Sale of life insurance policy destroys shapeable additional income

In its ruling of 16 October 2018, the Federal Court of Justice (BGH, ref. VI ZR 459/17) decided how contracts for the sale and assignment of used life insurance policies lead to an obligation to pay damages if the investor or policyholder (UN) of the life insurance policy bears the payout risk according to the contractual agreements, Section 32 of the German Banking Act (KWG).


Liability responsibility is borne by buyers – together with management, but also by their advisors and intermediaries; §§ 32, 54 KWG, §§ 823 II, 840 BGB.


Rights and claims are equated with cash and book money – as a deposit in accordance with the KWG

The Federal Court of Justice had already decided this in the case of a debt collection model in which the proceeds from the termination of a life insurance policy were to be invested elsewhere (Federal Court of Justice, Ref. VI ZR 263/17). The decisive factor is not whether the sale of the LV was not a genuine sale of LV for a fixed price with risk assumption by the buyer – but a type of factoring.

The BGH postulates that not only the acceptance of cash and book money is to be seen as acceptance of funds for a possibly given deposit business in the sense of the KWG, but also assigned claims, regardless of whether the risk of recoverability remains with the sellers of the securities. The detour via the assignment of a claim – in this case in the form of a claim to the surrender value of the life insurance policy – does not therefore prevent a deposit transaction being permitted within the meaning of the German Banking Act only if it has been approved by the supervisory authority and if the other requirements are met. This is the case if there is an unconditional claim for repayment of the deposited money.


Case for initiators and insurers (VR): Invalidity may also exist under the RDG

Up to now, the purchase of life insurance policies with subsequent collection has frequently failed because the buyer does not have a licence as a collection company under the Legal Services Act (RDG), as this would result in nullity – for purchase and assignment (BGH, XI ZR 46/13 and XI ZR 131/13 – “LV-Doktor”). If a BoD pays despite the ineffective assignment of the UN, it risks having to pay twice. The insolvency risk relating to the buyer is also borne by the BoD if the buyer does not receive its first payment in full at a later date.


Extended concept of deposit business:

For the Federal Court of Justice, a deposit transaction can also exist “if the investors do not directly pay cash or book money to the capital holder, but (only) assign to him rights and claims from capital life insurance policies held by them, but the purpose of this transfer of rights is the collection of the surrender value by the capital holder” and this also if “the investors retain the payout risk relating to the surrender value (i.e. the “whether” and the amount of the surrender value) according to the contractual agreements”. The decisive factor is whether the later repayment of the ultimately invested certain amount of money is absolutely promised.


Invalid purchase with collection of life insurance without permission

In the past, the Federal Court of Justice had already dismissed the claim of a policy purchaser against a board of directors on the grounds that the assignment was null and void due to the lack of a licence as a collection company.

In a later decision, the Federal Court of Justice came to the same conclusion, despite the fact that in the meantime the company had been licensed as a collection agency, as the license had not yet been granted at the time of sale and assignment.

By the way, it does not help either if the policy buyer relocates his company abroad.


Admission as legal service provider according to RDG and/or as financial service provider according to KWG ?

Factoring with BaFin approval is a framework agreement in which all receivables are simply transferred to the initiator – even before maturity, with pre-financing.

In the case of debt collection with court permission, individual – possibly also later due – claims are assigned to the initiator for collection.

Deposits can be made as soon as money is accepted with an unconditional promise of repayment. Even if the money comes from the purchase price or the repurchase value proceeds for the LV, or is only paid in instalments over a longer period of time. Also a so-called loan in kind of gold or other assets can become a deposit transaction by promising an unconditional (minimum) repayment of a monetary amount, not just the reimbursement of an equivalent item.

An unconditional promise of repayment, and thus a deposit transaction under the German Banking Act, does not exist, for example, if a “subordination agreement” in the sense of a qualified subordination – also in terms of the General Terms and Conditions of Business – has been effectively agreed.

The BGH considers the latter to be legally effective if the initiator is the leader of a sectarian association and the subordination agreement was not surprising for lenders or members of the sect due to their particular interests, and therefore could not be invalid (BGH, judgement of 26.03.2018, ref. 4 StR 408/17, “King of Germany”).


Wrong design of business models at the buyer?

Violations of the RDG regularly lead to nullity (Prohibition Act). Not, however, if the prohibition is directed only against one contracting party (protective law), as in the case of banking and insurance transactions without a licence (BGH, ruling of 19 April 2011, ref. XI ZR 256/10) – then contracts remain valid under civil law.

However, it could also come quite differently, namely if the main business consists of collecting investor funds and the collection activity is not an independent service at all, but serves another permitted main purpose, and is therefore also permitted in this way (Federal Court of Justice, judgement of 21.03.2018, Az. VIII ZR 17/17). This would be a sign that the design of the business model had been deficient.


Additional income through revocation or additional claims

Regularly, the revocation of life insurance policies (LV) offers the prospect of an additional return compared to the surrender value of the LV. Consultants and intermediaries of the buying companies have almost always failed to explain this. This can later lead directly to liability.

Then the seller of a used life insurance policy still has the option to demand the reversal of the purchase contract due to invalidity according to the RDG – and/or compensation. Of course, intermediaries and consultants involved in such models for the purchase of life insurance policies are also liable for damages. Since the reform of the law of obligations, additional compensation can be demanded even in the case of unjust enrichment, if there is also fault due to the damage, or without fault in the case of nullity – e.g. due to violation of the RDG. If the policy purchase is null and void due to legal prohibitions (according to RDG), not even a clarification will help. The professional liability will refer to your relevant exclusions of cover.


Consultants and intermediaries are liable for the legal costs of the action against the buyer

Finally, consultants and intermediaries may also be liable for aid. A direct consequence of the brokerage of used life insurance policies to dubious buyers may be that the subsequent costs of legal action by consultants or intermediaries may also have to be reimbursed. This concerns, for example, own costs (if the policy is lost in a legal dispute), but also the reimbursement of legal costs of the policy seller including the costs of a private expert – all as part of the compensation. Every customer will be happy to say afterwards “yes, if I had known that”, there would never have been any business with the policy buyer.

Only very few people have secured themselves against the many economic and legal risks and pitfalls – even in the case of brokering to buyers from abroad – by means of documentation.

It is not uncommon for sellers of used life insurance policies not to hear anything from the buyer or agent for years – perhaps until the statute of limitations could intervene at some point ?


Reversal of transactions in the case of life insurance buyers in insolvency?

Hundreds of thousands of life insurance policies were ceded to buyers. Some buyers have gone bankrupt – partly because their concept did not meet the requirements of RDG and/or KWG. Then the liability of intermediaries and advisors is perhaps the second best option.

It would usually be simpler if one could invoke the nullity of the contract in the case of purchase with assignment under the RDG, and then claim the surrender value from the BoD, or if possible revoke the life insurance policy.

Because those who only demand the reversal of the transaction from the insolvency administrator will perhaps only receive a modest partial amount (the insolvency quota) and ask for the difference from the consultant or agent, with the chance of an even lower insolvency quota there.

In addition, there is also the damage that may have been caused by rights to shape the policy that were perhaps given away when the policy was sold – if they were effective – such as the right to challenge, revoke or object.


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


by courtesy of (published on 05.03.2019)



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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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