Germany: Breach of Contractual Incidental Obligation Due to Gross Negligence Can Release Insurer from Obligation to Pay
The Insurance Contract Act (Versicherungsvertragsgesetz, VVG) contains provisions about risk exclusions and incidental obligations. A risk exclusion means the insurer does not provide insurance cover for a specified excluded risk, and in cases of an incidental obligation, the policyholder loses insurance cover if he/she does not observe the specified incidental obligation.
Both the risk exclusion and the breach of an incidental obligation can have the same legal consequences, namely fully or partially releasing an insurer from its obligation to pay a policyholder. This would apply to the excluded risk of “causing the occurrence of the insured event” noted in Section 81 VVG and to the breach of contractual incidental obligations in general, the legal consequence of which are provided in Section 28 VVG.
According to Section 81 VVG, the insurer is fully released from its duty to pay if the policyholder caused the occurrence of the insured event intentionally. If the policyholder only acted with gross negligence, the insurer can reduce its payment commensurate with the severity of the policyholder’s fault. That means the more gross negligence on the part of the policyholder, the more the insurer can reduce its payment.
If the policyholder breaches a contractual incidental obligation intentionally, pursuant to Section 28 VVG, the insurer may deny payment completely. If the contractual incidental obligation is violated due to gross negligence, the insurer can reduce its payment commensurate with the severity of the policyholder’s fault.
The legal consequences of Section 81 VVG, which concerns a policyholder causing the occurrence of the insured event, and Section 28 VVG, which focuses on the breach of incidental contractual obligations, is the same. In cases of intentional behavior, the insurer does not have to pay, and in cases of gross negligence, it can pay less. The latter is known as the reduction model.
In contrast to the reduction model, the former VVG, which was in effect until December 31, 2007, was based on the all or nothing principle whereby the insurer was fully released from its obligation to pay in cases of gross negligence. This was considered unfair to the policyholder, particularly if the degree of gross negligence was rather close to ordinary negligence.
Under the new VVG, a dispute arose about whether an insurer could reduce its payment to zero if the degree of gross negligence was very close to intentional behavior in cases where the policyholder caused the occurrence of the insured event or failed to observe an incidental obligation due to gross negligence.
In a decision on June 22, 2011 (IV ZR 225/10), the Federal Court of Justice Bundesgerichtshof ) found that if an insured event is caused due to gross negligence, the insurer is entitled to reduce its payment to zero in exceptional cases where the degree of gross negligence is close to intention, according to Section 81 VVG. More recently in January 2012, the Federal Court considered whether reducing an insurer’s payment to zero should be possible if a contractual incidental obligation is breached due to gross negligence (IV ZR 251/10).
Facts of the Case
In this case dealing with contractual incidental obligation, the policyholder drove despite being unfit to drive because of a blood alcohol concentration (BAC) of 0.21 percent. He was involved in an accident, driving through a wall of a nearby landowner and causing damages in the amount of EUR4.657.17. The liability insurer reimbursed the injured landowner and took recourse against the policyholder.
Section D.2 of the insurance contract specifically noted the incidental obligation to refrain from driving in cases where the driver is unable to drive due to alcohol consumption. The contract defined the legal consequence of the breach of this incidental obligation as follows: “If you breach one of the obligations contained in Section D.2 intentionally, you have no insurance cover. If you breach your obligation grossly negligently, we are entitled to reduce our payments commensurate with the severity of your fault.”
Before the court of first instance, the policyholder declared the claim against him was justified for an amount of EUR1,877.95 and denied making any further payment. He argued that he had not breached the obligation intentionally and that he only had to bear half of the damage costs since the insurer’s payments could not be reduced to zero under Section 28 VVG.
The court of first instance decided that the insurer was entitled to take recourse against the policyholder, and the policyholder was obliged to pay the liability insurer the claimed sum. After the Appellate Court dismissed the policyholder’s appeal, he appealed to the Federal Court.
Federal Court Findings
The Federal Court found that in exceptional cases an insurer can be fully released from its obligation to pay if the policyholder breaches a contractual incidental obligation grossly negligently. This is the case when the policyholder violates an incidental obligation contained in the insurance contract with a degree of gross negligence that comes close to intention. The insurer, then, can reduce its payments to zero.
The court argued that there is no reason to judge the failure to observe a contractual obligation due to gross negligence differently from causing the occurrence of an insured event due to gross negligence (Section 81 VVG). Referring to its June 22, 2011, decision (IV ZR 225/10), the court argued that it had already allowed a payment to be reduced to zero when an insured event was caused due to gross negligence (Section 81 VVG) and that the same reduction should be allowed if a contractual incidental obligation was breached due to gross negligence.
The court pointed to the fact that the wording, the legislative procedure and the purpose of Section 81 and Section 28 VVG are the same. With regard to legal consequences, the wording of both Section 81 and 28 VVG is identical and does not exclude a reduction to zero. First, Section 81 Paragraph 1 and Section 28 Paragraph 2 clause 1 VVG contain the provision that the insurer is fully released from its obligation to pay if the policyholder intentionally causes the occurrence of the insured event or does not fulfill the incidental obligation, respectively.
Second, Section 81 Paragraph 2 and Section 28 Paragraph 2 clause 2 VVG state that in cases of gross negligence the insurer is entitled to reduce its payments commensurate with the severity of the policyholder’s fault, meaning the degree of gross negligence. Neither Section 81 nor Section 28 VVG say an insurer should only be released from its obligation to pay in cases of intentional behavior. In addition, neither section includes a provision that the insurer’s obligation to pay must remain in cases of gross negligence.
Furthermore, the court held that the legislative procedure of both Section 81 and Section 28 VVG did not provide a reason why fully releasing an insurer from its obligation to pay should not be possible in cases of gross negligence. In its June 22, 2011, judgment (IV ZR 225/10), the court found that the final report of the legislative commission that reformed the Insurance Contract Law noted that “the reduction of the obligation of the insurer to pay, exceptionally, can lead to a full release of the insurer.” Although the government’s statements regarding the VVG draft did not expressly mention the possibility of fully releasing the insurer from its obligation to pay, this did not mean the legislator wanted to exclude this possibility.
The Federal Court also found that even though the new VVG abandoned the all or nothing principle, it provided no reason why a reduction to zero would not be possible in cases where the policyholder acted grossly negligently. In its June 22, 2011, judgment (IV ZR 225/10), the court said a difference remained between fully releasing the insurer in cases of intention and fully releasing the insurer in cases of gross negligence. If the policyholder acted intentionally, the insurer was not obligated to pay by law. If the policyholder acted grossly negligently, the circumstances could be weighed, leading to different payment amounts, including a reduction to zero in exceptional cases. The court further held that the opposing view, which considered a reduction to zero not possible in cases of gross negligence, would allow reductions of up to 99 percent and that such quotas were artificial and arbitrary.
In addition, the court noted in its June 22, 2011, judgment (IV ZR 225/10) that all circumstances of a case must be considered in detail in order to guarantee that a reduction to zero is the absolute exception if the policyholder acts with gross negligence.
By applying these standards to the case at hand, the Federal Court found that the Appellate Court had considered the circumstances in detail. It had based its decision on the grounds that the policyholder’s BAC of 0.21 percent was significantly beyond 0.11 percent, the point at which a person is unable to drive, and that driving a car in this condition is one of the most severe traffic violations. Furthermore, the Appellate Court found that the policyholder’s inability to drive was the only reason for the damages.
The Federal Court, therefore, confirmed the decision of the Appellate Court.
The Federal Court judgment is sound. The abandonment of the all or nothing principle enabled the insurer to reduce its payments commensurate with the severity of the policyholder’s fault, if the policyholder breached an incidental obligation grossly negligently. The more grossly negligently the policyholder acts, the more the insurer can reduce its payment. In exceptional cases where the degree of gross negligence is very close to intention, the insurer can reduce its payment to zero - in other words, the insurer is fully released from its obligation to pay. The Federal Court first decided this for cases involving the causation of an insured event’s occurrence (Section 81 VVG) in its June 22, 2011, judgment (IV ZR 251/10) and has now clarified that the same applies to the breach of incidental obligations contained in an insurance contract.