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What general rules, requirements and procedures govern the conclusion of (re)insurance contracts in your jurisdiction?
Absent a definition in the Insurance Contract Act, the Federal Supreme Court has defined an ‘insurance contract’ as an agreement under which the insurer promises an economic performance to the insured in case of the realisation of a risk in exchange for payment of a premium. The essential elements are the transfer of risk against payment. The conclusion of an insurance contract requires the parties' mutual consent with respect to these elements.
Although insurance contracts are normally concluded in writing, the act provides no particular form requirements. Insurance contracts can be made free of form, including orally or by consenting behaviour.
A potential policyholder usually submits an offer to the insurer. The applicant must answer the insurer's questions truthfully. If the applicant fails to do so, the insurer may refuse payment in case the insured event occurs, provided that causality exists between the undisclosed facts and the loss sustained.
However, the applicant has no duty to disclose on its own motion all material risk factors that might be relevant for the insurer's underwriting decision. The Insurance Contract Act does not provide for a duty of utmost good faith (known in common law countries in connection with the rule that the purchaser of insurance must disclose all material facts on his or her own initiative).
Before conclusion of the insurance contract, the insurer must inform the applicant about the identity of the insurer and the main content of the insurance contract. This includes:
- the insured risks;
- the scope of the insurance coverage;
- the premiums due;
- any other obligations of the policyholder; and
- the handling of personal data.
If the insurer fails to comply with its duty to inform, the policyholder can terminate the insurance contract by written notice.
In contrast to direct insurance contracts, reinsurance contracts are not governed by the Insurance Contract Act. Instead, they are governed by general contract law, including the Code of Obligations.
It is widely accepted that reinsurance contracts are based on a special trust relationship between the parties and that the principle of good faith is crucial. The pre-contractual disclosure obligations are broader than in direct insurance, but the exact extent of such obligations remains unclear. Some authors argue that the utmost good faith principle applies to reinsurance contracts. However, there is no settled case law in Switzerland regarding whether an insurer must disclose on its own motion all material risk factors needed by a reinsurer to make its underwriting decision.
Are (re)insurance contracts subject to any mandatory/prohibited provisions?
The parties to an insurance contract are generally free to agree the terms and conditions that will govern their relationship, but certain Insurance Contract Act provisions are mandatory and cannot be contractually modified. Among other things, these provisions concern:
- the principle that the insurance contract is null and void if, at the time of its conclusion, the risk had already ceased to exist or the insured event had already occurred (including exceptions for fire and transport insurance);
- restrictions regarding the premium payment obligations in the event of early termination of the insurance contract;
- the place of performance;
- the due date of insurance claims;
- the tacit renewal of insurance contracts;
- overinsurance and double insurance;
- the replacement value;
- the assessment of damage;
- the assignment and pledge of personal insurance claims; and
- insurance policies on the life of another person.
Other Insurance Contract Act provisions are partly mandatory in the sense that they cannot be modified to the disadvantage of the policyholder or the insured. These include:
- rules on the conclusion (offer and acceptance) of insurance contracts;
- the insurer's duty to inform the insured and the insured's right to terminate the contract of insurance in the event that the insurer does not comply;
- the insurer's duty to issue a policy to the insured, stating the rights and duties of the parties;
- the consequences of default in the payment of the premiums;
- the aggravation of risks with or without the policyholder's involvement;
- the insurer's liability for its intermediaries;
- rules concerning the substantiation of the insurance claim;
- rules concerning partial damage;
- the statute of limitations; and
- the insurer's right of recourse.
These and other Insurance Contract Act restrictions do not apply to reinsurance contracts. In reinsurance, the freedom of contract principle prevails, as long as the terms and conditions of a reinsurance contract are not impossible, unlawful or immoral within the meaning of general contract law.
Can any terms by implied into (re)insurance contracts (eg, a duty of good faith)?
Terms can be implied into (re)insurance contracts. Whether a term is implied is essentially a matter of interpretation.
In that context, reference is often made to the duty of good faith, which is one of the cornerstones of Swiss contract law. The duty of good faith is particularly important in relation to pre-contractual disclosure duties and parties' obligations after the insured event has occurred.
However, there are no implied exclusions in direct insurance. To be valid, exclusions must be explicitly stated in the insurance contract.
In reinsurance contracts, paramount principles – such as the reinsurer's right to inspect the cedent's file and follow-the-fortune and follow-the-settlement principles – may be considered to be implied and applicable in the absence of a specific clause relating thereto.
What standard or common contractual terms are in use?
Most insurers use their own general terms and conditions (GTCs).
The Swiss Insurance Association has published sample GTCs for certain types of insurance, including third-party liability, motor vehicle, property, technical and transport insurance. While these sample GTCs are non-binding, they give guidance on what standard or common contractual terms one may expect in such types of insurance.
In reinsurance, GTCs have not gained any practical relevance. There are no standard reinsurance contracts. However, many reinsurance contracts include commonly used provisions, such as access to records or right to audit, as well as follow-the-fortune and follow-the-settlement clauses.
What is the state of development in your jurisdiction with regard to the use of ‘smart’ contracts (ie, blockchain based) for (re)insurance purposes? Are any other types of financial technology commonly used in the conclusion of (re)insurance contracts?
While blockchain-based smart contracts and other types of financial technology are not yet commonly used in Switzerland for (re)insurance purposes, they could have an important impact in the future.
Many of the most common insurance contracts can be broken down into ‘if-then’ statements and digitised as smart contracts. Using event-monitoring functions, payments could be automatically triggered based on an objective validation of specified events. Among other benefits, blockchain-based smart contracts may reduce:
- the need for intermediaries;
- voluminous amounts of paperwork; and
- pay-out times.
It is therefore unsurprising that both incumbent (re)insurers and new players are investigating the use of blockchain technology in (re)insurance.
What rules and procedures govern breach of contract (for both (re)insurer and insured)?
As outlined above, under the Insurance Contract Act, the insurer must inform a potential policyholder about the essential content of the insurance contract. If the insurer fails to comply with such obligation, the policyholder can terminate the insurance contract. The termination right expires four weeks after the policyholder learns of the breach of the duty.
In the case of non-disclosure or misrepresentation of a material risk factor on the part of the policyholder in response to a written question of the insurer, the insurer may terminate the insurance contract. The insurer can do so within four weeks of the discovery of the misrepresentation or non-disclosure.
A similar termination right applies in the case of non-disclosure or misrepresentation in reinsurance contracts.
If the insured caused the insured event in a grossly negligent way, the insurer can reduce the indemnification. The insurer may reject liability outright if the insured caused the insured event intentionally.
Under the Insurance Contract Act, if the policyholder fails to pay the premium by the due date, the insurer can set an additional time limit of 14 days for payment of the premium. If the premium is not paid within this time, the policyholder is in default and the insurer’s obligations are suspended.
If the policyholder has been in default for more than two months and the insurer has not commenced legal proceedings to enforce the claim, the Insurance Contract Act presumes that the insurer has waived its right to claim the premium and exercised its right to terminate the insurance contract. Conversely, if the insurer enforces its claim for the premium payment, it remains under the obligation to provide coverage as stated under the insurance contract.
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