by Johannes Fiala
Insurance gap The experienced insurance broker will point out two common coverage gaps in the VSH conditions to his VSH client: On the one hand, the lack of coverage if the insured, in particular, “knowingly violates an order, instruction, resolution, power of attorney, or in any other way”. This can be mitigated by individual agreements or special coverage concepts for the insured. Occasionally, the insurer will deny coverage by relying on the claimant’s arguments ? not always successfully. On the other hand, the insurer may invoke the dangerous serial loss clause.
Broker liability under the serial damage clause A serial damage occurs if the damage is “based on the same or similar source of error, through action or omission”. Then it is only one case of damage, so that the sum insured is only available once for all damages. Some insurance brokers “sell” this to their clients by saying “if you, as a tax consultant, incorrectly account for the occupational pension scheme in the annual accounts of various clients, then this is considered to be one claim”.
? so why don’t we just take out a bigger policy right now?
The insurance premium is then unnecessarily high ? a classic error of advice on the part of the insurance broker.
The claims departments of VSH insurers also like to invoke the serialloss clause. One case involved the brokerage of real estate funds. The intermediary had not sufficiently tested the concept ? numerous investors later demanded compensation for damages. The intermediary was granted cover to the extent of the sum insured once ? the rest of the damage was to be borne by the agent himself, and would thus have been over-indebted. Therefore, the agent sued his VSH insurer and won before the BGH (judgement, file number IV ZR 19/03 as well as VersR 1991, 873).
Arguments of the BGH The intermediary owes each prospective investor personal individualized advice. Even if this had affected the same investment object (real estate fund) again and again, in the opinion of the BGH each wrong consultation justifies an own offence, and just no serial damage. The BGH narrows down the concept of serial damage and requires a close legal and economic connection for this. Concretely, it can come to the serial damage afterwards only if the always same and/or similar obligation offence happened with the same customer! If mandates are handled independently of each other, a serial loss is therefore ruled out; such mandates do not form a community of fate within the meaning of the serial loss clause.
However, there are further arguments besides the principle that risk limitation clauses in insurance law are generally tobe interpreted very narrowly. If there are gaps in the insurance cover, these must be made very clear to the insured person ? otherwise such clauses could only be interpreted from the perspective of a policyholder who does not have specialist knowledge of insurance law (BGH, IV ZR 318/02). Further ? and there is only one dissertation on insurance law ? the serial damage clause is likely to violate the transparency requirement (§ 307 of the German Civil Code or § 9 of the German General Terms and Conditions Act (AGBG)), because the legal and economic effect of the clause is hardly comprehensible to the average policyholder.
Conclusion Your insurance broker needs to closely examine overinsurance and underinsurance. 1) The Court of Appeal correctly assumes, and this is not challenged by the appeal, that there are several breaches within the meaning of § 3 II 2 c GCI and thus several claims which are in themselves subject to cover. As an investment intermediary, the defendant owes each individual prospective investor advice tailored to his personal circumstances and, in doing so, correct and complete information about the circumstances that are of particular importance for the respective investment decision (cf. BGH, judgment of 25 November 1981 ? IVa ZR 286/80 ? NJW 1982, 1095 under I 2
b). Each failure to comply with individual independent advisory relationships constitutes a breach which may result in liability claims against the policyholder for which the defendant has agreed cover in accordance with § 1 GCI, regardless of whether the breaches of duty are based on the same misconception about the scope of the advice and relate to investments in the same investment object. This does not allow the individual infringements to become a continuous infringement for which, despite several injured parties, insurance cover is to be granted only once in accordance with the conditions.
2) The breaches of the duty to advise committed in the various mandate relationships as a result of insufficient information about the same investment object are also not combined into a single breach to be compensated via § 3 II 2 c sentence 2 GPC because the matters concerned do not have the necessary connection.
This is the result of the interpretation of the clause.
a) As with all insurance terms and conditions, this clause, which is difficult to specify with its expression “legal or economic” context (Bruck/Möller/Johannsen, VVG 8th ed. IV G 45), must be based on the possibilities of understanding of an average policyholder without specialist knowledge of insurance law (see BGH, judgment of 5 November 1997 ? IV ZR 1/97 ? VersR 1998, 179 under I 2 a and constantly). The view of the injured client of the policyholder, on which the court of appeal as well as the appeal with reference to Bruck/Möller/Johannsen (loc.cit.) mainly want to base themselves, is irrelevant in this respect. The fact that this is a voluntary and not a compulsory liability insurance is just as irrelevant as the third party protective function of compulsory liability insurances emphasised by the appeal. On the basis of the wording of the clause, it is clear to a reasonable policyholder that the cover guaranteed in § 1 GCI for all liability cases arising from professional activity is to be limited already in the case of the same or similar cause and not only in the case of an identical cause (source of the fault).
This far-reaching limitation of risk is in turn limited in a way that is just as recognisable to him, in that it is only to apply if the matters in question are legally or economically connected to each other. In doing so, he will not refer to the “matters concerned” in abstract general terms to his professional field of activity. Rather, he will understand this to mean the respective mandate relationships. The conditional connection of the mandates is lacking if the policyholder has been entrusted with them independently of each other and he is not able to make use of their independent “connection”. although influenced by the same source of error ? The respective accusation of liability is made at the time of the settlement (cf. BGH, judgement of 15 May 1991 ? IV ZR 85/90 ? VersR 1991, 873 under 3 on the commissioning of a tax consultant with the preparation of annual tax returns of the same taxpayer).
aa) It is obvious that no legal connection can be established between the individual investment brokerage relationships solely on the basis of the recommendation and subsequent brokerage of an investment opportunity. The participation in the same closed real estate fund as a kind of public KG may let also legal relations develop between the investors, this can generate however contrary to the opinion of the revision no legally important bracket effect between the contractual relations of the mandates of an investment consultant.
bb) Nor are economic connections created between the brokerage transactions in this way. The investors, who relied on the knowledge of the same advisor when making their investment decision, do not form a “community of fate”, as the revision suggests, which justifies the limitation of the cover, because they must have been aware at the time of the conclusion of the transaction that other interested parties also received similar advice and relied on the information received. It will not be clear to a policyholder that he should not receive the cover promised per se for all cases in which he has become liable for damages only because his insufficient knowledge about an investment object has had a damaging effect on the assets of various investors who were therefore wrongly advised by him.
b) Moreover, the serial damage clause, as a risk limitation clause, is in principle to be interpreted narrowly, i.e. no further than its meaning requires, taking into account its purpose and the chosen wording. For the average policyholder does not need to expect that he will have gaps in the insurance cover without these being made sufficiently clear to him (constant case law, cf. only BGH, judgements of 27 November 2002 ? IV ZR 159/01 ? VersR 2003, 187 under III 2 a and of 19 February 2003 ? IV ZR 318/02 ? VersR 2003, 454 under II 1, in each case with further references).
An extended understanding to the effect that a serial breach justifying a loss of cover should also be given if independent investment mandates are poorly fulfilled due to the same misconception on the part of the adviser is not compatible with this. There is no need here for an abstract specification of when, in individual cases, legal or economic contexts can limit the scope of cover in this professional activity, nor is there any need to address the fears of the revision that there would no longer be any significant scope of application for the serial damage clause. According to the undisputed facts to be taken as a basis concerning the independence of the agency business, any other understanding of the clause in this case would run the risk of deviating from essential basic ideas of the statutory regulation of private liability insurance to the detriment of the policyholder. This provides in § 149 VVG the financial coverage of the responsibility of the policyholder arising from the individual liability case towards a third party as the object of the insurer’s promise of performance (see BGH, judgment of 28 November 1990 ? IV ZR 184/89 ? VersR 1991, 175 under 3 a).
c) Whether, with the understanding demanded by the appeal, the serial damage clause could still stand up to review under the law on general terms and conditions, does not appear to be beyond doubt, but ultimately does not require a final decision.
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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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