January 10 2006
In a June 2 2005 decision(1) the Second Civil Division of the Supreme Court ruled that, where insurers fail to comply with the requirement to restate in their insurance policies the statute of limitation for actions arising from insurance policies, the penalty is that the limitation period established by Article L114-1 of the Insurance Code is 'ineffective' against policyholders.
The decision is a reversal of precedent. Although it clearly incites insurers to inform policyholders of the limitation period prescribed by law (ie, Articles L114-1 and L114-2 of the code), it raises other issues that remain unresolved.
The decision of the Supreme Court is based on Article R112-1 of the code, under which insurance policies must restate certain provisions of the code - in particular, those relating to the statutory time limit for bringing an action under an insurance policy.
Article R112-1 applies to policies issued by companies listed in Article L310-1(5) of the code - namely, all insurance companies that are subject to the supervision of the French authorities. Although Article L310-1(5) was repealed in 1994,(2) the courts continue to apply Article R112-1 as if Article L310-1(5) were still in force. It may therefore be assumed that Article R112-1 applies to policies issued by all insurers under the supervision of the French authorities.
The code does not prescribe any specific penalty for non-compliance with Article R112-1.
The issue of whether the statute of limitation for actions under insurance policies may be raised against a policyholder whose policy does not refer to it was previously dealt with by the First Civil Division of the Supreme Court. In a decision rendered on January 22 2002,(3) the court found that Article R112-1 prescribes no penalty where insurers fail to inform policyholders about the statute of limitation and, specifically, does not provide that insurers are barred from relying on the statute of limitation.
Legal writers criticized the decision, asserting that it would have been more appropriate to bar insurers in breach of Article R112-1 from raising the statute of limitation against policyholders.
Following a reallocation of subject-matter jurisdiction among the divisions of the Supreme Court, the Second Civil Division now deals with insurance matters. In the June 2 2005 decision, the division decided to reverse the former precedent by ruling that policyholders can use the insurer's non-compliance with Article R112-1 to exclude the operation of the statutory limitation period.
In order to be entitled to rely on Articles L114-1 and L114-2 of the code, insurers must have restated those provisions in their policy.
However, this obligation is confined to reminding policyholders of the content of the relevant provisions. Insurers have no duty to advise their policyholders on the provisions, to comment on them or to explain judicial doctrine relating to them.
Hence, insurers would discharge their duty by including the following wording in their policies:
"Pursuant to Article L114-1 of the code:
All legal actions arising from an insurance contract shall be barred for two years from the event that gave rise thereto. However, such time limit shall run:
1. in the event of non-disclosure, omission, fraudulent representation or misrepresentation of the risk incurred, only from the date on which the insurer has become aware thereof; and
2. in the event of loss, only from the date on which the parties concerned became aware thereof, if they prove that they were unaware of such facts until then.
When the insured's action against the insurer arises from a claim by a third party, the limitation period shall run only from the date on which such third party brings a legal action against the insured or the latter has paid compensation to the third party.
The limitation period shall be increased to 10 years for life insurance contracts when the beneficiary is not the policyholder, and in insurance contracts covering personal injury when the beneficiaries are the deceased insured's assigns; and
Pursuant to Article L114-2 of the code:
The limitation period shall be interrupted by any of the ordinary causes that interrupt the limitation period and by the appointment of experts following a loss. The limitation period of the legal action may also be interrupted by the insurer sending the insured a registered letter with acknowledgement of receipt in respect of the action for payment of the premium and by the insured to the insurer in respect of the settlement of the claim."
Article L112-3 requires that information relating to the statute of limitation be written in clear print. For other important information to be brought to the attention of policyholders (eg, clauses providing for avoidance, forfeiture or exclusions of cover,(4) or policy periods exceeding three years),(5) insurers are required to write the information in "very clear print".
As the courts are likely to extend the requirement to use very clear print to information relating to the statute of limitation, as a precautionary measure insurers should use the same typeface for information relating to Articles L114-1 and L114.2 of the code as that used for other mandatory information.
Among the issues raised by the June 2 2005 decision, two in particular need to be addressed: (i) whether insurers in breach of Article R112-1 may correct the situation after the issuance of the insurance policy; and (ii) whether the June 2 2005 decision applies to all the provisions of Article R112-1.
Firstly, insurers that failed to include information on Articles L114-1 and L114-2 in an insurance policy may correct the situation by executing a policy endorsement with the policyholder. In this case, the limitation period would begin to run on the date of execution of the endorsement. If the policyholder refuses to sign the endorsement, the requirement that the information be included in the policy would not be satisfied formally, although the policyholder would have been informed of the statute of limitation.
In such a case, would barring the insurer from relying on the statute of limitation be an appropriate penalty? Probably not. Courts may well hold that the limitation period began to run against the policyholder on the date it received the proposed endorsement that it refused to sign. It would therefore be in the insurer's interest to send the proposed endorsement by recorded delivery.
Secondly, a question remains as to whether the June 2 2005 decision applies to all the provisions of Article R112-1. Non-compliance with some of the provisions of Article R112-1 would probably be punished by holding that the statute of limitation is 'ineffective'. For instance, Article R112-1 requires insurers to remind their policyholders of the rules governing co-insurance, as contained in Parts I and II of Book I of the legislative portion of the code. It would be in the insurers' interest to include information on those rules in very clear print in their insurance policies.
On the other hand, 'ineffectiveness' appears to be an inadequate penalty for non-compliance with other provisions of Article R112-1 (eg, the requirement to provide information on the maximum period during which insurance indemnities may be paid by the insurer to the insured). Making this period legally ineffective would not prevent insurers from imposing the same period de facto.
The limitation period for bringing an action under an insurance policy may be raised against policyholders only if the relevant provisions of the code have been restated in the policy. If the insurer has not informed the policyholder of the limitation period, the limitation period does not begin to run against the policyholder.
Legal writers assert that such information must be repeated by the insurer after notification of a loss, but the courts have not yet imposed such an obligation on insurers. Conversely, following a loss, insurers may not use delaying tactics in an effort to let the limitation period expire. The courts consider such tactics unfair and punish insurers using these tactics by barring them from relying on the expiry of the limitation period.(6) Although this judicial doctrine was devised in cases where the unfair conduct bordered on fraud, it may soon be applied more broadly.
For further information on this topic please contact Carole Sportes at BOPS (SCP Bouckaert Ormen Passemard Sportes) by telephone (+33 1 70 37 39 00) or by fax (+33 1 70 37 39 01) or by email (firstname.lastname@example.org).
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