The free “insurance broker contract
In recent decades, the call for standardized forms has led to brokers who are not legally trained to make use of “free samples of no value” – they are then often really free in the other sense of the word – namely in vain. A specimen similar to the “Verbandsmuster” is here subjected to a first rough review:
Deadly headline and preamble:
Zitat: “Insurance and financial brokers …” – “Insurance brokerage contract” in basic studies, business economists and lawyers learn about the “contract” (§§ 662 ff. BGB), with special rights and obligations. The insurance broker acts “on a case-by-case basis” (§ 93 HGB) – once he has covered the risk, his job is done. Calling it a “contract” is unspecifically beside the point – just as the drafter of the contract did not see or address the actual legal problems with the contract.
The designation as “broker’s order” with a suitable legal supplement for clarification, would help to keep the order and the liability within bounds It is also a pity that building societies do not offer “broker ties” according to § 93 HGB: So the question arises whether this broker is not also an agent, and thus inevitably very much a tie-up with construction financiers:
A written lie in the preamble?
The insurance mediation contract has special features and is to be regulated differently than, for example, a loan mediation or the building society distribution. Therefore it is advisable to separate the contracts, if necessary also to work over several companies. by the way, some brokers are only registered and insured as such – in other areas, the “appropriate” VSH coverage is often missing until today!
Deadly power of attorney in brokerage contract:
Quote: “The power of representation of the insurance broker vis-à-vis the insurance companies results from the brokerage power of attorney granted by the client. This power of attorney includes …”
The insurance broker includes the power of attorney in his “contract” – how practical: Then he has to present his “contract” to every insurer, which is not necessary at all. Even more: If the power of attorney is revoked, the broker must also return his copy of the contract to the customer (§ 175 BGB) – he no longer has any suitable evidence for a possibly necessary deed process later.
Clean legal work can be recognized by the fact that the power of attorney and the brokerage agreement are recorded in separate documents. It is best to have at least two copies of the power of attorney – that way you still have one in your file in case of an emergency. Originals should be reclaimed from the insurer immediately, otherwise how can they be returned to the client later (e.g. at the end of the broker’s mandate)?
Quote: “All measures and declarations that are of fundamental importance for the insurance relationship require the agreement of the principal.”
It is also nice to see the regulation that “all measures” require the agreement of the client – in case of doubt, the insurance broker will certainly lose his coverage in the pecuniary damage liability (acting without a mandate, as a knowing breach of duty). Our broker is therefore uninsured and entirely responsible for urgent measures (the lawyer often calls this “emergency management”) in case of doubt.
Some “professionals” apparently sell the same contract text over and over again for a lot of money, sometimes with software. A typical error would be, for example, that the legal situation after the reform of the law of obligations since 1.1.2002 has not been taken into account. A network of colleagues can help to know dubious alleged experts, before one spends money senselessly and has to reclaim later laboriously.
Deadly Broker Duties:
Quote: “The client commissions the insurance broker with the management of his insurance matters. This management extends to existing and future private and professional/commercial insurance relationships brokered by him, as per the attached appendix, with the exception of statutory insurance.”
The insurance broker takes over the “care of the insurance matters”, without any ifs and buts. If the customer acquires an animal, the broker must know it by virtue of a special clairvoyant gift – otherwise there would be no insurance cover. Supervision turns the “contractor” into a “lifetime guarantor” – no broker can practically do this, but thousands have assumed such duties in their contracts.
Check performance and consideration with your contractual partners, for example the software supplier, your own VSH broker and the professional association. Model contracts should not unnecessarily increase broker liability by using the “magic word” of “care”. A conscientious VSH broker will look at all contracts with product providers (broker duties include property investigation and underwriting!). A competent VSH broker will also have to look at the “brokerage agreement” and then point out, without being asked, that according to the usual VSH conditions, an activity concerning “already existing” (but not yet transferred in the portfolio) insurances are not covered by the VSH protection.
Quote: “The insurance brokerage contract is concluded for an indefinite period. However, the minimum term is one year. …“
How serious the broker is, is also clear by looking at the “term” of the contract – at least one year the broker guarantees in writing the “care”, probably he does not even know how expensive this can cost him (without personal clairvoyant talent). In case of doubt, the “client” would always have insured himself on advice if he then suffered an unforeseen loss – this brokerage contract simultaneously replaces any insurance cover, however remote, within the broker’s ability to pay.
Broker assignments must be limited as far as possible, because the legal rule is that the broker acts “on a case-by-case basis”: Nowhere in the HGB does it say anything about a “broker’s duty to look after”, but that the insurance broker is just “not permanently entrusted” with the risks of his clients – only this responsibility can be managed. Perhaps our insurance broker also does not know the legal term of “care”: This can be found in the law especially under § 1901 BGB: Maybe it is part of the profession of an insurance broker according to the idea of some “lawyers and association functionaries” that not only a supplementary care insurance is brokered first, but that the insurance broker later also legally organizes the home care for his broker clients. However, our broker does not want to take care of the private compulsory long-term care insurance – which is a statutory long-term care insurance just like the social insurance.
Deadly customer obligations in the brokerage contract:
Quote: ” The customer undertakes to inform the broker without delay of all personal and financial changes and other changes in risk that could be of significance for the insurance cover, for example family or professional changes, changes in place of residence and changes in income.”
It is also fine if the customer is allowed to inform the broker about “personal changes” (customer has flu?) and “other risk changes”: Unfortunately, it is the core task of the insurance broker to investigate the risks and to check the objects – not the customer, but the broker is “the expert in risk”. Only the broker is here in the duty personally (!) to check the circumstances, and to know the conditions. Such clauses are certainly void. Who would accept it if the garage foreman said to the customer during the inspection “So, what has changed in your car since the last inspection and needs to be repaired, you have to tell me yourself, and without being asked – Mr. Customer!”.
Anyone who calls themselves an insurance broker should really be an expert on risk, and not think they can turn the world upside down by trying to impose on the client to identify any changes in risk. A good VSH broker can be recognized by the fact that he also completely inspects the employee contracts, because otherwise it is almost certain that the “VSH special concept” is incomplete – in the event of a claim there is then no cover in case of doubt, despite premium payment.
The client mentions that he will be travelling to the USA in two weeks’ time – the broker hurriedly arranges luggage and overseas health cover with his client – he does not want to pay the 20,000 EUR for repatriation himself. Customer reports that the trip has been cancelled – he is ill – oh yes, and how is it actually with the travel cancellation insurance, someone must now pay for the cancellation costs of the trip, what do you have a broker for?
Contradictory scope of brokerage Quote: The insurance broker covers the risks of his clients with insurance companies established on the market which have their registered office or maintain a branch in the Federal Republic of Germany. If the nature of the risks or the market conditions so require, the insurance broker shall also be free to procure insurance from insurers operating in the provision of services. Insurance contracts are not brokered to direct insurers, companies without a branch in the Federal Republic of Germany or insurance companies that do not grant the insurance broker any remuneration.”
Confusing and contradictory is the information about brokerable insurance. Initially, the broker only covers insurers with their registered office or branch office in Germany. However, insofar as these do not cover risks, insurers operating under the freedom to provide services may be added – this will probably oblige the broker to cover these risks as well. However, the next sentence then states that no insurance contracts are then brokered to these insurers in the free movement of services (i.e. without a branch). Nevertheless, the customer can pay a fee for this if desired – presumably then for the mediation and not for the non-mediation.
The Federal Court of Justice has repeatedly “overturned” contractual clauses simply because they were “non-transparent” – a perennial issue, especially for the insurance industry, which is not always popular with legislators and the courts. Therefore, according to decades of case law, all clauses should also be “readily comprehensible to the layman”. Insurance experts should also check their own risk, i.e. think about who will compensate them for the damage if contracts lead to a liability case – and above all whether this “someone” will then still be able to do so by virtue of good creditworthiness?
Deadly liability clause with void statute of limitations:
Quote: “Any claims for damages on the part of the client arising from the insurance brokerage contract are limited to the amount of EUR 1,000,000.00 for cases of damage caused by simple negligence. Claims arising from the insurance brokerage contract are subject to a limitation period of three years from the date on which the claim arose, but no later than three years after termination of the insurance brokerage contract.”
This is another case of legal incompetence, because the insurance broker only wants to be liable for one million. There is only one type of contract in which the customer can be expected to do this – the cleaning contract: only in this case can the customer have a better overview of how valuable “his best piece” is in order to foresee whether the one million liability is typically sufficient.
The regulation of insurance brokers’ liability, if it is to be effective, must be made on a case-by-case basis. A good insurance broker is an expert “even in matters of his own risk”, and will therefore seek training from the lawyer he trusts on how to effectively limit liability. This usually requires a bundle of measures – in other words, nothing that can be implemented overnight: The VSH cover is only the mental keystone, classically only there to cover a remaining residual risk.
If the insurance broker arranges about 3 million private liability as cover according to a (mostly unsuitable) association recommendation, and if then the probably practically most frequent case of loss occurs, namely the application is accidentally left lying around or slips into the wrong customer file, then the customer’s risk has a corresponding amount. And then the broker has to inform the customer about it, he is also the “expert for risks” towards his customer – in any case, every judge will wipe the liability limitation in the model contract of only one million off the table.
Even more: The limitation rules in this contract are in any case not compatible with the new law of obligations in force since 01.01.2002. The statutory rule is a 10-year liability period, and only minor deviations from this can be made in sample contracts. Every small commentary to the BGB can be taken that a shortening to 3 years is ineffective. It is thought-provoking when some brokers do not recognise such “models” as worthless – and worse when individual pools and brokerage companies are said to have paid four- and five-figure sums for similar elaborations in recent years – presumably to formerly very good lawyers.
The current market upheaval offers tremendous opportunities for above-average revenues with the right strategy. Without risk and contract management, it could be pure chance to keep the assets you have acquired into old age. Although it is the judge who triggers the guillotine in the end, many a mediator has already voluntarily laid his head on the scaffold many years before?
Insurers provide advice only to a limited extent The new Insurance Contract Act (VVG-E) only provides for an obligation for the insurer to provide advice and, if necessary, to ask for advice, if the insurer recognises this and only in relation to the products concluded. The obligation assumed here in the brokerage agreement goes beyond that: thus, the broker will never be allowed to rely on the insurer.
A “care” – which is not tied to any further preconditions – which is agreed upon contractually as in this case or even only by the fact that the broker is named as caretaker by the insurer or that the broker passes on this insurance policy without restriction), goes much further – this is how the court will see it later (when the customer has the claim).
The new legal obligation for insurers to provide advice does not help brokers; in fact, it poses a threat to them. The law actually makes it worse for the broker – not easier. Because now the customer (or his lawyer) turns to the insurer because of the damage from inadequate demand and consultation of the broker, demands already on the basis of the law compensation, and the insurer refers to the broker (who has taken over the support anchored in the insurance policy unchallenged).
The customer, who at first thought that he could accuse the insurer of neglecting his “duty to advise”, will – if his loss then turns out not to be the legal case after all – hold the broker harmless.
If, for example, the broker client defaults on payment, the insurer will inform him of the consequences for his existing contract and finally terminate it. The broker is regularly informed by the insurer about the reminder, thus has positive knowledge of the delay in payment and the possible consequences. If the broker – trusting in the sufficient “advice” by the insurer – does not act in an advisory capacity in good time before the cancellation, the customer may later hold him liable if no other insurer takes him on because of the cancelled contract for reasons of creditworthiness.
Some lawyers offer an “initial consultation” – i.e. a short consultation (usually lasting up to 60 minutes) for just under 250.00 euros. As a rule, this scope should be sufficient to determine whether a contract requires revision because it violates mandatory statutory provisions or established case law. Freely according to the motto “Better ask your doctor – but never the pharmacist”.
By the way: A good legal advisor will also have his client’s risk checked at an early stage, for example by an actuary – and insure it appropriately. It is said that there have been lawyers who have lost their licenses solely due to “lack of quality and risk management, as well as incorrect own VSH coverage”:
So why should the insurance broker be any different on this point? When all else fails – you can’t even hang yourself!
by Dr. Johannes Fiala, Dipl.-Math. Peter A. Schramm and insurance broker Hermann Siebenhaar
by courtesy of
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About the author
PhD, MBA, MM
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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