Insurance Litigation in Austria

The following article deals with insurance disputes as contentious matters before Austrian courts.

Reinsurance

An insurance dispute follows either out of or in connection with a private insurance contract or a reinsurance agreement. However, the latter are generally not litigated in Austria but rather arbitrated and, as far as is known, there was only one arbitration proceeding pending in the last year regarding the scope and/or interpretation of a facultative reinsurance or retrocession agreement that was subject to the laws of Austria. A sensible prediction in this regard would be that the number of arbitration proceedings out of reinsurance agreements under Austrian law will not increase, and that Austrian state courts will not see more reinsurance disputes in the future.

Notwithstanding this, the following explanations are likely to apply to both insurance and reinsurance policies, and to disputes arising out of them.

Pandemic and Statistics

To predict the future, it is worth looking back to understand the overall trends in insurance disputes from the past. In doing so, 2020 and 2021 are not considered, because they are deemed to be extraordinary in view of the COVID-19 pandemic, which had an outstanding impact on litigation overall, leading to a substantial decrease in the number of cases.

Without doubt, disputes against insurers regarding business interruption policies to indemnify insureds for loss resulting from business closure during several lockdowns in Austria increased within these two years. However, in a recent ruling the Supreme Court considered that a business closure caused by the pandemic is usually not covered by (the typically sold wordings of) business interruption policies under Austrian laws. Therefore, such civil proceedings are not expected to increase.

Looking back further, a statistic published in 2019 indicates that cases allocated to "insurance contracts" (Fallcode: Versicherungsvertrag) in Austrian courts decreased between 2002 and 2018, by 27.92% or by 40,925 cases (from 146,604 to 105,679). It remains to be seen if the topics raised below will change or dam this overall trend in insurance litigation.

Cyber

As of the end of August 2022, the Legal Information System of the Republic of Austria (Rechtsinformationssystem des Bundes – RIS), which is a platform and database providing information on Austrian law, has not published a single ruling related to cyber-insurance policies. This is against the background of the 2018 publication by the Austrian Insurance Association (Versicherungsverband Österreich – VVO) of a cyber-insurance wording template (Allgemeine Bedingungen für die Cyberrisiko-Versicherung [ABC 2018]), and noting that the first COVID-19 lockdown in Austria started in mid-March 2020. The situation made it easier to implement cyber-attacks against all sizes of Austrian companies that allowed employees to work from home without taking sufficient time to professionally prepare the IT infrastructure environment.

Whereas cyber-risks for businesses and privates increased over recent years and cyber-incidents allegedly increased as well, it was noticeable that the appetite of insurers to accept cyber-risks decreased. These factors – in addition to the fact that policyholders may have paid ransom money without notifying the insurer in order to avoid any reputational risk – most likely led to the current lack of precedent in Austria related to cyber-insurance policies.

Some believe that the current war in Ukraine may result in a further increase of cyber-attacks. If this is true, then it may lead to new cyber-insurance disputes in the future.

War Exclusions

The recent military attacks by Russia against Ukraine could eventually have a greater impact on insurance disputes. The Chamber of Commerce reported in March 2022 that Austria is the sixth largest foreign investor in Ukraine, with more than 200 branches and investments of around USD1.7 billion, with the majority being in western and central Ukraine.

The attacks in Ukraine are geographically extensive and the country is defending itself with armed force, but not all loss in Ukrainian territory necessarily results from or is related to the war. Policyholders could also be entitled to claims from so-called non-combat losses (Nicht-Kampfschäden). Therefore, Austrian policyholders and their (international) insurers will have to examine in detail the extent to which claims caused by or in connection with war (the so-called war risk) fall within the scope of coverage or are exempt.

Whereas insurance products that were designed to protect a policyholder against political risks and typically cover losses from war are rather unlikely to become heavily disputed, it is more likely that policyholders with the benefit of insurance coverage containing a war exclusion will need to bring cases to court for an interpretation of the insurance policy documents. These cases will depend on how the exclusion had been drafted to delimit an insured from an uninsured loss.

Different definitions

Although the model terms and conditions of the Austrian Insurance Association are non-binding templates, these terms and conditions are generally used by Austrian insurers as a basis for their insurance contracts. In general, this could certainly have been an advantage for policyholders and insurers if a uniformly defined "war exclusion" would be contained in the different model terms. However, a review of several model terms for individual lines of business reveals the following deviations among the "war exclusion" wordings:

• in liability insurance, loss caused by acts of violence by states is excluded;
• in cyber-risk insurance, losses due to war events of any kind are excluded, regardless of contributory causes;
• in property insurance, losses due to the direct or indirect effect of war events of any kind are not insured; and
• in legal expenses insurance, there is no insurance cover for the representation of legal interests in causal connection with wars.

Existing case law

According to the established case law of the Supreme Court (Oberster Gerichtshof – OGH), the general terms and conditions of insurance are to be interpreted according to the understanding of a reasonable average policyholder, whereby ambiguities are to be borne by the insurer. Therefore, risk-limiting clauses do not have contractual force to the extent that their understanding cannot be expected from a policyholder without prior legal training.

Coverage decisions by courts

The lack of a uniform definition or at least similar wordings for the war exclusion clauses in the different model terms and conditions may easily result in several insurance disputes in the years to come, because there has been no need for case law on "war exclusions" in insurance contracts so far.

Burden of proof

Furthermore, the model terms partly contain a reversal of the burden of proof for the non-existence of an exclusion. Considering that such a clause contradicts established case law because an insurer has to prove the existence of an exclusion, a reversal of the burden of proof will most likely be regarded as an ineffective contractual provision. An argument to justify the reversal of burden of proof to the detriment of the policyholder objectively could be the proximity of the policyholder to the evidence. However, this argument would apply in its generality to every loss event and not only to damage in connection with a war (event), and may therefore be considered insufficient by the Supreme Court.

Supply Chain

In terms of insurance contracts, the supply chain of a company can lead in several ways to an increase in insurance litigation. The insurance product to test is called Contingent Business Interruption (CBI). According to recent Allianz Global Corporate & Specialty information, the number of CBI claims has constantly increased over recent years.

Simply speaking, the global pandemic situation since 2020 more quickly revealed the strong interdependence and complexity of corporate supply chains but, so far, no lawsuits arising out of CBI policies have made it to the Austrian courts. This is a hot topic for insurers and corporates, which should be monitored.

Environmental, Social and Governance

Environmental protection measures are a hot topic in politics and society. Court rulings from 2020 in Germany and from 2021 in the United States against global oil companies Exxon, BP and Shell, and in the Netherlands against Royal Dutch Shell, clearly demonstrate that the pandemic did not overshadow the importance of this topic. Unlike the Hague District Court, Austrian courts have not yet held an oil company responsible for its CO2 emissions, nor ordered an oil or gas company to lower them.

However, the global trend of judging privately owned companies (including stock corporations) by their ESG measures might not stop at Austrian borders, even though it may take some time for Austrian courts to accept a legal basis for such lawsuits. Article 37 of the Charter of Fundamental Rights of the European Union currently sets out environmental protection measures. Furthermore, in the Green Deal, the 27 EU member states agreed to achieve climate neutrality by 2050. Unlike, for example, Germany, which released a Climate Protection Law, the Austrian legislator has not yet become active and has not implemented a specific act to achieve climate targets.

In any event, environmental damage may not result in a pecuniary loss but it can easily cause reputational damage to a listed company and have an impact on the share price thereof. The Austrian Companies Acts (GmbHG and Aktiengesetz) require a company’s management to act with the diligence of a prudent (or conscientious, in the case of a joint stock corporation) businessperson. By this benchmark, companies’ representatives can be held liable. Whenever a board member is held responsible for an alleged breach of duty, the question arises of whether a pecuniary damage liability insurance for Directors and Officers (D&O) covers such a loss and the defence costs.

Although there seems to be little knowledge about environmental liability, this does not negate the fact that the number of legal proceedings regarding specific and relevant topics, such as ESG and D&O, could easily pick up at any time.

Class Actions

In Austria, it is still impossible for numerous injured parties to jointly file one lawsuit out of identical or similar key facts by way of a class action or mass proceedings against the same defendant. This form of collective legal redress is not recognised in the Civil Procedure Code (Zivilprozessordnung – ZPO), the Consumer Protection Act (Konsumentenschutzgesetz – KSchG) or any other law.

This is despite the fact that the Justice Committee requested the Ministry of Justice (MoJ) to develop suitable instruments for mass proceedings almost 20 years ago. The MoJ never got further than drafting a group and model lawsuit.

Therefore, a "class action Austrian style" has developed in practice over the years, under which the injured parties that want to join the class (opting-in) assign their claims to a person (generally one of the injured parties or an organisation) who then sues for all claims in the form of an accumulation of claims.

After the EU "Class Action Directive" (Directive (EU) 2020/1828) was published, the member states became obliged to transpose it by 25 December 2022, with a further six months to apply it. The transposition deadline is fast approaching and the Austrian legislator has been called to present a draft law, but no such draft is yet publicly available.

A class action for consumers may also add value to insurance disputes. Allegedly, more than 1,000 separate lawsuits were filed in Austrian civil courts because of the ECJ ruling in Endress/Allianz (C-209/12) to determine the scope and preconditions of a so-called "perpetual right of rescission" from a life insurance contract.

The Supreme Court had broadly solved this topic but the next topic is just around the corner, and it remains to be seen whether a class action against insurers can further decrease the number of insurance disputes after 2022.