What entrepreneurs can learn from this for their own liability insurance
7.5 mi. Euro sum insured – instead of the usual 100 million minimum cover
The Love Parade disaster in Duisburg after a mass panic was insured at an astonishingly low level. The amount of cover provided by the organiser’s liability insurance is obviously far too low from the outset, at EUR 7.5 million.
However, such gaps in insurance tend to be the rule in practice, as a look at the practice of settling claims for medium-sized businesses and industrial damage shows.
It is not uncommon for insurance agents to lack the knowledge to correctly determine the amount of insurance.
Gross negligence: lack of requirement by the licensing authority?
It is usual for such events to be insured for sums in the hundreds of millions. It is astonishing that the permission to hold the Love Parade was not made dependent on the proof of an adequate insurance sum against existential risks.
Finally, the organiser is a limited liability company with recognisably limited assets.
Liability insurance not always a standard requirement
The insight into the necessity of liability insurance is only slowly gaining acceptance. What is a prerequisite for professional licensing for car owners, lawyers, notaries and tax consultants has only been required of insurance brokers for a few years – a doctor, on the other hand, can obtain and retain his license without any liability protection at all.
Love Parade Damage scenario: 15 million euros and more
Damages of this kind add up to compensation for pain and suffering, medical expenses, lifetime care costs, alimony and lost income.
Just as a rough example:
20 deaths with perhaps 10 dependants (wife or presumably still small children) come to approx. 10 * annually 15,000 EUR
Alimony * Annuity cash value 16 = approx. 2.4 m.
500 injured * outpatient first aid + transport 1.000 EUR = approx. 0,5 Mio.
Approx. 25 severely injured persons * 20,000 EUR medical costs = 0.5 mio.
10 permanently injured persons with loss of earnings (incl. maintenance) 10 * 30,000 EUR annually * pension cash value 20 = 6 million EUR.
Nursing costs for 3 nursing cases: 3 * 25,000 EUR * pension cash value 20= 1.5 million EUR.
Compensation for pain and suffering 475 * 2.000 EUR + 15 * 25.000 + 10 * 200.000 = approx. 3,3 Mio.
Together about 15 million, including property damage, security surcharge, and some minor other cases at the same event, and still excluding future cost increases.
Intermediation by an insurance broker
When an insurance broker arranges deficit coverage, the broker is initially liable for his or her errors until the arrangement is completed. If the insurance sum of the broker should be exhausted by a recourse of the organizer, other its customers would stand in the end without protection.
But since the broker probably can’t pay it either, the IHK would have to revoke his permit in the end. However, the insurer may also be under a duty to provide advice, because in the event of a recognisable need for advice – such as “undercoverage” which is recognisable even to laypersons – the insurer would be obliged to pay compensation. This may in fact result in the insurer having to pay more than is stated in the policy it issues.
Insolvency risk for SMEs
As a rule, cases with incomplete coverage or insufficient sums insured end in insolvency. However, the gaps in insurance coverage can only be identified in time if the small print is analyzed and compared.
In small and medium-sized businesses it is quite typical that the entrepreneur or business manager does not receive a well-founded determination of the risk to be insured from his insurance intermediary.
It is possible that – where it exists at all – it is based on statutory or official minimum requirements which, however, are objectively insufficient. For a liability insurance broker, for example, the EUR 1.13 million insurance sum prescribed by law for obtaining IHK approval is quite obviously not sufficient in the case of incorrect advice.
Later on, the insurer may appoint a so-called surveyor who will be rewarded by the insurer if the indemnity is lower than what is due under the terms of the policy.
There is no other explanation for the fact that an insurance customer from Baden-Württemberg was recently asked, after a fire damage, to simply look for used machines, although the new purchase was insured.
As a rule, it is only after fire and water damage that you realise how large the gaps in cover or the underinsurance are. The statutory minimum cover for financial losses for which insurance brokers are usually responsible (around EUR 1 million) is rarely sufficient in practice to even come close to filling existing gaps.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
by courtesy of
www.juraforum.de (published in juraforum.de, 02.08.2010)
www.nachdenkseiten.de (published August 2010)
www.maschinenmarkt.de (published 02.08.2010 under the headline: Coverage gaps in public liability can endanger the existence)
www.neues-deutschland.de (published Aug 07, 2010)
www.der-bau-unternehmer.de (published in Der Bau Unternehmer 09/2010, page 14)
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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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