Insurance Broker Liability in the Light of the Reform of the German Insurance Contract Act (VVG)

Why medium-sized businesses and industry are increasingly suing insurance brokers?


The responsibility of insurance brokers is considerable. As representatives of the client’s interests, brokers have an abundance of contractual and legal obligations, which they often cannot or do not want to take care of due to time constraints, especially if they promise unnecessarily much in the contract. For insurance customers, this very often opens up the possibility of successfully holding the insurance broker responsible at a later date.


Amendment to the VVG (2008) introduced personal liability of insurance agents

According to §§ 60 ff. VVG, not only insurance brokers are personally liable, but also insurance representatives (formerly called agents) as well as sub-brokers of the insurance broker, even if this sub-broker does not have a personally concluded contract with the insurance customer.

The statistics for property damage liability insurances show that the bulk of claims in brokerage offices are only discovered after six to nine years. Looking at a period of ten years, one in four brokers suffers a claim – the number of undetected claims due to consulting errors is far higher. In up to more than 95% of cases, the liability insurer does not refuse to settle the claim, but instead compensates the damages or the case ends up in court. In the main, experts observe damage amounts of 25-45 TEUR. However, time and again there are losses in the single or double-digit million range.


Breaches of duty before conclusion of the contract

The broker’s duties to advise and inform go so far that he must have the contracts with customers and suppliers shown to him, because otherwise he cannot inform the insurance customer about contract contents that are detrimental to cover and about uninsured behaviour. These duties of disclosure on the part of the broker are intended to compensate for deficits in the customer’s experience.


Breaches of duty in the placement of the risk

From a medium-sized GmbH onwards, there is a duty to manage risk. However, the examination of insurance portfolios, especially after a claim, reveals that in up to more than 80% of companies risks identified by the insurance broker were not insured at all or not insured correctly.
A considerable proportion of SMEs do not engage in risk management at all. It is then more difficult for the insurance broker to determine the risks – usually this will not be possible in the commercial sector without an on-site inspection. The auditor should not be expected to help in this field, because he is not trained for this, and the risk-compliant insurance of the company is therefore not normally audited.


Insurance broker as guarantor for clear insurance conditions

If there is any ambiguity about the contents of the insurance conditions at a later date, the insurance broker must accept responsibility for this in the same way as a guarantor. Insurance terms and conditions are often created along the lines of “How am I supposed to know what I meant before I read it in a judgment?” In the area of personal insurance, too, i.e. for example in the case of occupational disability clauses, intransparency is probably more the rule – and thus broker liability is the order of the day. Brokers who want to explain to the client, even before the judge, exactly what the insurer has agreed to do are laying the foundation of their liability. In the corporate sector, the non-transparent clauses of managers’ liability offers mean just as much risk for the broker. The client may later even ask the broker to pre-finance the lawsuit with the insurer over the interpretation of contract terms – if it later turns out that there would have been a serious alternative, the broker may, in case of doubt, pay for the difference between unclear brokered and comprehensive but not brokered insurance contract.

The control question to the insurance broker, how he has chosen the insurance company, shows that mostly the broker’s commission is more important for the broker than the solvency or creditworthiness of the insurer. It must be clear to every insurance broker that it is already enough not to have a complete overview of the market in order to learn afterwards from the court that there would have been a more suitable or more comprehensive insurance solution somewhere.


Breach of duty in market research, reinsurance and documentation

The insurance broker has to inform the client about the market and information bases, because in most cases a broker will work more intensively with a few insurers. If there are new offers on the market, i.e. better terms and conditions or more favourable premiums, the broker must reinsure – i.e. he must not opt for multi-year contracts from the outset. In private health insurance, it will be the other way round, because the PKV-insured person will lose his ageing reserves by switching to the other insurer – that is then up to more than 40% of his accrued premium payments to the previous insurer. In life insurance, too, the conclusion of long-term contracts does not go well with a reinsurance option, because even after 12 years not even the premiums paid in are usually available as a surrender value.
It can also be observed with large industrial and commercial brokers that there is no or insufficient documentation for the customer, despite the legal obligation since 22.05.2007. The documentation depends on the complexity of the insurance cover. The lack of documentation can lead to a complete reversal of the burden of proof in the event of liability. Many brokers already fail to review, compare, evaluate the insurance quotes they obtain, and then incorporate that into the documentation. The reference to “ratings” paid for by insurers or the recommendation of the “Stiftung Versicherungstest” (insurance test foundation) are by no means sufficient for this purpose.


Breach of duty after insurance mediation

In principle, the insurance broker guarantees the best possible insurance cover at all times. This means that the insurance broker has to observe the risk object as well as the changes on the insurance market. This implies a duty on the part of the broker to actively propose a change of cover to another insurer in the event of changes in risk or market conditions.
Typically, insurance brokers promise more than they actually deliver – such as “expert claims handling.” To do so, the broker would have to employ a lawyer as in-house counsel and would easily fall into the realm of unauthorized legal advice in disputed cases.


Evidence facilitation for insurance customers

In the event of a breach of duty, the fault of the insurance broker is presumed. The client benefits from the fact that case law presumes that the client would always have followed the broker’s correct advice. The broker has the concrete burden of proof of the information and consultation meetings. All the client has to do is make a more or less blanket claim that he was not advised or was advised incorrectly. A frequent case is the insurance of private or commercial risks for which the insurance broker has not determined any insured values – if the frequently ascertainable underinsurance occurs, for example in the case of water or fire damage, the insurance broker is liable for the gaps in the brokered cover.


Typical indications of insurance broker errors for small and medium-sized businesses, trade and industry

In fire insurance, a distinction is made between the sum insured for the risk object, the sum insured based on all costs in the event of a loss, and the insurance premium for precautionary measures. If these values have not been determined, there is a lot to be said for false coverage.
The case is similar in the entrepreneurial sphere if the balance sheet with the asset and depreciation schedules were not checked by the insurance broker – including the correctness of the approaches of the tax advisor. A conscientious broker would have to examine the work, quality, product and supplier processes in addition. Otherwise, closing parts are unnecessarily insured as machinery or, conversely, essential risks are simply overlooked. Without knowledge of the insurance client’s organization, and without on-site inspection of the risk, faulty insurance coverage is bound to happen as a rule.
Sometimes it is enough to take a look at the insurance folders in the offices of medium-sized companies to see that the insurance broker has taken the precaution of keeping all the mail from the insurer, i.e. policies, special conditions, requirements for machine and equipment safety, with him for many years. In the event of a claim, the customer then finds out what he should have paid attention to, and as a result the business is often in danger of going out of business – the broker himself is not even adequately insured for such cases, i.e. insolvent.
The chances of taking recourse against the insurance broker, who must have compulsory insurance for pecuniary loss, are so good for small and medium-sized businesses above all because the insurance brokers often like to try to get out of liability by means of any ineffective but freely available brokerage contract clauses. The lack of own contract and risk management at the broker shows its foreseeable consequences later, and is then already today the best proof of the lack of understanding in dealing with risks.


Large risk through insurance brokers for small and medium-sized businesses, industry and commerce?

If SMEs consider the frequency of claims with insurance brokers, the following options emerge: Management regularly and at least randomly has a consultant who is not dependent on commissions review the compliant mapping of risks in insurance contracts. Alternatively, you can build up and accumulate enough equity capital yourself so that you can easily cope with an insurance claim and subsequent recourse proceedings – or even do without insurance cover altogether.

In many cases the insurance broker is in permanent pain – on the one hand he is supposed to advise his clients, on the other hand he gets the remuneration from the insurance company, which however is often not in any relation to the actually required consulting effort and liability risk. The broker must actively approach the client in order to obtain information about the risk to be insured and, on the basis of this duty of enquiry, carry out a professional analysis of the risk.


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


by courtesy of (Issue 09/2013)


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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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