In the third part of their exclusive article for FONDS professionell ONLINE on additional services provided by brokers, attorney Johannes Fiala and actuary Peter Schramm deal with the question of what consequences additional services can have for the brokerage fee.
There is more than just a legal question mark behind various additional services that brokers offer their clients. In two publications attorney Johannes Fiala and the actuary Peter A. Schramm have already discussed some immediate problems. In the concluding third part of this exclusive article for FONDS professionell ONLINE on questions about extra services, both experts go into great detail about problems with the brokerage fees received for the extra services. (jb)
Why does the broker owe the brokerage fee to the policyholder – the insurer paid it after all? The brokerage fee is always owed by the principal, i.e. first of all by the policyholder. An insurer will not even want to be another client of the broker’s insurance brokerage, because this would bring him excessively into liability for broker errors.
The client not only takes out an insurance policy with the insurer, but at the same time (implied, i.e. tacitly) concludes a contract in favour of third parties, i.e. in favour of the broker or agent, according to which the insurer uses the premium proportionately to pay the brokerage fee (owed by the client). Even if the client does not (yet) know or has not negotiated the amount of the brokerage fee, the usual brokerage fee is deemed to be agreed – a brokerage order is sufficient for this purpose.
If the insurer – as a so-called third party, by virtue of trade practice – has paid the policyholder’s brokerage debt to the broker, the broker is liable to reimburse the client in the event of forfeiture of brokerage, Section 654 of the German Civil Code (BGB). The decisive factor is that the broker provides the insurer as principal with his main and ancillary services: If the broker assumes additional tasks for the insurance company, the lack of a (brokerage) main service to the insurance company means that these are no longer ancillary services of the brokerage, which leads – not only – to the obligation to pay turnover tax, because only the brokerage with associated ancillary services is exempt from turnover tax.
Double broker
A double broker is someone who does not maintain his loyalty to the client. Either he is also active for the other party (hidden or only recognisable afterwards) – or he grossly violates his (in particular custodian) brokerage obligations towards the policyholder: only one of these two alternatives leads to forfeiture of the brokerage fee (OLG Cologne, judgement of 11. OLG Celle, judgement of 7 March 2008, case no. 5 O 112/07; BGH, judgement of 11 November 1999, case no. III ZR 160/98; LG Osnabrück, judgement of 16 April 2014, case no. 3 O 2547/13; LG Offenburg, judgement of 20 April 2004, case no. 1 S 15/03; BGH, judgement of 19 May 2005, case no. III ZR 322/04).
A typical indication is that the broker reports a claim to the insurer on behalf of the customer – but (strategically in the interest of the insurer) accepts that nothing happens for about half a year: In this way, the broker becomes the insurer’s de facto vicarious agent, and in his “strategic claims settlement” by delaying the settlement, he is obviously already acting against the interests of the customer. Not only agents (OLG Saarbrücken, judgement of August 13, 2008, file no. 5 U 27/07) but also brokers (OLG Düsseldorf, judgement of April 30, 1999, file no. 7 U 201/98) are subject to the so-called follow-up obligation, for his conscientious exercise of his profession.
Some brokers also fear that the insurer will terminate its portfolio because of a too high loss ratio. However, this must not influence him in his work for his customers. If necessary, he must accept that the insurer terminate his entire portfolio in the interest of a single customer.
Value added tax at the insurance broker?
This does not at all clarify the legal consequences for the insurance broker in terms of turnover tax if he promises the customer additional ongoing services in addition to insurance brokerage – within the framework of a continuing obligation, completely voluntarily, without a basis in the statutory job description (§ 93 of the German Commercial Code (HGB)). For additional services, there may be an obligation to issue an invoice to the customer including VAT. This may already be the case if the insurer charges the broker the follow-up commission (which is only owed for brokerage) as a support commission (for activities that are actually the responsibility of the insurer); for example, on the basis of a framework agreement or brokerage promise by the insurer to the broker.
The first decisive factor is the broker’s agreement with the customer, i.e. the promise of services with or without VAT (value added tax) liability towards the customer. No VAT-exempt activities exist if the work is in kind (outsourcing of the VR) instead of agency services (European Court of Justice ECJ, UR 2002), which are not merely ancillary services for the policyholder. Ancillary services only exist if they do not have a purpose of their own for the service recipient (customer), but only have the purpose of optimising the (own) main service (ECJ, UR 1999, 254), i.e. to facilitate or directly enable the placement (ECJ, UR 2007, 617). Without the main service, the secondary service must be “worthless”.
Admittedly, the preparation of construction plans is not an ancillary service of arranging building insurance for the building to be erected. However, intermediaries of reinsurance in occupational pension schemes often think that they should also legally design the pension commitment so that they can then provide the appropriate reinsurance for it.
The Federal Court of Finance (BFH, ruling of 6 September 2007, file no. V R 50/05) stated the following with regard to VAT on outsourcing: “In general, support services for the performance of the tasks incumbent on the insurer itself are taxable. Consultancy services provided by a broker to the customer remain VAT-free; for at least as long as a contract is brokered to the policyholder by this insurance broker (§ 6 of the Insurance Contract Act VVG).
For example, a commercial broker claims in an advertisement: “If the worst comes to the worst, we will be at your side during the entire claims handling process – quickly and easily. We make sure that deadlines are met, expert opinions are coordinated and claims subject to regulation are settled in good time by the insurance company. We negotiate with your insurers and are also helpful at your side in disputed cases. Our aim is to achieve the best result for you and to relieve you of time-consuming processing and administrative work as far as possible. In his brokerage power of attorney, he can be even more comprehensively authorised by promising not only insurance brokerage but also contract management (i.e. including ongoing support and claims settlement) – with notice period and renewal from year to year.
For the broker this means a continuing obligation with constant performance obligations, also beyond the actual brokerage as well as his own professional profile according to commercial law. In addition, the brokerage contract and power of attorney tend to be null and void – insurance contracts concluded with such a power of attorney share this fate – another means, for example, of unwinding life and other insurance policies that are unwelcome to the policyholder or, as the insurer, refusing to pay benefits.
For these legal services, even if they are illegal (according to the Legal Services Act, RDG) (e.g. negotiations with the insurer “in controversial cases”) or deceive the customer about what the broker is allowed to provide, the insurance broker still owes the pro rata payment of value added tax (VAT). The privilege of tax exemption according to the Value Added Tax Act (UStG) must be interpreted narrowly – in any case, the settlement of claims has hardly anything to do with mediation (not only according to the RDG), because it is then a new case of performance (Federal Fiscal Court BFH, decision of 20 July 2012, Az. V B 82/11).
Debt collection brokers who charge insurance premiums on their own letterhead to the customer with insurance tax (VersSt) only, i.e. who simply ignore the proportionate VAT, expose themselves to the suspicion of VAT evasion. At this point, the Federal Central Tax Office (BZSt) and the tax investigation department (Steufa) react humorlessly, unlike professional teasing, starting no later than Ash Wednesday.
This also concerns such claims settlements for accident victims – not only through brokers – where an unrealistically high tax-free compensation for pain and suffering is agreed upon for tax avoidance – instead of compensation for loss of earnings plus taxes – compare paragraphs 40, 42, 370, 378 of the German Fiscal Code (AO). The more than questionable US exemption also affects insurance brokers who settle claims for insurers.
Brokerage services and special concepts with VAT liability?
The BFH (ruling of 9 October 2002, file no. V R 67/01) decided that for the sake of VAT freedom, it is important that the legal claim to insurance cover may only be directed against an insurer; i.e. not against companies with other occupations (such as brokers, underwriters, car manufacturers with a mobility guarantee). This also applies if insurance cover is only procured. However, the European Court of Justice (ruling of 17 January 2013, C-224/11) allows only the “exact cost of the insurance” to be charged on without VAT if cover is provided.
The European Court of Justice (ECJ, ruling of 3 May 2005, Case C-472/03) already ruled that back-office activities of insurance intermediaries are not VAT-free, such as policy administration, contract amendments, processing of claims, and (dis)payment services.
The situation is different for the advisory service until the conclusion of the placement, because then it is a VAT-free ancillary service (FG Kassel, judgement of 23 October 2008, ref. 6 K 1970/03). In the past, the Federal Ministry of Finance (BMF) also assigned the portfolio management services of brokers to the VAT exemption (BMF 28 February 2000, IV D 2 – S 7167 -2/00), as well as the administrative activities of insurance agents (BMF 2 May 1995, IV C 4 – S 7167 – 3/95). This also applies to portfolios transferred by the board of directors to the agent for contract management, maintenance with collection (FG Köln, judgment of 21 August 2002, ref. 5 K 613/02). This is obvious for the insurance agent as a typical service (“to be constantly entrusted with it”, § 84 HGB) – in contrast to the insurance broker, who is not “constantly entrusted with it” (§ 93 HGB), so that portfolio maintenance, support, contract management, collection and claims settlement are not part of the statutory job description.
Contract management as double brokerage
The following promise to the policyholder may also be an indication of forfeiture of the brokerage fee: “to act for me (us) in connection with the brokerage and administration of insurance contracts and to safeguard my (our) interests vis-à-vis insurers. This power of attorney also includes the right to conclude, amend, cancel all or part of insurance contracts and to conduct all negotiations with insurers.
Such formulations appear to be too comprehensive because they include activities prohibited under the RDG, which may lead to the double nullity of power of attorney and brokerage agreement. Likewise, all changes, cancellations and new insurance policies concluded with such a void power of attorney are contestable or void, just as if a contract had been concluded by a person who is recognised as insane or incapable of acting.
Errors in contract administration are already apparent when the customer writes to his insurer in accordance with Section 3 IV VVG and requests information on all correspondence by requesting copies. Poor performance in the service contract is normally not sanctioned – but in the case of the broker, it is, by way of forfeiture of the brokerage fee; completely without the necessity of damages, Section 654 BGB. The broker must pass on any mail from insurers to the customer in original and complete form (§ 667 BGB). Frequently, there is already a lack of information from the broker to the customer about telephone calls and email traffic with various insurers. Some brokers, however, are of the opinion that section 666 of the German Civil Code (BGB) is wrong in law and that these are their own secret internal company matters.
In this way, the broker also indicates that he may only be working as an agent or focus broker for one or very few providers, which could be a violation of Section 60 VVG. A lack of documentation leads to a reversal of the burden of proof, Section 61 VVG. Subsequent accountability does not replace timely documentation prior to covering, Section 62 VVG. The policyholder can then consider whether to file an action for a declaratory judgment first – perhaps because there was a cheaper or better cover available somewhere. Some brokers are not aware that upon termination of the brokerage mandate they also owe the surrender of all original powers of attorney to the customer (§ 175 BGB).
Outsourcing of the VR leads to the role of a double broker
The secret double broker is the “administrator of insurance contracts for the customer” already because, according to established findings of the judiciary, the broker is already regularly an administrator of the insurer: “The main service of the insurance broker in relation to the insurer is the performance of administrative tasks, as is also assumed by the Hamburg Regional Court (BeckRS 2008, 25129) and the Hamburg Higher Regional Court (…)”. (Bonn District Court, judgement of 17 October 2013, file no. 14 O 44/13). Of course, this fact says as little about legality as it does when the court finds that the bank robber’s main service to the banks is to rob them.
If VR outsources the current contract management to the broker, then this has nothing to do, logically speaking, with rather selective “examination, amendment, advice” (§ 34d GewO) or the provision of cover (§ 93 HGB) for the customer. The ongoing contract administration including claims settlement for the insurer (or customer) can therefore hardly be a secondary service of the brokerage in the sense of the RDG. Pursuant to section 32 of the Insurance Supervision Act (ISA) 2016, the insurer must also ensure data access rights and rights of instruction and control vis-à-vis the broker if, for example, it grants powers of attorney to settle claims or issue policies.
Those who promise contract administration together with claims settlement (Third Party Administrator) rarely have to expect an action for injunction from lawyers or insurance consultants: The decision of the BGH of 14 January 2016 shows that this can happen. However, the broker is also required to split his brokerage fee in the event of illegal activity under the RDG in order to subject part of it to the usual value added tax – for promised (although possibly prohibited) or performed legal services as well as services not typical of the profession. The brokerage service (including precisely this associated insurance legal advice and ancillary services) remains VAT-free according to the job description of the broker, who acts for the policyholder “without being permanently entrusted by them with it on the basis of a contractual relationship” (§ 93 HGB).
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
with friendly permission of www.fondsprofessionell.de, published on 25.04.2016
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Dr. Johannes FialaDr. 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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