Quo vadis brokerage profession: negligent self-inflicted lifetime broker liability?

In view of more than 20,000 liability suits per year, intermediary liability is a special topic, especially for insurance brokers. The insurance brokers, meanwhile, have probably (consciously?) possibly brought on themselves an enormous increase in liability in their profession and a reduction in income. The beginning of the end began in 1988.

In the beginning there was the lobby of the insurers

It’s good to know who’s writing something. If you read “Prölls/Martin” on the commentary to the VVG, for example, you should know Prof. Martin’s connection to Allianz. Do insurance brokers still like to buy commentary from such writers who are on the “pay roll” of certain insurers or their associations?

The initiation of the turnaround began in 1988

The 24th edition of the Prölls/Martin commentary on the VVG in 1988 marked a turning point. The real insurance broker has since been “buried” – the “broker-agent” was created. The insurers distribute the brokerage fees “in the manner of a lord of the manor”, said an industry expert.

Most importantly, the “indivisibility of brokerage fees” was softened. The follow-up brokerage fee should only be paid if the insurance broker also takes over the permanent support, and thus the permanent (lifelong) liability. Even then, the broker’s commission is not secure. Experience shows that some insurers today simply refuse to pay the broker the brokerage to which he is entitled under traditional commercial brokerage law.

This was done on the grounds that, mutatis mutandis, ‘the transfer of the insurance portfolio is refused because too little new business has been submitted to date’. Literally, insurers dare to write, “Of course, we cannot prevent policyholders from being taken care of by you … However, you cannot expect any brokerage from us for this service, which you provide exclusively in the interest of the policyholder.”

Too little influence of the broker associations?

Three leading experts have pointed out the dangers of a change in commercial practice for almost two decades: Mr. insurance broker Peter Odendahl (Munich), Mr. insurance broker Horst Kergassner (Berlin), Mr. insurance broker Hermann Siebenhaar (Neutraubling/ Regensburg). The “new dogma” of divisibility of the brokerage fee introduced by the VVG commentary, according to the motto “without ongoing broker support of the customer, no follow-up fee”, subjected the independent insurance broker more or less to arbitrariness on the part of the insurer as to when there would be a follow-up fee or not.

The insurance broker has thus virtually become a broker-agent and at the same time has an almost “lifelong liability” on his leg. All this in the hope of the follow-up brokerage. Further encouragement for this came from the ranks of those insurance brokers who thought they should send the insurer their entire brokerage contract instead of just their brokerage power of attorney. In this respect, it is not surprising that this more or less unprofessional approach has damaged the formerly free broker guild. But how to deal with the liability now?

Starting point for liability: BGH ruling on guardianship of property

The Federal Court of Justice (Az. IV a ZR 190/83) has specified the broker’s liability in its famous Sachwalterurteil, in particular by numerous obligations (Nachfasspflicht, risk observation obligation, Objektprüfungspflicht, etc.). The normal honorary professional (RA, StB, WP) does not know all this outside of a permanent mandate – on the contrary, it could be understood as forbidden advertising for a (new) mandate in individual cases. The “new” judgement of the BGH of 20.01.2005 (file no. III ZR 251/04) only expresses a self-evident fact here: According to this judgement, no service provider can completely exclude his consulting obligations, above all the cardinal obligations, by means of general terms and conditions (“by way of form”).

Hand on heart: There are also renowned market participants with “self-made” contracts – including those for sales connection. It’s all mixed up – above it it says brokerage agreement, inside it says something about exclusive exclusivity.

Later in the liability trial, many a sales executive is surprised at the judge’s harsh-sounding verdict.

The tip for the professional: Terminate the broker contract of “advice-resistant customers” who do not take out an occupational disability insurance policy despite their financial ability, but who want broker advice in this respect – in most cases, this ends the liability. As a broker, who would want to “top up” a client’s meagre reduced earning capacity pension out of their own pocket for the rest of their life?

And furthermore, the terms of the contract should be negotiated individually – because in the above-mentioned ruling, the BGH “only” ruled on the insurance broker’s general terms and conditions. If you want to make a living as a professional, you should set yourself up that way. This starts first and foremost with your own VSH protection and your own contracts. The OLG Nuremberg (judgement of 27.01.1994, file no. 8 U 1184/93) put it in a nutshell: Not the title of the contract with the customer (brokerage contract) is decisive, but the subsequent activity of the insurance broker.

Even this “little thing” in the distinction is rarely found in the protocol patterns of experts on the market.

Liability provision

Taking precautions against escalating liability means taking action at various levels. In particular, documentation, the choice of the appropriate legal form, sufficient pecuniary loss liability insurance (VSH) and an order restriction belong in one’s catalogue of duties. Those who want to call it modern, call it “Total Quality Management” or ISO 9001 ff.

(a) Documentation:

Jurisprudence requires a mapping of the course of a consultation, i.e. where and what was consulted with whom and how. Unfortunately, the vast majority of “forms” do not represent the consultations in a legally secure manner. Some software providers are trying to remedy this situation. However, without electronic signatures and data protection with data backup, this is usually just an ineffectual attempt at protection. Incidentally, the storage or documentation of email correspondence with “superiors” and “broker supervisors” can provide very valuable services for the broker in individual cases.

It is incomprehensible that some product providers are worse positioned here than clever professional intermediaries. Remember that email from the broker’s supervisor saying “yes that fits – we’ll pay in the event of a claim” – and later the broker is sued because no one backed up and saved that email anymore?

b) future legal form for brokers?:

The corporation is intended to be a brake on liability – not an invitation to criminal behavior. Using a “low cost” limited can be better than not using a corporation at all. Corporations require much more prudence – the administrative costs should therefore not be underestimated, even in the case of a GmbH, and even more so in the case of a small AG.

Here’s another tip: You can become the victim of your own vanity by installing yourself as the “managing partner”, or as just such a board member. This is where “pass-through liability” strikes particularly mercilessly. The professionals in liability matters have inhaled the loopholes of the D&O insurance and implemented them in their own (!) matter. To put it casually: Despite all the administrative problems, the motto could be “Better a Limited or the like as a corporation – than no steel door at all between professional liability and private assets”?

c) VSH protection:

By no means all products that are brokered on the market are currently insurable. A VSH broker with years of experience will first cleanly determine the risk, identify the gaps and educate on them.

For example the VSH broker Ralf W. Barth knows to report that even small things which are used partially naturally like the switching of a GKV (company health insurance company change) are not insured for a long time always. Uninsurable risks may also arise in the area of mezzanine capital and the brokering of profit participation rights.

The fact that hundreds of intermediaries (agents) as employees of distributors are sometimes seen as a cluster risk by VSH insurers is also reflected in the systematic conversion of some pools to broker contracts. Sometimes the contents of the contract are astonishing, when “brokerage contract” is written over it, but in terms of content everything runs back to a de facto agent status. A VSH insurer who only examines such contracts in the event of a claim can thus easily declare a challenge or refuse cover.

The VSH protection in the amount of 1.0 million per claim, maximised to 1.5 million p.a., is an obligation according to the EC Insurance Mediation Directive: But it would be a mistake to believe that one can simply limit the liability towards the customer by “general terms and conditions”. Fiddlesticks! This requires active, informative risk management – i.e. an analysis of the typical contractual damage if the broker negligently overlooks something. Therefore, if necessary, the sum insured must be increased – and an agreement must be reached with the customer individually (not through general terms and conditions!). The author is not aware of a single protocol “on the market” that captures this broker risk of their own (!) underinsurance: Why actually, with so many experts in the loop?

Does the insurance broker accept a “general order” or does he prefer to conclude an “individual order”? The legally secure option of only taking action “on a case-by-case basis” can also reduce the liability risk enormously. Reading the guardianship judgment is only half the battle – the other half lies in practical day-to-day implementation. d) Order limitation: This is a particularly important way of effectively limiting responsibility. Since tax and legal advice is not insurable, difficult questions or complicated concepts should be referred to a – preferably named (!) – tax or legal advisor.

Also, to use a blank brokerage contract without narrowing down the areas of activity would be gross negligence on one’s own part: who would like to broker an occupational disability insurance policy, and later be held liable for lack of insurance coverage in the property area?

Herein lies one of the major sticking points: The call for uniform brokerage contracts, i.e. GTCs, has not only damaged the reputation of the brokerage community, but also drives the broker – in case of doubt – into lifelong liability. By the way: Do you know the case that the widow pays the damage because the deceased broker did not take sufficient precautions in terms of “subsequent liability”? Visit a nursing home sometime – the prospects there are not terrific, but after such a case merciless. An important option for the broker is to terminate the contract with the client – especially in the case of “resistance to advice”.

A time period can also be agreed without any problems in order to take action “on a case-by-case basis”. In general, the scope of the activity can be agreed individually with the customer – individual orders are permissible, but not with the simultaneous exclusion of “any advice and support beyond the brokerage” (BGH judgement of 20.01.2005).

Income provision

In the past, it was almost invariably common for insurance brokers to assume that “the brokerage shared the fate of the premium”. Only in the case of the agent was there a portfolio maintenance commission – in the case of the broker it was later a “follow-up commission”, which of course arose legally with the brokerage. The heirs of the broker could still profit from such subsequent fees – in the case of the agent, on the other hand, the maintenance of the portfolio ended with his death, i.e. the end of the service. If the agent changes, the new agent receives the portfolio maintenance service commission.

In the case of a change of broker, the brokerage fee remained with the original broker, as dogmatically derived by the commentators “Bruck/Möller” or “Prof. Migsch”. Today, a change in trading practices is becoming noticeable, as some insurance brokers (out of a misunderstood short-termism in their thinking?) wanted to enforce that the “new servicing” broker (i.e. not the one who had brokered) would receive the follow-up fees in the future, even when changing brokers.

The damage to the brokerage community becomes apparent when the insurer makes the following consideration: We, Pfefferminzia, send our agents to the customer, arrange for the brokerage contract to be terminated, no longer pay a broker’s follow-up fee – and the whole thing ends up costing us less in distribution costs (because the agent gets less). Do you think Pepperminzia will pay the broker compensation?

Attention.
: The customer determines in this case who gets the brokerage. The Federal Court of Justice (BGH) has ruled (BGH judgement of 13.01.2005, ref. III ZR 238/04) that the insurance broker loses his “commission” if the insurer takes over the management of a contract with a one-year renewal clause himself. Whoever is familiar with the matter suspects that the broker does not get a “commission” – one of several approaches to march through the instances again, if necessary up to the “youngest court”.

In the reverse case, i.e. when a broker takes over the “servicing” of a contract formerly in the agent’s portfolio, there is usually no commission for the broker either. This practice appears to be difficult to understand for the outsider, especially since occasionally this case has already been insultingly referred to as “broker burglary”.

Self-expropriation by the insurance broker: The above-mentioned BGH judgement of 13.01.2005 shows that the insurance broker (and his heirs!) no longer receives a follow-up fee if he has not taken over “care” of the contract. This can be seen as a consequence of a lack of wisdom on the part of the brokers’ associations – the last word on this has not yet been spoken before the BGH. The impoverishment of the broker-agent should be a fact.

Income foregone

An article in the VersicherungsJournal of 24.07.2006 was the culmination of the considerations on the minimisation of the broker’s income: there it is claimed that for the broker “without [vertragliche] duty of care there would be no continuous portfolio fee”. Of course, this is already conceptually unclean, because one speaks of “care or inventory maintenance” only with the agent. In the case of the insurance broker, it is a question of a follow-up brokerage fee, which causally under the old commercial law does not presuppose a “duty of care”.

Support is not a claim of the customer anyway, but describes a service that is not core to the broker’s duties. Rather, the subsequent fee is only the result of a single brokerage in which the subsequent fee is also a causal consequence of the continued existence of the brokered insurance contract (possibly with an annual automatic renewal clause), i.e. it is based on a subsequent premium paid by the customer.

From the broker’s point of view, it makes sense to agree with the client when the existing insurance cover is to be reviewed again for adequacy, i.e. to agree a date for the conclusion of a new brokerage contract. If the insurer were to take the view that an annual renewal clause does not trigger a subsequent brokerage fee, the broker would have to systematically delete such clauses.

Trend in insurers’ sales liability

The above-mentioned BGH ruling marks a conceivable turnaround, in effect an abolition of the broker profession. However, this is also a gateway for customers to hold the product provider liable instead of the broker. This is because it is not uncommon for product providers to train “incorrectly” in the sense of being incorrect (incomplete), for example in the occupational pension market. Now, when the broker-agent partners with the client, he is the witness, delivers the training materials to the client – and that makes it harder for the product provider to meet his vicarious liability.

This has already been successful. In the meantime, some British insurers are taking a completely different approach to broking: they are more or less trying to set up “real” broker relationships, because a real broker (not the broker agents) could represent a shielding effect vis-à-vis the product provider. The outcome of this development is still open.

Trends in distribution costs

The VVG reform is intended to put the policy model to rest – the customer will then receive the contract conditions and information about the acquisition costs before signing. The EC MIFID Directive also points in the direction of greater transparency for the customer. The first sales companies or broker pools are already completely questioning the portfolio maintenance commission of their intermediaries if “no ongoing advice” is given (Handelsblatt.com of 11.08.2006). It’s not just that the trailer fee should be saved – “The customer has to get used to the fact that advice costs something.” It is likely to become increasingly important for intermediaries to consider models of remuneration, especially payments directly from the client’s till as an advisory fee.

by Dr. Johannes Fiala

by courtesy of

www.experten.de (published in ExpertenReport 7 10/2006, page 112)

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About the author

Dr. Johannes Fiala
PhD, MBA, MM

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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