
• Research article: is there a principle of responsible insurance?
• Regulatory and distribution services

References