Property damage liability: Risks in the event of reorganisation and termination of insurance cover

– Whereupon in particular financial plant mediators in accordance with § 34 f exp. 1 GewO and intermediaries of financial services according to § 34 c GewO, as well as insurance brokers have to pay attention to –


Currently, thousands and thousands of advisors and brokers are receiving notices from their asset protection liability (VSH) insurer that “testing for a viable, economic relationship between premium income and claims expense” will result in the cancellation of VSH coverage.


Complete discontinuation of the VSH division or restructuring in individual cases?

Occasionally, insurers as risk carriers decide to divest themselves of an entire line of business. Some management boards are considering, for example, discontinuing new life insurance business or selling the insurance line. Others stop working with brokers altogether. This is not unique to the VSH.
If there is an accumulation of losses, the VSH insurers will, in case of doubt, not terminate the contract but demand up to more than 20 times the previous VSH premium “as a restructuring contribution”, which is then tantamount to a profit transfer agreement or may force them to cease business. Sometimes the professional chambers then show solidarity with those affected and threaten that, if necessary, they will lobby the legislature for compulsory contracting.


Problems with connection coverage

Sometimes the previous VSH insurer provides the follow-up cover together with an insurance broker. This service is not free of risks and side effects. If the insurance broker has not been commissioned and authorised for this reinsurance, the follow-up cover may only exist on paper, but the contract may not yet be effective.


Agreed insurer cancellation instead of portfolio sale or cancellation by broker?

Occasionally, this may also conceal a sale of portfolio by one insurer to the other for a consideration, which would otherwise have to be approved by the supervisory authority. It is not uncommon for the contracts to have been completely reinsured with the new insurer beforehand anyway, so that the previous insurer only carried the risk on paper. Also, instead of giving notice and reinsuring on their own, a broker could ask the previous insurer to give notice instead of them so that the reinsurance can be sold more easily.


Risk of limited subsequent liability of former risk carriers

In addition, in the past, financial service providers were often not required to have a minimum compulsory SSH insurance. Then the VSH insurers have stipulated in the terms and conditions of the contract that subsequent notification and subsequent liability for losses is limited to a very few years. Since the bulk of claims only occur after seven to nine years (so-called “long-tail risk”), the reinsurance cuts off the liability of the former VSH cover, which would also benefit a reinsurer.
In this case, the financial services provider should sue for a declaratory judgment and demand security, because if claims are made later – as a result of the reinsurance – without VSH cover, there may already be no substance left to access.


Lack of difference cover due to VSH reassessment

It is not uncommon for the new risk carrier not to provide additional cover for old cases prior to the start of the contract. In individual cases, the insurance terms and conditions must be analysed in detail so that there are no unpleasant surprises. Viewing one’s own VSH broker as a reinsurer is rarely an option, even from an economic point of view.
The decisive factor is not the unlimited subsequent liability of the new risk carrier, but the possible gap in the subsequent liability of previous VSH insurers, temporally for up to 10 years in the past. This follows from the law of limitation of claims, for example due to alleged misadvice.


Security through a contract term of several years?

Every VSH insurer can, despite a contract term of several years, terminate the contract in the event of a claim, unless it has expressly waived this right. If an insurance broker now brokers multi-year contracts in VSH, for example, he himself will be liable in case of doubt, because this means that he will not be able to reinsure his customer for years if competitors later introduce better terms and conditions or more favourable premiums.


Ineffective VSH broker power of attorney through VSH claims settlement?

To this day, insurance brokers try to support the policyholder and broker client with the service of a claim settlement in the event of losses in the areas of fire and water, for example, or liability and property damage.
The certainly well-intentioned statement “We are your direct contact in the event of a claim” should be treated with caution. If the insurance broker, as a freelance commercial service partner, had a settlement authority from the insurer, the financial supervisory authority would have to object to this. If the VSH broker acts on the basis of a corresponding brokerage contract or brokerage power of attorney, this will lead in case of doubt to nullity due to a violation of the Legal Services Act on the basis of a too comprehensive power of attorney, because since the beginning of 2008 the legislator has, as it were, removed claims settlement from the professional profile of the insurance broker (cf. § 59 VVG) and has also stipulated this in § 34d GewO and § 2 I RDG.
In addition, it has long since been clarified by case law that the VSH insurer (VR) must already be there for the policyholder (VN) out of court if a conceivable claim is pending. There is also no need for a “VSH broker as a contact person in the event of a claim” because the VSH insurer must immediately assist the policyholder in the same way as his own lawyer. In the same way as the policyholder has to report imminent damage, the VR has a duty to assist as soon as any legal liability claim is conceivable on the basis of the allegedly injured end customer of the policyholder. If the VSH insurer does not react or does not react appropriately, the policyholder can represent his interests himself and, in addition, initiate a declaratory or payment action against the risk carrier at an early stage.


Approaches when the child has already fallen into the well

If there are gaps in the insurance coverage, e.g. in terms of time or amount, the financial services provider can still rescue its portfolios and new business into a (possibly only small) limited liability company. Strategically, this also has the advantage that, in addition to cutting off the company’s own subsequent liability for the past, it may also be intended to safeguard the future. This is because a later sale of portfolios, inheritance or a succession arrangement – possibly with a smooth transition – can be implemented in a practical manner. This can bring the financial services provider a big step closer to the goal of reducing liability and/or securing revenue.


by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm

by courtesy of


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About the author

Dr. Johannes Fiala Dr. Johannes Fiala

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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