European insurers warn EU over supply chain liabilities

The European insurance sector has told the European Union in no uncertain terms that insurers’ due diligence obligations should not cover their downstream value chains, under the coming Corporate Sustainability Due Diligence Directive (CSDDD). In response to the EU’s latest proposals to ensure that European businesses do not wittingly or otherwise support activities in their supply chains that threaten human rights and environmental destruction, Insurance Europe said that if obligations are included then provisions must be improved to “appropriately reflect the insurance sector’s specific characteristics”. “The Directive’s requirements should recognise that it is not necessary or possible for insurers to conduct due diligence on all of the potentially millions of business partners within their value chains,” said the European insurer federation. “Furthermore, the complexity brought by the nature of insurance activities, where the contract beneficiary is often different from the insurance client (company pensions schemes for example) makes the inclusion of insurers’ downstream value chain extremely challenging,” it added. Risk and insurance managers with European-based multinationals have been eyeing the development of the CSDDD closely as it threatens to expose them to serious potential liabilities through the supply chain. It potentially makes the construction of fully compliant global programmes even more difficult than they are now. They will presumably be pleased to hear that the powerful insurance lobby, represented by Insurance Europe, sees this potentially big problem too. “An insurer should not be expected or required to deny provision of a legally required insurance policy because of a due diligence assessment,” said the federation. “If an exclusion of the downstream value chain is not possible, insurers should only be required to carry out due diligence assessments on their direct business partners. No look-through to the business partners of an insurer’s business partners should be required,” added Insurance Europe. The body said the insurance industry welcomes the fact that recital 19 of the European Commission Directive proposal states that SMEs, individuals and households receiving insurance are not considered to be part of the value chain for the CSDDD. This should also be reflected in the articles of the proposed directive, as suggested by both the Council’s General Approach and the European Parliament’s report, it added. “Where there is a statutory requirement to have insurance (eg liability and life/health products), the beneficiaries (eg employees, local residents) are usually different from the insurer’s business partners. Therefore, refusing to provide insurance to a company for due diligence reasons can negatively impact other stakeholders and jeopardise the social role of insurance, and should not be an unintended consequence of the proposal,” Insurance Europe pointed out. “In this regard, Insurance Europe welcomes the derogation granted to financial services regarding the obligation to terminate the business relationship if it causes substantial prejudice to the entity to whom that service is being provided (Articles 7(6) and 8(7) in the EC proposal). While the parliament’s amendment recognises that there should be no termination of service if it would cause bankruptcy, this provision should at least be extended to mandatory insurance,” it continued. The federation argued that insurers would thus support the Council’s General Approach not to require termination/suspension of contracts for financial undertakings and to introduce an explicit recognition in Recitals 41 and 41b of cases in which the parties are obliged by law to enter into them, such as mandatory insurance. Insurance Europe said that if it is not possible to exclude downstream activity entirely, it recommends adapting the CSDDD scope of coverage of the value chain in Article 3(g) for financial services to: Limit it to direct business partners; Explicitly remove SMEs, households and natural persons; Exclude customers of (re)insurance mandated by law of a member state and company pension schemes; and, Exclude insurance that also benefits injured third parties, such as business liability, motor liability and accident insurance. If it does not, then it would otherwise affect the very victims the CSDDD aims to protect, said the federation. Insurance Europe also advised the European Union that due diligence requirements should follow a risk-based approach to ensure effectiveness, proportionality and feasibility for companies. “For adverse impacts in their downstream value chains (ie to underwriting customers and to investments), if those are included in the scope of the CSDDD, insurers should be recognised as only linked to potential adverse impacts (as opposed to causing or contributing to adverse impacts), in line with the approach proposed by the parliament,” it said. Among a host of other concerns raised by Insurance Europe, many of which will be shared by Europe’s risk and insurance managers, it added that the very viability of doing business with SMEs might be jeopardised by the CSDDD. “Requirements in Article 7(2d) for companies to provide targeted and proportionate support to affected SMEs creates a risk that it becomes commercially disadvantageous (if not unviable) to involve SMEs in large companies’ value chains, in particular given the risk of potential liabilities in the case of adverse impacts. This requirement, if maintained, would damage and not help SMEs,” it pointed out. To view the full Insurance Europe statement visit insuranceeurope.eu

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