The Reasonable Insurer

Which policy should be taken as the starting point in establishing the hypothetical decision of the Dutch insurer when an insured person has breached his duty to provide information before entering into an insurance contract? In a recent case the Dutch Supreme Court ruled on this topic.[1]
Under Dutch law
The prospective policyholder is obliged to inform the insurer about all facts that he knows or ought to know and of which he knows or ought to understand that the decision of the insurer whether or not to enter into a contract with the prospective policyholder, may depend on that information.
But what if an insurer discovers after a claim made by the insured that the insured party withheld information at the point of entering into the insurance contract?
After discovering a concealment, an insurer has the possibility to terminate the contract unilaterally within two months and without previous notice but only in two cases: (i) when there is deliberate deception of the insurer or (ii) when the insurer is able to prove that it would not have entered into the insurance contract in the hypothetical situation that it had knowledge of the true state of affairs. The underlying reason is that the duty of the policyholder to disclose this information, does not concern facts which would not result in a less favourable decision on the part of the policyholder. This is the so-called relevance requirement.
In these two cases the insurer may also refuse all claims. 
What happened in this case?
The case before the Supreme Court was about a policyholder who was a self-employed electrical fitter who took out a disability insurance with a Dutch insurance company in 2007. In 2009, the insured claimed invalidity and related damages. The insurer investigated the claim. According to the insurer, the policyholder had filled the questionnaire about his health incorrectly or incompletely. The insurer took the view that: had they been aware of the true state of affairs, they would not have entered into an insurance contract with this policyholder.
To prove that it would not have entered into the contract with this insured person in the hypothetical situation that they had been aware of the true state of affairs, the insurance company referred to their own individual acceptance policy. The policyholder, on the other hand, argued that a so-called reasonably acting insurer would have accepted him. To prove his view, he relied on acceptance policies of other insurance companies and on experts reports. Based on this evidence, he argued that the concealed information would not have led to an unfavourable decision for him.
Which acceptance policy should serve as a yardstick regarding what had happened hypothetically if the policyholder had not violated the obligation to provide information? Should that be the individual acceptance policy of this particular insurer or the acceptance policy of the so-called reasonably acting insurer?

Dutch insurance companies have a high degree of freedom when deciding who they do or do not wish to accept. This differs in this particular situation when one must determine what would have happened in the hypothetical situation that the policyholder has not breached his duty to disclose information, and when the parties have already reached an agreement. The reason is that an appeal for immediate termination after a claim, has great consequences for a policyholder. In such a situation the policyholder has assumed to be insured, but will be left empty-handed on termination. 

In 1978, in the so-called “Hotel Wilhelmina” ruling[2], the question also arose: which acceptance policy has to be referred to in this hypothetical situation? Before this ruling, the prevailing notion was that it was not reasonable to use an individual acceptance policy as a yardstick that was not in line with the common views of the industry concerned. This was different if the policyholder knew of the deviating acceptance policy of the insurer. The Supreme Court went a step further in “Hotel Wilhelmina”. The Supreme Court did not consider the common views in insurance circles to be decisive, but ruled that the reasonably acting insurer should be taken into the consideration. The insurers individual acceptance policy could still be relevant, but only in the event that the policyholder knew of the insurers’ deviating opinion.

The Supreme Court judgment
The Supreme Court rules that as a starting point the yardstick of a reasonably acting insurance company should (still) apply. However, there is an exception if an insurer applies an acceptance policy that deviates from that of a reasonably acting insurer, that it can defend it if it proves that the policyholder knew or ought to understand which acceptance policy the insurer used when entering into the agreement. But should the insured person also be explicitly notified of the fact that the individual policy differs?
The Supreme Court decides that in the afore-mentioned exception, it is not required that the policyholder also knows that the acceptance policy of his insurer deviates from a reasonably acting insurer. The policyholder is also sufficiently protected without this knowledge.

Furthermore, the Supreme Court acknowledges that when considering what a reasonably acting insurer would have done if it had known the true state of affairs, great importance can be attached to the acceptance policy of other insurers. However, the Supreme Court points out that it is possible that the policies of other insurers are also not in accordance with the standard of a reasonably acting insurance company. Nor is it inconceivable that the acceptance policy of the insurer in question appears to satisfy the standard of the reasonably acting insurer, even if other insurers implement a different (or no) policy with respect to the related facts and circumstances.

It is not always necessary to examine the acceptance policy of other insurers. This depends on the policyholder’s defence during actual legal proceedings. The reasoned argument of an insurer that a reasonably acting insurer would not have concluded the insurance may – depending on the arguments presented by the insurer for that purpose, and the circumstances of the case – lead to the conclusion that a reasonably acting insurer would not have entered into the insurance agreement.

This also applies if the insurer claims that they would have entered into the insurance contract but under different conditions (for instance at a higher premium or for a lower amount of cover), if it had knowledge of the true state of affairs.

[1] Dutch Supreme Court October 5, 2018, ECLI:NL:HR:2018:1841.
[2] Dutch Supreme Court, May 19, 1978, ECLI:NL:HR:1978:AC6258.
14.12.2018 | Wike Noordhoorn Boelen, Insurance Law Global
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