A policyholder has a pre-contractual duty of disclosure when entering into an insurance contract (Section 7: 928 of the Civil Code). If this duty of disclosure is breached, this can have far-reaching consequences. The Court of Appeal of Arnhem-Leeuwarden recently ruled in an issue in which the explanation of a question about the criminal past was central. The insurer refused coverage relying on concealment.

The facts

As a result of a fire, damage had occurred in a Grand Café. The policyholder, managing partner and director of the Grand Café, asked the insurer to provide cover, which was refused by the insurer relying on concealment. According to the insurer, before entering into the insurance contract, the application form should have mentioned the criminal record of the policyholder's brother, due to his actual activities and close involvement in the business. According to the insurer, there was deliberate deception within the meaning of Section 7:930(5) of the Civil Code. The insurance contract would not have been concluded if it had been correctly presented.

The policyholder initiated proceedings and claimed payment by the insurance company of the fire damage in an amount of more than €350,000.- The court initially rejected the policyholder's claim because the policyholder would not have sufficiently contested that she was only a director on paper and her brother was the actual director. However, the court thought otherwise and found that the insurance company was not entitled to rely on concealment.

Positions of the parties

The insurance company had based its reliance on concealment on the fact that in the closing statement of the application form, a negative answer had been given to the question : ”Have you, the company or a co-director of the company been convicted by the criminal court for a crime of property or violence in the last 8 years?”

According to the insurance company, the policyholder had to understand that her brother was actually involved in the company to such an extent that his criminal record should have been mentioned in response to this question.

According to the policyholder, the closing statement only asked about the criminal past of the directors and the company itself. It understood that the answer to this question referred to the persons who were formal directors and were registered as such in the trade register of the Chamber of Commerce. At the time of completing the form, these were only policyholder and her parents. Her brother was a trustee only, as was also listed in the trade register. He was employed as head chef and in that capacity managed the kitchen staff.

Judgment of the court of appeal

The court of appeal first stated that pursuant to Section 7:928 (1) of the Civil Code, the policyholder is obliged to disclose to the insurer, prior to the conclusion of the contract, all facts which he knows or ought to know, and on which, as he knows or ought to understand, the insurer's decision whether, and if so, on what conditions, he will want to conclude the insurance depends or may depend. Paragraph 5 of article 7:928 of the Civil Code stipulates that the policyholder is obliged to disclose facts about his criminal past or that of third parties, insofar as they occurred within the eight years preceding the conclusion of the insurance and insofar as the insurer has explicitly asked a question about that past in terms that cannot be misunderstood.

If the insurance was concluded on the basis of a questionnaire drawn up by the insurer, the insurer cannot rely on the fact that questions were not answered or facts that were not asked were not communicated, nor can it rely on the fact that a question contained in general terms was answered incompletely (Section 7:928(6) of the Civil Code). With such a questionnaire, the insurer indicates that the facts asked for in that list are of interest to it, but the list also suggests that other facts are of no interest to it. The addition to the questionnaire of a final question in general terms does not remove that suggestion. An exception to this only applies if the insurer was misled with the intent to deceive: the intent to induce the insurer to enter into an agreement which it would otherwise not have entered into, or not under the same conditions.

The burden of proof and burden of proof regarding the alleged concealment and intent to deceive rest with the insurer.

Given the far-reaching consequences of a successful reliance on concealment, strict requirements must therefore be imposed on the wording of the questions in the application form: they must be sufficiently clear and not open to any misunderstanding.

In the court's view, this requirement of clarity was not met in this case.

The insurance company had not presented sufficiently concrete facts and circumstances to justify the opinion that the policyholder or her co-directors should have understood from the questionnaire that the criminal past had to be mentioned not only of the persons who were formally directors at the time the questionnaire was filled in, but also of those who were intensively involved in the management of the company. Indeed, the list suggested that the insurer was only concerned with the company itself and its directors. It would have been up to the insurer to state explicitly, in exact terms, that by asking the question in question it was also aiming at persons who were closely involved in the management of the company or who actually managed the company.

In the court's opinion, the insurance company had also not put forward sufficiently concrete facts and circumstances to justify the conclusion that the policyholder deliberately intended to mislead it by presenting herself and her parents (on paper) as partners and directors and keeping her brother out of sight of the insurer, when in reality the latter (co)managed the company.

This issue thus ended well for the policyholder after all. The insurer had to compensate the material loss and partly the business loss.

Consequences of concealment and legislative amendment as of 1 July 2023

In case an appeal for concealment is accepted, this can have far-reaching consequences. For instance, the insurer can immediately terminate the insurance if there is deliberate concealment or if no insurance would have been agreed without concealment (see section 7:929(2) of the Civil Code).

This may also affect the right to benefits.

Section 7:930(4) of the Civil Code stipulates, for example, that if the insurer would not have taken out insurance if it had known the true state of affairs, no payment would be due.

As of 1 July 2023, the fourth paragraph of Section 7:930 has been amended and the following has been added:"The policyholder who acted in good faith shall also not owe any premium in this case. The insurer shall be entitled to equitable reimbursement of costs incurred at its expense.”

Previously, if the insurer terminated the insurance policy due to concealment, the policyholder was not entitled to a refund of the premium already paid. Now, this has become possible under conditions. The first condition is that had the insurer known the true state of affairs (i.e. without concealment), it would not have taken out insurance. If the insurer would have taken out insurance but on different terms, this right to a premium refund does not apply.
The second condition is that the policyholder must have acted in good faith.

Importantly, if the policyholder is a consumer, the policy conditions do not deviate from this provision to the detriment of the policyholder. With business insurance policies, however, it is possible to agree that there is no right to a refund of paid premium in such a case.

This change took effect from 1 July 2023, even for current insurance policies. However, for concealment issues where the concealment was discovered by the insurer before 1 July 2023, this right to premium refund does not exist.

Do you have questions or need advice on your insurance contract? If so, please contact one of our lawyers without obligation. We will be happy to assist you.