Austria: New unified cancellation right for Austrian insurance contracts brings legal certainty

2020 | roadmap

Under Article 186 of the EU Solvency II Directive (2009/138/EC), EU Member States must grant life insurance policyholders a 14- to 30-day period to cancel their contract from the time when the policyholders were informed that the contract was concluded.

Background
Until 2018, Austria had up to five different cancellation rights for insurance policyholders, plus the cancellation right pursuant to Section 8 of the Austrian Distance Financial Services Act. This made for a confusing legal situation, as the average customer was unable to distinguish between these six partly overlapping cancellation rights. Moreover, the level of detail required when informing policyholders about their cancellation rights prior to the conclusion of an insurance contract was unclear.
Pursuant to the 2013 European Court of Justice (ECJ) decision in Endress/Allianz and the subsequent 2015 Austrian Supreme Court decision in Case 7 Ob 107/15h, this resulted in life insurance policyholders having an indefinite cancellation right if the information provided by the insurer was incorrect.
However, this has finally changed. Since 1 January 2019, a new Section 5c of the Austrian Insurance Contract Act provides for one unified cancellation right with a cancellation period of 14 days for non-life insurance contracts and 30 days for life insurance contracts. The corresponding 14- or 30-day withdrawal right pursuant to Article 6 of EU Directive 2002/65/EC, implemented in Section 8 of the Austrian Distance Financial Services Act, remains unchanged, thus resulting in one or, in the case of distance contracts, two cancellation rights. In addition, the new Austrian law aligns with Section 8(5) of the German Insurance Contract Act and provides sample information to the policyholder, which, if used, is deemed correct and complete.

Clarified legal consequences of cancelling life insurance contracts
Since 1 January 2019, Section 176 of the Austrian Insurance Contract Act provides different legal consequences in two different cases:

  • if the insurer provides correct information, policyholders are entitled to the surrender value if they cancel the contract within the 30-day period; but
  • if the insurer provides incorrect information (e.g. a shortened period or incomplete information) – which hopefully will no longer happen – Section 176(1a) of the Austrian Insurance Contract Act provides that policyholders are entitled to:
    • the paid premiums for the first contract year in case of cancellation within the first contract year;
    • the surrender value without acquisition costs and cancellation fees in case of cancellation within the second to fifth contract year; and
    • the surrender value after the fifth contract year.

Pending ECJ Cases
Some of the problems triggered by the ECJ decision in Endress/Allianz are currently subject matters on the pending ECJ Cases C-355/18, C-356/18, C-357/18 (combined), C-479/18 and C-20/19. After PG Insurance represented three Austrian insurers at the combined hearing in April 2019, the general advocate Juliane Kokott published her legal opinion in July 2019, which is usually already an indication of how the ECJ will decide.

Regarding the information on the form in which the cancellation right has to be exercised (in our view the most important issue), general advocate Kokott argues as follows:

  • In accordance with EU law, national law must be interpreted in such a way that a formal compulsion – such as written form – can be effectively agreed.
  • A formal agreement is not only permissible under EU law, but required. Insofar as the form to be complied with has not been determined by law, its provision must be made by giving a precise statement in the pre-contractual information on the right of cancellation.
  • A reference to the written form, although cancellation is possible without a form under Austrian law, does not mean the given information is flawed.

Thus, the information about a specific form requirement of the cancellation declaration is "not a bug, but a feature". A reference to the written form, for example, is not a defect of the pre-contractual information, but on the contrary, a prerequisite for the cancellation period to commence.

Comment
The new unified cancellation right solves the problems triggered by the ECJ decision in Endress/Allianz in Austria. Hopefully the pending ECJ Cases C-355/18, C-356/18, C-357/18 (combined), C-479/18 and C-20/19 will bring additional clarity on the content of the information and the consequences of providing incorrect information.