Continental European Legislative and Judicial Trends: Recent Developments with Regard to the Principle of Utmost Good Faith in Insurance Law in Austria
Austrian Supreme Court Defines “Non-Statutory Duties to Inform” on the Part of the Insurer
In a decision of the Austrian Supreme Court in November of last year, the court specified a further case of non-statutory duty to inform on the part of insurers, which derives from the principle of utmost good faith applicable in insurance law.
According to this decision, the insurer must expressly inform any insured party who is in qualified arrears with a premium payment (for example, non-payment of the outstanding premium after the insurer has set a grace period and informed the insured party of the legal consequences, but the policyholder instead simply pays the next premium installment). The insurer needs to inform the policyholder that he will only regain insurance cover when the premium in arrears has been paid. If the insurer does not inform, even though it was aware that the insured party misunderstood whether insurance cover existed, such an omission to inform may be held against it.
The Case (1)
The decision at issue concerned a contract for third-party motor vehicle insurance. The premium was due quarterly under the terms of the contract.
The insured party failed to pay the premium due for the quarterly period from September 1, 2005, to December 1, 2005. Even after a qualified payment reminder and the initiation of a grace period of 14 days, in accordance with the statutory provisions, the amount in arrears remained outstanding. In spite of these arrears, the insured party still received a bill from the insurer for the premium in respect to the following quarterly period (December 1, 2005, to March 1, 2006). The insured party paid this premium on December 12, 2005, using the original payment slip provided by the insurer.
The insured party was involved in a motor accident in which it was at fault on December 17, 2005, whereupon the insurer made a payment of about EUR5,000 to the other party involved in the accident as the injured third party. Only after being notified by the motor vehicle registration authority and being asked to submit proof of insurance did the insured party transfer the outstanding premium for the quarterly period from September 1, 2005, to December 1, 2005, on January 26, 2006, using the original payment slip, which had been enclosed with the payment reminder. In the case at hand, the insurer sought to recover the payment made to the injured third party by taking action for recourse against the insured party, on the basis that the insurer had been released from all payment bligations in respect of the insured party because of the premium in (qualified) arrears.
Underlying Austrian Legal Background
Section 39 of the Austrian Insurance Policy Act (Versicherungsvertragsgesetz, VersVG)
As regards default on a renewal premium, Section 39 of the Austrian Insurance Policy Act provides that the insurer can notify the insured party in writing of a grace period which must be at least two weeks. In this case, it must inform the insured party that if any insured event occurs after the expiry of the grace period, the insurer will be free of any obligations to make payments in the event that the outstanding premium is still in arrears at this point in time. Moreover, it must inform the insured party of the insurer’s special right to terminate according to Section 39 (3) of the Austrian Insurance Policy Act, which played no role in the case at hand.
Supplementary Case-Law of the Austrian Supreme Court on Section 39 of the Austrian Insurance Policy Act
According to settled case-law of the Austrian Supreme Court, the insurer is only released from the obligation to make payments for the time subsequent to the expiry of the grace period notified. Moreover, the freedom from payment obligation ends with the payment of the outstanding premium. (2)
It has equally been established that the consequences of default also last beyond the next date when a premium is due until the outstanding premium which was subject to the qualified reminder has been paid.
If further premium payments are made, the Supreme Court assumes that such payment is to be credited against the oldest outstanding premium arrears unless otherwise agreed. (3)
In the introduction to its decision on November 18, 2009, the Supreme Court invoked in detail the three prerequisites for the insurer to be released from its payment obligations under Section 39 of the Austrian Insurance Policy Act in the case of default on the payment of a renewal premium.
According to the statutory doctrine and the applicable case-law, these prerequisites are:
- Qualified payment reminder (with a grace period and information on the legal consequences),
- Expiry of the grace period before the insured event occurs and
- Premium in arrears when the insured event occurs.
The Austrian Supreme Court commented in its decision relating to the question of whether the insurer was free from payment obligations in the specific case at hand. The prerequisite for success in the recourse claim against the insured party, and the only relevant factor, is whether the premium paid on December 12, 2005, by the insured party was for the previous quarterly period (September 1, 2005, to December 1, 2005) or for the following quarterly period (December 1, 2005, to March 1, 2006).
It is undisputed that the first two prerequisites, qualified payment reminder and expiry of the grace period before the occurrence of the insured event, were fulfilled.
In its legal evaluation of the case, the Supreme Court rightly went on to hold that when the insured party defaults on premium payments, the insurer in principle only becomes liable once again if the insured party also pays the premium, which was due first, and was subject to a qualified payment reminder, and then only provided this payment is made before the insured event occurs.
In assessing the specific facts of the case, the Austrian Supreme Court did not assume in accordance with the payment sequence established generally in Austrian civil law and in accordance with previous case-law on insurance issues that the premium paid was to be credited against the older and more burdensome debt (unless otherwise agreed).
Rather, the Austrian Supreme Court considered that the insured party had specifically assigned the payment to the later quarterly period (December 1, 2005, to March 1, 2006) by using the original payment slip, which specifically declared the payment to be for this period. In this respect, the court did not need to apply the above-described “default” rules for cases of doubt.
It could have come to the conclusion, as did the appeal court, that the insured party was in qualified arrears at the time of the insured event, which would have released the insurer from its payment obligations.
Nonetheless, the Supreme Court did not allow the insurer’s recourse claim. Instead it held that the insurer had infringed its non-statutory duty to inform. In the view of the Supreme Court, the insurer should have referred the insured party to the fact that paying the premium for the quarterly period from December 1, 2005, to March 1, 2006, would not alter the fact that insurance coverage would only be restored when the outstanding premium for the earlier quarterly period had also been paid.
In the opinion of the Supreme Court, the insurer ought to have realized that the insured party mistakenly believed that there was insurance cover. Thus, due to the principle of utmost good faith applicable in insurance law, the insurer could not rely on freedom from payment obligations under Section 39 of the Austrian Insurance Policy Act in this case.
In relation to the decision described above, it is interesting to note that the Supreme Court regarded as irrelevant whether the insurer actually realized that the insured party misunderstood the existence of insurance coverage or not. In the opinion of the Supreme Court, it at least ought to have recognized this.
The associated question of whether the insurer itself was in legal error is also apparently insignificant in the eyes of the Supreme Court. Clearly, the insurer is expected to have the relevant knowledge of the legal situation and thus can be faulted for the omission to inform.
As far as it was possible to ascertain, this decision has not yet been discussed in legal literature (at least not in depth), which explains why it is also not very well known in insurance practice.
In our opinion, the practical relevance of this case is nonetheless obvious. All comparable cases appear not to be infrequent. Neither is it improbable that an insured party would raise in defense a belief that the insurance coverage was reinstated by the payment of the subsequent premium. Thus, unless already in place in individual cases, a modus operandi should be implemented in everyday business operations and premium administration in order to avoid such issues in the future.
1 OGH November 18, 2009, 7 Ob 220/09t.
2 Grubmann, VersVG6 (2007) § 39 E 52.
3 Grubmann, VersVG6 (2007) § 39 E 54.
Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities Corp., a US registered broker-dealer and member FINRA/SIPC. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd., which is authorized and regulated by the Financial Services Authority. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC Securities Corp., MMC Securities (Europe) Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies.
This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance or insurance product. Guy Carpenter & Company, LLC provides this report for general information only. The information contained herein is based on sources we believe reliable, but we do not guarantee its accuracy, and it should be understood to be general insurance/reinsurance information only. Guy Carpenter & Company, LLC makes no representations or warranties, express or implied. The information is not intended to be taken as advice with respect to any individual situation and cannot be relied upon as such.
Readers are cautioned not to place undue reliance on any historical, current or forward-looking statements. Guy Carpenter & Company, LLC undertakes no obligation to update or revise publicly any historical, current or forward-looking statements, whether as a result of new information, research, future events or otherwise.
Statements concerning, tax, accounting, legal or regulatory matters should be understood to be general observations based solely on our experience as reinsurance brokers and risk consultants, and may not be relied upon as tax, accounting, legal or regulatory advice which we are not authorized to provide. All such matters should be reviewed with your own qualified advisors in these areas.