Introduction
The collapse of financial powerhouse Lehman Brothers in September 2008 marked the start of a financial crisis that demonstrated the true meaning of globalization. The financial landscape was different in 1993 when Vie d'Or, a life insurance company established in the South of the Netherlands went bankrupt. That left about 11,000 Dutch policy holders without a life insurance plan and with damages estimated at EUR 80 million.
In the Netherlands, similar to many other European countries, there is a strong reliance on regulatory oversight and enforcement. The general belief is that regulators are put in place to prevent the collapse of financial institutions. When an exceptional event takes place the Government is expected to provide a solution or at the very least to somehow facilitate a compensation scheme for the victims. The case study of the Vie d'Or litigation and settlement offers an insider view of how mass disputes are dealt with in a civil law jurisdiction in Europe.
The Rise and Fall of Vie d'Or
Vie d'Or was founded in 1985 by its two directors who combined their expertise in the banking and insurance sector to establish what in their view was an insurance company built on an innovative business model able to produce innovative insurance products. They developed a low priced life insurance in which also Merrill Lynch participated. The new product became very popular among mid and small size businesses entrepreneurs and independent contractors. Although relatively wealthy, this group is vulnerable since it has to provide for its own social benefits. A low priced life insurance product was therefore very attractive and initially the Vie d'Or life insurance was a huge success.
The established insurance companies followed critically the sudden growth and popularity of Vie d'Or. They believed that a life insurance product could not be offered at such a low price and distrusted the company and its founders. The Netherlands is a small country with a "clubby" business culture. Business partners and competitors tend to know each other well. Vie d'Or was not a member of the Verbond van Verzekeraars, which is the Dutch Association of Insurers: a powerful lobby organization1 with self regulatory powers, representing the interests of private insurance companies operating in the Netherlands. The Association's members represent more than 95% of the Dutch insurance market expressed in terms of gross premium income. Moreover, the Association of Insurers is often consulted by the Government and regulators on industry related issues and legislation.
There were signals from the market that the Vie d'Or story was "too good to be true". It was suggested that the Insurers Regulator should initiate investigations into Vie d'Or's product, administration and funding model. Initially the warning signals of the market remained fruitless, but when also Vie d'Or policy holders started complaining the Insurance Regulator undertook action and in October 1993 it replaced the CEO of Vie d'Or. However, that could not prevent the bankruptcy of the company a few months later. The life insurance policies of Vie d'Or were taken over by another insurance company in August 1994, but only at a substantial reduction of the coverage provided to the 11,000 policy holders.
The Netherlands doesn't have US style discovery rules so other types of proceedings had to be used in a creative manner to establish the facts that led to the collapse of Vie d'Or. There was clearly a mismanagement issue2: Vie d'Or couldn't handle the success of its product and adequately process the administration of its many new clients. Furthermore, it relied on a funding model that turned out to be inadequate. The remuneration of the intermediaries was too high, whereas the level of company reserves was too low. The solvency of the company was dependent on uncertain future profits. The products were indeed aggressively priced and promised too much. Also, one of the Directors of the company had used company funds to finance other, risky, private ventures.3 The balance sheets of the company and its annual financial statements did not reveal the true financial situation of Vie d'Or4 and the question was whether the Insurers Regulator shouldn't have identified those omissions at an earlier stage, especially considering the early signals from the market.
One of the respondents observed that if a small insurer like Vie d'Or would encounter financial problems, it would normally have been "rescued" by one or more of the members of the Association of Insurers and the issues would then be sorted out within the sector. The policy holders of the troubled insurance company would thus not suffer any (substantial) damages. The Association of Insurers would prefer to not let a (life) insurer go bankrupt, because that would damage the image of the industry and might lead to unwelcome regulatory interference. Indeed, the Vie d'Or affair eventually resulted in increased regulation of the insurance business. Another respondent commented that had the insurance sector known beforehand how Vie d'Or would have evolved, it might have facilitated a solution for the policy holders.
A few explanations emerged from the interviews about why Vie d'Or was not "rescued" by the industry members. According to some, at that time the sector didn't consider Vie d'Or as a joint problem of the existing insurance companies. Moreover, Vie d'Or was not a member of the Association of Insurers but an outsider. Vie d'Or was therefore viewed by the sector primarily as an issue for the Insurance Regulator, which however ignored the signals of the market with respect to Vie d'Or's business practices. It has also been suggested that the established industry members were not entirely unhappy with the collapse of such a competitor, which would confirm the risks involved in entrusting your money to an aggressive newcomer. Finally, someone observed that the dilemma of regulators always is that they "can never do good". The Insurers Regulator might have considered that the implementation of an innovative business model within a relatively "closed shop" as the insurance industry was an initiative that deserved a fair chance. It might also have had doubts about whether the warning signals from the market had merits or were aimed merely at eliminating an unconventional competitor . Whatever the motives of the insurance market, the Association of Insurers and the Insurers Regulator was, the result of their inaction was that 11,000 consumers were left behind with substantial damages and without a life insurance on which they were dependent. The matter drew the attention of politicians and in the summer of 1994 the Insurance Regulator incorporated the Vie d'Or Foundation (the Foundation) to protect the interests of the policy holders who suffered damages resulting from the bankruptcy of Vie d'Or.
The Vie d'Or Foundation
The Netherlands was one of the first European countries to introduce a collective action in April 1994, coincidently only shortly after Vie d'Or went bankrupt. In line with the collective redress tradition in many European countries only declaratory or injunctive relief is available and standing to act is granted only to non-profit organizations that meet certain criteria. The latter are relatively easy to meet, there is no separate certification stage,5 like in some other jurisdictions. The organization could be a foundation or an association, as opposed to a commercial entity or an individual, whose articles of association explicitly enable it to initiate collective actions for the collective protection of similarly situated individuals or companies whose rights are infringed. The organization could be a special purpose vehicle incorporated for the purpose of a specific litigation or an established public or private interest organization like Consumentenbond (the Dutch Consumer Association) or the Vereniging voor Effecten Bezitters: the Dutch Shareholders' Association.6
Consumentenbond did not get involved in the Vie d'Or matter, presumably because it has limited resources and has to prioritize. A special purpose vehicle had to be established to collectively protect the interests of the policy holders and that is why the Vie d'Or Foundation was incorporated by the Insurance Regulator. According to its articles of association a policy holder could not be a member of the Board of the Foundation and the Board members should be appointed by the Insurance Regulator. The Insurance Regulator also funded the initial expenses of the Foundation. Despite the criticism on the role it played in the bankruptcy of Vie d'Or, the Insurance Regulator wanted to make a statement that the matter was going to be dealt with not only vigorously, but also objectively. A more skeptical view on the decision of the Insurance Regulator to incorporate the Foundation and to appoint its Board members is that it wanted to have some influence on the investigations and follow on actions. The Insurance Regulator appointed accomplished, respected and well known individuals to sit on the Board of the Foundation. For example the chairman of the Board of the Foundation was the former chairman of the Board of Directors of ING Bank. Throughout the years he used his corporate connections, knowledge, experience and skills solely for the benefit of the policy holders, on a pro bono basis.
One of the first decisions of the Board after its appointment in August 1994 was to instruct a lawyer for the Foundation and an independent accountancy firm to investigate and collect facts about the cause of the bankruptcy, including the role of the Insurers Regulator. On the basis of the facts that were collected in the various fact finding proceedings that took place between 1994-19987 the Board decided to start the litigation in 1998 also against the Insurance Regulator that was not only the incorporator of the Foundation, but also its initial funder. The other defendants were the accountant of Vie d' Or, the actuary and the Dutch State.The State was sued because at the time that the Insurance Regulator was privatized, it was agreed that the insurance sector would provide the funds for any liability of the Insurance Regulator up to NLG 20 million, and that the State would indemnify the Insurance Regulator for any amount in excess thereof. If the massive claim of the Foundation against the Insurance Regulator would be awarded, the State would therefore be obliged to fund a substantial part of the damage award.
The Litigation and the Settlement
The litigation was designed as a collective action for a declaratory relief combined with eleven individual test cases to determine the calculation of damages in relevant subcategories of cases. The Foundation was anticipating that a favorable decision on liability in the collective action and on causation and damages in the individual test cases would facilitate a collective settlement and overall resolution of the matter.
Obviously the Foundation could argue that the directors and officers of Vie d'Or had failed to fulfill their contractual and fiduciary duties and obligations, but their personal assets were by far not sufficient to compensate the policy holders.8 The Foundation argued also that the Insurers Regulator performed a delegated State task, making the State liable if that task was not adequately performed. The court was also made aware of the fact that the State would have to cover for any liability of the Insurance Regulator in excess of NLG 20 million.
According to the Foundation the accountant and actuaries could be held liable because the balance sheets of the company and its annual financial statements did not reveal the true financial situation of Vie d'Or.9 The Foundation also claimed that the Insurers Regulator should have identified those omissions, especially considering the various early warnings and signals from the market. Although the Foundation obtained favorable court rulings before the District Court and the Court of Appeal in the Hague, the Dutch Supreme Court ruled in 2006 in a landmark decision that the Insurers Regulator enjoys a large margin of appreciation whether or not to make use of its discretionary investigative and enforcement powers. In a way the Supreme Court left the case open: it ruled in favor of the State and the Insurers Regulator that the Court of Appeal had applied an inadequate test to establish the civil liability of a regulator, but the case was remanded to another Court of Appeal to reconsider the facts with the application of the correct test. The "new" test was less strict and thus disadvantageous for the Foundation. The Supreme Court ruling on the liability test that was used for the accountant offered better chances for the Foundation, but its factual and legal position with respect to the actuary was more challenging. The actuary had been succeeded by another actuary three years before the demise of Vie d'Or and the Foundation had decided not to sue the successor. The actuary denied any causal link between his conduct and the damages suffered by policy holders three years later. The Supreme Court quashed the decision of the Court of Appeal that there had been causation, and also held that a disciplinary offence established by a disciplinary tribunal would not necessarily constitute a tort against the policyholders.
The Foundation was aware that the Supreme Court decision to remand the case could result in many more years of litigation, and that it was uncertain whether the defendants would be held liable under the new standards set by the Supreme Court. 10 Twelve years after the bankruptcy of Vie d'Or and several millions spent on fact gathering, expert opinions and the litigation the former policy holders had no expectation that compensation would be awarded anytime soon. Meanwhile 600 of the former policy holders had died in the course of the proceedings. The prospect that many more of them would pass away before the end of the litigation track, made it clear to the Foundation that another resolution had to be found and added substantial moral weight to their request to the defendants to settle.
Political lobby attempts in favor of a final settlement were also initiated, but in July 2007 the official position of the State was that this was not a scenario the State would consider. It should be noted that the Netherlands has a history of political interference with the resolution of major infringements or mass disputes.11 When the then Minister of Finance Mr. Wouter Bos answered questions before Parliament about whether he was considering a final resolution of the matter, he answered12 that there was no legal reason to settle, whereas a settlement would place a burden on the industry members and create a precedent at the disadvantage of the tax payer.13 Earlier settlement attempts of the Foundation failed also because of this position of the State and the Insurers Regulator, even though the accountant and actuary were willing to talk. The standard applicable for the determination of failing regulatory oversight was a matter of principle and required a Supreme Court ruling. One of the respondents shared that it was clear from the beginning of the litigation that the State would insist on obtaining the latter.14 The reason for that was that if the ruling of the Supreme Court on liability for failing regulatory oversight would be disadvantageous for the Regulator and ultimately the State, the timing would have been favorable to "repair" or modify the privatization agreement with respect to contingent liabilities (see above) so the State would not bear the financial burden for failing regulatory oversight in the future.15
Eventually the partial clarity provided by the Supreme Court ruling, political pressure on the State and Insurers Regulator and other external factors positively contributed to a change in the attitude of all parties involved. The Association of Insurers seems to have played a key role in that process. Early 2008 the Association of Insurers announced that although not a party in the litigation, it was willing to voluntarily contribute EUR 6,5 million to a settlement fund. The Association's offer had a strategic background. In the past 14 years the regulatory landscape had changed and the insurance sector was facing not only stricter national and European regulation, but also negative press coverage related to the high costs of (life) insurance products, the so called unit linked insurances. The Association anticipated that if it would present the offer as a gesture that would contribute to a more positive image of the industry. Also, if the Insurers Regulator would be held liable, the bill would be presented to the industry anyway, given the arrangements made with respect to the costs of the Insurers Regulator and contingent liabilities for failing regulatory oversight. The offer of the Association seems to have been the last push the parties needed to reach a final resolution.
In May 2008 it was officially announced that parties had reached a final settlement agreement creating a settlement fund of EUR 45 million.16 The parties who contributed to this fund in addition to the Association of Insurers were the Foundation,17 the accountant and the actuary. Although the State and the Insurers Regulator formally did not contribute to the settlement fund, the Insurers Regulator facilitated the settlement by retroactively volunteering to cover all costs and expenses the Foundation had incurred over the past 15 years (EUR 8,5 million) so that the previously collected settlement funds (see above) and the settlement fund of EUR 45 million could be used entirely for the claims of the policy holders.18 The picture that emerged from the interviews is that various parties for varying reasons were willing to contribute to a resolution of the matter at last, but at their terms and conditions. Moreover there was the willingness needed to facilitate each others' wishes and preferences. Each party obtained what it considered important. The contribution of the Association of Insurers generated the anticipated favorable media coverage and a collective settlement declared binding on an opt-out basis would cap the exposure of the Insurers Regulator, the State and the industry. The wish of some of the defendants to keep the amount of the individual contributions to the fund confidential was respected by all parties involved and the financial contribution of the Insurers Regulator and the State received a special treatment. It was named and presented differently to emphasize that there was no State liability for failing regulatory oversight and no legal reason to contribute to the settlement fund. Last but not least, the Foundation was at that point less concerned about the labels parties put on their contributions but understandably focused on the aggregate amount that would be generated and become available for the policy holders. This resulted in a compensation of about 50% of the damages of the policy holders. Although the interest on the claims was not compensated, the settlement was greeted with relief by the former policy holders.
The parties to the settlement filed a petition to the Amsterdam Court of Appeal under the Dutch Act on Collective Settlements, a mechanism introduced in 2005 that was inspired by the US settlement only-practice.19 No objectors appeared and the settlement agreement was approved and declared binding by the Amsterdam Court of Appeal in April 2009. There were no opt outs. The fund was distributed and in 2012 the Foundation was dissolved. 16 years after the bankruptcy of Vie d'Or the matter was finally resolved.
Lessons Learned
The Vie d'Or case study reveals how political culture and the dynamics within an industry can play a significant role in the emergence of a mass dispute, its development and in its ultimate resolution. The Netherlands has the kind of business culture that could have prevented the collapse of Vie d'Or, if the life insurance community had realized at an earlier stage that the financial problems of the company were not only an issue for the Insurance Regulator. The Vie d'Or case study demonstrates that the collapse of a financial institution in the Netherlands is not an isolated phenomenon, but has significant consequences for the business practice of all industry players, because it contributes to an increased level of regulation with long term effects.20
Europeans tend to rely on the protection of the State and regulators. However, these key players do not only have regulatory powers, but also the power to negotiate the terms of privatization of regulatory oversight, the power to set new rules and even to apply those rules in existing disputes. Rules that make it easier to present the bill of a failing regulatory oversight to parties and industry players who cannot be blamed for the mistakes or unfortunate judgment calls of other companies, individuals or regulators. Companies and multinationals facing mass disputes in Europe should be aware of the significant role States, regulators and politics may play in the resolution of mass disputes. This broader context makes the outcome of such cases unpredictable, and reduces the reliance a company can place on the legal realities present at the start of the conflict. For a company an unpredictable scenario is the worst case scenario.
This requires from companies facing a mass dispute in Europe and their external advisors a broader view and a proactive attitude that departs from the traditional way of thinking about the handling of mass disputes. Early identification of the relevant stakeholders, potential alliances and the political implications of the matter, could be very complex, but are essential and equally important as the development and implementation of a clever defense litigation strategy. Ironically, in Vie d'Or the industry would have preferred an early rather than a late collective settlement, but that would have required a proactive attitude and the willingness to pay long before a final court decision on the merits
Vie d'Or also demonstrates the importance of the availability of a device like the Dutch Act on collective settlements that allows parties to close the books and bring a conflict to a well-orchestrated end.21
Footnotes
1 The Association is an independent organization managed and financed by its members. See also www.verzekeraars.nl/en/Paginas/Home.aspx
2 Mismanagement was established in the inquiry proceedings into the affairs of the company and its management at the Enterprise Chamber of the Court of Appeal in Amsterdam. Those are special Dutch proceedings regarding a company's business policy often used to collect facts to substantiate damage claims in subsequent proceedings. M. van Hooijdonk, 2009. The use of the enquiry proceedings in Vie d'Or was not so easy because of statutory restrictions that only shareholders of the company have standing to file such a request. Here, as an exception to this rule the Public Prosecutor filed the request because it concerned a matter of public order and policy.
3 The Criminal Prosecutor started criminal investigations against the Directors of the company. Although this would not result in convictions, it did produce additional facts in support of the civil claim of the policy holders.
4 This finding was made in a report of accountancy firm KPMG that had been commissioned by the Foundation established to protect the interest of the (former) policy holders of Vie d' Or, and confirmed in subsequent disciplinary proceedings against the accountants and the actuary.
5 Article 3:305a of the Dutch Civil Code stipulates as follows: "1. A foundation or association with full legal capacity can institute an action intended to protect similar interests of other persons to the extent that its articles promote such interests. 2. A legal person referred to in paragraph 1 shall have no locus standi if, in the given circumstances, it has not made a sufficient attempt to achieve the objective of the action through consultations with the defendant. A two-week period from receipt by the defendant of a request for consultations giving particulars of the claim shall in any event suffice for such purpose.". Before an action can be filed, the organization is required by law to attempt to obtain the desired relief by means of a negotiated out-of-court settlement (see Kamerstukken II 1991/92 (Parliamentary Proceedings Second Chamber 1991/92) 22 486, no. 3 (Explanatory Memorandum)).
6 For a detailed discussion of standing in the Dutch collective actions, see I.N. Tzankova, Funding of Mass Disputes: Lessons from the Netherlands, George Mason Journal of Law, Economics & Policy, vol. 8,
7 See footnotes 2-4.
8 There was no D&O liability insurance.
9 This finding was established in a report of KPMG and in subsequent disciplinary proceedings against the accountants and the actuaries.
10 HR 13 October 2006, LJN AW2080.
11 Dexia and DES are examples of other major cases that were settled after political interference and under political pressure and recently the nationalization of SNS Bank. See I.N. Tzankova, Funding of Mass Disputes: Lessons from the Netherlands, supra note 7, 578, for discussion about the role of the politic in the resolution of the Dexia case.
13 See above the privatizing arrangement between the State and the insurance industry with respect to the liability of the Insurers Regulator.
14 Since 2012 this would no longer be necessary. The Dutch Supreme Court could be requested to rule on questions of law. For a description and a discussion of the prejudicial opinion mechanism, see B. de Jong, Prejudiciële vragen aan de Hoge Raad bij massavorderingen, Ondernemingsrecht 2009, no. 106 and I.N. Tzankova & D. Ozmis, De evaluatie van de WCAM: de kernthema's uitgelicht, Tijdschrift voor Civiele Rechtspleging, no. 2, 37-38.
15 In meanwhile such legislation has been enacted with respect to the Financial markets regulators: AFM and DNB As from 1st July 2012 article 1:25d of the Dutch Financial Supervision Act (Wet financieel toezicht) stipulates that the AFM and DNB cannot be held liable for damages resulting from improper supervision, unless the improper supervision is attributable to intent or gross negligence.
16 www.ed.nl/economie/3196108/Eindelijk-schikking-zaakVie-dOr.ece.
17 Some reserved funds left from the bankruptcy of Vie d'Or, that could be "set free" only in the case of a final resolution.
18 The former policy holders would receive about 50% of the nominal value of their claims, but no interest). Parties agreed further that defendants would settle without admitting liability, that the exact contributions of the various parties to the settlement fund would remain confidential, that they would file a petition to declare the settlement agreement binding and that the minimum participation rate of the policy holders should be 90%. The take up rate was ultimately 99,8%.
19 For a description and discussion of the Dutch collective settlement regime, see generally I.N. Tzankova, Funding of Mass Disputes: Lessons from the Netherlands, supra note 7, 561-669.
20 The bankruptcy of Vie d'Or led to the introduction of "Opvangregeling Leven": a measure that was established by the industry aiming to prevent the bankruptcy of a life insurance company. In essence the Opvangregeling Leven is a fund that can make EUR 100 million available to each life insurer that experience difficulties. The aim of the fund is to make the life insurer healthy again and prevent its bankruptcy. If a bankruptcy can't be avoided, the policy holders become preferent creditors. See for more info www.dnb.nl or www.verzekeraars.nl.
21 The case study was conducted in collaboration with Prof. Dr. Deborah R. Hensler, Stanford University and builds on interviews with eight individuals representing the interests of various stakeholders in the Vie d'Or litigation.
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