Time and again, companies in the investment brokerage industry get into difficulties or disappear from the market. In fact, the individual intermediaries, for whom such events can threaten their very existence, are always caught up in the maelstrom. The latest example of this could now become the liability umbrella of Infinus. For the time being, Infinus still enjoys the presumption of innocence.
Suspicion is based on an accusation of fraud, and associated with this a potential investor loss of around 400 million euros. Now naturally many mediators and investors ask themselves whether they are sufficiently protected by a pecuniary damage liability insurance (VSH) of the Infinus liability roof against the disadvantages from the incident?
Alleged advantages of liability umbrellas
So-called experts often assess the sales and contract documents in advance. But sales are often made without the agents ever getting their hands on an appraisal. With regard to the duties of clarification and information vis-à-vis customers, the intermediaries speak of legal certainty, including the guarantee of a plausibility check for the products.
And with a liability umbrella, intermediaries assume that the liability umbrella has done all the necessary product testing and has taken and provided all the safeguards centrally. The situation becomes critical if the liability umbrella initiates products indirectly or directly itself. Will the VSH protection still apply then? Such considerations and questions do not arise in the case of products such as investment funds, which are managed as separate assets.
Putting your own protection first
In many cases, intermediaries affiliated with a liability umbrella want to save the costs of their own pecuniary loss liability (VSH) cover. Or they are under the mistaken impression that they don’t need one because of the liability roof. There is no legal requirement for this. However, the scope of cover provided by the liability umbrella may not be sufficient. It is better that each intermediary first considers his own liability and puts his own protection first.
If a liability umbrella comes in for criticism and subsequently gets into difficulties, possibly goes insolvent or ceases business for other reasons, then most brokers, agents and business partners usually do not know which risks have been insured where and under which conditions. It may well be that around 400 million euros in potential losses are set against a covered sum insured in the single-digit millions.
VSH does not usually cover total loss
As a rule, VSH insurance cover is not designed for a total loss of the liability roof. Liability umbrellas also represent a so-called cluster risk for the VSH insurer, which it does not like to cover to any great extent. An important step in building confidence on the part of liability umbrellas could be to disclose their own VSH insurance and other security measures.
Interim conclusion: If an intermediary saves himself the registration or licensing due to the liability umbrella, he should under no circumstances save himself his own VSH cover. It would be saving in the wrong place – measured against the quite possible consequences.
In addition, the intermediary should urgently either check the liability umbrella’s VSH himself or have it checked by experts in order to find further potential gaps in the liability umbrella’s cover in addition to a sum insured that is far too low. A key point here is whether all products brokered via the liability umbrella are also insured under the liability umbrella’s VSH policy and the intermediaries’ VSH policies.
Intermediaries must not assume that the products brokered are also automatically included in the insurance cover in every VSH policy. Every intermediary under a liability umbrella should therefore seek dialogue with the liability umbrella with the aim of being informed in such a way as to obtain clarity about the consequences affecting him. This can give him clues as to what his own VSH insurance should be.
Intermediaries must not assume that the products brokered are also automatically included in the insurance cover in every VSH policy. Every intermediary under a liability umbrella should therefore seek dialogue with the liability umbrella with the aim of being informed in such a way as to obtain clarity about the consequences affecting him. This can give him clues as to what his own VSH insurance should be.
Self-insurance also advisable for tied agents
For financial investment intermediaries, there are VSH covers which insure the activities of the so-called tied agent under the liability of a liability umbrella. This makes sense for the intermediary. This is because it could well be that a liability umbrella that has been called upon asserts a recourse against its affiliated agent following a loss. Or customers make their claim directly to the tied agent. For both cases, it is advantageous for the agent to have his own VSH insurance, as this is also available for the defence against unfounded claims.
The situation is very similar to that of an insurer’s exclusive intermediaries: those who wish to avoid costly risks or their repercussions, for example in the event of recourse following a claim, obtain VSH cover for themselves independently of the insurer.
Close dangerous VSH gaps
In many cases, the amount of VSH cover for the liability umbrella itself will be low. It is little consolation that the directors of the liability umbrella are regularly liable for the gaps in cover with their private assets. A professional VSH cover should of course be designed for a mass loss, especially when selling special products. If this coverage cannot be obtained, confident managers of a liability umbrella should advise their agents of the alternative of self-insurance.
For tied agents, a reasonable amount of cover should be derived from the minimum cover required by law for a VSH. If you place significantly more per year, you should adjust the amount accordingly with a buffer upwards. Some VSH specialist brokers offer a VSH risk and policy check for a small examination fee. This gives the agent clarity about his insurance cover and allows him to close any dangerous gaps.
Blind trust can be expensive
The Infinus case shows the great importance for the intermediary to know the current sums insured and, if possible, also the insurance conditions of the liability umbrella’s VSH. For intermediaries, this can be vital under certain circumstances – careless trust in a seemingly free liability umbrella VSH can become expensive or even unaffordable in the event of a claim. Personal responsibility is the top priority. For yourself and for the customer. A reasonably priced yet comprehensive legal expenses insurance completes the package.
by Dr. Johannes Fiala and Ralf Werner Barth
courtesy of www.cash-online.de, published on 02 December 2013
Link: https://www.cash-online.de/Versicherungen/2013/vsh/157461/print
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About the author
Dr. Johannes FialaPhD, 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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