Unlimited right of withdrawal for life insurance policies – what now?

Current BGH ruling: Insurance customers are entitled to repayment


A hitherto largely unnoticed, recent acknowledgement ruling by the Federal Court of Justice (BGH) of 29.07.2009 (Ref. I ZR 22/07) surprisingly confirms that a life insurance policy with payment of the annual premium during the year in return for an instalment surcharge constitutes a consumer credit.

According to the version of § 355 (3) BGB valid as of 01.08.2002, such a consumer loan can be revoked for an unlimited period of time – probably also for old contracts since 1991 – if – from what one must assume – the special right of revocation for consumer loans was not instructed. The revocation then eliminates the complete, associated life insurance contract from the beginning – all premiums and income generated by the insurer from it must then be repaid to the customer.

This also applies if the contract has already been terminated by notice. As a rule, a higher benefit can be obtained through revocation than the normal surrender value. However, even the minimum surrender value according to BGH case law – amounting to only approx. 40% of the premiums paid in the first few years – is deducted from the claim to all premiums plus the surrender value. Interest rates on revocations far exceeded.

According to the case law of the Federal Supreme Court (BGH) and the Constitutional Court (BVerfG), the minimum surrender value on termination is only half of the unzillmerised actuarial reserve or the unzillmerised fund assets at any time of termination.


BGH ruling on effective interest rate indication for instalment surcharges

For older contracts or for customers who do not wish to cancel, there is also often money back. The BGH ruling also established that the obligation to state the effective interest rate, which has been in force since 1991 at the latest, also applies to monthly, quarterly or half-yearly payments of insurance premiums with instalment surcharges. The rule for insurance premiums is that an annual premium is due at the beginning of the insurance year – this can then be paid in monthly instalments for an additional instalment surcharge, for example.

If the insurer charges a 2% instalment surcharge, this roughly corresponds to an effective interest rate of 8.33% for a half-yearly payment. And usual 5% installment surcharge for monthly installments is even 11.35% effective interest rate. A good deal for the insurer – it can hardly invest any better today, since the ECB is known to offer only 1% interest. For the customer it can be interest usury, because if the conditions according to the former consumer credit law and/or today’s §§ 499, 502 BGB are not present, only the legal interest of 4% may be required.


Excessive instalment surcharge must be repaid

However, 4 % effective interest for monthly instalments then only allows for a 1,81 % instalment surcharge, so that 3,19 percentage points of the 5 % instalment surcharge have to be repaid. If, for example, a customer has been paying 500 euros a month into his endowment policy since 01.01.1991, including a 5 % instalment surcharge, he can now claim back more than 3 % of the 114,000 euros in premiums paid up to December 2009. This is already about 3,500 euros reimbursement claim against the insurer, plus interest for the use of capital.


Insurance customers can demand re-billing and repayment

Until now, the insurance industry had hardly adjusted to the fact that the effective interest rate must be shown in the case of rate surcharges. However, depending on the terms and conditions of the insurance policy, life insurance policies may also have different rules, which provide for genuine monthly premium payments instead of monthly instalments for the annual premium – in which case there is no consumer credit.

A consumer association had brought an action against an insurer under the Injunctions Act because the insurer had not stated an effective interest rate in the clause on instalment surcharges. The insurer has now expressly acknowledged its obligation to omit such clauses without stating the effective interest rate before the BGH. In the view of the Federal Court of Justice, agreements on payment by instalments with instalment surcharges were also to be regarded as consumer credits in the case of insurance premiums.


Failure to comply with mandatory legal requirements leads to liability in the billions of euros

If, for example, the cash price, the instalment price as a total amount, the amount with the number and due date of the individual instalments or the indication of the annual percentage rate of charge are missing in a consumer credit, the contract is void or ineffective. Only when a service is rendered to a consumer – for this purpose the granted insurance coverage is already sufficient – does the contract become valid. However, if there is no indication of the instalment price or effective interest rate, the interest rate is limited to the statutory 4% p.a..

Customers can thus demand repayment of the difference between the 11.35 % effective interest rate and the 5 % instalment surcharge plus a reasonable interest rate for the interim use of capital by the insurer. The latter is obliged to re-invoice. And if, in the case of life insurance policies in connection with such instalment surcharges, no information was given – as is customary – about the special right of cancellation for consumer loans, the version of the German Civil Code in force since the 2002 reform of the law of obligations provides for an unlimited right of cancellation, which was even extended to older continuing obligations – such as life insurance policies – from 2003 onwards.

The legislator has not spared the insurers but only the credit institutions in the case of the right of revocation by avoiding a retroactive effect for old contracts by law (in the case of usual doorstep transactions).


Liability of the Management Board

This can even lead to the responsible overall board member being suspected under criminal law of interest fraud, and in the end not only losing his job, but also the entire pension scheme provided by the insurer. Often, all that is needed is a criminal conviction, a penalty notice or a dismissal by BaFin for lack of suitability.

In addition, affected board members are liable with their personal private assets due to a lack of risk management – otherwise you would have to part with a host of overburdened legal advisors and hold them accountable as an example. In the worst case, there is the threat of an accusation of delaying insolvency with personal liability for damages if the management board fails to notify the supervisory authority of an impending insolvency in good time.


Excess insurance premiums will not be due

Because of the severe penalties for non-payment – e.g. the lapse of the insurer’s obligation to pay benefits – case law places very high demands on the “clarity, accuracy and correctness” of premium invoices in order for them to be due at all.

Therefore, consumers can refuse to pay the excessive premiums until the insurer sends a correct premium bill with a reduced rate surcharge that is still allowed by law. This puts the insurer in a bind. Only when he has correctly recalculated the premium instalments with the statutory interest and a corresponding insurance certificate has been received, the now reduced premiums – without any reminder and default costs – become due.


Life insurers repay billions

Around 3% repayment of premiums for the current and previous years up to the statute of limitations limit will hit even a medium-sized life insurer with a few billion euros in premium income with several hundred million euros in repayments. In addition, there are the much higher repayments of the premiums plus. Interest on revoked contracts. In the industry, these reclaims alone from contracts that have already been terminated and from new billing due to excessive rate surcharges in the case of contracts that have not yet been terminated add up to more than 60 billion euros.

If, instead of re-billing, existing contracts are increasingly revoked because more can be gained from them than from repurchase, this amount can still increase significantly. However, no insurer will pay without being asked – the customer must expressly request repayment. However, only insured persons who are aware of their entitlement can do so. By the acknowledgement at the BGH, the insurer has first of all prevented too great a publicity effect for the industry: Acknowledgment judgments are not published on the BGH’s website.


Agents should avoid shaky candidates

Since the repayments can endanger weakened life insurers, intermediaries should pay attention to how the individual insurer is affected by this problem when taking out new life insurance policies. Some life insurers, in particular a systemically important one, are not affected at all. Others may still not indicate the effective interest rate and do not grant a special right of withdrawal for consumer loans, even though they charge instalment surcharges – they then risk the withdrawal of all relevant contracts for decades to come. Incorrigible insurers and those that do not disclose how badly they are affected when asked should be avoided.


Take advantage of the opportunity to mediate and make a new start

Due to low surrender values as a result of acquisition costs, cancellation deductions and price collapses in unit-linked insurance policies, many policyholders are trapped in their contracts, which are now no longer considered to make sense, because they cannot withdraw without incurring high losses. The broker can now often offer these customers a way out by revoking the contracts due to a lack of information about the right of revocation for consumer loans and reclaiming the premiums paid in, including interest.

The recovered funds are then available for reinvestment in new better contracts arranged by the broker. Given the two-digit million number of contracts affected – including those already terminated and bought back – this can even be systematically used as a sales concept, especially by large distributors. In this way, even insurers that are not affected can offer dissatisfied customers of the competition an alternative to loss-making termination and surrender or often equally unfavourable premium waivers by means of scheduled reinsurance. Seminars and training courses on this topic that can be implemented in sales are to be expected.


avert liability

Brokers who may have been held liable for brokering unit-linked and other life insurance policies can now often escape compensation for damages, even in the case of proven incorrect advice, by pointing out that no damage has been caused at all.

Because if the policyholder can revoke the contract (which may have already been terminated) today and reclaim his premiums including interest, the loss from the loss in value of the funds will vanish into thin air – a welcome prospect for VSH insurers as well. Finally, the customer is then entitled to the usual long-term capital market interest with compound interest as compensation from the insurer in addition to the full repayment of all premiums paid, after offsetting biometric risk costs.


Protector affected?

Since the annual report of Protektor AG mentions rate surcharges in the declaration of surplus, rate surcharges may also have been customary for the contracts taken over from the former Mannheimer Leben. However, even if Protektor’s equity capital should not be sufficient to cover the customers’ claims for repayment, the industry has committed itself to further injections of EUR 6 billion, which means that, in any case, remaining Protektor customers do not have to worry about the continuation of their contracts even if there are a large number of claimants – even if the larger number of those who have already been terminated assert their claims.


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

by courtesy of

www.experten.de (published in Expert Report, issue 1/2010, pages 70-71)

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About the author

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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