Thomas Birch David Rubin November 26 2002 Anticipated Amendments to the Insurance Contracts Act Bech-Bruun | Insurance - Denmark Thomas Birch, David Rubin Insurance Insurance Contracts ActRecommended Amendments Other ProvisionsInsurance Contracts ActThe Danish Insurance Contracts Act is approximately 70 years old. The most recent amendment was adopted in May 2001 (by Act 435 of May 31 2000). A new Section 120(a) was inserted to improve the policyholder's legal position where he does not know of his illness at the time of taking out a health insurance policy, and the symptoms begin to show only afterwards. In such cases the insurer must honour the policy as the policyholder is a good-faith customer. In addition, Section 10(2) was extended to the effect that an incorrect or inadequate health statement by a doctor or other expert does not prejudice the policyholder.The changes were recommended by a parliamentary committee pursuant to a Supreme Court case in which a claim against an insurer for payment under a health insurance policy was dismissed (judgment of June 29 1998). The insurance covered illness, including multiple sclerosis, which occurred in the policy period. The policyholder made the claim against his insurer several years after taking out the policy, when he discovered he was suffering from multiple sclerosis. The court found that the illness had begun before the insurance was taken out (ie, outside the policy period). In fact, the policyholder was in good faith and, when the insurance was taken out, a specialist had declared that there was no reason to believe that he suffered from such an illness.Parliament also requested that the committee assess the need for amendments to the statutory rules on: the limitation of insurance claims; the insurer's duty to pay a claim; and the insurer's liability where the policyholder gives misrepresentations when taking out insurance. The committee also considered (i) whether it would be appropriate to introduce special rules on consumer insurance (eg, in a separate act), and (ii) overhauling the Insurance Contracts Act. The committee has now issued a White Paper. It remains to be seen whether (and to what extent) a majority of Parliament will adopt the committee's recommendations. The committee has not recommended the drafting of an entirely new act. Rather, it has recommended adjustments or specifications to better protect the interests of policyholders. Recommended Amendments Payment of premiumsIn case law and under insurers' conditions, the rules on payment of premiums (including the procedures and consequences of non-payment) deviate considerably from the statutory provisions. The committee has suggested that the act's provisions be amended to correspond to the rules applied in practice and in insurance conditions in general. Accordingly, the times for payment and the length of termination notices may well be extended, and the statutory requirements on the insurer's duty to send reminders to the policyholder in case of non-payment should be tightened, according to the committee. Insurer's duty to pay claims and interestUnder the act, a claim for payment under a policy falls due within 14 days of the insurer obtaining the information necessary for assessment of the legitimacy and amount of the claim. The act also provides for on-account payment of indemnity to the policyholder where the claim's legitimacy is not in question. The act also specifies the rate of interest on the claim in cases where it is not subject to interest under other legislation. However, the act does not determine whether the policyholder may request that interest be added to his claim for damages against the person causing the loss if the claim may be made directly against the liability insurer of the person causing the loss (according to current case law the policyholder's claim is subject to interest). Nor does the act determine whether the policyholder may claim compensation for costs (including attorneys fees) incurred in the calculation of the claim covered by the insurer (case law indicates that attorneys fees are covered if deemed reasonable and necessary). The committee has recommended (i) the inclusion of a provision specifying that the policyholder has a claim for compensation for reasonable and necessary costs (including attorneys fees) associated with the calculation of the loss, and that the insurer be obliged to advise the policyholder as to his entitlement to on-account payment; and (ii) an adjustment of the interest rate under the act to that applicable under the Danish Interest Act. Limitation of claimsAll claims arising from an insurance contract become statute-barred under the act between two and five years after the claim falls due for payment. Other claims are statute-barred between five and 20 years from the creation of the claim. The shorter limitation periods were introduced with regard to insurers and their accounts and provision for reserves, and have caused some difficulties in case law. For example, the Danish courts have not decisively ruled as to whether the policyholder's claim against the person causing the loss (which becomes statute-barred under the general limitation rules) becomes statute-bared within the shorter limitation periods set out in the act if the claim is made directly against the liability insurer of the person causing the loss. Nor is it clear whether the general maximum limitation period of 20 years under Danish law also applies to claims arising from insurance contracts, or what steps must be taken to interrupt the limitation period under the act. The committee has suggested an adjustment of the limitation periods to those under general Danish law, since the current rules cannot be observed fully without adversely affecting the interests of consumers.A separate committee (which is not due to finalize its recommendations until the end of 2003) is expected to propose the introduction of shorter limitation periods of between three and 10 years from the due date of a claim, with claims for compensation for personal injury being subject to a maximum limitation period of 30 years.Direct claims against a liability insurerUnder the act, the policyholder may make a claim directly against the liability insurer of the person causing the loss only if the liability and amount of the claim have been established. The courts have, however, made a few exceptions in cases where the person causing the loss has become bankrupt or is bound by a compulsory composition with his creditors after the occurrence of the loss, where the policyholder's right to full compensation may be limited.The committee's recommendations are expected to bring an end to lengthy debates about direct claims against liability insurers. The act is expected to be amended to allow claims to be raised directly against the liability insurer where the person causing the loss goes bankrupt or is bound by a compulsory composition with his creditors, although it is questionable whether a general right to make claims directly against the insurer will be included. Cohabitants and beneficiariesRegarding the inclusion of a third party as a beneficiary under a under life, personal accident or health insurance policy, the act refers to the Danish law of succession, including the rules on the deceased's right of control over his assets in favour of so-called 'forced heirs'. The policyholder's forced heirs may contest the appointment of a cohabitant as beneficiary to the effect that a smaller portion of the insured sum is payable to him or her, regardless of the fact that the policyholder and cohabitant may have lived together for years before the occurrence of the insurance event. This provision sits uneasily with modern lifestyles, where many unmarried couples live together and it is impossible to demonstrate a valid reason for favouring the policyholder's forced heirs (typically children) over the wishes of the policyholder and the needs of the cohabitant. Accordingly, the committee has proposed amendments to the act (albeit in consideration of any changes to the Danish law of succession).Insurers' duty of disclosure The rules on the insurer's duty of disclosure are governed by the act and: the Insurance Business Act; the Consumer Contracts Act (arising from an EU directive); the Financial Activities Act; the Marketing Practices Act; guidelines issued by the consumer ombudsman and the Danish Financial Supervisory Authority (in particular with regard to life and pension insurance products); trade organizations' recommendations on good insurance practices; and Danish contract law (particularly case law).The European Parliament and Council recently adopted a directive on the distance marketing of consumer financial services (including insurance services), laying down requirements as to the scope and content of information with which insurers must provide policyholders before the insurance contract is concluded. The act is likely to be amended with respect to the insurer's duty of disclosure, gathering fragmentary provisions in the act to ensure clarity and transparency. Other ProvisionsRisk particulars Generally, the policyholder has a duty to answer the insurer's questions when filling out a proposal form as well as a duty of disclosure before an insurance contract is concluded. If the policyholder fails to fulfil either of these duties, forfeiture or reduction of the insurer's liability may ensue.Danish case law has, with the assistance of the Danish Insurance Association, laid down fairly fixed guidelines for evaluating the importance of wrong or inadequate risk particulars. Consequently, the committee has not suggested material changes to the existing rules. Thus, it has suggested the introduction of a relaxation rule in cases where the policyholder gives wrong risk particulars, to apply only if he (i) takes out consumer insurance and life, personal accident or health insurance, and (ii) has been negligent to a minor degree.Cause of the insurance eventUnder the act, the liability of the insurer may lapse if the policyholder triggers the insurance event intentionally, through gross negligence or in a state of self-inflicted intoxication. Since the issue of liability is evaluated on a case-by-case basis and is ably dealt with by the courts and Insurance Appeals Board, the committee has not recommended any amendments to the act in this respect. Insurable valueUnder the act the insurable value is generally fixed on the basis of the replacement value of the damaged or lost property at the time when the insurance event occurs, less any decrease in value resulting from wear and tear, reduced usability and the like. No such deduction applies to household and personal effects without a clear agreement to that effect. This is firmly established in cases heard by the Insurance Appeals Board and the Danish courts, and so amendments to these provisions of the act are unlikely.Precautionary measuresThe provisions of the act on precautionary measures (in both indemnity and benefits insurance) require the policyholder to comply with the terms of the insurance contract. The insurer is exempted from liability and the policy may be terminated if its terms have not been met when the triggering event occurs due to an omission on the part of the policyholder (gross negligence is required with regard to benefit insurance). Both the Insurance Appeals Board and the Danish courts have declared that precautionary measures must be written in clear and unambiguous language in order for the insurer to avoid liability. Moreover, most indemnity insurers choose to adopt standard insurance terms where liability is limited if the policyholder fails to take a particular precautionary measure. Consequently, the committee has not proposed amendments with respect to precautionary measures.Fire insurance The act does not define the concept of 'fire' in relation to fire insurance. According to legislative history, the fire must be "blazing and unrestrained" to give rise to a claim for indemnity and, generally, no indemnity is payable for damage caused by mere scorching. Fortunately, the Insurance Appeals Board and Danish courts have provided a fairly exact definition of fire, and therefore, a proposal for a definition in the act is not expected. TerminationSome provisions of the act govern the rights of the policyholder and insurer to terminate an insurance contract (eg, the provisions on termination due to wrong risk particulars, failure to take precautionary measures or to pay premium). This right is otherwise regulated by agreement between the parties.It has become standard practice for insurance contracts to be concluded for a term of just one year so that both parties have the option of terminating the policy at that time. Moreover, the conditions of most indemnity contracts provide that in case of a claim, the insurer may terminate the policy or amend the insurance conditions as an alternative to termination. Generally, Danish policyholders are loyal to their insurers, which makes it doubtful whether new provisions giving the consumer a right to terminate his policy while it is active are required. In addition, it may well be difficult for insurers to fix their premium correctly, adjusting for seasonal changes in claim frequencies, where the policy is generally terminable. Thus it is unlikely that amendments to the act to allow termination in the policy period will be proposed.Benefit insurance and public early retirement pensionUnder various health and accident policies, and life insurance policies covering disability, the insurer may or must make disability compensation conditional upon the policyholder's entitlement to a public early retirement pension. In many cases this entitlement is vital to the determination of whether the insurance event has occurred. Generally, however, the insurer is not bound by the policyholder's entitlement to a public early retirement pension.The public early retirement pension is grouped so that the amount of benefit payable depends on the percentage (50%, 66.6% or 100%) by which the ability to work is reduced. Usually, insurance is based on this percentage.The pension rules are amended as of January 1 2003 and the percentage scale is replaced by one flat rate. Problems may ensue for insurers when they can no longer use the pension entitlement as a guide for their contract, particularly where the insurance product makes the payment of disability benefit subject to the entitlement to public early retirement pension, and where the insurance is interminable.As the problems concern fundamental contract law, the committee has not proposed that they be addressed by the act.Concept of accidentThe concept of 'accident' within the meaning of insurance law is not defined in the act, and the varying definitions are responsible for many disputes between policyholders and insurers. Such problems also concern fundamental contract law and are probably best resolved by the Insurance Appeals Board and the Danish courts of law, so the committee has not proposed that a definition of the concept of 'accident' be included in the act.For further information on this topic please contact David Rubin or Thomas Birch at Bech-Bruun Dragsted by telephone (+45 7733 7733) or by fax (+45 7733 7744) or by email ([email protected] or [email protected]).