European Court of Justice (ECJ): Perpetual right of withdrawal for policyholders

– Redemption risks for insurers, agents and insurance brokers –


The perpetual right to rescind or cancel insurance contracts

By judgment of 19.12.2013 (Case C-209/12), the ECJ ruled that a right to withdraw from a life insurance contract is perpetual if the policyholder
has not been properly and timely informed of this right. Contrary to the regulation in the German § 5a Versicherungsvertragsgesetz (VVG a.F.) the right of withdrawal expires
not one year after payment of the first insurance premium. And in accordance with § 8 VVG, which has been in force since 2008, the insurer must ensure access to a clearly designed instruction in particular
of the policyholder’s right of cancellation.

This results in the risk for the insurer of masses of eternally revocable contracts. If a life insurance customer doesn’t like what may be a negative rate of return, he or she wants to
he would be able to increase the benefit compared to the surrender value upon cancellation, or if there was no loss in a liability insurance policy, the customer could have the idea of
to declare the withdrawal or to submit the withdrawal to the insurer. In this way, the insurance customer would subsequently seek to have the insurer pay him his premiums plus interest.


Instruction is more than explanation

In order for the cancellation period to start running at all, the insurance customer must receive a “clearly designed instruction on the right of cancellation and on the legal consequences of cancellation”.
which makes the policyholder’s rights clear. The instruction may already fail due to the fact that the information given to the policyholder about the legal consequences of the revocation was incomplete or incomplete.


Too small font size, omission in the continuous text of the insurance conditions or other information, misleading additions, for example, in such a way that one can revoke instead of completely without reasons only with dissatisfaction are only a selection of numerous reasons which lead to the inefficacy of the revocation instruction. Of course, all insurers thought that their cancellation policy was effective – many mistakenly still think so today, or at least claim to be.


For BaFin, the question of the suitability of the management board at the insurer could arise if there were masses of correspondingly accumulated additional revocation risks in the operation of the insurance business. And for the shareholders or partners of an insurer, the question will arise as to what extent the insurer’s assets have been more than jeopardized by organizational culpability or a case of managerial liability?


Related contracts are eliminated

The revocation also eliminates linked contracts, such as loan agreements with residual debt life or repayment suspension insurance. If it was not pointed out that with the revocation of the life insurance also the connected contract is eliminated, then also already therefore the instruction over the right of revocation is ineffective. Often just the interest in the elimination of the linked contract will make the right of withdrawal even more interesting.


Calculation of the reversal

Lack of consent by the guardianship court in the case of children insured for life as policyholders, lack of consent by another person insured in the event of death, or rescission due to deception are further reasons leading to the rescission of insurance policies.


The insurer must then surrender the premiums together with all benefits derived. Particularly in the case of life insurance policies including unit-linked contracts, the calculation of the premium portions calculated from the various premiums for acquisition costs, administrative costs or the actual investment of the savings portion, as well as the resulting surpluses and kickbacks, e.g. from the fund company, which are then used for insured capital or the insurer’s equity capital, thus generating various further returns, is a demanding task in terms of actuarial appraisal and legal assessment. With returns on equity of the insurers of 30% and more, amounts ending up in equity over many years lead to a considerable increase in the claim from reversal, if only actuarial calculations are also sufficiently accurate and this is justified.


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About the author

Dr. Johannes Fiala Dr. Johannes Fiala

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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