What financial service providers need to pay attention to with regard to IBNR risk
The impacts seem to be steadily approaching: More and more major losses are weighing on the claims statistics of financial services providers. The list ranges from K1-Fonds, Phoenix Kapital, to S&K, Infinus, as well as many other unnamed companies. As a rule, the damage occurs late, mainly seven to nine years after a mediation or consultation (called long-tail risk). The look back, on felt age-old conditions in the VSH, must take place before a case of damage becomes known, otherwise restrictive conditions work to the disadvantage of the persons concerned. A qualified VSH broker or attorney can also examine older terms and conditions for gaps in coverage. The question then arises as to the possibility of “repair”, be it through reverse insurance and negotiations or through strategic asset protection arrangements.
Duty to report damage in practice
The VSH insurer must be notified of any imminent loss as soon as it becomes known. This places a burden on the contract of the adviser or agent, but also avoids the insurer later thinking that the case could still have been saved if the impending claim had been reported in good time. Breach of such obligations means that the risk carrier may subsequently withdraw cover on the grounds of negligence. Sufficient for the duty to report is already the knowledge of a possible breach of duty (BGH VersR, 2007, 389; 2008, 905). In very few VSH policies, which have been redesigned specifically to mitigate such disadvantageous situations, the duty to notify claims is only required when a claim is made in writing.
Another point is that VSH insurers, especially financial investment intermediaries (until 30.06.2013), but also insurance brokers (until 22.05.2007), had in many cases limited subsequent liability to two, three or five years for older insurance cover. However, since liability as a consultant or broker lasts up to 10 years, i.e. until the statute of limitations expires, there is often still a time gap between unlimited liability and time-limited VSH cover. Especially in recent years, the existential risk of damage from old cases has been increasing. This is particularly problematic if no assumption of subsequent liability was agreed in the new tariff, or if this was also limited to the active contract. Then the intermediary can very quickly be confronted with the fact that he alone has to answer for a possible claim with his assets.
No limitation of subsequent liability in the case of demonstrable lack of fault
The frequent clause in the older VSH conditions, or even today if it is not a VSH minimum liability insurance, that breaches are only insured if they are reported no later than five years after the expiry of the contract, is a preclusion period. Failure to do so only does not harm the policyholder “if he is not at fault” (Düsseldorf Regional Court, judgment of 29.10.2007, ref. 9 O 145/07). This had already been decided by the Federal Court of Justice (BGH) in the case that a missed deadline had occurred without fault in accordance with § 12 VVG a.F. (BGH, judgement of 08.02.1965, file no. II ZR 171/62). However, the financial service provider, as the policyholder of his VSH, has the difficult burden of proving that he is not at fault for the failure to meet the deadline, in order to obtain de facto unlimited subsequent liability (OLG Stuttgart, judgement of 27.11.2008, ref. 7 U 89/08).
Assumption of subsequent liability by the subsequent insurer
In order to avoid troublesome discussions, it is advisable in such cases to agree from the outset on the assumption of subsequent liability when changing VSH insurer, or to choose a concept in which the assumption of subsequent liability for all previous contracts is unlimited in time.
It is sometimes necessary to check whether the VSH broker has pointed out the circumstance when changing VSH in the last few years, especially if he has even initiated the change of risk carrier himself. A similar situation can arise in the case of a professional assignment. This is because the only partial coverage in terms of time represents an effective risk limitation on the part of the VSH insurer, which every VSH broker should explain in all consequences.
VSH insurers are often liable despite mediation via VSH brokers
As a rule, insurers do not have a duty to provide advice themselves only if an insurance contract is brokered by an insurance broker, § 6 VVG. At the latest when the brokerage is concluded, it is the insurer’s turn to react constructively if there is an identifiable need for advice. If the VSH cover is arranged through an agent, or through the main broker (underwriter) of an insurer, the insurer has a permanent responsibility to advise anyway.
Duty of the risk carrier to provide advice
If the Insurer offers VSH cover with limited subsequent liability, he must inform the Insured of the need for subsequent liability insurance without being asked – at the latest when the VSH cover is terminated due to a change of the VSH risk carrier by the financial services provider. If the VSH insurer omits this instruction and advice to the financial service provider, he in fact ensures his own unlimited subsequent liability, namely by way of being liable for his sin of omission.
This legal situation also applied at the time before the entry into force of § 6 VVV (2008). If the VSH insurer nevertheless fails to provide cover, i.e. if it offers neither defence cover nor indemnification as principal obligations in the event of a loss which is recognised too late, despite failure to inform the client of the need for additional insurance, or despite the financial services provider being blameless, an action will have to be brought to establish the liability to pay.
Destruction of existence due to late action against the risk carrier
Many a financial services provider, after filing a precautionary claim and denying coverage, has simply waited to see if the allegedly misadvised client will sue them. The risk carrier is pleased with this hesitancy on the part of the financial services provider because VSH will invoke the statute of limitations no later than three full calendar years after the denial of coverage, even if the liability judgment would have been covered clearly enough under the VSH terms and conditions.
After the financial services provider has filed a coverage claim, VSH insurers rarely let it go to verdict because word could get out in the market. Usually, the financial service provider then only has to commit himself to secrecy about the mistake of a clerk who had negated the obligation to enter into the contract in error of law or with a view to his annual bonus.
After a claim (regardless of settlement), intermediaries run the risk of being terminated due to claims. Due to the extremely short period of usually only one month to obtain new cover, the intermediary may lose his licence because it is often not possible to obtain new cover in the short time available with an enquiry to the previous insurer. As there is no obligation to contract, this can have fatal consequences for the intermediaries concerned.
The registration authority will ask for a new confirmation of insurance within 4 weeks, otherwise the registration will be cancelled. As a consequence, the product partners/companies of the intermediary will terminate his brokerage contracts and portfolios, as they will no longer be able to work with him without registration. Then many agents are existentially at the end. Good VSH solutions therefore include a 3 month cancellation period in the event of a claim, so that the agent has more time to reinsure, ideally with the professional help of a VSH broker.
Many of the aforementioned disputes and stress situations are significantly reduced by a sophisticated VSH coverage concept, whose constant expansions, improvements and optimizations always apply automatically to all existing VSH policies through a framework agreement.
By the many changes in the market and thus in the vocational risk of the mediators these should submit already for years “untouched in the drawer lying” VSH policies seriously a review to the current market conditions. VSH brokers are already offering solutions to close existing gaps and VSH policy reviews at a fixed price.
by Dr. Johannes Fiala and Ralf Werner Barth
WMD Broker Channel
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Über den Autor
Dr. Johannes Fiala ist seit mehr als 25 Jahren als Jurist und Rechtsanwalt mit eigener Kanzlei in München tätig. Er beschäftigt sich unter anderem intensiv mit den Themen Immobilienwirtschaft, Finanzrecht sowie Steuer- und Versicherungsrecht. Die zahlreichen Stationen seines beruflichen Werdegangs ermöglichen es ihm, für seine Mandanten ganzheitlich beratend und im Streitfall juristisch tätig zu werden.
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