Executive Summary:
- When faced with a recurring harmful event, undertakings should take out insurance before they can claim compensation for damage they have suffered.
- The availability of compensation should not disincentivise undertakings from reducing their exposure to harmful events.
Table of Contents:
- Introduction
- Background
- Frequent events and availability of insurance
- Unavailability of insurance for certain types of production
- Uniform application of a regulation
Introduction
A strong finding in the empirical literature on state aid is that the willingness of public authorities to grant state aid leads undertakings to take more risk. Of course, the raison d’être of state aid is to remedy market failure one of whose causes is asymmetric information that disincentivises investment. But there is a big difference between being exposed to more risk by not taking prudent risk-management measures in the expectation that public authorities will offer a helping hand in case things go wrong and making a risky investment in a new technology. The former avoids expenditure that can reduce risk while the latter incurs expenditure and assumes more risk in order to increase productive capacity.
In its judgment in joined cases C‑52/25 Binanrier and C‑53/25 Beaudeluc, the Court of Justice of the EU [CJEU] had to provide an answer to the question whether undertakings that had not taken out insurance were still entitled to compensation for damage they had suffered.1 The two cases concerned the interpretation of Article 25(9) of Commission Regulation 702/2014, the 2014 agricultural block exemption regulation [ABER] that was replaced in 2022 by the current ABER [Regulation 2022/2472].
A Belgian court submitted a request for a preliminary ruling in conjunction to legal proceedings between, first, RZ and GT (Case C-52/25) and, second, AX and UI (Case C-53/25) and the Wallon Region of Belgium. The proceedings concerned a dispute with regard to compensation for damage suffered by RZ, GT, AX and UI as a result of drought. RZ, GT, AX and UI were farmers in Wallonia.
Background
ABER allows Member States to compensate farmers for the damage they suffer as a result of natural disasters and adverse climatic events that, without being catastrophic, are serious enough so that they can be assimilated into natural disasters. Adverse climatic events and animal disease epidemics are in a sense “normal” risk for farmers. Therefore, like in other sectors exposed to recurring adverse events, farmers ought to take out insurance. However, insurance cover creates “moral hazard”: if the damage is compensated then insured persons or companies have a weaker incentive to take precautionary measures, especially when they are costly and require effort. Therefore, in order to incentivise farmers to show due diligence, manage risk and take out insurance, ABER allows full state compensation only of farmers who can demonstrate that they have undertaken reasonable efforts to minimise risks.
Therefore, Article 25 of the 2014 ABER, on the one hand, permitted compensation, while, on the other, limited the amount of compensation by 50% “(25)(9) unless it is granted to beneficiaries who have taken out insurance covering at least 50% of their average annual production or production-related income and the statistically most frequent climatic risks in the Member State or region concerned for which insurance coverage is provided.” This limitation is still in force as an identical provision exists in Article 25(10) of the 2022 ABER.
Article 25 in its previous and current version does not require farmers to take out insurance against any conceivable adverse event, but only insurance against the most frequently recurring adverse events. Until recently drought was not a frequent event in northern Europe.
The applicants, whose agricultural holdings consisted of pastures and grassland intended for feeding livestock, suffered damage during periods of drought between August 2016 and June 2017. The Walloon authorities recognised the drought as an agricultural disaster enabling the applicants to seek compensation.
However, the relevant authority decided to offer compensation at an amount equivalent to 50% of what the applicants had claimed on the ground that they had not taken out insurance covering at least 50% of their production against climatic risks.
The applicants contested that decision arguing that the insurance available in Belgium did not offer the possibility of covering agricultural holdings against the risk of drought.
Therefore, the referring Belgian court asked the CJEU to interpret Article 25 of the 2014 ABER and clarify whether the full amount ought to be paid in case it was impossible to take out insurance cover against adverse climatic events.
Frequent events and availability of insurance
The referring court asked, first, whether Article 25(9) of the 2014 ABER applied to situations where the event was not the statistically most frequent climatic event and, second, it was not an insurable risk in the Member State concerned.
The CJEU recalled that “(19) in interpreting a provision of EU law, it is necessary to consider not only its wording, but also the context in which it occurs and the objectives pursued by the rules of which it is part”.
“(20) As regards the wording of Article 25(9) of Regulation No 702/2014, that provision states that the aid granted under that article is, in principle, to be reduced by 50% unless the beneficiary has taken out insurance covering ‘at least 50% of their average annual production or production-related income’ and, with respect to the definition of the risks covered, ‘the statistically most frequent climatic risks in the Member State or region concerned …’”.
“(21) That provision thus sets out the two cumulative conditions which the insurance taken out by the beneficiary of the aid must satisfy if that aid is not to be reduced by 50%. No reference is made in that provision to the climatic risk which actually caused the damage giving rise to the grant of aid, or to the taking out of insurance specifically covering that risk. It follows, therefore, from a literal interpretation of Article 25(9) of Regulation No 702/2014 that neither the nature of the climatic risk which actually gives rise to damage for which compensation may be awarded, nor whether that particular risk, in the present case drought, was actually insurable, are relevant when determining whether or not the aid concerned must be reduced by 50% under that provision. The only verification which the competent national authorities are required to carry out in that context is to check whether or not the potential beneficiary of the aid has taken out insurance meeting the abovementioned conditions, in particular to ensure that he or she has taken out insurance against a risk that is among the statistically most frequent climatic risks in the Member State or region concerned.”
“(22) That interpretation is entirely consistent with the objective pursued by Article 25(9) of Regulation No 702/2014.”
“(23) As is apparent from recital 54 of that regulation, aid for making good losses caused by adverse climatic events which can be assimilated to natural disasters is in line with good risk and crisis management and is intended to help SMEs facing particular difficulties despite having undertaken reasonable efforts to minimise the risks, including climatic risks, to which primary agricultural production is exposed. It also follows from recitals 10 and 42 of that regulation that such aid should have a clear incentive effect, while enhancing the competitiveness and viability of the entire EU agricultural sector.”
“(24) The objective of the reduction provided for in Article 25(9) of that regulation is thus to encourage SMEs active in primary agricultural production to take out insurance covering the climatic risks to which they are statistically most exposed. By making the grant of the full amount of the aid subject to the condition that the potential beneficiaries of the aid have taken out insurance capable of minimising the financial consequences of foreseeable climatic risks on their agricultural activity, the EU legislature sought to reduce the economic dependence of the SMEs concerned on the agricultural aid granted under compensation schemes for damage caused by adverse climatic events which can be assimilated to a natural disaster, while limiting, overall, the total amount of that aid.”
“(25) Reducing the amount of aid granted for damage caused by a climatic phenomenon by 50%, pursuant to Article 25(9) of Regulation No 702/2014, in a situation where, first, that phenomenon is not among the statistically most frequent climatic risks in the Member State or region concerned and, secondly, is not insurable in that Member State or region, does not appear to be contrary to that objective. On the contrary, if it were to be considered that, in such a situation, the aid in question could not be reduced by 50%, that would risk diminishing the overall incentive effect across the entire primary agricultural sector in favour of insurance cover that is as comprehensive as possible.”
I find it difficult to understand the reasoning of the CJEU expressed in paragraph 25 above. Since Article 25(9) requires only cover for the statistically most frequent event, farmers would not obtain cover for events that are not statistically frequent. Moreover, if the event is not insurable, then no one can obtain cover. So, such a situation is irrelevant for the application of Article 25(9). I also do not understand why non-reduction by 50% would diminish the incentive effect and would be contrary to the objective of Article 25(9). Why should farmers be incentivised to obtain cover for infrequent events and especially for events for which no insurance is available. It seems illogical.
The CJEU concluded that “(26) the answer to the first and second questions is that Article 25(9) of Regulation No 702/2014 must be interpreted as meaning that aid intended to compensate an SME active in primary agricultural production for damage caused by an adverse climatic event which can be assimilated to a natural disaster must be reduced by 50% where that SME is not insured against the statistically most frequent climatic risks in the Member State or the region concerned, in a situation where the aid concerned is intended to compensate for damage caused by such a climatic event which, first, is not one of those risks and, secondly, does not constitute an insurable risk in that Member State or in the region concerned.”
Unavailability of insurance for certain types of production
Next, the referring court asked whether aid had to be reduced by 50% where the farmer was not able to take out insurance satisfying the conditions of Article 25 for the type of production in which it was engaged, having regard to the insurance available on the relevant market. The applicants were producers of animal feed from pastures and grassland.
The CJEU replied that “(28) it follows from paragraph 21 above that Article 25(9) of Regulation No 702/2014 merely sets out the two conditions which must be satisfied by the insurance taken out by the beneficiary of aid granted under that article if that aid is not to be reduced by 50%, in accordance with that provision.”
“(29) Thus, the wording of Article 25(9) of Regulation No 702/2014 does not, in itself, make it possible to determine whether, before reducing aid in accordance with that provision, the competent national authorities are required to verify whether, having regard to the insurance available on the relevant insurance market, the beneficiary of the aid was in fact able to take out insurance satisfying the conditions laid down in that provision for the type of production in which it is engaged. In particular, that wording does not lead to the unequivocal conclusion that the reduction of the aid by 50%, provided for as a general rule, is not intended to apply where the beneficiary does not have access to such insurance. In those circumstances, the answer to the third question requires a teleological interpretation of Article 25(9) of Regulation No 702/2014.”
Therefore, the CJEU proceeded to interpret Article 25(9) in the context of the 2014 ABER and its objectives. It recalled that “(30) as is apparent from paragraph 24 above, the objective of the reduction provided for in that provision is to encourage SMEs active in primary agricultural production to take out insurance covering the climatic risks to which they are statistically most exposed, in order to reduce their economic dependence on agricultural aid granted under compensation schemes for damage caused by adverse climatic events which can be assimilated to a natural disaster.”
Next, the CJEU repeated what it had concluded earlier. “(31) In the context of good risk and crisis management, taking out insurance satisfying the conditions laid down in Article 25(9) of Regulation No 702/2014 forms part of the reasonable efforts which may legitimately be required of SMEs active in the primary agricultural sector in order to minimise the financial consequences of foreseeable climatic risks on their activity. Where the beneficiary of aid has not made such efforts and has failed to take out adequate insurance for its holding, the substantial reduction in aid provided for in Article 25(9) of that regulation is justified as a direct consequence of that conduct.”
Then, it added an important nuance. “(32) However, …, such a consequence cannot be imposed in the exceptional case where insurance meeting the requirements of Article 25(9) of Regulation No 702/2014 is unavailable on the relevant market. In that case, the beneficiary of the aid cannot be criticised for failing to make all reasonable efforts to minimise the financial consequences of foreseeable climatic risks on its activity by taking out such insurance. That beneficiary was not in a position to reduce, on its own initiative, its economic dependence on the compensation schemes, with the result that the incentive objective underlying the reduction of the aid becomes devoid of purpose. That conclusion is all the more compelling since the beneficiary of the aid remains exposed to the full financial consequences of the damage which it has suffered and for which the aid it may claim is intended to compensate.”
The CJEU concluded that “(33) aid granted under Article 25 of Regulation No 702/2014 should not be reduced in accordance with paragraph 9 of that article where it is established that, in the light of the offer available on the relevant insurance market, the beneficiary of the aid was not able to take out insurance satisfying the conditions laid down by that provision for the type of production in which it is engaged. It is for the beneficiary of the aid, where applicable, to establish the factual and legal circumstances demonstrating the existence of such a situation.”
Uniform application of a regulation
Regulations must be uniformly interpreted and implemented throughout the EU. So, the CJEU also explained why its interpretation was not contrary to the principle of uniformity.
“(34) In that regard, it must be stated, first, that that interpretation of Article 25(9) of Regulation No 702/2014 is not contrary to the requirement for a uniform interpretation of that provision. …, that interpretation ensures that the reduction of aid applied under that provision is done on the basis of an objective criterion and in accordance with the requirement of good risk and crisis management.”
“(35) Secondly, there is nothing to suggest that that interpretation would be liable to give rise to distortions of competition in the European Union’s primary agricultural sector. On the contrary, the fact that aid granted under Article 25 of Regulation No 702/2014 does not have to be reduced in accordance with paragraph 9 of that article in a situation where the beneficiary of that aid was unable to take out insurance satisfying the conditions laid down in that paragraph is liable to remedy the disadvantages, for SMEs active in that sector, resulting from the absence of a European insurance market capable of offering complete and uniform insurance services in each Member State.”
“(36) In the present case, …, in Belgium, the most frequent climatic risk is hail and that, at the time of the events which gave rise to the dispute in the main proceedings, insurance cover against that risk was indeed available on the Belgian insurance market. The applicants in the main proceedings submit, however, that, in view of the particular features of their holdings, characterised by permanent and temporary pastures and by grassland intended for feeding livestock, it was impossible for them to take out insurance against hail covering at least 50% of their average annual production or production-related income.”
The argument of the applicants is puzzling, but may be true. Even though insurance against hail was available in Belgium, they could not take out cover against hail. Normally hail is most harmful to fruit trees during their blossoming period. Grass does not appear to be affected.
Therefore, the CJEU left it to “(37) the referring court to ascertain whether, in the light of all the information available to it, it can be established that, in view of the insurance available on the relevant insurance market, the applicants in the main proceedings were indeed unable to take out insurance satisfying the conditions laid down in Article 25(9) of Regulation No 702/2014.”
The CJEU concluded that “(38) the answer to the third question is that Article 25(9) of Regulation No 702/2014 must be interpreted as meaning that aid intended to compensate an SME active in primary agricultural production for damage caused by an adverse climatic event which can be assimilated to a natural disaster must not be reduced by 50% where that SME was not able to take out insurance satisfying the conditions of that provision for the type of production in which it is engaged, having regard to the insurance available on the relevant insurance market.”
