Advice errors by intermediaries, including on pension disadvantages in the event of a change of employer, open up the possibility of legal action against insurers, provident funds, etc…. –
*by Dr. Johannes Fiala, Attorney at Law (Munich), MBA Financial Services (Univ.), MM (Univ.), Certified Financial and Investment Advisor (A.F.A.), Lecturer for Civil and Insurance Law (BA Heidenheim, Univ. of Cooperative Education), (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) and Hermann Siebenhaar, insurance broker as well as management consultant for risk and pension management (Neutraubling), court appointed expert, lecturer (Univ. of Cooperative Education), retail salesman (www.hermann-siebenhaar.de)
Pre-programmed pension gaps in occupational pension schemes
The practical “90% rule” for occupational pension schemes for employees is that so-called group rates (collective agreements) are used. The vast majority of collective tariffs are only available if a certain minimum number of employees of the employer make provision for their old age. Such group tariffs promise cheaper premiums, better benefits or other advantages – however, the advantages regularly cease when the employee changes employer. Then only the normal “worse” individual tariffs are open, a continuation at the previous conditions and tariffs will not take place. This problem also arises if the employer is concerned with reorganising or merging different supply models within the company.
Employees do not need to sue the employer
The new judgement of the OLG-Celle of 13.09.2007 (file no. 8 U 29/07) shows that employees and employers can jointly or solely turn to the carrier of occupational pension schemes (insurance company, provident fund, etc.) when it comes to the compensation of pension disadvantages due to incorrect advice. The court ordered a pension fund to continue the pension insurance for old age under the original better conditions – despite the change of employer: The court thus awarded the employee a higher pension for old age. It is important to know that there are pension funds that always offer equally good conditions – in this respect, intermediaries are often liable alongside the pension provider due to the choice of carrier.
Direct action by employees against sponsors of occupational pension schemes possible
The court is dogmatically correct in finding that the employee is not merely a “person at risk,” but that there is an “annuity contract for the account of another,” and thus a true contract for the benefit of a third party. Here, there was a contract between the employer and a pension fund – but the employee can also derive his own rights from it. When changing employer, the employee has three options: The cancellation of the contract, the private continuation, and the continuation with the new employer. The reference to these “possibilities to receive a supply” means of course still far no clearing-up over the associated disadvantages with “conditions and tariffs”.
Insurance companies are also liable for full performance of the contract
According to the principles of common law liability for performance, insurers (and, as a rule, other providers of occupational pensions) must accept responsibility for incorrect information provided by their agents. Breaches of duty in this context are incorrect information about the content and meaning of insurance conditions or other points essential to the contract on which the claimant was entitled to rely. This applies not only to the embellishment of the scope of insurance benefits, but also to the case of failure to clarify recognizably inaccurate ideas. If there is an obvious need for information or if the policyholder is mistaken about an essential point of the contract, the insurer must inform and instruct his agent on his own initiative. This liability “based on trust” can reshape the contract, but it can also establish a contractual relationship for the first time, namely for the fulfilment of the expectations aroused by the false advice, not only for damages.
Rarely conceivable own fault of employees
The liability of the insurer shall only cease if the claimant is considerably at fault, i.e. if the incorrect information clearly and unambiguously contradicts insurance conditions which were already in place when the application was made. Unless the intermediary had expressly distorted or devalued the content of these conditions, which were in themselves clear, in his advice, so that the customer had to understand them differently. In the field of occupational pensions, it is also common practice that employees do not receive insurance terms and conditions from the employer before the contract is concluded: Furthermore, the courts repeatedly judge terms and conditions to be “non-transparent” (i.e. incomprehensible, contradictory, etc.). In this respect, the chances of enforcing liability are particularly good for employees. In addition, most intermediaries probably show professional deficits – in this respect it is also more difficult to recognise errors and they systematically make mistakes – especially in occupational pension schemes.
Facilitation of evidence in the “four-eye discussion”: Help via works council and colleagues
similarly, as already judged by the OLG Stuttgart in cases of capital investor deception, the OLG Celle also heard a witness with a comparable interest and his own consultation. The plaintiff employee’s co-worker had also been given the same positive false information by the agent. The continuation of the pension scheme with the new employer was not a problem – not a word had been heard about the worse “rates and conditions” or changes in “premiums and benefits” – on the contrary, continuation was possible under unchanged conditions. However, the single tariff now offered “only” 6% lower benefits for the same premium, which the court judged to be inadmissible.
Good opportunities for employees after change of employer
As a rule, sales documents for submission to the employer and/or employee contain numerous gaps or “half-truths”. Already from these, “a possible error will arise” on other important issues as well. The yardstick here is an unbiased policyholder, for whom misconceptions can therefore easily arise. Unclear “employee information” sheets, but also a lack of clarity and unambiguity in insurance or pension conditions, deprive the occupational pension provider of the right to object to the employee’s own fault.
Mediation without consulting competence leads to liability
The court makes clear that two things are at the core of liability: One is unclear or incomplete contract documents and the other is a lack of competent express disclosure or misrepresentation by the agent. Given the “market standard” sales training, many agents are likely to be overwhelmed with the sound education required.
Contractual performance often better than compensation
Despite incorrect advice, often no damage can be proven. Thus, it is not uncommon to find that the customer would not have obtained a more favourable contract – not even with another insurer – even if he had received correct advice, i.e. that no loss was incurred. In addition, the customer bears the full burden of proof for the amount of the loss – often only an actuarial report can provide a quantifiable result. However, the OLG Celle now states that the customer can also – instead of claiming damages – demand performance of the contract modified by the incorrect advice – the incorrect information thus becomes part of the contract. This can lead to easier to prove and more beneficial results than trying to claim damages. Of course, this also applies outside the occupational pension system, namely to all other insurance contracts.
Secure liability for insurance brokers
However, the liability situation is different for insurance brokers. In this case, the customer must trust that the insurance broker will provide comprehensive advice based on his professional knowledge. Here, in the event of a legal dispute, either the insurance broker alone – or together with the insurer – is in the boat. The insurance broker cannot therefore rely on the statements of so-called sales experts, as is usual in the occupational pension system – on the part of the insurer. Responsible insurance brokers have in the past – if possible – always offered group contracts (collective contracts), for the benefit of the customer and the employee. This is because, in contrast to the brokerage of individual contracts, this meant that the insurance broker waived the usual brokerage fee. This can now take bitter revenge; especially if, as a result, hardly any reserves could be formed for damages due to inadequate employee counseling. In addition, numerous property damage liability insurance policies “only” cover errors in advising the employer. Thus, there is no insurance coverage with respect to “erroneous advice given to employees as an agent of the employer.”
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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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