Choice of law and jurisdiction for insurance contracts in Estonia

A foreign insurer covering an Estonian risk will typically use its own wording with its own governing law and forum clause. Whether those clauses are effective depends on two EU regulations: art 7 of the Rome I Regulation on applicable law, and Section 3 of Chapter II of the Brussels I bis Regulation on jurisdiction. Both distinguish between "large risks", where party autonomy prevails, and other ("mass") risks, where it is restricted for the protection of the policyholder. Estonian law adds a layer of national rules, notably in the Private International Law Act (rahvusvahelise eraõiguse seadus, REÕS) and the Law of Obligations Act (võlaõigusseadus, VÕS).

1. Applicable law: Rome I art 7

1.1 Scope

Article 7 applies to insurance contracts covering large risks, wherever the risk is situated, and to all other insurance contracts covering risks situated in the Member States. It does not apply to reinsurance (art 7(1)).¹ Consequences:

• Reinsurance contracts are governed by the general rules (arts 3 and 4 Rome I): free choice, and in the absence of choice, typically the law of the reinsurer's habitual residence as the characteristic performer.
• Mass risks situated outside the EU are also governed by the general rules (and art 6 for consumers).

1.2 Large risks

A contract covering a large risk is governed by the law chosen by the parties under art 3. Absent a choice, it is governed by the law of the insurer's habitual residence, unless the contract is manifestly more closely connected with another country (art 7(2)).¹ Article 7(2) defines large risks by reference to art 5(d) of the First Non-life Directive 73/239/EEC; following the codification of the insurance directives, the definition is now found in the Solvency II Directive. In summary, large risks are (i) marine, aviation and transport risks (hull and cargo, and related liability); (ii) credit and suretyship risks where the policyholder carries on a business activity and the risk relates to that activity; and (iii) property, liability and financial loss risks where the policyholder exceeds at least two of three thresholds (balance sheet total, net turnover, average number of employees).

Estonian law separately determines when the protective provisions listed in VÕS § 427(1) may be departed from to the policyholder's detriment. Section 427(2) contains exceptions for reinsurance; insurance of railway rolling stock, aircraft and ships; cargo insurance; aircraft and watercraft liability insurance; and credit and suretyship insurance covering risks arising from economic or professional activity. These exceptions do not depend on the size thresholds in subsection (3). Separately, § 427(3) applies to the insurance classes listed in the Insurance Activities Act (kindlustustegevuse seadus, KindlTS) § 12(1), points 3, 8, 9, 10, 13 and 16, where the policyholder meets at least two of three criteria: balance sheet total exceeding EUR 6.6 million, annual net turnover exceeding EUR 13.6 million, and an average of at least 250 employees during the financial year. For companies in the same consolidation group, subsection (4) requires the company's data in the consolidated accounts to be used.² The two tests should be applied separately: a contract may be a large risk under Rome I while the mandatory VÕS rules still apply because Estonian law governs and § 427 lg 3 is not met, or vice versa.

1.3 Mass risks

For other contracts, the parties may choose only (art 7(3)):¹

• (a) the law of any Member State where the risk is situated at the time of conclusion;
• (b) the law of the country where the policyholder has its habitual residence;
• (c) for life assurance, the law of the Member State of which the policyholder is a national;
• (d) for contracts covering risks limited to events occurring in one Member State other than the one where the risk is situated, the law of that Member State;
• (e) where the policyholder pursues a commercial, industrial or professional activity and the contract covers two or more risks related to those activities situated in different Member States, the law of any of the Member States concerned or of the policyholder's habitual residence.

Where the Member States referred to in (a), (b) or (e) grant greater freedom of choice, the parties may use it. Absent a valid choice, the contract is governed by the law of the Member State where the risk is situated at the time of conclusion.¹

Practical result. A policy covering an Estonian company's Estonian premises, with an English choice-of-law clause, is not validly subject to English law unless the risk is large; Estonian law applies. A multi-country commercial programme for a group can, under (e), choose the law of any Member State where covered risks are situated, but not necessarily the insurer's law.

1.4 Where is the risk situated?

Under art 7(6), the location of the risk is determined by the insurance directives. Estonian law contains the same rules in REÕS § 41:³

• for buildings and installations (and contents covered by the same policy): the state where the property is located;
• for vehicles of any type subject to registration in Estonia or another EU Member State: the state of registration;
• for travel and holiday risks under policies of up to four months: the state where the policyholder took the steps necessary to conclude the contract;
• in all other cases, including life insurance: the state of the policyholder's habitual residence (natural person) or of the establishment to which the contract relates (legal person).

For a D&O, cyber or general liability policy of an Estonian company, the risk is therefore situated in Estonia if the contract relates to the Estonian establishment.

1.5 Compulsory insurance

Where a Member State imposes an obligation to insure, the policy satisfies the obligation only if it complies with that state's specific provisions, which prevail over the law of the state where the risk is situated; and a Member State may require the contract to be governed by its law (art 7(4)).¹ Estonia has used the latter option: a contract of compulsory insurance is governed by the law of the state that imposes the obligation (REÕS § 46 lg 1). Where a policy covers risks in several states and at least one imposes compulsory insurance, it is treated as several contracts (REÕS § 46 lg 2; Rome I art 7(5)). If the law of the state imposing the obligation requires the insurer to notify an authority of the end of cover, the insurer can rely on the absence of cover against third parties only in accordance with that law (REÕS § 46 lg 4).³

1.6 Overriding rules and the standard-terms regime

Even where a foreign law validly applies, Estonian overriding mandatory provisions may be applied by an Estonian court (Rome I art 9). Of particular importance is VÕS § 36 lg 3, under which the Estonian standard-terms rules apply to contracts between businesses whose relevant places of business are in Estonia, irrespective of the applicable law, and § 36 lg 2 for consumers.² See the wording review guide.

1.7 National rules (REÕS §§ 40–47)

The REÕS contains its own conflict rules for insurance contracts covering risks situated in Estonia or the EU, excluding reinsurance (REÕS § 40), with provisions on free choice and its limits for non-life and life insurance (§§ 42–44), the law applicable in the absence of choice (§ 45) and compulsory insurance (§ 46).³ Since Rome I takes precedence, these rules are mainly relevant as the vehicle for the option in art 7(4)(b) and as interpretive guidance.

2. Jurisdiction: Brussels I bis Section 3 (arts 10–16)

2.1 Protective jurisdiction

In insurance matters, jurisdiction is determined by Section 3, without prejudice to art 6 (defendants outside the EU) and art 7(5) (branches) (art 10).⁴

• Actions against the insurer. An insurer domiciled in a Member State may be sued in its home courts, or in the courts of the place where the policyholder, insured or beneficiary who brings the action is domiciled, or, if it is a co-insurer, where proceedings are brought against the leading insurer (art 11(1)). A non-EU insurer with a branch, agency or establishment in a Member State is deemed domiciled there for disputes arising out of its operations (art 11(2)).
• Liability and immovable property. The insurer may also be sued where the harmful event occurred (art 12).
• Third parties. In liability insurance the insurer may be joined in proceedings brought by the injured party against the insured if the law of the court permits; and arts 10–12 apply to direct actions by the injured party where such actions are permitted (art 13(1)–(2)).
• Actions by the insurer. The insurer may sue only in the courts of the Member State where the defendant (policyholder, insured or beneficiary) is domiciled, without prejudice to counterclaims (art 14).⁴

2.2 Jurisdiction agreements

The rules of Section 3 may be departed from only by an agreement (art 15):⁴

1. entered into after the dispute has arisen;
2. which allows the policyholder, insured or beneficiary to sue in additional courts;
3. concluded between a policyholder and an insurer both domiciled or habitually resident in the same Member State, conferring jurisdiction on that state's courts even for harmful events abroad, if not contrary to that state's law;
4. concluded with a policyholder not domiciled in a Member State, except for compulsory insurance or immovable property in a Member State; or
5. relating to a contract covering one or more risks listed in art 16, which includes marine, offshore and aviation risks, goods in transit, related liabilities and financial losses, and all large risks as defined in the Solvency II Directive.

The large-risk exemption operates between the contracting parties. A jurisdiction clause agreed by the policyholder and the insurer in a large-risk policy cannot be relied on against an insured under that policy who is not an insurance professional, has not consented to the clause and is domiciled in a Member State other than that of the policyholder and the insurer; such an insured keeps the protective jurisdiction rules of Section 3. The Court of Justice also rejected a case-by-case assessment of whether such an insured is in fact the weaker party.⁶ In group and multinational programmes, the effect of the clause should therefore be checked separately for each insured entity.

Where Section 3 applies, that is where the insurer is domiciled in a Member State or a non-EU insurer is sued over the operations of its branch, agency or other establishment in a Member State (art 11(2)), a London jurisdiction clause in a policy for an Estonian SME (not a large risk) is therefore ineffective against the policyholder, who may sue the insurer in Estonia; and the insurer can sue the policyholder (for example for premium or a declaration of non-liability) only in Estonia. Where the insurer is domiciled outside the EU and the dispute does not arise from the operations of an EU establishment, Section 3 does not apply (art 6), and jurisdiction depends on Estonian national law and any applicable convention (section 2.4).

2.3 Arbitration

Arbitration is excluded from Brussels I bis. Where Estonian arbitration law applies, an arbitration agreement with a consumer may be concluded only after the claim has become due and must satisfy the information, venue and signature requirements of § 718¹ of the Code of Civil Procedure (TsMS), subject to its limited exception in subsection 6. A non-compliant agreement is void as provided in subsection 5. Standard terms remain subject to the applicable unfair-terms rules, including VÕS § 42(3)(10) and § 44.² Commercial arbitration agreements require a separate assessment under the applicable arbitration law and the agreed rules. For large commercial risks, arbitration before the Arbitration Court of the Estonian Chamber of Commerce and Industry or under the ICC Rules is common and effective.

2.4 Non-EU parties

For the United Kingdom, Norway, Switzerland and Iceland, the Brussels I bis rules do not apply as such; jurisdiction and recognition depend on the Lugano Convention (for Norway, Switzerland and Iceland), the Hague Conventions to which the EU and the third state are parties, and Estonian national procedural law. A specific analysis is required in each case.

3. Third parties: direct action and subrogation

• Direct action. The injured party may sue the liability insurer directly if the law applicable to the tort or the law applicable to the insurance contract so provides (Rome II art 18; REÕS § 51).⁵ Estonian law grants a direct claim in compulsory liability insurance (VÕS § 521) and motor insurance, but not in voluntary liability insurance. See the direct action guide.
• Subrogation. Whether the insurer is subrogated into the insured's claim against a third party is governed by the law applicable to the insurance contract (Rome II art 19; REÕS § 39).⁵

4. Checklist

1. Is the contract reinsurance? If so, arts 3–4 Rome I.
2. Is the risk large (Rome I art 7(2)) and, separately, does VÕS § 427 lg 2–3 apply?
3. Where is the risk situated (REÕS § 41)?
4. Is the insurance compulsory (Rome I art 7(4); REÕS § 46)?
5. Is the choice of law permitted under art 7(3)? If not, which law applies by default?
6. Do Estonian standard-terms rules apply under VÕS § 36 lg 2–3?
7. Is the jurisdiction clause permitted under Brussels I bis arts 15–16?
8. Do third parties have a direct claim (Rome II art 18)?

Related pages

• Large risks under Estonian insurance law
• Local and panel counsel in Estonia
• Coverage opinions under Estonian law
• Arbitration of insurance disputes in Estonia
• Enforcing judgments and recovering debts in Estonia
• Reinsurance law in Estonia

References