Cologne Higher Regional Court: Premium adjustments in private health insurance often ineffective!

– OLG Cologne judges generally usual procedure of the PKV as inadmissible –

In its judgment of 20 July 2012 (Case No.: 20 U 149/11), the Cologne Higher Regional Court ruled that a procedure used for decades by private health insurers for premium adjustments was incorrect. As a result, many premium adjustments since 1995 have to be judged as ineffective.

OLG judges several premium adjustments to be invalid

The plaintiff, who is a doctor by profession, maintains medical expenses insurance under tariffs N213 for outpatient treatment, N3 for inpatient treatment and N4 for dental treatment. The contract is based on the General Insurance Conditions for Medical Expenses and Daily Hospital Allowance Insurance, Part I of which corresponds to the MB/KK 94; Part II contains the tariff conditions of the defendant, Part III the tariffs N213, N3 and N4. Among other things, the OLG ruled that the premium increase in tariff N213 as of 01.01.2001 was ineffective.

Judicial review of premium adjustments

Gem. § Pursuant to Section 203 of the German Insurance Contract Act (VVG), the insurer is entitled, in the case of an insurance relationship in which its ordinary right of termination is excluded by law or contract, to reset the premium in accordance with the corrected calculation bases, also for existing insurance relationships, in the event of a change in the actual loss requirement compared with the technical calculation basis and the premium calculated therefrom which is deemed to be not merely temporary, provided that an independent trustee has checked the calculation bases and approved the premium adjustment.

According to the case law of the Federal Court of Justice (BGH), this grants the insurer a statutory right of adjustment independent of a contractual adjustment clause, the more detailed requirements of which can be derived from supervisory law, in particular § 12 b para. 1 to 4 VAG and the provisions of the KalV (BGH NJW 2004, 2679, 2680). In court, the premium adjustment is to be reviewed to determine whether it can be considered consistent with the existing legal provisions according to actuarial principles. In the first step, it must be examined whether the prerequisites for the adjustment are met (BGH NJW 2004, 2679, 2681).

Adjustment requirement was not met in 2001

With regard to tariff N213 for out-patient medical treatment, the conditions for a premium increase in 2001 for the relevant observation unit of men were not met according to the Higher Regional Court of Cologne. According to § 203 VVG, an entitlement to a premium increase exists in the event of a not merely temporary increase in the loss requirement, for the determination of which §§ 12 b para. 2 Insurance Supervision Act (VAG), 14 Calculation Ordinance (KalV) contain more detailed provisions.

First of all, it is necessary that the calculation basis of the insurance benefits changes and that the change exceeds a certain threshold value – the so-called triggering factor. Pursuant to § 12 b para. 2 sentence 2 VAG 10 percent, unless – as in the present case – a lower percentage is provided for in the general terms and conditions of insurance. According to § 8 b number 1.1 of the tariff conditions of the defendant, an adjustment can already be made if a deviation of more than 5 % is determined.

Change would have allowed only reduction

The triggering factor is determined by comparing the required insurance benefits with the calculated insurance benefits. According to § 14 para. 1 sentence 1 KalV, the comparison of the required insurance benefits with the calculated insurance benefits is to be carried out separately for each observation unit of a tariff, since the insurer, in accordance with § 10 para. 1 sentence 2 KalV must calculate each observation unit of a tariff separately. The relevant observation unit here is “men in tariff N2 1 3”. In 2001, the required insurance benefits in the observation unit “Men in tariff N2 1 3” were 5.99 % below the calculated ones, so that the triggering factor according to § 8 b number 1.1 of the tariff conditions of the defendant was reached. This downward deviation, however, did not entitle the defendant to increase the premium in the opinion of the Cologne Higher Regional Court.

Opinion of the OLG Cologne

The Cologne Higher Regional Court states:

“Admittedly, according to § 12 b para. 2 sentence 2 VAG, if the comparison of the required insurance benefits with the calculated insurance benefits of a tariff shows a deviation exceeding the threshold value, the insurer has to review all premiums of this tariff and, if it is not only a temporary deviation, adjust them with the consent of the trustee. Thus, the rule does not make the premium adjustment contingent on the required policy benefit exceeding the calculated one. Rather, it is also conceivable that a change in the required insurance benefit that is favorable to the policyholder as compared to the calculated benefit will result in a premium reduction … However, a development favourable to the policyholder does not give the insurer the right to increase the premiums according to the meaning and purpose of the adjustment provisions, but only prompts an examination as to whether a premium reduction is possible. It would be absurd if the insurer could use the fact that the required insurance benefits fall short of the calculated ones to bring about a premium increase because of possible changes in other calculation bases.”

Decades of insurer practice illegal?

For decades and to this day, insurers have been of the opinion – without the supervisory authority ever having objected to this – that a downward change in the so-called triggering factor can also result in a premium increase if this is evident from the calculation as a whole. Accordingly, this has been and continues to be implemented on a regular basis. The ultimately surprising ruling of the Cologne Higher Regional Court therefore means that premium adjustments in private health insurance will be ineffective on a mass scale, unless other courts deviate from it. The opposite, however, is becoming apparent – other courts have even pointed out that if the adjustment clause were to permit a premium increase in the event of a downward deviation, the adjustment clause as a whole would be judged to be invalid, according to a possible interpretation of its wording.

Premium adjustments subject to judicial review

The rulings of the Federal Constitutional Court of 28 November 1999 (Case No. 1 BVR 2203/98) and of the Federal Court of Justice (BGH) of 16 June 2004 (Case No. IV ZR 117/02) have confirmed in principle that the ordinary courts must carry out a comprehensive review of the content and law of an objectionable premium adjustment in private health insurance in the event of a dispute. If the prerequisite (triggering factor) for a premium increase is not met, it is no longer important whether the calculation was carried out in accordance with the requirements of the Calculation Regulation – it is already invalid for lack of this prerequisite. A so-called negative declaratory action is sufficient for this – the insurer then has the burden of proof for all prerequisites of the premium adjustment, which is why it also regularly has to advance the sometimes high costs of an actuarial court expert.

Of course, the latter must not have already been active as a private expert in the same matter, so that in the case of a recommended previous expert opinion for a specific insurer, no activity in the same matter can take place as a court expert. The choice of qualified court experts is therefore ultimately small.

How to respond to triggering factor request?

Insurers need to ask themselves how they will respond to an enquiry from the policyholder as to whether the triggering factor exceeded the required threshold, or was negative, for example, especially if the policyholder insists on a precise figure. Today, the policyholder will often no longer be satisfied with general assertions to the effect that the contractually required threshold has been exceeded, as he could understand this as an evasive answer which, in his view, may merely reflect an erroneous view on the part of the insurer. However, insurers can deal well with individual inquiries, complaints or a few lawsuits. More important is the question of what to do about premium adjustments in the future.

When actuaries work on legal issues for their insurer

It is not only the Calculation Ordinance that works with undefined legal terms, which require the actuary – modern: Actuaries – are required to deal in depth with legal issues in advance, without actually being trained to do so. Corresponding elaborations, e.g. of the German Actuarial Association on actuarial methods, then often consist to 70 % first of all of the in-depth discussion of legal questions as to what the legislator might have meant by the Calculation Ordinance, etc. The German Actuarial Association is not a legal entity. Or the actuary assumes an outdated legal view, possibly not even thinking about it because he does not recognize the problem, even according to the motto: “Everything is allowed that is not expressly prohibited or has not been objected to so far.” The employed actuary is also allowed to give legal advice to his employer. They are all too happy to leave all responsibility unchecked, especially since as the responsible actuary they are already legally responsible for calculation in accordance with the law.

Judicial appraisal uncovers legal problems

The situation is different in the case of a judicial appraisal by an actuarial expert. The latter may not discuss in depth unclear legal issues underlying actuarial methods. However, to the extent that they are relevant to the actuarial assessment, he must explain this to the court and leave their clarification to the court. At the latest then real lawyers take care of the possibly unclear legal bases of the actuarial methods, with sometimes unexpected results – like here.

For example, courts up to the Federal Supreme Court have often ruled that actuarial methods used throughout the industry for decades, which were assumed to be correct and were not even objected to by the insurance supervisory authorities, were legally inadmissible. This then also led to the mass ineffectiveness of premium adjustments. For the insurers, however, this remains almost inconsequential, because adjustments are only judicially judged to be ineffective in the few cases of a court action against the individual policyholder.

Lawsuits against ineffective premium adjustments burden selected PKV management boards

If selected members of the Management Board are not suitable as managers, the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) can take action to remove them from office. This is probably BaFin’s sharpest sword, as it means that the board member regularly loses his retirement pay from the insurer. Of course, BaFin receives all calculations in advance anyway, so that the management board will at least be able to exculpate itself vis-à-vis BaFin by the fact that BaFin did not object to anything.

The BGH (judgement of 20.09.2011, file no. II ZR 234/09) describes the duties of the managing director as follows: “The representative of a company in a corporate body who does not himself have the necessary expertise can only satisfy the strict requirements for an examination of the legal situation incumbent upon him and for compliance with the law and case law if, giving a comprehensive account of the circumstances of the company and disclosing the necessary documents, he obtains advice from an independent professional who is professionally qualified for the question to be clarified and subjects the legal advice given to a careful plausibility check.” The fact that BaFin has not previously objected to anything is of course not sufficient.

Repeatedly lost processes around ineffective premium adjustments in the private health insurance, already suggested so far to the legal department of some insurers to have certain doubts about a sufficiently qualified consultation in the apron. It is not uncommon for insurers to have unrecognised risks in their portfolios from ineffective premium adjustments that have already been identified at other insurers, often amounting to more than a billion euros – with the risk that new problems will arise every year if the correct procedure is followed. If the suspicion of inaccurate accounting and tax misjudgements is confirmed – because these are also based on the premium adjustments that have been judged invalid by the courts – this also leads to the personal responsibility of selected board members. This is because they have to ensure that they have the necessary expertise both internally and externally.

Insured people have not yet made use of the modern collective communication possibilities of the Internet, which have already brought down one or two systems of government. However, insurers are particularly susceptible here due to the mass business according to exactly the same methods and tariffs with up to hundreds of thousands of equally affected insured persons. For them, it can be a matter of existence. Only a few management boards have drawn the consequences from this and are seeking actuarial and legal advice to first assess the risk, to take countermeasures for the future and, in the case of ineffective premium adjustments in the past, to actively find an out-of-court solution on a case-by-case basis, together with the customers.

However, policyholders may not always be amenable to the usual common sense – individual solutions are then called for. For example, one of the first cases one of the co-authors had to deal with was a policyholder who had been denied a benefit for psychotherapy, whereupon he sued against the next premium adjustment. In another case, the parties agreed in a court settlement that future adjustments should only be made at a certain average level, with recognition of the previous adjustments and payment of all procedural costs by the insurer. Of course, these are not models for a mass of contracts.

by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm

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About the author

Dr. Johannes Fiala
PhD, MBA, MM

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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