The PEICL: Precontractual information duties 1 I. INTRODUCTORY REMARKS

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1 The PEICL: Precontractual information duties 1 Prof. Dr. Herman Cousy KULEUVEN-University Belgium I. INTRODUCTORY REMARKS 1. The importance of the subject-matter. My task is to give some comments to a well known subject of insurance contract law which is treated with in the Principles of European Insurance Contract Law (hereafter: the PEICL or the Principles). I will deal with the well known problem of the precontractual information duty of the applicant (the duty of disclosure, l obligation de déclaration du risque ). If time permits I will add a very few comments on the topic of the change of risk in the course of the contract, a subject matter that is mostly treated from the angle of the aggravation of the insured risk, and which, in some legal systems, is often thought to be another aspect of the information duty of the policyholder. Let me first of all insist on the importance of this topic in the development of insurance contract law, of its importance in the day to day practice and insurance litigation, and of the continuing pivotal role that this issue plays in every new insurance contract law. 1 For a full report on the issue, see my contribution to the Conference of the «Europäische Rechtsakademie (ERA) in Trier on 22 January 2008 : The Principles of European Insurance Contract Law: the Duty of Disclosure and the Aggravation of Risk, published in European Contract Law. ERA Forum Special Issue 2008, Springer 2008,

2 2 2. The traditional approach. Under the traditional regime concerning the duty of disclosure the applicant had the duty to spontaneously declare the characteristics of the risk. In a number of jurisdictions this system of spontaneous declaration is presently considered to put an unreasonable burden on the applicant who is almost always a layman in matters of risk appreciation. In many legal systems, the old rule is currently being replaced by the system of the list of questions, the questionnaire. The old system made use of the all or nothing principle in the way in which violations of the duty of disclosure were sanctionned. Under this Alles oder nichts Prinzip approach a violation of the duty of declaration did lead to the loss of the entire cover even if the shortcoming was minor, and inspite of the absence of any causal relation whatsoever between the non declared circumstance and the insured event. In several national legal systems, the rule is being replaced by a system of reduction of the insurance payment, in proportion to the effect of the undisclosed circumstance upon the risk calculus of the insurer. Under the old regime, in its most extreme formulation, the violations of the duty of disclosure were considered to imply a defect affecting the consent of the parties to the contract ( vice de consentment ) and thus the validity of the contract. Here again recent legislation has abandonned this view and replaced this validity of contract approach by another more economical one, based on the equilibrum between the real risk and the amount of the price. Except in the cases of fraud, the applicant s failure to fully and correctly disclose will not lead to the avoidance of the contractual relationship, but will be conceived so as to enable the continuation of the contract whenever possible, be it accompanied by an adaptation of the premium on the basis of a new agreement between the parties.

3 3 3. New legislative developments. In the well known Max Planck Institute comparative study on the insurance contract law of a number of European national laws, that was published by J. Basedow and T. Fock in , the authors could still safely observe that the spontaneous duty of declaration was the prevailing rule in a large number of Member States, amongst which Belgium, Italy, Luxemburg, the UK and Ireland, and even Germany (although in this last case, the severity of the rule had been seriously reduced by case law corrections). Since then, things have changed rapidly in most of European Member States. In a number of national legislations the duty of spontaneous declaration would be abandonned, or at least softened, by putting the burden of identifying the relevance of the information upon the insurer. Personnally I consider the introduction of the requirement of causality (or relevance) as a very important change in the insurance contract law. Under the new causality rule a failure to the duty of disclosure will not give rise to a reduction of the payment, if the undisclosed or illdisclosed facts are not material to the assessment of the risk as it has materialized (Article 930 Dutch Civil Code) of if the failure to the duty of disclosure relates to a circumstance which is in a causal relationship neither with the occurrence or the discovery of the insured event, nor with the existence or extent of the insurer s duty to cover (German insurance law). 4. English law. Let me also mention English law as an illustration of the changing legal context since also (even) here a change in the fundamental aspects of the duty of disclosure is 2 J. BASEDOW & T. FOCK, Europäisches Versicherungsvertragsrecht, Mohr Siebeck, Band I, 2002, p. 108.

4 4 possibly about to take place. What I am referring to is the (Joint) Consultation Paper No. 182 of the Law Commission (simultaneously: Discussion Paper No. 134 of the Scottish Law Commission) on Insurance Contract Law: misrepresentation, nondisclosure and breach of warranty by the insured. The Law Commission proposes a law reform that would make a clear distinction between a mandatory regime for consumers (based on FOS practice), and a default regime for business, based on accepted good pratice. With respect to pre-contractual information from the insured in consumer contracts, the Law Commission proposes to replace a consumer s duty to volunteer information with a requirement to answer questions carefully and honestly. Deliberately and recklessly giving incorrect answers would entitle the insurer to avoid the policy and refuse all claims under it. In case of negligence from the side of the consumer, the insurer should be put in a position, in which he would have been if he had been aware of the full facts. This means proportional reduction of the claim if the insurer would have charged more; no payment of a claim, that the insurer would have excluded; and the right of the insurer to avoid the policy (with return of premiums) if he would have declined the risk altogether. 5. Background: recent developments and tendences. 1. Clauses d incontestabilité. 2. Non-communication of genetic information. 3. Non-discrimination laws. 4. Differentiation and segmentation. 5. The know your customer rule of conduct in the MIFID directive 3 3 Directive on Markets in Financial Instruments (2004/39/EC), O.J.L nr. 145, of 30 april 2004.

5 5 II. THE TRADITIONAL QUESTIONS AND ISSUES 1. The choices that had to be made. Shall the Principles stick to the (old) system of the spontaneous obligation of disclosure form the applicant or shall we choose for the formula of the list of questions, the so-called questionnaire. Must the applicant declare what he knows or must he also be expected to declare what he ought to know ( active or constructive knowledge ). How shall the issue be treated of the imputation of the knowledge of the persons to be insured to the applicant? Will the Principles have an explicit rule on the treatment of the declarations of the applicant that were not asked for? In the case where the inaccuracy of the applicant s declaration is discoverd, shall the insurer have the power to terminate the contract or should the law strive to induce the parties toward a continuation of the contract, be it under adapted premium tariff or other conditions? If an incorrectness or incompleteness in the description of the risk is discovered after a claim was brought against the insurer, should then the insurer have the right to refuse coverage ( Alles oder Nichts-Prinzip ) or

6 6 would, where appropriate, a proportional reduction of the cover be the proper sanction? In this last case, as well as in the previous issue (continuation or discontinuity), will the degree of culpability of the applicant, in making the inaccurate disclosure, play a role, so as to differentiate the sanction according to whether the shortcoming was innocent, negligent, or fraudulent? Also in the last case, shall the insurer be allowed to refuse total or partial coverage even in the case where there is no connection between the undisclosed circumstance and the insured event? Or should the Principles follow the tendency of some recent legislations by introducing a requirement of causality or relevance between the non-disclosed fact or circumstance and the occurrence of the insured event? 2. Other and broader issues. Will the Principles treat these matters in a mandatory way? The answer is yes, they will be mandatory in matters relating to mass risks (in the sense of the Internal Market Directives). The Principles are mandatory, not absolutely mandatory, but semi mandatory in the sense that the contract may derogate from the provisions as long as such derogation is not to the detriment of the policyholder, the insured or the beneficiary). Should, as was done in the proposal of the Law Commission, a difference be made between consumer risks (or Jedermann-Versicherung, or contrats de

7 7 grande diffusion ) and large business risks? The answer is that the Principles adhere to the distinction between large risks and mass risks, and do not further differentiate between consumer risks and other ones. Will the aggravation of risk and the thereto related duties of disclosure will be treated as a sort of prolongation of the original duty of disclosure into the further course of the contract. Here the answer is that in the PEICL a different approach is taken, the issue of aggravation of risk being rather brought in relation with the preventive duties of the insured (precautionary measures). III. THE APPLICANT S PRECONTRACTUAL INFORMATION DUTY UNDER THE PEICL 1. The basic rule. Article 2.101: 1) When concluding the contract, the applicant shall inform the insurer of circumstances which he is or ought to be aware and which are the subject of clear and precise questions put to him by the insurer. 2) The circumstances referred to in para 1 include those of which the person to be insured was or should have been aware. The basic idea of this rule is quite clearly to subscribe to the system of the question method.

8 8 In order to avoid that the insurer would limit himself to putting broad questions that result in reintroducing some kind of duty of spontaneous declaration, the requirement is that the questions must be clear and precise. The objective is to make it impossible for the insurer to postpone the real evaluation of the risk till the moment where the insured event occurs. Thus full and honest disclosure is required. The Principles make no difference between incomplete information ( ommissions ) and inaccurate information ( misrepresentations ), inter alia because it was considered that in some cases the distinction may be difficult to draw. The questions must be clear and precise. If they are not, the applicant is not subject to sanctionning for not answering such question. The terms the circumstances that he is or ought to be aware of relate to the delicate question what is the level of the knowledge that a person ought to have? Is the test for the presence of constructive knowledge objective or should individual characteristics or qualities of the applicant be taken into account? The projected comments to Article explain that although the Principles do not make such distinction, courts applying the provision should recognize the reality that some kind of applicant can be expected to know more than others. However the rule is intended to be an objective rule. Do applicants have a duty of investigation that enables them to better inform the insurer? Here, the projected comments make it clear that applicants are not expected to make investigations except when explicitly asked for but that applicants are expected to make honest statements. Applicants, it is said, are not allowed to turn a blind eye to the possibility of information that could be adverse to their application. To be sure the relevant circumstances that must be described are those prevailing at the time that the insurer reaches a decision to accept the application. In this

9 9 connection, it is understood that, if the circumstances change in a material way between the time the application is submitted and the time when the contract is concluded, the applicant is obliged to give the insurer notice of any such change, of which the applicant is or should be aware. 2. Sanctions. In accordance with what was done in several national legal systems, the Principles introduce a gradation of sanctions that is based on a number of distinctions. A first distinction that will play a role relates to the moment where the insurer becomes aware of the applicant s violation of his duty of disclosure. When the insurer discovers the true state of affairs outside the hypothesis where an insured event has taken place, the question will be about whether and how the contract will proceed in the future. However, more often than not, the insurer will discover the applicant s breach at the occasion of the occurence of an insured event. In such case there will not only arise the question as to the future destiny of the contract, but the first question will be if and to what extent the claim will be honoured by the insurer, given the discovery of the policyholder s earlier breach of his duty of disclosure. Another distinction relates to the degree of culpability with which the applicant has broken his duty of disclosure. The major distinction is the one between fraudulent breach and the non-fraudulent breach. In the later hypothesis of non-fraudulent breach of contract a further distinction is made between a so called negligent breach and what the Principles an innocent breach. A further distinction relates to the attitude and decision which the insurer would have taken, had he known the true state of affaires at the moment of the conclusion of the

10 10 contract. The question is to know whether in such hypothetical situation the insurer would have refused to enter into the contract or whether he would have done so, albeit at a higher premium or on different terms. A last distinction in the treatment of the consequences of breach of the duty of disclosure relates to the question whether or not the insured event is caused by an element of the risk, which is the subject of the inadequate disclosure by the applicant. This last distinction being in comparison to tradtional insurance law the most revolutionary one, we will give to it some more attention hereafter. 3. Discovery of breach before the insured event. When the policyholder is in breach of Article 2:101, the insurer shall be entitled to propose a reasonable variation of the contract or to terminate the contract. If, however, the policyholder is in innocent breach of his duty, the insurer may only teminate the contract if he proves that he would not have concluded the contract, had he known the information concerned 4. Procedural aspects of the choice. Written notice (+info) within one month Effect of termination Proposal of variation Loss of right in case of non-action

11 11 5. Insured event before termination takes effect. Innocent breach: insurance money is payable! If the policyholder is in negligent breach of the duty and an insured event occurs before a variation or a termination takes effect, no insurance money is payable if the insured would not have insured the risk at all. If, however, the insurer would have insured the risk at a higher premium or on different terms, the insurance money shall be payable proportionally or in accordance with such terms. But this only applies if the event was caused by an element of the risk which had not been disclosed or which had been misrepresented. 6. Exceptions to insurer s rights. The insurer concludes the contract although a question remains unanswered, or information supplied is obviously incomplete or incorrect. The information which should have been disclosed or the information inaccurately supplied is not material to a reasonable insurer s decision to enter into the contract at all, or to do so on the agreed terms. The insurer leads the policyholder to believe that the information does not have to be disclosed, or The information is or ought to be known to the insurer.

12 12 7. Fraudulent breach Article What is fraud? Three options of the insurer Avoidance works retroactively Materiality Timing 8. Additional information. Under Article 1.205, policyholders are not obliged to supply additional information but if they do so, it must be accurate and complete.