Insurance Law: An introduction - PowerPoint Presentation

1. Insurance Law: An introductionDr. Tonio Fenech LL.M. (Lond), LL.D.

2. These slides can be found at….http://www.fff-legal.com/student-files/tfenech@fff-legal.com www.fff-legal.com

3. The lecturesThe economic basis of insurance & the benefits to society of insurance systemsHistorical developmentThe branches of insurance and classification of insurance contractsThe contract defined or describedInsurance and derivative instrumentsInsurance and wagersInsurance distinguished from suretyship and guaranteesInsurance occupationstfenech@fff-legal.com www.fff-legal.com

4. a. The economic basis of insuranceDr. Tonio Fenech LL.M. (Lond), LL.D.

5. Insurance: one aspect of risk managementtfenech@fff-legal.com www.fff-legal.com“Risk management is the identification, assessment, and prioritization of risks (defined in ISO 31000 as the effect of uncertainty on objectives) followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities.” “Risk management’s objective is to assure uncertainty does not deflect the endeavor from the business goals.”“Strategies to manage threats (uncertainties with negative consequences) typically include avoiding the threat, reducing the negative effect or probability of the threat, transferring all or part of the threat to another party, and even retaining some or all of the potential or actual consequences of a particular threat….”Insurance as an economic device involves the transfer and sharing of riskIt is only one aspect of a possible risk management plan and approach

6. From: www.hmrc.gov.uk/manual/gim1090.htmInsurance as an economic device involves the transfer and sharing of risk. It is one of the ways in which risk can be managed:risk may be avoided by not engaging in any form of hazardous enterprise at all; It may be retained, so that the person exposed to risk accepts responsibility for the potential financial loss (self-insurance), that groups of companies may undertake using a captive. It may be reduced, by limiting the magnitude of the loss or the likelihood of its occurrence, for example by installing a sprinkler system, or putting more secure locks on your doors and windows. It may be shared, for example by combining with others as members of a company.Insurance is a way of sharing risk by transferring it to another person who is more willing to bear it. Such a transfer may be contractual, but not all contracts which transfer risk are contracts of insurance. Hedging instruments and guarantees are examples of non-insurance contracts which transfer risk, though the dividing line between insurance and other forms of risk transfer, and in particular derivatives, is sometimes a very fine one. The economic benefits of insurance are that the transfer and sharing of risk encourages economic activity, as the full risk does not fall on the entrepreneur.tfenech@fff-legal.com www.fff-legal.com

7. Insurance and redistributing the cost of lossesDorfman on insurance: “a financial arrangement that redistributes the costs of unexpected losses”An insurance system redistributes the cost of losses by collecting a premium payment from every participant in the system; In exchange for premium payment, the insurer promises to pay the insured’s claims in the event of a covered loss;Generally, only a small percentage of insured persons suffer losses;It is therefore in the interest of the many that fewer losses occur to the individual members of the system tfenech@fff-legal.com www.fff-legal.com

8. Insurance and redistributing the cost of lossesHouse no.5 suffers €100,000 fire damage. With no insurance system in place, the burden of loss falls only on the unfortunate individual who owns home no. 5tfenech@fff-legal.com www.fff-legal.com

9. Insurance and redistributing the cost of losses€ 1,000 €1,000 €1,000 €1,000 €1,000 €1,000With an insurance system in place, where the system particpants are contributing say €1,000 per annum for insurance from such possible losses, the cost of any actual loss is in effect redistributed to the pool.tfenech@fff-legal.com www.fff-legal.comFire Insurance Pool

10. The law of large numbersThis does not predict an individual’s losses, but can allow for the prediction of a group’s loss experience in relation to chance events;the greater the number of observations of an event based on chance, the more likely the actual result will approximate the expected result;The die example;The importance of statistics, historical and other records;the greater the number of exposures in the pool, the more likely is the expected loss to be realised;tfenech@fff-legal.com www.fff-legal.com

11. The law of large numbers (cont.)the insurance company can thus predict, in monetary terms, the losses it is expected to experience in any particular period;If losses can be predicted accurately, then the calculation of the premiums to be applied follows naturally, and just as predictably;It is normally only a small percentage of insured persons who suffer losses. The cost of the loss is thus supported by all premium payers in the system;tfenech@fff-legal.com www.fff-legal.com

12. The law of large numbers (cont.)An English description of the economic basis of insurance, in terms of the transfer and sharing of risk, comes from the Web-site of HM Revenue & Customs:www.hmrc.gov.uk/manuals/gimanual/gim1090.htmEmmett J. Vaughan in Fundamentals of Risk and Insurance sums up the economic function and mathematical basis of insurance as follows: ‘From the social point of view, insurance is an economic device for reducing and eliminating risk through the process of combining a sufficient number of homogeneous exposures into a group in order to make the losses predictable for the group as a whole.’tfenech@fff-legal.com www.fff-legal.com

13. The law of large numbers (cont.)“From an individual point of view, insurance is an economic device whereby the individual substitutes a small certain cost (the premium) for a large uncertain financial loss (the contingency insured against).”NB: the system cannot be understood as a mere pooling mechanism (although certain forms of mutual insurance is still conducted in this manner through P & I Clubs). Regulatory systems all over the world impose solvency margins and liquidity ratios, etc., which would help ensure liquidity to cover unpredicted losses, etc.tfenech@fff-legal.com www.fff-legal.com

14. How insurance systems are beneficial to societyStability in families: prevents material hardships that may otherwise result;Entrepreneurship: entrepreneurship implies risk-taking. Insurance facilitates risk taking, which itself is essential to progress;Credit facilitation: creditors more willing to lend money, if insurance is availableAnti-monopoly device: without insurance, only the largest businesses could operateLowers cost of capital: creditors/investors would otherwise charge more for the use of their money; also frees capital from non-productive reservestfenech@fff-legal.com www.fff-legal.com

15. How insurance systems are beneficial to societyThe insurance industry can be a more focused channel of investment in loss prevention and medical research;Insurers, and life insurance companies in particular, are quintessential financial intermediaries: they collect billions in people’s savings and essentially reinvest these amounts in the economy;This has yet to be seen in Malta on a meaningful scale, largely because we still have old-model state social welfare systems for such things as old age pensions, etc. But this has to changetfenech@fff-legal.com www.fff-legal.com

16. b. Historical DevelopmentDr. Tonio Fenech LL.M. (Lond), LL.D.

17. ....as old as society itselfOriginating in connection with the sea, bottomry contracts were well known to merchants in Babylon of 4000 - 3000 BC :loans granted to merchants with the provision that if the shipment was lost at sea the loan did not have to be repaid. The interest on the loan covered the insurance risk.Also known in ancient Greece and Rome, and became highly developed in Mediaeval Italy;Lombards brought it to England in the 13th Century (settling in Lombard Street);Eventually the business moved to the Royal Exchange, which was the site of "Lloyd's" until 1928tfenech@fff-legal.com www.fff-legal.com

18. The London Marketgroups of merchants agree to share marine risks and perils. From the late 17th Century, this business was increasingly transacted at a coffee house in the City of London owned by a man called Lloyd.Bird: "There developed the practice that the merchant wishing insurance would pass round to the people willing to provide it, who were gathered there, a slip of paper on which he had written the details of the ship, voyage and cargo etc. The slip was initialed by those willing to accept a proportion of the risk. When the total amount of insurance required was underwritten, the contract was complete.“This is more or less the system at Lloyd’s still today (underwriters accepting unlimited personal liability!tfenech@fff-legal.com www.fff-legal.com

19. Lloyds method probably modelled on Italian systemVivante explains that self-preservation instincts certainly induced medieval insurers to meet up in a central place, a coffee house or a stock exchange, simply to exchange information and the latest news concerning perils at sea, the probity of ship captains as well as the seaworthiness of particular ships. Maps, port hand-books, etc were normally kept there, and where necessary, they grouped up to discover fraud and denounce offenders, or recover lost ships. Certain individuals among them, Vivante continues, would naturally gain a reputation for expertise and wisdom in the choice, and handling, of risks, to the extent that, often entire groups would only underwrite a policy if such a person, or “name”, led it. tfenech@fff-legal.com www.fff-legal.com

20. The centrality of maritime perilsThe risk of losing ships and cargo at sea seems to have instigated the practice, and dominated insurance for a long time;When it spread to London, there were no separate insurers, just groups of merchants who would agree to share all of their risks among themselves;It was not until the appointment of Lord Mansfield as Lord chief Justice that the common law took a central interest in insurance contractsThe principles developed for marine insurance have mostly been applied to other insurances;tfenech@fff-legal.com www.fff-legal.com

21. UK developments The influence of Lloyds on insurancelaw has been significant: the standard Lloyds marine policy was adopted as the standard form in the Marine Insurance Act 1906The law governing non-marine insurance contracts is still largely based on case law, but there have been statutory inroads;Most importantly, the situation in the UK has developed as a result of the Consumer Insurance (Discolosure and Representations) Act 2012 and the Insurance Act 2015tfenech@fff-legal.com www.fff-legal.com

22. The evolution of industry regulationVivante: Insurance of maritime perils quickly become vital to maritime trade, but when increased trade spurred by the discovery of the new world also increased the incidence of insurer bankruptcy, the insurance market started becoming more collective and corporative in nature:"A Parigi (1686), a Londra (1726), a Copenhagen (1726), a Genova (1741), a Napoli (1751) si istituirono successivamente con regie patenti compagnie privilegiate per impedire, come lo attestano i decreti della loro costituzione, che gli assicuratori traessero nella propria rovina tutto il commercio marittimo e ne arrestassero gli ardimenti"tfenech@fff-legal.com www.fff-legal.com

23. The evolution of industry regulationThe insurance market thus became progressively less dependant on chance, a more systematic and prudent industry, with the insurers seeking to have a wide enough premium base to ensure enough liquidity, asset or capital base to compensate for insured losses.Regulatory action followed, further underscoring the regulatory element,ultimately in the interest of the system as a wholetfenech@fff-legal.com www.fff-legal.com

24. The evolution of industry regulation in Maltathe Insurance Business Act of 1981 regulated the industry, rather than the contract of insurance;It provided for organising the infrastructure upon which the insurance market should develop, and sought to ensure that all entities actively involved in the provision of insurance cover remain financially stable, and are "fit and proper" to be so active; Was replaced in 1998 by the Insurance Business Act 1998 (Cap. 403, being Act XVII of 1998) as well as the Insurance Brokers and other Intermediaries Act 1998;The latter was later replaced by the Insurance Intermediaries Act 2006tfenech@fff-legal.com www.fff-legal.com

25. The British influence in MaltaProf. Felice Cremona, writing in 1970, had this to say:“Our Commercial Code.....still regulates only the contract of marine insurance... In dealing with the kinds of insurance not regulated “expressis verbis” by our Commercial Code, i.e. land, life and accident insurances, the general principles governing same according to foreign laws shall be outlined, one may add that, because of the fact that in Malta the great majority of such insurances are entered into with English companies of insurance, the principles of English law and practice, in so far as applicable, shall form the basis for the purposes of said inquiry.”tfenech@fff-legal.com www.fff-legal.com

26. The British influence in MaltaThis view has probably been followed tacitly by the courts in Malta, as well as industry and most commentators. Insurance professionals are normally members of British Insurance Institutes, my starting point would be to follow in Profs. Cremona’s footsteps. However, particularly since EU membership, and the increasing body of law coming out of Brussels, I believe that this is changing. Increasing numbers of Continental and non-British insurers are being licensed to transact business in Malta.The need for a law regulating insurance contracts will eventually become compelling. So watch this space!tfenech@fff-legal.com www.fff-legal.com

27. Quote taken in 2022 from:http://ec.europa.eu/info/business-economy-euro/doing business-eu/contract-rules/insurance-contract-rules_enBuying and selling insurance in the EU is governed by national contract laws. Insurance coverage is a service that is exclusively defined by legal terms and provisions. In contrast to the sale of goods like washing-machines or clothes, insurance coverage depends on a particular legal framework and can be applied differently in different national legal environments.As a result, if an insurer wishes to offer their products in other EU countries, they may have to design different products for each of their intended national markets to comply with different national insurance laws. This may be costly for insurance companies and makes it almost impossible to offer the same insurance contract in more than one EU country.Removing contract-related barriers to cross-border insurance services would enable insurance companies to take full advantage of the European Single Market. Tackling such bottlenecks in the Internal Market is part of the Commission's "Europe 2020" strategy for promoting sustainable economic growth throughout Europe.tfenech@fff-legal.com www.fff-legal.com

28. c. Branches of insurance & classification of contractsDr. Tonio Fenech LL.M. (Lond), LL.D.

29. Branches of Insurance (Dorfman)tfenech@fff-legal.com www.fff-legal.com

30. Non-Life covers (1)Fire insurance generally (but not always, as with cars) covers stationary property. Damage caused by such perils as windstorm, riot, and vandalism can be added to the basic fire coverage. Businesses, particularly in the US, often purchase business income (interruption) coverage, which provides payment for indirect losses associated with damage done by fires and other covered perils. Marine insurance generally covers ships, and risks associated with carriage by sea.tfenech@fff-legal.com www.fff-legal.com

31. Non-life Covers (2)Casualty insurance describes several different fields of insurance including automobile insurance, liability insurance, crime insurance, workers’ compensation, and accident and health insurance.Bonding is a special type of protection where the surety guarantees the performance (surety bond) or the honesty (fidelity bond) of a second party to a third party.tfenech@fff-legal.com www.fff-legal.com

32. Life insurance covers human life contingenciesIf the covered peril is death, the contract is called life insurance. If the peril (peril must be understood as referring to the cause of the loss) is survival, the contract is called an annuity. The annuity guarantees that the insured will not have to survive without money. If the covered peril is sickness or disability, the coverage is called medical expense insurance or disability insurancetfenech@fff-legal.com www.fff-legal.com

33. Myriad other forms of coveragemyriad other perils covered, and there are new areas coming out regularly;Examples:Weather-related insurance: payments can be made for crop-hail damage, rained-out concerts, or too much or too little snow.Change-of-law insurance: Payments are made, for example, if new regulations increase construction costs after contracts are signedtfenech@fff-legal.com www.fff-legal.com

34. Myriad other forms of coverageThe Maltese Insurance Business Act defines the business of insurance by reference to Schedules 2 and 3 of the Act which draw a distinction between two broad bands of insurance contracts: the first being grouped under the Title “Long Term Business”, which broadly groups the more long term savings/pension-oriented classes of business, and the second being broadly termed “General Business”. tfenech@fff-legal.com www.fff-legal.com

35. The purely legal approach for classification of contracts of Ivamythe nature of the event insured against; e.g. in Marine Insurance, the event insured against is a marine peril; whereas in fire insurance it is the happening of a fire, etc. the nature of the interest affected or in accordance with the manner in which the assured is prejudiced by the happening of the event insured against.E.g. a personal insurance (sickness, personal accident or death) where the assured himself is directly affected, or a form of property insurance, where it is property that is directly affected (marine, burglary, fire, etc), or a liability insurance, where the event imposes a liability towards others (e.g. public liability insurances or employers liability insurances). the nature of the insurance; or principally whether or not it is a contract of indemnitytfenech@fff-legal.com www.fff-legal.com

36. The approach for classification of contracts followed by Birdsfirst or third party insurance, whereby under first party insurance one would be covering one's own direct losses, and under third party insurance one would be covering one's liability to third parties; simply distinguishing life and other insurances, simply because life is a certain event, whereas all other insurable perils are uncertain;tfenech@fff-legal.com www.fff-legal.com

37. d. The contract defined…… or describedDr. Tonio Fenech LL.M. (Lond), LL.D.

38. Not merely splitting hairsdefinition is a matter of great importance;The courts have dealt with the issue for decades; If a transaction is labeled “insurance”, it is subject to regulations and tax laws peculiar to this transaction; Product “guarantees” or “warranties”. Are these a form of insurance? The availability of service contracts that guarantee replacement of parts on new appliances or automobiles, has raised the question whether or not they are in the nature of insurance, and therefore whether the provider has to be regulated as an insurer, whether there are the same duties of utmost good faith, etc. tfenech@fff-legal.com www.fff-legal.com

39. “contract of insurance” according to Malta Insurance Business Act 1981 ".... an agreement in which one party agrees, for a consideration, to pay to or for the account of another party or to beneficiaries, a sum of money or other consideration, whether by way of indemnity against loss, damage or liability or otherwise, on the happening of a specified event with respect to which there is an element of uncertainty as to when or whether it will take place." tfenech@fff-legal.com www.fff-legal.com

40. “contract of insurance” according to Malta Insurance Business Act 1998 ".... an agreement in which one party agrees, for a consideration, to pay to or for the account of another party or to beneficiaries, a sum of money or other consideration, whether by way of indemnity against loss, damage or liability or otherwise, on the happening of a specified event with respect to which there is an element of uncertainty as to when or whether it will take place."tfenech@fff-legal.com www.fff-legal.com

41. Description not definitionThis is not really meant, and should not be taken to be a definition as such, but rather a succinct all encompassing description. It has often been said, particularly in the UK that attempts at legal definitions of an insurance contract are apt to fail. Normally, English courts have resorted to the old maxim that you know an elephant when you see one, although you cannot really define one.tfenech@fff-legal.com www.fff-legal.com

42. Description not definitionNo statutory definition of insurance or insurance contracts until December 2001, and the confusing attempt made under the Financial Services and Markets Act of 2000 is best ignored. a Commercial Court decision of 1973 has traditionally been the main point of reference, in terms of descriptions of the contract. This is Joseph Micallef noe vs Roman Vella, decided on the 6/04/1973tfenech@fff-legal.com www.fff-legal.com

43. Joseph Micallef noe vs Roman Vella definition"Il-kuntratt ta' assigurazzjoni huwa, bla dubju ta' xejn, kuntratt aleatorju, definit (mill-artiklu 1005 tal-Kodici Civili) bhala l-kuntratt li fih "l-qliegh jew it-telf, ghaz-zewg partijiet jew ghal wahda minnhom, ikun jiddependi minn grajja mhix zgura", u ghalhekk jekk ma jkunx hemm l'alea (ir-riskju tat-telf u l-isperanza tal-qliegh) jonqos l-element principali ghall-kuntratt ta' assigurazzjoni“ (Judge Riccardo Farrugia)tfenech@fff-legal.com www.fff-legal.com

44. Other attempts by the Maltese courtsCourt of Appeal 1188/2000/1 “Salvatore Sammut vs Middle Sea Insurance p.l.c” (14th May 2004) Court of Appeal 2993/2002/1 “Carmen Camilleri vs Middlesea Insurance plc” (4th May 2005)tfenech@fff-legal.com www.fff-legal.com

45. According to John Birds inModern Insurance Law (12th Ed.)"The contract of insurance is basically governed by the rules which form part of the general law of contract, but equally there is no doubt that over the years it has attracted many principles of its own to such an extent that it is perfectly proper to speak of a law of insurance. ”tfenech@fff-legal.com www.fff-legal.com

46. Definition by John Birds for regulatory purposesAfter making numerous caveats, Birds suggests the following:"...a contract of insurance is any contract having as its principal object one party (the insurer) assuming the risk of an uncertain event, which is not within its control, happening at a future time, in which event the other party (the insured) has an interest, and under which contract the insurer is bound to pay money or provide its equivalent if the uncertain event occurs. It would follow that anyone who regularly enters into such contracts….is carrying on insurance business”tfenech@fff-legal.com www.fff-legal.com

47. Birds’ attempt broken downTransfer of risk of a future event;not within the transferee’s control;Where insured has an interest;And where transferee must pay to transferor money or equivalent if event occursBirds’ own analysis focuses on:1. Legal entitlement;uncertainty;Insurable interest;Control;Provision of money’s worthtfenech@fff-legal.com www.fff-legal.com

48. Birds’ analysis:1. Legal entitlementThere must be a legal entitlement to compensation. In other words the insurer must be bound by A CLEAR LEGAL DUTY to compensate the insured, and not have a mere discretionary role.He cites Medical Defence Union v. Department of Trade where plaintiff was a company whose members were practicing doctors and dentists.Its business consisted primarily of conducting legal proceedings on behalf of members and... tfenech@fff-legal.com www.fff-legal.com

49. Legal entitlement, cont...indemnifying them against claims made against them in respect of damages and costs. However under its constitution, its members had no right to such benefits, merely the right to request that they be given assistance or an indemnity. It was held that the company was not carrying on insurance business, because an insurance contract must provide for the right of the insured to money or money’s worth on the happening of an uncertain event. The right to request assistance was not such a right. tfenech@fff-legal.com www.fff-legal.com

50. John Birds’ analysis:2. UncertaintyThe uncertainty in most classes of insurance is whether or not a certain event insured against will occur. In the case of life insurance, the uncertainty is as to when the event insured against will occur. insurance squarely falls under the classification of contracts of an aleatory nature. In this context, section 964 of the Civil Code states:"When the advantage or loss, whether to both parties or one of them, depends on an uncertain event, the contract is aleatory."tfenech@fff-legal.com www.fff-legal.com

51. John Birds’ analysis3. Insurable InterestThe insured must have an interest in the event, which must be an insurable interest. The concept will be dealt with separately;This does not really refer to an interest in the event, but rather an interest in the property or life concerned being insured against the event…..as well as an interest in an activity (liability in respect of which) is being insured against. tfenech@fff-legal.com www.fff-legal.com

52. John Birds’ analysis4. Controlthe event insured against must be outside the control of the insurer; manufacturer guarantees: not an insurance contract, despite manufacturer taking on the risk for defective products;Problem: it is not control that indicates that the contract is one of sale with warranties (limited or full).Is Birds' distinction problematic in cases of an insurance company being the parent of a manufacturer? Is there no control over the event in such circumstances?As to price paid, this is the consideration for the product itself, rather than for the effects of the warranty;On the other hand, when one sees the definition of the contract in the law, the issue is certainly one of relevancetfenech@fff-legal.com www.fff-legal.com

53. John Birds’ analysisControl (cont.)All that the manufacturer has done is to guarantee to put things right that it has put wrong in the first place. Its guarantee is not a contract of insurance;But someone who guarantees a product against risks that are not within his control (not his products, nor has he sold them) is probably insuring;Same where a manufacturer did more than simply guarantee its products against manufacturing defects, like undertaking to replace them if they were damaged from specified causes;Associations providing repair or recovery services for car owners upon breakdown should also be regarded as providing insurance, assuming that their members have a right to their services and not just a right to be considered.tfenech@fff-legal.com www.fff-legal.com

54. John Birds’ analysis5. Provision of money’s worthIn Department of Trade and Industry v. St. Christopher's Motorists' Association Ltd., the defendant undertook to provide its members with chauffeur services should they be disqualified from driving due to being convicted of having more than the permitted level of alcohol in the blood. Held: this constituted insurance. The fact that the benefits were not in money was irrelevant. Followed in the case of Re Sentinel Securities plc. Here the benefit provided was the repair of defects in double-glazing and home improvements in the event that the original supplier went out of business. This was held to be an insurance transaction. tfenech@fff-legal.com www.fff-legal.com

55. incompatible pronouncements?The distinction between these cases and the Medical Union Case is difficult, particularly when in the latter case the learned judge said that, even if the member had the RIGHT to “advice and assistance”, that would not fall within the definition of insurance because it was not “money’s worth…in the sense of being equivalent to money”if those who pay for the services of a chauffeur can be classified as insurers, why not also those who pay for advice?tfenech@fff-legal.com www.fff-legal.com

56. provision of money’s worthBirds: “As was pointed out in the subsequent case of Medical Defence Union v Department of Trade, it is neither sufficient nor accurate to say that the provision of services is enough. It is better to say that it must be the provision of something that is clearly worth money, whether that be a right to valuable services, a right to advice or a right to have an item of property repaired or replaced.”tfenech@fff-legal.com www.fff-legal.com

57. the view of Malcolm ClarkeClarke: The real answer and reason for the decision in the Medical Union Case is that, if the benefit were the decisive element, many professional and other bodies which give their members the right to advice and assistance might have to be treated as insurers. To avoid this result, the judge was compelled to the somewhat strained and certainly unsatisfactory conclusion that one who paid for the services of a third party (such as repairer or driver) could be an insurer, but one who provided the same services as part of his own operation (and thus paid the persons employed by him to provide that service) could not.tfenech@fff-legal.com www.fff-legal.com

58. the view of Malcolm ClarkeClarke concludes that the case can probably best be seen in the context of the regulatory concerns raised. Was this the sort of activity which should be regulated by the Insurance legislation? He says that in a different context the provision of services might be classified as part of insurance, citing R v Anderson & Teskey, where an organisation providing legal services for motorists charged with manslaughter was convicted of the offence of providing a “benefit…payable by an insurer” without a licence.tfenech@fff-legal.com www.fff-legal.com

59. ...and in Malta?Are the services provided by recovery companies, such as RMF etc in the nature of insurance? One of the items of General Business in the 3rd Schedule to the Insurance Business Act:“18. Assistanceassistance for persons who get into difficulties while travelling, while away from home or while away from their permanent residence;assistance in other circumstances.”tfenech@fff-legal.com www.fff-legal.com

60. Clarke’s views on definitionquick to invoke the elephant figure of speech, and makes it clear from the outset that while an attempt at definition is inescapable, so too is failure in arriving at a comprehensive definition. American courts have been less reticent than their English counterparts, at least at arriving at broad definitions. He focuses on the importance of context, as well as purpose – the purpose of the legislator, and the purpose of the particular contract.tfenech@fff-legal.com www.fff-legal.com

61. Clarke’s views on definition (2)The courts will focus on the purpose of the statute-why does it seek to regulate the business of insurance? The courts might ask whether parliament intended to regulate the contract (to protect, or encourage, people);The courts might look at the motive behind the contract and the purpose of the statute: the motive may be something to encourage (thrift through life insurance) or discourage (wagering, hence the need for insurable interest)tfenech@fff-legal.com www.fff-legal.com

62. Clarke’s description"An insurance contract has been described as a contract whereby a person (insurer), usually but not always in business as such, agrees to pay money (or provide a corresponding benefit) on the occurrence of an uncertain and adverse event, in return for a money consideration, usually called a premium.“He draws out 5 elements from this:tfenech@fff-legal.com www.fff-legal.com

63. Clarke’s descriptionContractual force: the duties inherent in the relationship must have contractual force, and not based on discretion; Habitual business: the insurer is usually (not always) in business as such; Insured receives money or corresponding benefit: there is the payment of money or corresponding benefit. Transference of risk is essential. When the insured event occurs, the insurer responds by bearing all or part of the risk, ie by relieving the insured of loss consequential on (indemnity insurance) or associated with (contingency insurance) the event. tfenech@fff-legal.com www.fff-legal.com

64. Clarke’s descriptionClarke criticises English judgments re services as not being enough. An insurer can provide benefits (and not payment) to an insured, such as mobility insurance (chauffeur service). In the 1st edition of his book, Clarke refers to a case in Alberta, where an organization providing legal services for motorists charged with manslaughter was convicted of providing insurance services without a licence.Quoted:"The true test is not the character of the consideration agreed to be furnished, but whether or not the contract is aleatory in nature. A contract still partakes of the nature of insurance, whether the consideration agreed to be furnished is money, property or services, if the agreement is aleatory and the duty to furnish such consideration is dependant upon chance or the happening of some fortuitous event".tfenech@fff-legal.com www.fff-legal.com

65. Clarke’s description4. The insured event: Funds must be payable on an event, the occurrence of which is uncertain, and payment is triggered by or related to the event. Uncertainty is tested at the time that the contract is concluded. Fuji v. Aetna (1994) concerned the nature of a single premium capital investment bond taking the form of life insurance: a sum was payable, calculated in the same way whether payable on death or sooner, (when the insured surrenders the policy). The main uncertainty was whether (and when) the insured would choose to surrender the policy. At first instance: the bond was not insurance. The principal purpose of the contact was investment, not life cover. On Appeal, it was considered that the purpose of life insurance is to make financial provision for the uncertainties of life and of the future. The Court concluded that in life insurance “the right to benefits is related to life or death” and that therefore the bond was indeed insurance tfenech@fff-legal.com www.fff-legal.com

66. Clarke’s description5. Premium: the purchase of insurance must be against a consideration, usually but not necessarily for periodic payments called premiums. Clarke states that this could be a fixed payment in advance of cover, or in the case of mutual insurance a subsequent call in the light of claims experience.Other attempts at definition should also be looked at. You will probably find that they all offer variations of the same theme, but are useful for your understanding the concept. tfenech@fff-legal.com www.fff-legal.com

67. One judicial attemptMacGillavray found the working definition given by Channell J. in Prudential Insurance Company v. Inland Revenue Commissioners (1904) as useful:"A contract of insurance is one whereby one party (the "insurer") promises in return for a money consideration (the "premium") to pay to the other party (the "assured") a sum of money or provide him with some corresponding benefit, upon the occurrence of one or more specified events. tfenech@fff-legal.com www.fff-legal.com

68. The French position (1)There is no legal definition of an insurance contract in the Insurance Code. However, it commonly refers to an agreement where one party (the insurer), agrees to provide coverage to another party (the insured), on the occurrence of a specified event that is beyond the control of either party, in exchange for receiving payment of premiums from the policyholder. tfenech@fff-legal.com www.fff-legal.com

69. The French position (2)Insurance contracts are not regulated per se, in the sense that prudential supervision applies to entities and not to contracts. For instance, there is no pre-approval of contract terms, nor does the ACP systematically check terms and conditions for compliance. Nevertheless, all insurance contracts are subject to a wide variety of rules to be found in the Insurance Code, as well as in other codes or statutory provisions. As a general rule, the most regulated contracts are consumer insurance contracts, with an exceptionally protective set of rules applying to unit-linked life assurance contracts. tfenech@fff-legal.com www.fff-legal.com

70. The French position (3)Art. 1964 Civil code: Insurance contracts are considered aleatory contracts. Insurers and reinsurers established in France must obtain a licence from and are supervised by the Regulator. Reinsurers are subject to a less restrictive set of rules. Reinsurance contracts stay outside the scope of the rules applying to insurance contracts. French insurers can be reinsured by non-EEA reinsurers. Non-EEA reinsurers must provide collateral to the ceding insurers to secure their obligations. tfenech@fff-legal.com www.fff-legal.com

71. The German positionNo legal definition. § 1 Insurance Contract Act (VVG) deals with the main obligations of both parties: “By making a contract of insurance the insurer undertakes to cover a certain risk of the policyholder or a third party by paying a benefit upon occurrence of the agreed insured event. The policyholder is obligated to pay the agreed contribution (insurance premium) to the insurer.” tfenech@fff-legal.com www.fff-legal.com

72. The Italian position (1)The Civil Code still applies for insurance contracts [where not derogated by the Code of Private Insurances ] Art. 1882 Civil Code: Insurance is the contract with which an insurer (in exchange of the payment of a certain premium) obliged himself: 1) to pay an indemnity to the insured equivalent to the damage caused by an accident; 2) to pay an income or a capital if a life-related event occurs. It is considered to be an "upon payment" and synallagmatic contract: Insurance is considered to be a synallagmatic contract even if it is at the same time an aleatory contract. We can also say that it has a synallagmatic element with reference to the moment where the insurer assumes the duty to cover, even if the insured event will never occur. tfenech@fff-legal.com www.fff-legal.com

73. The Italian position (2)Vivante:"E' un contratto di assicurazione quello per cui un'impresa si obbliga di pagare una certa somma all'accadere di un evento fortuito, mediante un premio calcolato secondo le probabilita' che quell'evento succeda." "Esso e', di regola, un atto di previdenza e di semplice amministrazione per l'assicurato che ricerca di porsi al sicuro dai pericoli che minacciono il suo patrimonio o la sua persona. E', di regola, un atto di speculazione commerciale per l'impresa assicuratrice che cerca di trarre un profitto dall'esercizio di quell'industria." tfenech@fff-legal.com www.fff-legal.com

74. The Italian position (3)Vivante talks of "impresa", not simply any party, and in fact modern regulatory infrastructural legislation provides for the provision of insurance services only by licensed insurers. Vivante also talks of a fortuitous, rather than a specified event. tfenech@fff-legal.com www.fff-legal.com

75. The Spanish position Art. 1 Insurance Contract Act (Ley 50/1980, de Contrato de Seguro, LCS) According to the Spanish Insurance Contract Act a contract of insurance is the contract by virtue of which the insurer agrees, for a specified consideration (premium) and when an event occurs (the risk of which is the object of the coverage), to indemnify, within the agreed limits, the damage suffered by the insured or to pay a capital sum, a rent or other agreed compensation. tfenech@fff-legal.com www.fff-legal.com

76. The UK position: a recapitulation (1)There is no statutory definition of an insurance contract, but for contract law and regulatory purposes, the description which is typically employed is the one adopted by Channell J in Prudential v Commissioners of Inland Revenue [1904] 2 KB 658;Chapter 6 (Guidance on the Identification of Contracts of Insurance) of the FSA Perimeter Guidance (‘PERG 6’), acknowledges that, in order to determine whether any particular contract is a contract of insurance, one must look to the English courts for guidance, and that it is for the courts (and, therefore, the position under common law), rather than the FSA, to determine whether or not there exists a contract of insurance. tfenech@fff-legal.com www.fff-legal.com

77. The UK position: a recapitulation (2)The English courts will give due regard to the form of contract chosen by the parties to the arrangement, but the form of the contract is not decisive in determining whether a particular contract is a contract of insurance (See, by way of example, Fuji Finance Inc. v Aetna Life Insurance Co. Ltd [1997] Ch. 173).tfenech@fff-legal.com www.fff-legal.com

78. The UK position: a recapitulation (3)It is sometimes more relevant to consider what is a regulated contract of insurance, whether within the mandatory scheme for regulation of insurance under EU Directive (the minimum mandatory framework) or under wider protections permitted and afforded in national law of Member States: see eg the recent decision of the UK Supreme Court in Re Digital Satellite Warranty Cover [2013] 1 WLR 605. Some forms of Credit Default Swap appear functionally identical to insurance, but are not treated as insurance (and are not regulated as such) tfenech@fff-legal.com www.fff-legal.com

79. e. Insurance distinguished from derivative instrumentsDr. Tonio Fenech LL.M. (Lond), LL.D.

80. Insurance & Derivative instrumentsthe development of alternative risk transfer methods which do not necessarily involve insurance, such as hedging currency or interest rate risks through derivative products, eg. SWAPS, options and futures. Here the boundaries between risk management, insurance, and other forms of risk transfer become blurred, as indeed becomes the distinction between risk management and pure speculation, to an extent depending on the intention of the players concerned.tfenech@fff-legal.com www.fff-legal.com

81. Insurance & Derivative instrumentsA derivative instrument is one whose performance is based on (or derived from), the behaviour of the price of an underlying asset, ( ‘the underlying’). The underlying itself does not need to be bought or sold, and a premium may be due. There are many types of derivative, eg. currency options (the underlying being foreign exchange), interest rate swaps (Government bonds), interest rate futures, etc.According to Philip Wood (“Law and Practice of International Finance - Title Finance, Derivatives, Securitisations, Set-off and Netting”), apart from interest swaps, most derivative contracts are contracts for differences - the difference between the agreed future price of an asset on a future date and the actual market price on that datetfenech@fff-legal.com www.fff-legal.com

82. Insurance & Derivative instrumentsSome operators wish to mitigate (or hedge) their risks, and others wish to speculate on such risk in the hope of making profits. Eg. in foreign exchange risk, a hedger wants to remove or manage his currency risk, whereas a trader wants to take currency risk in order to profit from it“Used correctly, derivatives perform hedging and risk management functions; used speculatively, derivatives can lose you, or make you large sums of money.” (Taylor, Francesca “Mastering Derivatives Markets”, Pitman Publishing, 1996)tfenech@fff-legal.com www.fff-legal.com

83. Insurance & Derivative instrumentsHedging is traditionally a form of non insurance transfer of risk:John bets Sandra €1 that heads will appear when he flips a coin. If tails appears, he loses. After some thought, John decides that the bet is making him nervous. So he makes a second bet with Peter on the same flip of the coin, but takes an opposite position. Hedging is essentially taking two simultaneous positions that offset each other, such that, the hedger neither wins nor loses.Dorfman: the distinction between these risk transfer methods and insurance is that insurance involves both transfer of risk and reduction of risk through the predictability provided by the law of large numbers. tfenech@fff-legal.com www.fff-legal.com

84. Insurance & Derivative instrumentsPhilip Wood is not so sure (he is not an insurance man):“Whether derivatives contracts might constitute insurance business requiring an authorisation is a matter for investigation. Some contracts are literally similar to insurance because one party pays a premium in return for the agreement of the other party to pay on a future event which may or may not occur. Derivatives trading does not feel like insurance, although the distinctions are not easy to draw when faced with usual black-letter statutory definitions of insurance.”When discussing contracts for differences in the context of wagers, Wood says the position often depends upon whether the parties truly intended a commercial sale or borrowing contract as opposed to a contract for differences.....tfenech@fff-legal.com www.fff-legal.com

85. Insurance & Derivative instruments....and, if it is a contract for differences, whether at least one party had a legitimate commercial interest to protect, eg hedging, and is not mere speculation.Exceptions to gaming laws to facilitate markets and to remove uncertainty are not uncommon, if there is other protection or the contract is between institutions who do not need the protection of gaming legislation. In Morgan Grenfell v Welwyn Hatfield (1995), the court rejected the contention that an interest swap contract was void under the Gaming Acts. Although the swap was speculative it was not a wager because the main purpose and interest of one of the parties wasn’t wageringtfenech@fff-legal.com www.fff-legal.com

86. Zooming in on credit default swapsCredit default swaps (‘CDS’), guarantees and insurance policies are used regularly by financial institutions seeking to protect themselves from counterparty failures;CDS in particular are utilized also to engage in speculative trading or arbitrage activity. tfenech@fff-legal.com www.fff-legal.com

87. The CDS (broadly speaking)The parties agree that, in relation to a reference asset issued by a reference entity (eg a bond issued by BP plc), the protection seller will make a ‘credit protection payment’ to the protection buyer upon a ‘credit event’ in respect of the reference entity. The credit event will usually include the failure to pay, bankruptcy or restructuring of the reference entity. The protection buyer pays a regular (typically quarterly) payment (effectively, a fee or premium) to the protection seller throughout the life of the CDS. A CDS is documented under the standard form agreements published by the International Swaps and Derivatives Association (‘ISDA’). tfenech@fff-legal.com www.fff-legal.com

88. The 3 elements of the Prudential description3 elements necessary for a contract to be one of insurance: ‘it must be a contract whereby for some consideration, usually but not necessarily for periodical payments called premiums, you secure to yourself some benefit, usually but not necessarily the payment of a sum of money, upon the happening of some event’; ‘… the event should be one which involves some amount of uncertainty. There must be either uncertainty whether the event will ever happen or not, or if the event is one which must happen at some time there must be uncertainty as to the time at which it will happen’, ‘… the insurance must be against something … The insurance is to provide for the payment of a sum of money to meet a loss or detriment which will or may be suffered upon the happening of the event’.tfenech@fff-legal.com www.fff-legal.com

89. CDS and the Prudential caseThe first two elements of the Prudential case are quite likely to be present in most credit protection contracts including CDS and guarantees, but it is usually the third element that is used to support an argument that a particular contract either is or is not a contract of insurance.tfenech@fff-legal.com www.fff-legal.com

90. ISDA actionIn 1997, ISDA asked the late Robin Potts QC to opine on whether credit derivatives were insurance contracts. ISDA asked Potts QC to consider, specifically, CDS, creditlinked notes and total return swaps’/credit spread swaps. The resulting opinion has come to be known in the financial services industry simply as the ‘Potts opinion’.tfenech@fff-legal.com www.fff-legal.com

91. The Potts opinion“A contract is only a contract of insurance if it provides for payment to meet a loss or detriment to which the payee is exposed.In the case of credit default options the payment falls to be made quite irrespective of whether the payee has suffered loss or ever been exposed to the actual risk of loss.”tfenech@fff-legal.com www.fff-legal.com

92. The Potts Opinion (cont.)‘credit default options plainly differ from contracts of insurance in the following critical respects:(1) the payment obligation is not conditional on the payee’s sustaining a loss or having a risk of loss;(2) the contract is thus not one which seeks to protect an insurable interest on the part of the payee. His rights do not depend on the existence of any insurable interest.’tfenech@fff-legal.com www.fff-legal.com

93. The Potts Opinion (cont.)the approach generally taken in CDS transactions since the issuance of the Potts opinion has been to structure the CDS to include a specific clause providing that there is no requirement for the protection buyer to hold the reference asset or to suffer a loss in order to make a claim under the CDS.tfenech@fff-legal.com www.fff-legal.com

94. f. Insurance distinguished from wagersDr. Tonio Fenech LL.M. (Lond), LL.D.

95. Gaming & WageringA wagering contract: two persons holding opposite views as to a future uncertain event, mutually agree that dependant on the determination of that event, a certain sum of money - or other stake - will be paid by the loser to the winning partyThere is no interest other than the gain or loss of the stake, an interest which is created by the contract. The purpose of the contract is not indemnification in the eventuality of loss, but the gain made if an uncertain event occurs or otherwise.tfenech@fff-legal.com www.fff-legal.com

96. Insurance & wagersMacGillavray: "Both insurance contracts and wagering contracts are aleatory. The risk of loss in a wager is, however, created by the making of the bet itself, whereas typically insurance is to indemnify the assured in respect of the risk of loss to an interest he already possesses.“Clarke: conventional definitions of wagering are too wide for distinction purposes. The distinction rests on the existence of an insurable interest, as well as the principle of indemnification in respect of most types of insurance. it is said that the requirement of insurable interest was developed to distinguish insurance from wagering tfenech@fff-legal.com www.fff-legal.com

97. originally permissible Originally, gaming and wagering were valid at common law. Thus wagers disguised as marine policies, or even as life insurance contracts, even the absence of any relationship whatsoever between the insured and the life covered, would generally be enforced by the courts. By way of illustration, the preamble to the Life Assurance Act of 1774 put it in this way:"[I]t hath been found by experience, that the making of insurances on lives, or other events, wherein the insured shall have no interest, hath introduced a mischievous kind of gaming."tfenech@fff-legal.com www.fff-legal.com

98. Wagers: statutory interventionIndemnity agreements could limit amounts paid, so the market developed policies (marine policies in particular) with "policy proof of interest" or "interest or no interest“ clauses. This was dangerous, and in life insurance, could even be inducement to murder, and statute intervened. In marine & life insurance, contracts without insurable interest have been made void since the 18th century.there is no statutory requirement in England for an insurable interest re policies on goods. However, the Gaming Act 1845 will strike down a goods policy which is really a wager.tfenech@fff-legal.com www.fff-legal.com

99. Insurance and wagers distinguishedBoth contracts contain a promise to pay a sum of money on the happening of an event, which may or may not occur, but in wager the purpose of both parties is gain, while in insurance the purpose, at least of the assured, is to diminish hardship which would result from that event occurring. In wager it is the contract which normally creates the risk. In insurance, the contract is made to guard against the consequences of loss, as a result of an insurable interest.tfenech@fff-legal.com www.fff-legal.com

100. Insurance and wagers distinguishedThe distinctions are not unequivocal in all cases, and the Courts have tended to take a rather circular approach. If one had to apply the reasoning adopted in the Morgan Grenfell case to insurance, the contract is insurance if it is not (mainly) a wager and it is not a wager if it is (mainly) something else, such as insurance.tfenech@fff-legal.com www.fff-legal.com

101. Insurance and wagers distinguishedClarke’s conclusion in the context of insurable interest, is interesting:“English courts have lowered their sights to step carefully around precedent and have consequently lost a general sense of direction. The law requires its courts to play on firm ground….In the margin between the safe ground and the sea of social evil, contracts about which the courts might have doubts are left in legal limbo; but once again, the necessity to reach a decision by reference to the “main purpose and interest” points to a rule of law with some flexibility.”tfenech@fff-legal.com www.fff-legal.com

102. Canada and pointersClarke: the Canadian rule concerning insurable interest is preferable to the rule currently applied in England. There are other Commonwealth countries that have gone beyond the strict English position, and nothing stops a Maltese court from following suit. Insurable Interest is a topic covered by Dr. Cascun, and he certainly has his own views on the matterClarke hasn’t completely lost hope on England. He reports a leading judge as having said that if insurers “make a contract in deliberate terms which covers their assured in respect of a specific situation, a court is likely to hesitate before accepting a defence of lack of insurable interest”.tfenech@fff-legal.com www.fff-legal.com

103. g. Insurance distinguished from suretyship and guaranteesDr. Tonio Fenech LL.M. (Lond), LL.D.

104. Insurance, suretyship and guaranteesSuretyship: A contract whereby A undertakes to discharge B’s indebtedness to C in the event that B defaults Insurance: A contract whereby A promises to indemnify C, if B fails to pay or repay a debt.There are clear affinities between the two, particularly certain types of contracts, such as fidelity, credit or guarantee insurance. The Insurance Business Act specifically includes suretyship as a class of insurancetfenech@fff-legal.com www.fff-legal.com

105. Insurance, suretyship and guaranteesBut distinction is important: the regulatory repercussions, as well as liability shifts which such characteristics as utmost good faith may implyArt. 1925, Civil Code defines suretyship as follows:"Suretyship is a contract whereby a person binds himself towards the creditor to satisfy the obligation of another person, if the latter fails to satisfy it himself."the contractual obligation of the surety, is accessory to the principal obligation, and the Code deals with the "benefit of discussion", etc., under-scoring the accessory nature of the obligations of the surety.tfenech@fff-legal.com www.fff-legal.com

106. Insurance, suretyship and guaranteesthe obligation of the surety is accessory, while that of insurer is normally direct. The creditor cannot demand payment from the surety except in certain circumstances. Seaton v. Heath"Contracts of insurance are generally matters of speculation, where the person desiring to be insured has means of knowledge as to the risk, and the insurer has not the means or not the same means. The insured generally puts the risk before the insurer as a business transaction, and the insurer on the risk stated fixes a proper price to remunerate him for the risk undertaken..... tfenech@fff-legal.com www.fff-legal.com

107. Insurance, suretyship and guarantees Seaton v. Heath (cont.):"On the other hand in .... contracts of guarantee .... the creditor does not himself go to the surety to represent, or explain to the surety, the risk to be run. The surety often takes the position from motives of friendship to the debtor, and generally not as the result of any direct bargaining between him and the creditor, or in consideration of any remuneration passing to him from the creditor. The risk undertaken is generally known to the surety, and the circumstances generally point to the view that as between the creditor and surety it was contemplated and intended that the surety should take upon himself to ascertain what risk he was taking upon himself." tfenech@fff-legal.com www.fff-legal.com

108. MacGillavray commentary on Seaton v Heathmotive. Insurer is in the business, and accepts risks for gain. A surety undertakes responsibility normally as a result of a pre-existing relationship with the debtor, commonly without remuneration.manner of dealing. Insurer usually receives his business by dealing with the insured (even if through a broker), not by dealing with the person whose solvency he is insuring. On the other hand, a surety is normally approached by the principal debtor.means of knowledge. The insurer is not fully aware of the risk, and relies on the insured to disclose all material facts. The surety is normally fully aware of the riskstfenech@fff-legal.com www.fff-legal.com

109. Kreglinger & Fernau Ltd v. Irish National Ins Co. LtdThe defendant insurers had given performance bonds, indemnifying against any loss resulting from failure to perform contract, under which plaintiffs (London merchants) were to purchase from Dublin dealers. The sellers defaulted and defendants repudiated liability on the bonds on the ground that, as contracts of insurance, material facts had not been disclosed, contrary to the duty of utmost good faith.The court cites Seaton v. Heath, in that guarantee proper is often based on friendship between the debtor and the guarantor...... tfenech@fff-legal.com www.fff-legal.com

110. Kreglinger & Fernau Ltd v. Irish National Ins Co. LtdThe real instigator of a contract of guarantee is often the debtor seeking the help of the guarantor, whilst in a similar contract of insurance the creditor will make the first approach to the insurer.In this case, the performance bonds related to persons who assumed relations comparable to those of creditor, debtor and surety, but the defendants did not undertake to discharge the sellers' liability to the purchasers. They undertook to indemnify the second plaintiffs who were the purchasers' bankers, against any loss resulting from the failure of the sellers to perform their obligations under the contract. tfenech@fff-legal.com www.fff-legal.com

111. Kreglinger & Fernau Ltd v. Irish National Ins Co. LtdThe matter was placed by the plaintiffs in the hands of insurance brokers who placed the risks before the defendants as a business transaction, and in consideration of a premium they agreed to take it.It was held that the performance bonds, although not described as a contract of insurance, effectively amounted to such a contract, with the consequent application of all the rules regulating insurance, including the obligation of full disclosure and utmost good faith.This case is interesting reading. It shows how a court will look at the whole circumstances, before coming to a conclusion on the nature of the contract in question.tfenech@fff-legal.com www.fff-legal.com

112. Other elements of regulatory importInsurance Business Act: “business of insurance” (not contract of insurance), includes the effecting or carrying out of contracts for fidelity bonds, performance bonds, administration bonds, bail bonds or customs bonds or similar contracts of guarantee. These must be transactions effected by way of business and not merely incidental to some other business, and should be offered in return for the payment of one or more premiums. Thus, if carried on as a business, while not always considered contracts of insurance, they may still be considered as within the business of insurance, with all the consequences incidental to such classification. tfenech@fff-legal.com www.fff-legal.com

113. Insurance and warrantiesInsurance should also be distinguished from express or implied warranties given by a contractual party in any contract to pay damages in the event of failure to perform a primary obligation. E.g. a producer who “guarantees” his product and factors into the price a prediction of the future cost of fulfilling the guarantee by curing defects or paying damages.US courts have used a “principal object” test, or primary or dominant purpose test. The product guarantee is ancillary to the sale of the product. tfenech@fff-legal.com www.fff-legal.com

114. Insurance and warrantiesHowever, if the buyer enters not only into a purchase contract with the seller, but also a maintenance contract, the risk of defect or break-down is not ancillary but central to this latter agreement.the principal object test does not help , yet such contracts are not considered insurance. What then? Presumably the courts will seek to be guided by common sense.Clarke: the test can be of some help in distinguishing eg. medical insurance from medical services, or in the context of widened services offered by insurance companies, such as advice about loss prevention. “Whether the contract is one of insurance or of risk management is a question of degree.”tfenech@fff-legal.com www.fff-legal.com

115. Questions?Dr. Tonio Fenech LL.M. (Lond), LL.D.Fenech Farrugia Fiott LegalMaltatfenech@fff-legal.comwww.fff-legal.comtfenech@fff-legal.com www.fff-legal.com