Facts
Decision
Comment
The insured's main contractual duty is the payment of the premium. The non-payment or late payment may, in the words of the Federal Supreme Court, have "dramatic consequences" for the insured – but only if the insurer meticulously adheres to the pertinent procedure. A relatively recent Federal Supreme Court ruling(1) concludes for the time being a series of four court decisions on the non-payment of premiums which, due to a lack of care on the part of the insurer, have all been rendered in favour of the insured. The non-payment of premiums is regulated by Articles 20 and 21 of the Federal Law on Insurance Contracts.
Facts
Swiss engineering company Y AG was mandated by City D to design and construct a power station. When the works had been completed, it became clear that the power station's capacity did not reach the required level. Therefore, City D presented Y AG with a claim for damages. Y AG notified its third-party liability insurer X AG, which commenced settlement negotiations with City D. When the negotiations failed, the insurer refused to provide coverage based on a number of grounds.
One of the insurer's arguments was in relation to the non-payment of the premium. The insured had failed to pay the premium on time, so that the insurer sent a reminder requesting payment within 14 days. The insured answered within the time limit that it would offset its obligation to pay the premium against its claim under the policy, and that it would deposit the premium on a blocked account with a local bank. Nevertheless, the insured paid the premium seven months later. The insurer refused to accept the late payment and alleged that coverage under the insurance contract had been suspended when the insured failed to pay the premium within the 14 days stipulated in the reminder. The insurer further argued that the contract had come to an end based on Article 21 of the law, as the insurer had not claimed again the premium within the additional two months stipulated by Article 21.
Decision
The Federal Supreme Court was called upon to decide whether the insurer's reminder met the legal requirements. Article 20 of the law stipulates that the insurer must send a written reminder by which the insured is requested to pay the premium within 14 days of the date on which the reminder was posted and is informed of the legal consequences of non-payment, which are:
- the suspension of coverage commencing on the expiry of the 14-day reminder period; and
- the insurer's right to revoke the contract or henceforth to refuse to accept the premium respectively (which results in revocation of the contract pursuant to Article 21(1) of the law).
In the case at hand the insurer's written reminder contained the explicit request that the insured pay the premium in an amount of SfrXXXX.XX within 14 days and the following additional sentence:
"In the case of non-payment your policy will not provide coverage any more starting at the end of this time limit (please refer to the abstract from the Federal Law on Insurance Contracts in the annex to this letter)" (author's translation).
The abstract stated in full the wording of Articles 20 and 21 of the law. Pointing to the fact that the legal consequences of non-payment of the premium are much stricter and more far-reaching than those stipulated in the Code of Obligations concerning non-payment in other types of contract, the court confirmed the finding of the cantonal court, which had held that the insurer's reminder was too vague in that it did not sufficiently inform the insured of the suspension of coverage (also concerning the loss which had until then been accepted) or of the "dramatic consequences of a possible contract revocation". These consequences, the court added, must be mentioned in the reminder itself and not merely in an annex thereto that contains the pertinent legal provisions. The insurer's additional argument that the insured had been represented by a lawyer at that time did not help, and the court highlighted the need for increased protection of the insured in view of the gravity of the consequences. It thus concluded that coverage had not been suspended; nor had the contract been revoked.
Comment
The decision confirms the court's readiness to invalidate a reminder if the insurer deviates even slightly from the prescribed rules. In order to be effective, the written reminder must contain the following four elements:
- the request that the insured pay the premium (the premium must be due at the time the reminder is sent);
- the exact amount of the outstanding premium (and, possibly, additional interest for late payment);
- the fixing of a time limit of at least 14 days; and
- a clear and complete indication of the legal consequences of a non-payment.
With regard to the last item, both the suspension of coverage and the insurer's right to revoke the contract must be stated. This requirement was not met in G v Insurer X,(2) as the insurer had mentioned the suspension of coverage only.
The drafting and sending of reminders is often done through a semi-automated process, in which standardised forms and facsimile signatures are used. This is said to be admissible. However, a copy of the reminder must be retained. That requirement was the insurer's downfall in X v Z(3), in which the automated reminder procedure did not produce a copy of the reminder. Thus, the insurer was unable to prove that the reminder contained the necessary elements and particularly the correct premium amount. While the cantonal court was satisfied with circumstantial evidence in that respect, the Federal Supreme Court insisted on strict proof and decided against the insurer.
Finally, the reminder must be drafted not in any one of Switzerland's three official languages, but rather in the language that the insured has chosen. Consequently, the reminder in French sent to an insured who had chosen the German language was held to be not effective.(4)
For further information on this topic please contact Stefan Knecht at BADERTSCHER Rechtsanwälte AG by telephone (+41 44 266 20 66), fax (+41 1 266 20 70) or email ([email protected]).
Endnotes
(1) Supreme Court Decision 4A_397/2010, September 28 2010.
(2) G v Insurer X, Decision BGE 128 III 186 = Pr 91 (2002) 175, April 25 2002.
(3) X v Z, Supreme Court Decision 5C.97/2005, September 15 2005.