Insurance Brokers: Brutal Educational Liability?

The Federal Court of Justice has rejected the allegedly legal settlement of claims by insurance brokers. The insurance broker concerned now owes omission and compensation. What does that mean in concrete terms?

No broker is allowed to settle claims for the insurer (VR) – with or without the usual additional remuneration. The so-called technical insurance broker, as an agent commissioned by the BoD to defend against and/or settle claims against the UN, was thus also buried, as it were, because of a collision situation of the broker. The industry of external claims adjusters regularly commissioned by the BoD is also affected; their managers are also threatened with personal liability in tort. Explosive question: When does the invalidity of the regulatory mandate have an impact on regulation?


Splitting up the underwriting agents as a solution?

Many an underwriting adept should thus be history by now: This is regularly a multiple agent who, like any underwriter, needs a licence when dealing with (end) customers, for example on the Internet, § 34d GewO. A spin-off of the claims settlement into a separate commercial enterprise is out of the question because insurance consultants are legally in the client’s warehouse and there is no alternative licence for legal services for VR. A probably initially costly solution could be to transfer the registered office to a more liberal country.


Brutal educational consequences for brokerage services according to BGH case law

However, the prohibition of the settlement of claims by insurance brokers on behalf of the BoD is only the tip of the iceberg if one examines more closely the liability risks posed by various services provided by insurance brokers – for one or both sides of the insurance contract:

The insurance broker may be liable for consulting errors without VSH cover, as well as loss of fees due to prohibited activities; personal liability for payment of insurance premiums due to invalid powers of attorney – up to the accusation of embezzlement; as well as forfeiture of brokerage fees due to double brokerage activities and the accusation of evasion, e.g. of sales tax. Some brokers have already been ordered to repay their fees for illegal (occupational) legal advice.


When does the double broker lose his commission?

A double broker is someone who does not maintain his loyalty to the client. Either he is (covertly or only recognisable afterwards) also working for the other side – or he grossly violates his (especially custodian) brokerage obligations towards the policyholder (UN): Already just one of these two alternatives leads to forfeiture of the brokerage fee.

A typical indication is that the broker reports a claim to the insurer on behalf of the UN – but (strategically in the interest of the BoD) accepts that nothing at all happens for about six months. The broker thus becomes a de facto vicarious agent of the BoD. Not only agents but also brokers are subject to the so-called follow-up obligation, for his conscientious exercise of his profession.


Mediation, collection, support, contract management, claims settlement – for whom?

§Section 4 of the Legal Services Act (RDG) prohibits the “loyal fiduciary trustee of the UN” from sitting between the chairs in any way, i.e. from representing the legal interests of the BoD (so-called collision), even indirectly, for example by weighing the interests of the UN he represents against each other, instead of seeing the interests of each individual strictly for himself. For example, by considering them as a portfolio collective that could be endangered by an excessive loss ratio, because the BoD could then terminate its contracts in their entirety. In doing so, it is making the interests of the BoD its own.

In addition, the commissioning by the board of directors (for example for the settlement of claims) is a violation of § 5 RDG, because it is then (in the event of a claim) no longer a permitted “ancillary service” – because there can no longer be any conceivable main service. If, however, the insurance broker’s claims settlement is not an ancillary or auxiliary transaction to a tax-free main service, this will inevitably result in a tax liability under the VAT Act.


Through claims settlement to tax evader?

A commercial broker, for example, claims in his advertisement: “If the worst comes to the worst, we will be at your side during the entire claims handling process – uncomplicated and fast. We make sure that deadlines are met, expert opinions are coordinated and claims subject to regulation are settled in time by the insurance company. We negotiate with your insurers and are also helpful at your side in disputed cases.

Our goal is to achieve the best result for you and to relieve you as much as possible from time-consuming processing and administrative work”. In his broker’s power of attorney, he can be authorized even more comprehensively by promising not only insurance brokerage but also contract management (i.e. including ongoing support and claims settlement) – with notice period and renewal from year to year.

For the broker this means a continuing obligation with constant performance obligations, also beyond the actual brokerage as well as his own professional profile according to commercial law. In addition, the brokerage agreement and power of attorney tend to be null and void – a fate shared by insurance contracts concluded in this way – a further means, for example, of unwinding life and other insurance policies that are unpopular with the UN or refusing to provide services as a BoD member.

For these legal services, even if they are illegal (according to the RDG) (e.g. negotiations with the BoD “in controversial cases”) or deceive the UN about what the broker is legally allowed to provide, the insurance broker still owes a proportionate amount of VAT. The privilege of tax exemption under the Value Added Tax Act (UStG) must be interpreted narrowly – in any case, the settlement of claims has hardly anything to do with the brokerage (not only under the RDG), because it is then a new case of performance (BFH, decision of 20.07.2012, Az. V B 82/11).

Debt collection brokers who charge insurance premiums on their own letterhead to the UN with only insurance tax (VersSt), i.e. who simply drop the proportional VAT, are subject to the suspicion of VAT evasion. At this point the Federal Central Tax Office (BZSt) and the tax investigation department (Steufa) react without humour.


This also applies to such claims settlements for accident victims – not only by brokers – where, in order to avoid taxes, an unrealistically high tax-free compensation for pain and suffering is agreed upon – instead of compensation for loss of earnings plus taxes; cf. §§ 40, 42, 370, 378 German Fiscal Code (AO).


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


by courtesy of (published on 16.02.2016)


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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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