Standardisation of withdrawal rights for policyholders and new regulations for "late withdrawal" in life insurance 

On 4 July 2018, the National Council adopted a comprehensive amendment to the rights of withdrawal for policyholders. At the same time, the legal consequences for “late withdrawal” in life insurance will be regulated by law. The new regulations will come into force on 1 January 2019 and will apply to contracts concluded after 31 December 2018.

A. Standardisation of rights of withdrawal

The core of the amendment is the standardisation of withdrawal rights for policyholders. The newly worded § 5c Austrian Insurance Contract Act is (together with § 8 Austrian Long Distance Financial Services Act in cases of e.g. online sales) the only remaining provision covering withdrawal. It replaces the existing rights of withdrawal according to §§ 5b, 5c and 165a Austrian Insurance Contract Act. § 165a and § 5b paras 2 to 6 no longer apply. The standardised right of withdrawal according to § 5c Austrian Insurance Contract Act shall also replace the rights of withdrawal according to the previous §§ 3 and 3a Austrian Consumer Protection Act.

Pursuant to the new § 5c Austrian Insurance Contract Act the policyholder may withdraw from the insurance contract without stating any reasons within 14 days—30 days in the case of life insurance—from the date on which the insurance contract came into effect and the policyholder was informed thereof. The period begins only when the policyholder has received

• the insurance certificate,
• the insurance terms & conditions, including the provisions on the fixing or amendment of premiums, and
• notification of the right of withdrawal (§ 5c para 2 Austrian Insurance Contract Act).

The right of withdrawal expires at the latest one month after receipt of the insurance certificate and the notification of the right of withdrawal.

Annex A of the amended Insurance Contract Act contains a new standardised model formulation of the notification about the policyholder's right to withdraw from the insurance contract. If the insurer uses this formulation and hands over the respective information to the policyholder, the policyholder is, by law, deemed to have been validly informed about his right to withdraw from the insurance contract pursuant to § 5c of the Austrian Insurance Contract Act. Said information must be printed in clearly legible script right next to the policyholder's signature, so in practise it will have to be located on the insurance application form.

The policyholder must declare their withdrawal in a written form (geschriebener Form). This means that the declaration must consist of a text in characters indicating the person making the declaration. The policyholder's handwritten signature is not required and it is in any case inadmissible to require such signature by virtue of the insurance contract or any other form of agreement between the insurer and the policyholder. The declaration can be made either on paper (letter, fax) or electronically (e.g. e-mail). Posting or sending the declaration of withdrawal is sufficient to meet the deadline.

B. Regulations for “late withdrawal” in life insurance

The newly inserted § 176 para. 1a Austrian Insurance Contract Act regulates the consequences of "late withdrawals" from life insurance contracts. These are cases in which the policyholder was wrongly or not at all informed about its rights of withdrawal or has not received all documents and information pursuant to § 5c (see above) and withdraws from the life insurance contract long after the time period to declare the withdrawal has lapsed arguing that said time period has not started running due to the wrong or omitted information. In practise, this is in particular relevant for insurance-based investment product, i.e. insurance products which offer a maturity or surrender value and where that maturity or surrender value is wholly or partially exposed, directly or indirectly, to market fluctuations.

§ 176 para. 1a Austrian Insurance Contract Act applies to life insurance contracts entered into after 1 January 2019 but also to contracts that were concluded before that date, provided that the policyholder withdraws on the basis of the already existing rights of withdrawal after 1 January 2019. Depending on the time of withdrawal, three case groups are distinguished:

1. If the withdrawal occurs within one year of the conclusion of the contract, the policyholder will receive the premiums paid.
2. If the withdrawal occurs between the beginning of the second and the end of the fifth year, the policyholder is entitled to the surrender value without taking into account the agreed acquisition costs and any agreed deductions. If the policyholder bears the investment risk, the insurer may take into account any investment losses that may have occurred up to the date of withdrawal.
3. If the withdrawal occurs after the end of the fifth year, the new regulation makes no special provision. In the opinion of the legislator, the policyholder is entitled to the surrender value in this case.

C. Assessment and outlook

The standardisation of the rights of withdrawal creates clarity and legal certainty. At present, policyholders can choose to withdraw from the insurance application or the insurance contract on the basis of several statutory provisions, each under different conditions and terms. A legally secure instruction/information on the rights of withdrawal is often very difficult to formulate.

According to the new regulations, insurers will only have to inform policyholders about the right of withdrawal according to § 5c Austrian Insurance Contract Act and in the case of a distance contract, e.g. online sales, according to § 8 Austrian Long Distance Financial Services Act.

As a result, insurers will have to adapt existing insurance contract documents and instruction forms by 1 January 2019.

The legal consequences of the late withdrawal of life insurance contracts are controversial because they do not set any legal limits on the exercise of the right of withdrawal but due to their possible effects could lead to policyholders not exercising their right of withdrawal. In the fiercely discussed decision of the Supreme Court of 2 September 2015, case no. 7 Ob 107/15h, which is based on the European Court of Justice's judgements in Endress (ECJ 19. 12. 2013, C-209/12) and Hamilton (ECJ 10. 4. 2008, C-412/06), the Supreme Court affirmed that if the notification about the right of withdrawal was missing or incorrect, the policyholder had the right to withdraw from the contract for an unlimited period of time beyond the withdrawal period. He could further demand repayment of the savings portion, including interest, even if the withdrawal took place years after the insurance contract was concluded. The new legal situation largely removes the basis of this ruling. It is no coincidence that consumer protection associations and litigation financiers have already voiced criticism of the new law. On the other hand, the consequences of the late withdrawal of life insurance policies are still the subject of fierce controversy following this decision. Legal opinions differ widely on this issue and there are already numerous first and second instance court decisions with different results, to the detriment of the legal certainty of all policyholders. The new regulations are at least the legislator’s attempt to eliminate this legal uncertainty in the future and should therefore be welcomed.

Because the new provisions of § 176 para 1a Austrian Insurance Contract Act are to be applied in the event of withdrawals from "old" contracts after 1 January 2019, an increasing number of withdrawals can be expected before the end of 2018.

For further information, please contact CMS expert: Thomas Böhm