UK: E-Commerce – Risks and Opportunities for Insurers and Reinsurers

Article by Mike Munro and Alex Kershaw

In this article the Electronic Commerce (EC Directive) Regulations 2002 (the "Regulations") will be considered. These came into force on 21 August 2002 and implement the provisions of the EC Directive on Electronic Commerce (Directive 2000/31/EC) (the "Directive") into UK law. They are designed to provide a framework for regulating certain contracts which are concluded electronically. Regulation 19 of the Electronic Commerce Directive (Financial Services and Markets) Regulations 2002 provides that rules made by the Financial Services Authority ("FSA") which correspond to Regulations 6-9, 11 and 15 of the Regulations will apply instead of those Regulations. Firms which are regulated by the FSA will therefore need to pay close attention to the FSA’s Electronic Commerce Directive Instrument (the "FSA Instrument"), made under the FSA’s general powers. This makes similar provision to the Regulations, elaborating in certain respects which are outside the scope of this article; it also came into force on 21 August 2002.

The Regulations apply to "Information Society Services" and these are defined as ‘any service normally provided for remuneration, at a distance, by means of electronic equipment for the processing (including digital compression) and storage of data, and at the individual request of a recipient of a service’. A recipient for these purposes can be a natural person or a legal entity and, as a result, the Regulations apply to contracts between businesses as well as contracts between businesses and consumers.

The FSA Instrument applies to "electronic commerce activities" ("ECAs"), which are defined as information society services provided from an establishment within the European Economic Area and which are FSA regulated activities. In addition to the matters covered by the Regulations, the FSA Instrument goes into considerable detail into such matters as the information to be provided by providers of electronic commerce activities to recipients.

• Where insurance and reinsurance contracts are concluded by electronic means, for example through an online market website, directly between an insurer and either a consumer or a business through an insurer’s website, or in limited circumstances and subject to the exceptions below, by e mail, they would appear to be information society services or ECAs. Details of some of the key provisions relevant to insurance and reinsurance contracts are summarised below. Regulation 6 of the Regulations obliges service providers to "make available to the recipient of the service, and any relevant enforcement authority, in a form and manner which is easily, directly and permanently accessible…" their name, address of establishment, contact details (including by e mail), registration numbers and the particulars of any supervisory authority; this will include, for example, Lloyd’s, or the GISC. Annex 1 of the FSA Instrument, at paragraph 1(1), mirrors these requirements, in addition requiring specifically that a statement is made that the provider is authorised by the FSA and is entered on its Register, as well as details of its FSA Register number.
• Regulation 9 (mirrored at paragraph 1(5) of the FSA Instrument) requires service providers to provide service recipients with information in a clear, comprehensible and unambiguous manner on:
  1 the technical steps to follow to conclude the contract;
  2 whether or not the concluded contract will be filed by the service provider;
  3 the technical means for identifying and correcting input errors prior to the placing of the order; and
  4 the languages offered for the conclusion of the contract.
  These provisions do not apply to contracts concluded wholly by e mail (Regulation 9(3) and paragraph 1(9) of the FSA Instrument) and, if the relevant contract is between businesses, the parties can agree to contract out of them.
• Regulation 11 and Paragraph 2 of the FSA Instrument state that service providers should acknowledge receipt of any order for information society services/electronic commerce activities from a service recipient without undue delay. The Regulation stipulates additionally that this should be "by electronic means". Both provide a mechanism for the correcting of input errors before the placing of the order. The importance of Regulation 11 is reinforced by Regulation 15, which provides that a service recipient will be entitled to rescind a contract governed by the Regulations into which they have entered if they have not been given the opportunity to correct any input errors. It should be noted that if the relevant contract is between businesses, the parties can agree to contract out of both Regulation 11 and Paragraph 2 of the FSA Instrument.

The wider use of the internet for doing business gives rise to a number of issues. Where is a contract concluded, and when? What law applies? If a dispute arises, where will it be determined? These questions are of particular relevance in the insurance/reinsurance industry, where the broker, insured, insurer and the different reinsurers may all be in different countries.

The Regulations and FSA Instrument generally maintain the freedom of parties to choose the law by which their contractual relations are governed and where disputes will be resolved, (the Directive explicitly states that it does not affect private international law or issues of jurisdiction) and parties will remain welladvised to ensure that clear choice of law and jurisdiction clauses are contained in their contracts.

However, a key provision of the Directive is that the freedom to provide information society services should not be restricted, and therefore the Regulations disapply UK law to the extent that it would restrict the ability to provide such services in the UK (Regulation 4). Similarly, the FSA Instrument provides that only a limited number of its rules will apply to "incoming ECA providers" i.e. those providing services in the UK from other States of the EEA. This will allow insurers and reinsurers to offer services more widely across the EEA, without the need to comply with different regulatory regimes applicable to those with whom they are contracting.

In short, the Regulations have the potential to affect all those involved in doing insurance/ reinsurance business online; brokers and online markets and other online facilities through which insurance companies do business will need to ensure that they comply with the new provisions, as will insurance companies who do business with each other (and with consumers) electronically. However, while some commentators have suggested that the Directive and Regulations may make online business more difficult, in an industry as complicated and with as much at stake as the insurance/reinsurance industry, they may add certainty and encourage more to do business electronically, at least with others within the EEA. They provide a framework for e-commerce which shows parties to online contracts what is expected of them and what they may expect. However, they emphasise further the need for clear and comprehensive express contracts for insurance/reinsurance business concluded electronically if the parties’ intentions are to be upheld.

The authors are grateful for the assistance provided by Shantini Satyendra of the BLG technology team with the preparation of this article.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.