Life insurance for the sham – customers in the Bermuda Triangle

No insurance product?
For Germans, there is a risk that, from a tax point of view, it is not an insurance product at all, for example because there is insufficient death cover or because the custody account management in the life insurance shell is carried out individually on the instructions of the investor. Sometimes this risk is referred to in the fine print, for example with the sentence “There is no guarantee that Life Portfolio International will be recognised as life insurance in the customer’s domicile.”

The customers concerned would then have to pay tax on the current income on an ongoing basis, just like those without an insurance wrapper, or obtain binding information from the tax office for their own protection – both of which are usually undesirable because they lead to annoying questions from the tax office about the origin of the funds. On the other hand, one should not rely on so-called tax opinions of renowned law firms for sales support.

No permitted distribution via banks in Germany?
The Higher Regional Court of Hamburg (judgement of 3.7.2002, file no. 14 U 36/02) sentenced an intermediary for insurance policies not licensed in Germany. It is not possible for insurance agents including credit institutions, as well as insurance brokers in Germany and abroad to broker any life insurance or any insurance policy to a German customer, unless there is a permit for this from the Federal Financial Supervisory Authority (BaFin) or – only for EEA insurers – the distribution takes place in the free movement of services. In all other cases an unauthorized action is present, so that the mediators – also banks with their advisors – are personally responsible for possible damage, including back completion – in addition regularly a fine threatens.
It becomes even more explosive if, in addition, the “Joint Declaration on an Intergovernmental Approach to Improving Tax Honesty in the Cross-Border Area and Implementing the Foreign Account Tax Compliance Act (FATCA)” has been violated.

Vacationing in Bermuda?
If intermediaries and brokers are not permitted to broker an insurance policy that is not licensed in Germany, the only option is to take out a so-called correspondence insurance policy. The customer would have to go directly abroad to the insurer without the assistance or accompaniment of any intermediary in order to conclude his insurance contract there, or otherwise contact the insurer directly. However, some private banks would like to spare their customers this trouble, and mediate anyway – which is then illegal and punishable, §§ 144, 144a Insurance Supervision Act (VAG). Malicious tongues claim that occasionally the fact that no mediation and thus no commission payment can take place with correspondence insurances may also play a role.

Tort damages
The Insurance Regulatory Act also serves to protect customers. If the necessary licence is not available for distribution, for example in the case of insurance shell companies from Bermuda or bearer bonds from the British Virgin Islands, the parties involved are liable in tort, as the Federal Court of Justice (BGH) has long since ruled (judgement of 21.04.2005, ref. III ZR 238/03). It should not be forgotten that also assistants of all kinds are regularly personally liable according to § 830 II BGB (BGH, judgement of 15.05.2012, file no. VI ZR 166/11). The circle of responsible parties also includes intermediary (structural) distributors and their sub-brokers (BGH, judgment of 14 May 2012, Case No. II ZR 69/12). Customers who contact a foreign insurer by correspondence, on the other hand, are not covered by this protection.

Dr. Johannes Fiala
Peter A. Schramm