What are the rights of an insured under a group policy?

Introduction
Facts
Decision
Comment

Introduction

Group insurance is a common yet distinctive form of insurance policy. While they are often used in the event of casualties, they apply far more commonly in life and health insurances. A group of persons will be insured under one policy and, usually, the same coverage will be provided to all of them, irrespective of factors such as their gender and age.

Groups often consist of employees at the same company but can also be formed based on a common characteristic between members, such as a professional activity or the same credit card membership. The organisation that purchases the policy is considered as the policyholder and retains the master contract, while the members of the group are usually provided with a certificate of coverage and typically do not have access to the terms of the group policy.

Problems will occur when the policyholder (often referred to as the "manager", "organiser" or "representative") does not observe the terms and conditions of the policy. This jeopardises the insureds' covers, who may find themselves deprived of their rights despite having fully complied with their own obligations.

In a 2019 decision, the local first instance court in the northern Greek town of Edessa had to address this issue when the beneficiaries in a group life insurance plan claimed the proceeds that their insurer had denied them as a result of the policyholder's failure to comply with the policy's conditions.

Facts

In 2006, a bank (the Bank) executed a group life insurance contract (the Policy) with an insurance company (the Insurer). Provided that the terms and conditions of the Policy were observed by the Bank, the Insurer promised to pay the benefits specified in the Policy in the case of accidental death of any person (the Insured) who:

• maintained a deposits account with the Bank;
• had filed an application to the Bank in order to participate in the group cover; and
• had paid a yearly premium of €56.

It was agreed that these benefits would be paid by the Insurer to the person(s) that the Insured would designate as beneficiaries in his application.

According to the Policy, the Bank:

• had to provide to the Insurer the original applications that the clients who wished to participate in the group cover had filed during the previous month, along with relevant details;
• would pay, in compliance with a specific schedule, the premiums that it would have collected from its participating clients' deposits accounts. The Policy contained terms pertaining to the validity of cover being conditional upon the policyholder's and the Insureds' declarations, as well as the timely payment of premium.

In March 2010, the Bank sent to the Insurer the application that an Insured had filed in August 2007, which had been overlooked by the Bank for three years. In November 2011, the Bank reported to the Insurer the accidental death of the same Insured, which had occurred two years ago, in July 2009. When the Insurer requested additional information, particularly regarding the payment of a yearly premium corresponding to the Insured's cover, the Bank stated that it had cancelled the same Insured's participation in August 2008, due to lack of sufficient funds in his deposits accounts to pay the plan's premium.

When the Insurer denied any payment to the beneficiaries mentioned in the deceased Insured's application on the grounds of never having collected any premium for the participation of this Insured in the Policy or having ever been notified of such participation in the plan, the beneficiaries filed a lawsuit against the Insurer claiming the payment of the Policy's benefits. In turn, the Insurer also filed an impleader against the Bank while filing a defence before the Court, claiming from it any amount that he might be found liable to pay to the original claimants.

Decision

Based on the facts of the case, the Court found that in August 2007, the deceased Insured had indeed submitted the relevant application to the Bank, where he maintained his deposits account and had paid the first year's premium. The Court also found that when the second year's premium became due in August 2008, there were enough funds in his account for the Bank to collect the premium and pay it to the Insurer, as it had been instructed to do by its client through his application.

The Bank, on the other hand, repeatedly breached its obligations under the Policy: it notified the Insurer about the Insured's application three years after it was submitted and only after the Insured's accidental death had already occurred. Additionally, the Bank:

• never forwarded the first year's premium to the Insurer, which the Insured had paid to the Bank at the time he submitted his application; and
• failed, by its own fault, to collect from the Insured's account the second year's premium, during which the loss occurred.

The Court held that two separate contractual relationships were established in the case. The first, which was qualified by the court as "internal", was a third-party beneficiary contract governed by article 410 of the Civil Code; deviating from the general rule of contract privity, the Bank and the Insurer executed a contract and agreed between them that a third party would be entitled to claim a benefit directly from the Insurer (the promisor), subject to the Bank (the promisee) fulfilling certain obligations specified in the contract. The second, "external" relationship was the insurance contract incepted at the time the Insured filed his valid application to participate in the Policy and paid the premium.

According to the Policy terms, a client of the Bank would only have to file an application and pay the yearly premium to the Bank in order to become an insured under the group cover; the latter had the obligation to inform the Insurer about the application's submission and content and to transfer the collected premium to the Insurer. The Court held that the Insured, having filed a valid application and paid (or made available) to the Bank the initial premium and, one year later, the second-year premium, he had incepted and maintained a valid insurance contract with the Insurer and, therefore, the beneficiaries named in the application were entitled to claim the Policy's benefits. The subsequent transfer of the premium to the Insurer was a contractual obligation of the Bank, under its internal third-party beneficiary contractual relationship with the Insurer, the breach of which did not affect the Insured's rights under the insurance contract, as the Insured was deemed to have fulfilled all his obligations.

The Court also held that under article 6 paragraph 2 of the Insurance Contract Act 2496/1997, which compulsorily applies to life insurance, a life policy cannot be terminated without a one-month prior written termination notice to the policyholder, and the termination does not take effect if the policyholder pays the premium within this month.

The Court awarded the full amount of the Policy's benefits and ordered the Insurer to pay the claimants, since the Insured was maintaining a valid insurance contract at the time of his accidental death, which was the event that triggered the Insurer's liability. Further, the Court found that the Bank had breached its contractual obligations under the "internal" third-party beneficiary contract, as it had failed to notify the Insurer about the Insured's application to participate in the Policy and to transfer to the Insurer the premiums it had collected from the Insured. As a result, the Court endorsed the impleader filed by the Insurer against the Bank and ordered the latter to pay the full amount that the former had to pay to the original claimants to the Insurer.

Comment

Group insurance can provide affordable coverage to large numbers of people without the administrative burden of the underwriting process. It does generate practical issues, however, particularly regarding:

• the inception and termination of each individual insured's cover;
• the premium flow; and
• the group's organiser duties and liabilities and the effect these may have on each individual's insurance.

The core problem was that the party executing the group policy and formally entering into a contractual relationship with the insurer, has a role that does not coincide with that of the common policyholder. He managed the flow of the premiums paid by the individual insureds and the flow of information between the Insureds and the Insurer. These are critical factors for the inception, maintenance and termination of each insured's cover and are not dissimilar to the duties of an insurance intermediary. At the same time, he too – as any policyholder – was subject to the obligations regarding:

• disclosure (about himself);
• notifications; and
• compliance with the terms and conditions of the policy.

The sui generis status of the group insurance organiser has generated controversy with extensive implications. Whether a group insurance policy organiser should be classified, at least in some instances, as an insurance intermediary rather than a policyholder, is an issue currently being addressed by the European Court of Justice, with the advocate general recommending an affirmative answer with his 24 March 2022 opinion (Case No. C-633/20).(1)

Further, the violation of a policyholder's own disclosure duty by the organiser may irreparably harm an individual insured's cover, despite the latter not having any knowledge of, or control over, such breach.(2)

The idiosyncrasies of group insurance have been addressed by only a handful of jurisdictions,(3) making the regulatory vacuum increasingly obvious.

This vacuum also exists under Greek law. In the case at hand, the Court's visible effort was to protect the Insured's interests from being cancelled as a result of the Bank's failure to comply with its own contractual obligations. It resorted to the original solution of breaking down the insurance contract into two different contractual relationships, so that it could insulate the Insured's rights from the organiser's obvious breaches. The Court "contained" the contractual relationship regarding the insurance contract and found that this was exclusive to the Insured and the Insurer.

Characteristically, it made use of article 6 paragraph 2 of the Insurance Contract Act 2496/1997 in order to establish that the insurance contract could not have been terminated for non-payment of the premium, as the Insured had not been notified in writing one month before. In fact, this article states that the Insurer cannot terminate the policy without prior written notification of the policyholder. This shows that the Bank was not the policyholder; on the other hand, it could not have been an insurance intermediary either, on account of several facts of the case. The Court resorted to the concept of the third-party beneficiary contract of article 410 of the Civil Code, which may be relevant, but it cannot provide a solid legal ground for the group insurance transaction. This approach also allowed the Court to find the Bank liable to indemnify the Insurer for the amounts he had to pay to the beneficiaries, in spite of not having collected premiums for the Insured's cover and not having been aware of the existence of the Insured's participation in the Policy until he had to pay his named beneficiaries.

The Court did find a way to protect the "innocent insured" and the "innocent insurer" from the group insurance organiser's wrongdoing. The decision was never appealed.

For further information on this topic please contact Athanassios Lambrou, Anna Louka or Elena Kouremenou at Zemberis, Markezinis, Lambrou & Associates by telephone (+30 210 363 6016) or email ([email protected]). The Zemberis, Markezinis, Lambrou & Associates website can be accessed at www.zmlaw.gr.

Endnotes

(1) For further information, see "Advocate General calls on ECJ to determine that group insurance policyholders conduct a regulated business".

(2) For further details please see "Precedential judgment: innocent insured doctrine applies in specific circumstances".

(3) In the French Insurance Code, articles L141-1 to L145-9 specifically regulate group insurances. The Swedish Insurance Contracts Act of 2006 has a section dedicated to group insurance (for further information please see "Group insurance in Sweden: general overview and implications of EU legislative acts").