In view of the severe sanctions involved, it is not surprising that affected customers, seeking a way out of their difficulties, decide to complain to BaFin. However, by this point it is too late to resolve the issue – the horse bolted when the contract was signed and shutting the stable door now will not bring it back. Failure to comply with pre-contractual disclosure obligations has the effect that the insurer is entitled to apply the strict sanctions regime permitted by law.

However, such breaches can be avoided. This article describes the relevant grounds and consequences and is meant as advice for avoiding typical mistakes when trying to comply with pre-contractual disclosure obligations.

The principle of equivalence

Private health insurance is governed by the principle of equivalence. According to this principle, a premium must always correspond to the risk involved. The value of the premium payments must match the benefit payments throughout the term of the policy.

The application of the principle of equivalence also involves pre-contractual disclosure obligations. These are governed by the provisions of section 19 (1) of the German Insurance Contract Act (Versicherungsvertragsgesetz – VVG). Pre-contractual disclosure enables insurers to set risk-adequate premiums for each customer. Anyone who wants to enter into an insurance contract is therefore required to provide truthful information on the state of their health. If there is a risk factor, the insurer may add a risk loading in order to ensure that premium and (future) benefit are equivalent.

If it becomes evident after conclusion of the contract that the customer provided false information on their health, equivalence must be considered affected from the outset.

Deliberate or involuntary

How does a breach of pre-contractual disclosure obligations occur? In practice, breaches can be very different. It goes without saying that by no means all breaches of pre-contractual disclosure obligations are due to deliberate concealing of risk factors by dishonest customers.

Breaches can also be caused by negligence. For example, policyholders who try to comply with disclosure obligations may overlook or not think about a risk-relevant factor which they could have remembered had they made a reasonable and appropriate effort to exert their memory.

However, policyholders can sometimes also be faced with the accusation of having breached disclosure obligations through no fault of their own. An example is the – fortunately rare – case of a dishonest insurance agent bent on getting his acquisition commission persuading a customer who is inexperienced in business matters and unfamiliar with insurance law to conceal or provide false information about a risk-relevant previous illness by denying or trivialising its relevance.

Legal consequences

If a policyholder claims benefits from a private health insurer, the insurer is entitled and, in the interest of the community of the insured, even obliged to verify whether the event insured against has actually occurred and how much benefits will have to be paid. In this context, the insurer can also make inquiries as to whether a breach of pre-contractual disclosure obligations has potentially occurred on the part of the policyholder, in particular if there are grounds for suspicion.

If this suspicion is confirmed, the type of legal sanctions which the insurer can impose on the policyholder depends on the severity of the fault. They reach from unilateral contract adjustment and cancellation of or withdrawal from the contract to avoidance. If the contract conditions are adjusted, the insurance is maintained under the changed conditions. Cancellation of the contract terminates the policy at the time the cancellation becomes effective, i.e. at a future date. If the insurer withdraws from the contract, the insurance contract is rescinded with retroactive effect. Avoidance makes the insurance contract invalid ab initio.

In this process, insurers must observe specific legal time limits in which rights may be exercised or after which rights lapse, as well as disclosure obligations and particular formal requirements in accordance with sections 19, 21 and 194 (1) of the VVG.

Further unfavourable effects

In addition to the legal consequences, breaching disclosure obligations may entail considerable disadvantages for the policyholder in the future.

In substitutive health insurance, i.e. health insurance which replaces statutory health insurance in whole or in part, a breach followed by withdrawal or avoidance of the insurer would mean that the policyholder would lose all provisions for increasing age, which will be allocated to the community of the insured instead. In addition, the policyholder will have to bear all medical expenses incurred up to the time new comprehensive health insurance has been taken out, which can easily cause a financial burden if expensive treatments have to be paid for.

A new contract with another insurer means that, in addition to a risk loading for the previously concealed risk factor, other premium components, i.e. the risk portion and the savings portion of the premium, may also increase long-term, which would not have been the case had the policyholder maintained the initial contract with the previous insurer. The risk portion can increase because of the higher entry age, which serves as the basis for the calculation of the risk portion – the higher the age the higher the risk. The savings portion is bound to increase because the new insurer will have less time for establishing the actuarially required provision for increasing age.

Moreover, if the concealed risk factor involved an exceptionally high risk, or the health of the person concerned has considerably deteriorated in the meantime, it can be difficult to obtain new insurance coverage at all. The principle of contractual freedom allows private health insurers to refuse to enter into standard tariff contracts if the relevant risks are particularly high. The only option then left to the person concerned is the industry-wide basic tariff where private health insurers are subject to compulsory contracting (article only available in German). However, in case of fraudulent misrepresentation or intent, the previous insurer may reject an application even for insurance at the basic tariff because the applicant failed to act in accordance with the previous contract. The premiums of the basic tariff can be relatively expensive because of the high claims expenditures which, unlike in other tariffs, are not offset by individual risk loadings. The threshold for capping premiums is €665.29, which is the limit for premiums within statutory health insurance provided for in legislation. Section 152 (4) of the German Insurance Supervision Act (Versicherungsaufsichtsgesetz – VAG) provides relief only if payment of the full basic tariff premium would result in need for support in accordance with the Second or the Twelfth Book of the German Social Security Code (Sozialgesetzbuch – SGB).

Anyone subject to compulsory insurance pursuant to section 193 (3) of the VVG can face another significant financial disadvantage: if new insurance cover is not obtained within one month after the previous cover expires, there will be a retroactive premium supplement for the non-insured period. Pursuant to section 193 (4) of the VVG, the supplement amounts to a full monthly premium for each commenced month starting from the second month of non-insurance. From the sixth month onwards the supplement is one sixth of a monthly premium. The premium supplement must be paid in addition to the regular insurance premiums and can be paid in a lump sum or, if necessary, in instalments.

Tips for consumers: avoiding breaches of pre-contractual disclosure obligations

Given the severe consequences of such breaches, truthful and accurate replies to each question about the state of health on the application form are of crucial importance.

This article strongly warns against any notion of deliberately concealing a potentially risk-relevant pre-existing illness in order to obtain the desired coverage or a more favourable insurance premium. In the long term, policyholders who do not resist this temptation are not doing themselves any favours. At the end of the day, dishonest policyholders will be worse off than those who provided truthful information from the beginning.

Carelessness in answering health questions can also be disastrous. Applicants should not assume that all information retrieved from memory is correct. Their answers should rather be based on a definite knowledge of their health. They should not put themselves under any time pressure nor should they let themselves be pushed by others, for example the insurance agent.

If applicants conclude that there has been a risk-relevant pre-existing illness, they should not let the agent talk them out of disclosing it to the insurer. It is, after all, the insurer who decides if and to what extent the circumstance is risk-relevant. All information that may be relevant for the risk should be disclosed, even if the applicant is not sure about the actual relevance of a certain circumstance.

It is not sufficient to inform the agent verbally about a risk-relevant pre-existing illness – such information must be indicated in the application form. In this way, policyholders can avoid potential conflicts and prevent later difficulties in providing evidence to the insurer.

Questions about the state of health: gathering information

Design of the contents and wording of the relevant questions are entirely up to the insurer. If specific questions are asked concerning particular pre-existing illnesses or well-defined disease types, applicants are less likely to accidentally omit information. Example: "Do you currently suffer – or have you suffered in the past five years – from any illnesses, accident consequences, injuries or health problems concerning the heart or cardiovascular or vascular disease, such as high blood pressure, stroke, vascular disorders or venous insufficiencies?"

More general health questions, however, make it easier to unintentionally omit a risk-relevant circumstance. Example: "Have you had any outpatient treatment, medication, medical examination or advice over the past three years?" Most applicants will not be able to instantly recall every symptom and examination they may have had over such a long period of time. In such cases it can be helpful to have the previous insurer and/or the doctors draw up a list of all the treatments received during the period in question. Applicants will then be able to answer all questions accurately and in full. They could also attach a copy of this list to the application, just to be on the safe side.