German court: minor flaws insufficient grounds to revoke insurance contract

The Federal Court of Justice (Bundesgerichtshof, BGH), ruling in a recent case (22-page / 223KB PDF, link in German), said that allowing the policyholders to revoke their contracts because of a minor flaw would be a breach of the principle of “good faith”, on which the insurer was entitled to rely. The court found that the nature of the flaw – the revocation instruction in this case stated that revocation rights could only be exercised ‘in writing’, with a signature, rather than ‘in text form’ – “could not have seriously deterred” the policyholders from exercising their revocation rights within the permitted time frame.

The policyholders entered into the contracts on 1 November and 1 December 2002. They purported to revoke the contracts in 2016 and 2017, long after any revocation right had expired – by which time the insurer had an “overriding legitimate expectation” in the continued existence of the contract, the BGH said.

“The flaw of the instruction on the written form to be observed instead of the sufficient text form for the declaration of revocation could not have seriously deterred the policyholders from exercising the right of revocation within the period applicable in the case of proper instruction,” the court said in a press release (link in German).

Dispute resolution expert Vera Bremer of Pinsent Masons said: “With this judgment, the BGH follows the reasoning of the Court of Justice of the EU (CJEU), which had already found that the assertion of the right to revoke the contract is disproportionate if the incorrect information does not deprive the policyholder of the opportunity to exercise their right of revocation under essentially the same conditions as if they had been correctly informed”.

She added: “There is not supposed to be a ‘perpetual revocation joker’ in those cases”.

The BGH found that it was not required to make a referral to the CJEU in this case, as its findings were consistent with those of the CJEU in the ‘Rust-Hackner’ case and related cases in December 2019. A more recent CJEU ruling upholding the contractual right of revocation, against Volkswagen Bank in September 2021, could be distinguished from the facts of this case, as it involved consumer credit contracts rather than insurance contracts, the BGH said.

In the Volkswagen Bank case, the CJEU found that a German consumer credit contract was invalid as it did not contain certain mandatory information around the right to revoke required by EU consumer credit law. No such EU law applies to unit-linked life and pension insurance policies, which means that terms in these contracts can be regulated by each individual EU member state.

“It is important to note that the BGH makes clear that the CJEU did not intend to deviate from the Rust-Hacker case law in Volkswagen Bank, as this decision referred to consumer credit agreements and not to insurance contract law,” Bremer said.

“Thus, the general principles of Union law on the abuse of rights and its requirements are not relevant here. In the area of life insurance, recourse to the national principle of good faith is permissible,” she said.