Insurance-Based Investment Products: Similar Economics, Different Legal Regimes

This post is also available in:

The issue

The characterisation of insurance-based investment products raises several questions about the regulatory framework applicable to insurance intermediaries and their liability for breach of the duty to advise. In its judgment C-542/16 of 31 May 2018, the Court of Justice of the European Union held that financial advice on the investment of capital, given in the course of insurance mediation for the conclusion of a capital life insurance contract, falls within the scope of Directive 2002/92 on insurance mediation, and not within MiFID [1]. Investment advice given by insurance intermediaries is thus excluded from MiFID, on the basis of the exemption in Article 2(1)(c) of MiFID I.

We also commented on a decision of the French-speaking Brussels Court of First Instance highlighting the obligations of insurance intermediaries. Given the insurance nature of a unit-linked life insurance contract, the court assessed the intermediaries’ liability under the Insurance Act of 4 April 2014.

Is a life insurance product a financial product? The Constitutional Court’s answer

The Constitutional Court’s judgment of 22 October 2020 [2] deepens the analysis. The case arose from investments made in the 2000s by individuals in insurance policies of an Irish company. The premiums had been invested in various investment funds, which were suspended in 2009 and 2011. Before the French-speaking Brussels Enterprise Court, the investors sought the nullity of the policies for defect of consent and invoked the insurer’s pre-contractual or contractual liability.

Insurance law has a shorter limitation period, even for life insurance

In insurance matters, an action for nullity is time-barred three years after the event giving rise to the action, under Article 88, paragraph 1 of the Insurance Act of 4 April 2014, which sets a three-year limitation period for any action derived from the insurance contract.

The court asked the Constitutional Court whether Article 88 breached the constitutional principles of equality and non-discrimination, in that it provides much shorter periods than ordinary law (Article 1304 of the Civil Code for nullity, Article 2262bis for personal actions), thereby creating an alleged unjustified discrimination between investors in branch 23 life insurance products and investors in financial instruments linked to underlying funds. The insured parties argued that both categories are economically and legally comparable, particularly as to the risk incurred, which is precisely what drove the “mifidisation” of insurance law at EU level.

The insurer replied that a life insurance product is not a financial instrument, citing the case law of the Court of Justice [3] and several Belgian judgments. Insurance products linked to financial instruments are insurance-based investment products, not financial instruments governed by MiFID II. The life insurance contract is also distinguished by the policyholder’s ability to designate a beneficiary other than himself, by the partial deductibility of premiums, and by the existence of an uncertainty linked to the life of the insured.

Distinct products on several levels

The two products further differ as regards the effect of the holder’s death on the contract, the real or personal nature of the holder’s right in the investment, and the transferability of rights. Branch 23 life insurance is subject to the Insurance Distribution Directive (EU) 2016/97, and the insurance limitation rules apply to it.

The Constitutional Court held that investors in branch 23 life insurance and investors in financial instruments linked to underlying funds are in objectively different situations, given the characteristics of the products and the nature of the contracts concluded: an insurance contract in one case, another contract in the other.

Economic similarities, but no full alignment

The Court accepted that branch 23 contracts economically resemble investments in fund-linked financial instruments: both are linked to investment funds, and the individual alone bears the financial risk. They nonetheless retain the principal characteristics of an insurance contract, notably the designation of a third-party beneficiary and the uncertainty linked to the life of the insured, and they enjoy a favourable tax regime.

The Court concluded that the “mifidisation” of insurance law, through the IDD Directive inspired by MiFID II, does not mean that the regimes of branch 23 life insurance and of fund-linked financial instruments must be fully aligned, including as regards limitation periods.

---

[1] CJEU, 31 May 2018, C-542/16. See also G. Laguesse and P. Proesmans, “Baromètre de jurisprudence en droit bancaire: 2019”, D.A.O.R., 2021/1, p. 30; Civ. Brussels (FR), 10 May 2019, unreported, R.G. 2016/7635/A.

[2] Constitutional Court, 22 October 2020, No 140/2020.

[3] See notably CJEU, 1 March 2012, C-166/11, Alonso.

This article is a translation. Only the French version is authoritative. It is provided for information purposes and does not constitute legal advice.