Dutch amendment gives insured right to premium refund despite pre-contractual non-disclosure
As of 1 July 2023, a significant amendment has been made to Dutch insurance law in the Dutch Civil Code (DCC). In situations where the insurer is not obligated to make a payment due to pre-contractual non-disclosure by the insured, the insured did not have the right to a refund of the paid premium. With the recent amendment, this has changed, and under specific conditions, the insured does have the right to a premium refund.
Pre-contractual duty of disclosure
Before entering into the insurance contract, the insurer must be able to assess the risk to be undertaken by the insurer according to the agreement. The necessary information for this purpose must be provided by the insured. This pre-contractual duty of disclosure for the insured is regulated in Article 7:928 DCC. The consequences of not complying with the duty of disclosure as stipulated in Article 7:928 DCC by the insured are outlined in Article 7:929 paragraph 2 DCC (termination) and Article 7:930 DCC (no or reduced payment).
According to Article 7:930 paragraph 4 DCC, the insurer is "not obligated to make a payment if, had the insurer been aware of the actual state of affairs, no insurance would have been concluded".
Until 1 July 2023, in these cases, the insured did not have the right to receive a refund of the premium that was already paid. In practice, this sometimes led to the undesirable situation where the insurer, in the event of a breach of the duty of disclosure by the insured, could terminate the insurance contract under Article 7:929 paragraph 2 DCC and at the same time was not obliged to make a payment under Article 7:930 paragraph 4 DCC. Since the insurance contract remained in force until termination by the insurer, the premium that was already paid was not unduly paid, while payments by the insurer were not due. With the legislative amendment, the Dutch legislator has ensured that this situation no longer occurs.
Amendment to Article 7:930 paragraph 4 DCC
Due to the recent legislative amendment, the following has been added to Article 7:930 paragraph 4 DCC as of 1 July 2023: "The insured who has acted in good faith is also not obligated to pay a premium in this case. The insurer is entitled to receive a fair compensation for the costs incurred.”
In short, in situations where the insured has not complied with the pre-contractual duty of disclosure and the insurer is not obliged to make a payment because the insurer would not have concluded an insurance contract had they known the actual state of affairs, the insured has the right to a refund of the premium already paid.
The insured, however, must prove that he has acted in good faith. The exact definition of acting in good faith and the evidence that the insured must provide in this context has not been elaborated in the legislative text or in the legislative history. The legislative history does state that there is no good faith in cases of wilful deception by the insured. The evidence of good faith in the case of a premium refund will undoubtedly receive attention in Dutch literature and jurisprudence.
The situation is analogous when it comes to establishing what qualifies as fair compensation for the costs to which the insurer is entitled in the event of a premium refund, as stated in the new paragraph 4 of Article 7:930 DCC. This is because the definition of fair compensation remains unspecified both in the legal text and in the legislative history.
Consequences for the insurance practice and the London market insurers
The legislative amendment applies to insurance contracts concluded after 1 July 2023. Additionally, the obligation for insurers to refund the paid premium also extends to cases in which the insurer discovers a breach of the duty of disclosure within the duration of already existing insurance contracts after 1 July 2023.
According to Article 7:943 paragraph 3 DCC, the obligation to refund the premium as stated in Article 7:930 paragraph 4 DCC is semi-mandatory. This means that no disadvantageous provisions against the customer-insured can be included in the policy regarding the obligation for the insurer to refund the premium. In commercial insurance, however, it is possible to agree in the policy that no entitlement exists to a refund of a paid premium if an insurer does not pay out due to pre-contractual non-disclosure.
Considering the new Article 7:930 paragraph 4 DCC, it is conceivable that the insurer, when faced with a potential claim of breach of the pre-contractual duty of disclosure, chooses not to make a payment because they would not have concluded the insurance had they known the actual state of affairs, and will assess the extent of the payment and the amount of the premium to be refunded.
If a substantial premium has been paid for insurance and the amount claimed for payment is relatively small compared to the paid premium, the insurer will likely make a payment rather than invoke the breach of the pre-contractual duty of disclosure and Article 7:930 paragraph 4 DCC. The inverse also applies. An insurer will be more inclined to invoke the pre-contractual duty of disclosure and Article 7:930 paragraph 4 DCC if the paid premium is lower than the payment.
Furthermore, it is conceivable that an insurer, when invoking a breach of the pre-contractual duty of disclosure, will more often argue that, had they known the actual state of affairs, they would have negotiated a higher premium or closed the insurance for a lower insured amount, or that, under those circumstances, they would have imposed different conditions. According to Article 7:930 paragraph 3 DCC, in such cases, the payment is adjusted proportionally to what the premium would have been if higher or the insured sum were lower respectively, or if only a payment were due as if these conditions were included in the agreement. In both cases, there is no obligation for insurers to refund the premium.
The recent legislative amendment underscores the importance of providing accurate and complete information by the insured to the insurer prior to concluding the insurance contract. A situation where the insured fails to do so and the insurer would not have concluded an insurance contract had they known the actual state of affairs is undesirable for both the insured (as they would not receive a payment) and the insurer (as they would be required to refund the paid premium).
For more information on this Dutch legislative amendment and the Dutch insurance sector, contact your CMS client partner or local CMS experts.
