1. Precautionary Measures
After a breach of an obligation, the insurer is only entitled to terminate the contract if the policyholder (or the insured) breached his obligation with the intent to cause the loss or if he acted recklessly and with the knowledge that the loss would probably result.72 “Recklessness” has to be interpreted as being more than just grossly negligent; it is close to dolus
eventualis (awareness of an action’s possible outcome which the
policyholder is willing to accept, rather than abstain, from the perilous action). The burden of proof lies with the insurer, who in practice will
68 PEICL, supra note 5, at art. 3:101(2). 69 PEICL, supra note 5, at art. 3:101(3).
70 See Directive 2002/92/EC of the European Parliament and of the Council of 9
December 2002 on insurance mediation, 2002 O.J. (L 9).
71 Heiss, supra note 2, at 229, 238 (objecting to incorporation).
72PEICL, supra note 5, at art. 4:102(1). Looking at the wording, it is not clear
whether the intent of causing a loss is sufficient or whether an additional element, like the knowledge that the act will cause a damage, is required. It is more likely that this latter requirement only applies to the case of “recklessness.” This is also evidenced by the clarifying comma in the parallel clause in art. 9:101.
often find it difficult to prove that the policyholder acted with the knowledge that the loss would probably result. As a policyholder who does not think about the losses caused by his behaviour is not in need of protection, it should be sufficient that the policyholder ought to know that he could probably cause losses.
Of great importance is the question under which circumstances the insurer is exempted from liability. According to Art. 4:103 (1) PEICL, this is only the case if the loss was caused by the non-compliance of the policyholder (or the insured). This deserves approval. However, the fact that the exemption depends on the knowledge of the policyholder that the loss would probably result should be criticised (see above).
In the case that the loss was caused by negligent non-compliance it is possible to reduce the insurance money according to the degree of fault by a “clear clause”.73 This rule is remarkable. The exemption depends on the degree of fault, proportionality, and a clause that has to meet (as the mention of “clearness”74 superfluously suggests) special requirements. Yet, there are certain disadvantages of such a clause that cannot be denied. Firstly, there is no need for any reduction of the insurance money according to the degree of fault in case of simple negligence. Secondly, it will often be difficult to establish what grade of reduction should correspond to which kind of negligence. Thirdly, if the policyholder acts recklessly, but without knowing the loss that can result, Art. 4:103 (2) PEICL is, according to the wording, not applicable, although systematically this rule should apply. In addition, there seem to be only few situations in which the insurer is totally exempted from liability as the subjective elements refer to the loss and not to the breach of obligation.
Considering everything, the rule in Art. 4:103 (2) PEICL needs to be modified. Most importantly, in case of simple negligence, the breach of an obligation that aims at avoiding the occurrence of the insured event should not even partially lead to an exemption from liability.
1. Aggravation of Risk (Art. 4:201 – 4:203 PEICL)
Usually, insurance contracts contain a clause about the consequences of an aggravation of risk. Such rules may provide for the insurer not to be held liable if the insured event occurs as the result of an aggravation of a risk that has intentionally been caused by the policyholder or the insured, but there may be provisions on legal consequences in less obvious cases as well.
73PEICL, supra note 5, at art. 4:103(2). 74PEICL, supra note 5, at art. 1:203.
At the beginning of the section of PEICL which deals with the aggravation of risk, there is a provision that limits the impact of clauses concerning the aggravation of risk. Those clauses shall have no effect unless the aggravation of risk in question is material and of a kind which is specified in the insurance contract.75 This provision offers some kind of definition. It clarifies that immaterial aggravations of risk have no consequences for the insurance contract. In addition, it states that the clause only has effects if the aggravation of risk is of a kind specified in the contract. This seems problematic as the insurer is forced to foresee every kind of aggravation of risk that might occur in the future and describe it precisely in the insurance contract. This is hardly possible. Furthermore, the contract terms become lengthier, and thus, the policyholder risks excessive burden. There is no predominant interest of the policyholder to be protected from a termination of the insurance contract or an exemption of liability by an exhaustive enumeration of possible aggravations of the insured risk, especially as only material aggravations are concerned.
The further provisions concerning the aggravation of risk seem suitable. There is a duty to give notice of an aggravation of risk.76 In the event of breach of the duty of notification, the insurer is not entitled to refuse to pay any subsequent loss resulting from an event within the scope of the coverage unless the loss was caused by the aggravation of risk. Furthermore, it is necessary that the policyholder is, or ought to be, aware of the aggravation and that the insurer would not have insured the aggravated risk at all. If, however, the insurer would have been prepared to insure the aggravated risk at a higher premium or on different terms, the insurance money is payable proportionately or in accordance with such terms.77
If the contract provides that in the event of an aggravation of the risk insured, the insurer is entitled to terminate the contract, further requirements have to be met.78 However, it seems too strict that there is no possibility at all to continue the contract with adjusted conditions (e.g., higher premium, exclusion of risks). In fact, the PEICL forces the insurer, even if he is prepared to continue the contract, to terminate it as long as he is not willing to stick to the original terms. This is unsatisfactory for the policyholder as well as he is obliged to react in case of an “adjusting”
75PEICL, supra note 5, at art. 4:201. 76PEICL, supra note 5, atart. 4:202.
77See PEICL, supra note 5, at art. 4:202(3); 4:203(3). The rule in art. 4:203(3)
does not match with the headline of this article, particularly as it should not only apply to the termination of contracts; from a systematic perspective, it would be preferable to combine this provision with art. 4:202(3) and create a separate article with the headline “release from obligation to perform in the event of aggravated risk.”
termination (termination combined with an offer to conclude a new contract adjusted to the new risks). If he does not react in due time, he will lose protection and will have to face all the risks of a new conclusion of contract (e.g., a new risk assessment and the consequences of a delayed payment of the first premium).79
2. Reduction of Risk (Art. 4:301 PEICL)
In the case of a material reduction of risk, the policyholder is entitled to request a proportionate reduction of the premium for the remaining contract period.80 As the wording is not very precise, this rule implies a risk of uncertainty. It seems that the authors of the PEICL were well aware of this risk as paragraph two provides a right of the policyholder to terminate the contract in case the parties do not agree on a proportionate reduction of the premium within one month of the request.
The difficulties start with the need for a “material” reduction of risk. Contrary to the provisions concerning the aggravation of risk,81 the hypothetic reaction of the insurer is of no importance in this context. Further uncertainty is caused by the term of “proportionate” reduction. This makes a quantification of the reduction of risk necessary, even if the tariff structure contains no such quantification. The provision therefore contradicts the insurer’s principles of calculation. This may result in higher costs for calculation and administration, especially since according to the PEICL, the contract period may not exceed one year anyway. It would clearly be preferable to insert a provision which is modelled on the structure of the tariffs of the particular insurer with differentiations based on certain circumstances.