Why brokerage claims against the broker pool are unprotected in the event of insolvency
Some broker pools promise 100% security of existence in their self-advertising, and then underpin this with an effectiveness guarantee. But does that even apply?
Such an advertisement gains weight if a so-called professor and advisory board liability (e.g. BGH, judgement of 17.11.2011, Az. III ZR 103/10) for the claimed guarantee is included. Only in the case of purely sympathetic advertising, for example by an actor (Manfred Krug) – recognisable without recourse to expert knowledge – is there no question of personal liability (OLG Frankfurt/Main, judgment of 16 May 2012, Ref. 23 Kap 1/06, para.1595). However, if experts are at work as advisors, it will hardly be possible on the one hand to emphasize one’s own “great care” and then to want to exclude any liability for it – just ineffectively.
Sub-courtage or direct connection?
So far, only one broker association has managed to convince with its business model of a purchasing cooperative, because the cooperating insurance brokers always receive their own direct brokerage commitments, especially from the insurers, right from the start. If, however, the brokerage fee commitment is held by the pool, perhaps in conjunction with cancellation reserves, the insolvency administrator will retain and exploit these assets, e.g. for the pool’s cancellation liability, even far in excess of the existing reserves for this purpose.
In “Versicherungspraxis24” of 05.03.2015 it is correctly pointed out that neither an assignment shortly before pool insolvency, nor a future assignment of subsequent commissions will protect against an insolvency administrator challenging such dispositions pursuant to Sections 129 et seq. InsO will challenge such dispositions. After all, the brokerage fees are due to the pool when it submits the new business on the basis of its own brokerage fee commitment – which initially does not mean that the broker has any assets.
Pool brokers are liable with new business and portfolio commissions for cancellation at the pool
For example, in the event of (imminent) insolvency or even just a sharp decline in new business, the pool portfolios brokered by the broker are collectively liable, as all brokers are jointly liable for the cancellation of all pool contracts with their new business and portfolio commissions. If brokers then stop submitting their new business to such pools, the situation will only get worse. This is because insurers will then demand increased lapse reserves for the existing portfolio during the liability period due to the lack of cover through new business.
Therefore, one has to ask whether the attitude of some pools not to cut commissions to brokers, despite LVRG, has not arisen out of necessity, because a cut and thus a decrease in new business would have led to financial problems all the more. For then the insurers would have demanded higher cancellation reserves or collateral for them. It is possible that only very few pools will be able to withstand a slump in new business. Often not even the pool’s expert broker advisory board can accurately quantify the question of the liability volume that then arises. It is estimated that it is often more than 15 times the equity of the pool and is often only covered to less than 25% by the cancellation reserves of the brokers in the pool.
Insurers apparently base commission liability on the pool’s total brokered business. If, for example, 25 % of the contracts are then cancelled, the remaining ones (with the outstanding commissions or follow-up commissions) and the future new business with future commissions are also liable. Therefore, an insurer cannot simply allocate the portfolios to individual brokers, nor does it have to, because that would remove the mutual liability. If a pool claims that it merely manages the brokers’ portfolios, a glance at balance sheets and annual reports is often enough to recognise this as a clumsy deception.
Some broker pools do not know their liability risk or prefer to keep quiet about it
Since 01.05.1998, the “Law on Control and Transparency of Companies (KonTraG)” has made risk management compulsory, also for limited liability companies, § 91 II Akt. At the latest when the insolvency administrator arrives, he will deal with hidden liabilities and other (negative) assets not identifiable from the balance sheet, including liability risks, in order to hold the former managing director personally liable due to undercapitalisation (BGH, judgement of 19.11.2013, ref. II ZR 229/11).
The broker associated with the pool will not get “his” portfolio free, because he is still jointly liable for the other pool brokers in the event of pool insolvency. For the time being, he does not receive any follow-up commission and also no release of his cancellation reserve with the pool, because the insurers (VR) want to have the liability volume covered if the pool does not deliver any new business – or even far less than planned. This is all the more the case as many brokers may then restock their portfolios which have become worthless for them in the pool, i.e. the cancellation will increase once again.
The risk of insolvency for pools which, as it were, have the cancellation reserve deferred by the VR because of the expected new business, increases in this way in the event of a decline in new business. The fact that some pools or pool broker advisory boards do not know their own risk here is a pointer to the fragile basis on which the earnings situation is based.
Example of a scenario for illustration
The X-Pool has annual commission income of around EUR 10 million, but only equity capital of around EUR 1,5 million. Approximately 2.5 million each are receivables and liabilities, probably mainly lapse reserves held with insurers and those retained by brokers. These only cover a currently average lapse, insofar as insurers fear that it will not be covered by current new business. Some VRs refrain from doing so altogether because, in contrast to many individual brokers in each case, future new business can still be easily estimated at present. MEG had even been given large advances for similar reasons. This is not far from a Ponzi scheme, perhaps a prosecutor would think later.
One can estimate the total liability volume, mainly in the area of KV and LV, at approx. 5 million brokerage fees per year times outstanding for an average liability period of 2.5 years, which then results in 10 to 15 million EUR. Total liability amount. Of this amount, approximately EUR 2 – 3 million should be covered by cancellation reserves and collateral. So if the X pool loses new business and more than about 20 % of the contracts are cancelled in the liability period, it is flat. The broker then sees nothing of his cancellation reserve (or given securities), nor of follow-up commissions or those for business already submitted. The X-Pool’s guarantee to the insurance broker proves to be up to completely worthless, and an insolvency quota can then hardly be expected.
The insurance brokers could perhaps, with a good chance of success, still claim damages as joint and several debtors from the professors, other experts or advisory board members due to negligent false statements, §§ 826 in conjunction with 31, 840 BGB (BGH, judgment of 19.11.2013, file no. VI ZR 410/12).
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
by courtesy of
www.experten.de (Published 01/07/2015)
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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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