by RA Dr. Johannes Fiala* and Dipl.-Math. Peter A. Schramm**
The Federal Court of Justice has ruled: brokered life insurance policies must meet the customer’s needs and capabilities!
Endowment life insurance a legal scam?
Already since the judgement of 3.6.1983 (Az. 74 O 47/83) of the regional court Hamburg the evaluation of the capital life insurance as “legal fraud” was judicially blessed. Professor Michael Adams (Univ. Cologne) followed this up in 1997 with his essay “Die Kapitallebensversicherung als Anlegerschädigung”.
Liability for insurance intermediaries according to the principles of the BOND judgement
Another 5 years later a dissertation proved that also with life insurances as capital investment the intermediary has to consider the BOND judgement (Az. XI ZR 12/93) of the BGH to the investor and object-fair consulting obligation. Since only about every 4th long-term life insurance contract was kept up to the end by the investor, the suspicion was obvious that capital investors were mediated masses of unsuitable contracts.
New power word of the Federal Supreme Court!
This is taken up in substance by the BGH in its new decision (judgement of 14.6.2007 (Ref. III ZR 269/06), in which it points out that an insurance broker is obliged to pay damages if he brokers a life insurance policy to a customer which did not “meet his needs and financial capacity”. If the “savings contract” in the form of a life insurance policy runs for only one year, then according to a study by Prof. Adams, the investor does not even get back 2% of his payments on average – a negative return of over 98%.
Damages rarely time-barred?
While numerous customers with terminated life insurances hope for a new account, with on the average only comparatively minimal additional payments from contract-legal requirements against the insurer, the more weighty requirement lies within the range of the wrong consultation: Investors can require here apart from the paid in contributions also a tidy capital market interest as escaped profit. Still investors have the possibility of demanding the compensation from requirements of the last 30 years: Because after the statute of limitations rules valid since 1.1.2002 brokers are responsible (calculated starting from 1.1.2002) for at the longest still 10 years.
Multiple cases of misadvice
This does not only include contracts where it was questionable from the outset whether the customer would be able to pay the fixed premiums at all in the long term. Often, a shorter contract term (12 to 15 years instead of 25 to 40 years) would have been less disadvantageous to the customer if terminated early, while the long term would not have been advantageous even if held out to the end. It is not uncommon for insurers to present their customers with “non-binding sample calculations” showing high yields when they conclude a contract – several rulings or notices from the supervisory authority and comments from rating firms show that such forecasts have sometimes shown unrealistically high yields, maturity benefits, lump-sum settlements or annuity payments on an erroneous basis. According to some rulings, this can lead to the insurer not being allowed to reduce the surpluses at a later date (claim for performance) or to the contract having to be rescinded with repayment of premiums including interest. Or a false return was given, because it was not based on the paid-in premiums, but only on the savings portion after costs and risk premiums – often referred to as the “net” return for the sake of confusion. Annuities were not infrequently sold as yield products, especially when their lump-sum payment was increased in the absence of a death benefit. The fact that the “return” came partly from the “bet” on survival and was paid for by the fact that there was no benefit at all in the event of death was then concealed in the advice given. Conversely, policies often contain unnecessarily high risk protection, which further reduces returns.
(Dental Tribune (08/24/2007))
Courtesy of www.dental-tribune.de.