– The broker’s main service is mediation in return for a brokerage fee –
*by Dr. Johannes Fiala, Attorney at Law (Munich), MBA Financial Services (Univ.), MM (Univ.), Certified Financial and Investment Advisor (A.F.A.), Lecturer for Civil and Insurance Law (BA Heidenheim, Univ. of Cooperative Education), (www.fiala.de) and Dipl.-.Math. Peter A. Schramm, expert for actuarial mathematics (Diethardt), actuary DAV, publicly appointed and sworn by the IHK Frankfurt am Main for actuarial mathematics in private health insurance (www.pkv-gutachter.de) and Hermann Siebenhaar, insurance broker as well as management consultant for risk and pension management (Neutraubling), court appointed expert, lecturer (Univ. of Cooperative Education), retail salesman (www.hermann-siebenhaar.de)
Ignorance breeds confidence (management consultant wisdom)
In view of the numerous legal changes for insurance intermediaries in 2007 and 2008, charlatans who mislead the intermediary are always making themselves known. However, the starting point of mental order is first of all clean terminology. 1. mistake: the information duties (VVG-InfoV) do not affect the broker? The reason given is that according to the wording of the VVG-InfoV, the handing over of contract documents only concerns the insurer and its agents/brokers. It is true that an insurance broker has always had to do more than just “hand out” or “hand over” contract documents. For the “real” insurance broker, the abolition of the German policy model (conclusion of the contract by application and policy) and the additional information duties do not change anything at all, provided that he works properly: For an insurance broker is obliged to advise and support the customer with regard to the insurance contract to be brokered, as confirmed by the Federal Court of Justice (BGH) in its judgement of 14.06.2007 (Ref. III ZR 269/06) ! This always includes the comparison of insurance conditions, the discussion with the customer about the contents, including an often necessary persuasion work as a duty. To what extent he already hands over the complete contract documents for this purpose, he must decide responsibly himself. If the insurance broker were to simply purchase “any” insurance cover for the client via his power of attorney without fulfilling his core duties (comparison of conditions, advice, discussion, persuasion), the VSH insurer would not be able to provide cover in the event of a claim “due to a knowing breach of duty”. 2. misconception: the insurance broker can act as a fee consultant at any time? There are professions where “advice – but not success and not mediation ” is the focus: for example, actuaries, legal, tax and insurance consultants. However, if you have registered your business as an insurance intermediary (broker or agent), the focus is on insurance brokerage, i.e. the successful conclusion of an insurance contract – advice is added, but not as the core of the activity: the intermediary owes a success – without success no remuneration. And again the insurance broker is threatened with a coverage gap in his VSH: Because whoever converts the brokerage activity as “pure fee consulting”, i.e. whoever generally agrees on “a fee instead of a brokerage fee”, is in a completely different (then unfortunately not insured) profession, in particular in the profession of an insurance consultant: Insurance consultants, however, require a court license, otherwise they violate the Legal Advice Act – the “fee agreements” would be null and void in case of doubt, § 134 BGB. Insurance advisors also owe no success – that is, no mediation: in fact, it is forbidden to them by law. The situation is different in the case of insurance brokers (also according to the Higher Regional Court of Stuttgart, Ref. 2 U 121/90, judgement of 28.12.1990): The insurance broker – inseparably connected with his profession – also always and constantly provides insurance (legal) advice. He does not require a special trade licence for this, nor does he require a licence in accordance with the Legal Advice Act (RBerG, in future: RDG). Legal advice is an auxiliary business not subject to a licence under the RBerG. The insurance broker is obliged to give advice (in return for a success fee, also as a success fee from the customer!) in any case – however, he is not permitted to simply change his profession and only provide insurance (legal) advice in return for a (success-independent) fee without being licensed to do so under trade law. It is correct that the insurance broker can agree on a remuneration with his client (especially when brokering net tariffs or brokerage-free contracts). Payment by the customer (and not by the insurer in accordance with commercial practice) is in line with the legal model – it is therefore perfectly legal, as confirmed by the BGH. However, it is and remains a “success fee” and not a “consulting fee”. 3. misconception: the insurance broker can receive remuneration from the customer and the insurer without any problem (possibly one fee and one brokerage)? The reason given is that this is legal “in accordance with § 99 HGB” as long as the remuneration is not indecently high. The pseudo-broker rarely owns a law book, so he doesn’t notice that Section 98 of the Commercial Code says: “The commercial broker is liable to each of the parties for the damage caused by his fault.” Again, the insurance broker is leaving his job description if he “collects from both sides” – and again, he is missing VSH coverage in case of doubt. If the commercial broker concludes a brokerage agreement with only one party, a contractual obligation exists only with this party, while a legal obligation exists with the other party – and this has consequences for the broker’s liability. Whoever “collects from both sides” has to disclose this – as the Federal Court of Justice (BGH) decided decades ago; otherwise the loss of any claim of both (!) sides to the remuneration (collision) is imminent! In contrast to a commercial agent, an insurance broker does not act as an intermediary on the basis of a permanent mandate, but rather on a case-by-case and object-related basis for others, without being bound by instructions. Whoever acts as a (multiple) agent for one party cannot conclude a brokerage agreement with the other party at the same time ! If the insurance broker wants to receive remuneration from both parties, like any other commercial broker, he must also conclude a brokerage agreement with both parties – but from the insurer there is (unfortunately?) only a “brokerage agreement” ! Furthermore, it is part of the image of the insurance broker (OLG Stuttgart, loc. cit.) that he is the fiduciary trustee “of his customer” “without being bound to an insurer” – therefore the “idea” that one could also conclude an (additional) insurance broker contract with the insurer is out of the question. It is therefore correct that the broker could (only !) agree an additional remuneration (open !) with his client, i.e. brokerage (if not already paid by the insurer according to commercial practice) and fees for insurance advice. In this case, however, it is not a question of two brokerage contracts with insurer and customer at the same time, but a combination of brokerage (for insurance brokerage) and fee (for insurance advice), as confirmed as legal by the so-called Pilz ruling at the beginning of the 1990s. 4. misconception: insurance brokers should best refuse insurers the assumption of information duties in brokerage commitments? The opposite is true. It is one of the core duties of the insurance broker to inform his clients. These obligations even go far beyond the “simple information” required by the VVGInfoV. Those who disregard elementary basic professional duties risk their own VSH coverage. It would be correct to inform the insurer that one does not want to take over “its duties”, but that it is always and constantly part of one’s own working method and, of course, also part of one’s professional profile to inform the customer (to give information about facts) and, in addition, also to advise (to evaluate the facts). Moreover, it is sufficient for any insurer to provide the information to the customer’s insurance broker, who is legitimised by a power of attorney. The broker is then in the role of a proxy for the client. The insurer has a duty towards the broker – even if some insurers prefer to see this the other way round. In this respect, the attempt by insurers to oblige the broker to comply with the VVG-InfoV in the same way as an agent could also be seen as another attempt to dispute the broker’s status. 5. mistake: agree with the customer on remuneration for mediation and for support? Many insurers are trying to turn the insurance broker into a kind of pseudo-broker or broker-agent. However, according to the legal professional profile, the insurance broker does not act on the basis of a permanent commission, but on a case-by-case and object-related basis, “from case to case”, § 93 HGB. Thus, if an insurance broker additionally “takes care” of the customer or the customer’s insurance contracts, he unnecessarily creates a “continuing obligation” and thus an enormous extension of liability. In practice, the insurance broker would then have to carry out “risk investigation, object examination, risk placement, information” on a permanent basis, i.e. immediately recognise and insure every change in the risk. This will not be able to succeed – unless the insurance broker is demonstrably gifted “as a clairvoyant”. It is of no use at all to instruct the customer in the brokerage contract to “notify changes in risk” – because the customer is not even capable of recognising insurance gaps according to the terms and conditions. It is correct that, according to the traditional view of brokers, the brokerage fee is divided into “acquisition fee and follow-up fee”, according to the motto “the brokerage fee shares the fate of the premium” – as long as the insurance contract exists, the broker then also receives remuneration. The insurance industry (from Pröls/Martin 24th edition) has endeavoured to “take the butter off the broker’s bread”: the broker is to receive a closing commission (like an agent) and later only a support commission (like an agent). The Federal Court of Justice (BGH) has established for the first time in its judgement of 13.01.2005 (Ref. III ZR 238/04) 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. In effect, this means that the brokerage loses a large part of its value, whether for sale or even for inheritance. The rumor is piquant that at least one “broker association prince” should have participated here to the (legal) damage of the brokerage in this court decision? Conclusion: Some large brokers, distributors and pools have prevailed upon the insurer that the broker does not lose his subsequent commission and that the insurer also refrains from “breaking into the broker’s portfolio” through his agents. It would be a mistake to try to compensate for these asset losses via the “fee-based advisor”. Rather, the broker must learn to communicate the “value” of his qualified services to the customer – the basis for this is sound training, otherwise the broker, who is reviled among the people, will hardly become a valued partner for advice in insurance matters. Recently, numerous brokers have also recognised that the sample contracts they use with “support, administration, notice periods” etc. contain unnecessary liability risks – indeed, even their own VSH protection not only occasionally contains large gaps. From the broker’s point of view, it is also decisive who writes something: Take, for example, the “BUZ – (allegedly) without risk assessment”. In the event of a claim, the broker will remember that the insurer put something like this in his mouth, but the insurer will say that it is an “exceptional problem case” and therefore § 16 VVG must be invoked. The broker is then certain of liability – he may not rely on “false information from insurers on the allegedly correct type of insurance”, as the OLG Nuremberg (Case No. 5 U 1002/01, order of 12.10.2007) recently also recognised to the detriment of a broker. The insurer will apply §§ 16 ff. VVG and/or §§ 119 ff. BGB (withdrawal, rescission due to error) – and the insurance broker will sit back and relax according to the motto: “Let’s see if the customer finds a lawyer and his legal expenses insurance covers it”. It is cheaper not to provide the occupational disability benefits than to refund the premiums to the customer following a contestation. Industrial brokers are familiar with the PML (probate maximum loss) investigation, and use it to design client coverage. Applied to one’s own brokerage business, the statutory VSH minimum cover is already the proverbial drop in the ocean when working for the smallest of commercial enterprises. Insurance brokers who have no laws and no GCI for their products, but a “collection of tranquilizer pills from the broker’s supervisor” cannot be up to their task – the existence-destroying liability case is then only a question of time. It is not without reason that the head of the DAV’s working group on property insurance law recommends that, in case of doubt, the intermediary should be brought on board in court in the event of any dispute. Numerous intermediaries have not yet recognised that jurisdiction and legislators have always imposed massive additional “advisory duties” on them – it is hardly expedient to exacerbate this extension of liability by providing one’s own “fee-based advice”.
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About the author
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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