The decision made by the European Court of Justice requires a change in approach for freight forwarders when it comes to handling cargo insurance. This change must be made while ensuring that IDD requirements are not violated.
The European Union cargo insurance market is undergoing a significant transformation, with a shift towards greater transparency, that will impact logistics companies. The European Court of Justice (ECJ) decided that companies offering to purchase insurance products by joining group policies will be deemed insurance intermediaries and subject to Insurance Distribution Directive regulations. Therefore, freight forwarders must adapt their practices in handling cargo insurance to be exempt from IDD requirements.
Insurance Distribution Directive
The Insurance Distribution Directive (IDD) regulates how insurance products are sold and distributed across member states. It sets stricter standards for transparency and distributor conduct. This ensures consumers receive clear information, are sold appropriate products, and are treated fairly throughout the insurance process.
The IDD (article no. 1) applies to those who (not limited):
It targets traditional insurance brokers and agents and extends to companies and individuals offering insurance as an additional service to their primary business activities. For example, travel agencies offer travel insurance and freight forwarders sell cargo insurance as part of their service package.
Previously, freight forwarders using open-cover policies for cargo insurance were not subject to the IDD. However, the regulatory landscape is evolving, placing these practices under closer examination.
Open cover
An open cover cargo insurance policy is explicitly tailored for freight forwarders engaged in regular shipping activities. This policy covers declared cargo shipped within a period. Rather than negotiating a new policy for each consignment, freight forwarders benefit from an open cover policy’s flexibility, which allows for the declaration of shipments as they occur. This approach streamlines the insurance process and ensures that the freight forwarder, acting as the assured, can purchase insurance on behalf of their customers, the insured, or beneficiaries.
Decision
In a landmark ruling on 29 September 2022, the European Court of Justice (case C-633/20) expanded the definition of insurance intermediaries within the EU’s regulatory framework. The court acknowledged that:
Any legal entity arranging for clients to voluntarily join a group insurance agreement in exchange for remuneration, thus offering them insurance benefits, is considered an insurance intermediary.
The factual background revolves around TC Medical Air Ambulance Agency GmbH’s (TCMA’s) engagement with external advertising firms to offer consumers membership in a collective insurance scheme through door-to-door sales in exchange for a fee. TCMA entered into a group insurance agreement with the insurer W. Versicherungs-AG, obtaining coverage for personal accidents abroad and repatriation costs. TCMA’s customers who joined the group insurance scheme gained access to various benefits under this policy while paying fees to TCMA. Neither TCMA nor the advertising companies it employed possessed the requisite national licence to conduct insurance mediation activities, a point of contention in the legal proceedings.
Freight forwarders offering group insurance options to their customers are now classified as insurance intermediaries. This reclassification subjects them to the oversight and regulations mandated by the Insurance Distribution Directive (IDD).
Insurance Agency
A freight forwarder acting as an insurance intermediary is obliged to:
It is essential to acknowledge that the specific requirements of operating as an insurance agency may differ from one country to another.
In conclusion
The recent European Court of Justice decision regarding the Insurance Distribution Directive holds significant implications for freight forwarders. While the ruling will eventually find its way into local legislation, the precise wording and timeline for its incorporation across different countries remain uncertain. Freight forwarders must stay vigilant to these forthcoming changes, as they will fundamentally influence how insurance mediation is conducted within the industry.
Under the IDD, specific conditions dictate its applicability to freight forwarders. Notably, the directive does not come into play if a forwarder procures a single cargo insurance policy with a premium below €200 (IDD article no.1.3.c).
It’s not a secret that the insurance premium freight forwarder invoices to the customer are rarely equal to the one the insurer charges. Many freight forwarders are not shy about adding their “commission” or “fee” for handling insurance matters. If the freight forwarder receives remuneration when a customer joins the group policy, it becomes subject to IDD. To ensure adherence to IDD regulations, the forwarder must invoice customers the premium they pay to the insurer, ensuring transparency and compliance with the regulatory framework.
The penalties for distributing insurance products without a license and non-compliance with IDD may result in fines, which can be up to 5% of the freight forwarders’ turnover. The fines may vary from country to country.
To sum up, the decision made by the European Court of Justice requires a change in approach for freight forwarders when it comes to handling cargo insurance. This change must be made while ensuring that IDD requirements are not violated. Freight forwarders must ensure transparency in their insurance dealings or get a single cargo insurance policy for each customer to ensure they function within the legal framework.
Gediminas Dauksa
Group Practice Leader Transportation & Logistics
T +370 616 08451
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