Author: Kanzlei Dr. Johannes Fiala Published on: 27.07.2007 at 08:54
Federal Court of Justice: Brokered life insurance policies must meet the customer’s needs and ability to pay
With every second life insurance customer claim for compensation possible ‘” new billion liability for the insurance industry? *
Capital life insurance ‘” legal fraud?: Already since the judgement of 03.06.1983 (Az. 74 O 47/83) of the regional court Hamburg the evaluation of the capital life insurance as ‘legal fraud’ was judicially blessed. Professor Michael Adams (University of Cologne) followed this up in 1997 with his essay ‘Capital Life Insurance as Investor Damage’. Insurance intermediary liability according to the principles of the BOND ruling: Another five years later, a dissertation proved that also in the case of life insurance as an investment, the intermediary has to observe the BOND ruling (Ref. XI ZR 12/93) of the BGH on the duty to advise investors and objects. Since only about every fourth long-term life insurance contract was kept up to the end by the investor, the suspicion was obvious that capital investors were mediated massively unsuitable contracts.
New power word of the Federal Supreme Court ! The BGH takes up this in its new decision (judgement of 14.06.2007 (Az. III ZR 269/06) contentwise, in which it refers to the fact that an insurance broker is obligated to the payment of damages, if it mediates a life insurance to a customer, which did not correspond to ‘its need and its financial ability’. If the ‘savings contract’ in the form of a life insurance policy runs for only one year, then according to a study by Prof. Adams the investor does not even get two percent of his payments back on average ‘” a negative return of over 98%.
Damages rarely time-barred? While numerous customers with terminated life insurances hope for a new account, with on the average only comparatively minimum additional payments from contract-legal requirements against the insurer, the more weighty requirement lies within the range of the wrong consultation: Investors can require here apart from the paid in contributions also an or-dentlichen capital market interest as escaped profit. Still investors have the possibility of demanding the payment of damages from requirements of the last 30 years: Because after the regulations for the statute of limitations valid since 1.1.2002 cling mediators
This does not only include contracts where it was questionable from the outset whether the customer would be able to pay the fixed premiums at all in the long term. Often a shorter contract period (12 to 15 years instead of 25 to 40 years) would have been less disadvantageous for the customer in the case of early termination, while the long term would not have brought any advantages even if the customer had held out to the end. It is not uncommon for insurers to present their customers with ‘non-binding sample calculations’ with high returns when concluding a contract.” Several rulings or notices from the supervisory authority and statements from rating companies show that such forecasts have sometimes shown unrealistically high returns, maturity benefits, lump-sum settlements or pension payments on an erroneous basis. According to some judgements, this can lead to the insurer not being allowed to reduce the surpluses later (claim for fulfilment) or the contract having to be wound up with repayment of premiums including interest. Or it was indicated immediately a wrong net yield, because it was referred not to the paid up contributions, but only to the savings portion after costs and risk contributions ‘” often then still to the confusion as ‘net’ net yield designated. Annuities were not infrequently sold as return products, especially when their lump-sum payment was increased for lack of death benefit. The fact that the ‘return’ came partly from the ‘bet’ on survival and was paid for by the fact that there was no benefit at all in the event of death was then concealed in the advice given. Conversely, policies often contain unnecessarily high risk protection, which further reduces the return. Allegedly, the customer did not want a capital investment at all, but a risk protection. The so-called Methuselah policies with premium payment periods up to the age of 85 are also popular for maximising commissions and are particularly disadvantageous due to the high acquisition costs and risk premiums. In sample calculations it is then held out that at the age of 60 to 65 the benefit can be disposed of without deductions because then the cover capital and surpluses together reach the sum insured. The risk of decreasing surpluses and the ever increasing (up to age 75!) postponement of payments to retirement age was usually not explained.
What is to be done?
In order for the customer to know what type of contract ‘” with costs, risk premiums, surplus model and other actuarial ‘conditions’ – he has concluded, an actuarial appraisal should first be carried out. This reveals the discrepancies with the client’s original ‘need’, i.e. the extent to which the advice is not in line with the client’s needs. At the same time the damage can be determined actuarially ‘” as difference amount to the result with conclusion of a product meeting demand -, if not the complete back completion of the contract with repayment of all contributions plus interest is more meaningful. This requires ‘” also because of the question of the statute of limitations ‘” and also because of the legal chances of success of an examination by a lawyer experienced with it. A side effect of this check: not so rare errors in the determination of surpluses, maturity benefits, surrender values or earlier contract amendments become apparent.
*by Dr. Johannes Fiala, Lawyer (Munich), MBA Financial Services (Univ.Wales), MM (Univ.), Certified Financial and Investment Advisor (A.F.A.), Lecturer in Civil and Insurance Law (Univ. of Cooperative Education), Banker (www.fiala.de) and
Dipl.-Math. Peter A. Schramm, expert for actuarial mathematics (Diethardt), actuary DAV, publicly appointed and sworn by the IHK Frankfurt am Main for actuarial mathematics in private health insurance (www.pkv-gutachter.de). Law Office Dr. Johannes Fiala De-La-Paz-Str. 37 80639 Munich
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PhD, MBA, MM
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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