The background is the decision of the European Court of Justice dated 19 December 2013 (case ref. C-209/12), according to which the provisions governing objections under section 5a (2) sentence 4 of the Insurance Contract Act (Versicherungsvertragsgesetz – VVG, old version) are in violation of European law. These provisions were found to be in violation of the Second and Third Life Assurance Directives.

In the case at issue, the insurer had failed to properly inform the policyholder about his right to object. After the contract had already been in force for a period of several years, the policyholder declared his objection and asked the insurer to reimburse him all of the premiums plus interest.

Decisions of the Federal Court of Justice

Based on this decision by the European Court of Justice, on 7 May 2014 the BGH ruled that, as a matter of principle, a policyholder’s right to object continues to apply if they have not properly been informed of their right to object and/or have not received the terms and conditions of insurance or consumer information. According to the BGH, the insurer must unwind the contract under unjust enrichment legal principles if the policyholder exercises the right to object effectively. (See the section entitled “Legal consequences” for details on what this means for the policyholder.)

The BGH also ruled on 16 July 2014 that, if a policyholder has been properly informed, they have no right to demand the unwinding of the life insurance contract under unjust enrichment legal principles once it has been in force for a period of several years.

In the case at issue, the policyholder received the general terms and conditions of insurance and the consumer information together with the insurance policy document. However, the policyholder failed to object to the contract within 30 days in accordance with section 5a (1) sentences 1 and 2 of the VVG (old version). The BGH found no fault with these provisions governing objection, primarily because the Second and Third Life Assurance Directives do not contain rules on the performance of the insurance contract, instead leaving this issue to national law. The policyholder acted in bad faith by alleging the invalidity of the contract after it had been in force for several years. In this case, the BGH stated that the issue of whether the policy model is inconsistent with European law was irrelevant to the decision.

Affected contracts

Both BGH decisions relate to life insurance policies taken out under the policy model between 29 July 1994 and 31 December 2007 based on general terms and conditions of insurance that had not been approved by the Insurance Supervisor. The judgement handed down in May also applies explicitly to pension insurance and supplementary insurance to life insurance policies.

The provisions of section 5a (2) sentence 4 of the VVG (old version) remain applicable to all types of insurance not covered by the Second and Third Life Assurance Directives.

Legal consequences

The judgement of 7 May means that, if the above conditions are met, the policyholder has an indefinite right to object as a matter of principle. They are entitled to a claim under unjust enrichment legal principles when cancelling the contract. The insurer must reimburse the premiums paid plus interest on the benefit that has accrued to the insurer to the policyholder. The insurance cover received (according to the BGH this could be roughly the share of the premium relating to the insured risk) must be deducted from this. The BGH explicitly stated that the insurer cannot claim forfeiture.

In particular, the judgement of 16 July provides life insurers with legal certainty that policyholders do not have a “perpetual” right to object in the situation described above, i.e. that this cannot give rise to claims under unjust enrichment legal principles.

Consumer complaints

Based on the BGH judgement of May 2014, BaFin’s complaints bureau is repeatedly being contacted by consumers asserting claims against their insurers after declaring objections.

In one case, the issue was whether the information on the right to object had been provided by the insurer in typographically clear form. In its decision of 28 January 2004 (IV ZR 58/03, only available in German), the BGH gave a detailed explanation of what this requirement means in practice. According to this decision, the factors that must be taken into account include whether the information has been presented to the customer separately from the other contract documents, and whether it stands out clearly against the surrounding text, for instance in bold type, a different colour, font or text size, or by indenting or being placed in a text box. In the above case, BaFin believes that the undertaking had adhered to these requirements.

Another complainant had objected to her contract after it had been in force for several years, claiming an indefinite right to object. She claimed not to have been informed of her right to object. However, the insurer, who held the burden of proof in accordance with section 5a (2) sentence 2 of the VVG (old version), was able to demonstrate that the complainant had received the insurance policy document: the complainant had provided the original policy document to the insurer’s mortgage department as part of a pledge. Since the information on the right to object was emphasised typographically in the text and formed part of the insurance policy document, the complainant had been properly informed. In a similar case, a complainant denied receiving the insurance documents, but in an exchange of correspondence with the insurer had referred to these documents on numerous occasions.

Prior to the BGH judgements, a lawyer had already contacted BaFin on behalf of nine policyholders of one insurer. He declared an objection under section 5a of the VVG (old version) for his clients, alternatively declaring termination of the contract. The company initially refused to pay out the premiums. It considered the objection to be ineffective based on the provisions of section 5a (2) sentence 4 of the VVG (old version). Nor did it recognise the termination of contracts, since this was done “alternatively” and was therefore conditional, arguing that termination constitutes an alteration of the legal relationship which may not be subject to conditions. Following the BGH judgement of 7 May 2014, the undertaking additionally stated that the policyholders had been properly informed when they entered into the contracts, and that they had received all of the contract documents. According to the undertaking, this meant that they had no “perpetual” right of objection. Taking into account the BGH judgement of 16 July 2014, the supervisory authority could find no fault with this interpretation. However, while the complaint was being processed by BaFin, the undertaking recognised the termination declared as an alternative, and paid out the surrender values with interest on the amount owed.

The policy model (Policenmodell)

The provisions of section 5a of the old version of the Insurance Contract Act (Versicherungsvertragsgesetz – VVG (old version)), which governed contracts entered into under the policy model, applied to German insurance law between 1994 and the end of 2007. Under this legislation, a contract could also be deemed to be entered into if the insurer provided the policyholder with the insurance policy document, the general insurance terms and conditions, or consumer information at a later date, and not when the application was made. Policyholders had 14 days in which to exercise their right to object, rising to 30 days in the case of life insurance policies. This period only commenced once the policyholder had received the complete policy documentation and had been informed in writing, in typographically clear form, about the right to object, the commencement of the period and its duration. Irrespective of this, in accordance with section 5a (2) sentence 4 of the VVG (old version), the right to object expired one year after payment of the first premium.