100 per mille brokerage fee: liability trap or suicide for insurance brokers?

– How pools deliver their insurance brokers as partners directly to the knife –

“We illuminate the market”: 100 per mille brokerage fee – “extremely favorable” ?

A broker pool lures with a remarkably high brokerage fee – but unfortunately this does not matter for the broker liability: After all, the advertised product, a “risk insurance”, does not only offer about five times the brokerage fee – but also the premium amount is about twice as high, compared to the cheapest provider: If a broker were to come up with the idea of providing his customers with this “extremely cheap” policy, he would almost certainly be liable for breach of a core duty.

Insurance brokers as “easy prey” for the insurer.

Insurers who advertise every evening on television must of course also cover their costs – but with such a high brokerage fee, the question can still arise later as to whether the brokerage fee promise and the premium were usuriously excessive, i.e. invalid anyway. In the case of a term insurance policy, the insurance broker will also find it difficult to refer to better terms and conditions – after all, the insurance case “dead or still alive” is not nearly as complicated as in the case of an occupational disability insurance policy, with the exception of vampires and zombies.

Usury in premiums and brokerage fees under judicial review

If the customer later claims usury, this is regularly reviewed by the courts, if necessary also with expert opinions. Both the premium and the brokerage fee (relative in per mille or absolute in EURO) are subject to a usury limit of twice the market rate. Corresponding contracts could then prove to be invalid.
Withdrawal of license: Does the insurer have to report a broker partner to the IHK?

The risks and side effects also include the fact that the IHK could, for example, impose a fine – or even withdraw the licence: After all, a customer’s suspicion of having been defrauded could turn into criminal proceedings with a conviction. Which insurance broker is likely to succeed in getting his clients to sign a declaration in advance that the client “will gladly pay e.g. 21,000 euros too much over the total term”? Perhaps the client will keep his head down and think about the fact that such a case represents “his lawyer’s pension scheme”, so to speak, who will then be allowed to bill the insurance broker handsomely later – plus interest and costs, of course.

Promille test for the customer – Depperl test for the broker

The pool would have to supply actually still another form “sample instruction for stupid customers” for the “extremely favorable” offer to the broker – each judge would ask itself however whether in such extreme cases still another Promille test should be required of the customer, so that one does not have to judge the customer signature as “joke explanation”, and thus for meaningless. For the “pseudo-broker”, a “Depperl test” would also have to be considered, because his VSH will probably not contribute a cent in such liability cases. The insurance company also finds itself in the nice situation that it would have to check whether it would not have to report such “dusty” brokers independently to the Chamber of Industry and Commerce in accordance with the Insurance Supervision Act – after all, doubts about professional suitability and reliability will arise.

Market consolidation or hara-kiri ?

In any case, the insurer would have to put up with the question why it did not recognise the pool as its vicarious agent – i.e. why it is not jointly liable for the pool’s conduct? After all, one could have the idea of asking BaFin whether they don’t think that it would be educationally helpful for the responsible board of directors to open a file on “withdrawal of approval” in the near future?

Liberalisation and insurer responsibility: doomed to freedom?

BaFin had issued regulations on the maximum brokerage fee for life insurance policies – but these have now been repealed,. However, it would be a misjudgement to conclude from this that arbitrarily high brokerage fees could now be given – and included in the premiums. Rather, only the fixed limits have been abolished – and thus, for the time being, it remains open and, in case of doubt, left to the judgement of the courts as to what is permissible. When one then learns in the judgment what one should not have done, “weeping and gnashing of teeth” is the consequence of such “testing of the possibilities”. This experience has already been made by insurers – and their customers – who have taken the abolition of fixed “minimum death benefits” as an opportunity to include as minimal a death risk as possible – and have thus turned life insurance into a taxable investment, which the tax courts will then determine for the customer in individual cases.

by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm

courtesy of

from www.experten.de (published on 19.09.2008)

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About the author

Dr. Johannes Fiala
PhD, MBA, MM

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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