– How insurers and their lawyers give away money unnecessarily in the event of revocation –
A recent ruling of the Federal Court of Justice (BGH, ruling of 1 June 2016 – Ref. IV ZR 482/14) clarifies the calculation in the case of revocation of unit-linked life insurance policies. It then becomes apparent that many insurers (BoD) have so far paid too much for revocation and that insurer lawyers have probably conducted legal proceedings incorrectly.
BGH: The policyholder is entitled to the benefits from the development of the fund value
In the case of unwinding due to revocation under enrichment law, the policyholder (UN) is generally entitled to repayment of the full premiums of the life insurance policy less the risk costs and plus the benefits drawn. The BoD may not deduct acquisition costs, administrative costs, etc. as enrichment. In the case of unit-linked life insurance, the benefits of the savings portion consist of the fund profits drawn from the savings portion through the performance of the invested fund units. If the fund had a loss, i.e. if the value of the fund units invested from the savings units was lower than the amount of the savings units at the time of revocation, this loss – although not unlimited under EU law, as the BGH indicates – must be borne by the UN itself (BGH, ruling of 11.11.2015 – Ref.: IV ZR 513/14).
In its ruling of 11 May 2016 (Ref. IV ZR 348/15), the Federal Court of Justice (BGH) had accordingly made the following calculation for the revocation of a unit-linked life insurance policy:
€ 3,964.60 premiums paid (without supplementary occupational disability insurance)
– 104,99 € Risk share
+ € 252.69 Value increase fund
– 1,882.68 € paid out surrender value =
2,229.62 € additional claim
Here, the savings portion was 1,882.68 – 252.69 = € 1,629.99, corresponding to the premiums paid less costs and less the risk portion. Thus, the UN had already received the use of the funds – i.e. the increase in value of the funds – in the RKW. This was probably erroneously stated by the board lawyer but not carried forward, with the result that the Federal Court of Justice awarded the UN a further EUR 252.69 too much for the fund uses already paid out with the surrender value.
Many insurers give away money unnecessarily
Many insurers have so far been similarly generous and calculate the same themselves. Some, however, have always argued that the UN has already received the fund uses in the surrender value. In the cases known to the authors, however, no BoD has been able to prevail in court because it has always been possible to expose this as an actuarial milkmaid calculation, so to speak. So far, no board lawyer has succeeded in asserting himself in court against an expertly well advised UN – only against some others. However, a new ruling by the Federal Court of Justice (BGH) shows that this may simply have been due to incorrect litigation by the VR lawyers:
New BGH ruling clarifies claim
According to the BGH ruling of 01.06.2016 – Ref.: IV ZR 482/14 – the UN wanted to calculate as follows
18,917.36 € premiums paid
– 465,06 € Risk share
+ € 3,375.23 Value increase fund
– 18,808.00 € paid out surrender value =
3,019.53 € additional claim
At first glance, this looks like the example above. Meanwhile, the UN was granted by the Federal Court of Justice: …in no time.
Grounds of the BGH
“However, as the appeal rightly criticises, the Court of Appeal granted the UN benefits which the insurer had already paid out with the surrender value. It has correctly seen that in the case of a unit-linked life insurance policy, the profit achieved with the investment of the savings portion in funds is due to the UN as actually drawn use (Senate decision of 11 November 2015 – IV ZR 513/14, VersR 2016, 33 marginal no. 51 f.). This was the difference of €3,875.23 between the fund account of €18,808 and the savings portion of the premiums invested in the funds in the amount of €14,932.77. This difference was already included in the repurchase value of €18,808.
After deduction of the risk portion of €465.06 and the surrender value of €18,808, nothing remains of the premiums paid in the amount of €18,917.36″.
Different calculation method
The savings portion here was € 14,932.77; € 18,808 was already paid out as the surrender value, i.e. € 3,875.23 more – meaning that the UN has already received the fund uses with the surrender value paid out.
In the judgement of 11.05.2016, the savings portion was € 1,629.99, € 1,882.68 was already paid out as the surrender value, i.e. € 252.69 more – meaning that in this case, too, the UN has already received the fund uses of € 252.69 with the surrender value paid out.
The fact that in its ruling of 11 May 2016, the Federal Court of Justice (BGH) only 19 days previously awarded the UN the fund uses received with the surrender value allows the conclusion to be drawn that the BoD and its lawyer may simply have conducted the proceedings incorrectly. You have probably forgotten to submit to the BGH that the surrender value already paid out also already includes the fund uses.
Liability for lawyer’s errors
In the first case, the board lawyer may have failed to “present the factual and legal aspects in favour of his party as comprehensively as possible”, and would now be liable as a debtor of recourse for the additional usage payments awarded on top of this (BGH, ruling of 10 December 2015, file no. IX ZR 272/14).
Boards of directors who calculate voluntarily, as the BGH ruling of 11.05.2016 seems to suggest – but perhaps only because of incorrect litigation by the board lawyer – pay out unnecessarily much. Employees and members of the board of directors may be liable in this case, thereby damaging the insurance company.
However, UN lawyers have so far still succeeded, with qualified expert advice, in convincing courts that it is not an argumentation such as that of the Federal Court of Justice (BGH) of 1 June 2016, but its calculation method as of 11 May 2016 that is to be applied. Also in this respect, the UN could now make use of its lawyers as debtors of recourse if a court, like the Federal Supreme Court, were to rule last. They might then have failed, in the absence of actuarial expertise, to present to the Court of First Instance ‘as comprehensively as possible the factual and legal points of view in favour of his party’.
The BoD attorney may object that the BoD is up to 100% at fault if its legal department has had its briefs approved by lawyers of the “juris non calculat” type. However, the board of directors’ lawyer must be reproached for the fact that the personnel policy of employing mathematical laypersons in staff departments of the board of directors cannot be at the expense of the board of directors if the board of directors’ lawyer fails to expressly point out the necessity of an expert to accompany the process – and to lay down this requirement if the instruction is fruitless. The board lawyer also risks the accusation of intentional immoral damage, § 826 BGB.
As a precaution, only revoke, not terminate
It may already be a mistake on the part of the UN to cancel the insurance and only revoke it at a later date, or, in the event of revocation, (alternatively) to accept payment of the surrender value instead. Rather, it should always be stated at the time of withdrawal that the contract will not be terminated under any circumstances. If necessary, the surrender value already received for the revoked contract could first of all be refunded to the BoD, as there is no longer any contractual claim to it due to revocation.
With the figures of the BGH decision of 01.06.2016 – Ref.: IV ZR 482/14 – he should then have to calculate as follows:
18,917.36 € premiums paid
– 465,06 € Risk share
+ € 3,375.23 Value increase fund
– 0.00 € paid out surrender value =
21,827.53 € receivable
This is €3,019.53 more than the surrender value of €18,808, beyond which the BGH would not have conclusively awarded anything if it had already been paid out. However, it has not yet been paid out at all. The argumentation of the Federal Court of Justice that the UN has already received the fund uses with the surrender value paid out is futile if no surrender value has been paid out so far. Incidentally, the amount in dispute also increases considerably.
Uses in addition to the savings contribution
A further ruling of the Federal Court of Justice (BGH) of 1 June 2016 – Ref.: IV ZR 343/15 – clarifies that the BoD may also have taken advantage of the premium components which are neither invested savings portions nor paid out to the agent as acquisition costs (commission) – such as the administrative costs – which must also be disclosed. However, the UN must present these to the court with reference to the earnings situation of the BoD – the BGH does not recognise flat-rate interest rates, industry averages or the net return on the BoD’s own investments (BGH ruling of 24 February 2016 – Ref.: IV ZR 512/14).
The courts have already recognized the UN’s actuarially and expertly supported statement – after the BoD did not substantially oppose this – that these contribution components remained in the BoD’s equity and the BoD must therefore issue its return on equity as benefits. Anyone who is in the fortunate position of having collected the annual reports of life insurers for decades can also meet the expectation of the Federal Court of Justice that these publications can easily be used to demonstrate the benefits derived. According to the Federal Court of Justice (BGH), one should not expect a claim for information against the board of directors in this case.
If a UN is unlucky enough to get a lawyer who, like the banking senate of the Federal Court of Justice, thinks he can always count on statutory interest, then he will lose up to 30% of the return on equity on the interest to be published by the BoD on the proportionately paid premiums.
Fund losses not always borne by the UN
The Federal Court of Justice (BGH) states in its judgment of 11.11.2015 – Ref.: IV ZR 513/14
“It is not contrary to the European law requirement of effectiveness if the policyholder can still object to the conclusion of the insurance contract after the expiry of the one-year period of § 5a para. 2 sentence 4 VVG old version, but has to bear fund losses. In any case, the right of objection is not devalued if the losses represent only a small part of the savings portions”.
Up to now, the BGH has only ruled on fund losses, some of which were well below 10% of the savings contribution and only a few hundred euros. Under EU law, it would not be permissible to significantly impede the right of revocation by preventing the UN from doing so through the fund losses that would then have to be borne. For example, because he could no longer hope that the fund values would improve again as a result of a revocation. Thus, in the event of fund losses of several thousand euros or significantly more than 10% of the invested savings portion, the fund loss may have to be borne entirely by the BoD.
Revocation for life insurance policies concluded before 1995 or after 2007
In the case of life insurance and pension insurance policies, the Federal Court of Justice (BGH) has recognised the “perpetual right of revocation”, the so-called “revocation joker” (BGH, ruling of 7 May 2014 – Ref. IV ZR 76/11; and judgments of 29 July 2015 – Ref. IV ZR 384/14 and IV ZR 448/14). The European Court of Justice (ECJ) helped the BGH on the right path, and ruled in its ruling of 19.12.2013 (Ref. C-209/12) that the right of withdrawal is, as it were, a sanctuary of EU consumer protection. This was a de facto reprimand to the German legislator, who had legally shortened eternity to a period of one year. Eternity can be of different lengths, because “whoever dies earlier is dead longer”.
The new regulation of the German legislator since January 1, 2008 could also prove to be illegal before the ECJ, because the so-called effectiveness requirement is not met, because according to the legal situation since then, there is always only the surrender value, § 9 VVG, in the case of termination as well as revocation.
Term life insurance and, for example, occupational disability insurance could also be considered. For example, after an initial consultation with the UN’s lawyer, it is crucial to have an actuarial calculation of how much money is actually involved?
The unwinding of life insurance policies taken out before 1995 due to incorrect revocation instructions under enrichment law is also already being dealt with by courts in individual cases, including actuarial expert opinions on this.
Board members and employees in legal departments soon in the pillory?
For the shareholders and members of insurance companies as mutuals, the question arises not only as to why incorrect consumer information was and is given at all. A major primary insurer recently provided an answer with the confession that certain sample contracts are drawn up by business economists with a focus on marketing. This then turns out to be a blueprint for an organizational fault on the part of the Board of Management, and also a sufficient reason for the “HR” (Head Of Human Resources) to leave immediately: “How long have you worked for our company, not counting today?
According to the decisions of the Federal Constitutional Court (BVerfG, order of 23 June 2010 – Ref. 2 BvR 2559/08, 2 BvR 105/09, 2 BvR 491/09), it is important for the public prosecutor’s office that a concrete (possibly expertly determinable) loss can be established, for example in the case of embezzlement. The threshold for a “particularly serious case” is reached from EUR 50 thousand (BGH, ruling of 27.10.2015 – Az. 1 StR 373/15). Maybe some board members will have to get rid of their “CCO” (Chief Compliance Officer), because he too, by omitting to do so, will ensure that in the future they will try to play bowls with the heads of some insurance directors? Because high payouts after revocation are unnecessary and mostly avoidable, as long as one does not get the wrong UN and lawyer.
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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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