Trust and Transparency in Insurance Contract Law: European Regulation and Comparison of Laws

Abstract

The aim of this paper is to examine transparency principles under English and German Law, EU acquis and PEICL and to answer the question whether current legal regulation reflects high standards of transparency requirements and offer adequate consumer protection. The author is particularly interested in investigating are there any typical, common or shared characteristics in the regulation of transparency requirements across these jurisdictions. The focus of this paper is on consumer insurance contracts only. The main argument is that through transparency we can build consumer's trust in insurance market and offer adequate consumer protection.

I. INTRODUCTION

The aim of this paper is to examine transparency principles under English and German Law, the EU acquis and the Principles of European Insurance Contract Law (‘PEICL’), and to answer the question of whether current legal regulations reflect high standards of transparency requirements and offer adequate consumer protection. The author is particularly interested in investigating whether there are any typical, common, or shared characteristics in the regulation of transparency requirements across these jurisdictions. The focus of this paper is on consumer insurance contracts only. The main argument is that through transparency we can build consumers’ trust in insurance market and offer adequate consumer protection.

Transparency is one of the basic principles of law. It is continuously expressed in many areas. Legislation should be drafted transparently, administration and justice must be delivered transparently, public (state) processes should follow the principles of transparency, public and private relationships must reflect transparency requirements, EU programmes and consumer protection policies² are based on transparency, etc.³ Contract law and contractual relationships in particular must follow the principles of transparency as contract terms⁴ must be drafted in such a way as to be clear and understandable to the parties involved.⁵

Generally, transparency is about actively disclosing information in the pre-contractual phase. In insurance contract law specifically, transparency ensures that all relevant information about the insurance policy we are buying, including fees and conditions for the payment of claims and dispute resolution mechanisms are known to the customer. The scope of transparency in insurance law often relies on several factors. First, what kind of information we need to share or want to find out.⁶ Usually, this is information that is not clearly and immediately visible, but somehow hidden. This also needs to be the information relevant for making the decision on the buying/selling of insurance products and must come at the right time and in the right form. The applicant (future policyholder) usually holds information about the risk, as well as other circumstances that could influence the aggravation of risk against which he is insuring himself. Daily behaviour (risk factors) may strongly impact the increase or decrease of the risk and premium (for example fast drivers have increased risk). On the other hand, the insurer is aware of ways that the premium is calculated: specific risk factors per groupings of policyholders; statistical probabilities of risk occurrence; and/or the mandatory and voluntary elements of the insurance contract. Thus, both parties hold information relevant to the decision of the other party and the performance of the contract. Second, the scope of transparency requirements depends on the type of the insurance product (life insurance policies are often more complex) and the market structure and regulation. The less competitive and regulated an insurance market is, the stronger the position of the insurance companies in negotiation.

Looking at the legal theory, it is difficult to find the exact definition of transparency. Different legal regimes approach the topic differently.⁷ Generally this means that for something to be transparent, it must be clear, understandable, legible, and unambiguous.⁸ However, there is difference between: (1) transparency as a general principle of insurance law, which is focused on the exchange of information between contracting parties;⁹ (2) transparency in insurance mediation, which is focused on transparency in the relationship between the insurer and the intermediary;¹⁰ and (3) transparency in insurance supervisory law with a focus on the transparency of the regulatory requirements of the insurance business.¹¹ This Article focuses on the first.

Another element of the insurance contract is trust.¹² If the aim of insurance is to offer protection to the policyholder against a specific event (car accident, fire, or illness). Both parties need to trust each other in order to build a well-balanced and credible relationship. This is mostly built through open and transparent pre-contractual disclosure for all: consumers, insurers, and underwriters.¹³ The more trust there is in a contractual relationship, the more trust there is in the financial system as a whole.

The UK Financial Conduct Authority's (FCA) Financial Lives 2020 Survey shows that the ‘lack of trust and confidence can result in consumers not engaging with the financial services industry, or failing to address their own financial needs’.¹⁴ In February 2020, only 42% of adults had confidence in the UK financial services industry, and just 35% agreed that financial firms are honest and transparent.¹⁵ The report confirms that ‘people with characteristics of vulnerability and the over-indebted were more likely than average to lack confidence in the industry’.¹⁶

In order to tackle this problem, and looking comparatively across all three jurisdictions, the regulation of transparency and pre-contractual information duties has undergone many reforms and changes in the last ten years. In the UK, the Law Commission has proposed the new Consumer Insurance (Disclosure and Representation) Act 2012¹⁷ (‘CIDRA’), which is applicable to consumer insurance, and the new Insurance Act 2015¹⁸ (‘IA’), which is applicable to business insurance, thus setting two parallel regimes for the regulation of insurance contracts and transparency requirements. Both Acts, in parts, replaced the old Marine Insurance Act (‘MIA’)¹⁹ from 1906, which contained the codification of insurance practice beyond marine insurance. In Germany, there has also been significant change as the old Insurance Contract Act 1908²⁰ (‘VVG 1908’) was replaced in 2008 by the new Insurance Contract Act²¹ (‘VVG’) followed by the Regulation on Pre-contractual Information Duties in Insurance Contracts 2008²² (‘VVG-InfoV’). The former regulates both consumer and business insurance contracts, while the latter regulates transparency requirements and information duties for consumers particularly. Finally, at the EU level, one can witness publication of some relevant directives on transparency, such as Solvency II Directive²³ and Directive (EU) on Insurance Distribution²⁴ and the first EU soft law instrument in the area of insurance, PEICL.²⁵ This instrument is trying to establish a voluntary insurance contract law regime across the EU and find middle ground for rules on transparency and pre-contractual disclosure.²⁶

This Article provides comparative and functional overview of the transparency requirements in all three jurisdictions under investigation and hopes the ideas will feed into discussions about the themes in future.

II. MAIN LEGISLATIVE INTERVENTIONS TOWARDS ENSURING TRANSPARENCY

This Part examines some of the main legislative interventions aimed at ensuring transparency in insurance contract law. They are mostly shaped by long-term insurance practice and the relevant case law. In the last ten years, the conduct of the insurance business was impacted by the EU consumer acquis. The issues addressed are: change of the insurer's pre-contractual duty of disclosure (under 1); the fundamental change of the concept of the pre-contractual duty of disclosure and replacement of spontaneous disclosure with the questionnaire (under 2.1); the scope of the policyholder's knowledge (under 2.2); structure of the legal remedies for the breach of the duty of disclosure (under 2.3). These issues will be examined by taking a comparative and functional approach and the conclusions will be bolstered with economic reasoning.

Before we get into the analysis, some brief observations regarding the choice of legal orders are needed. This paper will focus on English and Welsh law (hereinafter, collectively, English law) and German law for several reasons. Firstly, they are both renowned representatives of common law and civil law, respectively. It is important to observe how different legal traditions approach the same issue. Secondly, the number of German and English companies carrying out insurance activities together hold more than thirty percent of the European insurance market,²⁷ making them important players in the field. Thirdly, they are prominent examples of the changing legal environment in recent years. After many years of discussion and some failed attempts for reform, Germany completed the reform of its consumer insurance contract law (‘VVG Reform’) in 2008 and England completed theirs in 2012. Analysis of the EU insurance acquis communuautaire (in particular the Insurance Distribution Directive) and corresponding legislative initiatives (PEICL) is important for the creation of one single European market for insurances. Although PEICL is a soft law instrument, at the moment it is the only piece of legislative initiative that sets forth common rules and principles on insurance contracts across Europe.²⁸ This set of rules is based on a considerable amount of comparative research performed by numerous respectable researchers in the field and since it is backed up by the European Commission, it holds credibility in the field.²⁹ For these reasons, this paper will also address legislative proposals of PEICL.

A. Insurer's Pre-Contractual Duty of Disclosure

1. Legal Framework and General Remarks

The main duty of an insurer is to make open and transparent pre-contractual disclosures to the consumer (policyholder) during negotiations. Such an obligation is clearly acknowledged in all jurisdictions under survey.

German law displays very detailed provisions on this issue. The basic disclosure rule is prescribed in Section 7 VVG 2008 (Insurance Contracts Act) and is further elaborated by Sections 1 and 4 VVG-InfoV 2008 (Regulation on Pre-contractual Information Duties in Insurance Contracts). Insurers’ pre-contractual disclosure obligation consists of duty to inform consumers about the elements of the contract (identity of the parties, beneficiaries, insurance agent), the commitment (risk covered, sum insured, premium and method of calculation, consequences of failure to pay premium), consumer right to revoke the contract, the applicable law, dispute resolution mechanisms, the name of competent supervisory body, and insurance terms and conditions.³⁰ Additional requirements are further laid out for special types of insurance, such as life assurance, health insurance, or insurance concluded via telephone (Sections 2–5 VVG-InfoV 2008).³¹ The content of information is shaped by EU acquis in particular the third generation of Life and Non-Life Insurance Directives,³² the Solvency II Directive,³³ and the EU consumer protection acquis.³⁴ Article 2:201 PEICL follows the same pattern as German law and the EU acquis.³⁵ In order for the law to be suited to consumer contracts, insurers are required to display information in an additional pre-contractual ‘information document’, in a clear and transparent way and in writing (Section 7 VVG, Article 2:201 PEICL). Serving consumers with the information document is considered to be one of the most efficient mechanisms of ensuring transparency and consumer protection on the EU level in general.³⁶ It is also clearly reflected in the EU consumer acquis.³⁷ The information document is not a standard form document, but needs to be tailored to meet the individual requirements of each consumer and the insurance contract under negotiation. Such duty is also independent of the obligation of the insurer to issue an insurance policy after the conclusion of the contract (Section 4 VVG-InfoV, Article 2:501 PEICL).

Another mechanism for ensuring transparency and consumer protection is regulatory separation between the consumer and business insurance. Both Germany and England are good examples. The Consumer Insurance (Disclosure and Representation) Act 2012 (CIDRA, England) and VVG-InfoV (Germany) apply to consumer insurance, the Insurance Act 2015 (IA) applies to business insurance, and VVG (Germany) applies to both. As already mentioned, this Article will be dealing with consumer insurance only.

English CIDRA however works in a different way from German and EU regulation. CIDRA does not regulate an insurer's pre-contractual disclosure, the Act is focused on easing the position of the consumer by introducing new lighter rules on consumers’ information duties only.³⁸ In theory, the insurer's duty is still based on the old (and sometimes considered unjust and harsh) concept of the utmost good faith from Section 18 of the Marine Insurance Act 1906. Historically, the duty of utmost good faith derives from the statements of Lord Mansfield in the landmark decision Carter v Boehm ³⁹ in 1776. Both parties to an insurance contract have a duty to disclose all material facts as part of their pre-contractual disclosure,⁴⁰ in addition to the general obligation for all contracts not to make false statements during pre-contractual negotiations.⁴¹ This duty, together with the general law of misrepresentation as developed in the nineteen century, led to a ‘significant body of case law on the nature and scope of the duty of utmost good faith and the consequences of its breach’.⁴² The latter were particularly harsh on the insured. Even if the misrepresentation was innocent, the insurer had the right to avoid the contract fully and refuse to pay all claims. With the development of the consumer protection policies streaming from the EU in the 1970s, it became apparent that such law was not well suited for consumers. CIDRA abolished the utmost good faith rule for the insured and replaced it with the duty not to make misrepresentations (Clause 2 CIDRA),⁴³ whereas the utmost good faith rule still associates to the insurer's pre-contractual disclosure and both parties’ post-contractual disclosures. The reason the Law Commission was not overly concerned with this issue in the Draft Bill of CIDRA is because insurance practice clearly displayed different behaviour by following different codes of conduct rather than strict rules of law.

Practice often pursued principles of transparency and fairness laid out in the self-regulatory instruments and the rules of the insurance industry.⁴⁴ The most influential instrument is the Association of British Insurers (‘ABI’) Statement of General Insurance Practice (‘ABI Statement’),⁴⁵ which has been used in the market for more than 40 years. The ABI Statement provides that the insurers must warn consumers about the duty to disclose material facts, but they also must explain which facts the insurer would regard as material (Section 1(c)(i) ABI Statement). The ABI Statement was withdrawn on 15 January 2005 and replaced by the ICOBS Rules of the Financial Services Authority (‘ICOBS Rules’).⁴⁶ The latter practically repeat the rules from the ABI Statement. In addition, they prescribe the duty of insurers to ask clear questions about any matter material to the insurance undertaking (Rule 5.1.4 ICOBS). The ICOBS rules were replaced by the ICOBS Insurance: Conduct of Business Sourcebook (‘ICOBS’)⁴⁷ as part of the Financial Conduct Authority Handbook made under the Financial Services Act 2021. All insurers must provide product information to the consumer by way of a Standardised Insurance Information Document (ICOBS 6 ANNEX 3). Although ABI Statements and ICOBS 2005 are no longer in force, they had considerable impact on shaping CIDRA as it is today because of their softer approach towards consumers. Such approach was also greatly supported by the Financial Ombudsman Service (‘FOS’) created in 1981.⁴⁸ FOS interpreted applicable common law rules very restrictively in its decision making, to the extent that if an insurer fails to ask questions, it cannot complain later that the information was not disclosed.⁴⁹ By correcting the harsh principle of utmost good faith and mitigating the full avoidance of contract, FOS offered great comfort to consumers.⁵⁰ When drafting CIDRA, the Law Commission followed the FOS approach, thus ensuring more widespread protection of individual consumers.⁵¹

In 2018, the EU Insurance Distribution Directive⁵² and the corresponding EU Commission Implementing Regulation⁵³ made another step towards ensuring transparency of information for consumers. All insurers must now provide product information to the consumer by way of a Standardised Insurance Information Document (Art 20(9) Directive 2016/97, ICOBS 6 Annex 3). All three jurisdictions under survey need to comply with this requirement. The Document needs to summarise the key elements of the insurance product offered (eg life, car, fire insurance) and key elements of Standard Terms and Conditions of that particular insurer (Arts 1–5 Implementing regulation, ICOBS 6, Annex 3, 2.1). But, unlike the information document under German Law and PEICL, such Document is not tailored to the specific needs of that particular consumer nor forms part of the insurance contract. The specifics of the actual (individual) pre-contractual and contractual information can be found only in the insurance cover and must be submitted separately (Article 20 Directive 2016/97, ICOBS 6, Annex 3, 2.6). The aim of such regulatory approach is for the insurers to be transparent about the insurance product they offer on the market and their terms and conditions, in order to facilitate the consumer decision-making process.

2. Functions

Fundamentally, insurers’ pre-contractual disclosures have two basic functions: (1) ensuring transparency; and (2) securing consumer protection. The first function, informing the consumer about the information relevant for the conclusion of the contract, helps to ensure transparency for the prospective policyholder. The written document containing all relevant information will put the policyholders in such a position that they will be able to check all relevant elements of the future contract and thus make an informed decision about the contract they are about to conclude.⁵⁴ This also helps build trust in the consumer-business relationship. The second function consequently develops from the previous one. Presenting the pre-contractual document protects the policyholder from the insurer's non-disclosure, which might be material or relevant for the policyholder decision. As the insurance relationship works both ways, pre-contractual document also protects the insurer from possible future consumer complaints that some facts were not disclosed during negotiations. In business practice, the consumers may later say ‘but I did not know this information’ and may try to exercise the right to withdraw from the insurance contracts based on that argument. The written information documents act as a shield against such complaint. Otherwise, the policyholder may withdraw from the contract.

3. Economic Reasoning

Law and economics theories generally offer economic justification for the proposed law regulation. The aim here is not to provide full overview of the law and economic approaches but just to add additional arguments regarding the benefits of the information document. One of the main sources of market failure is information asymmetry,⁵⁵ and the information document helps to scale down the consequences of such asymmetry. Asymmetric information, as the name implies, means differing, disproportionate, or partial information.⁵⁶ This also means that one party regularly knows more or less than the other party. When negotiating an insurance contract, the consumer knows more about the risk and other factors surrounding the risk (their drinking or driving habits, lifestyle, frequency of health checks, which kind of insurance they want, etc). On the other hand, the insurer knows more about the statistical data, the ways of calculation of premium, and enforcement of claims. There is clear asymmetry here as one party always knows more than the other. In order for the contract to meet the expectations of both parties, there must be full and adequate disclosure on both sides. When there is no adequate exchange of information, consumers will simply leave the market.⁵⁷ Usually, information asymmetry can be remedied via voluntary exchange of information (eg the seller is willing to provide a warranty for the goods), but in cases of serious market disruption or if the industry is subject to state supervision (such as insurance), state intervention is needed.⁵⁸ All jurisdictions under survey responded to the issue of information asymmetry by clearly regulating insurers’ pre-contractual disclosure and by introducing the pre-contractual information document. In England this is even regulated as public law duty through ICOBS (product information document).⁵⁹

Another benefit of pre-contractual information document is minimisation of transactional cost. Very simplified, and on a very basic level, if the law requires that standard information be communicated to the consumer, insurers do not have to lose time and money investigating which facts are material to that particular consumer in order to make a decision. Additional investigation would only increase the costs of the insurer, which would consequently increase the premium, which then might cause a decrease in the demand for insurance and the policyholders would again leave the market.⁶⁰ My argument here is that the document containing relevant information makes sense from the transaction cost economics perspective.

Finally, the information document also helps consumers to process information. Behavioural economics or rational choice theory⁶¹ assumes that decisionmakers are rationally self-interested.⁶² The central insight of behavioural economics is that ‘humans beings make predictable errors in judgement, cognition and decision making’⁶³—meaning that people are ‘predictably irrational’.⁶⁴ The insurance information document relies on these assumptions and tends to eliminate predictably irrational behaviour. Largely simplified, the assumption is that if the consumers have adequate information at the right time and in the right form, they will make adequate decisions regarding insurance contracts.⁶⁵ Again, any further law and economics analysis is beyond the scope of this Article.

4. FCA's New Consumer Duty Instrument 2022 and Duty to Advise

In July 2022, the English Financial Conduct Authority (‘FCA’) announced its plan to introduce the new ‘Consumer Duty Instrument 2022’ (‘Duty’),⁶⁶ which will raise the standard of care that businesses give to consumers in the area of financial services. This indirectly indicates that there was clearly a certain level of dissatisfaction with the transparency requirements. Under Principle 12, the ‘Firm must act to deliver good outcomes for retail customers’.⁶⁷ This principle is based on the wider FCA consultation process,⁶⁸ followed by the Parliamentary discussion on the Financial Services Act 2021⁶⁹ where the current standard of consumer protection in financial services was not satisfactory and required further interventions. FCA explains that under this new Duty, ‘the firms will need to assess and evidence the extent to which and how they are acting to deliver good outcomes for the consumer’.⁷⁰

The focus is on new requirements for businesses to ‘ensure that their products and services are fit for purpose and offer fair value, and to help consumers make effective choices or act in their interests’.⁷¹ The increased supervision will help to ensure the required level of consumer protection and this measure, being more ‘consumer-focused’, will also stimulate competitiveness between businesses in order to attract more consumers.⁷²

FOS aims for all information to be transparent and empower consumers to make informed decisions about financial products and services. According to FOS, ‘consumers are to be given the information they need, at the right time, and presented in a way they can understand’.⁷³ This applies in particular to transparency of product governance, price and value, consumer understanding, and supporting consumers in reaching their financial objectives and buying financial products.⁷⁴ FOS clearly acknowledges the need to introduce such a Duty because consumers have a weaker bargaining position—they are often subject to cognitive and behavioural biases and lack experience and specialized knowledge in relation to the financial products and usually there is some type of information asymmetry in the consumer-business relationship.⁷⁵ The Duty is to be implemented starting 31 July 2023 without retrospective effect.⁷⁶ The success of the proposal will be monitored via Financial Ombudsman Service decisions and through the FCA Financial Lives Survey.⁷⁷

Looking comparatively, neither German law, PEICL, nor the EU acquis explicitly regulate such a Duty. However, there is the insurer's general duty to advise the policyholder (Germany, Section 6 VVG) or to assist the policyholder (Articles 2:202 and 2:203 PEICL) when taking out insurance.⁷⁸ Under German law, the insurer is under a duty to inquire about the wishes and needs of the prospective policyholder and to provide advice and justify reasons for it (Section 6 VVG, Art 2:202 PEICL). Providing advice is usually recorded, in order to avoid any potential future claims and facilitate the burden of proof. Similarly, under the EU Insurance Distribution Directive and PEICL, an expert should warn consumers about the inconsistencies between the cover and the consumer requirements (the elements of the proposed risk)⁷⁹ and about the commencement of the cover, as this proved to be an issue in the insurance practice.⁸⁰ For breaches of the duty to advise/warn consumers, insurers will be liable for damages (Section 6.5 VVG, Article 20 Insurance Distribution Directive, Article 2:202 paragraph 2a PEICL).

I believe that functionally, the duty to advise under German law and the duty to warn under PEICL do not follow the same concept as English conduct of business nor do they have such a broad application as the new Consumer Duty to deliver good outcomes under English law. Since 2008 and the German insurance contract reform, there have not been many court decisions on the insurer's duty to advise.⁸¹ Some authors believe that the provision was deliberately drafted ‘softly to keep up the opportunity for the court to consider the circumstances of each individual case’.⁸² Also, when deciding, the German courts are not keen to develop and apply the special standard for the insurer's duty to advise, but rather base their decisions on the general principles of contract law, in particular provisions on good faith and fair dealings.⁸³ This is similar under the Insurance Distribution Directive and PEICL. Insurers’ pre-contractual duties do not entitle consumers to expect any assistance from the insurers and the duty to warn will be less extensive where there is no direct negotiation between the consumer and the insurer (either because it is online or there is an agent or broker involved).⁸⁴ The new Duty under English law clearly indicates that there is still a real need to raise the standard of transparency and consumer protection in practice.

B. Policyholder's Pre-Contractual Duty of Disclosure

1. Spontaneous Disclosure Versus Questionnaire (Modifying the Test of Materiality)

a. Legal framework

Before April 2013 when CIDRA came into force, a well-established principle of the English insurance law was that the consumer (policyholder) needed to volunteer all information material to the risk (disclosure by the assured, Article 18 MIA). The insurer was not obligated to inquire nor to ask any questions. If the material information was not disclosed, the insurer was entitled to avoid the contract fully and refuse the payment of the claim.⁸⁵ In England, this principle is believed to derive from the Lord Mansfield opinion in the landmark case Carter v Boehm 1666⁸⁶ and the doctrine of utmost good faith was also established there. As discussed in the previous chapter, this doctrine is applicable to both insurer and insured pre-contractual disclosures. It is also well reflected in Sections 18 and 20 of the Marine Insurance Act 1906, which has shaped English insurance practice for more than 100 years, up until CIDRA. For many years, the rationale behind the ‘spontaneous disclosure’ approach relied on the understanding that the policyholder knows everything about the risk (eg life style, driving habits, consummation of alcohol, etc) and the insurer nothing, so it is the policyholder's duty to disclose.⁸⁷ The dilemma around this approach relates to the basics of human cognitive perception.⁸⁸ How can one party (the consumer) know which facts are relevant for the risk assessment made by the other party (the insurer)? Consumers simply cannot know which information is relevant for calculating the risk and the premium as this is technical knowledge. In English insurance practice, such regulatory approach was considered unjust and burdensome for the consumer. The insurer could avoid the contract and refuse to pay all claims no matter the culpability of the policyholder (even for an innocent breach). Because of such draconian consequences this approach was softened in English insurance practice.⁸⁹ As it will be discussed in detail later, FOS, the main body in the UK dealing with consumer insurance disputes, disregarded the requirement of the spontaneous disclosure and based its decision on the culpability of the policyholder's behaviour instead.⁹⁰

CIDRA made significant changes and embraced the FOS approach to ease the position of the consumer.⁹¹ It abolished the existing pre-contractual duty of a policyholder to volunteer information and the concept of utmost good faith for pre-contractual disclosure from MIA⁹² and replaced it with the duty ‘to take reasonable care not to make a misrepresentation’ (Clause 2 CIDRA).⁹³ In other words, the consumer has a duty to avoid misrepresentation. This change plays a central role in the consumer disclosure reform and assurance of transparency under English law. As the insurer now needs to ask relevant questions, it is presumed that material circumstances are the ones explicitly asked for.⁹⁴ The new duty is also acknowledged in the case law.⁹⁵

Interestingly, a functionally similar approach was taken in many other European countries in order to ensure transparency and fairness in insurance contractual relationship. For example, in Germany the insurer's questionnaire (Fragebogen),⁹⁶ replaced insured spontaneous disclosure. After German Insurance Contracts Law reform (VVG Reform) in 2008, consumers must only answer questions from the questionnaire, to the best of their knowledge, even if they do not know or cannot estimate which facts are material (Section 19(1) VVG). That is why the policyholder is under obligation to answer questions fully and accurately and is not permitted to state: ‘I think this question is not important thus I will not answer’.⁹⁷

Many European legislations (eg Poland, The Netherlands),⁹⁸ as well as PEICL, followed the same trend. The consumer ‘shall inform the insurer about the circumstances material to the risk … which are subject to a clear and precise questions put to him by the insurer’ (Article 2:101 PEICL).⁹⁹ The consumer (applicant) will be relieved of such duty only when the questions have been answered fully and honestly.¹⁰⁰ The requirement of ‘clear and precise’ questions plays an important role in performing the pre-contractual disclosure. If the insurer's question is abstract: ‘Have you been ill in the last five years?’, it is unclear whether the insurer is interested to know about any illness in the last five years (eg simple cough, headache) or about a more serious illness—if yes, which one? The questionnaire method thus clearly enhances the transparency of the insurer's behaviour.¹⁰¹ The insurer needs to specify clearly and transparently what he wants to know. If the insurer requires the consumer (policyholder) to make a decision which illness to report/not to report, we are practically returning into the old regime of spontaneous disclosure, which was abandoned as harsh and unjust to the consumer.

b. Modifying the test of materiality: The test of reasonable care

Change from consumer spontaneous disclosure to a questionnaire had an important effect—it modified the test of materiality, thus bringing us one step closer to ensuring transparency. The test of materiality is about the question of who is making the decision on which risk factor is material/decisive for an insurance contract and under which conditions. For example, two heart operations in the last two years is a material fact for the insurer as he is calculating the premium and the value of claim.

Under all regimes under investigation (English and German law and PEICL), the materiality (relevance) of information is determined by the judgement of the insurer (not insured as it was before reforms). Under German law, the fact is material if it would influence the judgment of an actual insurer to conclude that a particular contract (Section 19 VVG, actual insurer test).¹⁰² With a questionnaire, the circumstance is deemed to be material without further inquiry if the insurer asked a clear question about it. PEICL takes the same approach. The material fact is the one the insurer put down as a clear and precise question (Section 2:101 PEICL).¹⁰³ The EU Directive on Insurance Distribution has no explicit provisions. However, the Directive imposes a duty on the insurer to take appropriate arrangements and consider the demands and needs of the customer before the proposal of the contract (see Article 1). Accompanying comparative study to PEICL showed that some EU countries, such as Croatia, Austria, Belgium, and Luxembourg, still rely on the consumer to volunteer material information, while others, such as Finland, France, Greece, Poland, Spain, and Switzerland, rely on the insurer questions.¹⁰⁴ The drafters of PEICL clearly opted for the latter, as volunteering information was considered unjust and burdensome for consumers.¹⁰⁵

For years, under English law, the MIA offered interpretation of the materiality of information by applying a ‘prudent insurer test’. Every circumstance was material if it would influence the judgment of a hypothetical prudent insurer in fixing the premium or determining whether he will take the risk (Section 18(2) MIA). In the past, this test in practice was usually softened by the ABI Statements, ICOBS Rules, and the practice of the FOS, as the test was considered unjust and burdensome for the consumer.¹⁰⁶ CIDRA introduced significant changes in that respect. CIDRA abolished the duty of pre-contractual disclosure and the concept of ‘material circumstance’ and replaced it with the consumer duty ‘to take reasonable care not to make the misrepresentation to the insurer’ (Clause 2(2) CIDRA). This section applies to both the application for a new policy and the amendment or renewal of the existing one. The Law Commission thinks ‘it is right to take a wide and flexible approach to the issue of what amounts to a misrepresentation. … The Draft Bill therefore preserves the concept of misrepresentation as interpreted through the case law’.¹⁰⁷ CIDRA does not attempt to define the term ‘misrepresentation’ thus leaving it to the common law.¹⁰⁸ Generally, misrepresentation is a statement of fact made by or on behalf of the insured (consumer) before the contract is concluded, which must be governed by the requirement of reasonableness. Looking at Section 2(2–3) of CIDRA, there are three possibilities where misrepresentation may occur. First, misrepresentation takes place in response to the insurer's questionnaire. This will be the most usual scenario in practice. Second, misrepresentation takes place independent of the insurer's questionnaire. Under CIDRA, consumers have no duty to volunteer information but if they do, there is no prohibition in CIDRA not to treat those statements as misrepresentation. Thirdly, misrepresentation takes place while varying or renewing the existing contract.¹⁰⁹ ‘A failure by the consumer to comply with the insurer's request to confirm or amend particulars previously given is capable of being a misrepresentation’ (Section 2(3) CIDRA). This provision very likely relates to the situation of amendments or renewal of the policy where the consumer was specifically asked by the insurer to confirm or modify information provided earlier and was warned about the consequences of such omission.¹¹⁰ The Law Commission in the CIDRA Report clarified and confirmed that a consumer failure to reply to such a request may be considered a misrepresentation for the purposes of the Act.¹¹¹ Whether failure to reply to an insurer's request actually amounts to misrepresentation will depend on the facts of the case.¹¹²

Section 3 of CIDRA explains the test of reasonable care. Whether the consumer acted with reasonable care to avoid misrepresentation is judged in the light of ‘all the relevant circumstances’ and not in accordance with the opinion of the actual/reasonable consumer (Section 3(1) CIDRA).¹¹³ In order to help with an assessment as to whether reasonable care was taken, CIDRA provides examples of some relevant circumstances: (1) the type of consumer contracts in question and its target market; (2) any relevant explanatory material publicly produced or authorised by the insurer; (3) how clear and how specific the questions were; (4) on renewal or variation of contract, how clearly the insurer communicated to the consumer the importance of answering questions and the possible consequences to not doing so; and (5) whether or not an agent was acting for the consumer (Section 3(2) CIDRA).¹¹⁴ This list is open, as other circumstances may be taken into account. The Law Commission only mentioned that these are the cases where misrepresentation might be reasonable.¹¹⁵ Misrepresentation done in dishonesty will always be considered as acting without reasonable care (Section 3(5) CIDRA).

The test is primarily objective, and the standard of care is that of a reasonable consumer (Section 3(3) CIDRA). As it will be discussed more in the next Section, the concept of ‘reasonableness’ is not strange to English law. The ‘reasonable consumer’ is an average consumer without any particular or specific skillset. The exception is where the actual consumer ‘was, or ought to have been, aware of any particular characteristics or circumstances and they were not disclosed, those are to be taken into account’ (Section 3(4) CIDRA).¹¹⁶ The attestation whether a consumer's statement of fact is a misrepresentation is on the insurer. The insurer must show that without the misrepresentation, he would not have entered into the contract (or variation of the contract) or would have done it only under different terms (Section 4(1) CIDRA).

Looking comparatively and functionally, although German, European, and English approaches differ in the drafting technique, the final outcome is not so different. If the insurer needs to set forth a clear question about circumstances deemed to be material, the insurer is the one determining the test of materiality (or the test of a reasonable care in England). The function of such provision(s) is to shift the burden of proof of materiality/misrepresentation from the consumer onto the insurer, and this was clearly achieved in all jurisdictions under investigation.

c. Economic reasoning

This Section address basic economic arguments as support of the questionnaire method. From the law and economics perspective, the questionnaire method helps address some of the main obstacles in the insurance market, such as: information asymmetry (one party knows more than the other); insurance rate differentiation (calculating the rate for that particular consumer); adverse selection (extending coverage to substantially higher risks); and ultimately leads to costs reduction.¹¹⁷

In practice, in the pre-contractual phase, the insurer makes the assessment of each single risk it is about to undertake. This assessment largely depends on the characteristics, type, and nature of the risk in question (eg ensuring someone's health, life, house, specific voyage). The insurance practice shows that the range of elements and factors relevant for the insurer's decision are sufficiently well known and objectively predictable,¹¹⁸ thus allowing insurers to develop standard rates for certain types of insurance as a group (for example standard rates for car insurance or home insurance).¹¹⁹ This is called the pooling of risks.¹²⁰ As a result, the relative predictability of rates and costs attracts more consumers onto the market. But, in some cases there are still some other risk factors unique to that particular consumer, such as health reasons, drinking and fast driving, risky lifestyle, etc.¹²¹ The questionnaire method is thus an adequate tool for the disclosure of the factors unique to that particular consumer. Maybe the applicant is a professional car driver or free climber and thus their lifestyle is riskier. From a legal perspective, information captured through a questionnaire allows the insurer to design the insurance contract specifically for that particular consumer. From the law and economics perspective, the questionnaire method helps to tackle some of the main problems faced by the insurance companies.¹²² They will be explained very briefly here.

The main problem for insurance companies is information asymmetry, a concept that was discussed above. It is the situation where one party knows more (or different) information than another. The questionnaire method helps insurers to find out about the unique risk factors of that particular insured and creates a situation where both parties are informationally equal. For example, four heart operations is relevant information for the life insurance policy and disclosure of that information removes information asymmetry. Secondly, as the risk is higher (four heart operations), the insurance premium (rate) must be higher. The insurer will thus differentiate the insurance premium for that particular insured and not apply the standard rate for life insurance policies. This is called insurance rate differentiation.

Another major issue for insurance companies is called adverse selection.¹²³ Adverse selection refers to a situation where the insurer extends the coverage to a risk that is substantially higher than the insurer is aware of.¹²⁴ The insurer will find itself in a situation where it must pay more than anticipated.¹²⁵ This happens usually because the information about the risk is not accurate. Together with some other tools,¹²⁶ asking the right questions helps insurers to identify the correct risk factors and avoid exposure to adverse effects (overpaying a claim).¹²⁷ For example, a policyholder failed to disclose that he is a passionate free climber without security ropes (high-risk customer) in the questionnaire for a life insurance policy.

Finally, the questionnaire method also helps with the issue of cost reduction. Generally, collecting information costs time and money. Any increase of the costs of collecting information will spill over onto the consumer (policyholder) through the increase in the premium, which may give rise to an undesirable consequence—the reduction of a demand for insurance.¹²⁸ Because of the cost increase, consumers will simply leave the market and not buy insurance. To avoid these negative consequences, insurers in the consumer insurance market have a tendency to group similar risks and to develop standard rates for certain types of insurance, based on the previous statistical calculations and experience (for example for car insurance, property insurance, travel insurance, etc). Because insurers collect information for years, they know there are patterns of information, such as risk factors and consumer characteristics, that are continuously repeating as decisive for certain types of risks and for certain profiles of consumers. In order to reduce the cost of collecting information, the insurer's decision about the insurance contract is most usually based on those predictable risk factors. This is cost efficient. Furthermore, if the insurer, based on the questionnaire, finds out that the risk could be further differentiated, it is more cost efficient for the insurer to lower the premium for that particular consumer, rather than to conduct a full investigation from the beginning.¹²⁹

2. Actual Knowledge Versus Presumed Knowledge – Is the Level of Knowledge of a Policyholder Still Relevant?

a. Legal framework and general observations

This Section follows up on the previous one and the discussion of whether the consumer (policyholder) should disclose the information known (actual knowledge) or that ought to be known to him (presumed knowledge)? Actual knowledge is a question of fact.¹³⁰ The policyholder simply cannot disclose beyond his knowledge. ‘The duty is duty to disclose, and you cannot disclose what you don't know. The obligation to disclose, therefore, necessarily depends upon the knowledge one possesses’.¹³¹ It would seem unjust for policyholders to suffer repercussions for something they simply do not know. What about presumed knowledge? Should policyholders be under an obligation to disclose information they ought to know?

Under German law policyholders must disclose only ‘the risk factors known to them…’¹³² (Section 19(1) VVG, actual knowledge). Actual knowledge is based on the positive knowledge of that particular policyholder when answering the questionnaire in writing. The policyholder is not required to conduct research regarding which facts classify as material, he simply needs to answer the questions, even if he does not know or cannot recognise the materiality of the facts.¹³³ However, according to the German basic method of ‘Anscheinsbeweis’ taken from German civil procedure (Section 286 ZPO), the actual knowledge of the policyholder is (rebuttably) presumed if the insurer shows that under normal conditions and on the basis of a typical course of events, the policyholder would have had actual knowledge of the relevant fact.¹³⁴

In contrast, PEICL requires actual or presumed knowledge. The policyholder should disclose circumstances he ‘is aware or ought to be aware of…’ (Section 2:101 PEICL). The drafters of PEICL expressed the opinion that in most European countries, the law makes no distinction between actual and presumed knowledge.¹³⁵ Instead, individual characteristics and experience of the policyholder should be taken into consideration by courts when deciding on the breach (for example, knowledge of a firefighter is relevant when applying for home insurance against fire).¹³⁶ The policyholder has no duty to investigate facts outside his actual knowledge, but he must be honest and is expected to make reasonable enquiries and check his statements on the application.¹³⁷

Under English law, there have been some discussions by the Law Commission regarding whether the reasonableness test should be objective (reasonable assured) or subjective (the actual insured), or some sort of synergy between both (reasonable insured in the position of the actual insured).¹³⁸ As examined in the previous Section, CIDRA clearly indicated that the standard of care is ‘that of a reasonable consumer’ (Section 3(3) CIDRA).¹³⁹ The reasonable care test is principally objective, looking at the typical behaviour expected of a reasonable consumer in the market. This test usually does not take individual characteristics of the actual consumer (language, age, gender, etc), although sometimes there are exceptions to this rule.¹⁴⁰ This implies an average consumer in the market with no special skills or knowledge. Subjective adjustment of an objective test is when an insurer was aware, or ought to have been aware, of any particular characteristics of the actual insured (subjective test), these circumstances are to be taken into account (Section 3(4) CIDRA). Similar to this is dishonest behaviour of the consumer, as this will always be considered as breach of duty (Section 3(5) CIDRA). In the Draft Bill Report, the Law Commission provides for some useful illustrations of the test. For example, the level of care expected from the consumer will sometimes depend on the way the insurance was sold (via telephone or face to face, or with the help of an agent).¹⁴¹ Greater care is also expected if the insurer asked the consumer to check their records before completing the questionnaire (eg medical records), or if an insured has knowledge or understanding beyond what is average and the insurer is aware of that (eg a firefighter regarding insurance against fire or a doctor regarding medical insurance).¹⁴²

Several conclusions could be reached on this point. Firstly, under both English and German law, the consumer's (policyholder's) pre-contractual disclosure requires actual knowledge only. PEICL requires actual and presumed (constructive) knowledge. But is the distinction between actual and presumed knowledge actually relevant in practice? First, in relation to the criterion of judgment, the judgment of the policyholder's actual knowledge is based on ‘the reasonable/typical expectation of disclosure of consumers in the market’ (England), or expected behaviour of the insured to disclose ‘under normal circumstances and on the basis of typical course of events’ (Germany). These two criteria do not differ significantly.

Secondly, looking at the legal remedies, breach or omission to disclose facts in a questionnaire gives the insurer the right to withdraw from the contract (Germany), to avoid the contract (England), to propose a reasonable variation of the contract, or to terminate the contract (PEICL). But the right to exercise these legal remedies largely depends on the distinction between deliberate, reckless, or careless misrepresentation (England) or the innocent, negligent, and fraudulent breach of the policyholder (Germany, PEICL). Legal remedies thus rely on the level of culpability of the breach and not on the differentiation between actual or presumed knowledge. I believe this issue was greatly important in the past before reforms, but today, following the requirement of insurers’ questions, the distinction between actual and presumed knowledge has lost significance.

3. Legal remedies: All-or-Nothing Principle Versus Principle of Proportionality

a. Legal framework and general observations

This Section examines the legal remedies for the breach of the policyholder's pre-contractual duty of disclosure. Failure of pre-contractual disclosure will trigger a complex system of legal remedies in all jurisdictions under comparative survey. The main characteristics of all systems is the shift from an all-or-nothing principle to the principle of proportionality. What are those principles about and how are they contributing to building trust in the consumer-insurer relationship?

An all-or-nothing principle is based on the understanding that breach of the disclosure duty leads to a defect of the consent (will) of the parties and hence to the invalidity of the contracts. The sanction could not be anything else except the nullity (avoidance) of the contract even if the non-disclosure was innocent (Section 61 VVG 1908, Section 18 MIA 1906). So, the contract could either stay in force (all) or be avoided in full (or nothing). Until a decade ago, this approach was typical for all systems under survey. For years, this approach was considered unjust and too burdensome for the consumer and had a negative impact on trust between the parties.¹⁴³ Thus, it was often softened in both English¹⁴⁴ and German¹⁴⁵ insurance practice.

The principle of proportionality, as the more modern approach applicable today, abandoned this view and replaced it with a more economical one ‘based on the equilibrium between the real risk and the amount of the price’.¹⁴⁶ With some exceptions and depending on the nature of breach, the principle of proportionality requires the contract to be adjusted proportionally to the level of breach (Section 22 VVG, Clause 2 CIDRA, Article 2:102 PEICL). The general intention of the law was obviously to foster the trust and continuation of contract, even under modified premium or contract terms.

b. Principle of proportionality

Under English law, the insurer will have a right to a remedy against a consumer only under two conditions. If the consumer failed to ‘take reasonable care not to make a misrepresentation’ (Clause 4(1)(a) CIDRA) and only if it ‘shows that without the misrepresentation, insurer would not have entered into the contract at all or would have done so only on different terms’ (Clause 4(1)(b) CIDRA).¹⁴⁷ This provision is in essence codification of the requirement of inducement developed by the House of Lords in the case of Pan Atlantic Insurance Co Ltd v Pine Tom Insurance Co Ltd,¹⁴⁸ which was again acknowledged in Jones v Zurich Insurance PLC in 2021.¹⁴⁹ The test is summarised with the question regarding what would the insurer do if there was no misrepresentation.¹⁵⁰ If these two conditions are met CIDRA refers to it as ‘qualified misrepresentation’ and the insurer may resort to legal remedies specified in Clause 5 of CIDRA.

The remedy available to the insurer largely depends on the classification of the qualified misrepresentation as: (1) deliberate or reckless; or (2) careless. The Law Commission consulted extensively on these concepts with the stakeholders. In the end, the Law Commission adopted the classification of FOS and the ABI Code of Practice.¹⁵¹

A qualifying misrepresentation is ‘deliberate’ or reckless” if the consumer (1) knew that it was untrue or misleading, or did not care whether or not it was untrue or misleading,¹⁵² and (2) knew that the matter to which the misrepresentation related was relevant to the insurer, or did not care whether or not it was relevant to the insurer (Clause 5(2) CIDRA).¹⁵³ Simply put, a consumer acts deliberately if they act with knowledge. A consumer acts recklessly if they act without care as to the truth of an answer (as was established in the case Derry v Peek ¹⁵⁴).¹⁵⁵ Where the qualified misrepresentation is deliberate or reckless, the insurer may avoid the contract, refuse all claims, and need not return any of the premiums paid, except to the extent (if any) that it would be unfair to the consumer to retain them (all-or-nothing principle) (Clause 2, Schedule 1 CIDRA). CIDRA, in principle, follows the same approach of the common law (Section 84 of MIA), where in case of fraud there is an avoidance and no need to return the premiums paid, with slight difference as to the new possibility to return premium partially due to the requirement of (un)fairness.¹⁵⁶ Also, return of a premium is not to be regarded as estoppel against the claim that the insurer acted deliberately or recklessly.¹⁵⁷ The burden of proof that the misrepresentation was deliberate or reckless is on the insurer.¹⁵⁸ However the insurer must operate within two additional presumptions: (1) that the consumer had the knowledge of a reasonable consumer; and (2) that the consumer knew that a matter about which the insurer asked a clear and specific question was relevant to the insurer¹⁵⁹ (Clause 5(5) CIDRA). The Law Commission did explain that such a burden of proof should not be too onerous or burdensome on the insurer, but something that can be reasonable expected.¹⁶⁰ For example, if a consumer fails to provide an answer regarding a heart attack in the last five years as a response to the insurer's clear and specific question.¹⁶¹

A qualifying misrepresentation is ‘careless’ if it is not deliberate or reckless (Clause 5(3) CIDRA).¹⁶² In Jones v Zurich Insurance PLC,¹⁶³ the Court held that a deliberation whether conduct is deliberate or reckless is possible only if there has been an express pleading to that effect on behalf of the insurer; a Court may not reach that conclusion on the basis that the evidence speaks for itself.¹⁶⁴ Where the qualifying misrepresentation is ‘careless’ the insurer will be entitled to a compensatory remedy based on the principle of proportionality. The decision would depend on what the insurer would have done had the consumer complied with the duty to make a representation. CIDRA considers three possibilities. Firstly, if the insurer would not have entered into a contract on any terms, the insurer may avoid the contract and refuse all claims, but must return the premiums paid¹⁶⁵ (Clause 5, Schedule 1 CIDRA). Secondly, if the insurer would have entered into the contract but under different conditions, the contract will be treated as if had been entered under those different conditions if the insurer so requires (Clause 6, Schedule 1 CIDRA). This option does not relieve the insurer of the duty to pay the claim itself.¹⁶⁶ Thirdly, if the insurer would have entered into the contract but under a higher premium, the insurer may reduce proportionately the amount to be paid on the claim (Clause 7, Schedule 1 CIDRA).¹⁶⁷ The so called ‘reduced proportionately’ rule enables the insurer to pay only the proportion of a claim that it would otherwise have been under the obligation to pay under the (different) terms of the contract (Clause 8, Schedule 1 CIDRA).

PEICL takes a similar approach and makes differentiation between legal remedies based on the type of breach. In the case of an innocent breach, the insurer is not entitled to terminate the contract, but only to propose a variation of the contract, unless the insurer proves that it would not have concluded the contract had he known the information concerned (Article 2:102(4) PEICL). In other words, in the case of an innocent breach, the insurer would be entitled to terminate the contract and to refuse payment of the cover in total only in two cases: (1) if the insurer proves that the information concerned was material to his decision; and (2) if the parties were unable to agree on a reasonable variation of the contract within a one month period from the notice.¹⁶⁸ In the case of negligent breach, the principle of proportionality applies, and the contract will be adjusted, unless the insurer would not have concluded the contract at all (Article 2:102(4) PEICL). Of course, the requirement of causal connection must be met. In the case of fraudulent breach, the insurer has the right to avoid the contract and keep any premium due (Article 2:104 PEICL).¹⁶⁹

German law offers the most complex system of all three legal regimes under investigation. This system is a combination of special rules developed for consumer insurance contracts (lex specialis, VVG) and the general rules under the German Law of Obligations (lex generalis, BGB). It also largely relies on the culpability of the consumer from the general contract law (Section 276 BGB). Innocent breach or breach in simple negligence will no longer lead to a full rejection of a claim (all-or-nothing principle)¹⁷⁰ but the insurer has the right to withdraw from the contract (zurücktreten, Section19(2) VVG)¹⁷¹ in accordance with the general rules of the German Code of Obligations (Sections 346–354 BGB). Intentional breach or breach with gross negligence¹⁷² will give the insurer the right to terminate the contract, with one month notice period (Sections 19(3), 21(2)(3) VVG).

Interestingly, these rights can be exercised only if the contract cannot be adjusted proportionally to the undisclosed facts (principle of proportionality). Unlike English law and PEICL, under German law, the principle of proportionality takes precedence over withdrawal or termination. If the insurer would have concluded the contract with knowledge about the non-disclosed facts, albeit under different terms and conditions, the insurer will amend the contract instead of terminating or withdrawing it (Vertragsanpassung, Section 19(4) S 1 VVG). The newly ascertained information shall then become an integral part of the contract with retroactive effect upon the request of the insurer¹⁷³ (Section 19(4) VVG).¹⁷⁴ It is evident that the German legislator was strongly focused on keeping the contract in force even under different terms and conditions.¹⁷⁵

For the principle of proportionality to be applied under German law, two more conditions must be met: (1) there should be a causal connection/link between the undisclosed fact(s) and the risk determination; and (2) the insurer would have entered into the contract if he had known about the undisclosed facts (even if under different conditions).¹⁷⁶ The basis of this rule has origins in the general law of contract. To prove the latter the German insurance practice is to use the so-called ‘estimation’ method.¹⁷⁷ This method takes into consideration the general and special terms and conditions in force at the time the contract is concluded and all the insurance practice of that particular insurer until today. From the insurers’ practice, one can easily estimate whether that particular insurer would have entered into that particular contract under the undisclosed facts. If necessary, the legislation also proposes using comparative analysis with a similar contract of that particular insurer.¹⁷⁸ Interestingly, the estimation method attributes the knowledge to the insurer that he does not have, only to keep the contract in force. By requiring the insurer to adjust the contract, the legislator actually puts the insurer in the position as if he had known about the undisclosed facts (although he had no actual knowledge about the facts).¹⁷⁹ This is not found in other jurisdictions.

c. Economic reasoning

Introducing the principle of proportionality in all jurisdictions under survey is also acceptable under law and economics theories, especially in terms of reduction of costs in long-term insurance policies, such as life insurance. In the case of negligent breach (Germany, EU) or deliberate or reckless misrepresentation (England), under the all-or-nothing principle, the insurers would always have the right to terminate (Germany, EU) or avoid (England) the contract and return all the premiums paid. In the case of long-term insurance, this may be even after five or ten years. This would also mean that insurers need to invest more time and money for the pre-contractual investigation of the facts to eliminate the avoidance or termination of a contract in the future. Economically, insurers also suffer loss as they did not take up other insurance contracts instead. For policyholders, the all-or-nothing principle implies insecurity as there could always be some undisclosed facts (even innocently undisclosed) because of which the contract may be avoided or terminated. It seems like the all-or-nothing principle is a ‘lose-lose’ situation for both parties.

The principle of proportionality brings in more contractual security and balance into a policyholder-insurer relationship. It serves as a protection mechanism for the consumers and it also reflects the reality of insurance practice. Comparative analysis clearly shows that in the case of a breach, consumers will be able to recover at least some part of the claim under insurance policy. The exceptions are fraudulent (Germany, PEICL), deliberate, or reckless breach (England). This must bring great psychological relief to the consumers. Such security is also a strong incentive for the consumers to enter into insurance contracts, which is economically desirable for the insurers. The principle of proportionality thus reduces the costs for the insurer as they do not need to seek new contracts and pre-contractual disclosures. As insurers are able to adjust the contract after, finding out about new risk factors (either by proportionally reducing the payment of the claim or adjusting the premium), they are not inclined to spend time and money for the comprehensive pre-contractual investigations in order to escape the termination/avoidance of the contract.¹⁸⁰ The principle of proportionality seems like a ‘win-win’ situation for both parties.

d. Prohibition of disclosure of certain information – An exception to transparency?

An interesting tendency visible in the last few years is the legal prohibition of the exchange of certain information, with the impact of limiting or restricting the policyholder's duty of disclosure. The function is clearly to protect diverse values, depending on the area of law. One good example is the prohibition to transfer to or use an insured's genetic information, with the purpose of protection of privacy, human dignity, or non-discrimination.¹⁸¹ Another example deriving from the anti-discrimination laws is prohibition to use ‘sensitive information’, such as gender information, with the aim of protecting the individuals in question. This prohibition is already well acknowledged in the area of life insurance and personal insurance when forming premium segmentation.¹⁸² The same is true for numerous EU directives, which prohibit any discrimination on the grounds of gender, ethnic origin, age, sexual identity, race, religion, disability, ability of contract performance, etc.¹⁸³ In Germany, the General Act on Equal Treatment (Allgemeines Gleichbehandlungsgesetz (‘AGG’))¹⁸⁴ was enacted in 2006, implementing the provisions of many of these EU directives. The Equality Act 2010 in England is similar.¹⁸⁵

The mechanism of consumer protection is clearly visible. By respecting the legislation on prohibition of disclosure of certain information, the consumer is protected against non-disclosure of certain information, even if they are material to the insurer. I believe such prohibition works as the exception to the transparency requirements. The aim here is not to analyse prohibition in detail but to draw attention to yet another mechanism that could raise confidence and trust in the consumer-insurer relationship.

III. CONCLUSION

Insurance is a ‘trust management business.¹⁸⁶ Because insurance is a complex legal product,¹⁸⁷ it does not have physical form and cannot be held in our hands and examined; it must be based on trust. Trust is relevant not only for consumers (that they will buy a product they actually need for a fair price) but for the insurance companies and underwriters as well in order to grow their business and keep the customers content.¹⁸⁸ One of the ways to build trust is certainly through transparency rules.

This paper is dealing with transparency as a general principle of insurance law, which is focused on the exchange of information between contracting parties. Insurance products are complex. Together with the complex regulatory environment made out of national and supranational legal provisions, terms, conditions, and exceptions, accompanied by the complex changing insurance market, offer and demand it is necessary to keep the transparency requirements as high as possible.¹⁸⁹ Basically, transparency in insurance contract law tries to ‘keep the informational gap between actors involved as low as possible’.¹⁹⁰ This paper showed some common tendencies. The most important one being that the informational gap can be reduced through the rules on pre-contractual disclosure.

The last decade has been exciting across Europe as pre-contractual disclosure was subject to major legislative reforms (England in 2012, Germany in 2008). One of the most important interventions towards securing transparency and trust is the shift from spontaneous disclosure to a questionnaire method (Germany, EU) or an obligation not to make misrepresentation (England). For years, this was a thorn in the side of the insurance system. The advantages are numerous. Firstly, there is clear evidence in practice that in consumer insurance contracts, the factors material for the insurer's assessment of risk are well known and quite predictable, thus allowing the insurer to group similar risks into risk pools and to develop standard rates for certain types of insurance. On those grounds, the insurers can easily ask a number of questions for the great majority of risks and may use general clauses for the rest. Second, the clear statutory concept of pre-contractual disclosure provides a clear platform for decision making with the avoidance and refusal of the insurer claims (especially in England). This relates to transparency of the insurers’ terms and conditions. Thirdly, the tendency of ‘asking questions in writing’ is clearly in line with the consumer protection policies striving from the EU consumer acquis. In many cases, consumers are not aware that they have to disclose, and even if they are, they are unable to evaluate the relevance of information. Finally, the form of a questionnaire helps with cost reduction as well as the elimination of negative consequences of information asymmetry and adverse selection.

The next building block towards ensuring transparency (compared to earlier regimes) is the clear regulation of the insurer's duty to make all information about the contract known to the consumer (policyholder) during negotiations. Usually, this is done via a product information document. This ensures transparency about pricing, transparency about terms and conditions, and transparency about dispute resolution mechanisms. This obligation has been clearly acknowledged in all systems under comparative survey, although it takes different forms.

Finally, one more step towards ensuring transparency manifests in the regulation of legal remedies for the breach of pre-contractual disclosure. The principle of proportionality, which replaced the harsh all-or-nothing principle, led to strengthening the position of the consumer. If the information is not shared in a transparent manner (no matter the reason), depending on the nature of breach, the insurance contract might still be proportionally adjusted and binding, although under different conditions. Compared to earlier solutions where contracts could be avoided even for innocent breach, such legislative intervention certainly improves the legal position of consumers.

Overall, compared to earlier regimes, current regulation in England, Germany, and the EU corrected some harshness towards consumers and led to the increase of trust. Nonetheless, there is still room for improvement. For example, the need for further development is already clearly evidenced by the new UK Consumer Duty Instrument 2022, which imposes a new and higher standard of conduct for financial businesses (transparent marketing, duty to act in good faith, duty to avoid foreseeable harm) and has a much broader application in relation to the current practices. Comparing to German and EU insurers’ pre-contractual duty to advise, the new development under English law clearly indicates that insurers need to increase transparency and discovery of what consumers actually need. Indirectly, this calls for further improvement of the precontractual disclosure.