[expert network] Dear Mr. Fiala, brokerage contracts are offered as a service by pools, working groups, associations and distributors. From your point of view, were there any anomalies?
(John Fiala) I have noticed that numerous sample contracts contradict each other in terms of content. Spot checks show that any text patterns were copied from form books. Time and again, clauses are encountered that were declared invalid by the courts years or decades ago. An example would be the clause that “the broker’s liability is barred after 3 years”. Unfortunately, the rule is that it is also not explained which contract can be used safely and when. Recently, a broker reported that his association was offering two different brokerage contracts, penned by two law firms: Each firm is said to be calling the other office’s contract flawed. The association is not in a position to judge the matter, and continues to offer two contracts of which it knows that at least one other professional lawyer has pointed out the “risks and side effects”. A secure liability?
How is that to be understood? We read again and again in broker contracts that the liability of the insurance broker is limited to 1.0 million. Is that a problem?
Yes and I read that VSH brokers recommend such clauses with the words “There is no BGH ruling on the unification of the maximum liability amount”. From a VSH broker I would expect that he knows the most common reference books about his profession: There he could have read that such clauses are invalid in 99% of all cases. If the VSH broker does not know the usual broker duties, and also does not know how to assess whether an intermediary has effectively or ineffectively limited his risk, how is such a VSH broker supposed to recognise the existing risk with the intermediary, assess it and insure it properly? Who would have any confidence in that?
How can a pool proceed if it knows that its contracts are invalid?
Well, the first thing I would do is call for a remedy, and get an independent opinion. First, I would take such samples from the Internet, because liability can also arise from such publications. I would also inform the pool members. The exchange of partially invalid contracts will also cost the pool members money and time: I would then carefully document this – the costs will then probably be paid by the author’s insurer.
What considerations are reasonable if I want to limit the liability to a maximum amount?
Let’s stick with the pool sample contract example for now. The consideration will be how often such a contract is used, with which turnover and with which damage volume as a contract-typical risk is to be expected. If there is insurance cover for this amount, liability can also be limited to this amount. The preliminary question, however, will be what are the further conditions of effectiveness for such an agreement to actually withstand later judicial review? If the law firm only has a compulsory cover of 250,000 Euro, the following calculation results: If the pool has 1000 members and each member uses the contract “only” 100 times, this results “according to Adam-Riese” in an arithmetical pro rata cover of 2.50 Euro (in words: two Euro and fifty cents). And that’s supposed to be appropriate? For the VSH insurance broker, things look similarly complicated. He must investigate and examine the risk. The risk borne by the intermediary can easily exceed the statutory minimum compulsory cover. If the VSH broker has not checked carefully here or has not done his convincing work, then he hopefully represents (via his VSH cover) a reinsurance for the intermediary, so to speak? Typically, however, brokers make erroneous statements such as “I don’t make mistakes.”, “I’m not liable because I don’t have a written brokerage agreement.”, “I’m not liable yet.”, “My insurance today also covers the past.” If only the statutory compulsory cover is desired, i.e. the actual risk cannot be discussed with the advisor or broker in probably 95% of cases, then the question arises as to whether and how the VSH broker can protect himself against later recourse. Later on, every agent will be happy to contact their VSH broker about a gap in cover, even if the broker is difficult to reach by phone.
What could be the other mistakes of a VSH broker?
So there would be the case, for example, that the VSH broker is not aware of stationery, doorbell sign, internet presence, telephone directory listings, etc. Some person is reported as an “employee” but is in reality a “partner” to the outside world (socius according to the AHB). Inevitably, this often leads to underinsurance, and in the event of a claim the VSH insurer will simply reduce its benefits under the AHB to a fraction. Or take the case of the multiple agent (according to the content of the sales connections with insurers), who calls himself a broker: This means that in case of doubt there is no VSH coverage, because there is an insurance for a broker – but not for the sales connections as an agent. My point is that not only do the contracts with all employees need to be looked at by the VSH broker, but also those with the product providers. If the VSH broker does not recognise the differences because he or his staff cannot do so, the broker is, in doubt, wrongly insured. As a result, he loses some or all of his coverage, which, of course, will often not come up until a claim is made. It is certainly useful to be aware of the burden of proof for custodial duties. A VSH broker who cannot or does not want to determine the risk situation of the client/intermediary on all sides is in effect setting himself up as a reinsurer of his incorrectly or underinsured clients/intermediaries. One way out would be, for example, to switch to a separate corporation that only carries out agency activities. The insurance broker Hermann Siebenhaar once described the situation as follows: “The necessary sum insured then results “almost” by itself from the comprehensive risk assessment, since the risk was individually recorded (consultation protocol). If an insurance broker cannot do this, he should give up his profession”!
Are there any other important cases where there is no cover with the intermediary?
The most important point is often the “knowing breach of duty”. Think of the intermediary who, together with the client, decides to conceal a back condition from the PKV insurer (pre-contractual duty of disclosure). This means that the agent does not have VSH cover in the event of a claim, but is only liable privately and personally. Whether the PKV insurer challenges the contract later or simply does not pay for the concealed previous illness is a completely different matter – an economic consideration for the insurer. Another fine point concerns fee-based advice: intermediaries will certainly keep a close eye on whether the staff of the consumer centres are all licensed by the Chamber of Industry and Commerce. Jurisprudence will also deal with the question of whether the fee-based advisor may recommend a net policy that is too expensive without pointing out that there may be other cheaper products on the market – which do not constitute net tariffs (duty of disclosure).
What other important points would there be to know after the case law on limitation of liability?
Since the 50th Jurists’ Conference in 1974, it has become apparent that also merchants are more or less protected against “unreasonable disadvantages” in a similar way as consumers or non-merchants: This includes provisions which restrict essential contractual rights or obligations in a way which endangers the purpose of the contract. In this area, it is not even possible to limit liability for simple negligence in the case of vicarious agents. This applies accordingly to main contractual obligations, as well as to such secondary obligations which are of particular importance according to the purpose of the contract. The 1985 guardianship ruling sets the tone here. In 2006, the Federal Court of Justice (BGH) declared an intermediary clause to be invalid according to which an intermediary wanted to “only mediate and not advise”. The limitation of liability only for slight negligence fails if it concerns essential obligations, the fulfilment of which is necessary for the proper execution of the contract, and the contractual partner could rely on this. Incidentally, this also applies in commercial dealings, in particular when specimen contracts are used. This also includes such ancillary obligations which foreseeably entail a risk of particularly high damage. In the case of an insurance broker, his special expertise and the customer’s expectation of trust lead to the invalidity of any release from liability, even in the sub-case of a limitation of liability only in terms of amount. These are examples from a wealth of BGH rulings, without any claim to completeness.
Can’t I just ask the client to get in touch themselves if they want more comprehensive VSH cover from the intermediary?
This already fails because the intermediary is an expert in risks and their control – at least in the case of insurance brokers this can be assumed. Often only the intermediary can cover the risk (of his wrong advice), i.e. insure it. An insurance broker’s client does not usually have a separate option for this. The only exception would be if the “damage to be feared in the normal case” (also in terms of amount !) is actually insured by an existing VSH cover, and the conclusion of an additional VSH cover had been specifically recommended to the customer; but only if the customer can best judge the extent of the insurance interest: This is the situation when the customer hands in “his most valuable piece” at the dry cleaners, and can best judge the value himself. In the case of brokers, however, the exact opposite is the case, as they are specialists in risk assessment for the customer and can therefore hardly limit their core duty as trustees. Apart from the possibility of negotiating such points, care must always be taken to ensure that a risk typical of the contract is included in the cover. Questions concerning the exemption from benefits, the deductible and any risk exclusions will also have to be settled.
Where is the error of thinking of those brokers who simply want to limit their liability towards the customer to 1.0 million in a blanket and thus ineffective manner?
The minimum compulsory VSH cover follows the customer protection. To insure oneself properly, on the other hand, is only an option for the normal intermediary, but for the VSH broker it is a central duty that cannot be limited. The VSH broker must comprehensibly calculate and document how he has determined the appropriate sum insured and the necessary maximisation as a recommendation. Any intermediary who allows themselves to be “looked after” by the VSH broker should have this in writing without exception. This also includes the questions of excesses and individual property cover, as well as the negotiation of genuine improvements in the terms and conditions (design obligation of the broker).
Can you illustrate this with an example of a typical invalid clause?
As a little mental exercise, can you estimate why the following popular and unfortunately only “allegedly” liability-proof brokerage contract clause is invalid in case of doubt: “The broker’s liability is limited to an amount of EUR 1 million per case of damage in the event of a slightly negligent breach of his contractual duties. … Insofar as the risk of a higher loss exists in an individual case, the customer has the option of increasing the broker’s liability insurance cover at his own expense to a sum insured that covers the risk assumed.” Here is the solution to the mental exercise: If the foreseeable typical risk of the customer is higher, the clause is invalid. It is not the client who must recognise the “higher” risk, but the broker, as expert and trustee. It is not the client who “has an opportunity for adequate VSH insurance”, but the broker who must do the convincing for adequate insurance in the client’s interest. And to limit liability for ordinary negligence in central duties of a trustee is regularly “null and void” – that is, ineffective. All this is not an “outgrowth of legal pessimism”, but has been common jurisprudence for decades: The only astonishing thing is that there are apparently “alleged experts” who, as experts in the matter of “risk and hazard control via insurance solutions”, do not (want to) know anything about it? For all those who may not believe it: the publishing house VVW (Verlag Versicherungswirtschaft), which is completely unknown to some experts, has just relaunched its 2007 publishing programme: Those who know how to read are clearly at an advantage – for decades.
How does a lawyer come to deal with such issues?
Many years of professional exchange with experienced insurance brokers and “old hands” in the market help – nobody is born all-knowing. Quality management and active risk management complement our findings: Model contracts always have one thing in common – they are model contracts! In individual cases, these must be adapted, for example, to the VSH conditions of the intermediary and its external appearance on the market. For example, it is crucial that the insurance cover of the intermediary covers the insurance cover of the broker: In individual cases it can happen that the insurance cover of the intermediary who is active in the structural distribution of a broker does not apply as far as and as long as the broker is also liable. And conversely, that broker liability does not apply because the broker has his own insurance coverage (in whatever amount). This can result in reciprocal fine recourse issues in a structure: If an intermediary is co-insured as an employee of the broker, this does not mean that the intermediary cannot be subrogated by the broker (e.g. deductible) or the broker’s VSH insurance (e.g. full amount of loss) in the event of a claim. Blind adoption of model contracts always leads to liability problems. The brokerage agreement must therefore be drawn up individually, just like the consultancy protocol and the company form. It is a good rule to separate the terms and conditions, the brokerage power of attorney and the actual brokerage agreement in a separate easy to understand form each.
How should an intermediary proceed now?
Well, the first step is to have your own “matching” contracts drawn up. One of the first questions to the lawyer is then how he intends to insure the liability for his draft contracts. When things are running optimally, instructions are given on how to use the sample contracts, and training is provided for individual agreements with the company’s own customers. Knowing the rules of the courts optimizes coverage. This is usually followed by the realisation that having clean contracts is only one of several building blocks for minimising liability – VSH cover is usually only there to cover the residual risk. One of the many conceivable measures for minimising liability is for the intermediary to have, for example, a complete archive of experts – with all training documents and to create his own transparency. From this, a personal system for conscious risk management can develop.
And your conclusion?
The user of “free” sample contracts should first question who is responsible for the content and how much this “work of art” has been insured. If a defect becomes apparent, the responsible author must immediately and demonstrably report a claim to his own VSH insurer, otherwise the author will lose his VSH coverage (obligation). Sample contracts without “operating instructions” are always unusable because the associated risks are not foreseeable for the user. In the case of allegedly “liability-free sample contracts”, often only one thing is certain: one’s own liability.
Mr. Fiala, thank you very much for the interview.
(expert report 9 – 04/2007, 1)
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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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