July 13 2010
The Supreme Court recently held that an insurer had presented incorrect and misleading information regarding pension contributions and anticipated pension incomes in its marketing for unit-linked pension insurance policies.(1) Unit-linked pension insurance policyholders make pension contributions by investing units in a range of the insurer's funds. In the case before the court, the insurance contract was held to be in force based on the interpretation of the marketing material reviewed by the policyholder. As a result, the policy's management cost clause was not applied (to the insurer's detriment), since the investment yielded no income from which the management costs could be deducted.
The policyholder claimed that the information presented in the insurer's marketing material regarding management costs and their impact on the pension income was incorrect and misleading. According to the product sheet and pension brochure, the insurer was entitled to an annual management fee amounting to 1% of the policyholder's pension contributions, in addition to other management costs and fees. The product description regarding the calculation of management fees as understood by the insurer and the insured differed.(2) As a result, the insurer calculated the policyholder's pension to be worth 1% less than the policyholder had expected. This 1% was significant, since the pension fund had accumulated over a long period of time.
The court had to decide whether the insurer had provided sufficient information regarding management costs and their influence on pension income, and whether the information presented regarding the cost and pension income was incorrect and misleading. Pursuant to Section 5 of the Insurance Contract Act, before an insurance contract is concluded, the insurer must provide the policyholder with all information that the policyholder may need in order to assess his or her insurance requirements and select the appropriate insurance (eg, details on the insurer's insurance products, insurance premiums and insurance terms and conditions). When providing such information, the insurer must point out all major exclusions from the cover provided. The court held that unit-linked pension insurance policies differ from traditional insurance policies in many respects, including the fact that such policies require an economically significant investment over a long period of time. Consequently, the most relevant information concerns expected income, risks and costs. The policyholder can evaluate the insurance offered solely on the basis of the information provided by the insurer, and the duty to inform is greater where a complex and lesser-known insurance arrangement is concerned.
The court established that the insurer's agent which sold the insurance in question and insurance brokers, who were heard in court as experts, understood the meaning of the term 'investment' in the insurer's calculation model in the same way as the policyholder – that is, that the term was intended to refer to pension contributions by which units were bought in the funds. The product description stated that "100% of pension contributions will be used to purchase funds".
The court's decision was subject to a vote. Two judges voted to dismiss the claim, but three voted to allow the claim. Thus, the court found that the information which had been given to the policyholder was incorrect and misleading. The court held that the insurance contract should be interpreted so as to correspond with the policyholder's view and held that the insurer did not have the right to charge the annual management cost.
This precedent is likely to have considerable consequences regarding the marketing of unit-linked pension insurance and other complex investment-related insurance arrangements. It appears that it is insufficient for the relevant information to be written in brochures and other marketing material; rather, the policyholder must also understand this information. With regard to complex calculations, the question arises as to how the insurer can ensure that the policyholder understands the arrangement in the same way as the insurer. The somewhat inconsistent description of the facts in the judgment demonstrates how difficult it can be to explain the exact nature of an insurance product. Furthermore, the situation will be no simpler where tax issues are involved in the purchase decision.
In light of this ruling, it remains to be seen whether other policyholders will commence claims for the revision of their pension insurance contracts. For this purpose, policyholders could turn to the Insurance Complaints Board which operates in conjunction with the Insurance Ombudsman Bureau.(3)
For further information on this topic please contact Matti Komonen or Herman Ljungberg at Hammarström Puhakka Partners, Attorneys Ltd by telephone (+358 9 474 2207), fax (+358 9 474 2247) or email (email@example.com or firstname.lastname@example.org).
(1) Decision KKO 2010:25.
(2) Unfortunately, the court failed to provide a clear description of the financial product in its decision.
(3) For further information on the Insurance Complaints Board please see "Out-of-court dispute resolution for foreign insurance company clients".
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