David Lewin, Managing Director
The Swiss Insurance Contract Act (Versicherungsvertragsgesetz, VVG) has been the subject of growing criticism for a number of years. In particular, the VVG does not provide for equivalence between the obligations of the insured and those of the insurer. Also, there has been deficient coordination between the VVG and the Swiss Code of Obligations (OR). As a consequence, the 100-year-old VVG is being modernized and oriented more towards the future.
Revisions to the VVG will provide the act with a more modern, better-arranged structure that is relevant to the current market. Furthermore, new content will create more equality between contracting parties and will improve the position of the insured.
The recent VVG revision constitutes a major overhaul that builds upon the partial revision of the act in 2006. At that time, several important rules were changed, and the Swiss Insurance Supervision Act (Versicherungsaufsichtsgesetz, VAG) was renewed. Recently, a final draft of the new VVG (E-VVG) and the associated explanatory report (Botschaft des Bundesrates) were given to the Swiss Parliament (Bundesversammlung).
Overview of the New and Controversial Regulations
Disputed Rules in the Revised VVG
Right of Revocation
A right of revocation that benefits the insured is provided in Article 7 E-VVG. This allows the insured to revoke a contract within two weeks without any need to provide grounds for revocation. As a result, the insured will no longer be obliged to enter into the contract. This rule aims to protect the insured against the consequences of hastily completed contracts and applies to all types of insurance contracts.
Article 12 E-VVG details the insurer’s requirements for information on the insured. The extended information requirements implemented by the E-VVG aim to remedy the lack of information provided to the insured.
One concern with the information requirement is the calculation of premiums by gender (Article 12 Paragraph 1, d) E-VVG). The rule clarifies that premium differentiation by gender is allowed (in contrast to EU law) if it is based on actuarial and statistical data.
Duty of Disclosure
Article 15 E-VVG implements the insured’s pre-contractual duty of disclosure, which extends to all relevant risk factors (erhebliche Gefahrtatsachen). According to Paragraph 3, such risk factors are limited to past and present factors. Future assumptions do not have to be disclosed because the insured should not be forced to speculate. However, insurers may ask for reasonable developments on the basis of current circumstances.
Additionally, the insurer must request information in a comprehensive and precise manner. Previously, significance could be placed on risk factors subject to vague and unclear queries by the insurer. This was a highly disputed area. In such cases, the insurer only had to prove that the undisclosed risk factor influenced its decision to move forward and complete the contract. With the new law, however, the insurer must provide evidence that a risk factor is significant.
If the insured violates the duty of disclosure, the insurer is entitled to cancel the contract within four weeks (cf. Article 18 Paragraph 2 E-VVG). This type of cancellation requires that the insurer had made an incorrect risk assumption on the basis of disclosed information. In addition, it is required that in a case where if the insurer had been provided with correct information the insurer neither would have completed the contract nor would have completed the contract with different content.
Moreover, the degree of fault is significant. Only an intentional breach of duty frees the insurer from the duty to perform. If the policyholder acts with conditional intent or even carelessness, the insurer can reduce its performance by degree of fault. However, according to Article 19 Paragraph 3 E-VVG, the insurer does not have the duty to perform if the risk would not have been covered in the case of a truthful notification. In view of the far-reaching consequences of this rule, the insurer must prove unambiguously that it would not have covered the risk – not even at a higher premium.
Instead of refusing to indemnify the policyholder (partially or completely), the insurer is entitled to adjust the premium retrospectively for the whole insurance period, according to Article 19 Paragraph 2 E-VVG. This allows the insurer to collect the difference between the paid premium and the premium that would have been invoiced if the risk factor had been disclosed correctly at the beginning of the contract.
According to Article 20 E-VVG, there is a special rule for jumbo risks that states that Articles 18 and 19 E-VVG are basically applicable. However, Article 20 E-VVG is more rigid and rules that a failure to disclose risk factors might constitute a breach of obligation even in cases where the insurer did not request the disclosure.
Costs of Preventing, Minimizing and Establishing the Loss
Article 40 E-VVG determines that the insurer must pay for loss prevention and loss minimization. In contrast to the previous regulation, the insurer is not obliged to make any payment exceeding the insured sum unless the costs of loss prevention and loss minimization are attributable to the insurer. This may be important as minimization costs can be significant in some insurance cases.
According to Article 40 Paragraph 2 E-VVG, the insurer must bear the costs of investigating and establishing the loss. The previous regulation allowed for such costs to be divided. It is questionable as to what extent the regulation can force the insurer to pay for expert, court and attorney fees.
Article 65 E-VVG addresses the insurance broker’s tasks. While there are no fundamental changes, it does feature improvements that aim for better disclosure and advice, including documentation of duties.
Article 66 E-VVG requires disclosure of broker fees because it involves a situation where the broker should be acting in the interest of the insured even though its services are paid for by the insurer. To avoid conflicts of interest, the broker must disclose the details of its own remuneration, including not only the amount of payments, but also their type and frequency.
Direct Claim in Liability Insurance
Article 91 Paragraph 1 E-VVG now provides for the injured party to make a direct claim against the insurer. The previous law granted the injured party only a lien on the insured’s claims against the insurer – a solution that was not considered pragmatic. However, according to Article 91 Paragraph 3 E-VVG, this ability to make a direct claim is not available for non-obligatory liability insurance lines with only pure financial losses.
To ensure that the injured party is aware of the direct claim option, Article 91 Paragraph 2 E-VVG provides the injured party with a disclosure right against the insured. However, the right of disclosure does not differentiate between private customers and business clients. This aspect has faced criticism. Business clients may be required by law to provide detailed information about how the company is insured along with details of its coverage.
Further Important Rules
Under certain circumstances, Article 24 E-VVG allows the possibility of retroactive insurance coverage (insurance coverage for the past).
Premium Adjustment Clause
Article 48 Paragraphs 1 and 2 E-VVG contain the requirements for an insurer increasing premium levels. If the premium is increased, the insured receives the right to cancel, pursuant to Article 48 Paragraph 3 E-VVG.
General Right of Cancellation
Article 52 E-VVG contains a general right to cancel that may be exercised at the end of the third year of the contract or every year following. If agreed upon, the cancellation right may even be exercised at an earlier stage, according to Article 52 Paragraph 2 E-VVG. In view of this general cancellation right, there is no special termination right in case an insured event occurs.
According to Article 55 Paragraph 1 E-VVG, the insured has ten years to notify the insurer of the insured event. This regulation applies only if the insured event has occurred during the contract term. According to the previous legal situation, loss and notification must both fall in the contract period.
Extension of Limitation Period
The limitation period that applies to insurance indemnifications is extended to ten years, according to Article 64 Paragraph 1 E-VVG. In addition, the limitation starts with the occurrence of the insured event. Similarly, the limitation period for premium receivables is extended to five years according to Article 64 Paragraph 3 E-VVG.
The complete revision of the VVG aims to strengthen consumer protection. As part of this effort, existing rules that may be detrimental to the insured have been weakened. At the same time, several instruments that benefit the insured have been implemented in the new version.
However, the proposed draft is being significantly criticized from different sides. Major insurance buyers state that the E-VVG tends to limit the freedom of contract in their evenly balanced negotiations with insurers and insurance brokers. Therefore, revision of the current VVG would be more important for private customers than for business approved major clients.
In conclusion, the entire upcoming parliamentary procedure is subject to a significant level of controversy, and it remains to be seen how lobbying groups will influence the final version of the Swiss Insurance Contract Act.
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David Lewin, Managing Director