A recent ruling by the Federal Court of Justice (BGH) dated 29.07.2009 (Case No. I ZR 22/07) confirms that the obligation to state effective interest rates, which has been in force since the 1980s, also applies to the payment of insurance premiums by instalments with instalment surcharges.
The rule for insurance premiums is that an annual premium is due at the start of the policy – this can then be paid in monthly instalments, for example, including an instalment surcharge.
BGH ruling on effective interest rate indication for instalment surcharges
Such rate surcharges can occur in all classes of insurance. If the insurer charges a 2% rate surcharge, this roughly equates to an effective interest rate of 8.33% for semi-annual payments. And 5% installment surcharge on monthly payments is even 11.35% effective interest rate.
A good deal for the insurer. For the customer it can be interest usury, because if the conditions according to the former consumer credit law and/or today’s §§ 499, 502 BGB are not present, only the legal interest of 4% may be required – but for example no compound interest. % effective interest rate for monthly instalments then allows only 1.81% instalment surcharge, so that 3.19 percentage points of the 5 percent instalment surcharge or 3.04% of the total premium must be repaid.
If, for example, a customer has been paying 500 euros a month into his endowment life insurance policy since 01.01.1979, he can now demand more than half of the 5% instalment surcharge back – at present this is already more than 5,000 euros in reimbursement claims against the insurer, plus interest for the use of capital.
Insurance customers can demand re-billing and repayment
Until now, the insurance industry had only partially adjusted to the fact that the effective interest rate must be shown in the case of rate surcharges. This does not only apply to personal insurance or property insurance. Private health insurance is not affected, however, insofar as monthly premiums are provided for from the outset, on which a discount is granted conversely in the case of annual advance payment.
Life insurance policies may also have different arrangements, depending on the terms of the policy, that provide for true monthly premium payments instead of installment payments. In this specific case, it was a matter of Riester savers paying in instalments – in principle, it would have been no different with other insurance policies. A consumer association had brought an action against an insurer under the Injunctions Act because the insurer had not stated an effective interest rate in the clause on instalment surcharges.
The insurer has now expressly acknowledged its obligation to omit such clauses without stating the effective interest rate before the BGH. Agreements on payment by instalments with instalment surcharges are in fact to be regarded as consumer credits even in the case of insurance premiums.
Failure to comply with mandatory legal requirements leads to liability in the billions of euros
If, for example, the cash price, the instalment price as a total amount, the amount with down payment and the due date of the individual instalments, or the indication of the annual percentage rate of charge are missing in such a consumer credit, the contract is void.
Only when a service is rendered to a consumer – possibly the insurance coverage granted is already sufficient for this purpose – does the contract become valid. However, if there is no indication of the instalment price or effective interest rate, the interest rate is limited to the statutory 4% p.a. instead of, for example, the 11.35% effective interest rate for monthly payment and 5% instalment surcharge.
Customers can thus demand repayment from the insurer, plus any insurance tax due on it and an appropriate interest rate for the interim use of capital at the insurer.
Mass direct debit returns by customers with insurance companies
Because of the severe penalties for non-payment, e.g. the discontinuation of the insurer’s obligation to pay benefits, case law places very high demands on the “clarity, accuracy and correctness” of premium invoices in order for them to be due at all.
Consumers could therefore leave the direct debits for the premium collections of the last quarter up to 6 weeks after receipt of the quarterly statement without falling into arrears, as well as all other current ones.
Until around 10 February, corresponding premium direct debits could therefore still be recalled from October 2009 simply by declaring this to one’s own bank by telephone. This puts the insurer under pressure. Only when he has correctly recalculated the premium instalments with the statutory interest and a corresponding insurance certificate has been received, the now reduced premiums – without any reminder and default costs – become due.
Then I guess some insurers need new calculators, because the eterm “premium rates” does not assign it to the policyholder to “guess his correct premium amount himself”.
Weakened life insurers existentially endangered
Around 3% repayment of premiums for the current and the 30 previous years up to the limitation limit could pose an existential threat to weakened insurers in particular. There, these amounts add up to more than 20 billion euros plus interest.
Up to more than 100 million life insurance policies could be affected – including those already terminated in the last 30 years. Insurers need to react quickly, because the retroactive and ongoing chargeback of all the incorrectly calculated collected premiums would only create a liquidity problem for them.
It could then not be ruled out that life insurers already weakened in the financial crisis would be further devalued by the rating agencies.
Rescue by the state?
The insurance supervisory authorities are also called upon to act. When direct debits are returned, life insurers are not directly helped by the usual supervisory measures, such as a ban on payments. However, this could have a flanking effect if, in addition, customers increasingly withdraw their funds from life insurers in the event of a changed situation – such as a deterioration in ratings.
In an emergency, there is still the reduction of the surplus participation, the regulatory reduction of already “guaranteed” benefit obligations in order to adjust them to the financial resources still available, the Protektor fall-back solution or, if this does not hold because of an industry-wide crisis, insolvency or rescue by the state.
by Dr. Johannes Fiala and Dipl.Math Peter A. Schramm
by courtesy of
www.handwerke.de (published in Computern im Handwerk, issue 12/2009, pages 5-6)
www.kommunalverlag.de (published in Municipal Economics. Issue 02/2010, 90-91 under the headline: BGH: Bank and insurance customers are entitled to billions in reversal).
www.der-bau-unternehmer.de (published in Der Bauunternehmer, issue 01/2010, page 13)
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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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