Information Obligations (Insurance Contracts)
by Giesela Rühl
Insurance contracts belong to the genus of contracts which particularly suffer from information asymmetries: the policyholder usually knows more about the insured risk than the insurer. He knows whether circumstances exist which increase or reduce the insured risk, and he knows how the insured event has occurred. On the other hand, the insurer usually knows more about the statistical probability of a particular risk than the policyholder. He knows the circumstances which tend to increase or reduce that probability, and he understands the complex ‘legal product’ he offers, ie the insurance coverage. Since both parties are thus lacking information which is important for the conclusion and execution of the insurance contract (insurance contracts), the equilibrium of performance and counter-performance as well as the orderly functioning of the insurance market are in danger. Most national orders and international instruments, therefore, establish information duties that require both the policyholder and the insurer to contribute to the diminution of the respective information deficits. Where the contract is concluded with the assistance of an insurance intermediary (insurance intermediaries), this intermediary will also bear such duties.
2. Information duties of the policyholder
Information duties are imposed on the policyholder in every phase of the insurance contract (insurance contracts): before the conclusion of the contract; during the actual period of the risk; and after the insured event has occurred. The legal basis for these duties is for the most part to be found in national law. Efforts to harmonize the relevant rules on the European level have not yielded much success so far: a draft directive of 1979 never came close to adoption and was therefore retracted in 1993 (internal market (insurance)). Nevertheless, the calls for unification or, at the very least, harmonization of substantive insurance contract law have not ceased. To the contrary: since the European common market for insurance has not become a reality, increasing numbers of scholars have in recent years called for a renewal of the work on harmonization. The European Commission reacted in 2001 and called for a discussion of harmonization of contract law in general and harmonization of insurance law in particular. However, since 2004 the Commission has been backtracking and is now aiming at the adoption of a Common Frame of Reference (European private law) which may contain the most important rules of European contract law including the information duties of the policyholder. The relevant provisions pertaining to insurance law are being drawn up by the Restatement Group of European Insurance Contract Law, which published a first part, the so-called Principles of European Insurance Contract Law (PEICL) at the end of 2008. However, since the Common Frame of Reference will not be binding, the information duties of the policyholder established therein will continue to find their actual legal basis in national law. The situation will only be different if the PEICL—according to the proposal of the Restatement Group—acquires the status of an optional instrument with the result that the parties can choose to subjugate their contract to the PEICL (choice of law by the parties). However, whether the PEICL will be structured as an optional instrument is not yet clear. Consequently, many European states—eg Belgium, Germany, the Netherlands and Sweden—have recently modernized their insurance contract law including the information duties of the policyholder. In England, the Law Commission began in 2006 to make suggestions for the reform of relevant provisions, in particular the provisions on non-disclosure and misrepresentation.
a) Before conclusion of the contract
The most important information duty of the policyholder is the duty of disclosure which commences before conclusion of the insurance contract (insurance contracts). It is imposed on the policyholder by all legal orders and also by the Principles of European Insurance Contract Law (PEICL) because the insurer must know the particularities of the risk offered to him in order to collect risks and to distribute them amongst a large number of people. Only when the particularities are known can he set the correct premium for the policyholder and thereby hinder inefficient adverse selections which would otherwise result from insuring bad risks too cheaply or insuring good risks too expensively. Since the information requisite for a correct risk assessment is regularly in the sphere of the policyholder and since the policyholder, therefore, has better access to this information than the insurer (cheapest cost avoider), he is responsible for providing the insurer with the relevant information. The design of pre-contractual information duties in the various European national legal orders reflects this purpose of the duty: the demand on the conduct of the policyholder is usually high. Nevertheless, in all European countries there are tendencies to protect the policyholder from an overly broad duty to disclose and, in particular, from the consequences of an unintentional violation of the pre-contractual information duty.
In most legal orders, the policyholder is required to produce all information relevant to the insured risk. He must disclose this information irrespective of whether or not it has been requested by the insurer. In the countries which have reformed their insurance contract laws in recent years, the duty is sometimes limited to correctly answering the insurer’s questions. This holds true for the new German insurance contract law. By the same token, Art 2:101(1) PEICL merely requires the policyholder to answer the insurer’s questions correctly. In England, the Law Commission has recently advocated the same limitation, at least for consumer contracts. The new developments take into account that the insurer regularly knows better than the policyholder what information is needed before conclusion of the contract. At the same time, this sort of provision is more suited to the typical information and knowledge distribution associated with insurance contracts than a simple duty of disclosure requiring the policyholder to disclose certain facts even if the insurer has not asked a corresponding question.
Irrespective of whether a duty to disclose is simple or not, in all legal orders it extends only to material facts which are known to the policyholder. Where the insurer has failed to ask any questions, the materiality of the fact is measured with reference to the actual insurer. Only in a few countries is the objective standard of a prudent insurer decisive, as in Art 2:103(b) PEICL. In most European legal orders, a fact is therefore material if it would have influenced the decision of the actual insurer to enter the contract at all or on the original terms. Normally, it will be enough if the insurer would have taken the fact into account, irrespective of whether he would have changed his decision. Only occasionally is it required that coverage of the risk would have been refused by the insurer or would only have been taken on under other conditions, in particular subject to a higher premium. Differences exist as to whether the policyholder is also obliged to disclose facts which he does not actually know but ought to know. Whilst legal orders belonging to the common law and Art 2:101 PEICL include such facts, most other countries do not see them as part of the policyholder’s duty of disclosure. However, as set out above, the consequences of this rule are moderated by the PEICL in that the duty of disclosure only extends to facts requested by the insurer.
The violation of the policyholder’s pre-contractual duty of disclosure results in different consequences in different legal systems. The basic distinction is between legal systems that are based on the all-or-nothing principle and those which apply the proportionality principle. The all-or-nothing principle is the model which is traditionally applied in Europe. It provides the insurer with the right to avoid the contract and leads to the unravelling of the contract. It is still used today in numerous countries and is distinct in that the insurer is either completely bound to perform the contract or entirely exempt from liability. It is driven by the basically correct idea of avoiding an unintended and consequently inefficient contract. Yet the insurer also has the right to avoid the contract if the policyholder is not at fault or only slightly to blame. Since this is increasingly seen as unsatisfactory, the countries which have modernized their laws in recent years as well as the Restatement Group of European Insurance Contract Law and the Law Commission in its most recent suggestions have opted for the proportionality principle. This model has the effect that the insurance contract can only be avoided where there is a deliberate violation of the duty to disclose whilst, otherwise, only the policyholder’s right to claim the insurance sum is reduced. Differences, however, exist as to the question of how the policyholder’s right to claim the insurance sum has to be reduced. Whilst the claim in most legal orders, and according to Art 2:102(5) PEICL, is reduced in proportion to the increased premium that would have been set had the violation not occurred, in other countries the insurance sum is reduced according to the circumstances of the case, especially the blameworthiness of the policyholder and the causal relationship between non-disclosure and the occurrence of the insured event. In any event, the proportionality principle vindicates the interests of the policyholder in the preservation of the contract and the interests of the insurer in being protected from unintended contracts better than the all-or-nothing principle.
b) During the actual period of the risk
During the actual period of the risk, the policyholder has the duty to inform the insurer of changes, especially increases in the insured risk. This duty has a legal basis in most countries. However, in some countries, notably England, the policyholder bears this duty only if it is foreseen in the insurance contract. This is also the case according to Art 4:202 PEICL. Independently of their origin, the duty to disclose any increase in the insured risk guarantees that the risk, which existed at the time of the conclusion of the contract and which was the basis for the calculation of the premium, is perpetuated and the equilibrium between performance and counter-performance is maintained. Since the insurer can be fairly certain that the insured risk will not change during the actual period of the risk insofar as the policyholder has an influence, the duty of disclosure absolves the insurer from the necessity of considering changes in the risk at the time of conclusion of the contract and in particular when calculating the premium. In this way he does not need to consider all possible increases of the risk when calculating the premium. Rather, he need only draw conclusions once the risk has actually increased. The design of the duty of disclosure that is imposed on the policyholder during the contract period resembles the pre-contractual duty of disclosure in all European legal orders. In particular, a violation carries similar legal consequences.
c) After occurrence of the insured event
After occurrence of the insured event, all European legal orders as well as Arts 6:101 and 6:102 PEICL require the policyholder to disclose and communicate certain information. These duties are usually imposed on the policyholder by law and independently of the insurance contract. This might seem surprising at first blush. After all, the policyholder has an incentive to tell the insurer that an insured event has occurred. However, the duty to disclose and communicate information is also in the interest of the insurer. He has to be able to investigate the factual details surrounding a claim, and he must be able to do so in a timely fashion after the insured event occurred. Since it is normally easier and more economical for the policyholder—due to simple proximity—to determine whether damage has been incurred, he has to inform the insurer about the occurrence of the insured event and the details of the damage sustained. The design of the duty of disclosure and communication is oriented in all legal orders towards the other duties of disclosure that are imposed on the policyholder.
3. Information duties of the insurer
Like the policyholder, the insurer has informational duties before the conclusion of the contract and during the actual period of the risk. However, unlike the duties of the policyholder, those of the insurer stem, primarily, from EU law. The relevant rules are to be found in the third Life Assurance Directive (Dir 96/1992, Dir 83/ 2002), in the third Non-Life Insurance Directive (Dir 49/1992) as well as in the Financial Services Directive (Dir 65/2002) (distance contracts). All directives prescribe in fine detail what and how the insurer must tell the policyholder about the product, the services offered, the contract and the possibility of recourse to legal action. In the case of life assurance, the insurer must provide the policyholder with information about expected services, means and duration of premium payments, means of calculation and distribution of bonuses, surrender and paid-up values, as well as its purchase and running costs. For health insurance, information about the development and structure of premiums are added. If the information given prior to conclusion of the contract changes after conclusion of the contract, the insurer must inform the policyholder.
Since the aforementioned directives oblige the insurer to provide important information, they create transparency with respect to the product offered. This is of particular significance in insurance contracts because insurance is defined through the law and cannot exist independently thereof. Unlike tangible goods, whose quality can be checked, insurance policies—as ‘legal products’—need explanation and elaboration from the insurer to enable the policyholder to choose the product that actually covers his risks. Nevertheless, it is unclear whether and to what extent the provisions of the directives actually contribute to better decision making by the policyholder. The information that the insurer must communicate is so voluminous and detailed that many policyholders will neglect to read it because the costs of doing so outweigh the anticipated benefits (rational ignorance). But even where the policyholder reads all the information sent, this does not necessarily mean that his decision will be better. Since human capacity to absorb and process information is limited, more information does not necessarily lead to more knowledge. In fact, studies from the field of consumer and behavioural science show that decisions of consumers do not improve when the amount of information transmitted exceeds a certain level. More information, beyond a certain threshold, reduces the quality of decision making, because the important information is no longer perceived as such. Against this backdrop, the information duties of the insurer will often only be useful after the insured event has occurred, when the policyholder—in a targeted fashion—wishes to inform himself about the policy and the conduct required of him.
Thus, this information asymmetry can often be better resolved in another way. One example is the duty of the insurer to provide advice, to be found in Art 6 of the new German insurance contract law and in a diluted form in Art 2:202 PEICL. Another example is the ‘product information leaflet’, which the insurer must give the policyholder pursuant to § 4 of the new German decree on information duties. The leaflet summarizes the most important information with respect to the services offered and, thus, provides a comprehensible overview which gives the policyholder the opportunity to quickly obtain an understanding of the significant features of the contract. It should help the policyholder to master the ‘flood’ of information and allow him to arrive at a decision which corresponds to his needs.
4. Information duties of the insurance intermediary
If, as is usually the case, the insurance contract is not made directly between insurer and policyholder, but with the help of an insurance intermediary (insurance intermediaries), the intermediary also has information duties. Their legal basis is to be found in EU law, in particular in the Insurance Mediation Directive (Dir 92/2002), and they have essentially two goals: first, they attempt to balance the above-described information asymmetry and ensure that the policyholder is informed about the product. To this extent, the information duties of the intermediary have a function similar to those of the insurer. Moreover, the intermediary’s information duties are also designed to make sure that the policyholder can assess the service provided by the intermediary as regards his quality and neutrality. In particular, they shall ensure that the policyholder knows how large the intermediary’s own interest is in the conclusion of the policy. The Insurance Mediation Directive, therefore, requires the intermediary to reveal his relationship to the insurer whose insurance he is promoting, in particular, disclosing respective profits and contractual obligations. In the long term, the information duties of the intermediary should ensure that the intermediary does not encourage the policyholder to conclude a contract which meets the intermediary’s interest of attaining a commission but does not meet the policyholder’s needs. Together with the information duties of the insurer, the intermediaries’ information duties should contribute to the proper functioning of the insurance market.
Andrew McGee, The Single Market in Insurance (1998); Eva-Maria Kieninger, ‘Informations-, Beratungs- und Aufklärungspflichten beim Abschluß von Versicherungsverträgen’ (1999) 199 AcP 190; Jürgen Basedow and Till Fock (eds) Europäisches Versicherungsvertragsrecht, vols I–III (2002/2003); Malcolm A Clarke, Policies and Perceptions of Insurance Law in the Twenty-First Century (2005); Giesela Rühl, ‘Die vorvertragliche Anzeigepflicht: Empfehlungen für ein europäisches Versicherungsvertragsrecht’ (2005) 95 Zeitschrift für die gesamte Versicherungswissenschaft 479; Martina Eckardt, Insurance Intermediation (2006); Giesela Rühl, ‘Common Law, Civil Law, and the Single European Market for Insurances’ (2006) 55 ICLQ 879; Jörg Ihle, Der Informationsschutz des Versicherungsnehmers (2006); Angela Regina Stöbener, ‘Informations- und Beratungspflichten des Versicherers nach der VVG-Reform’ (2007) 96 Zeitschrift für die gesamte Versicherungswissenschaft 465.