The current Swiss Insurance Contract Act (Versicherungsvertragsgesetz, VVG) prohibits retroactive insurance. Therefore, an insurance contract is usually void if the risk no longer exists or the feared event has already occurred before the contract is concluded (Article 9 VVG).
The Swiss Supreme Court (Bundesgericht) recently decided whether the ban on retroactive insurance applies only to new contracts or also to reinstatements of suspended insurance contracts (judgment of April 2, 2012, 4A_580/2011). While the case dealt with daily benefits insurance, the ban on retroactive insurance applies to other types of insurance as well. The court’s findings, therefore, can be transferred to liability insurance.
Facts of the Case
The policyholder had been insured under a daily benefits insurance contract since May 2004. He did not pay the premium for the period from July to December 2006, which was due in June 2006. The insurer sent a reminder on September 4, 2006, requesting that the policyholder pay the premium due within 14 days or face the consequences of default. The policyholder paid the premium on May 29, 2007, and began inpatient treatment for mental illness on this same day.
In July 2007, the policyholder claimed daily benefits from the insurer based on incapacity for work due to mental illness that had existed since November 2006. The insurer denied payment because of the gap in coverage from September 19, 2006, to May 29, 2007.
The policyholder sued the insurer under the daily benefits insurance contract and partially prevailed in the proceedings before the Cantonal Court, specifically regarding the daily benefits for the period of time after May 29, 2007. The insurer then filed an appeal to the Supreme Court and applied for dismissal of the case in total.
Supreme Court Findings
The Supreme Court found that the insurer had no duty to pay since payment would mean a breach of the ban on retroactive insurance.
According to Article 20 Paragraph 1 VVG, the insurer reminded the policyholder to pay the premium due within 14 days (by September 18, 2006). Because the payment was not made until May 29, 2007, the insurance ceased to be in effect on September 19, 2006, according to Article 20 Paragraph 3 VVG. Since no payment was made within two months to resume the insurance coverage, a rescission of the insurance contract is assumed according to Article 21 Paragraph 1 VVG. Thus, the contract expired by law.
Coverage is revived if the insurer accepts a subsequent payment of the premium, according to Article 21 Paragraph 2 VVG. The coverage is revived in the moment when the outstanding premium is paid together with interest and costs. In the case at hand, this occurred on May 29, 2007. However, the Supreme Court decided that Article 21 Paragraph 2 VVG refers only to Paragraph 1. Therefore, the coverage is only revived if payment occurs within a period of two months.
Since the premium was paid after the expiration of the two-month period, the old contract was not reinstated. Rather, a new contract was concluded with the same conditions that were contained in the old contract, meaning the original agreement was restored but only for the future.
According to Article 9 VVG, the insurance contract is void if the “feared” event has already occurred before the contract’s conclusion. The insured risk must refer to a future event. Retroactive insurance that provides coverage for existing events is inadmissible even if the existing event is not known.
The Supreme Court clarified that the ban on retroactive insurance applies not only to a contract conclusion but also to an alliteration or reinstatement of a contract. If the contract ceases to be effective because of premium in arrears and the “feared” event occurs before the contract is revived, the contract cannot be continued without further ado (Article 20 Paragraph 3 VVG). It is also not admissible that an expired contract is concluded just after a subsequent receipt of the outstanding premium if the “feared” event has already occurred (Article 21 Paragraph 1 VVG).
The Supreme Court referred the case back to the Cantonal Court for a new decision with these considerations in mind.
The Supreme Court clarified that the ban on retroactive insurance applies to all contract instances, such as conclusion, alliteration or reinstatement of a contract.
However, the VVG is being revised currently, and part of the revision deals with the permissibility of retroactive insurance. This revision is still in progress, so it remains to be seen whether there will be a significant modification of the final draft of the new VVG. It is likely that the ban on retroactive insurance will not remain in the new VVG.
According to Article 130 of the final draft of the new VVG, the new VVG will be applicable to the conclusion or alliteration of a contract that takes place after this revised act has come into effect. Therefore, the judgment for this case is only important for cases in which the conclusion, alliteration or reinstatement of a contract takes place before the new VVG becomes effective.