Insurance brokers risk “head and neck” due to faulty brokerage contracts
*by Dr. Johannes Fiala, lawyer (Munich), mediator (Univ.), MBA Financial Services (Univ.Wales), MM (Univ.), certified financial and investment advisor (A.F.A.), lecturer for civil and insurance law (BA Heidenheim, Univ. of Cooperative Education), banker (www.fiala.de) and Hermann Siebenhaar, insurance broker (Neutraubling), court-appointed expert, lecturer (Univ. of Cooperative Education), retail salesman (www.hermann-siebenhaar.de)
Duty of care of the insurance broker only up to the mediation ! The Federal Court of Justice (BGH) decided in its judgement of 14.06.2007 (Ref. III ZR 269/06) that the insurance broker is obliged to provide advice and support with regard to the insurance contract to be brokered: the words “to be brokered” are decisive here, as the obligation to provide support does not have to last longer than until the insurance contract is brokered. Unnecessary liability due to duty of care in insurance brokerage contract Section 93 of the Commercial Code states that “[a]ny person who commercially undertakes the brokerage of contracts for … insurance, … on behalf of other persons, without being permanently entrusted with it by them on the basis of a contractual relationship, shall have the rights and duties of a commercial broker.” Those who like to fulfil their broker duties (risk investigation, object examination, risk placement, information) “constantly”, and in fact feel called to be a clairvoyant, write for their own potential destruction of existence in the broker contract that they “manage and look after” the insurance contracts of their customers – and best of all they then add the note that the insurance broker contract can be “terminated” with a notice period of a few months. Numerous insurance brokers have spent thousands of euros on drafting this type of “continuing obligation”. Remuneration agreements with the customer are permissible The BGH underlines what it has repeatedly ruled, that the insurance broker can agree with his customer that “commissions” (meaning brokerage fees) are paid directly by the customer (e.g. in the case of net policies). This message is particularly important for insurance brokers because in future they will have to disclose their brokerage fees – product sales will then take a back seat and the person of the insurance broker will become more important. The distribution of brokerage fees “in the manner of a lord of the manor” by insurers could come to an abrupt end if the insurance brokerage receives remuneration from the customer in a similar way to a management consultant: The brokerage fee as a control instrument is becoming less important, especially since the EU Commission apparently wants to abolish “brokerage fees from insurers”. Comprehensive brokerage duties The insurance broker “is regularly commissioned by the policyholder and is the latter’s representative of interests or even of the conclusion of the contract. As a confidant and advisor, he has to provide the policyholder with individual insurance cover. Therefore, in contrast to the commercial or civil broker, he is usually even obliged to act towards the policyholder who is contractually bound to him, usually to conclude the desired insurance contract. This corresponds to the fact that the insurance broker must investigate the risk on his own initiative, examine the object and inform the policyholder, as his principal, constantly, without delay and without being asked, of the interim and final results of his efforts to place the relinquished risk, which are important for him. Because of these comprehensive duties, the insurance broker may be described as the policyholder’s fiduciary trustee in the area of the insurance relationship of the policyholder whom he serves, and to that extent may be compared to other advisors …” So: The normal broker’s duties begin with the customer’s request to cover a certain risk and end with the conclusion of the insurance contract. On the other hand, comprehensive – in particular ongoing – advice and support in all insurance matters is by no means necessary. Comprehensive broker liability due to incomplete risk management Only very few VSH brokers can explain to their clients, i.e. the insurance intermediaries, why the amount of cover and the maximisation are “appropriate”. Considering that a VSH is only supposed to cover the residual risk, many an agent later wonders why he was not recommended effective risk management. No broker’s duties of disclosure in the case of his own contract with the customer The BGH explicitly clarifies that the duties of care concern “the insurance relationship to be brokered by him [dem Versicherungsmakler]”. A duty to provide support or advice when concluding the brokerage contract, on the other hand, can only arise in exceptional cases, for example if the broker’s client does not see through the circumstances because he is completely inexperienced in business. Payment of the insurance broker’s remuneration by the customer The BGH also expresses that it is precisely the payment of the broker by his customer that corresponds to the statutory model, § 652 BGB. The insurance broker is also entitled to remuneration if the contract is subsequently terminated, i.e. it is basically independent of the subsequent fate of the insurance contract. Insurance broker liability according to the principles of the BOND judgement: Already in a dissertation from the year 2002 U.Mauntel (published by Verlag Ver-sicherungswirtschaft) explained that in the case of life insurance the broker has to observe the BOND judgement (Ref. XI ZR 12/93) of the BGH (obligation to advise investors and objects). The BGH takes up the substance of this in its new decision by pointing out that an insurance broker is obliged to pay damages (§ 280 BGB) if he has procured an endowment life insurance policy to a customer which “corresponded to his needs and his financial capacity [nicht]”. This aspect alone suggests billions in liability for intermediaries and insurers. After all, according to insurance industry statistics, three out of four long-term life insurance policies are terminated prematurely, most of them in the first five years. Impeccable brokerage commitments necessary for insurance brokers ! In its judgement of 13.01.2005 (Ref. III ZR 238/04), the Federal Court of Justice (BGH) ruled that an insurance broker loses his entitlement to commission (i.e. the broker follow-up fee) if the insurer (i.e. his agent) “takes over the management … himself” in the case of an insurance contract with a term of one year and a renewal clause. This de facto expropriation of the insurance broker is based on the expert opinion of an expert who – according to a nasty rumour – is supposed to be a board member of a brokers’ association: Would the broker association have thereby apparently harmed the interests of its members, the insurance brokers? This becomes particularly critical if the broker merely formally incorporates the duty of care into his brokerage contracts in order to receive the insurer’s commission, and then presents it (usually unnecessarily) to the insurer. Often he will find, in view of his stock to be looked after, that adequate care cannot be provided at all in terms of time – inevitably the liability cases then follow. For the understanding it is essential to recognize that the debtor of the insurance premium is the broker client. The brokerage fee is a calculated component of the premium. According to established case law, the insurer is therefore the debtor of the brokerage fee. The insurance broker is and remains the creditor of the brokerage. According to these guiding principles, it is not possible for the broker’s clients to dispose of the broker’s brokerage entitlement or to distribute it freely as they see fit in the event of a change of broker. However, since the insurer only pays the brokerage once, there is a risk for the customer, if he has unilaterally transferred the brokerage claim to the new agent (or has it transferred), that the first broker will assert his brokerage claims against the customer. Historically, it all started with the brokerage or commission being divided into “acquisition and follow-up commission”, even sometimes into “servicing and collection commission”: Brokerage associations started opening the door over 20 years ago for insurers to “unload” their portfolios from insurance brokers without compensation and let their own agents, who are often comparatively less expensive, do the “servicing.” Since then, the business value of an insurance brokerage office in the event of a sale or even for the widow in the event of inheritance moves towards zero if – as is the case here – the “commercial practice” is relevant. Flawless brokerage commitments even without support obligations? Currently, only a few insurance brokers and pools have recognized and implemented that there can be a follow-on fee even if “servicing” is not provided. These brokers have enforced that they receive a commission/fee under the old basic rule of “the brokerage shares the fate of the premium” – regardless of whether the client later “takes care” of the insurer/agent or another broker. In some boardrooms there are already new “insurance broker stroking programs” – because it has been noticed that more and more often the broker advisors with suboptimal offers in terms of “conditions and brokerage commitments” are no longer even offered a place in the office of the “real” insurance brokers. The best brokerage fee commitment? None ! Since everything is regulated in the BGB, HGB and VVG. The law has established the customary brokerage fee as the entitlement of the insurance broker.
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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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