The pecuniary loss liability of the insurance broker and other financial service providers

What benefits the policyholder can expect from the insurer

Passive insurance

The aim of the insurance cover is to keep the policyholder free from liability obligations (BGH NJW 1967, 2203). This will also include claims for injunctive relief and removal pursuant to Section 1004 of the German Civil Code, for example in the case of expressions of opinion on the Internet. Decisive are in particular the questions about the insured profession, the insured activities and the exclusions in the insurance coverage. Therefore, an insurance broker regularly does not need a second policy as “journalist coverage” because of the opinions he expresses.

Insurance content

As with any liability insurance, the insurer (VR) must first examine the question of liability in the case of property damage liability (VSH). He must then decide at his own dutiful discretion whether to defend unfounded claims or to pay compensation for justified claims (BGH VersR 1981, 180). Ultimately, the VR is obliged to indemnify the policyholder from claims in one way or another (BGH VersR 1976, 477).

For a claim to be filed, it is sufficient that the injured party believes that he has claims which he is pursuing or will pursue (BGH VersR 1956, 187). Sufficient is, for example, the extrajudicial demand for payment, the demand for acknowledgement, or a notice of dispute (BGH VersR 1979, 1117). Any justification of the claim within the scope of protection of the VSH is sufficient (BGH VersR 1956, 186). The VR then checks in particular whether and in what form its cover is given in terms of time and place, or whether cover is excluded, for example, due to intent on the part of the policyholder. For this purpose, the policyholder is first of all obliged to provide him with all the necessary information about the facts truthfully, if he does not want to jeopardise his insurance cover for this reason alone.

A typical case, for example, is where the motor vehicle owner is innocently involved in a traffic accident – but VR settles and the no-claims class changes. At least as far as the VR exercises its discretion reasonably, the policyholder has to be satisfied with this – without any claims of his own (BGH VersR 1981, 173). The insurer violates its duty of consideration only if it carries out a completely improper claim settlement (AG Munich, judgment of 04.09.2012, file no. 333 C 4271/12).

Duty to provide legal protection

The obligation to provide legal protection (defence cover) or the alternative principal obligation to indemnify the policyholder against liability claims (settlement cover) are principal obligations of equal rank for the insurer. Whether the claim of the injured party was justified is irrelevant for the fact that one of these coverages is owed (OLG Karlsruhe, NJW-RR (2002, 1111). Even if the VR considers the liability claim to be well-founded, it may tactically opt for defensive coverage instead of settlement.

In addition, there are the cases of defence coverage, where liability is out of the question, but the amount of damage is wholly or partially questionable. The BoD must first determine whether the damage is covered by insurance. If the VR invokes an exclusion of cover, e.g. the knowing breach of duty by the policyholder, then, depending on the content of the VSH terms and conditions, cover will certainly exist expressly up to the conclusion of the first or last instance in the liability proceedings as defence cover, because ultimately it is above all the findings in the liability proceedings of the policyholder that are decisive for the cover. He will then be able to reclaim the expenses incurred in the event that there was an exclusion of cover on the basis of the facts established by the court.

The insurer will also be able to check whether there has been a “friendly” interaction between the policyholder and the injured party to the detriment of the VR. If the VR is of the opinion that no insured event has occurred, he must grant defence cover and wait to see whether there has been no breach of duty – or whether, in the case of intent which later becomes apparent, exemption from benefits with reclaiming of benefits will apply. However, should the policyholder, according to the insurer, breach an obligation in the event of a claim, i.e. provide the VR with incomplete or untruthful information, the VR may become completely exempt from performance and must then also no longer offer a defence.

“Section 14 of the VVG merely seeks to give the insurer the opportunity to adequately examine its liability to pay before it is overburdened with a claim. For this purpose, the policyholder has to comply with his duties to cooperate and, in addition to reporting the insured event, also to answer the questions posed by the insurer. If, however, the policyholder has answered the relevant questions and has also otherwise submitted to the insurer’s investigations, he cannot be expected to wait any longer if it is not specifically explained to him which further details or information are required in order to be able to conclusively assess the obligation to indemnify.” (OLG Hamm, judgement of 26.09.2012, ref. I-20 U 23/12).

Default of the insurer

In the case of cash benefits, every liability insurer must, in accordance with § 14 VVG, make at least an advance payment in the amount of the ascertained minimum damage, even if the so-called surveys of the VR have not yet been completed.

The policyholder is not obliged to prove all conditions for the existence of a compensable damage. Rather, it is part of the BoD’s inquiry to consider both the findings of fact and the related questions of law.

“From § 11 para. 2 – 4 VVG [old version, today: § 14 VVG] it can be deduced that the insurer has a duty to expedite in the interest of the policyholder. The insurer is therefore also obliged to examine the insured event quickly and to decide on an obligation to pay benefits as soon as possible. If the insurer does not make any or no useful inquiries or if he drags out the inquiries without any reason, the point in time at which the inquiries would have been finished if he had proceeded correctly is decisive for the due date.” (OLG Saarbrücken, judgement of 09.11.2005, Az. 5 U 286/05-26).

Automatic delay due to breach of the acceleration obligation

The insurer cannot regularly take more than one month to investigate the insured event – even if the investigation or criminal proceedings are still in progress. In particular, the injured party has an interest in speedy settlement (OLG Saarbrücken, NZV 1991, 312; OLG Dresden, judgement of 29.06.2909, Az.7 U 499/09; OLG Hamm, VersR 1988, 1038; OLG Frankfurt/Main, VersR 2004, 1595).

The fact that the BoD considers the inspection of investigation files to be necessary generally has no influence on the duration of the inspection period (OLG München, decision of 29.07.2010, file no. 10 W 1789/10, in: DV 2011, 30; NZV-aktuell vis-à-vis the lawyer (like the insured himself) would have to present the facts leading to liability, even if he defends himself vis-à-vis the claimant. The question is whether this is actually done or whether the BoD insists on it – it may then be agreed that the BoD does not make a decision. If the insured (or their attorney) were to provide false or incomplete information, they could lose their insurance coverage. He and his representatives must tell the truth to the BoD.

If, on the other hand, the VR merely gives other indications, e.g. that the injured party has not yet explained the damage in sufficient detail, that the conduct was not legally causal, or that the conduct of the contracting party was not in breach of duty, these are beside the point. The decisive factor is that the VR has thus not fulfilled its discretion (defence cover or settlement cover), which means a breach of duty on the part of the VR, § 280 BGB. However, this only does not apply as long as the VR is still examining its obligation to perform and the VR has observed the acceleration obligation.

(4/2011, IV). Especially in the case of major damage, delays lead to further damage, which the VR has to avoid by acceleration (OLG Hamm, VersR 1994, 717; 1987, 602).

In the event of refusal to pay by the VR, the insurance benefit becomes due immediately, because the VR’s “collection” is thereby completed (BGH, VersR 1990, 153; VersR 2002, 472; VersR 2007, 537).

“In fact, the existence of a default in the sense of § 286 BGB is a special case of non-performance of contractual obligations, the legal consequences of which arise from §§ 280, 241 BGB.”(ZfV 2013, 449). In the event of a breach of duty on the part of the VR, e.g. if no surveys are carried out or the VR believes that it does not have to comment on the content, the VR must eliminate the “appearance of the existence of an insured loss”.

If the VR reacts to a notification of loss in such a way that, for example, it is unable to recognise any loss, this already constitutes a breach of the VSH insurance contract, because the VR thereby does not make a decision (at its discretion as to which main service it provides) as to whether to defend against the claim for damages or to indemnify against the loss. Unless, for example, he is objectively unable to complete his investigation of the obligation to pay benefits – e.g. because the policyholder has not fulfilled his obligations to cooperate – or the loss is not insured under the insurance contract.

Obligations of the policyholder in the determination of damages

A distinction must be made here between the damage assessment phase. The policyholder is obliged to provide the VR with all information relevant to the assessment of the loss. This may be lacking, so that the BoD has not even been able to complete this phase. This is also the case if the policyholder himself engages a lawyer out of court, who is commissioned by the policyholder with the defence despite existing liability, and who also conducts the correspondence with the VR. Sufficient for a breach of duty on the part of the VR is a prior (implied) reminder, or the unjustified refusal to perform on the part of the VR (BGH, VersR 1990, 153).

The policyholder must take this as a reason for an action for a declaratory judgment if the claims against the VR threaten to become time-barred. The statute of limitations begins at the end of the year in which the claim is filed by the (allegedly) injured party (BGH VersR 1960, 554).

Principal obligations of the indemnity or the defence cover

If the VR decides to defend itself against liability claims, it must bear the costs and, in case of doubt, actively pursue the defence. This already includes correspondence before court, if necessary on-site inspections to preserve evidence and, if necessary, obtaining expert opinions as well as hiring a lawyer if a lawsuit is filed (AG Hannover, VersR 1968, 566).

From the duty of the BoD to investigate in the event of damage, i.e. to examine the factual findings on the one hand and the associated legal issues on the other (duty to investigate damage), it follows that such activities of the BoD are often already to be initiated in preparation for a decision whether defence or performance.

An obligation on the part of the VR to institute active proceedings in the case of defence against the (allegedly) injured party already arises if the injured party resorts to a right of retention, an (implied) set-off or a removal of objects (LG Berlin, VersR 1987, 578). The VR must reimburse its own costs and advances on court costs, even if no recourse payment can be obtained from the injured party (RGZ 124, 235). Should the VR, after losing the case, continue the defence in the next instance, the defence also includes the provision of securities or an unconditional promise of performance to the opponent in the event of the final defeat of the contracting party, in order to avoid compulsory execution on the contracting party on account of the adjudicated claim for damages and the legal costs of the opponent.

Since this security must be at least as valuable as the security provided by the policyholder himself, the insurer cannot reserve the right to make his obligation to indemnify the injured party dependent on further preconditions, i.e. he must indemnify the injured party even if, for example, intent on the part of the policyholder has been established and is then dependent on any possibilities of recourse against the policyholder which may not be of value. If the VR does not decide to indemnify the policyholder against the liability claims in accordance with §§ 100, 106 VVG, the VR must provide the defence cover. This claim is due upon assertion of compensation against the policyholder and notification of damage to the VR after swift completion of the necessary damage investigations.

The VR is obliged to protect the rights of the policyholder “like a lawyer” (BGH, judgement of 07.02.2007, Az. IV ZR 149/93). The VR not only has the right to conduct the proceedings, but is also obliged to conduct the proceedings (BGH, judgement 14.02.2207, file no. IV ZR 54/04). The defence cover by the VR does not yet mean an acknowledgement of the indemnification claim against the policyholder, because it can still turn out in the liability proceedings that there is no VSH cover for the damage. Legal support from your own insurance broker?

If a VSH broker takes over the monitoring of the VR’s claims settlement, he will, according to the opinion of insurance consultants, no longer be able to provide this service comprehensively in accordance with § 59 VVG since the reform of the VVG2008, and will therefore not have VSH coverage himself for errors in this activity. Another view is that assistance in the event of a claim is certainly in line with the Legal Services Act (RDG) as an ancillary service.

However, it is questionable whether this activity would be covered by the broker’s VSH, when “legal and tax advice” is mostly excluded in the standard policy. Many an insurance broker has stumbled across deadlines and traps despite employing a fully qualified lawyer “in the claims service to prepare the claims report to the insurer”, whereupon the client’s insurer has simply refused to pay benefits because of coverage exclusions. However, the VSH broker had committed himself unnecessarily extensively to a “support” according to a free sample brokerage contract, and thus at best relieved the VSH insurer of his financial services clients.

If the VSH broker thinks he has to reshape the claim for better acceptance by VR and make it a little more beautiful, this is attributed to the policyholder, who can thus completely lose his insurance cover due to breach of obligation. Another liability trap for the broker may be to recommend an insurance adjuster to settle the claim. This is because the latter may only act out of court and only vis-à-vis the BoD. Therefore, he will avoid a court decision and instead choose an expert or review process, which can drag on for years.

The out-of-court costs will sometimes be many times higher than what a summary court proceeding for the preservation of evidence or the assessment of damages would have cost. Thereby, in many cases of damage, the judicial independent procedure of taking evidence would be the indicated means of choice in all cases that could lead to a dispute, e.g. with the insurer, whereby all those otherwise affected should be notified of the dispute as a precaution, so that they are bound to the result of the evidence. Without such preservation of evidence, there is a risk that evidence will be lost because later appraisers will no longer be able to determine the condition that existed at the time. Courts will then see the elimination of damage without such a procedure simply as an obstruction of evidence, which can be to the detriment of the insured party.

Primary obligation to regulate or provide defence cover

If the VR decides to settle the claim, it must pay the injured party itself, unless the policyholder has already made advance payments in this respect. It is often argued that each claim reported by the BoD incurs (internal) costs of around €1,000 and thus has an impact on the renta. However, the policyholder is regularly obliged to notify the loss already in the event of imminent damage. In the absence of sufficient information, the very first reaction of the VR will always have to be to make inquiries in order to determine the obligation to perform – whether defence or fulfilment (duty to investigate). If the VR reacts – after completion of its investigations or with non-investigation – without a decision on settlement or defence, the policyholder can sue for a declaratory judgment that the VR must grant insurance cover (OLG Koblenz, VersR 2000, 755). Only after the policyholder has made his own advance payment to the injured party can an action for payment be brought against the VR.

Binding effect and separation principle

If the BoD wishes to invoke an exclusion of risk or lack of cover, the reasons for this must be objective

(OLG Cologne, ZfS 1998, 304). It is sufficient for a claim to be covered that the injured party alleges a claim that falls within the scope of protection of the VSH. Even a remote possibility of being convicted of a claim covered by the VSH triggers the VSH’s coverage obligation (NVersZ 2000, 98), which is enforceable in the coverage process. As long as the policyholder has not rendered any service or paid any expenses, an action for a declaratory judgment is possible. In a liability suit, on the other hand, it is determined what the liability is based on. The reasons for the judgement are only binding in the subsequent cover proceedings insofar as findings have been made. The VR has to put its interests aside in liability proceedings and may not act to the disadvantage of its own policyholder by working towards an exclusion of cover (BGH VersR 2001, 1150).

The VR is obliged to behave absolutely loyally towards the contracting party, as if he were the contracting party’s own lawyer.

On the basis of his discretionary power, the VR could also decide to settle the claim instead of defending it if the claim is justified, even if, for example, the sum insured is insufficient and the policyholder thus encounters a problem of a financial nature. As a rule, the BoD will act similar to a lawyer for economic reasons alone, and will also try to defend itself in less promising cases.

On the other hand, in the coverage process, own determinations can then be made regarding coverage exclusions, insofar as in the

no findings were made in the liability proceedings, e.g. on the exclusion of coverage for the knowing breach of duty.

or of (conditional) intent. The VR cannot refer to other – e.g. uninsured – breaches of duty,

which were not adjudicated in the liability suit. If the insurer wrongly leaves the policyholder alone in the event of a claim, the insurer will be bound by an appropriate settlement on the basis of a court proposal when settling the claim or indemnifying the policyholder.

Insured in insolvency, § 110 VVG

The injured party has a right to separate satisfaction as soon as the liability claim has been established and the compensation claim has become due, so that the payment of the VSH does not fall within the insolvency estate. This requires an acknowledgement in the insolvency table or a judicial determination vis-à-vis the insolvency administrator. Upon the occurrence of insolvency, the indemnity claim of the policyholder is transformed into a payment claim of the injured party, combined with a right of recovery against the VR, § 110 VVG. The insolvency administrator shall remain the passive party in the liability proceedings.

Corresponding payment claims are limited to the payment of the liability insurance (LG Köln, judgement of 05.05.2004, Az. 20 O 690/03). However, the insolvency administrator can also sue the VSH broker for incorrect advice if he has provided inadequate advice on an inadequate sum insured, even if he has simply left the determination of the sum insured entirely up to the policyholder without such advice.

infringement or damage theory

In the VSH, the breach theory applies to domestic compulsory insurance, according to which the content and scope of the VSH cover at the time of the first faulty conduct is decisive. In the case of sins of omission, on the other hand, what matters is the last day on which the omitted act should have been performed in order to prevent damage.

VSH brokers who provide ongoing support, for example, may still have increased the sum insured to an appropriate level by the last minute.

Ineffective serial damage clause

Events which are legally and temporally connected, based on a uniform cause, may constitute a serial loss, so that the sum insured is only available for them together once. The Federal Court of Justice (BGH IV ZR 184/89) considers the serial damage clause to be invalid because it unreasonably disadvantages the policyholder. Accordingly, the clause was also overturned when it was a question of numerous investment consultations on the same closed investment (BGH judgement of 17.09.2003, file no. IV ZR 19/03). Each customer relationship is considered to be a separate claim – even if the same type of error occurred with different people.

Thwarting of VSH coverage by the claimant

Experienced VSH brokers report that (allegedly) injured parties of financial service providers and especially insurance brokers merely plead knowing breaches of duty through their legal counsel in liability proceedings due to carelessness, so that the VSH does not intervene. If, on the other hand, negligent breaches of duty are added, the VR will have to step in on the basis of this in case of doubt – in spite of the additional knowing breach of duty.

Liability insurance does not replace equity

In the event of a dispute over VSH cover, policyholders who operate their business as a corporation for the purpose of segregating their private assets have an advantage. Others may have legal expenses insurance (RSV) that would specifically cover even a coverage lawsuit. In the case of major losses, the VR may think that it will not step in for the time being and wait to see whether the company becomes insolvent in order to come to an agreement with the insolvency administrator more agreeably afterwards. In this case, those entrepreneurs are at an advantage whose company RSV does not provide for the corporation as the insured person, but rather, for example, the managing partner himself, but whose own corporation is also insured.

Liability for pecuniary loss via framework contracts, group contracts, pools and liability umbrellas

Occasionally, a pool or liability umbrella terminates its activities on the market, for example because a connection with a pyramid scheme was identified too late. In this case, affiliated financial service providers will not only be left empty-handed if their portfolios do not belong to them at all, but in the future they alone will increase the insolvency estate. In addition, the VSH insurance conditions or the loopholes they contain often remain unknown. Sometimes VSH coverage exists, but the financial services provider is not even entitled under the contract with the VR to contact the VR for defense coverage or indemnification. If the insolvency administrator, who may be responsible, does not respond to letters from the financial services provider, or responds only slowly, further trouble is inevitable. Here, transparent individual designs can provide better protection for the financial services provider than off-the-shelf products.

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

by courtesy of

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About the author

Dr. Johannes Fiala
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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