Many financial service providers are dramatically underinsured and expose themselves to unnecessarily significant liability risks.
By Johannes Fiala
Year after year, a five-digit number of financial advisors and insurance brokers are hauled before the cadi due to claims for damages. The number of out-of-court settlements is many times higher. A particularly large amount of “backlog” is caused by gaps in expertise and a lack of risk management. This has not been changed by the entry into force of the EU Insurance Mediation Directive, which obliges every intermediary to take out pecuniary loss liability insurance (PII), which provides for a minimum cover of one million euros per claim. Incomprehensibly, VSH cover is often perceived by financial advisors as merely an onerous task to fulfil a legal obligation or as a formal requirement for broker licensing. Yet it serves precisely to protect the intermediary. It is not uncommon for a well-founded risk analysis to be dispensed with. Experts such as VSH broker Ralf W. Barth warn: “In our opinion, the vast majority of insurance brokers who have limited their choice of coverage to the legally prescribed minimum level are definitely underinsured. Given the particularly low level of premiums at present, it is difficult to explain why many intermediaries expose themselves to this risk in the first place. After all, it is a widespread misconception that one can escape this risk, for example by limiting liability in the brokerage contract.” Several recent judgements have made it clear that in the event of underinsurance not only the VSM broker is liable, but also the insurer itself. The financial services provider is therefore well advised to have a risk analysis comprehensibly documented by the agent or broker. This applies all the more to insurers and pools that “buy in” a VSH – because the legal obligation to manage risk entails the well-known danger of not only losing one’s retirement benefits, but also later having to rely on a check from the social security office. In practice, the coverage levels provided in common VSH insurance concepts for financial services (FDL) offer only a quarter or at best half of what is provided for insurance broking. In the FDL sector, the risk of dissatisfied customers making use of the service is particularly high due to the high level of expectations.
Some supposed specialists refer to the “legally prescribed unlimited subsequent liability”. However, this is a misconception because unlimited subsequent liability only covers the area of insurance mediation. Switching to a new provider must always be checked very carefully to ensure that the retroactive insurance cover of all previous contracts remains in place. The insurance intermediary must also disclose whether he is an agent or broker, register and be insured accordingly. If, however, he acts alternately as agent or broker vis-à-vis the customer, the question arises as to which activities are insured at all under a single cover. Such fundamental issues affect insurers and their sales organisations just as much as pools and small FDLs. The expert risk analysis is the duty of the VSH broker and can neither be excluded by a (mostly ineffective) agreement on a waiver of advice, nor by obliging the client to provide him with the information for the risk assessment. It should also be noted that a VSH only covers the residual risk. The risk recording sheet must not be confused with this – it is usually incomplete and offers numerous liability traps as a result. But the VSH broker is no substitute for a lawyer or a business consultant. Before dealing with the residual risk, strategic corporate planning and legal liability optimisation are important. However, this cannot be achieved with ineffective clauses such as “claims against the intermediary become time-barred three years after termination of the contract” – nor with the hope that the ineffective “limitation of liability to one million euros” would hold up in a German court. Legal risk management also concerns the liability of shareholders and managing directors in the event of a claim – here too, the VSH is “only” the building block for the residual risk. The priority is to implement asset protection including risk management – to protect the assets of the traders.
The author Dr. Johannes Fiala is a lawyer, MBA in financial services, financial and investment advisor, and lecturer at the BA Heidenheim.
(Cash 11/2007, 159)
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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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