By Dr. habil. Boris Bartikowski, Associate Professor in Marketing, Euromed Marseille School of Management, Tel.: +49 (0) 8294 30 63 60; Tel.: +33 (0) 4 91 82 79 82, email@example.com, www.euromed-marseille.com and lawyer Dr. Johannes Fiala, Kanzlei Fiala & Weber – RA, Mediator, StB & WP, MBA (Univ.Wales), MM (Univ.), Bankkaufmann (IHK), Geprüfter Finanz- und Anlageberater (A.F.A.), Tel.: +49 (0) 89 179 0 90-0, firstname.lastname@example.org, www.fiala.de
Abstract This article deals with liability risks of “pseudo-brokers”, i.e. insurance intermediaries who outwardly appear as brokers, but in reality do not fulfil cardinal duties of the same. The authors provide information and hope to contribute to an increase in legal certainty in insurance mediation.
Background Duty to Inform The implementation of the EU Insurance Mediation Directive in the middle of this year also includes the duty to inform in addition to the sufficiently known and often discussed regulations. This includes a number of disclosures that insurance intermediaries must make to their customers. The mandatory disclosures to be made in the future are outlined again below.
In summary, insurance intermediaries are obliged to ensure a high level of transparency right from the start of a business relationship. While the requirement to list product partners of single-company representatives and multiple agents can be solved unambiguously and in a legally secure manner by simply listing them, this point in particular may harbor a significant liability potential for brokers that has received little attention to date.
Sufficient number of alternative product providers Whoever claims to be an insurance broker must subsequently also work like one in order not to fall into a liability trap or not to jeopardize the protection of his pecuniary damage liability insurance. It is well known that an insurance broker undertakes to clients to base his advice on objective and balanced market research. Such an analysis is based on a sufficiently large number of alternative offers from which he must derive a specific recommendation for the optimal satisfaction of the customer’s needs.
However, there is considerable disagreement as to when such a number can be considered sufficiently large. The fact is that a breach of the principle of balanced market investigation leads to increased liability risk for insurance brokers. At the same time, in view of the large number of insurers operating in Germany, a complete overview of the market, even with the aid of powerful comparison software, is only ever possible in purely theoretical terms.
In other words, concrete product or provider recommendations by insurance brokers always remain subjective in nature due to factually incomplete market transparency. This results in a general residual risk for this group of intermediaries, which can, however, be minimised by conscientious fulfilment of the duties of advice, support and documentation, and which can be almost completely ruled out with professionally competent advice.
Restriction of supplier selection Restriction of supplier selection is a clear part of the business agreement with clients for single firm agents and multiple agents. As described above, it can be handled relatively easily within the framework of the duty to inform and does not lead to a breach of duty with possible consequences under liability law.
In view of the generally tightening liability situation, but above all against the background of the increasing demands on the quality of advice and the complexity of providing this with a large number of product alternatives, there are today numerous “insurance brokers” who operate in individual or even all lines of business with a systematically limited choice of providers. So you want the “freedom” of the multiple agent gem. §§ 84, 92 ff HGB (German Commercial Code), without referring to the elitist status of the insurance broker according to §§ 93 ff. HGB to be waived. In this way, according to an opinion often held in practice, the liability risk could be elegantly and conveniently avoided.
Knowingly violating cardinal duties The following example illustrates that this assumption may be a dangerous fallacy: If a broker, who identifies himself as a specialist for a certain area (e.g. private health insurance), were to broker, for example, building insurance in an individual case (whereby he clearly indicates here that building insurance is not his area of expertise), then a limited choice of provider for building insurance would appear to be justified from the outset. This case is unlikely to entail additional liability potential with regard to a possible breach of cardinal obligations, but only if the legal technical implementation is done professionally.
On the other hand, a broker who, for example, regularly brokers occupational disability insurance (i.e. who demonstrably specialises in this line of business) and who points out from the outset that there is a limited choice of provider, may be taking on an extremely high liability risk. This is because by restricting the choice of suppliers it regularly breaches the duty to conduct an objective and balanced market investigation in the interest of the customer, as described above. In case of doubt, his conduct could be regarded as a knowing breach of duty, whereby the character of general terms and conditions (GTC) could be presumed due to their regularity. However, such general terms and conditions would not be compatible with current legislation on insurance brokers, as they violate cardinal obligations imposed by law. For although the broker trades as such, in fact he regularly acts like a multiple agent with regard to market research. The case described is particularly explosive in view of the fact that deliberate breaches of duty are usually not considered insured under pecuniary loss liability insurance.
If a loss were to occur and the customer were to prove that, for example, another occupational disability insurer would have provided benefits in the specific case, the “pseudo-broker” could be held responsible with all consequences, despite the previously limited choice of provider, and the assessment of the quality of his product recommendation would, in extreme cases, be measured against all products theoretically available on the market. The liability risk and the resulting consequences would thus be disproportionately higher than if no restriction had been imposed on the choice of provider from the outset. Last but not least, it should be borne in mind that arguments such as the general quality of service or the previous good experience in settlement practice are also regularly cited in the justification for product recommendations by the insurance broker. Such reasoning may be downright “cut off” by limiting the choice of providers.
Many paths lead to the goal A solution approach to the question of the “best” business strategy lies in the area of expert strategy consulting, and on the basis of an analysis, says Ralf.W.Barth (Ralf.W.Barth@rwb-finanz.de). From a marketing point of view, the openly communicated status of a multiple agent represents a business model that is also perceived as attractive by customers. However, for those who have a certain demand for advice, the clear positioning of the broker acting on behalf of his client is of course much more advantageous.
The VSH pseudo broker problem Let’s just look at the various broker portals with listings on the internet. How can an insurance broker “advise and convince” his clients, i.e. fulfil his cardinal obligations, if he does not hold any discussions with the clients? No reputable broker is going to believe they can do their “duty to educate and advise” through an insurance brokerage website.
Or let’s take a closer look at the offers of individual (alleged?) VSH brokers: Here there are brokers who in fact only work with one provider or tariff. These are therefore single-company agents or pseudo-brokers, but not “real” insurance brokers. Who lets cover his own VSH protection there, should obtain also equal a creditworthiness information, because if the VSH insurer of the pseudo broker in the case of loss refuses the cover (because of “knowing breach of duty” and/or “deliberate breach of cardinal obligations”), only the fortune of the VSHPeudomakler is available as liability mass.
The form-risk From apparently inexpensive solutions, by legally unsafe free forms from the Internet or in advisor software, must be warned urgently. Even the ready-made form stating that “Broker X only works with Y insurers in the area of household insurance” can provide the best evidence of being a “pseudo-broker”. Equally ineffective is the widespread reference that “Broker X is VSH-insured with 1.0 million Euro and the liability is limited to this”. If the conceivable damage is higher in the case of an unintentional mistake by the broker, (almost) every court will assess the clause as “null and void”. Again, only professional elaborations in the “risk management of the insurance intermediary, on his own behalf” prove to be practicable.
(www.experten.de on 01.02.2007)
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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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