Insurance and financial brokers are liable for debts and disadvantages

Life insurance and fixed credit

A judgment of the Regional Court of Izehoe dated 29. 1. 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 financing alternatives

The insurance and finance broker’s objection that it was an “insurer with strong performance, creditworthiness and service” did not prevent his conviction. In fact, the court recognized that no interest-based financing alternative had been 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 for investment advisors, financial and insurance brokers

An incorrect sample calculation can create the misconception in the credit and life insurance customer that one will certainly have enough money available to pay back 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. In addition, it is not uncommon for the interest rates charged on loans to be in the middle or upper range of those customary at the time the contract was concluded.


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 failed to protect the interests of the customer and to explain the 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 company. 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 n a liability for residual debt.


Model calculations 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. However, many courts are seeing such an expert opinion for the first time – until now, the aggrieved investors had waived it and thus almost always lost their case. 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 Dipl.-Math. Peter A. Schramm

by courtesy of (published in Die Tabak Zeitung, issue of 11.06.2010)

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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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