The Danish Guarantee Fund for Non-Life Insurers – new rules on membership and coverage

Mandatory membership for more companies 

The new rules on membership and coverage were triggered by an amendment to the Danish Guarantee Fund for Non-Life Insurers Act. The amendment has affected many of the insurance companies that are required to be members of and pay contributions to the Guarantee Fund. 

Before 1 January 2019, membership of the Fund was mandatory for the following companies: (i) Danish direct non-life insurance companies and (ii) branches of direct non-life insurance companies having their registered office in a non-EU/EEA country which would need authorisation by the Financial Supervisory Authority to pursue insurance activities in Denmark.

Before the amendment, Danish branches of insurance companies in other EU member states were therefore not required to be members or to pay contributions to the Fund.

However, membership of the Fund was optional for direct non-life insurance companies which had their registered office in other EU member states or in countries that had entered into a financial agreement with the EU and which offered consumer insurance in Denmark through a branch or as provider of cross-border services.

As from 1 January 2019, the following insurance companies must be members of and pay membership contributions to the Fund:

• Existing mandatory members: Danish direct non-life insurance companies and branches of direct non-life insurance companies which have their registered office in a non-EU/EEA country and which need authorisation by the Financial Supervisory Authority to pursue insurance activities in Denmark. It is not possible for direct non-life insurance companies having their registered office in a non-EU/EEA country to pursue cross-border activities as service provider in Denmark from a non-EU/EEA country.
• New mandatory members (where membership used to be optional): Direct non-life insurance companies which have their registered office in a non-EU/EEA country and which pursue insurance activities in Denmark through a branch.
• New mandatory members (where membership used to be optional): Direct non-life insurance companies which have their registered office in a non-EU/EEA country and which pursue insurance activities in Denmark as provider of cross-border services. 

Thus, the Act applies to both (i) Danish non-life insurance companies and (ii) non-life insurance companies which have their registered office in an EU/EEA country and which offer non-life insurance in Denmark through a branch or as provider of cross-border services. 

The amendment has therefore increased the number of non-life insurance companies which must be members and pay contributions to the Fund.

Narrowing of the scope of cover – what risks are covered by the Fund?

If a member company is declared bankrupt, the Fund will from now on (after 1 January 2019) only cover insurance events which affect the company’s policy holders in Denmark and which are related to risks in Denmark. Previously, there was no requirement for the risk to be in Denmark, and the scope of cover has therefore been narrowed under the new regime. This is particularly relevant for foreign insurance companies with cross-border activities in Denmark, but it may also affect Danish companies that pursue cross-border activities abroad.

Cross-border activities into Denmark

In future, insurance companies with cross-border activities into Denmark should check in particular if they, due to the nature of their non-life insurance products, fall within the Fund’s scope of coverage. If so, they must be members of and pay contributions to the Fund. 

EXAMPLES

If a policy holder resident abroad has taken out holiday house insurance with a Danish insurance company covering a holiday house in Denmark, then the Fund will cover in the event of the non-life insurance company’s bankruptcy. This is because the risk (the holiday house) is situated in Denmark, and the insurance contract is entered into in Denmark. 

Conversely, motor vehicles registered abroad and pleasure boats sailing under foreign flag will not be covered by the Fund, whether the insurance has been taken out in Denmark or with a Danish company, because the risk is deemed not to be in Denmark. However, motor vehicles registered in Denmark and pleasure boats sailing under Danish flag will be covered by the Fund if non-life insurance has been taken out with a member of the Fund.

It makes no difference if the damage occurs in Denmark or abroad, or if the motor vehicle/pleasure boat causes damage to a third party abroad. In these situations, the Fund will still provide coverage, provided that the loss is recoverable under the insurance contract.

Cross-border activities out of Denmark are no longer covered 

From 1 January 2019, the Fund will no longer cover losses incurred by Danish insurance companies’ foreign policy holders and beneficiaries if the foreign policy holders and beneficiaries have taken out non-life insurance with a Danish company through a branch or in pursuit of foreign cross-border activities as service providers. 

EXAMPLES

If a policy holder in e.g. Germany has taken out non-life insurance with a Danish non-life insurance company through that company’s German branch, then the policy holder will no longer be entitled to compensation from the Fund if the Danish insurance company goes bankrupt.

Where the object insured is real property situated abroad, the Fund will no longer provide coverage in the event of the Danish insurance company’s bankruptcy. If the policy holder is resident in Denmark and has taken out holiday house insurance with a Danish non-life insurance company for a house situated in another country, then the Fund will not cover, because the risk (the holiday house) is in that other country. The same would apply if the policy holder had taken out the insurance through a branch of an insurance company having its registered office in another EU/EEA country. 

Movable assets situated abroad are not regarded as risks in Denmark and will therefore in most cases not fall within the scope of cover. By way of example, a bicycle which the policy holder keeps at his holiday house abroad and brings to Denmark only once in a while will not be covered. In contrast, movable assets that are located in Denmark most of the time will be covered, because the risk is deemed to be in Denmark. For this purpose, it makes no difference if the damage to the asset occurs in Denmark or abroad. 

Insurance, including travel insurance, intended to protect policy holders and beneficiaries against risks while staying abroad will not be affected by the new rules. The risk is believed to exist in Denmark, because the policy holder, the beneficiaries and the movable assets they take with them on holiday or during a short stay abroad are situated in Denmark most of the time.

Consequences of the new scope of cover

The new scope of cover means that foreign insurance companies with branches or cross-border activities in Denmark must be members of and pay contributions to the Guarantee Fund in relation to insurance taken out in Denmark, where the risk is in Denmark. 

On the other hand, some of the insurance companies that have been subject to the Guarantee Fund rules until now will no longer have to be members or qualify for coverage. It means that their policy holders will not enjoy the same protection as they did before 1 January 2019. 

Insurance companies were required to notify their policy holders before 31 August 2018 that they would no longer be covered by the Fund after 1 January 2019 in the event of the insurance company’s bankruptcy. However, the duty of notification did not apply in relation to policy holders and beneficiaries in other EU/EEA member states, if the insurance company was exempt from the duty to pay contributions as such companies are likely to be covered by a similar guarantee arrangement in their own country.