Liability trap overprovision: Less is often more.*

*by Dr. Johannes Fiala, Attorney at Law (Munich), MBA Financial Services (Univ.), MM (Univ.), Certified Financial and Investment Advisor (A.F.A.), Lecturer in Civil and Insurance Law (BA Heidenheim, Univ. of Cooperative Education), ( and Prof. Dr. Hans Jürgen Ott, Head of the Insurance – Insurance Sales and Financial Advice course at the University of Cooperative Education in Heidenheim
Many agents only have the sale of insurance and financial products in mind – according to the motto: the more and the higher the customer takes out, the better. The sales manager and the commission account are pleased and ultimately also the customer, who is better insured and receives a higher benefit in the event of a claim. Very few agents think about the fact that there are cases of overprovision, which then backfire on him nastily. Particularly in the field of occupational pension schemes (bAV), cases are now known where intermediaries have been held liable in this respect. Even worse: Under certain circumstances, not even the pecuniary loss liability will cover the damage and the agent will have to pay the damages out of his private assets. On December 15, 2005, a letter from the Ministry of Finance of the Saarland pointed out that an overprovision in the insurance-type implementation paths “direct insurance”, “Pensionskasse” and “Pensionsfonds” is to be examined in the case of spousal employment relationships. Previously, the Federal Minister of Finance had already comprehensively addressed this issue in his letter of 3 November 2004. Intermediaries must therefore check the circumstances of their customers before concluding a contract so that overprovision does not occur. For brokers and tied sales representatives, the issue of occupational pension schemes is complex and fraught with liability: A multitude of implementation methods with numerous special provisions requires very extensive specialist knowledge. Many intermediaries therefore specialise in certain implementation alternatives and try to keep abreast of technical and insurance law issues in these areas. Even greater problems in advising on occupational pension schemes are encountered by intermediaries who are affiliated with banks and who, in addition, have to know their bank products and are perhaps only half-hearted in their insurance brokerage. A prerequisite for correct and thus liability-minimising advice, particularly in the case of occupational pension schemes, is not only knowledge of the insurance products, but also specialist knowledge in the areas of statutory pension insurance and professional pension schemes. This knowledge is necessary for an intermediary to determine what entitlements already exist with the person being cared for. If these existing requirements are not taken into account, then the customer may be oversupplied. Here is an example: In the case of an employee spouse, the promised benefits from the company pension scheme – together with an expected pension from social insurance and professional pension schemes – may not exceed 75% of the last taxable salary. If the occupational pension plan provides for higher benefits, these cannot be claimed even though the employee has made contributions to them – for example, through deferred compensation. The intermediary, who should have checked this, is liable to the employee for this. From an income tax point of view, the employer suffers a loss: The tax auditor, whose task it is to shed light on such matters on a regular basis, will reduce an overprovision, i.e. deny the deduction of operating expenses to that extent. This applies analogously to the accounting treatment of pension commitments. This check is always related to the balance sheet date – the tax advisor must therefore check this year after year, otherwise there may be recourse against him. According to the case law of the higher courts, however, not only the tax adviser but also the occupational pension broker can be held liable for breach of due diligence. No VSH cover Some occupational pension brokers are not even properly insured against financial loss (VSH) – depending on the implementation method – because the VSH conditions exclude this. In the case of tax and legal advice, VSH insurance cover is offered in very few cases anyway. In addition, there is the following: bAV “experts”, “pension specialists” and similarly appearing experts usually claim personal trust precisely because of this title. In this case, the intermediary or consultant is always also personally liable – and in this case the intermediary would need his own (often additional) VSH cover. Incidentally, this also applies if the intermediary or consultant acts as an “employee” of Pfefferminza, an intermediary agency or a management consultancy. Pulling the head out of the noose It is certainly bad form for an intermediary to knowingly take premiums from customers by overproviding for them, while at least partially denying them the benefit equivalent. How can an intermediary guard against doing this unintentionally? How can he avoid liability risks if this should nevertheless occur? A protection for the intermediary is certainly not so much a VSH cover, but rather a good professional training, which one can create by study or professional training as well as permanent further training. It is certainly not possible to be overqualified, especially in the area of occupational pension schemes. One solution could also be expert networks, in which specialists can exchange their competencies and supplement their specialist horizons with external expertise. In addition, it is important to delegate legal and tax tasks to lawyers and tax advisors rather than having to take personal responsibility for these matters. Specialist lawyers and tax advisors often give this topic a wide berth: the tax advisor has a special responsibility; as a rule, he must check the bAV concepts when preparing the balance sheet, but he is not allowed to advise his clients outside of tax law. Incidentally, the courts do not resolve this conflict – the tax adviser is often liable for faulty arrangements. However, you should make it unmistakably clear to your client that, as an intermediary, you are not legally allowed to give legal and tax advice (apart from “auxiliary business”) – and that you cannot accept any liability for this. Finally, an occupational pension intermediary should anyway consider who his client is and whom he should address and advise. If he only advises the employer, he at least has the liability issue against the employee off his back. He thus automatically imposes these liability risks on the employer or tax advisor. While occupational pensions are already an ideal access route to private customers, this could be done in other ways – for example, through employer recommendations, through services, but perhaps not necessarily through occupational pension brokerage.
( (10.12.2007))

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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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