June 26 2007
In a decision dated February 15 2007(1) the Supreme Court gave a rather logical response to the question of the consequence of an insured's failure to disclose circumstances which were material to the insurer's assessment of the risks, even though the insured had answered the questions put to it by the insurer truthfully.
Article L113(2)(2) of the Insurance Code reads as follows:
"The insured must truthfully answer the questions put to it by the insurer, in particular in the risk disclosure form, in which the insurer questions the insured, at the time of carrying out the contract, about circumstances that will enable the insurer to assess the risks covered."
Article L113(8) of the code reads as follows:
"Apart from the ordinary grounds of nullity and subject to the provisions of Article L132(26), the insurance contract shall be null and void in the event of non-disclosure or fraudulent misrepresentation by the insured where such non-disclosure or fraudulent misrepresentation changes the subject of the risk characterization or distorts the insurer's assessment, even if the risk that the insured concealed or misrepresented had no impact on the loss."
A problem arises when the insured truthfully answered the questions submitted by the insurer in the risk disclosure form, but failed to disclose circumstances that might have affected the insurer's assessment of the risk of loss. In a 1997 case the Supreme Court held that an insured is under no duty to inform the insurer of changes in circumstances that were not the subject of questions in the risk disclosure form at the time of conclusion of the contract.
The decision of the court dated February 15 2007 highlights the importance of the questions included in the risk disclosure form in terms of evaluating fraudulent misrepresentation by the insured.
The two plaintiffs appointed portfolio management company Etna Finance to manage some of their assets. Etna Finance regularly sent management reports informing the plaintiffs of the increase in the value of their portfolios. At the same time, they received bank statements that appeared to contradict these reports.
The plaintiffs requested explanations from Etna Finance. Etna Finance failed to respond; the plaintiffs asked Etna Finance to pay them an amount corresponding to Etna Finance's latest valuation of their portfolios. The company admitted that the requested amount was unavailable.
After discovering that Etna Finance carried professional indemnity insurance under a policy issued by AXA, the plaintiffs brought proceedings directly against the insurer in order to be indemnified for their loss. The insurer contended that at the time of taking out the policy, Etna Finance had failed to disclose circumstances that may have caused Etna Finance to incur liability. When Etna Finance took out the policy, it was the subject of an investigation by the Commission des Opérations de Bourse (COB) Disciplinary Committee into whether the company had used independent portfolio managers in violation of the COB regulations.
The Paris Court of Appeal found that such non-disclosure was necessarily intentional and affected the insurer's assessment of the risks. Therefore, in its February 15 2007 decision the court ruled that the insured intended to mislead the insurer about the risks involved and that, consequently, the insurer was entitled to have the insurance contract rescinded. The plaintiffs appealed to the Supreme Court.
The Supreme Court quashed the appellate judgment. The court held that the insurer had not put a question to the insured that would have led the latter to disclose the investigation by the COB Disciplinary Committee. As a result, the insurer was not entitled to have the insurance contract rescinded, even though non-disclosure by the insured affected the insurer's assessment of the risks.
The Supreme Court went beyond merely confirming previous case law: it made it clear that an insured can confine itself to truthfully answering questions put to it by the insurer without disclosing circumstances which are material to the insurer's assessment of the risks to be covered if the circumstances in question were not addressed in the questions.
This decision is not surprising in light of the law of December 31 1989, which amended the ways of disclosing risks at the time of carrying out an insurance contract. Previously, Article L113(2)(2) of the code provided as follows:
"The insured shall be obliged to declare all circumstances of which it was aware at the time of concluding the contract and which would enable the insurer to assess the risks covered."
The courts interpreted Article L113(2)(2) to establish a principle of spontaneous disclosure by the insured with the risk that, if the questionnaire were incomplete, the insured might not disclose circumstances that might be material to the insurer. Therefore, the law of December 31 1989 introduced a disclosure system whereby the onus is on the insurer to ask questions. The insured must truthfully answer the questions, and only the questions.
Consequently, the insured may confine itself to truthfully answering questions put to it by the insurer without disclosing circumstances which, although material to the insurer's assessment of the risks, were not addressed in the questions.
Although not in keeping with morality, this decision is not surprising in light of the amended wording of L113(2)(2) of the code.
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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