Disclosure duties in German insurance contract law

Pursuant to sec. 126b BGB, text form means that inquiries of the insurer must be conducted on a durable medium. This includes, in particular, messages sent by telegram, telex, telefax and e‑mail. The purpose of the intention behind the text form requirement is, on the one hand, to decrease the risk of misconceptions caused by spoken word and to give the policyholder the chance to read and re-read the inquiries word by word. On the other hand, this formality requirement serves evidentiary purposes. Hence, within the meaning of sec. 19 para. 1 VVG, solely displaying inquiries on the insurance agent’s laptop without having arranged for any separate documentation for the policyholder’s own use, must be considered insufficient.⁵ It is also insufficient if an agent fills in the questionnaire of the insurer on its own and urges the applicant to sign while not giving him due time to read the questions and respective answers.⁶

Sec. 19 VVG expressly requires the insurer to ask questions. Since queries must be made in writing, insurers mostly use questionnaires for this particular requirement. Hence, the insurer can easily demonstrate having asked questions in text form.⁷

However, the allocation of questions of an insurance broker can be problematic. With regard to a questionnaire of an insurance broker, the Oberlandesgericht Hamm (OLG—German Higher Regional Court) held that questions (with respect to risk factors) contained in such a broker questionnaire generally are not to be considered as questions of the insurer in the sense of sec. 19 para. 1 VVG—and that, therefore, misrepresentations in this questionnaire do not trigger the legal consequences of sec. 19 VVG.⁸ However, there might be scenarios in which an insurer takes “ownership” of pre-defined questions, provided by the broker prior to the policyholder’s responses—in case these circumstances are apparent to the policyholder. According to several decisions of German Higher Regional Courts, those questions activate the policyholder’s duty not to misrepresent.⁹ However, this approach should be restricted to the field of non-consumer contracts in the sense of sec. 210 VVG whereas in the field of mass risk insurance (especially when it comes to personal insurance) such an approach is considered inadequate. This is why, in this field, the rule provided by law is to be followed strictly. It goes without saying that an insurance broker can contribute to preparing the wording of questions or even can impose the wording on the insurer—if the broker is sufficiently influential in the market. However, in the field of mass risk insurance there is no convincing reason why the insurer should be exempted from asking the policyholder on its own.

The insurer’s request for representation of a certain risk factor indicates that this circumstance is “material to the insurer’s decision to conclude the contract with the agreed content”, sec. 19 para. 1 VVG. The point of view of the prospective insurer is considered as decisive factor with due regard to the insurer’s underwriting decision. However, considering the policyholder’s need for protection, the insurer’s subjective view should not be the exclusive criterion. According to the legislative materials, the inducement into contracting must be evidential from an objective point of view, as well. This requirement is not met, for instance, when a question refers to a matter reaching far back into the past.¹⁰ Substantially, it comes down to a double test: The inquired risk factor must be crucial looking at the actual insurer’s usually practiced way of concluding insurance contracts, but company-individual behaviour must be reasonable as measured by the market-wide usually practiced way of concluding insurance contracts, as well.

In this context, the Act on Human Genetic Testing (Gendiagnostikgesetz—GenDG)¹¹ which shall prevent discriminations against persons with crucial diseases must be taken into account.

According to sec. 18 para. 1 GenDG, the insurer is neither allowed to request the policyholder or the insured to undergo genetic testing or analyses, nor to request information on genetic testing and analyses conducted in the past, nor to receive any such information. However, this provision could be easily ignored unless the purpose of this provision is kept in mind. Therefore, the insurer is not allowed to ask if genetic testing has ever been previously conducted, either.¹² In respect to already conducted genetic testing, this prohibition does not apply to life-insurance, disability insurance and care pension insurance if the one-time insurance cover is more than € 300,000 or if the annual pension exceeds € 30,000 (the relevant sum is the fixed sum agreed upon in the contract, ignoring any dynamic progress). The reason for this re-exemption is to prevent an advantage in knowledge at the expense of the insurer or the insured individuals, constituting a community of solidarity. It is, however, controversial if sum limits are to be calculated per insurance contract with the consequence that a policyholder could conclude several contracts with various insurers up to the permitted sum (see above) without being obliged to reveal his genetic disposition.¹³ Yet, the policyholder must represent to the insurer existing and pre-existing conditions according to secc. 19–22, 47 VVG even if these illnesses were diagnosed by genetic testing, sec. 18 para. 2 GenDG.¹⁴

In addition, requests aiming for revelation of circumstances, upon which any differentiated treatment of policyholders is unlawful pursuant to the General Equal Treatment Act (Allgemeines Gleichbehandlungsgesetz), are not permitted. This is true, for instance, regarding a request for revelation of any existing pregnancy.¹⁵

Regarding questions not answered at all or answered obviously inconsistently by the policyholder, German case law has imposed on the insurer a duty to request information. It is to be prevented that the insurer reserves its remedies until the insured event had occurred albeit serious indications pointing towards the policyholder’s incomplete, inconsistent or incorrect statements have existed prior to the occurrence. From a systematic point of view, the duty of the insurer to request information does not affect the policyholder’s duty. However, the insurer is not allowed to exercise any remedies (venire contra factum proprium).¹⁶ Contrary to former case law,¹⁷ it is now established that the insurer has no duty to request information in case the policyholder fraudulently misrepresented to the insurer.¹⁸

In contrast to the old VVG 1908, sec. 6 para. 1 VVG 2008 stipulates a duty of the insurer to advise the policyholder. Secc. 6 paras. 1–4 VVG are not applicable if the contract was mediated by an insurance broker (sec. 6 para. 6 VVG), since in this scenario the duty to advise applies only to the insurance broker having a closer connection with the policyholder. An exception to this rule—with the result of the insurer having the duty to warn or correct—is acknowledged and based on the principle of good faith (sec. 241 para. 2, sec. 311 para. 2, sec. 242 BGB) if the insurer is aware that the policyholder is mistaken despite being advised by the insurance broker.²⁶

Pursuant to sec. 6 para. 6 VVG, the duty to advise neither applies to large risks in terms of sec. 210 para. 2 VVG since in these cases for those large risks the policyholder typically has sufficient insurance-related business experience and a necessity of protection by specific duties to advise does not arise. Again, duties to advise according to general principles of contract law are still possible.

Sec. 6 para. 1 VVG contains a whole series of pre-contractual duties of the insurer that aim to secure adequate advice to the prospective policyholder: The insurer is obliged to ask (if circumstances require) for wishes and needs of the potential policyholder, to advise and to reason given advice. Moreover, questioning, advising and reasoning are to be recorded in order to ease the proof of the facts in favour of the policyholder. A general prerequisite for setting up these duties for the insurer is a discernible cause.²⁷ In case of a breach of a duty under sec. 6 VVG, the insurer is obliged to pay damages pursuant to sec. 6 para. 5 VVG.

A breach of this duty by an insurance agent can be attributed to the insurer by way of secc. 278, 311 para. 2 BGB. On the other hand, the action of a broker (closer connected with the policyholder) is generally not attributed to the insurer. In exceptional circumstances the Bundesgerichtshof (BGH—Federal Supreme Court of Germany) attributes the action of all intermediaries of a structured distribution system in terms of a marketing network including brokers if the insurer refrained from building up its own distribution system in order to fulfil its duties to clarify and advise.²⁸ Pursuant to sec. 6 para. 5 sentence 2 VVG respectively sec. 63 sentence 2 VVG, a rebuttable presumption of the fault of the insurer or the insurance agent applies.

Decisions of the BGH concerning the insurer’s (and the insurance intermediary’s) duties to advise are still rare.²⁹ This is due to the fact that the requirements adding up to a duty to advise (as stipulated in secc. 6, 61 VVG) are deliberately drafted softly to keep up the opportunity to consider the circumstances of individual cases.³⁰ However, when establishing duties to advise, German courts are not going down slippery slopes but rather ground such duties on principles of general contract law. Resultantly, court judgments on the required discernible cause (see above), up to now, are doubtlessly plausible when they had to deal with premature terminations of existing life insurance contracts, the conclusion of new life insurance contracts, substitutions of health insurers or risks resulting from underinsurance.³¹ Only in a special situation where a net policy with an additional payment agreement was concluded, the respective court had to reason its decision with profound dogmatics. Following the established case law of the BGH, an insurance agent—in contrast to a broker³²—shall instruct the customer on the impact of the conclusion of a net policy in cases of premature termination. In detail, this means that the agent must make the customer aware of the fact that he is still obliged to pay the agent-fee if the insurance contract is terminated after a short time period; if this instruction has not taken place, the court will assume that the policyholder would otherwise not have concluded the net police.³³

The BGH decided rather dogmatically uncomplicated that a breach of the duty to record leads to a reduction of the burden of proof in favour of the policyholder or even in an inversion of the onus of proof.³⁴ If a necessary notice of evident importance has not at all been recorded, the BGH states that the insurer or the insurance intermediary basically bears the burden of proof.

According to German case law, a general duty to clarify during contractual negotiations exists without further request where the other party is reasonably (pursuant to the principle of good faith and generally accepted standards) entitled to expect a notification of facts, which are apparently evidential to the decision-making of that party.³⁵ Especially, this applies to facts, which could have a significant impact on the particular purpose of the contract. In addition, facts that could be of fundamental economic damage to the other party are to be considered as facts of significant impact. However, where the party itself is individually responsible with regard to these facts, the party is restricted from relying on the explained duty to pre-contractually advise.³⁶

In its decisions of 11 July 2012, the BGH ruled on life insurance contracts named “Wealthmaster Noble” (single premium; Einmalbeitrag) and advertised in Germany from the late 1990s until late 2007 by the English insurer Clerical Medical Investment Group Ltd.³⁷ In summary, the BGH decided that customers were entitled to damages³⁸ because the intermediary’s breaches of duties to clarify when concluding the contract were attributed to the insurer.³⁹ According to its reasoning, the damage to the policyholder consisted of a disadvantageous contract.⁴⁰ The insurer was obliged to clarify according to established principles of clarification in case of investment businesses (Anlagegeschäfte) because the conclusion of the life insurance contract in question was similar to an investment business from an economic perspective. In particular, the fact that the insurer had drawn a wrongful and far too optimistic picture of profits from the expected return of the life insurance contract amounted to the breach of its duty to clarify.⁴¹ A second breach of the contract resulted from the lack of adequate clarification in respect of the specifics of the so-called Glättungsverfahren (smoothing technique).⁴²

A controversial question, which has not been decided yet by the BGH, affects the formerly recognised and case law-established⁴³ liability for performance by customary⁴⁴ insurance contract law. Before the VVG 2008 entered into force, German courts followed this approach alongside general principles on pre-contractual liability (culpa in contrahendo) or positive Vertragsverletzung (positive infringement).⁴⁵ The term “liability for performance” originates from the legal consequence of incorrect advising and concerns the extent of the insurance cover: The insurer is obliged to adhere—in terms of performance—to the contract with the content the policyholder could reasonably expect as a result of the incorrect advising. However, this liability for performance dropped unsubstituted (Alles-oder-nichts-Prinzip—principle of all-or-nothing) if the mistaken understanding of the policyholder was due to its own substantial fault.⁴⁶

Some German courts and parts of doctrine considered the aforementioned liability for performance as applicable even after the VVG 2008 entered into force.⁴⁷ Certainly, the opposite opinion⁴⁸ is more convincing as the need for this approach dropped after the revision of the VVG. This dogmatically doubtful former construction (which in itself did not fit in with general principles and systematics of general contract law) is no longer tenable since the liability for damages is now expressly set out in statutory law, namely sec. 6 para. 5, sec. 63 VVG.

Supporters of the continued application of this legal instrument (generated from customary law) argue as to the merit⁴⁹ that cases in which the policyholder is promised insurance coverage which is otherwise not available in the market cannot be solved adequately by relying on secc. 6, 63 VVG⁵⁰—albeit a reasoning that explains the inadequacy of the solution provided by the VVG is missing. Secc. 6, 63 VVG protect the incorrectly advised customer uncomplicatedly if the promised insurance cover is available in the market. Even in today’s rare and exceptional cases in which the insurance cover is unavailable in the market, the policyholder is protected inasmuch as he trusts the existing insurance cover and behaves riskily which he would not if there were no insurance coverage at all. With regard to evidentiary issues of casualty, the incorrectly advised policyholder, thereby, is granted with certain reductions of the burden of proof. A reason for an additional protection through liability of performance based on general principles of private law is, therefore, no longer obvious.

During the term of the policy, circumstances may arise which may cause the policyholder to push for contract change or to conclude a new insurance contract.⁶¹ For this reason, the insurer has the post-contractual duty to inquire and advise, according to sec. 6 para. 1 sentence 1 VVG (yet, this does not entail a duty to document⁶²), provided that there is an objective reason, which is recognisable to the insurer (sec. 6 para. 4 sentence 1 VVG). An objective reason for inquiry and advice may be given in the event of actual or legal changes that could cause the policyholder to change the contract or conclude a new insurance contract, e.g. in the event of a change in legal framework conditions. An objective reason is also given if the policyholder expresses the desire for a reduction of the insured sum in a consultation. The insurer must then inform the policyholder of the risk of underinsurance and of the significance of the replacement values for the sum insured.⁶³ However, there is a tendency to make strict demands on the objective cause and on the insurer’s ability to recognise it.⁶⁴ It should also be noted that there must always be an occasion for a review of the existing insurance cover, i.e. it is not necessary to give general advice.

With regard to the occurrence of an insured event, disclosure duties of the insurer are linked to the maturity date of the insurer’s performance under the insurance cover. In accordance with sec. 14 para. 1 VVG, the maturity of payments of the insurer depends on the fact that the elicitations (Erhebungen) are necessary to establish the insured event and the scope of the insurer’s payments have been completed.⁶⁵ “Completed elicitations” (and thus the maturity date is also given) with the receipt of a definitive refusal of coverage by the insurer⁶⁶ or, in the case of delayed elicitations, at the time when the elicitations would have ended if processed properly.⁶⁷

This provision reflects the legitimate interests of the policyholder when the insured event has occurred. In addition to the maturity description, sec. 14 VVG provides for a duty of the insurer to determine the insured event and to conduct elicitations thereto.⁶⁸ Failures and delays on the part of the insurer may cause existentially detrimental situations for the policyholder. Hence, the policyholder must rely on the insurer’s reasonable claims handling, wherefore reasonable expectations must be considered. Against this background, the term necessary elicitations (stated in sec. 14 para. 1 VVG) needs to be interpreted as elicitations an average and prudent insurer must carry out in order to determine the insured event, its duty to provide coverage and the scope of the payment.⁶⁹

After determining the key elements of the insurer’s claims handling, the policyholder has to be notified of the result. Yet, this duty is not explicitly stipulated by statutory law but by German case law.⁷⁰ Additionally, this conclusion is supported by sec. 15 VVG as the beginning of the limitation period for claims of the policyholder is linked to the insurer’s final statement regarding its duty to provide coverage.⁷¹ With its final statement, the insurer is as well obliged to refrain from any further elicitations. In case its final statement was delayed by the insurer, the maturity date is preponed to the date the notifications would have reached the policyholder in the usual course of business.⁷²

More precisely, the VVG entails a special provision with regard to specific insurances. First and foremost, this is true for third party liability insurances. Here, sec. 106 VVG provides for a duty of the insurer to release the policyholder from the third party’s claim within two weeks, beginning at the time when the third party’s claim is established with binding effect for the insurer by final judgement, acknowledgement or settlement. The same applies with respect to the reimbursement of judicial and extra-judicial costs arising from claims asserted by a third party (sec. 101 para. 1 VVG), i.e. payment within two weeks after communication of the calculation.

In occupational disability insurance, the policyholder is entitled to receive a notification (in text form) on the existence or non-existence of a duty of the insurer to provide coverage, sec. 173 VVG. The insurer carries out this duty by acknowledging its duty or by stating that it is not obliged to perform. This duty arises on the maturity date defined by sec. 14 para. 1 VVG. In case the insurer omits to notify the policyholder, the latter is—after a reminder—entitled to damages caused by the delay in accordance with sec. 286 para. 1 BGB.⁷³

In addition, secc. 186, 187 VVG stipulate specific disclosure duties of the insurer for accident insurances. In this respect, the insurer especially has to notify the policyholder of the time-limited requirements of his claim for coverage (sec. 186 VVG).⁷⁴ However, this duty is again drafted as an Obliegenheit of the insurer (with regard to the terminology see above), i.e. the insurer is restricted from relying on the expiry of the policyholder’s time period. Moreover, sec. 187 para. 1 sentence 1 VVG generally obliges the insurer to notify the policyholder (in text form), if it recognizes a duty to provide cover, and to what extent within a one-month-period after having received all necessary documents. Yet, this recognition is not considered to establish a duty of the insurer. That is why the insurer may still be entitled to reclaim the payment on ground of unjust enrichment (sec. 812 para. 1 sentence 1 case 1 BGB).⁷⁵ Any breach of this duty may, again, solely entitle the policyholder to damages caused by the delay pursuant to sec. 286 para. 1 BGB.

Sec. 19 VVG provides for a scaled set of remedies with the right to avoid the contract being the basic remedy. Accordingly, the insurer’s right to avoid or to vary the contract is restricted only by exclusions set out in sec. 19 paras. 3–5 VVG.

The question whether the insurer is exempted from indemnifying the policyholder for loss suffered on the occurrence of an insured event prior to the avoidance is governed by sec. 21 para. 2 VVG. This crucial matter is linguistically hidden in the provision’s heading “exercise of the rights of the insurer” and located between sec. 21 para. 1 VVG (time period and the requirement to give reasons) and sec. 21 para. 3 VVG (expiration period for remedies).

In life insurance a specific provision on false declarations of the insured person’s age applies. In such a case, and according to sec. 157 VVG, the insurer’s liability is modified in the proportion that the insurance premium commensurate with his actual age bearing to the agreed insurance premium. In deviation from sec. 19 para. 2 VVG the insurer shall only have the right to avoid the contract on account of the misrepresentation if it would not have concluded the contract had the age been notified correctly.

In health insurance, an innocent misrepresentation does not lead to any negative consequences (sec. 194 para. 4, sec. 206 VVG). Contrary to sec. 19 para. 3 VVG, the insurer is not entitled to terminate the contract due to slight negligence of the policyholder in mandatory health insurance since any termination is excluded according to sec. 206 VVG.⁷⁶

Except in the case of fraudulent behaviour, any remedy requires that the insurer must have already instructed the policyholder in due time of the consequences of any misrepresentation (sec. 19 para. 5 sentence 1 VVG).⁷⁷

The burden of proof generally lies with the insurer claiming remedies according to sec. 19 VVG.⁷⁸ However, the burden of proof regarding the fact that the policyholder acted without fault or only slight negligently lies with the policyholder (sec. 19 para. 3 sentence 1 VVG). This also applies to the fact that the insurer, nevertheless, would have concluded the contract had it known the facts which were not revealed—albeit with other conditions. In order to prove the latter, the policyholder’s allegation is generally sufficient; in the aftermath, it is up to the insurer to substantiate that it would not have concluded the contract at all.

For the ease of comprehension, the following depiction does not mechanically follow the intricate statutory regulation but displays the legal consequences of breach with reference to the policyholder’s degree of fault.

It should be noted that secc. 19–21 VVG do not provide for a separate remedy in case of fraudulent intent of the policyholder. However, fraudulent intent for which the burden of proof is borne by the insurer exempts the insurer from its duty to ask questions in case of obviously incomplete or inconsistent answers by the policyholder. It also exempts the insurer from the requirement to instruct the policyholder on the consequences of a misrepresentation and denies the policyholder a rebuttal of causality.

If the policyholder misrepresents without fault or with only slight negligence, the insurer is entitled to terminate the contract within a one-month period where the insurer would have refrained from concluding the contract had it known the facts (Vertragshinderungsumstände). The one-month period aims to enable the policyholder to obtain insurance coverage elsewhere.

Upon avoidance of the contract, the insurer is released from its obligation with regard to a previously occurred insured event, sec. 21 para. 2 VVG.⁸⁰ However, the insurer is liable if the policyholder proves that the misrepresentation is of a fact that has neither been the cause of the occurrence or of the assessment of the insured event nor of the determination or the scope of the insurer’s liability (rebuttal of causality, sec. 21 para. 2 sentence 1 half sentence 2 VVG). However, the policyholder is denied a rebuttal of causality if he misrepresented fraudulently, sec. 21 para. 2 sentence 2 VVG.

In the course of varying the contract, the equivalence ratio of insurance coverage and premium is either established retroactively from the beginning of the contract (in case of slight negligence) or retroactively from the beginning of the insurance period (in case of no fault).

As a reaction to the notification by the insurer, the policyholder may terminate the contract within one month without prior notice if the insurance premium increases more than 10 per cent on account of an adaption of the contract or if the insurer refuses to cover the risk of the unrevealed circumstance, sec. 19 para. 6 sentence 1 VVG. The insurer shall notify the policyholder of this right of termination in the notification of the variation of the contract, sec. 19 para. 6 sentence 2 VVG.

By retroactively inserting an exclusion clause, the insurer may be exempted from liability for an insured event that occurred after the adaption of the contract came into effect if the insurer proves that it would have concluded the contract with the exclusion clause had it known the unrevealed fact.⁸¹ It is argued, however, that such a solution would not be in line with the insurer not being entitled to avoid but only to terminate the contract. Following this argument, German doctrine proposes to teleologically reduce the application of sec. 19 para. 4 sentence 2 VVG to the basis that slight negligent or innocent misrepresentation of a material circumstance (the revelation of which would have caused the insurer to exclude the respective risk) does not entitle the insurer to exclude the risk retroactively but only for the future.⁸² However, this approach is not conclusive. If the insurer would not have concluded the contract at all, the misrepresentation would at least have been sanctioned by termination of the contract within one month. If, however, the insurer would have concluded the contract but would have excluded the risk, a slightly negligent misrepresentation would not be sanctioned at all, if the risk exclusion solely applied for the future. Hence, a slightly negligent policyholder would be privileged in comparison with a policyholder properly representing all circumstances, since the latter was confronted with a risk exclusion from the very beginning. Consequently, the policyholder’s incentive in the pre-contractual representation of material circumstances would be weakened and the retroactive exclusion of the respective risk should, therefore, be possible.⁸³

All available remedies require that the insurer has instructed the policyholder in a separate notification in text form of the consequences of any misrepresentation, sec. 19 para. 5 sentence 1 VVG; the burden of proof lies with the insurer. However, according to case law this requirement shall not apply to a fraudulent policyholder.⁸⁴ “Separate notification” does not require a separate document and it is sufficient that the notification clearly differs from the rest of any text, for instance by using typographical design and placing in order to ensure that the instruction catches the policyholder’s eye while he is fulfilling his duty not to misrepresent.⁸⁵ Such instruction must generally be rendered prior to the date on which the policyholder must fulfil his duty.⁸⁶

The insurer’s rights are excluded according to secc. 19 paras. 2–4 VVG if the insurer was aware of the unrevealed risk factors or the erroneous representation (sec. 19 para. 5 sentence 2 VVG; the burden of proof lies with the policyholder). In this respect, policyholders often invoke that the involved agent of the insurer was aware of a notifiable fact (for example a previous illness) and, on top of that, did expressly advise the policyholder not to mention this fact in the insurer’s questionnaire. According to secc. 69, 70 and 72 VVG the knowledge of the agent is equivalent to the knowledge of the insurer, since the agent is to be considered as being “eye and ear of the insurer”, with the result that the duty not to misrepresent is properly fulfilled to this extent.⁸⁷ The same applies to a statement of the policyholder vis-a-vis the physician being engaged by the insurer.