As of 22 May 2007, insurance intermediaries subject to licensing must, among other things, possess a VSH. For months, a price war has been raging in order to win the loyalty of as many intermediaries as possible – and they obviously have more plans for their addresses later on.
The offers of the pecuniary damage liability insurers are often intransparent. Some so-called pundits shine with half-knowledge, so it’s important to clear up some key misconceptions.
My lawyer gave me a safe VSH concept:
A nasty rumor has it that lawyers or their intermediary associations broker VSH policies. If this is true, the broker can check with the bar association, because anyone working as a broker will be disbarred. This also applies to lawyers who work in financial services companies or “management consultancies” that are commission-oriented. Such “consultants” are often not even VSH-insured, because they violate a legal prohibition. Up to now, the lawyer has neither been allowed to make a commission nor to charge a contingency fee.
With the VSH insurance broker, I can cover my VSH over the internet:
A fatal mistake! The custodian duties also force the VSH broker to speak personally with each client, even if it is “just” an intermediary. Otherwise, he can neither examine the risk nor advise and represent his client as a “fiduciary trustee”. And: A breach of the VSH portal broker against his duties as a custodian can lead to the VSH of the VSH broker not being covered (no coverage, because of “knowing breach of duty” or intentional breach of “cardinal duties”): It is best for the broker to first check the VSH broker’s creditworthiness with a credit agency. Complex structures at placement companies or in the cooperation of employees can hardly be clarified via the Internet, especially not structural changes in this area. For example, many an agent’s employee presents to the customer with two business cards, his own and that of the distributor: This can only increase liability.
The Internet states that “up to five employees” are covered free of charge:
Such sweeping advertising statements are not only untenable upon close examination, but are presumably anti-competitive and, moreover, capable of being challenged as deceptive. This case is also related to the topic of “reversal of the VSH contract”. Even those who are qualified to act as brokers in the office must be insured. Usually through a premium surcharge. Thus, often “administrative, salaried office staff” such as secretaries and trainees are also insured free of charge. But: All intermediaries, even those who are co-insured (!) with a company, require their own policy in order to be licensed as an intermediary – and this is not available for “zero euros”.
My “initiator of closed investments” claims that a VSH for financial service providers is mandatory:
The initiator has a lawyer publish 1 July 2007 as the cut-off date, but she is wrong in two respects, because no financial services provider needs VSH cover for his professional activity. Of course, it is always advisable to have VSH cover for the residual risk of financial service providers, but the Insurance Mediation Directive does not stipulate this for “financial service providers”, but only for insurance intermediaries. The cut-off date is not 1 July 2007 but 22 May 2007.
“Damages are covered if the breach of duty was committed while the policy was in force”:
This is not correct. Practice shows that insurers may well refuse VSH cover under the terms and conditions. An example: A classic in the private equity segment are yield calculations in which the internal rate of return (IRR) is advertised. However, this IRR method is now considered investor deception and can be prosecuted as fraud. The consequence: the coverage is omitted (compare: Professor Dr. Klaus Jaeger, “Was taugt der interne Zinsfuß als Renditekennziffer? Exposing the IRR as a yield lie”, in Versicherungswirtschaft 2006, p. 1747 ff.). The basis for this handling is the clause of the “knowing breach of duty” in the VSH conditions; i.e. the deviation from “order, legal duties, prohibitions and standards”. Another accusation in relation to insurance brokerage without VSH cover may be that it has not complied with the “statutory requirement of equal value” in occupational pension provision. Note: Zillmerization has never been better – repeatedly employers have been held liable. Agent subrogation is safe, VSH coverage is not. Tip: In the case of working time account and occupational pension schemes, the intermediary should protect himself by means of guarantees, indemnities and contractual penalties – vis-à-vis the product provider, including a credit check and additional collateral. Even well-known product providers sometimes have considerable conceptual deficits, so that intermediaries are almost certain to be liable to recourse.
Customers should do without documentation and advice – in writing, of course:
Recently, attempts have also been made to circumvent the legal requirement for documentation by asking the customer to forego advice. However, if the documentation is missing, this can also lead to the loss of VSH coverage. The protocol is then the best proof of the intentional and thus often VSH-contract violating waiver of documentation. Courts may regard the systematic waiver of advice as ineffective. With this illegal procedure, the agent is putting his private assets at risk and his license with the Chamber of Industry and Commerce. Tip: Talking to an experienced VSH specialist broker from the field of tax advisors or auditors VSH can help to better assess the new situation.
An advertising campaign declares that the “assumption of post-contract liability” would be without any restriction:
This is not correct. In practice, subsequent liability is often only available subject to strict conditions (for example, that everything has been documented and recorded over the last ten years), and especially not for those lines of business that the client does not cover with the new insurer and/or were not covered with the old insurer. Again, only a proper risk and property assessment by the VSH broker will help.
The “zero euro premium” through deductibles?
In the price war for VSH policies, high deductibles are also offered, sometimes even in the five-digit range. Affected intermediaries could receive a requirement from the IHK before they are licensed, for example to provide evidence of bank-locked cash collateral in the amount of the high deductible? In this case, intermediaries should obtain an opinion from the Chamber of Industry and Commerce and, if necessary, cancel the VSH contract.
My VSH broker has a great offer – and only one rate:
Those who call themselves insurance brokers but are in fact “agents” or “pseudo-brokers” need not be surprised later if the insurer refuses VSH coverage because of a “knowing breach of duty”. If one’s own VSH broker turns out to be a “pseudo-broker”, then the question arises as to whether the broker is getting what he needs. For example, the co-insurance of other products (e.g. closed participations) or fee-based consulting (financial planning or occupational pension consulting)? The Insurance Mediation Directive not only clearly describes the information obligations towards the customer, but also precisely defines the status of the intermediary – whoever calls himself an insurance broker must also work as such and, according to the legal regulation, be liable accordingly. There are already “brokers” today who are considering, for example, only acting as multiple agents in the life insurance segment and who hope that the lower-priced agent VSH tariff will then be applied.
Zero euros by pool with alleged “assumption of liability”:
Those who take out their insurance solely through a pool as a “financial service provider without insurance brokerage” risk being without VSH protection in the short term in the event of a rate or contract restructuring. An agent with liability assumed by his insurer has the same problem if the cooperation ends unexpectedly. It cannot be ruled out that the search for a new VSH insurer will be difficult because the insurer will also be interested in the circumstances why the cooperation ended so suddenly. Tip: Ensure your own insurance cover in addition via your own policy, even if there is no compelling necessity. The licensing procedure as an insurance agent at the IHK can take weeks, until then the VSH coverage is not applicable, and you cannot work as an insurance agent during this time.
Product partners request VSH cover confirmation that is not yet available:
In addition to the law for the Intermediaries Directive, a regulation is also required. Most confirmations of cover are sent only after the regulation has made the appropriate provision. The confirmation of cover for submission to the Chamber of Industry and Commerce will also only confirm the statutory minimum cover (one million euros plus a maximum of 1.5 times this amount per year). Everything else is determined by the application, the terms and conditions and the policy. But it is precisely this “other” that matters! Tip: Depending on the risk structure and company organisation, there can be considerable differences in policies and coverage concepts. This starts with the “co-insurance” of employees who appear with a company’s business card and ends with the question of whether a higher sum insured is required. You are well advised to ask your VSH broker to explain in writing (!) why certain regulations should be suitable for your needs. It would be a mortal sin, for example, not to document the problem of underinsurance in the case of so-called serial losses.
Improved terms and conditions?
Great precision is required in this respect, because often only risk management on one’s own behalf allows the last gaps in coverage to become apparent. A VSH broker will be able to procure the “appropriate” VSH cover for the intermediary on a case-by-case basis. If the VSH broker’s client, i.e., the broker, does not receive transcripts, then the broker has already created an indication that he is unaware of his brokerage obligations. Tip: Going to an insurance broker may also be a matter of survival for the agent. The growing number of liability lawsuits against financial services providers speaks volumes.
It is the same with the insurance broker as with the tax consultant. Both are accountable to their client for what they did and when. If he cannot do this, the suspicion is obvious that there is also no proper accounting: Errors in deadline monitoring or in the resubmission system are the most frequent causes of liability cases in the brokerage business. Example tip provider: Here, too, all information from the VSH broker or insurer should be available in writing! This is because tipsters are individuals who are regularly subject to licensing and insurance requirements. The question of what happens when a “registered association” is interposed is also a delicate one. The process in this regard: agents recruit association members, after which the association then brokers the insurance policies. How then is membership recruitment to be judged? By the way, the BaFin prosecutes the forbidden commission levy: Then those affected receive a summons to the criminal investigation department and then mail from the public prosecutor’s office.
Can I waive a confirmation of cover for the IHK?
Only intermediaries subject to licensing require their own confirmation of cover with the full amount of cover required. All HGB-84 insurance agents and part-time agents of insurance brokers as well as multiple agents who advise clients need their own license and VSH. Salaried employees “only in the office” without their own brokerage activities, and under certain circumstances also salaried field staff, do not need their own VSH. Within the scope of the sum insured (for example, three or five persons), these are often covered free of charge or for a small additional premium. It is also important to know here: The coverage amount of the company (for example, one million euros doubly maximized per year) is available for employed MA (ID or AD) together, i.e. only together in the company. So there is no separate coverage amount for them. If a business includes its §-84 HGB employees, i.e., agents, then it is a matter of negotiation whether this premium (often 50 percent added to the premium) of the business is partially passed on to the agent.
considerations for additional managing directors or shareholders:
In most concepts, these persons are also insured with a premium surcharge of 25 per cent (i.e. 50 per cent cheaper than HGB 84 employees), but they do not receive their own sum insured; instead, the following applies here: the company – including one person in the management – is insured with the sum insured. But be careful: If there are several partners in a partnership (OHG, GbR, KG), there can be subtle differences if each is insured elsewhere and/or the sums insured are not identical. Tip: A concept is also required for such constellations. It gets even more complicated when cooperation partners are involved. VSH insurers are far from offering an off-the-shelf solution for all cases. This is where the real VSH broker comes in.
That’s not possible: “VSH up to five persons free of charge”?
These concepts should be urgently questioned, it may be a dubious bait and switch offer. This is because “non-contributory co-insurance” is generally only provided for if no independent sum insured is required for the respective employee, i.e. in the case of office staff or salaried field staff. However, “premium-free” does not mean free of charge, because the insurer will have long since factored this into the premium.
Beware of milkmaid bills:
Wrong: A company consists of one managing director (for example, an insurance broker) and four HGB-84 employees (agents). Then the coverage is just not five times the one million at the company. Correct: Each HGB-84 employee who is subject to registration (own business registration) needs his own policy and his own cover and thus his own confirmation of cover for presentation to the IHK. This then costs a “normal premium”: a discount is usually given if the agent only works for one company. If all agents work for one company, they are additionally insured in the company policy together with the managing director (necessary notification to the VSH insurer of the company) – but only for the (joint) activity there and only for one million Euro coverage, if the company has only insured this one million. So the one million euro cover is only available to the managing director and his staff once. Each employee costs the company a regular surcharge. Tip: More employees mean a higher risk and therefore require a premium surcharge. If there is not enough coverage, it is a matter of figuring out whether to adjust the sum insured or the maximization. The VSH broker must also provide a written analysis of this.
Beware of subrogation and underinsurance:
If a claim is made, the question arises as to whose VSH policy will intervene. Once it hits the company’s policy because the agent was acting as an employee, the insurer usually reserves the right of subrogation against the employee. The legislator wanted to ensure that injured customers did not go away empty-handed because of the advisor’s lack of creditworthiness – hence the VSH protection. The aim of the VSH protection required by law is therefore not primarily to exempt the intermediary from the financial consequences of any errors of his own. This should be taken into account when studying the terms and conditions. by the way, there are also recognizable gaps in the coverage of the exclusive agent in the service of an insurer: here, too, a competent VSH broker can help to close the gaps on the insurance side – the lawyer would often offer cheaper solutions, for example by changing the agent’s contract. Tip: A typical sales concept in occupational pension schemes is one in which employees are advised and the contract is then signed with the employer as policyholder. However, employee counseling is often not covered or insured. There is a need for action here, even before the first damage occurs. Here is an example: In the case of a broker with four agents, one million euros is often not sufficient, so that it would be advisable to choose a higher sum insured, or to agree that the one million euros is more than “simply” available. By way of comparison, the minimum cover available to a tax adviser is 250,000 euros four times over (maximised), and for an auditor it is at least one million euros, and this an infinite number of times. Avoiding underinsurance requires a risk analysis by the VSH insurance broker: plausibility and writing should be demanded from clients or intermediaries. Risk or property assessment is one of the cardinal virtues of the insurance broker; it cannot be dispensed with, for example, by the “general conditions of contract”.
Dangers of unclear employee contracts:
Numerous distributors, credit institutions, intermediary offices and initiators work with self-constructed model contracts. In these, there is often an opaque legal mix. For the sake of transparency, the following types of employees should be distinguished: ■ Pure office staff (employed, also customer advisory service) is not subject to licensing and does not require its own VSH. The reason for this is the lack of business registration. But of course, such employees, especially if they advise customers, should be covered by insurance, i.e. they must be reported to the insurer. The employed sales force is also not subject to licensing and does not require its own VSH; however, these persons must also be insured with the employer. ■ HGB-84 outside sales (even if the agent works all or part of the time inside) is also required to be licensed due to its own business registration and also requires its own VSH coverage. Not to forget: Such “freelance” employees must also be registered with the managing director, the agent’s principal, and must also be insured. ■ HGB-93 broker: An employee cannot be called a broker in contracts. Brokers have a connection to insurers, pools, distributors. However, there is no such thing as a “sub-broker” either conceptually or legally. ■ HGB 92 – Part-time activities in customer advisory services are also regularly subject to licensing, which means that a separate VSH is also required.
Cutting costs by hiring?
Whoever comes up with the idea of reducing costs by hiring employees because they then only have to be co-insured with the employer for a relatively small surcharge, should consider the following: This not only requires corresponding employment contracts, but also a time-consuming clarification of social security issues – this path can also be a mistake from a cost point of view. And there is still the question: what is the comparative calculation? The legislator only requires a minimum level of protection with regard to pecuniary loss liability – and this is for the protection of the advised client. He is not primarily interested in the financial fate of intermediaries and corresponding businesses. If you only want to formally comply with this legal minimum obligation, you can tell your VSH broker so. It is better to have a written VSH concept from the outset and then calmly weigh up the pros and cons. First and foremost should be “managing risk on your own behalf” – including D&O protection for managerial liability. Because risk management has also been a legal obligation for GmbHs for years.
Dr. Johannes Fiala, lawyer and certified financial and investment advisor (A.F.A.) (www.fiala.de), and Peter A. Schramm, DAV actuary and mathematician (www.pkv-gutachter.de).
(versicherungsmagazin 5/2007, 56)
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About the author
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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