Comparing German and English Insurance Law – A Series

Introduction

Germany and England have two fundamentally different legal systems – Civil Law, which is based on codified provisions, and Common Law, where court judgments create legally binding precedent to be followed by lower courts in subsequent cases. Does this automatically lead to fundamentally different insurance laws? Or will we be surprised by many similarities? This article will be the first of a series where some peculiarities of English insurance law shall be compared to German insurance law.

The most relevant Acts for private insurance contract law in Germany are the Versicherungsvertragsgesetz (VVG), which can be translated to Insurance Contract Act, and the Bürgerliches Gesetzbuch (BGB), which contains the central provisions of German private law.

English insurance law was codified by several pieces of legislation, such as the Marine Insurance Act 1906 (MIA), the Insurance Act 2015 (IA) as well as the Consumer Insurance (Disclosure and Representations) Act 2012 (CIDRA). Additionally, English insurance law is supplemented by a wide variety of case law.

This first article will look at the difference in provisions dealing with the pre-contractual presentation of the risk by a prospective business insured under the new law. English insurance law was significantly reformed by the IA in 2015. The German VVG was amended in 2008. These changes were made with the intention to make the respective laws, amongst other things, more policyholder-friendly.

The Provisions

Under English law, a prospective business insured must, before it enters into a contract of insurance, make a fair presentation of the risk to the insurer, s.3(1) IA – it has a “duty of fair presentation”. The scope of the duty is set out in the following subsections of the Act and requires, in principle, that the prospective insured discloses every material circumstance which it knows or ought to know. Alternatively, it must disclose in a way which gives the prudent insurer sufficient information to put it on notice that it has to make further enquiries. The disclosure has to be made in a reasonably clear and accessible manner, and every material representation has to be substantially correct, while an expectation or belief has to be made in good faith. There is a “fresh” duty of fair presentation when the contract is renewed or amended.

Importantly, this means that prospective business insureds have to disclose material facts even where the insurer has not expressly asked questions, unless it concerns a circumstance which diminishes the risk, a circumstance which the insurer knows, ought to know or  is presumed to know, or where the insurer waives the requirement to disclose information (s.3(5) IA). In substance, the legislator decided that prospective business insureds require less protection as compared to prospective consumer insureds, to which s.3(1) IA is not applicable. Prospective business insureds are therefore burdened with the responsibility to decide which information they have to disclose.

This is – at least for so called “non-large risks” – different under German law. According to § 19 I 1 VVG, which is applicable to both business and consumer insureds, the prospective policyholder must notify the insurer of the circumstances known to it which are material for the insurer’s decision to conclude the contract – if the insurer asked about it in writing. The provision is applicable to business insureds which do not fall under the scope of the provision of § 210 VVG, which ensures that insurance sectors dealing with so-called “large risks”, mainly transport, credit and indemnity insurance, are granted wider contractual freedom.

Both English law and German law utilised the same arguments for their respective amendments: the old law did not sufficiently take into account the legitimate interests of prospective policyholders because they were burdened with the responsibility of having to disclose all known relevant circumstances, as well as with the difficult assessment of what was material to the risk. In England, the duty to disclose information where the prospective insured had not been asked was, in light of the consequences of a possible breach, seen as a potential trap (at least for consumers). The German legislator decided to remove this burden from both consumer and business insureds, while the English approach makes a clear distinction between the two. Under German law, the risk of misjudging whether a circumstance is relevant to the risk therefore no longer lies with the prospective policyholder. The German provision mirrors the English provision applicable to consumer insureds under s.2 CIDRA, which imposes a duty on consumer policyholders to take reasonable care not to make a misrepresentation to the insurer.

It is worth noting that German courts are reluctant to accept questions by the insurer that require an assessment by the prospective policyholder, e.g. the question whether there were any “anomalies”. German insurers are therefore prevented from relying on any alleged mis-statement by the policyholder in relation to such questions and cannot decline cover on these grounds. Moreover, insurers can only ask for information that is material to the risk.

According to the explanatory notes to § 19 VVG, the situation differs where the prospective policyholder acts in bad faith: then, the insurer can contest the contract even when he has not asked for the information. However, the German courts set high expectations by requiring evidence of circumstances obviously relevant to the risk which must be so unusual that a question aimed at the circumstances cannot be expected. As a consequence, the number of cases where insurers can actually contest the contract on the grounds of bad faith are significantly limited.

Another noteworthy difference arises with regards to the scope of the duty. Under German law, the prospective policyholder only has to reveal material circumstances of which it actually knows. When the prospective policyholder has forgotten facts, it is obligated to attempt to recall them. The provision does however not indicate that the policyholder must reveal what it should have known, based on a reasonable search (including information held by agents), as required under English law.

Conclusion

Regarding non-consumer insureds, the German provision differs considerably to the law as set out under the IA (while the provisions applicable to consumer-insureds show great similarity). In this respect, Germany’s law can be regarded as more policyholder-friendly than the provision applicable to business insureds under English law. The rationale behind the requirement of having to ask the policyholder in writing is to decrease the risk of misunderstanding as well as to give the policyholder the opportunity to read the enquiries made by the insurers. Obviously, the written requirement also serves as evidence. It is made very clear to the prospective insured what is material to the insurer and what must be done to fulfil obligations. Moreover, the scope of the duty is smaller than under English law, where the prospective insured also has to disclose deemed knowledge.

Isabel Becker is a Foreign Qualified Lawyer at Fenchurch Law