It now has been more than seven years that the new Insurance Contract Act 2008 (“VVG 2008”) took effect in Germany and changed some of the basic underlying principles of insurance law. One of those principles concerns the sanction side of the breach of insured’s contractual duties (“Sanction Rues”) and it has not been fully adopted in contracts today even though implementing the Sanction Rules is in the best interest of insurers.
Investigating violations of contractual duties can be of paramount importance during loss settlement. Yet, it is only when the sanctions regime agreed in the insurance contract complies with the changed Sanction Rules that insurers can limit their liability and protect themselves in face of dependency on insured’s disclosure of information. Where insurers have not taken action to comply with the new law and failed to amend their terms and conditions/policies, the new Sanction Rules continuously and unfavorably effect reimbursements.
Insurance contracts (can) contain a number of such duties the insured must respect in order to obtain/maintain insurance cover. It can be contractual agreements like compliance with property insurers’ fire prevention guidelines or the more general duty to comply with fire protection requirements in a building and/or operating permit. They help managing a particular risk and reduce the probability of a (major) loss.
Other duties guide the insured through handling a loss. Those duties include, but are not limited to, the duty of prompt loss notification as well as the duty to disclose all loss-relevant information the insurer requests. In particular the latter is found in all kind of insurance products irrespective of the class of insurance (i.e. property, liability, health insurance).
Yet, agreeing such a duty is only the first step. It is without effect unless accompanied by an agreement about the sanction regime. Even though the law provides Sanction Rules the rules are only applicable if a valid sanction regime is agreed in the policy.
Prior to 2008 the law already requested insurers to agree sanctions in his policies but the sanctions were broader. Insurer only carried the onus for the facts establishing the breach of contract (objective side). Once those facts were established, it was up to the insured to prove that he neither acted deliberately nor recklessly (objective side). Financially, that proof was an all-or-nothing-issue. If the insured could not dispose of the reproach of a deliberate or reckless breach of duty, he could not claim reimbursement.
Change of Law in 2008
Under the VVG 2008, the Santion Rules lay out the basis for a different regime.
Insurer carries the burden of proof for a deliberate breach of duty (objective and subjective side). It is only if insurer can proof both sides that he is free of liability.
If insurer only finds facts for the objective side but does not succeed to proof the breach to be a deliberate act, insured has the onus to prove that he didn’t act reckless (as opposed to simply negligent) in return. Recklessness entitles insurer to reduce the cover partially. The remaining quota an insured may claim of the initial reimbursement depends on the degree of recklessness and is subject to judicial discretion.
If the duty is about disclosure of facts subsequent to a loss it is insurers’ duty to provide sufficient instructions. Without instruction insured is not bound to the truth.
All of the above is stated in Sec. 28 VVG 2008.
The new Sanctions Rules in Sec. 28 VVG 2008 are semi-mandatory. Semi-mandatory rules are legislator’s strong tool of enforcing changes in practice. They are binding for the insurers unless they waive rights and agree something strictly advantageous for insured (like putting the onus entirely on insurer for example).
Making the Sanctions Rules semi-mandatory stipulations has a strict consequence once the VVG 2008 became effective for previously existing contracts (i.e. 01 January 2009): clauses in insurers’ terms and conditions based on the old law violated the VVG 2008.
There has been a broad discussion throughout the industry how to handle a loss under the VVG 2008 if the sanctions clause in the terms and conditions was set up under the old law. The discussion abruptly ended when the Federal Court of Justice held that sanction clauses based on the language of the old law simply are invalid under the new law (IV ZR 199/10).
Of course, an invalid clause does not void the insurance contract. But subject to lack of a validly agreed sanction regime a breach of duty does not affect reimbursement. Violating contractual duties is not sanctioned. Insurers need to seek other relief strategies if they identify a breach of duty. They have to fit it under a legal duty even though the legal duties are less specific and provide procedural disadvantages to insurers.
Up to 2008 it was best practice to simply repeat the back then effective law in terms and conditions – no matter whether it was volume business with limited individual risk exposure or industrial risks, whether an insurer provided the wording or it was a broker policy. Despite a limited option to change those previously existing contracts to make them suit the VVG 2008 many contracts remain unchanged up to today. In particular, there is a high risk of an invalid old sanction regime where policies are automatically renewed every year unless they are terminated on time.
And even if the sanction regime applies with the Sanction Rules, many insurers put not enough emphasis on the necessary – written! – instructions when they request disclosure of loss information.
All relief strategies expose insurers to a larger risk than the options with a duly agreed, valid sanction regime and a reliable practice to handle instructions and keep records of handing them out to insured. It is therefore worth the effort to scan insurers’ portfolio for those risks that have not been updated to the VVG 2008. It is of likewise importance to set up a loss adjusting process that ensures sufficient instructions are handed to the right recipient and records of the handout are available if dispute arises over false/incomplete loss information.