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The implementation of clauses
on short-term premium instalments
In its ruling (7 Ob 5/16k) of 17 February 2016, the Austrian Supreme Court determined that a clause on "short-term premium instalments" (Unterjährigkeitsklauseln) contained in the general terms and conditions for life insurance contracts with premium refund was non-transparent. The clause provided that premiums may be paid in semi-annual, quarterly, or monthly instalments.
According to the clear wording of the clause, it may be agreed that premiums are to be paid in short-term instalments for a surcharge. However, it is not apparent from the text of the clause whether the policyholder, by virtue of such agreement, may exert an influence on the amount of the surcharge, or whether the policyholder must accept the amount of the surchage as unilaterally prescribed by the insurer. The clause thus lacks the requisite transparency.
The Austrian Financial Market Authority (FMA) conducted a survey on the impact of this ruling and expressed its – rather strict – position in the FMA’s 2016 Report on the State of the Austrian Insurance Industry. In the course of product development and product modification, insurers must ensure that pre-contractual information is transparent. Moreover, according to Sec. 252 para. 1 subpara. 5 Austrian Insurance Supervision Act 2016 (VAG 2016), policyholders must be informed about the means of premium payment, instalment plans and, accordingly, about the amount of the surcharge for short-term premium instalments in advance of the conclusion of the contract. In addition, the general prohibition of providing misleading information enshrined in Sec. 252 para. 8 VAG 2016 must, naturally, be taken into consideration as well.
What do these legal provisions entail for insurance companies? Even more caution should be exercised within the company-specific product development process, both with regard to the development of new products and the modification of existing ones. It is also highly recommended that legal advice be sought throughout the process.
Marguerita Sedrati-Müller, Attorney / DORDA Attorneys at Law