The Motor Insurance Directive and Compensation Funds: Amendments to Maltese law and European developments

Introduction

In 2021, Directive 2009/103/EC was amended by Directive (EU) 2021/2118 (the ‘Amending Directive’), (both instruments collectively referred to hereinafter as the ‘Motor Insurance Directive’ or the ‘Directive‘). This prompted Malta to amend its insurance regulatory framework, to ensure compliance with the Directive.

Apart from providing an overview of the Motor Insurance Directive, Compensation Funds, and the corresponding amendments under Maltese Law, this Law Report will also provide insight into broader European developments involving the Motor Insurance Directive. In particular, this Law Report reviews the recent judgement in Case C-370/24, which offers a significant interpretation of the Motor Insurance Directive, and considers the stance of the European Insurance and Occupational Pensions Authority (“EIOPA”), which has shown a growing interest in this Directive.

The Motor Insurance Directive and amendments thereto

The Motor Insurance Directive relates to insurance against civil liability in respect of the use of motor vehicles, and the enforcement of the obligation to insure against such liability. This Directive regulates compulsory insurance of vehicles (as defined in the Directive), obliging Member States to ensure that civil liability in respect of the use of a vehicle normally based in its territory is covered by insurance. The Directive establishes the minimum amounts of insurance in this regard, and obliges Member States to establish a procedure for settlement of claims arising from any accident caused by a vehicle covered by insurance described above. The Motor Insurance Directive also mandates Member States to establish dedicated body or bodies (“Compensation Fund/s”), responsible for providing compensation to injured parties, in certain scenarios outlined within the Directive. For instance, such Compensation Funds are required to provide compensation for damage to property or personal injury caused by a vehicle, in the case where the insurance obligation described above has not been satisfied.

The Motor Insurance Directive also addresses the enforceability of exclusion clauses in motor insurance policies, and the role of the Compensation Fund in terms of stolen vehicles. The Directive obliges Member States to ensure that any statutory or contractual provision excluding insurance coverage, on the grounds that the driver lacked (ii) authorisation, (ii) a valid licence, or (iii) compliance with vehicle safety standards, shall be considered void, with respect to third-party victims of road traffic accidents. However, in the case where the driver lacked authorisation, an exception exists where the third-party voluntarily entered the vehicle which caused injury, and the insurer can prove that such person knew the vehicle was stolen. The Directive also allows Member States to designate the respective Compensation Fund to provide compensation, instead of the insurer, where the vehicle involved was stolen or obtained by violence, subject to certain conditions as set out in the Directive.

While the Amending Directive introduced a range of reforms, this Law Report focuses on the additional obligations imposed on Member States in relation to Compensation Funds. The Amending Directive obliges every Member State to set up an additional Compensation Fund/s to provide compensation to injured parties, in the event of insolvency of the insurance undertaking of the vehicle. Insolvency, for the purposes of this Directive, arises from the moment the insurance undertaking becomes subject to bankruptcy or winding-up proceedings, as defined under Directive 2009/138/EC (the Solvency II Directive). The Compensation Fund must provide compensation to injured parties who are resident within the territory of the respective Member State, for damage resulting from accidents occurring:

1. in their Member State of residence; or
2. in another Member State.

The Motor Insurance Directive now also provides that if the insurance undertaking’s home Member State is different from the Member State where the injured party resides, the Compensation Fund of the injured party’s Member State, which paid out the compensation, has the right to recover that amount from the Compensation Fund of the insurance undertaking’s home Member State.

Amendments to Maltese law

Following the amendments made to the Motor Insurance Directive, the following changes occurred in Maltese insurance legislation, as outlined in the MFSA’s Circular dated 16th April 2025:

1. Revisions to the Insurance Business Act (Chapter 403 of the Laws of Malta);
2. Revisions to the Insurance Business (Reorganisation and Winding up of Insurance Undertakings Regulations) (Subsidiary Legislation 403.15);
3. The promulgation of the Insurance Business (Protection and Compensation Fund) Regulations (Subsidiary Legislation 403.25) (the “New PCF Regulations”, and the repealing of the Protection and Compensation Fund Regulations (Subsidiary Legislation 403.13) (the “Repealed PCF Regulations”); and
4. Revisions to Chapter 1 of Part A of the Insurance Rules.

The changes to Maltese legislation mentioned above occurred specifically to give effect to the changes introduced by the Amending Directive. In Malta, a Compensation Fund, termed the Protection and Compensation Fund (“PCF”), already existed prior to the Amending Directive. The PCF under the repealed PCF Regulations already covered claims made by injured parties residing in Malta, where the insurance undertaking was licensed in Malta, and had become insolvent. However, under the Repealed PCF Regulations, only insurers with their head office in Malta, underwriting motor insurance business in Malta were obliged to contribute to the PCF.

Therefore, to align with the Amending Directive, the scope of the PCF was broadened. Maltese legislation has been revamped, as outlined above, to require insurance undertakings who (i) have their office in Malta and (ii) underwrite third party motor insurance business in a Member State outside of Malta to also contribute to the PCF. The Insurance Business Act in fact now provides that insurance undertakings which carry out motor vehicle liability insurance from Malta shall contribute to the PCF in such amounts as may be prescribed by the New PCF Regulations. Under the New PCF Regulations, ‘from Malta’ is defined as “carrying on of motor vehicle liability insurance business by an insurer in another Member State outside of Malta, and excludes any motor vehicle liability insurance business carried on exclusively in Malta.”

Interpretation of the Motor Insurance Directive before the CJEU: Case C-370/24

Apart from prompting legislative amendments as described above, the Motor Insurance Directive has also attracted renewed attention following the recent judgment delivered by the Court of Justice of the European Union (“CJEU”), in Case C-370/24. The judgment, handed down on 30th April 2025 by the Ninth Chamber of the CJEU, offers an important clarification on the interpretation of the Motor Insurance Directive, particularly in the context of compensation claims involving stolen vehicles.

The case originated from proceedings in Italy between AT, who was a passenger in a vehicle involved in a road traffic accident, and CT, the undertaking designated by the Italian Compensation Fund. AT was invited to a car, as a passenger, and during the journey, a road traffic accident occurred. In their report, the local police officers found that the car had been stolen. AT subsequently brought an action before the Tribunale ordinario di Lodi, the referring court, to seek compensation for harm suffered as a result of the accident. The Italian court decided to stay proceedings and refer the matter to the CJEU, for a preliminary ruling on the interpretation of certain provisions of the Motor Insurance Directive.

The CJEU held that for a Compensation Fund to discharge itself from its obligation to pay compensation in the event of a road traffic accident, such Compensation Fund must prove that the injured party who voluntarily entered the vehicle which caused the damage or injury knew that it was stolen. Moreover, the CJEU held that the Motor Insurance Directive precludes national case-law which interprets national legislation as meaning that, in such a situation, it is for the injured party to prove that he or she did not know that that vehicle had been stolen, in order to obtain compensation for the harm he or she suffered.

EIOPA’s stance on the Motor Insurance Directive

The Motor Insurance Directive has also recently attracted the attention of the EIOPA. On 19 June 2025, EIOPA published its response to the European Commission’s April 2025 consultation, on integrating EU capital markets under its Savings and Investments Union initiative. While EIOPA acknowledged that the existing supervisory framework has played a key role in developing the single market, it noted that further improvements are required to meet current and emerging challenges.

One area identified for improvement in this regard was the Motor Insurance Directive. EIOPA expressed concern that, since the Directive currently falls outside its mandate, the Authority lacks the powers necessary to effectively address related issues, therefore limiting its ability to protect policyholders. As a result, EIOPA has proposed that the Motor Insurance Directive be brought within the scope of its mandate.

Disclaimer: Ganado Advocates is responsible for contributing to this law report but was not in any way involved as legal advisor for the parties in the judgement being covered in this law report. This article was first published in ‘The Malta Independent’ on 02/07/2025.