The duty of the insured to inform the insurance company about changes in risks complied with in a practical manner

The duty of the insured to inform the insurance company about changes in risks complied with in a practical manner

Martina Smit
27 January 2016

The importance of internal communication within insurance companies

Publication Court of Appeal 19 May 2015, S&S 2016,11 (ECLI:NL:GHDHA:2015:1088)

Recently the judgement of the Court of Appeal in The Hague of 19 May 2015 was published in the Netherlands. The judgement is interesting to the extent that it shows how insureds may fulfill their duty to inform the insurance company about changes in insured risks in an unconventional way. The judgment furthermore makes it clear that existing case law about payment of claims based on costs for demolition or costs for rebuilding remains unaffected.

In this case the owner (a private individual) of the building concluded an insurance contract against amongst others the risk of fire. At the time the insurance contract was concluded the building was inhabited. Approximately one and a half year later the current inhabitant left the building in February 2011. Shortly thereafter, still in February 2011, the building was damaged by fire. On the claim form the insured crossed the check box “no” answering the question whether the building was inhabited. The insurance company instructed a surveyor and this surveyor also noticed that the building was not inhabited. This was also explicitly confirmed by the insured. The surveyor mentioned the fact that the building was not inhabited in his final report.

The policy (article 10.1) contained the duty for the insured to inform the insurance company about changes of amongst others the use of the building and whether or not the apartment is inhabited. The insured must do so in writing. The insured must comply with this duty ultimately within three months after the change concerned. Since only a couple of weeks had passed since the previous inhabitant left the building, the insurance company could not invoke this condition. There seems to be no discussion about this claim. 

Unfortunately, the same year, November 2011, there was another fire in the building. At that moment the building was still not inhabited. The insurance company did invoke the aforementioned condition stating that the insured did not comply with his duty to inform the insurance company about the fact that the building was not inhabited. Furthermore, the insurance company stated that in case it had to pay the claim such payment would only have to be based on the demolition value of the building rather than the full rebuilding value. The underlying argument of the insurance company was that the owner of the building wanted to demolish the building any way prior to the fire in order to build a whole new building. Such assertion was based on the fact that the insured (i) had instructed a company to take care of an asbestos inventory in April 2011, (ii) did request a building contractor to tender for a whole new building, and (iii) sent the construction plan for the new building to an engineer to check whether the plans were in accordance with the applicable law and regulations.

The insured rejected and denied the allegation that the insurance company did not know about the building being uninhabited, because it was mentioned on the claim form regarding the first fire. Furthermore, the insured had explicitly informed the surveyor of the insurance company about this. The surveyor himself had also mentioned this in his report. However, the insurance company reiterated that this was not complying with the duty to inform the insurance company in accordance with the policy condition.

The discussion of the duty to inform concerns the question what was intended with “informing the insurance company in writing about a change”. The Court of Appeal analyzed this condition in accordance with the so-called Haviltex-criteria and the DSM/Fox-criteria. The Court of Appeal analyzed in which way the insured should and may have understood the duty to inform as contained in article 10.1. Because the insured was also a private individual the Court furthermore decided that an insurance company must present the insurance conditions in a clear and comprehensible way to the insured at the moment of concluding the insurance contract. In case of doubt about the insurance conditions the most favorable interpretation of the condition for the insured must be applied. This is in accordance with the judgement of European Court of Justice 23 April 2015, C-96/14 (Hove/CPN Assurances SA). 

The Court of Appeal decided that article 10.1 did not contain any requirements for the way the insured should inform the insurance company, except for the fact it should be in writing. Neither did the insurance conditions contain a requirement to which department the written information had to  be sent. The Court of Appeal held that the duty to inform clearly serves the purpose that the insurance company is able to judge and decide whether or not it would like to continue the insurance contract in case of a change of the risk and if so, under what conditions. The Court of Appeal held that the insured did comply with his duty to inform by crossing the check box on the claim form for the first fire and informing the surveyor about the fact that the building was not inhabited. Moreover, the fact that the building was uninhabited was also explicitly mentioned in the survey report. Taking everything into account the insurance company could and should reasonably have known that the building was not inhabited. The insured expected that after the first fire the insurance company knew about the uninhabited building. Since the insurance company did not subsequently terminate or amend the insurance contract, the insured may have reasonably expected that the insurance contract was continued on the same conditions.

The argument of the insurance company that information in question was only known at the claims handling department and not at the underwriting department was rejected. The Court of Appeal held that the insurance company as a professional should have organized the departments and internal communication in such a way that information from the insured about changes of the risk would become known to the relevant department. Therefore the insurance company is to blame for the internal miscommunication within the different departments. 

As to the discussion regarding payment of the claim based on demolition value or rebuilding value the Court of Appeal confirmed the current case law. The facts as stated by the insurance company were insufficient for the Court of Appeal to accept that the insured was about to demolish the building prior to the fire. The Court of Appeal ruled that the asbestos inventory had to be done either in case of demolition or in case of reconstruction. Furthermore, the insured had made it clear that the tender by the building contractor was way over his budget and therefore the insured decided to put this plan on hold. There was no situation of a clear intention to demolish the building. Besides that, the insured also submitted renovation plans and informed the Court that these plans were already discussed with the local planning committee. This committee did object against the plans with the result that the insured still not had decided what to do with the building. This led the Court of Appeal to conclude that there was not enough evidence to accept the argument of the insurance company that the insured had a real intention to demolish the building. Considering to demolish the building is simply not the same as having the specific intention to do so. 

This part of the judgement is not that innovative but still a nice confirmation of the current case law.

More interesting is that the judgement makes it absolutely clear that it is of great importance for insurance companies to take care of clear communication and transfer of knowledge between the different departments (in this case between the claims handling and underwriting department). With the upcoming big data and the possibility to posses and use enormous amounts of information, this judgement seems to put insurance companies under a strict obligation to keep and use all known information about the insured and the insured risk no matter where this information can be found within the insurance company.  

Source photo: Photo credit: <a href="">Keoni Cabral</a> via <a href=""></a> / <a href="">CC BY</a>