Consumer protection in the insurance sector: Legal news
Authors: Mgr. Michal Nulíček, LL.M., Mgr. et Mgr. Ing. Jan Tomíšek, CIPP/E and Mgr. Ondřej Kašpar
Publisher: Pojistný obzor
The legal regulation of consumer protection will see a number of significant changes in the near future, particularly due to new legislation in the form of the New Deal for Consumers package – the amendments to the Civil Code and the Consumer Protection Act. It is the Civil Code and the Consumer Protection Act that will undergo the most changes, which will have a significant impact on the insurance business.
Legislative novelties will have a particularly significant impact on the conclusion of contracts over the telephone and over a distance (remotely), the disclosure obligations of business entities and, to a large extent, sanctions, which can be imposed for individual breaches. The enforcement of consumer claims through class actions will also become more effective, and supervising bodies will be given greater authority. You can read about what specific changes will be brought about by these regulations and what impact they will have on the insurance sector in the article published in the current issue of Pojistný Obzor by our Consumer team here.
News on Legal Regulation of Consumer Protection
Mgr. Michal Nulíček, LL.M. / partner / ROWAN LEGAL, law firm, Mgr. et Mgr. Ing. Jan Tomíšek / managing associate / ROWAN LEGAL, law firm, Mgr. Ondřej Kašpar / junior lawyer / ROWAN LEGAL, law firm
The legal regulation of consumer protection will see a number of major changes in the near future, particularly due to the new legislation in the form of a New Deal for Consumers package – amendments to the Civil Code and the Consumer Protection Act. It is the Civil Code and the Consumer Protection Act that will undergo the most changes, which will have a significant impact on the insurance business.
Legislative novelties will particularly have a significant impact on the conclusion of contracts over the telephone and over a distance (remotely), disclosure obligations of business entities and, to a large extent, sanctions that may be imposed for individual breaches. The enforcement of consumer claims through class actions will also become more effective, and the supervising bodies will be given greater authority. What specific changes will be brought about by these regulations and what impact will they have on the insurance sector?
New Deal for Consumers
In April 2018, the European Commission presented a proposal for a European Union package of consumer directives called the “New Deal for Consumers”. The first of the directives in the package was the Directive on representative actions for the protection of the collective interests of consumers , the point of which was to introduce the concept of class actions. In particular, the Directive simplifies the enforcement of consumer claims, which authorized subjects may now bring before the court on behalf of consumers. The draft Directive is mirrored in the actions happening at the national level associated with the Class Proceedings Bill, which is currently awaiting hearing by the Chamber of Deputies. 
Then in November 2019, the so-called “accompanying Directive”  was passed that regulated the four existing EU consumer directives. The accompanying Directive contains a number of crucial changes, be it the amount of fines for acting in violation of consumer protection rules, prohibition of dual quality products, specification of consumer claims in breach of consumer protection rules, or the extension of disclosure obligations of business entities. Since consumer directives in the Czech Republic are transposed particularly into Sec. 1811 and following of Act No. 89/2012 Sb., the Civil Code, as amended (hereinafter the “CC”) and to Act. No. 634/1992 Sb., on Consumer Protection, as amended (hereinafter the “ACP”), the changes in European law will primarily affect those two pieces of legislation. At the same time, the Czech Republic has to transpose the accompanying Directive into its body of law no later than on November 28, 2021.
The Threat of Class Actions
A threat that may concern a number of businesspeople in the future is the consumers’ opportunity to file a representative (or class) action. The concept of representative actions for the protection of collective interests of consumers will be applicable in cases of breaches of a wide range of EU regulations, both the general regulations on consumer protection (in particular the CC and ACP), and the specific regulations from the financial services, energy and telecommunications sectors. Class actions will make the enforcement of low value (so-called “minor”) claims more effective. So far, such claims were rarely enforced before the court by consumers due to the financial burden of litigation and legal representation.
They will now be represented in court by authorized entities that will be authorized to make the same claims as the consumer would (e.g. compensation for damage, refund of the paid amount or termination of a contract). These authorized entities will be non-profit organizations (or independent public entities) working in the field of protection of collective interests of consumers, who at the same time have sufficient financial resources (for compensation of litigation costs in case of unsuccessful litigation) and are financially and practically independent from market participants.
It is also important that these claims will not be limited in time by the Directive’s coming into effect, or by the relevant transposed legislation. Therefore, all claims that were [not] time-barred at the moment of filing the action can be enforced by means of representative actions, i.e. even claims existing prior to the transposed legislation coming into effect. The same principle should be incorporated in the domestic legislation of class actions as discussed by the Chamber of Deputies.
Thus, class actions represent a double risk for business entities. On the one hand, litigation will become more accessible to consumers (in terms of both finances and procedures – in the form of legal representation). In addition, in case of unsuccessful litigation, the business entity may be obliged to compensate for the damage or to pay for unjust enrichment to all the consumers concerned, or possibly to cover appropriate costs of public purpose serving the common interests of consumers if the damage to individual consumers was minor. Although the proposal for the Directive has not yet been passed, class actions are highly likely to come into effect in the next few years, especially considering the discussed legislative processes on the domestic level.
For widespread infringements or widespread infringements with a Union dimension within the meaning of the Regulation on cooperation in the sphere of consumer protection , the accompanying Directive stipulates an obligation of the member states to provide under their national law for a penalty with an upper limit of at least 4% of the annual turnover of the trader that committed an infringement in the member state(s) concerned. It should be noted that this is only the minimum penalty and member states may introduce higher penalties at their discretion. If it is not possible to determine annual turnover, the Directive provides for a maximum penalty of EUR 2 million. Member states will be able, as before, to choose a specific procedure for imposing such penalties.
For the sake of clarity, the accompanying Directive also gives a non-exhaustive list of criteria that member states should take into account when imposing penalties in order to make them effective, proportionate and a deterrent. When imposing penalties, the supervisory bodies should particularly take into account the character, severity, extent and duration of the infringement, the financial profit gained by the trader, as well as the possibilities of remedying any damage caused to consumers.
Right to Individual Redress
In case of a breach of the rules of consumer protection by a trader, consumers will have the right to contractual and non-contractual redress. As a part of the non-contractual redress, the consumer shall have the right to claim compensation for loss, if there has been any, or to claim a proportionate price reduction. Contractual redress is newly represented by the right of a consumer to withdraw from the contract. In both cases, these are the minimum means of redress, and member states can also give consumers more rights. It is therefore possible that after the transposition of the accompanying Directive, Czech business entities will have to face stricter consequences from the breach of consumer protection rules.
Extension of the List of Unfair Commercial Practices and Extension of Disclosure Obligations
Newly increased penalties will typically be imposed for unfair commercial practices perpetrated by business entities within the meaning of Sec. 4, ACP. According to the amendment to the accompanying Directive, the list of those practices will be extended. For example, not disclosing paid advertisements for the purpose of positioning a product higher in the results of on-line searches, or the publication of false reviews not written by consumers that have paid for the product or service, will now be considered an unfair commercial practice.
In this respect, the source of risk for insurance companies may be paid cooperation with online comparison platforms, if their operators do not ensure proper disclosure of the promoted offer of a particular insurance company, or even place false positive reviews on their website. For this reason, it may be recommended in this field to review the rules of cooperation with these types of partners.
The accompanying Directive will also extend the obligation of business entities to inform consumers. If traders personalize the prices of their offers for specific consumers or a category of consumers on the basis of the automated creation of behavioral profiles and decision-making, they will be obliged to clearly inform consumers of the fact that the price offered to them was adjusted on the basis of automated decision-making. We consider this obligation relevant for the insurance industry, especially in relation to the annual adjustment of insurance premium prices in long-term contracts, such as the insurance of vehicle liability or property, where the price offer for the next year is often personalized for a particular policyholder.
The Civil Code Amendment
As part of the legislative changes, the Civil Code will also be amended in reaction to the shortcomings that were discovered in the transposing process of the existing European directives in the sphere of consumer protection. The amendment is supposed, for example, to extend the non-exhaustive list of prohibited stipulations in consumer contracts, to extend the disclosure obligations of business entities, or to specify the option to withdraw from a contract by the sample form established by implementing legislation. The conclusion of contracts by telephone will also undergo major changes. This CC amendment was expected to come into force on July 1, 2020, but the draft amendment is still awaiting hearing by the Czech government. It is now highly likely that the coming into effect of the amendment will be postponed.
Pay Attention to Unfair Stipulations
It is also proposed in the amendment that the prohibited stipulations withing the meaning of Sec. 1813, CC, be renamed “unfair stipulations”. The general provisions on prohibited stipulations will be supplemented by the criterion of assessment of the unfair character of a stipulation so that it is assessed with respect to the character of the product or services that are the subject of the obligation, other contractual stipulations and all the circumstances surrounding the conclusion of the contract, including the stipulations contained in other contracts upon which the given stipulation depends.
The non-exhaustive list of particularly prohibited (now “unfair”) stipulations in consumer contracts contained in Sec. 1814, CC, will be specified in several cases and extended by a total of seven stipulations. Thus, the prohibited stipulations will now also include, for example, stipulations that automatically renew a fixed-term contract or prolong an obligation without a reasonable time limit for withdrawal, stipulations that allow the business entity to transfer the contract without the consumer’s consent if it may lead to a reduction in the consumer’s guarantees, or that allow the business entity to determine whether the product or service complies with the contract.
What to Inform the Consumer about and How?
The CC amendment should also specify the general disclosure obligations of the business entity prior to the conclusion of a contract as per Sec. 1811, CC. The amendment enshrines, for example, the business entity’s obligation to inform the consumer of its telephone number or e-mail address. Also, the total price of goods or services must be made known in advance and should include all taxes and similar money payments. It will now only be possible to replace its specific determination with a calculation secondarily, provided that the nature of goods or services does not allow for reasonable determination of the price in advance.
In addition, the amendment should extend the business entity’s disclosure obligations prior to the conclusion of contracts remotely or outside of its commercial premises pursuant to Sec. 1820, CC. Now, on concluding a contract remotely or outside of its business premises, the business entity will have to share, for example, its contact details (including telephone number) , information about the shortest duration of the consumer’s obligations, the address of the main office, and if possible, the address for the handling of complaints, etc. Those details become a part of the contract and can be changed only by explicit agreement between the contracting parties. These obligations seem disproportionate especially with respect to contact details, so it may be expected that this should at least be discussed in the next stages of the legislative process.
In case of purchases via buttons (usually on websites), the business entity will also now be obliged to notify the consumer of the fact that the consumer’s obligation to pay will arise after the button is pressed, which should be expressed clearly (the Act suggests the words “binding order requiring payment”). Otherwise, the consumer will not be bound by the contract.
No More Concluding Contracts Over the Telephone?
A crucial change that will affect companies that offer to conclude contracts with consumers over the telephone, which also includes a number of insurance companies, is a change to the rules of marketing calls and a change in the moment when the contract is concluded. The current regulations do not exclude the possibility of concluding a contract for a period of less than a year orally in a telephone conversation. It is only after the call that the business entity sends a confirmation of the concluded contract in written form to the consumer. The new legislation intends to change this process.
First, the requirements for offering insurance by telephone should change. According to the draft of the new wording of Sec. 1825, CC, it will be necessary to inform the consumer of the purpose of the call and of the business entity’s identity. If the insurance company is not contacting the consumer directly but through an agent, the obligation to share one’s identity is transferred to that agent.
Now, according to the draft of Sec. 1825 Par. 2, CC, the business entity will be obliged to confirm the offer made by phone to the consumer in written form. At the same time, the definition of written form contained in Sec. 1819, CC, will be amended so as to mean that the written form is preserved if the details are provided in a way that allows them to be saved and displayed repeatedly, in a form that is not changed during the period relevant for the purpose of those details. Thus, a mere reference to the offer available on the website will typically not be enough without the option of easy download. A contract concluded by phone is then effective only from the moment when the consumer signs the offer or sends his/her consent, which should again be in written form, that is, for example, in a form that supports text messages or in another form of documentable electronic act.
The change will not concern contracts that are negotiated with the consumer by phone, but still concluded in writing, e.g. if the proposal sent by e-mail is then accepted by payment within the meaning of Sec. 2758 Par. 2, CC. However, the new regime shall apply in case any subsequent change to an already concluded contract with the consumer is made via the telephone, pursuant to Sec. 564, CC, according to which the contract must be changed in the same form which the Act provides for its conclusion. Thus, the change in requirements may affect insurance contracts lasting for a period of less than one year (e.g. short-term travel insurance) and the processes of management and change of insurance contracts if they were concluded by phone.
Withdrawal from a Contract by Means of Sample Form
The possibility to withdraw from a contract by means of sample form will also become more specific. According to the current provisions of Sec. 1820 Par. 1 let. f), CC, the business entity must even before concluding a contract inform the consumer of the options for withdrawing from the contract, including the option to use a form whose details are stipulated by the implementing legal regulation. Similarly, the current Sec. 1830, CC, provides for the use of a sample form, but only in cases when the business entity allows the consumer to withdraw from the contract by using the sample form. Now, it will be stated explicitly in Sec. 1830, CC, that the consumer has a right to withdraw from the contract by using the sample form or by making any other unequivocal statement to the business entity. The business entity will thus be obliged to accept the sample form and must not set any conditions for accepting the form or any other unequivocal statement of withdrawal from the contract.
Consumer Protection Act Amendment
The Consumer Protection Act amendment  adapts the body of law for the Regulation on cooperation in the sphere of consumer protection.  Apart from the ACP, the amendment will also affect other legal regulations, where it will annul the regulation of cross-border cooperation between supervisory bodies in the sphere of consumer protection, which was enshrined in these regulations on the basis of the preceding Regulation (EC) No. 2006/2004 of the European Parliament and of the Council, on cooperation between national bodies responsible for the enforcement of consumer protection laws. Now, this issue will wholly be regulated in the ACP, which should make it clearer and more comprehensible both for the responsible supervisory authorities and for the persons who must comply with the regulations on consumer protection.
In the first place, the amendment introduces a new central office, enshrines the instruments for cross-border cooperation in the sphere of consumer protection and also endows the supervisory bodies with new competence. In addition, it also provides for a fundamental possibility of breaking through the banking secrecy enshrined in Act No. 21/1992, Coll., on Banks, and similarly in Act No. 87/1995, Coll., on Saving and Crediting Associations, as amended.
It is the Czech Ministry of Industry and Trade that will become the so-called “central office for liaison and cross-border cooperation”, which should be responsible for coordinating the application of the above Regulation. Apart from establishing this office, the amendment also specifies which national bodies will be the competent bodies within the meaning of the Regulation, and includes the Czech National Bank in this list.
For the purpose of effective enforcement of legal regulations on consumer protection, the ACP enshrines three new competences of the supervisory bodies; in particular, the jurisdiction to request the details necessary for the detection of infringement , to order business entities to desist from infringement , and to introduce provisional measures in the form of blocking the content of a web page. 
Impact of the Changes on the Insurance Sector
These changes will have an impact on contracts concluded remotely and outside of business premises. Before concluding an insurance contract, insurance companies must provide a wide range of details to the consumer pursuant to Sec. 1811, 1820 and 1843, CC. While the amendments should extend the list of required details further, the consequences of not providing this information are not insignificant.
The direct consequence of unfulfilled disclosure obligations can be the invalidity of the information provided to the consumer, which will then not become a part of the contract. This may secondarily give rise to the consumer’s right to claim compensation for damage or the payment of unjust enrichment (i.e. the payment of a premium). Failure to provide pre-contractual information (in particular, information on price, duration of obligation, rights in case of defective performance of contract, etc.) in a clear and comprehensible fashion can signify unfair commercial practices within the meaning of Sec. 4, ACP, and secondarily represent a violation of other regulations (e.g. of Sec. 12) of the ACP. A business entity may be fined up to CZK 5 mil for such infringement (4% of annual turnover after the accompanying Directive is transposed).
At the same time, a business entity may face an action brought by the consumer organization pursuant to Sec. 25 Par 2., ACP, and also a class action in the future. Finally, a breach of disclosure obligations and prohibition of unfair commercial practices may constitute unfair market competition, on the basis of which the consumer may seek remedy, including compensation for damage, pursuant to Sec. 2989, CC. In this case, the burden of proof is reversed and the business entity has to prove that it did not engage in unfair competition, or that unfair competition did not cause any damage to the consumer.
Thus, on concluding an insurance contract, it is necessary to ensure that the disclosure obligations are fulfilled, especially the obligation to provide all the information to the consumer about the insurance, including the exclusions from insurance coverage. Here it is important to remember that the information given to the consumer will become a part of the contract pursuant to Sec. 1820 Par. 1, CC. Since these details become a part of the commercial terms and policy terms, in the future they may not be changed unilaterally under the regime of Sec. 1752, CC. In cases when the consumer negotiates a contract on-line (e.g. on the insurance company’s website), it will be necessary to inform the consumer of the binding nature of such order and of the obligation to pay.
The process of offering insurance by phone is also to be changed. In addition to the obligation to disclose the commercial purpose of the call and of the business entity’s identity right at the beginning of the call, the moment of conclusion of a contract or an amendment to it will also be changed to the moment the consumer confirms acceptance of the offer in written form.
The new legislation will bring a number of risks, be it the higher penalties, or the consumers’ rights to individual treatment. Along with broader cooperation in the cross-border enforcement of obligations arising from the regulations in the sphere of consumer law and the new jurisdictions of supervisory bodies, the competent administrative bodies will act more effectively while detecting and fining for infringements. With the arrival of class actions, it may be expected that the number of claims brought to court by consumers will rise. At the same time, the obligations of and limitations on business entities in relation to consumers will be extended, be it the extended disclosure obligations, the extension of the list of prohibited agreements and unfair commercial practices, or the requirements for concluding contracts remotely, outside of business premises, or by telephone.
Although neither the legislative procedure nor the transposition of all the above-mentioned regulations have been finalized, it is advisable to start implementing the changes into commercial terms and processes as soon as possible. In case of the New Deal for Consumers package, it is highly likely that the current version of the Directive on representative actions will be passed in the second half of 2020. The New Deal for Consumers will bring about only minor changes to the content of the current legal obligations and will primarily introduce higher penalties for breaches of the existing rules. Considering the broadness of the changes ushered in by the accompanying Directive and by amendments to the CC and ACP, their implementation into commercial terms and processes will require a deeper and more time-consuming revision. The implementation of other complex legislative changes, such as the General Data Protection Regulation (GDPR), have also shown that if the necessary steps are taken closely before such legislative changes come into effect, for the obliged entity it may mean higher costs and organizational burden.
Therefore, business entities (including insurance companies) should already start checking and revising their contracts, including their general terms and conditions, and focus on the process of concluding contracts and amendments to them, and, last but not least, on the processing of complaints, particularly on receiving complaints from consumers and withdrawals from contracts.
A crucial change that will affect companies that offer to conclude contracts with consumers over the telephone, which include a number of insurance companies, is a change to the rules of marketing calls and a change in the moment when the contract is concluded.
- See the proposed directive of the European Parliament and of the Council on representative actions for the protection of consumer interests and repealing Directive 2009/22/ES. Available at: https://eur-lex.europa.eu/legal-content/CS/TXT/ PDF/?uri=CONSIL:ST_14600_2019_INIT&from=EN.
- See the proposed Act on Class Proceedings. Available at: https://apps.odok.cz/veklep- detail?pid=KORNBA9EXSST.
- See Directive (EU) 2019/2161 of the European Parliament and of the Council of November 27, 2019, amending Council Directive 93/13/EEC and Directives 98/6/EC, 2005/29/EC and 2011/83/EU of the European Parliament and of the Council as regards the better enforcement and modernization of Union consumer protection rules.
- See Art. 4, points 3 and 4, Regulation (EU) 2017/2394 of the European Parliament and of the Council of December 12, 2017 on cooperation between national authorities responsible for the enforcement of consumer protection laws and repealing Regulation (EC) No 2006/2004.
- See the bill that amends Act. N. 89/2012 Coll., the Civil Code, as amended, Ref. No. 311/19. Available at: https://apps.odok.cz/veklep- detail?p_p_id=material_WAR_odokkpl&p_p_lifecycle=0&p_p_state=normal&p_p_ mode=view&p_p_col_id=column-1&p_p_col_count=3&_material_WAR_odokkpl_ pid=KORNB7NGQS1H&tab=detail.
- The explicit requirement to provide a telephone number in the light of the Judgment of the EU Court of Justice in case C-649/17 exceeds the requirements of the current Directive 2011/83/EU, yet this judgment was issued after the text of the amendment had been submitted to the government.
- See Act No. 238/2020 Coll., amending Act. No. 634/1992 Coll., on Consumer Protection, as amended, and other related acts.
- See Regulation (EC) No 2006/2004 of the European Parliament and of the Council on cooperation between national authorities responsible for the enforcement of consumer protection laws (the Regulation on consumer protection cooperation).
- See Sec. 24g, ACP, the wording of the amendment.
- See Sec. 24h, ACP, the wording of the amendment.
- See Sec. 24i, ACP, the wording of the amendment.