David Lewin, Managing Director
Introduction and Background
The Insurance Contract Act 2008 (Versicherungsvertragsgesetz 2008, VVG 2008) became effective on January 1, 2008, and reformed the “old” VVG fundamentally. Until January 1, 2009, insurers were allowed to adapt general insurance conditions in older insurance contracts to the new VVG 2008 if the old conditions did not comply with the new act. Many insurers accepted the opportunity to adapt their old conditions, but some did not.
The old general insurance conditions requiring adaptation generally deviated from Section 28 Paragraph 2 Sentence 2 of the VVG 2008, which deals with policyholder non-observance of contractual incidental obligations (Obliegenheiten). Typically, with an incidental obligation, policyholders cannot be legally forced to observe obligations, but they may lose certain rights if they do not. For example, the policyholder could lose the right to demand compensation from an insurer.
Pursuant to Section 28 Paragraph 2 Sentence 2 VVG 2008, an insurer is entitled to include a provision in its general insurance conditions that fully releases it from the obligation to pay if the policyholder breaches an incidental obligation intentionally. If a policyholder does not observe an incidental obligation due to gross negligence, the insurer is entitled to reduce any benefits payable commensurate with the severity of the policyholder’s fault.
However, according to Section 6 of the former VVG, the insurer was entitled to include a provision in its general insurance conditions that allowed it to fully deny payment in case of grossly negligent non-observance of the incidental obligation. General conditions in older contracts often contained such provisions.
The consequence of not adapting old insurance conditions to the VVG 2008, in particular Section 28 Paragraph 2 Sentence 2 VVG 2008, was the subject of a recent decision of the Federal Court of Justice of Germany (Bundesgerichtshof ).(1) The case deals with contractual incidental obligations under residential building insurance. Since the question of not adapting old insurance conditions to the VVG 2008 applies to all direct lines of insurance, the court’s findings can be transferred to other types of insurance, in particular, liability insurance.
The policyholder sued the insurer under a residential building insurance contract, claiming reimbursement for water pipe damage. The incidental obligations to be fulfilled by the policyholder were regulated in Section 11 of the General Residential Building Insurance Conditions (Allgemeine Wohngebäudeversicherungsbedingungen, VGB 88) included in the insurance contract. Pursuant to that section, the policyholder was obliged to take preventive measures, in particular to control the water pipes regularly, to empty the water pipes if the house was not occupied and to heat the building in winter.
Section 11 VGB 88 further stated that the insurer shall be released from its obligation to pay if the policyholder did not observe any of these incidental obligations, either intentionally or with gross negligence, in accordance with Section 6 of the former VVG. The defending insurer did not adapt Section 11 VGB 88 to the VVG 2008.
The policyholder did not fulfill his contractual incidental obligations. The insured building was not inhabited during the winter, and the water pipes were not emptied. On January 8, 2009, water pipe damage occurred.
The insurer denied payment arguing that the policyholder had breached both his contractual incidental obligations and the statutory incidental obligation to not cause an insured event (Section 81 VVG 2008). The plaintiff prevailed in the proceedings before the court of first instance. The insurer then paid 50 percent of the damages to the plaintiff and filed an appeal to the Appellate Court.
After dismissal of the appeal by the Appellate Court, the defendant insurer decided to appeal to the Federal Court.
Federal Court Findings
The Federal Court found that neither Section 11 VGB 88 (the former general condition) nor Section 28 Paragraph 2 Sentence 2 VVG 2008 (the new statutory provision) released the insurer from its duty to pay. Furthermore, the insurer could not reduce payment to the plaintiff on the grounds that the plaintiff was grossly negligent for not observing its contractual incidental obligation.
The Federal Court held that the former general condition was no longer effective since that section referred to Section 6 of the old VVG. According to this old regulation, grossly negligent non-observance of a contractual incidental obligation fully releases the insurer from its obligation.
However, the old regulation of Section 6 VVG did not comply with the new fundamentals laid down in Section 28 Paragraph 2 Sentence 2 VVG 2008. Therefore, the former general condition (Section 11 VGB 88) led to an inappropriate and unreasonable disadvantage for the policyholder and was found null and void by the Federal Court, according to Section 307 Paragraph 1 Sentence 1, German Civil Code (Bürgerliches Gesetzbuch, BGB). The result found that a gap existed in the general insurance conditions of the insurance contract.
Generally, when contract terms are ineffective, the contents of the contract are determined by statutory provisions (Section 306 Paragraph 2 BGB). However, the gap stemming from the ineffectiveness of Section 11 VGB 88 could not be filled by the statutory provision of Section 28 Paragraph 2 Sentence 2 VVG 2008 because this would have resulted in unfair treatment of the policyholder. The court held that it is reasonable for the insurer to have to bear the ineffectiveness of its own general insurance conditions because it did not adapt old general conditions to the new VVG 2008.
The court further found that Section 28 Paragraph 2 Sentence 2 VVG 2008 cannot entitle the insurer to reduce its payment due to a grossly negligent breach of a contractual incidental obligation if the contract itself does not contain such a provision. In the case at hand, the contract did not include such a provision, and therefore the defendant insurer could not reduce its payments on the grounds of breach of a contractual incidental obligation.
Finally, the Federal Court referred the case back to the Appellate Court for another reason: The Appellate Court improperly limited the insurer’s right to claim for “causing of the occurrence of the insured event” (Section 81 VVG 2008).
The Federal Court judgment is sound. If insurers did not make use of the opportunity to adapt their old general insurance conditions to the VVG 2008, the old conditions not in compliance with the VVG 2008 are ineffective. They cannot be replaced by the respective provision of the new VVG 2008 as this would create a disadvantage for the policyholder. Without a provision addressing the policyholder’s failure to observe a contractual incidental obligation due to gross negligence, the insurer may not reduce its payment. However, the insurer can argue that the policyholder also breached statutory incidental obligations, for example, that the insured event was caused by the policyholder’s gross negligence (Section 81 VVG 2008).
1 Federal Court of Justice of Germany, October 12, 2011 – IV ZR 199/10
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David Lewin, Managing Director