The liability of “freelance” agents and salaried insurance agents
Dr. Johannes Fiala, Munich, and Peter A. Schramm, Frankfurt am Main
If the insurance company has assumed unlimited liability for an exclusive agent or multiple agent, no permission is required to act as an intermediary – registration by the insurer is more or less a formality. If an intermediary (agent/broker) has a licence, persons employed by the intermediary – with supervision by the intermediary – do not need a licence or authorisation. Such employees are also allowed to arrange insurance. How far does the liability of these groups of persons without the necessary permission to act as insurance intermediaries extend vis-à-vis their principal or employer?
Similarities between free and salaried agents
The legal principle (vicarious liability), but often the practical exception, is that the insurance company is liable for its agents, just as an intermediary company is liable for its employed insurance intermediaries. As a rule, there is – usually in addition – personal liability of the vicarious agent, for example because of the following reasons: Appearance as a professional, expert, specialist, occupational pension consultant, etc. can mean the claiming of personal trust on the part of the customer. An own economic interest, which goes beyond the mere commission, can also lead to own liability. This is conceivable in cases of fee-based advice or if the client pays additional remuneration in addition to the commission. In addition, there is the further field of unlawful acts – i.e. above all fraud and money laundering offences. Kick-back agreements can be an example of this. Finally, the violation of work instructions, service regulations or other contractual obligations can also lead to the agent’s own liability. Unclear employee contracts, mostly self-assembled form contracts or free samples, can give rise to personal liability without this being apparent at first glance. This area also includes unclear printed matter, such as a business card, which can give rise to self-liability, as it were, as a bogus self-employed person.
Waiver of recourse and release from liability in the case of free agents
However, the fact that in many cases the insurer is liable for its agent vis-à-vis third parties (customers) does not automatically mean that the agent is not also liable (jointly and severally with the insurer) or is not subject to recourse by its insurer. The agent may obtain a declaration from his insurer releasing him from his own liability to third parties and waiving any recourse against him. A close analysis of such agreements shows that significant gaps often remain at the expense of the agent. Examples include: Individual activities are not covered, such as advising employees in the context of occupational pension insurance brokerage. Individual products or lines of business are not included, such as fee-based advice in occupational pension schemes or the brokerage of working time account models. Limitation of the amount of the liability assumption – despite conceivable far higher damages in the event of an agent’s error or high deductible of the agent. Limitation of the total claims of a year – despite the conceivable case that the agent has systematically always made the same mistake in the mass insurance business. Limitation to cases of slight negligence or partial lack of inclusion of employees. Such gaps must then be closed – ideally on the basis of a written expert opinion or appraisal by an actuary, lawyer or specialist broker. How high, for example, is the customer’s loss if an inheritance worth millions is invested in a life insurance policy with a contractually agreed premium payment period of five years instead of in one that is only deferred after five years?
Recourse situation with the employed agent (also: agent of the broker)
One day, the first claim is made by the employed agent – In the end, the pecuniary loss liability (VSH) pays. The insurer charges the boss with “deductible and fee insertion”. The fee insert stands for the broker (i.e. at the boss level) for the earned brokerage or commission. The fee can be excluded against a surcharge with the VSH insurer – this is in the hands of the boss. Now the employed agent is taken into recourse: he is supposed to pay “deductible and fees” because, after all, he is also responsible for the damage. After all, it was the agent’s negligence that caused VSH to settle. The agent figures he’s covered after all. But as far as the co-insurance does not exist, there is no replacement. Some employed agents are not insured at all – in case of damage, the recourse of the boss can first lead to the termination of the cooperation and later to insolvency. The agent goes on to consider that § 7 of the GCI states that the insurance company will only take recourse in the event of intent. But this concerns the agent’s relationship with the VSH insurer, not with his own boss. In some insurance policies, the waiver of recourse is regulated differently – one more reason to inform yourself. The agent gets the idea whether he should have insured himself better? It is hardly comforting that such recourse claims by the boss are usually not even covered by the VSHS protection in normal policies. It is therefore up to the agent to question the coverage concept of the boss in his own interest. The agent is checking to see if the boss hasn’t waived liability on his agents? Unfortunately, a look at your own contract doesn’t give you anything for this. On the contrary – as a rule, the boss can also still charge the agent for the operating costs of a working time to settle the claim, it is explained to him by the lawyer – this is how the judges see it. The agent is helped by a look at the internet: Maybe liability is waived because of so-called hazardous work? But the boss pleads full liability due to a gross error, the agent knows that the question of damage sharing will be contentious – a long legal battle could be looming and no one knows how the last instance will decide in the end. This path does not seem safe. The agent goes on to consider whether it wasn’t a mistake on the part of the boss, at least in the agent’s guidance or the way the office was organized. Sorting this out in court can take years – if it doesn’t go well, there are the legal costs to boot. The agent considers whether the boss should not have insured the risk elsewhere or differently? Otherwise is not a good idea, because the insurance conditions always provide for a deductible. But different? Yes, you can think about it – but what about the extra premium and possible conditions imposed by the insurer? The agent had not cared about these issues – now the legal consequences, unknown until then, hit him. In our case, the hired agent is left sitting on his damages, the risk has already materialized. But what can he do – before? First of all, make a liability agreement. Alternatively, check the boss’s insurance plan and set up your own. The scenario technique helps here not to leave a gap unconsciously open. Going to an actuary, lawyer or specialist broker can be helpful because “only the donkey advises himself” as the saying goes.
Indemnity for multiple agents
If the multiple agent has a release from liability with waiver of recourse from all insurers, the insurer in question will already be liable! But who is this if the agent has advised incorrectly against taking out an insurance policy and so no contract has come into being at all? Or more complicated: He is an agent for two life insurers and one accident insurer and advises an accident insurance, although actually an occupational disability insurance would be needed? In practice, then, the multiple agent’s indemnity may be worth little.
Protection of the customer or protection of the agent?
The legislator is primarily interested in consumer protection. The customer should be compensated in the event of liability. His claims should not go nowhere just because the intermediary is unable to pay. The subsequent inability of the agent to pay after the customer has been indemnified in the liability case does not interest the legislature at all. Risk provision for this case is the responsibility of the agent himself out of his own interest. Coverage concepts for the VSH insurances or indemnities required after the implementation of the Insurance Mediation Directive must therefore initially only be based on these requirements of the legislator in the interest of the customer. After the customer has been compensated, these concepts can basically care less about who ultimately has internal recourse for this. So the agent has no choice but to look out for his own interests here. Not at all meant by the coverage concepts with regard to the implementation of the Insurance Mediation Directive are the even more frequent cases where the agent’s activity has not caused any damage at all to a third party (the customer), but very much to the insurer itself. Example: The agent forgets to correctly enter the customer’s verbal answers to the health questions and the insurer cannot withdraw from the actually undesirable risk due to the eye-and-ear jurisprudence in the event of a claim. The customer has no loss at all due to the agent’s error, but the insurer does. This constellation falls neither under the usual indemnity agreements nor under the VSH offers to fulfil the minimum requirements due to the Intermediaries Directive. There is no waiver of subrogation in this case either, because it is not subrogation at all if the insurer holds the agent liable for it, but the assertion of direct liability claims of the insurer against the agent. The legislator is not interested in this at all with regard to consumer protection of the insurance customers. The agent may go bankrupt, but no consumer was harmed. Well advised who has thought of this case before.
The authors: Dr. Johannes Fiala is a lawyer (Munich), mediator (Univ.), MBA Financial Services (Univ. Wales), MM (Univ.), certified financial and investment advisor (A.F.A.), EC expert (C.I.F.E.), lecturer for civil and insurance law (Univ. of Cooperative Education), banker (www.fiala.de); Peter A. Schramm is actuary DAV (Diethardt), graduate mathematician (Univ.), expert for actuarial mathematics, publicly appointed and sworn by IHK Frankfurt am Main for actuarial mathematics in private health insurance (www.pkv-gutachter.de)
(Insurance Industry 23/2007, 1952)
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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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