On 14 November 2016, the Austrian Supreme Court ("OGH") published a decision dated 13 October 2016 (7 Ob 112/16w) that deals with the renewal of a combined policy and the question of how far a change in the wording to one class of insurance applies if the respective insurance continues.
The key facts of the decision involve an Austrian insured that bought a combined policy in 2001 that included the classes of fire, household, liability and legal expenses. The policy was taken out for 10 years. In 2011, prior to an expiry of the policy, the insurer contacted the insured to renew it. The renewal resulted in the allocation of a new policy number to the combined policy and stated that the legal expenses insurance would now refer to new general terms and conditions of insurance for that class of business. Whereas it was in the interest of the insured that the legal expenses insurance continued as it was agreed, the new general terms and conditions of insurance excluded an insured's claim for damages out of financial investments from legal expenses insurance.
The insured was not made aware of this exclusion but had invested in 2010 a substantial amount in bonds, which turned out to be worthless in June 2013 and probably related to a fraud case. The insurer denied coverage under both wordings for a claim for damages against the issuing bank because (i) the insured event was not notified during the sunset clause as stipulated for in the original wording, and (ii) the new general terms and conditions of insurance had exclusion for such a claim for damages. However, the insured argued that the issuing bank and the auditor of the issuer had actual knowledge of the issuer's poor financial status at the time when the bond was issued but did not advise on that fact and it filed a claim for coverage against the insurer.
First of all, the OGH concluded that the insured suffered a loss already in July 2010 when it bought a worthless bond and subsequently, and this is probably more relevant for the insurance industry, it had to rule on which general terms and conditions of insurance the originally agreed to terms in 2001 or the new version of 2011 that contained the exclusion – would apply to the insured's claim for coverage under the legal expenses insurance.
Considering Austrian civil law aspects for a novation (Neuerungsvertrag) and a change of debt (Schuldänderung), the OGH concluded that the parties did not wish to terminate the legal expenses insurance agreement by the renewal, but quite the contrary. It was intended to continuously proceed by solely refreshing it. Neither the technically required new policy number for the combined policy nor that the legal expenses insurance was part of a combined policy would change that result in this case, according to the OGH. Consequently, the general terms and conditions that were in place at the time when the insured event occurred apply, i.e. in 2010, without triggering its sunset clause and therefore the insurer had to grant coverage for the insured's claim for damages against the issuing bank under the old policy.
For the insurance industry and for reinsurers, it is worth noting that according to Austrian case law, an insured may be entitled to coverage under an old policy wording irrespective of a new policy number or new general terms and conditions that are thought to apply, as long as the specific class of business is considered as an ongoing business relationship between the insurer and its insured which needs to be established on a case-by-case basis.