A previously unpublished judgement of the OLG Munich (file no. 20 U 4956/06), – because of decision on the non-acceptance appeal at the BGH (file no. 1/1 ZR 288/07 of 18.12.2008) legally binding -, proves the misadvice by insurance brokers in the financing even of million-dollar projects.
DM 110 million construction financing with life insurance policies
An entrepreneur wanted to use the maturity payments from a total of eleven life insurance policies to repay his future loans for construction financing and to redeem mortgages. For mediation he turned to a “special agency” in Munich. The latter arranged life insurance policies for him, each of which also included the death risk for one of the entrepreneur’s children. This was in line with the agent’s advice to insure younger people on the policy to reduce costs.
Tax saving model of the special agency: Deceptively favorable financing concept
The financing model of the special agency provided that the funds extended by the bank did not originate from its own loan funds, but were made available to insurance companies, for which the bank in turn issued a registered mortgage bond to the insurance company. The respective loans and mortgages were to be repaid at maturity by disbursement of the funds from the insurance policies taken out.
Customer deception through hidden costs with kick-back for the bank
This financing model works as follows: The insurance company buys a registered bond from the bank at, say, 5.7%. The bank then takes the money, slaps 0.25% “margin” on it, and gives it to the policyholder (PI) as a loan, i.e. for 5.95% interest. For the construction financier, there are also tax advantages, because the interest on the loan is deductible and the insurance benefit can remain tax-free.
Insurance company’s hope for a return on investment
The insurance company then hopes to earn an average of 6.8% in the end, for example, with the premium money of its policyholders and others – and despite the only 5.7% return on investment at the bank. After deducting its own margin of 0.3 %, it hopes to be able to give its policyholder about 6.5 % on the savings portions in the end. This means that the policyholder would also have a margin (6.5 -5.95 % = 0.65 %): if one now takes into account the costs of the brokerage by the broker (who also earns money from this) and the insurance, the policyholder would only be left with around 6.1 % in relation to his premiums, so that after costs it would still be worthwhile for the policyholder to pay the insurance premiums instead of saving only 5.95 % interest by repaying the loan. The question remains to be explained how everyone is supposed to have earned money in the end through such a series of money exchanges – the customer is most likely to lose out if the hopes do not work out.
Deception through interest subsidy in practice
If necessary, a part of the included costs or brokerage fee is used behind the customer’s back to enable the bank to keep its own margin low, so that the bank loan looks competitively cheap without the customer noticing that he is paying part of it (and not just the disclosed margin) via the costs included in his premiums. If the customer negotiates hard, you have to make the agent a broker with double costs so that the agent has more leeway to subsidize the bank through the costs charged with the premiums. No customer has to reckon with this, because such offsetting from brokerage fees has always been prohibited as the passing on of commissions.
Insurance company bashes insurance agent?
If the entrepreneur had opted for a pure annuity tariff for the construction financing, the death risk, which was unnecessary for the model, would not have been expensive to insure: This would have brought a higher return on the investment with the insurer, and a higher guaranteed benefit, as the insurer later kindly confirms to the entrepreneur. The agent himself had changed his status from agent to insurance broker prior to the referral, roughly doubling his referral fee. With it a liability comes nevertheless additionally to the effect, if it concerns actually only a so-called pseudo broker. Especially since such financing models have been trained for decades by insurers for their agents to promote insurance sales. In any case, the broker is liable in the first instance – in the present case, the expert commissioned by the entrepreneur estimated his loss for two life insurance policies alone at around 940,000 euros. The OLG Munich sentenced the insurance broker – the declaratory judgement is legally binding after an unsuccessful appeal to the BGH.
Broker fully liable for any advice error
Financial advice places high demands on insurance brokers, which they are often unable to meet. Even small errors quickly have an effect on 6 to 7 -digit damages. Brokers often try to talk themselves out of it by claiming that they only helped to arrange the insurance. In fact, however, the judge is quick to determine what consulting services they had actually committed to provide to the client. Possibly also simply because they have factually -even if flawed- produced them. They are then judged on this – not having arranged any insurance for the concept, and not the best, then becomes a liability trap for them. Especially in the case of financing, the death benefit often does not play a role: simply brokering a contract with a standard death benefit is then erroneous. Contracts with increasing or altogether reduced death benefit or also annuity insurance only with premium refunding plus Surpluses in the event of death are then the better choice to be expected.
Control instead of trust
Crass cases of erroneous loan settlement arise in particular when the bank EDP makes it possible to enter one interest rate for the printout on the account statement and a completely different higher interest rate for the actual arithmetical settlement with the customer. Not only the examination of insurance and loan offers for erroneous advice by bank advisors and insurance brokers when concluding a contract, but also the regular monitoring of the settlements of banks for loan accounts and insurers for the payment of maturity benefits should be an imperative for small and medium-sized enterprises. Who spares itself this expenditure, meets in the doubt a greedy mediator and/or advisor, who was trained in former times by a still by far greedier product offerer hardly qualified, but mainly sales-promoting. For the insurer, in any case, the sale of endowment policies with high death benefits has advantages because it also earns additional money from the risk surpluses.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
by courtesy of
www.kommunalverlag.de (published in Kommunalwirtschaft 02/2011, page 84)
www.dashoefer.de (published on 08.02.2011)
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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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