Ineffective insurance contracts due to void brokerage authority

The importance of legally effective brokerage agreements is repeatedly pointed out. The team of authors, Dr. Johannes Fiala and Peter Schramm, explain in their contribution which difficulties arise for the parties involved due to missing, insufficient or too comprehensive brokerage powers.


The Federal Court of Justice (BGH, ruling of 29.05.2013, ref. IV ZR 165/12) has already ruled that it is unreasonable for an insurer (VR) to work with a broker – even just as a correspondent broker – if this leads to unreasonable additional work in mass business. For example, because the power of attorney is not comprehensive, but was only granted in a limited form (so-called partial power of attorney). He would then have to check each time with unreasonable effort on the basis of the power of attorney what he is allowed to pass on to the broker and what not.

On the other hand, however, the brokerage power of attorney can be so comprehensive that it violates the Legal Services Act (RDG) and is therefore null and void from the outset – for example, in the case of unrestricted customer power of attorney for disputed claims settlement or simply representation in all insurance matters of even just one brokered contract. Agreements to regulate legally disputed cases without a licence under the RDG are null and void – even if there are brokers whose main business is precisely this (AG Mannheim, judgement of 25.08.2010 – 9 C 208/10).

This often leads to the double nullity of power of attorney and brokerage agreement (LG Bonn, judgement of 17.10.2013, Az. 14 O 44/13). This means that VR is already often on the cutting edge in the mass business with brokers.


Obligation of the insurer to pay benefits despite a change of tariff or termination

If the power of attorney is ineffective, the policyholder (VN) can later demand the higher benefits of the original tariff after the tariff change to an emaciated tariff in accordance with § 204 VVG, because the tariff change carried out per (ineffective) power of attorney is also ineffective. However, the BoD may not demand the higher premiums if they are time-barred.

This also applies to cancellations, e.g. also of a life insurance policy with a void broker’s power of attorney. Even more than 10 years after the termination which is ineffective due to ineffective – for example, because the broker’s power of attorney is too comprehensive – the full maturity benefits or pensions can still be demanded – but the contributions for this are only to be paid in arrears for the current and the three previous years due to the statute of limitations.

If the broker’s power of attorney is ineffective, the UN can revoke all types of insurance contracts – both new ones and any changes – for an indefinite period of time, provided that the BoD has sent the instructions with tariff and consumer information only to the broker. It is then irrelevant whether this instruction in itself would have completely complied with the regulations. The VR could just as well have attached it to the large oak tree in Frankfurt’s Stadtwald – in 8-degree lettering at a height of 20 metres – without telling the UN, or thrown it into the Main River by message in a bottle from the Iron Bridge.

Insurer practice often means: It does not ensure that it works properly, but it is only done in such a way that in the end you cannot blame yourself, but rather the broker. And incidentally, hoped that there are not too many problems.


No proof of broker’s power of attorney without certificate

The same is the case if the broker confirms to the BoD that he will always be authorised in connection with a framework agreement or brokerage commitment. The belief of brokers and BoD that there is a power of attorney may often be based on misconceptions. For example, some brokers believe that the client’s signature on the insurance application together with the policy issued by the insurer would result in an “implicit” power of attorney on the part of the policyholder for the broker, which remains in force until the client revokes it with the insurer.

If the broker has no written power of attorney, the BoD may reject any unilateral declaration (e.g. termination, notification of the change of a subscription right, decision to change tariff), § 174 BGB. Some brokers do not know that they have to return all power of attorney documents after revocation or termination of the brokerage agreement, §§ 168, 175 BGB.

However, if the broker never had a power of attorney, or if he cannot prove it, the insurer can go directly to the broker for the premium, § 179 BGB. The case would also be without power of attorney if the broker only has a power of attorney to act as an insurance broker, but cover is arranged with an “underwriting agent”, who is of course not an insurer, and does not yet have a BaFin licence by issuing a “dummy policy”, §§ 140, 144 VAG. The Federal Court of Justice (BGH) ruled on criminal embezzlement (judgement of 04.03.1999, file no. 5 StR 355/98) “The brokerage service aimed at brokering void insurance contracts was in fact economically worthless”.

However, the (genuine) BoD will usually have to request the UN to approve the transaction, which is pending and ineffective due to the lack of an effective brokerage mandate, retroactively. If the UN does not give its approval within two weeks, it shall be deemed to be refused, § 177 BGB.

The sending of “contractual provisions, including the general terms and conditions of insurance and the information specified in a statutory instrument in accordance with paragraph 2” to the insurance broker shall remain without effect without proof of brokerage authority. The BoD might as well deposit these documents with its own gatekeeper. The gatekeeper would then be a “messenger of explanations”, because he is not a real messenger in the legal sense.

Since quite a few brokers often do not even have a power of attorney issued to them and many BoDs do not want to see it, the option of a possible revocation opens up for many UNs, at the latest after they have changed to another risk carrier. More frequent objections after years will result in some BoD members always having to obtain brokerage authority for their own safety – including checking the content, even in bulk business with brokers.

Even if the broker were only a messenger of the BoD, he would still have to prove that the BoD’s documents had been submitted, which will rarely be possible after years if the documents are forwarded by email. Here, one could also think of cases where the broker has long since (after e.g. 10 years – the destruction of all files after 10 years is standard according to the broker’s information) no more documents exist, or even the broker as a whole can no longer be found, or perhaps is already in the Alzheimer’s ward of the nursing home – or his ashes have long since been scattered in the resting forest for the resurrection as paper for new insurance policies.

Even years of contract implementation, with contact via the Internet, do not conflict with the UN’s right of revocation in good faith, if “provision of the insurance policy, the insurance conditions, consumer information and proper instruction of objection” has not been demonstrably provided (Federal Court of Justice, ruling of 16.07.2014, ref. IV ZR 73/13): The burden of proof is borne by the VR.


Double broker

If the insurance broker is only entrusted by the insurer with the settlement of claims, he is not in breach of the RDG. However, this double activity, which was not disclosed to the client from the beginning, leads to forfeiture of the brokerage fee, § 654 BGB. The insurance broker becomes a double broker if he also takes over the collection for the BoD in exchange for an additional brokerage fee of perhaps up to 5% in the property business.

The broker is usually unaware that he (regularly commissioned alone for one line of business) has an asset management obligation towards the UN, § 266 StGB (Federal Court of Justice, in: NStZ 2002, 107), because he switches off the initiative of the UN and reserves the right to negotiate with the BoD. In doing so, he must safeguard the property interests of the UN, otherwise he will be liable to prosecution (BGH GA 1971, 209 f.). He must prove the fulfilment of his duty of loyalty and give an account of it, § 666 BGB, § 266 I Alt.2 StGB. Thus, the conclusion of overpriced contracts, for example conditionally intentionally without observing § 60 VVG (“… a sufficient number of insurance contracts offered on the market and by insurers to be taken as a basis …”) would be a breach of loyalty.


Double trusteeship with the collection agent

Some brokers (also) have the UN or clients “authorise” them to accept premium payments “from the principal in order to pass them on to the BoD”. However, since 31.10.2009 the broker will require a licence from the Federal Financial Supervisory Authority (BaFin) in accordance with § 8 of the Payment Services Supervision Act (Zahlungsdienste-Aufsichtsgesetz, ZAG) (Cologne Regional Court, ruling of 29.09.2011, ref. 81 O 91/11). The Federal Court of Justice (BGH) ruled (decision of 11 June 2015, file no. 1 StR 368/14): If “payment services are provided without a licence (Section 31 (1) no. 2, (2) ZAG), the agreement and execution of the payment service is a criminal offence”.

Directive 2007/64/EC allows an exemption for “commercial agents”, which may include the insurance broker (§ 1(1)(a) of the Directive). 10 No.2 ZAG), but only if the broker has been authorised by the BoD (not the UN!) to receive and forward money on behalf of the payee – i.e. to accept money on behalf of the payee with fulfilment of the BoD’s obligations, and thus does not provide a payment service for the UN, i.e. is solely in the warehouse of the payee/ BoD (BaFin information sheet – Information on the Payment Services Supervision Act, as of 22 December 2011).

Such collection brokers with power of attorney (also) of the UN/customer not only make themselves liable to prosecution, but also risk serious breach of fiduciary duty if the BoD only subsequently (e.g. in the insurance policy by means of a broker clause) recognises their appointment as collection brokers, and in the end forfeiture of brokerage fees, § 654 BGB – together with double nullity due to collusion.

A further difficulty is posed by § 12 of the Ordinance on Insurance Mediation and Advice (VersVermV) for brokers, even in the case of legally simple and uncontested claims settlement and collection activities: The broker may only accept payments – for customer protection – “if he has previously provided security or taken out suitable insurance to protect the policyholder against the fact that the trader cannot pass on the payment to the insurance company”, and must prove this to the UN on request, § 13 VersVermV. If the provision of security does not result in the endangerment of “significant value” it is a criminal offence, § 18 I, IV VersVermV. In the case of “measurable damage” to the UN, one will be able to assume embezzlement, § 266 StGB (Federal Court of Justice, ruling of 07.09.2011, ref. 2 StR 600/10). This also applies to those brokers commissioned by the BoD who do not forward premiums in a timely manner (Federal Court of Justice, decision of 3 December 2013, ref. 1 StR 526/13).

In the technical literature this is considered a tort, so that the broker’s pecuniary loss liability insurance (VSH) is unlikely to provide cover. The UN will thus be able to rely on the fact that in case of partial nullity of the power of attorney, in case of doubt this will lead to the total nullity of the power of attorney, § 139 BGB.


Breach of data protection and professional secrecy

If the power of attorney is ineffective, the client will later point out to the BoD that § 203 StGB – which the broker may also see as a criminal involvement; and may question the data protection at the broker and BoD. Even if it were possible to legally “save” the non-existent power of attorney by means of a so-called “toleration or apparent power of attorney”, the problem remains that insurers hardly ever check whether the UN has really visibly released them from insurance secrecy (for example in a broker’s power of attorney or by means of an explicit declaration).

The self-employed persons named in § 203 StGB – in particular health and life insurers – are not allowed to disclose the fact of the relationship to a customer (OLG Karlsruhe, judgement of 11.08.2006, Az. 14 U 45/04). The BoD may not invoke a statutory disclosure right or a disclosure obligation vis-à-vis brokers. Moreover, “global declarations of delivery” violate the fundamental right to informational self-determination (BVerfGE of 23.10.2006, Ref. 1 BvR 2027/02). Moreover, the release from the duty of confidentiality must always be effected before and not only afterwards (BGH, judgement of 10.07.1991, NJW 1991, 2955). The obligation of secrecy also applies to other professions with their own obligation of secrecy. However, § 203 StGB does not apply at all to the confessional and pastoral secret.

Every policyholder can turn to the BoD in accordance with § 3 IV VVG: “The policyholder may at any time request the insurer to provide him with copies of the declarations he has made with regard to the contract. The UN could link the friendly inquiry with the BoD as to which information it sent to the broker and for which powers of attorney, including effective (i.e. not global) release from confidentiality, were available, with reference to § 203 StGB. It is safer to demand from the insurer immediately all notifications of stored and forwarded data and associated powers of attorney to which the insurer is obliged under the provisions of the Federal Data Protection Act. Some policyholders were already surprised what was stored about them, including powers of attorney to lawyers and experts, when the insurer refused to provide them with a little information, asking them on what legal basis they were actually requesting it – and then, in a big sweep, they demanded all the information to which they were entitled under the Federal Data Protection Act.

Brokers should therefore understand that insurers want to see the power of attorney in each individual case, and will reject both a limited or unclear power of attorney – because it constantly causes unreasonable effort in practice to examine its scope – and a too comprehensive power of attorney – which tends to be null and void in its entirety due to violation of the Legal Services Act.

Moreover, it was apparently the intention of the legislator in § 7 VVG that not the broker, but always necessarily the customer, should personally receive the pre-contractual information before submitting his contractual declaration.


by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm


by courtesy of (published on 08.01.2016)


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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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