Property insurance risks

In the light of the judgement of the Federal Court of Justice (BGH) of 22.05.1985


One can debate the issue, hold other legal opinions, or like us here, set a judgment as a reference point. We still consider the judgement to be trend-setting, because it describes the obligations which an insurance intermediary, in this case the insurance broker, must comply with as far as possible. In implementing the Insurance Mediation Directive, the legislator did not determine this catalogue of obligations, but left this area, as well as other areas, to the free play of forces. This will result in a potential for change over time and it will be interesting to see how the legislature approaches this reorganization. There are, of course, other jurisdictions in the meantime, but in our view they do not demonstrate this breadth and scope.

According to the BGH, the duties of the insurance broker are far-reaching. The broker is not the neutral third party, but is assigned to the customer: “He is his ‘fiduciary-like trustee'”. The latter is regularly commissioned by the policyholder and is regarded as his representative of interests or even as the closing representative. As the representative and advisor of the policyholder, he must procure individual insurance cover suitable for the property in question. This results in the following reading and derivations, the tasks and workflows to be performed in detail. The insurance broker must investigate the risk on his own initiative, inspect the object and inform the policyholder, as his principal, constantly, promptly and without being asked, of the interim and final results of his efforts to place the relinquished risk, which are important to him.

That pretty much says it all. The client’s expectations are also the starting point for a broker’s duties. Customer expectations are reflected in the idea that an insurance broker has: – special expertise in his field – special relationship with insurance companies – tailor-made insurance cover, taking into account the variety of insurance products available on the insurance market. The reason for the high standards lies in the prominent position compared to the multiple agent and the group agent and culminates in the fact that he has to compensate for the lack of expertise of the client. This results in an abundance of information obligations in addition to activities that actually have to be carried out. The contractual basis between an insurance broker and a client regularly consists of a contract of agency with elements of contracts for work and services of the most varied nature and sometimes critical legal effect.

The legal relationship between client and broker is very often to be legally qualified as a continuing obligation; this is how we see it, although we are aware that public discussion also produces other opinions. As always, it depends on the circumstances, so a generalization always has to be seen under the assumed premises. It should not be misjudged that the qualification of the insurance brokerage contract as a continuing obligation depends very much on its content. Alternatively, it may simply be an assignment in the form of an agency, which can significantly reduce the broker’s responsibility, at least on the timeline. Particularly frequently insurance brokers use free sample contracts, in which numerous regulations are found (e.g. contract administration, support), in order to generate a continuing obligation and an often unnecessary liability extension surely still. This is completely in line with the insurers, who are only happy if the broker voluntarily protects the insurance company from responsibility and liability. The new VVG 2008 provides for an advisory duty of the insurer within certain limits – however, this is not legally obligatory for the insurer at least if a broker with a continuing obligation is involved in his customer relationship.

The fact that this can destroy the insurance broker’s very existence is shown by the practice of VSH cover: virtually no VSH contract with insurance brokers expressly includes, for example, “support, contract management and/or fee-based advice outside the broker’s own portfolio, etc.”. In practice, many insurance brokers use “free of charge continuing obligation contract models” – in case of doubt then without corresponding VSH coverage for the activities promised to their own customers. According to our reading, the broker’s tasks regularly focus first of all on the fact that the insurance broker: – intensively familiarises himself with the client’s insurance needs, without using the insurance industry’s product ranges as a constant comparison.

Dealing with hazards and risks, products and production processes and the formation of scenarios up to the examination of contractual relationships and compliance with regulations and laws belong to this area, – analyzing the individual situation of his client against the background of market conditions and finally obtaining offers from insurance companies from which he assumes through his own observation and analysis that both the insurance product and the insurer itself are capable of shouldering the promised performance. Whether the analysis of the annual reports or the consideration of the solvency margin could be imposed as a duty, we leave open for the moment.

– The broker must examine these offers with regard to risk coverage, declaration, clauses and costs and then discuss, discuss and describe them in detail with the client – taking into account any existing weak points. After weighing up all the individual circumstances, this results in concrete proposals for risk coverage.

From what has been said so far, the following general cardinal duties of an insurance broker arise, which are:

– Preparation of an exact risk analysis and determination of the individual insurance needs

– Market-wide solicitation of bids, review and examination of bids according to previously defined criteria

– Selection of the most favourable product offer for the broker client in terms of a favourable price-performance ratio – Permanent risk monitoring with adequate adjustment of the insurance cover

The duties of the insurance broker arising from this can be catalogued or described as follows:

Duty of care and protection of interests

The duty to safeguard interests includes the broker making appropriate proposals to the policyholder and warning the customer of identifiable risks. This includes consideration of the residual risk of the insurance contract.

Risk analysis

The broker must carry out the examination of the danger or risk. We recommend that these tests are carried out on the basis of existing standards, such as ONR 49000, which will very soon be converted into DIN EN IOS/IEC 31000 and thus determine an international standard. These standards specify certain process tests and describe a total of 125 test processes in 4 hazard areas, which are subdivided into 24 hazard areas. If it can be proven that a standard has been complied with in a risk analysis, the presentation of a liability for incorrect advice is considerably increased by the degree of difficulty to almost impossible. Measurements of the time required for this, which we have carried out, have shown that for manufacturing companies with a turnover of up to 50 million €, an expenditure of time, which can extend over 12 to 16 months (the customer also has to invest time and it is not always easy for him), of approx. 250 hours +/- can be assumed.

This means that the obligation to obtain precise knowledge of the nature and extent and possible manifestation of the risk exists, indeed, it is the basis for effectively establishing an insurance contract in the first place. A variety of sources of information are provided by the reports of the specialists established in the companies, e.g. the reports of the occupational health and safety specialist, safety officer, etc. In our investigations, we had to establish that these reports are generally of no significance in the implementation of insurance cover (we have had only 5 exceptions in the past 14 years in around 100 investigations), but in the last 5 years these reports have become increasingly popular, at least with the expert reports called in by the insurers, when it comes to establishing the co-responsibility of the policyholder on the occasion of a loss. In this context, it can be deduced from the Sachwalter ruling that if it is apparent to a broker that a contract placement can only be achieved after comprehensive analysis, he must undertake it.

The same applies if, due to the size and significance of the risk and the economic importance of the principal’s need for security, a comprehensive analysis appears to be appropriate. Fortunately, we have already seen very good analyses in audit mandates, but also some that do not deserve the name and unfortunately form-based risk analyses are advertised by insurer-sponsored working groups, which are rather to be regarded as a liability trap for an intermediary/broker.
For those who are interested, we have a compulsory inspection catalogue, which is based on ONR 49000, available. Just call.

Coverage analysis

The broker shall perform a compliant coverage analysis based on the risk analysis. The concept of conformity states what is being measured by what. In this case, the reference is risk analysis and the extent to which coverage analysis meets risk analysis is measured. The insurance broker must also determine in what way the risk and the object can be covered in terms of insurance.

This includes

– the determination of the right type of insurance and

– the determination of the needs-based and sufficient sum insured, whereby the cooperation of the customer is required in this respect.

It is clear, however, that there is an obligation to provide information on how the insurance values are to be determined methodically. – The determination of the conditions in question, in particular whether supplementary conditions, clauses and clarification for adaptation to the risk and object to be insured are eligible. As already explained, care must be taken to ensure that no gaps in cover can arise with regard to the perils to be insured and the risk to be insured and the scope of cover. If there are nevertheless gaps in coverage, these must be described. The reason for the description is that a company has to include these elaborations in catalogues of measures to avoid or minimize these hazards and risks, or to develop certain emergency scenarios.
In the case of existing contracts, this also includes the audit,

– whether the insurance cover is complete,

– whether the existing insurance contracts are still appropriate, and

– whether reinsurance can be considered. (BGH VersR 71, 714; OLG Munich, WM 91, 1817)

Offer analysis

It is and may be assumed that a broker has knowledge and experience in dealing with offers in the insurance market. This refers to its access to the insurance market. These offers shall be objectified as far as this is at all possible. In other words, the amount of the brokerage fee cannot be a criterion for a bid analysis.

The duty to advise and inform must also include:

– Comparison of conditions by – Presentation of the differences in price

– Evaluation of the scope of cover, in terms of conditions and product-related and legal differences

– Examination of the service quality of the insurers

– Assessment of the regulatory behaviour of the various providers. In the case of larger risks, he has to develop or organise a co-insurance model, and sometimes there is also the supervision of reinsurance contracts, especially when a provider in the insurance industry falters, as was seen in the recent past with the world’s largest insurer.

Provider analysis/selection of the appropriate risk carrier

Likewise, the broker must conduct a provider analysis. Here, too, the amount of the brokerage fee is not an assessment criterion. Rather, this refers to the examination of the solvency/performance of the insurance undertaking. There are various providers on the market that offer balance sheet structure analyses of insurers. However, the broker’s own considerations are always decisive. After weighing and considering all the interests and concerns of the policyholder, the broker must decide which insurer offers the best possible insurance cover in terms of performance and premium amount. (Trinkhaus, p. 131; Zierke MDR 89, 781; Matusche, p. 54, Werber VersR 92, 922).

Cover concept

On the basis of the market, offer, provider, risk and coverage analysis, the insurance broker shall present the coverage concept for the risk and object to the customer and explain it in writing. At this point, too, there is a duty of disclosure regarding the residual risks that may be inherent in an insurance contract. The contractual obligations and contractual ancillary conditions are also an integral part of the coverage concept. Last but not least, this part includes the examination of the documentation carried out by the insurer, i.e. the comparison between the offer or agreed contract conditions on the one hand and the documented contract content on the other.

Duty of supervision (duty of care) during the current contract

The customer shall be informed of all essential points which may be of importance for the course of the contract. This also includes the continuous monitoring of the risk and the indication of compliance with the safety regulations, which have led to a veritable flood of information for the customer since the enactment of the VVG Info Ordinance. In addition to providing advice on the ancillary obligations arising from the insurance contract, such as information on the observance of obligations (for example, inspection of electrical installations) or the adjustment of insurance cover in the event of a change in the risk or advice on safety and loss prevention measures, there are also educational functions, such as how the insurance premium comes about or the large field of exclusions from the insurance contract, which are unfortunately not anchored in the VVG INFO Ordinance. The dangers of non-compliance with laws and regulations must be pointed out, and the question must then be asked as to which ones must be complied with. One source for this can be found in the area of legal governance and these can usually be found in the certification documents according to DIN EN ISO 9001:2008, of course only if this certification has also been carried out in a company in accordance with the standard.

Claims handling obligation

The insurance broker must also offer settlement assistance to the policyholder in the context of claims handling, but cannot normally actively intervene in the settlement. Derivable functions of the broker are, for example, to assist the policyholder with the notification of the claim, to make all necessary inquiries and to carry out investigations so that the insurer can form a picture of the claim and take action without delay. Claims settlement obliges the insurance broker to examine the existing insurance cover in detail and to support the client in order to achieve the best possible and quickest possible settlement of the claim.

This includes in particular
– the inspection of the damage, – the preparation of meetings with the insurers or third parties, – the appointment proposals for the client’s own experts, – the submission of settlement proposals – the enforcement of a quick settlement. From the damage occurred and in the settlement of the damage occurring gaps in coverage may be indicated that the contract is to be re-established or must be supplemented, this is often forgotten.

Concluding remarks

From the previous descriptions of the function derivations, a check scheme for any mandate can be derived for each brokerage and the workflow, procedures and work instructions for the employees can be created. These representations should at least be visible to everyone in an organisational handbook or, better, in a quality management handbook. This documentation would be suitable to be a broker’s own risk management system.

In the new law on intermediaries, the duty to provide information and advice is a very important part, which can go so far that a broker can be required to provide verifiable, auditable, traceable information on the reason why he advised a particular product and a particular insurer. In the case of large risks, the Insurance Mediation Directive is suspended, but the validity of the BGH ruling is not affected. A breach of the obligation to provide advice and documentation constitutes an administrative offence which can be punished with an administrative fine of up to EUR 5,000.

We certainly do not need to discuss the question of coverage under pecuniary loss liability for such a breach of duty at this point. But you can look at it another way, by viewing the documentation requirement as preserving evidence, and then the whole thing makes sense. In our view, the consequence of this is that an insurance broker should formulate more precisely in his brokerage contract with the client the areas of activity he wishes to bring in and also record his client’s cooperation in a catalogue of duties and monitor that this is also complied with. He would also do well to coordinate his sample contract with his pecuniary loss liability insurer. Various major brokers maintain framework agreements with their insurers for specific risks or for specific commercial and industrial sectors. This should give courage not to accept everything that an insurer stipulates conditionally. It has been our experience that insurers are prepared to reward the presentation and ongoing maintenance of a risk management system, both in the terms and conditions of the contract. The greatest savings potential we saw was well over 50% and in the 7-digit euro range in absolute terms. The terms of the contract were agreed individually.


by Dr. Johannes Fiala and Dieter Olejar

by courtesy of (published in Expert Report 03/2009, 10-13)

Our office in Munich

You will find our office at Fasolt-Strasse 7 in Munich, very close to Schloss Nymphenburg. Our team consists of highly motivated attorneys who are available for all the needs of our clients. In special cases, our law firm cooperates with selected experts to represent your interests in the best possible way.

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.
»More about Dr. Johannes Fiala

On these pages, Dr. Fiala provides information on current legal and economic topics as well as on current political changes that are of social and/or corporate relevance.

Arrange your personal appointment with us.

Make an appointment / call back service

You are already receiving legal advice and would like a second opinion? In this case please contact Dr. Fiala directly via the following link.

Obtain a second legal opinion

The first telephone call about your request is free of charge.