False advice: In the case of real estate financing with life insurance

Insurance and finance brokers liable for residual debt, or interest disadvantage?


Life Insurance and Fixed Loan:

A judgment of the Regional Court of Izehoe dated 29.01.2009 (Case No. 7 O 27/09) demonstrates a typical course of events in financing and insurance brokerage. The plaintiff had financed the construction of his house. His insurance and finance broker had arranged a so-called bullet loan, which was to be repayment-free. Later, the client discovered that the agent had concealed the non-binding nature of his sample life insurance calculation during the consultation. The intermediary could also have achieved a better return through higher surpluses by selecting a more efficient insurer.

Lack of reference to funding alternatives:

The insurance and finance broker’s objection that it was an “insurer with strong performance, creditworthiness and service” did not prevent his conviction. Indeed, the court recognized that no interest-based financing alternative was offered at all, but only in conjunction with the life insurance policy. It would have been more advantageous to use the available capital for the down payment of the purchase price and to pay off the remaining purchase price via an annuity loan.


Burden of proof on investment adviser, financial and insurance broker:

An incorrect sample calculation can create the misconception in the credit and life insurance customer that one will certainly have enough money to repay the loan at the end of the term. similar to false prospectuses of a capital investment, the burden of presentation and proof lies with the insurance and finance broker.


Various errors lead to liability:

Often, it is not the insurer that offers the best return prospects that is brokered. And often the combination with a fixed loan does not ensure the best possible financing anyway.


Content of the court’s decision:

The court orders the finance and insurance broker to refund interest already paid on the loan. In addition, the broker had to take over the loan repayment, but was credited with the surrender value of the life insurance policy. He was also ordered to pay attorney’s fees and court costs. The broker had violated the obligation to protect the interests of the customer and to inform about risks in such a way that the customer could have made a qualified decision among reasonable financing alternatives.


Frequent inflation of interest and costs:

Hundreds of thousands of buyers of real estate, mutual funds and life insurance policies were advised to finance their investment on a loan basis. Many an advisor from a credit institution urges the customer to use such “combination models” in order to optimise fees and commissions for his own institution. The bank must then at least reimburse the additional costs. Occasionally, non-binding sample calculations are explicitly represented as safe, which can lead financial advisors into liability for residual debt.


Model calculation predominantly flawed:

Where the adviser has used calculations to show the alleged advantages of the life insurance/fixed-rate loan combination over a normal annuity loan, these have often proved to be incorrect after examination by an actuarial expert. The consequence is that the court will hold the broker liable. But many courts see such an expert opinion for the first time – so far aggrieved investors waived and lost their case with it almost always. Brokers therefore have a good chance of escaping liability even in the case of incorrect advice, because anyone who has already accepted only “free” advice during the financing process will rarely want to pay more for it in a legal dispute.

by Dr. Johannes Fiala Peter A. Schramm

(Computers in Crafts, 07-08/2010, 7)
Courtesy of www.handwerke.de

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About the author

Dr. Johannes Fiala Dr. Johannes Fiala

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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