When calculating the surrender value, life insurers regularly deduct a lapse deduction agreed in the terms and conditions of the insurance policy – although this is usually ultimately ineffective. The BGH has already ruled on this for life and annuity insurance policies, including unit-linked policies, which were concluded between 1995 and 2007. Even if the so-called minimum surrender value (half the “unzillmerised actuarial reserve”) has already been reached, the vast majority of insured persons are also entitled to repayment of the lapse deductions made in amounts of up to more than four figures. With millions of affected terminated contracts, there are billions of euros in potential claims for additional payments. From the insurers’ point of view, it is to be feared that the BGH will also declare cancellation deductions for contracts concluded at a later date to be invalid.
“Every cancellation deduction clause has yet to be thrown out”
Attorney Grote from the renowned law firm Bach Langheid Dalmayr puts this in a nutshell in an article in the professional journal Versicherungsrecht 2013, p. 666 et seq. “The lapse deduction – needed by actuarial science, rejected by the judiciary, only to be saved by the legislature?”:
“In this context, the case law to date can be summarised to the effect that every cancellation deduction clause has so far been rejected as ineffective for various reasons.” He rightly fears “newly discovered reasons for ineffectiveness in the future” and points to considerations of dispensing with cancellation deductions altogether.
However, not only the ineffectiveness of the cancellation deduction clauses raises problems, but also the – according to the German law – “no-obligation” clause. § Section 169 paragraph 5 VVG – statutory requirement that lapse deductions must be reasonable – which may only be determined by an actuarial appraisal by court order. Thus Grote writes: “The characteristic of adequacy, moreover, continues to raise difficult legal questions of doubt, especially since their answer depends on the purposes of the cancellation deduction, which are disputed in detail.”
As of 2008 – for contracts concluded up to 2007, the BGH has already regularly rejected cancellation deduction clauses – a quantification of the cancellation deduction is required by law. Here, there are different legal opinions that, for example, an indication in percent or another calculation formula that is easy to use for the policyholder would be sufficient. Grote takes a critical view of this: “The wording of the provision (“quantified”) in fact indicates that the cancellation deduction must necessarily be shown in terms of amount in euros.”
He warns all those who nevertheless think, for the sake of simplicity, that a figure such as a percentage would suffice: “However, a restrictive handling of such clauses by the courts is to be expected, so that it is safer for the insurance company to quantify the cancellation deductions in future.
In his opinion, it is problematic if the information is not in the General Conditions of Insurance, but can only be found in an attached table, for example, and its location cannot be easily found in the General Conditions of Insurance (GCI) themselves.
Inadequate actuarial justification
As an example of a cancellation deduction that is ineffective due to inappropriateness, Grote cites the case where the cancellation deduction cannot be justified actuarially. On judicial review, this actuarial rationale will then have to be reviewed by a court-appointed actuarial expert. The insurer bears the full burden of presentation and proof for the appropriateness of the cancellation deduction, Grote emphasizes.
However, it also points out that supreme court rulings on the question of the appropriateness of cancellation deductions in specific individual cases have not yet been issued – the outcome is therefore open. However, he notes that there has not yet been a case where a cancellation deduction has withstood scrutiny by the highest court.
One justification given by the German Actuarial Association for calculating the lapse deduction, which is often used, is to compensate the remaining customers for the equity provided for the new contract but no longer amortized by its termination. However, the justification for such a deduction is disputed – Grote himself, however, argues that a cancellation deduction should in principle be permissible for this purpose. The extent to which this is then also appropriate in terms of the amount remains subject to judicial review in individual cases.
Grote is also critical of the justification of a lapse deduction with measures against speculative terminations, because there is instead, for example, the possibility for the insurer to deduct the surrender values for a limited period of one year in accordance with § 169 Para. 6 VVG, e.g. to prevent a speculative wave of cancellations.
As to the justification for a cancellation deduction on the basis of lost profits due to termination, Grote comments: “In this case, however, it will often be difficult for the insurer to prove in a specific individual case that it has incurred a loss and, in particular, to what extent. That’s because the benchmark is often far in the future in the case of a pre-show termination.”
However, this also applies to the question of preventing speculative terminations, which occur, for example, because the capital market offers better investment opportunities at a given later date due to unforeseen developments. The only thing that actually helps here is the reduction of the “guaranteed” surrender value in accordance with § 169 Para. 6 VVG, which the insurer can bring about at any time by a simple resolution of the Board of Management without requiring the consent of the supervisory authority or trustees.
Grote further points out that a cancellation deduction which is not judged to be reasonable in the total amount is not reduced to a reasonable amount, but is ineffective in its entirety. However, some overestimates or inefficiencies could be balanced against underestimates if the total can still be justified.
Grote attaches little importance to the AGB-legal conditions to the cancellation deduction – like the transparency requirement – in practice, restricts however immediately: “.It remains to be seen whether the BGH will share this assessment. This is because the legal issues addressed in this article have not yet been resolved by the highest courts.”
Call for the legislator?
Grote therefore demands more legal certainty through action by the legislator, also with regard to the cancellation deduction. “After all, if case law always changes the premium and benefit calculations of life insurance policies after the fact, life insurance policies that have been in force for decades cannot be reliably offered in the long term. … That’s not how he’s going to make the switch to private pensions work.”
Today, millions of policyholders who rely on life insurance as a retirement provision have to bear the disadvantages of terminators who take advantage of consumer-friendly case law to demand additional payments that negatively affect the benefits paid to remaining customers. In addition, it is to be feared that every legislator will once again make use of undefined legal terms, with the good prospect for professional lawyers on the side of all parties involved to argue for decades about the interpretation or correct meaning.
Insurers are advised to take appropriate countermeasures. Even BGH rulings in individual cases do not necessarily mean that the claims adjudicated must also be recognised in the case of other customers. Due to the constitutional separation of powers, legal disputes in individual cases are none of the supervisory authority’s business as long as there is no supervisory maladministration.
However, the latter would have to have more of an interest in the validity of lapse deductions, since these are necessary for the permanent fulfilment of the insurance benefits and therefore the more or less “voluntary” waiver of them would even be more likely to be judged as an abuse of supervisory law. Nor is it the Ombudsman’s business if the insurer pleads that there is a question of principle in law. Thus, the policyholder has to resort to the cumbersome and expensive legal process, again in each individual case.
This can also take away the consumer protectors’ appetite for lawsuits by noting that they do not achieve more than a decision for a specific individual case and even this may be prevented before a judgment is reached. Insurers who act appropriately can also convince consumer protection groups, as well as class action associations and consumer advocates of all stripes, that there are more appropriate victims.
Pragmatic approach avoids sprawling problems
Disputes can be prevented by appropriate communication making it clear to the customer that (from the insurer’s reasonable point of view) he has no further claims. Most insureds are sufficiently indolent anyway that probably more than 99% do not claim even claims they are reasonably aware of.
The remainder can be reduced to an insignificant sediment, as shown by very successful insurers. Often, the both correct and misleading information that no lapse deduction was made from the surrender value is enough for the customer not to ask further – the fact that the surrender value results from the actuarial reserve less lapse deduction must first be noticed by the customer.
In practice, it is almost irrelevant whether the claim is actually objectively seen by the insurer, as long as he only takes a different stance with justifiable and, if necessary, other reasons. If necessary, a goodwill payment can also be made without recognition of legal claims, so that legal proceedings or even a judgement are not necessary – often confidentiality is agreed upon at the same time.
The authors have gained considerable experience over many years on both sides – insurer and policyholder, depending on the mandate – in how emerging problems can be dealt with discreetly and, in some cases, a goal desired by the insurer can be achieved relatively easily. The benefits also accrue to policyholders who wish to build up their old-age provision without cancellation, as well as to the insurers themselves.
It may be interesting and at least lucrative for the lawyers involved to have such legal questions clarified in detail in a mass of proceedings at some point by the highest court. However, a pragmatic approach is less risky, less expensive and more useful and promising for insurers and the insurance community, which does not depend on the clarification of fundamental legal issues and can even simply ignore fundamental rulings of the BGH in favour of avoiding adverse consequences.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
by courtesy of
(Insurance Journal 04/2014)
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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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