Should a Regulatory Body Control Insurance Policies Ex Ante or Is Ex Post Control More Effective?

Abstract

This paper deals with the much debated issue of control of insurance provisions. The topic is part of the broader area standard contracts law and unfair provision in standard contracts. By standard contracts or adhesion contracts we mean contracts that are concluded without the adhering party's power to influence the provisions in question. Standard contracts have a valuable function in the market economy. Without the use of standard contracts, transaction costs would be much higher. Insurance policies are typically standard contracts. Consumers must accept consumer insurance policies as they are or refuse to enter into an insurance contract. The same is true for most industrial insurance, although larger enterprises may sometimes negotiate tailor-made policies. From a legal viewpoint, standard contracts are problematic. They do not fit into the framework of traditional contract law, which is based on individually negotiated contracts. General rules on entering into a contract and construction of contract clauses do not easily apply to standard contracts. Furthermore, the fact that the producer or manufacturer formulates the contract's provisions without cooperating with the other party brings up the possibility of abusive practices. This calls for methods to restrict the use of unfair or unconscionable contract clauses. The current paper focuses on possible ways to prevent unfair clauses in insurance policies.