Insurance law: No default in payment without clear instruction by the insurer

Published on 24.07.2006

*by Johannes Fiala, Lawyer (Munich), MBA Financial Services (Univ.Wales), M.M. (Univ.), Certified Financial and Investment Advisor (A.F.A.), EC Expert (C.I.F.E.), Banker (www.fiala.de)
The Federal Supreme Court (BGH) had to decide on a case involving the following facts: The policyholder had been promised provisional cover. The subsequent premium payment for the actual policy was made by way of a broker collection, whereby the initial premium was received late by the insurer after a claim had occurred.
The judgement: With judgement of 26.04.2006 (Az. IV ZR 248/04: click here) the BGH decided that the insurer cannot refer to the exemption from performance according to § 38 II VVG. Therefore, in the present case, the insurer has to compensate about 2 million of property damage caused by a flood. The policyholder was covered by provisional cover until the certificate of insurance was issued.
The court reasoned that the insurer should have informed the policyholder transparently and clearly about the legal consequences of late payment. First of all, the provisional cover is to be seen as a separate insurance contract, which only ends when the final insurance contract comes into effect with the policy or handover of the insurance certificate: § 38 II VVG is deemed to be waived for the provisional cover.
If the insurer does not clearly point out that a late payment of the initial premium affects both the policy and the provisional cover, then the insurer cannot later invoke § 38 II VVG, i.e. exemption from performance. The instruction requirement according to § 39 I 2 VVG applies to both contracts, the provisional cover and the main contract, because the policyholder is equally entitled to protection with regard to both contracts.
No exclusion of benefits without comprehensive and complete information: It is not sufficient, for example, to state that late payment leads to exemption from benefits. For example, it should be pointed out that in the event of a delay through no fault of the policyholder, the policyholder can retain insurance cover by paying the premium in arrears. For reasons of clarity, the insurer’s instructions must also indicate the consequences of late payment for both the provisional cover and the actual main contract. If the information is incomplete or not comprehensive in this sense, the insurer cannot invoke exemption from benefits despite late payment of the premium.