1. Do not re-size text boxes as they are measured to fit paper with pre- printed Freshfields Bruckhaus Deringer design. The red lines indicate absolute top and bottom. If you accidentally change the text boxes, go to ‘format/slide layout’ and choose the top left hand corner slide called ‘title slide’ and click ‘re-apply’. To insert other ready-formatted pages: go to the insert menu/slides from files/ select ‘presentation inserts.ppt’ Click the display button, then click the button on the right (marked with red below). Click on the slide(s) to insert then insert and close. Non-disclosure in insurance contracts – England, France & Germany compared Gillian Eastwood, Dimitri Lecat, Christian Duve 10 July 2007

2. Do not re-size text boxes as they are measured to fit paper with pre- printed Freshfields Bruckhaus Deringer design. The red lines indicate absolute top and bottom. If you accidentally change the text boxes, go to ‘format/slide layout’ and choose the top left hand corner slide called ‘title slide’ and click ‘re-apply’. To insert other ready-formatted pages: go to the insert menu/slides from files/ select ‘presentation inserts.ppt’ Click the display button, then click the button on the right (marked with red below). Click on the slide(s) to insert then insert and close. Non-disclosure issues in insurance contracts – England Gillian Eastwood

3. Current English Law (1)  An insurance policy is a contract of utmost good faith (Carter v. Boehm (1766))  The duty of utmost good faith results in two principal obligations on the insured:  To disclose all material facts  To avoid any material misrepresentation  Breach of the duty of utmost good faith entitles the insurer to avoid the policy ab initio  Regardless of whether breach was fraudulent, negligent, or entirely innocent  In other words, policy is treated as if it never existed, and premium is usually returned.

4. Current English Law (2) - Misrepresentation  Obligation not to misrepresent facts that are material to the insurer’s decision whether or not to accept the risk  What is material?  “…would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk” (s.20 MIA1906)  How far must it “influence the judgment”?  A material circumstance is one which would have an effect on the mind of the prudent insurer, but it is not necessary that it would have a decisive effect (Pan Atlantic v. Pine Top (1995))  i.e. insurer’s decision need not actually have been different  In order to avoid the contract, insurer must show that it was induced by the misrepresentation to enter into the policy on the relevant terms

5. Current English Law (3) – Non-Disclosure  Obligation to disclose all material facts  Whether or not specifically asked by insurer  Test of materiality same as for misrepresentation  Only four exceptions:  Facts which reduce the risk  Facts which insurer knows or is presumed to know  Facts which are common knowledge  Facts of which insurer has waived disclosure  Remedies  Avoidance  Damages – not available

6. Current English Law (4) – Consumer Protection  Current law not always applied strictly, particularly to consumer insureds  Financial Ombudsman Service – must consider insurance law, but is not bound by it  FOS complaints determined by reference to what is “in the opinion of the ombudsman, fair and reasonable in all the circumstances of the case”  Representations of opinion or belief  For consumers, true if made in good faith – no representation that based on reasonable grounds  Economides v. Commercial Union (1998)

7. Reform of the English law of non- disclosure/misrepresentation  Reports recommending reform date back to 1957  Current law is a “patch work” of common law, various statutes, industry, self regulation, FSA Rules & Principles and Financial Ombudsman decisions  Law Commission Issues Paper published September 2006 – intended to promote discussion  Consumer focus – but some changes to business insurance  All proposals only tentative - subject to change and development.  Intention that same principles apply to all lines (marine/non marine) and reinsurance  Formal consultation paper due in summer 2007

8. Reform of English law – Consumers (1)  Avoidance – available where the insured has acted fraudulently  Avoidance for fraudulent misrepresentation, i.e. if the insured:  knew that the statement was untrue (or realised that it might not be and did not care); and  knew that the statement was material to the insurer (or realised that it might be material and did not care whether it was or not).  Absent fraud, insurers to have no remedy unless the misrepresentation/non-disclosure was material

9. Reform of English law – Consumers (2)  A new definition of “material” – no longer “prudent insurer” but “reasonable insured”  A breach would be classified as material only if:  The actual insurer could show that had it known the true position, it would not have written the cover on the same terms or at all; and  The actual insured, or a reasonable insured in the circumstances, appreciated that the fact in question was relevant to the insurer  Insurers to have no remedy if the insured had reasonable grounds for believing the truth of the representation – i.e. for innocent breach  Then, the Court should apply “a proportionate remedy” by asking what the insurer would have done, if it had known the true facts.

10. Reform of English law – Consumers (3)  The proposals effectively end the duty of disclosure  Onus is now on insurer  Insurers must ask specific and clear questions, failing which they will be treated as having waived their rights to such information  Similar to position adopted by FOS  No right to contract out

11. Reform of English law – Business insureds  Current tendency for business insureds to “over-disclose”  The Law Commissions recommend:  Limit duty of disclosure of facts that a “reasonable insured” would understand to be material  Avoidance available for fraudulent misrepresentation or non- disclosure  No general right to avoid where misrepresentation or non-disclosure is made innocently (i.e. without fraud or negligence).  Negligent misrepresentation or non-disclosure - insurer should be able to cancel the policy on reasonable notice, without prejudice to claims that have arisen within notice period  Views sought as to whether remedy should be “proportionate” as for consumers  No right to contract out

12. Do not re-size text boxes as they are measured to fit paper with pre- printed Freshfields Bruckhaus Deringer design. The red lines indicate absolute top and bottom. If you accidentally change the text boxes, go to ‘format/slide layout’ and choose the top left hand corner slide called ‘title slide’ and click ‘re-apply’. To insert other ready-formatted pages: go to the insert menu/slides from files/ select ‘presentation inserts.ppt’ Click the display button, then click the button on the right (marked with red below). Click on the slide(s) to insert then insert and close. Non-disclosure issues in insurance contracts – France Dimitri Lecat

13. French Law (1) – The insured’s duty to disclose  Insured must comply with a two stage disclosure process (article L. 113-2 of the French Insurance Code (FIC))  Prior to the placing of the policy: the initial disclosure  Continuing duty to disclose during the life of the policy in certain specified circumstances  What must be disclosed at the initial disclosure stage?  Prior to 1989, French law position was similar to current position under English law: insured had an obligation to disclose to the insurer any information known to him that would affect the insurer‘s decision whether or not to accept the risk  Act 89-1014 of 31 December 1989 – introduced a new rule: insured now required to answer the insurer’s questions  Similar to approach suggested by English and Scottish Law Commissions for consumers

14. French Law (2) – The initial disclosure stage  Insured has an obligation to complete a “questionnaire” (prepared by the insurer) AND answer any additional questions asked by the insurer truthfully (article L. 113-2 paragraph 2 of the FIC)  Insurer needs to ensure that his questions to the insured are clear and precise  the insurer “may not complain that a question expressed in general terms procured only a vague reply” (article L. 112-3 paragraph 4 of the FIC)

15. French Law (3) – Continuing duty to disclose during the life of the policy  Insured has an obligation to disclose any further information (article L. 113-2 paragraph 3 of the FIC):  which affects the accuracy of the answers that he gave to the insurer at the initial disclosure stage, and  which increase the nature or the size of the risk originally accepted or results in the insurer accepting new risks  Obligation to disclose does not apply to life insurance policies  Litigation around whether information relates to a risk (i) covered under the original policy (disclosure required) or (ii) to be covered under a new policy (disclosure not required)  Obligation to disclose within 15 days from the date when the insured becomes aware of the further information

16. French Law (4) – Legal remedies where insured fails to comply  Legal remedies depend on the insured’s good/bad faith:  Bad faith is established when the insured fraudulently misrepresented or deliberately failed to disclose:  i.e. he knew that his statement was untrue, or  deliberately failed to disclose all essential facts  Courts assess the insured’s good/bad faith at the time the disclosure was made; monitored by the French Supreme Court  In concreto analysis: Courts consider the individual insured’s skill and knowledge to answer the questions, clarity of the insurer’s questions etc.  Insurer has burden of proof of showing insured’s bad faith

17. French Law (5) – Legal remedies where deliberate misrepresentation or non- disclosure  Article L. 113-8 of the FIC  Policy is avoided from the time of the deliberate misrepresentation/non-disclosure:  Insurer keeps any insurance premiums already paid to him  Insurer also able to claim any outstanding/un-paid insurance premiums until the date the policy is deemed avoided  Any indemnity received by the insured under the policy must be refunded  Binding on third-parties

18. French Law (6) – Legal remedies: innocent/negligent misrepresentation or non- disclosure  Article L. 113-9 of the FIC  Two stages:  Non-disclosure/misrepresentation occurs before an event giving rise to a claim under the policy: insurer can choose between termination of the policy or increasing the premium  Non-disclosure/misrepresentation occurs after an event giving rise to a claim under the policy: proportional premium rule applied  Proportional premium rule:  Insured’s claim reduced in proportion to the ratio between the premium that was charged and the higher premium that should have been charged

19. French Law (7) – Contractual remedy: the insurance guarantee forfeiture clause  Clause must be provided for in the policy  Remedy available where disclosure is delayed  Not applicable in case of Force Majeure or Act of God  Concept of “delayed disclosure” not easy to define  In practice, it often applies where there is a total lack of disclosure  Insurer isn’t required to prove insured’s bad faith (as required for legal remedies)  However insurer must prove that the delayed disclosure caused loss

20. French Law (8) – Conclusion  Whether insurer will bring his claim under article L.113- 8 (for avoidance of the policy) or L. 113-9 (proportional premium rule) of the FIC:  Depends on ease with which insurer can prove the insured’s bad faith  Courts cannot declare that a policy is avoided if they are not asked to do so (no obligation to rule sua sponte)  In practice, if the insurer brings a claim under both articles, Courts apply proportional premium rule rather than declare a policy to be avoided

21. Non-disclosure issues in insurance contracts - Germany Dr. Christian Duve M.P.A. (Harvard) To insert other ready-formatted pages: go to the insert menu/slides from files/ select ‘presentation inserts.ppt’ Click the display button, then click the button on the right (marked with red below). Click on the slide(s) to insert then insert and close. Do not re-size text boxes as they are measured to fit paper with pre- printed Freshfields Bruckhaus Deringer design. The red lines indicate absolute top and bottom. If you accidentally change the text boxes, go to ‘format/slide layout’ and choose the top left hand corner slide called ‘title slide’ and click ‘re-apply’.

22. German Law (1) – The insured’s duty to disclose at the time of placing  In the absence of any contractual provisions, sec. 16, 17 Insurance Contracts Code (Versicherungsvertragsgesetz – VVG) govern the insured’s disclosure obligations  Position similar to English law - sec. 16 VVG requires the insured to disclose to the insurer at the time of placing:  all facts relevant to the insurer’s assessment of the risk  Sec. 17 VVG requires the insured to provide the insurer with information that is correct  In the event of a breach of sec. 16 or 17 VVG, the insurer has the right to withdraw from the contract (sec. 16 (2), 17 (1) VVG).

23. German Law (2) – The insured’s duty to disclose after the insured event has occurred  In the absence of any overriding contractual agreement, sec. 34 VVG governs the insured’s disclosure obligations  Insured’s obligation to provide information arises once the insurer has asked for it - no obligation to volunteer information  BUT duty to provide information is not limited to a response to a series of questions asked by the insurer  Insured must provide all information which is obviously relevant to the insurer for the determination of the insured event and the insurer’s payment obligation  N.B. Breach of sec. 34VVG has no immediate consequences BUT if the parties’ insurance contract contains a corresponding contractual provision, the insurer will be released from its payment obligation where provision breached

24. German Law (3) – The insured’s duty to disclose after the insured event has occurred  Information is generally limited to facts (Umstände), which are known to the insured or of which the insured can obtain knowledge  Some German courts have held that facts do not include value judgments or cost estimates BUT other courts have decided that questions involving legal judgment – e.g. whether the insured culpably caused an accident – have to be answered by the insured  Insured’s conflicts of interests irrelevant – see German Federal Supreme Court (Bundesgerichtshof, BGH)

25. German Law (4) – Legal remedies where insured is guilty of wilful deceit  Insurer entitled to rescind the contract under German contract law (German Civil Code (sec. 123, 142 BGB/ sec. 22 VVG))  Most insurance contracts also provide for an explicit exemption for the insurer in case of the insured’s wilful deceit

26. Recent Case Law: breach of disclosure duties in D&O insurance contracts (1)  Following the Comroad scandal, the Higher Regional Court of Düsseldorf (Oberlandesgericht Düsseldorf) ruled on the consequences of the breach of disclosure obligations in D&O insurance contracts (Comroad; OLG Düsseldorf, ZIP 2006, 1677)  Technology company Comroad repeatedly claimed dramatic increases in turn-over and in1999 (the year of Comroad’s IPO) the turnover increased by 756%  Investigative journalist Renate Daum discovered that almost all of the turnover was generated by a virtual company in Hongkong  Comroad founder and CEO, Bodo Schnabel, had manipulated financial statements and forged invoices; he was sentenced to seven years in prison in 2002

27. Recent Case Law: breach of disclosure duties in D&O insurance contracts (2)  Comroad took out a D&O insurance contract covering the members of the supervisory board (Aufsichtsrat) and members of the board (Vorstand)  The contract included a severability clause pursuant to which the knowledge of one insured person was not to be imputed to other insureds  When concluding the contract, Bodo Schnabel, denied when he was asked whether he knew of any facts that could possibly lead to a claim under the insurance contract  The insurer declared its withdrawal from the contract under sec. 16, 17 VVG and, at the same time, declared the rescission of the contract for wilful deceit under sec. 123, 142 BGB

28. Recent Case Law: breach of disclosure duties in D&O insurance contracts (3)  The court held that the insurer was entitled to rescind the D&O insurance with respect to all insureds for wilful deceit under sec. 123 BGB  It also ruled that a severability clause pursuant to which the knowledge of one insured is not imputed to other insureds does not apply in case of wilful deceit  Members of the supervisory board who did not know about the false financial statements and invoices were deprived of their insurance coverage

29. Recent Case Law: breach of disclosure duties in professional indemnity insurance contracts (1)  In a recent case, the German financial services provider, K GmbH, concluded a professional indemnity insurance contract in favour of its clients as well as the company  The contract explicitly covered losses from fraudulent behaviour of K GmbH’s management. K’s management declined to comment when it was asked whether the management knew about any facts that could possibly lead to a claim under the insurance contract  Under the insurance contract, K’s clients could bring their own claims against the insurer in the event of a loss affecting their assets managed by K GmbH

30. Recent Case Law: breach of disclosure duties in professional indemnity insurance contracts (2)  At the time of the conclusion of the contract (and afterwards) K’s management was stealing client funds  K’s clients brought claims against the insurer for their losses  However the insurer rescinded the insurance contract with K GmbH and with K’s client’s for wilful deceit:  The insurer argued that K’s management breached its disclosure duties when concluding the insurance contract and, at the same time, wilfully deceived the insurer

31. Recent Case Law: breach of disclosure duties in professional indemnity insurance contracts (3)  K’s clients (as well as K’s management) argued that it was illogical to have an insurance contract covering management’s fraudulent behaviour if the coverage ceases to exist where the fraudulent management does not disclose its fraudulent behaviour  Under a ruling of the BGH, the insured does not have to disclose information leading to criminal persecution  The case is still pending in court  Decision is likely to have strong impact on future development of German insurance case law

32. Recent Case Law: potential risks when disclosing information (1)  In another recent case, the German financial services provider E A.G., was faced with several claims by investors relating to a tax shelter product in the U.S.  E A.G. notified its insurer of the claims under its professional indemnity insurance  The insurer informed the reinsurer of the claims against E A.G. in the U.S.  Both, the insurance and reinsurance contracts were subject to German law  Reinsurer requested potentially harmful information from E A.G. for the purpose of assessing the claims against E A.G. in the U.S.

33. Recent Case Law: potential risks when disclosing information (2)  Reinsurer relied on disclosure obligations under German law, but requested information in a way that was suitable for U.S. style discovery  E A.G. was reluctant to provide the information to the reinsurer in Germany due to potential risk of  waiver of privilege under U.S. law and  discovery request against the reinsurer (any information gathered might be used against E A.G. in proceedings in the U.S.)

34. Do not re-size text boxes as they are measured to fit paper with pre- printed Freshfields Bruckhaus Deringer design. The red lines indicate absolute top and bottom. If you accidentally change the text boxes, go to ‘format/slide layout’ and choose the top left hand corner slide called ‘title slide’ and click ‘re-apply’. To insert other ready-formatted pages: go to the insert menu/slides from files/ select ‘presentation inserts.ppt’ Click the display button, then click the button on the right (marked with red below). Click on the slide(s) to insert then insert and close. Questions

35. Do not re-size text boxes as they are measured to fit paper with pre- printed Freshfields Bruckhaus Deringer design. The red lines indicate absolute top and bottom. If you accidentally change the text boxes, go to ‘format/slide layout’ and choose the top left hand corner slide called ‘title slide’ and click ‘re-apply’. To insert other ready-formatted pages: go to the insert menu/slides from files/ select ‘presentation inserts.ppt’ Click the display button, then click the button on the right (marked with red below). Click on the slide(s) to insert then insert and close. Non-disclosure in insurance contracts – England, France & Germany compared Gillian Eastwood, Dimitri Lecat, Christian Duve 10 July 2007

36. Freshfields Bruckhaus Deringer 2007 The information and opinions contained in this document are not intended to be a comprehensive study, nor to provide legal advice, and should not be relied on or treated as a substitute for specific advice concerning individual situations.