Re-insurance by financial brokers and insurance brokers often without information about disadvantages

When substitution of investments and insurance leads straight to liability –


By judgment of 24.07.2015, the OLG Cologne (Case No. 20 U 44/15) ruled that termination and sale of life insurance policies is typically associated with significant disadvantages. Since every insurance broker knows this, he has to point out the disadvantages. If the finance or insurance broker violates a professionally elementary duty to inform, which he must know, he is not even insured for it.


Duty to point out disadvantages in life insurance, PKV and property insurance

In the event of a so-called reinsurance, you lose your previous claims under the previous contract and gain new ones under a future contract. Then the insurance and financial broker has to advise clearly about the disadvantages due to the loss of the previous contract. This is also the case if the new contract has advantages over this one. The breach of duty cannot be negated because the new contract is better. At best, this means that there may be no harm done.


If the broker is lucky, no damage occurs, which is why the breach of duty has no consequences for him. However, it is not sufficient to prove that no damage was foreseeable or improbable at the time of the change of cover – the breach of duty nevertheless remains.


This comes into effect when damage actually occurs. But also, if a damage proves to be possible or not improbable for the future, even if it has not yet occurred – the customer can still file a declaratory action before the statute of limitations sets in.


It also does not matter whether the finance and insurance broker was aware of the breach of duty or perhaps negligently unaware of it – this only plays a role for the liability of his liability.


Double duty to advise – on the termination of the contract as well as on the conclusion of a new contract

The advisory and information duties do not only concern the termination and the sale of previous financial products, but also the risks concerning a new substitute contract. This applies not only to life insurance, but also to private health insurance (PKV), including the change of tariff or insurer, but also to property insurance, including loan agreements and other investments. When switching product providers and products or tariffs, the possibility for errors such as omitted notices multiplies.


Statistically soon surely at least one breach of duty when covering up

It also constitutes a breach of duty if the customer has not received any advisory documentation (in the case of insurance) or an advisory protocol (in the case of capital investments in securities) as a basis for decision-making prior to his order, or if these are incomplete, if not superficial and meaningless. This can be observed in the area of credit institutions in more than 2/3 of all consultations – in the insurance area in more than 85% of the cases. Typical forms for sales facilitation, for example for ticking off, are not recognised by courts because they are not suitable for representing the concrete advice in the individual case even to some extent.


Burden of proof on the adviser and intermediary

In the case of liability, it does not even matter whether the oral advice was correct if complete documentation, minutes or prospectus were not handed over in time before the transaction was concluded. The purpose of the documentation is to enable the customer to recapitulate all the facts that he may not have grasped during the verbal consultation.

The burden of proof lies with the adviser or intermediary – even if he wishes to object that the customer would nevertheless have decided to his disadvantage. The lack of documentation leads at least to the reversal of the burden of proof. But if the customer complains about the inadequate documentation as the cause of his wrong decision, the intermediary is cut off from proving that he had at least given correct verbal advice.

Without an independent expert review, a customer will hardly be able to determine whether, from today’s point of view, a future loss would not have to be assumed. If then only a probable but not yet certain minimum loss results, a declaratory action against the finance and insurance broker can first be considered.


Above-average chances in recourse actions

Some brokers focus on the issue of breach of duty and overlook the possibilities of avoiding damages despite breach of duty. Some also conflate the issue of breach of duty with whether the advice was correct and defensible at the time. Often this is due to the fact that they may not be well advised legally, but often not even expertly.


For example, in the case of the sale of life insurance policies, it is often the case that the intermediary aids and abets a criminal offence if the dealer’s concept of second-hand insurance policies or investments turns out to be illegal from a legal point of view. The other day, a financial broker ended up in custody for being involved in a loan scheme involving fake banknotes.

Not only then does the agent’s liability insurance not provide coverage – neither for damage defense nor for compensation as damages. In the case of the OLG Cologne, the broker had to have the court explain to him that the brokerage of gold as an investment was not even insured in his own liability policy. Perhaps he himself, had relied on a liability broker with no expertise?


Providing only oral advice is insufficient and constitutes a breach of duty

In any case, in the case of recourse, it is aggravatingly added that a merely verbal – even possibly correct – consultation does not help out of liability if it was not also documented to the customer before conclusion of the contract at least in text form, because this is also a breach of duty, the consequences of which lead to liability. With the switching of closed participation as investment two dates are regularly necessary – one for the folder delivery, and then after approximately two weeks at consideration period a date for the signature under the subscription form.


The intermediary even has to prove that he had pointed out existing prospectus errors and negative press coverage about the capital investment and the initiator. Some intermediaries want to give the product provider a “presumption of innocence” in the case of negative press reports, as long as the product provider has not yet been legally convicted. They then keep quiet about negative press reports so that the supplier does not have to suffer from the unsaleability of his products – a view that leads straight to liability.


It is conceivable that the client may have been inattentive during the consultation or overwhelmed by the need to grasp everything quickly, but may have given the impression that he was able to follow and yet not insisted on precise documentation. Or if he has not objected to them as obviously incomplete on the basis of comparison with facts which have partly remained in his memory. If, however, there is a more frequent breach of criminal law, contributory negligence will regularly be ruled out.


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

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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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