Only soft, no longer hard

The IV. Civil Senate of the Federal Court of Justice deals with inheritance and insurance contract law. On 25 July 2012, this senate, chaired by Barbara Mayen, made a decision that could have far-reaching consequences: In the ruling with the file number “IV ZR 201/10”, the judges in Karlsruhe criticised insurance clauses that were common practice until the end of 2007 and concerned surrender values, cancellation deductions and zillmerisation. The “hard form” of zillmerisation applied at that time spreads the acquisition costs of the contract over the first two to three contract years and is deducted from the premium payments. And in the eyes of the BGH judges, this is precisely what constitutes an “unreasonable disadvantage to the policyholder”. Attorney Johannes Fiala derives the following two principles from the decisions of the Federal Constitutional Court and the Federal Supreme Court: firstly, that policyholders are to participate appropriately in the assets accumulated by the insurer through their premium payments. In concrete terms, this means that they are entitled to half of the unzillmerised actuarial reserve (in the case of unit-linked policies, half of the unzillmerised fund assets). Secondly, clauses that inappropriately disadvantage the policyholder (settlement of acquisition costs by Zillmerung, non-reimbursement of small credit balances of less than ten euros) or are non-transparent (cancellation deduction) are invalid and generally not applicable. This would apply to all such clauses, including those of other insurers – whenever they were used in whole or in part.

Conclusion: Zillmerisation must be “softer”, i.e. the acquisition costs must be spread over a longer period. However, if acquisition costs are spread in the future, this also means that the acquisition fee will be spread over a longer period of time.

So what does the longer term mean? Apparently, it is not objectionable if the acquisition costs are distributed evenly over the first five contract years. Markus Mehlig, lawyer for employment and insurance law from the law firm Föhr, Adam & Mehlig from Bühlertal, explains why: “With the reform of the Insurance Contract Act, the legislator regulated in section 169 as of 1. 1. 2008 that acquisition and sales costs must be distributed over at least the first five years of the contract term. If, for example, premium payments are stopped after one year of the policy term, only one fifth of the acquisition costs may be charged. The Act on the Certification of Retirement Provision Contracts contains a provision with identical content in Section 1 (1) No. 8 AltZertG.” This means that zillmerisation over five years is unassailable for Riester contracts as well as for privately concluded endowment life insurance policies and deferred and unit-linked pension insurance policies.

Uncertainty prevails as to the scope of influence of the important Karlsruhe ruling. Formally, the BGH ruling of 25 July 2012 only affects contracts used by Deutscher Ring between 2001 and 2007. Against such contracts the victorious consumer center Hamburg can proceed now with the judgement directly. However, the corresponding clauses of other insurers hardly differ, so that similar judgements are also expected against Ergo, Iduna and Allianz. The BGH already ruled against Generali on 17 October 2012 (Case No. IV ZR 202/10) – also in favour of the consumer protectors. “We can be curious to see whether the BGH will also rule in favor of consumers in the cases that are still pending,” Mehlig says. There is much to be said for it.

Mathias Nittel, a consumer lawyer from Heidelberg, explains why the rulings are so relevant: “Up to 80 percent of life insurance and private pension insurance contracts are terminated prematurely. But after the notice for the insured ones the shock comes regularly: From the money paid into the insurance contract they receive hardly something back, because from the insurance companies high conclusion costs are deducted in advance with the determination of the surrender value. Policyholders who took out their policy from 1995 onwards and have cancelled it or made it non-contributory in the meantime can demand back payments from their insurance company as a result of this case law.”

Fiala also sees a very broad scope of application of the ruling: “In my opinion, this concerns all insurance contracts – the BGH only writes that these (defective) clauses were ‘temporarily used’ by an insurer in the period from 2001 to the end of 2006. Contracts from earlier periods are also affected.”

Lawyer colleague Mehlig sees the time window as shorter: “Contracts concluded between 2001 and 2007 are affected. However, the recent rulings also cover some clauses that affect new contracts concluded since 2008.

In its decision of 17. 10. 2012, the BGH clarified that the clauses complained of do not apply even when concluding new contracts.”

For example, policyholders who have cancelled their contract in the last few years or made it non-contributory can demand from the insurer the deductions that were wrongly withheld. Mehlig refers to the limitation periods: “Possible claims for recalculation and subsequent payment of the surrender value without deduction of acquisition costs and cancellation fees are subject to a limitation period of three years, calculated from the calendar year in which the contract was terminated. In my view, there is much to suggest that the requisite knowledge leading to the running of the limitation period did not exist until the publication of the BGH’s decision of 25 July 2012. This means that for contracts that were terminated in 2009, the statute of limitations expires at the end of 2012. In this case, consumers do not need to sue themselves, but can refer to the BGH to be compensated in the sense of the judgments.”

Intermediaries also affected

As nice as the financial supplement may be for the policyholders who have left, it is annoying for those who are paying the bill. These are either the intermediaries – if the cancellation liability period is not yet over – or the insured community, i.e. all those insured persons who service their policies as planned. This is especially annoying in times of low interest rates; the interest rate on life insurance policies is not high anyway. The low interest rate scenario is also the reason why the cases are coming up right now: “In the past, when interest rates were higher, zillmerisation was not such an obvious problem because the surrender value and the deducted acquisition costs were in a balanced relationship. In the current low interest rate environment, the surrender value can sometimes be zero if the contract is terminated early,” Mehlig points out.

Since the five-year distribution of acquisition costs has been standardised by law – i.e. since 2008 – many insurance companies have also extended the cancellation liability for commissions paid out to a period of five years, so that these de facto represent interest-free loans. Mehlig concludes: “This increases the pressure on intermediaries because commissions already paid out are subject to clawback, which means that intermediaries inevitably have their own economic interest in retaining their customers for longer periods of time.”

Occupational pension scheme possibly affected

Legal experts disagree as to whether the BGH ruling also applies to insurance contracts concluded in the context of occupational pension schemes (bAV). Since insurance law and employment law are intertwined here, the employer’s liability also comes into consideration in addition to the insurance company’s liability, since the employer is ultimately liable to its employee for the conditions of the insurance contract. However, as long as the reasoning of the BGH decision of 17 October 2012 has not yet been published, it is difficult to say anything conclusive about this. Lawyer Mehlig explains: “In my opinion, however, the criticism of the BGH is likely to have an impact on deferred compensation. The underlying problem that if the acquisition and sales costs are fully offset in the event of premature termination, the capital stock is considerably eroded, also exists in the case of deferred compensation. Employees who, for example, stop contributing to the policy after a job change and do not continue it within five years are unlikely to receive an economically adequate pension benefit if the acquisition and sales costs are fully offset.” If the Federal Labour Court (Bundesarbeitsgericht – BAG) also follows this line of argument, the two recent BGH rulings could also be significant in the area of occupational pension schemes – at least in the case of deferred compensation.

Fiala agrees: “These rulings apply to all life insurance policies, including bAV contracts.” And he advises employees: “Employees should generally ask their employer to provide them with an annual confirmation from the sponsor of the occupational pension scheme so that they can compare surrender values with the contributions paid, for example. Reputable pension funds provide such data automatically – some provident funds, however, do not disclose the use of money or cannot prove the use of money. If the employees knew the figures, they would often realize that especially provident funds tend in individual cases not to invest the money or to invest it later or in contracts with high commissions. In the case of one provident fund that has since fallen into insolvency, some of the assets of those being provided for are said to have ended up in the Caymans or in Methuselah policies.”

In a prominent case, however, the Federal Labour Court (Bundesarbeitsgericht – BAG) decided on 15 September 2009 that zillmerised contracts in the case of deferred compensation do not automatically violate the principle of equal value (Ref.: 3 AZR 17/09). In this case, the parties had agreed on deferred compensation in November 2004 and selected a direct insurance with a zillmerized tariff. When the parties terminated the employment relationship on September 30, 2007, the employer had paid insurance contributions in the amount of EUR 7,004.00 in lieu of the converted cash salary up to that date. The insurer informed the plaintiff that the actuarial reserve amounted to 4,711.47 euros. The plaintiff demanded payment from the defendant in the amount of the converted salary of 7,004.00 euros.

The Labor Court had dismissed the action at the time; the Regional Labor Court rejected the appeal, and the appeal was unsuccessful. In its reasoning, the Federal Labour Court writes: “There are indications that, in the case of deferred compensation, the use of (fully) zillmerised insurance contracts does not violate the value equality requirement of section 1(2) no. 3 of the BetrAVG, but does constitute an unreasonable disadvantage within the meaning of section 307 of the BGB. It could be reasonable to spread the acquisition and distribution costs over five years.” It further states: “Insofar as the intended offsetting of the acquisition and sales costs does not stand up to legal scrutiny, this does not lead to the invalidity of the deferred compensation agreement, but to a higher company pension. A claim to higher pension benefits, however, was not the subject of the present legal dispute.” In layman’s terms, Mehlig explains the last sentence: “The employee wanted too much in this case, he wanted to hold himself completely harmless, so to speak. If he had only sued for the difference between the hard zillmerised contract actually concluded and a soft zillmerised contract, he might have been proved right.”

It is not to be expected that a wave of claims from the occupational pension corner will now roll in on the insurance companies. Finally, Towers Watson found in a survey

The results of a survey of employees showed that most of them do not pay much attention to their occupational pensions. Only 17 per cent of respondents fully agreed with the statement “I have closely examined my occupational pension scheme in the last year”. Therefore, it is not likely that many will follow the case law in this area and sue now.

Markus Mehlig, Dr. Johannes Fiala, Mathias Nittel, Lawyer