– Obligation of the insurance broker to advise in the case of brokering in the secondary market for life insurance policies –
An insurance broker was ordered to pay damages by the Higher Regional Court of Dresden (OLG, ruling of 29 February 2019, file no. 4 U 942/17) because he had not informed the policyholder (UN) about the risks and alternatives to selling his life insurance policy to a buyer on the secondary endowment policy market. The court quantified the amount of damage with the surrender value on the day of sale, which he would have received even if he had returned the property to the life insurer, less the down payment – the broker was left with the insolvency quota vis-à-vis the buyer.
Sale of used life insurance policies requires particularly intensive consultation
In the case decided, the buyer of used policies had paid a 15% brokerage fee to the broker, but had only made a down payment to the UN/seller on the purchase price. Later, the buyer went into insolvency – the (total) risk of loss in this respect had not been clarified.
Duty to inform about the amount of brokerage – or forfeiture of brokerage?
In most cases, the insurance broker will be commissioned by the UN without disclosing that he is linked to the policy buyer by a framework agreement or brokerage commitment.
However, the broker is also obliged to provide information if he is not a purely unilateral fiduciary representative of interests, but has entered into a contractual relationship with both the buyer and the seller (BGH, ruling of 18.01.2007, ref. III ZR 146/06). The (secret) double broker forfeits his commission, § 645 BGB (OLG Cologne, judgement of 11.03.2003, Az. 24 U 197/02; BGH judgement of 11.11.1999, Az. III ZR 160/98).
If there is no case of forfeiture, it can nevertheless occur that the broker owes the settlement and delivery of the brokerage received to the UN – and may only keep “the usual” for his brokerage, § 653 BGB.
Reversal in case of still incomplete purchase price payment
UN, whose purchase price has so far only been partially paid by the buyer, could often reverse the sale today – better before the buyer becomes insolvent – for example because of fraudulent deception – for example, lack of insolvency-proof loan collateral, or even if official approvals for collection transaction(s) or deposit transactions (BGH ruling of 16 October 2018, ref. VI ZR 459/17) were not available at the time of the sale.
Missing consultation documentation – together with the consultation protocol – reverses the burden of proof
In the case of the OLG Dresden, the court agreed with the meanwhile prevailing view in literature and jurisdiction; in that the burden of proof for correct advice is placed on the broker for lack of minutes or documentation of the consultation. Since 22.05.2007, the documentation obligation has been in force according to the EU Mediation Directive.
Evidence of advice on alternatives to the sale of policies must be provided
The insurance broker should have advised on various alternatives; in particular the premium exemption, the policy loan, (possibly partial) termination with the insurer or surrender by the insurer, as well as premium reduction.
In its reasons for the judgment, the OLG did not separately list other points of clarification requiring advice, such as Lending the policy to a credit institution, but also the revocation of the insurance contract for life insurance. However, deferral and payment of arrears in premiums by offsetting them against the actuarial reserve or from existing surpluses as well as postponement of the start date or extension of the term are also common alternatives.
In a comparative presentation of the alternatives required for correct advice, the average insurance broker can fail due to the comparison of the different complete economic and tax effects of all alternatives, which is subject to the obligation to clarify (BGH, judgement of 26.08.2018, Az. I ZR 274/16). In this respect, he must in any case point out the possibility of obtaining an expert actuarial and tax assessment.
Of course, the obligations to show and compare alternatives must also be observed in the reverse case, i.e. if, for example, a repurchase is intended – then, for example, the sale could be more advantageous and the broker could become liable to pay damages for the higher sales proceeds compared to the repurchase value.
Brochure errors in flyers and buyer advertisements?
When comparing the surrender value in pension insurance, it is often ignored that initially only the insured death benefit is paid out and shown, but when the pension start date is reached, the value beyond this is paid additionally with interest and surpluses as a lump-sum settlement after the surrender. This is an advantage for the buyer, as it makes the sale of the policy seem comparatively cheap. To compare and advise on the economic side includes that the broker questions and clarifies an “unclear business model” (OLG loc. cit.). Advice to the UN to obtain credit information is helpful anyway.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
by courtesy of
www.experten.de (Published on 01.07.2019)
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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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