Overview of new provisions applicable to all types of insurance
Advice and information
With effect from 1 January 2008 insurers are obliged to provide more detailed advice and information to policyholders in a timely manner. Insurers are now required to give advice that takes into account the wishes and needs of the policyholder and this advice must be documented and given to the policyholder. Failure to comply with this obligation may result in potential liability for damages.
The Regulation on Information Obligations for Insurance Contracts (VVG-InfoV) sets out in detail the information that must be given to a policyholder before the submission of his contractual declaration (in practice this is usually the policyholder’s application form). Policyholders have to be provided with a separate product information sheet summarising the key details of the insurance policy and information about the provisions of the policy and the general terms and conditions of insurance coverage in a timely manner. The ‘policy model’ (Policenmodell), under which the insurer sent the policyholder documentation along with the insurance policy, has been abolished. Failure to comply with the obligation to provide a policyholder with information can be severe: the new law gives the policyholder an unlimited right to revoke the policy. Under the old law the right of revocation lapsed one year after the payment of the first premium.
Policyholder’s right of revocation
Under the old law the policyholder had the right to revoke, object to or withdraw the policy. The new law provides only for a right of revocation. This can be exercised within a two-week period or, in the case of life insurance, within 30 days. The period does not start until the policyholder has received all policy conditions and information and has been properly informed about his revocation rights. The exclusion of the right of revocation one year after payment of the first premium has also been abolished.
Abolition of the ‘all or nothing’ principle
The so-called ‘all or nothing’ principle has been abandoned because it often led to unfair results. Policyholders who breached their policy obligations intentionally or recklessly were not entitled to any claim under the insurance policy, whereas in cases of negligence the insurer had to pay the full amount. Under the new law payment of claims in cases of recklessness will not be excluded but will be reduced depending on the policyholder’s degree of responsibility.
Pre-contractual disclosure obligations
Under the old law the policyholder had to disclose all relevant information about the insured risk. Under the new law he is only obliged to respond to written enquiries from the insurer about the risk. Furthermore, under the old law the insurer was entitled to withdraw from the policy in the event of intentional or negligent breach of the policyholder’s disclosure obligation, whereas under the new law the insurer’s right to withdraw is excluded in cases of negligence. Abolition of time period for filing an action The time period of six months for filing an action against the insurer after the insurer has denied the claim in writing has been abolished.
Abolition of the principle of premium indivisibility
Under the old law the policyholder was obliged to pay the full annual premium even if the insurer terminated the policy partway through its term. Under the new law the insurer is entitled only to the premium pro rata temporis up to the termination date.
Reform of the law on life insurance
The reform significantly improves the position of life insurance policyholders.
Entitlement to participation in surplus One important provision of the new act is the policyholder’s statutory right to share in the surplus (Überschussbeteiligung) as well as in the insurer’s unrealised reserves (Bewertungsreserven). This provision implements a ruling of the German Federal Constitutional Court.
A policyholder has a claim for half of the unrealised reserves earned with his premiums if he terminates the policy. This rule applies only to policies that were commenced on or after 1 January 2008 and in respect of which a right to participate in the surplus was agreed. The insurer is required to disclose the unrealised reserves and inform the policyholder annually about his share.
Calculation of the surrender value
Under the new law, the calculation of the surrender value for life insurance is, in principle, based on the actuarial reserves (Deckungskapital) of the insurance. Under the old law it was calculated on the basis of the current value (Zeitwert) of the insurance. This provision implements a ruling of the German Federal Court of Justice. The surrender value of unit-linked life insurances is, however, still to be calculated on the basis of the current value.
Allocation of acquisition and distribution costs In the event of early termination, the acquisition and distribution costs (Abschluss- und Vertriebskosten) of the life insurance are to be allocated evenly over the first five policy years when calculating the surrender value. In the future, the surrender value in the first years will therefore be higher than it used to be. Previously, costs were often deducted in the first two policy years, so that the policyholder received only a very small surrender value (if any) in the event of early termination. It is unclear whether this new provision also applies to singlepremium contracts.
This new provision implements a ruling of the German Federal Constitutional Court made in July 2005 and applies to policies commenced after 31 December 2007. Information obligations – eg transparent acquisition and distribution costs
Transparency will improve under the new law because insurers are obliged to disclose and specify the acquisition and distribution costs in euros in a timely manner before the potential policyholder makes his contractual declaration. The Regulation on Information Obligations for Insurance Contracts sets out the detail of the information required.
If the insurer provides information to a policyholder on expected benefits he is required to give the policyholder a model calculation that sets out the potential final payment calculated on the basis of three specific interest rates. The insurer must state that the calculation of the final payment is a projection only and is not guaranteed. This does not apply to term life insurance contracts and fund- or index-linked life insurance contracts.
Applicability of the new law
The new Insurance Contract Act came into effect on 1 January 2008 and applies to all contracts commenced on or after 1 January 2008. All contracts commenced before 1 January 2008 are governed by the old law until 31 December 2008 and after that by the new law.