The Insurance and Reinsurance Law Review: Germany
Approximately 914 foreign insurers are underwriting direct risks on the German market,2 either through a branch3 or, for the majority, by offering services from their foreign places of business.4 Most of these insurers are based in countries of the European Economic Area (EEA).5 Approximately 1,265 German underwriters6 add to this number. All of these underwriters together achieved a turnover related to direct insurance of €117 billion in non-life insurance and €92.4 billion in life insurance, of which €6.3 billion and €5 billion respectively was generated by EEA insurers.7 Many of the German insurers are small-capital companies or mutuals that are only active within narrow geographical limits. The Federal Financial Supervisory Authority (BaFin), the German insurance supervisory authority, lists 30 actively operating reinsurers that have their seat in Germany and five that are seated in the EEA as at 30 September 2019.8
The implementation of Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the Taking-up and Pursuit of the Business of Insurance and Reinsurance (Solvency II) into German law focused on the capital backing of insurers. Despite initial expectations that the Solvency II requirements might not come into force before 2017,9 on 6 March 2015 the Bundesrat (representation of the German federal states) approved the Parliament Act on the Modernisation of the Financial Supervision of Insurance Companies, which implemented the Solvency II regime into national law. The German Solvency II legislation came into force on 1 January 2016. Under the Solvency II regime, both low interest rates and capital requirements were identified by reinsurers as drivers for reinsurance solutions10 and by the growing number of run-off service providers as drivers for run-off solutions. As required by European law, insurers may transfer portfolios to other insurers in a Member State of the European Union, which, since 2008, also applies to reinsurers (Section 166 of the German Insurance Supervision Act (VAG)). Germany is far from being a haven for run-off services, however, as German law does not recognise the English concept of 'schemes of arrangements' and the Federal Supreme Court held in 2012 that English court orders on the approval of these schemes11 are not enforceable in Germany.12 This fits with the German approach of being somewhat protective with regards to the position of the insured, often without any strict differentiation as to whether an insured is a consumer or a business entity.
BaFin supervises insurers on behalf of the federal government. Insurers of less economic significance, and especially those that operate within only one of the federal states, may be supervised by supervisory bodies of one of Germany's federal states. BaFin currently supervises approximately 43 per cent of German insurers.13 Insurers supervised by BaFin nevertheless achieve 99.9 per cent14 of the total earnings of both groups, which underlines its economic significance. Pension funds and domestic reinsurers are also subject to BaFin's supervision, whereas statutory insurance institutions (statutory accident, unemployment, pension, health institutions) are not.
Insurance companies require a licence to operate. Under the single licence principle, insurers who have obtained a licence in another EEA Member State do not require a further licence to operate in Germany.15 These insurers may conduct business in Germany in accordance with their right to provide services under Article 56 of the Treaty on the Functioning of the European Union (TFEU) or through a branch in Germany in accordance with their right under Articles 49 to 52 TFEU. However, before commencing business from a branch in Germany, certain notification requirements must be met (Section 61 VAG and Section 169 VAG for reinsurance companies).
EEA insurers are subject to the financial and legal supervision of their home countries and, in respect of their German operations, additionally to the legal supervision of BaFin (Section 62 VAG).
In light of the Brexit negotiations it remains to be seen if and how insurance companies that have their home Member State in the United Kingdom and a licence from the Prudential Regulatory Authority (PRA) are allowed to conduct their business in Germany. BaFin stated that a 'hard Brexit' would cost UK insurance companies their Member State status in accordance with Section 7 No. 22 VAG. Instead the United Kingdom would be considered a third country pursuant to Section 7 No. 6 VAG.16 As a result, the company could no longer legally operate in Germany with a licence from the PRA pursuant to Section 61 VAG. In order to soften the effect of a possible hard Brexit, on 23 March 2019, Germany adopted a bill on Tax-Related Provisions accompanying the Withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union.17 Article 10 of this bill amends the new Section 66(a) into the VAG. As of Section 66(a) VAG, BaFin can declare Sections 61 to 66 and 169 VAG applicable by analogy for UK-based insurance companies that were operating in Germany prior to the withdrawal of the UK from the EU for the purposes of settling the insurance contracts concluded up to the time of withdrawal during a transitional period not longer than 21 months.18 BaFin already used this newly created discretionary power on 15 April 2019 entering into an agreement with the Prudential Regulation Authority (PRA) in the UK. They agreed that they will continue to cooperate on financial supervision and market conduct supervision regarding those companies that no longer write new business in the host country.19 Furthermore, BaFin will keep handling complaints against insurers based in UK regarding contracts concluded in Germany.20
Only public limited companies, mutuals or public law institutions can obtain a licence from BaFin. Documents to be submitted with the application include, inter alia, a business plan describing the risks that are intended to be covered, the reinsurance policy, proof of sufficient funds to cover the risks (minimum guarantee fund – the required quantum depends on the class of insurance) as well as sufficient funds to develop a business and sales organisation (organisation fund). At least two senior managers or executive directors need to demonstrate that they are sufficiently qualified and experienced to run the business.
The principle of business separation applies, which means that an insurer cannot obtain a licence for all classes of business (e.g., an insurer that has been granted a licence to cover life risks cannot obtain an additional authorisation for property risks).
Insurance supervision comprises legal and financial supervision. In respect of legal supervision, BaFin supervises whether insurers comply with all statutory requirements (Section 294 VAG). In respect of financial supervision, BaFin controls whether insurers comply with the principle of good business practice, which requires them to maintain proper accounts, consider risks under the insurance contracts and finance risks for their investments properly, maintain a proper risk management system, and keep sufficient funds (solvency). Generally, an insurer must refrain from conducting non-insurance business in order to avoid non-insurance related business risks.
Pursuant to Sections 294 and 298 VAG, BaFin can make any orders that are appropriate and necessary to avoid deficiencies or bring these to an end and, if necessary, withdraw the insurer's licence under Section 304 VAG. The VAG sets out additional competences for BaFin, such as being able to prohibit a manager who has recklessly breached obligations from continuing to work in his or her function pursuant to Section 303 VAG.
In accordance with EU Directive 2002/92/EC of 9 December 2002, all persons who intend to distribute insurance products require a licence. This Directive has been implemented into German law in Sections 11a, 34d and 34e of the German Trade, Commerce and Industry Regulation Code, and in the Insurance Broking and Advice Regulation.
Insurance and reinsurance law
i Sources of law
German material insurance law is primarily set out in the Code on Insurance Contracts (VVG). The rules of the VVG initially came into force in 1908 but were considerably changed in a reform that came into effect in 2008. As a consequence of this reform, judgments on the interpretation of the VVG rules of courts and other publications need to be considered carefully to establish whether they refer to the old or the current rules.
The reform's purpose was to modernise German insurance law, and especially to improve the position of the insured.21 Although the VVG is always focused on consumer protection, its rules also apply to non-consumer insurance contracts. The VVG's only differentiation between consumer and some non-consumer insurance contracts is that the insurer of consumer risks cannot deviate from most of the rules of the VVG to the detriment of the insured so that the VVG provides a minimum standard of consumer protection, whereas the parties to insurance contracts on specific non-consumer risks can, to a certain extent, deviate from all VVG provisions as dealt with further below. These specific non-consumer risks that allow deviations from the provisions of the VVG pursuant to Section 210 VVG are large risks and risks covered under open policies. However, this does not mean that there are no limits for deviations even where they are generally allowed. Insofar as the VVG generally applies, it sets out the overall concepts as to what rights and obligations German law considers a fair balance between the potentially colliding interests between insurer and insured. The rules on unfair contract terms impose limits on any deviation from the overall legislative concepts even in purely business relationships without any consumer involvement. The evaluation of whether a deviation from general statutory concepts is sufficiently balanced (and, therefore, valid) often gives German courts considerable discretion. This leads to considerations in German judgments that might appear odd, especially to foreign practitioners. Judgments on the claims-made principle or costs clauses in directors' and officers liability' (D&O) insurance contracts are good examples (discussed below).
Large risks (as opposed to mass risks), which determine whether an insurer is generally able to deviate from provisions of the VVG that otherwise were compulsory, are – partly by reference to VAG provisions – set out in Section 210(2) VVG. The term large risks and the risks so classified have their origin in European law, and have been introduced by Article 5 of the Second Council Directive 88/357/EEC of 22 June 1988 'on the coordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance and laying down provisions to facilitate the effective exercise of freedom to provide services and amending Directive 73/239/EEC'. Large risks are, inter alia:
- railway rolling stock: all damage to railway rolling stock;
- aircraft: all damage to aircraft;
- ships (sea, lake and river vessels): all damage to river, inland waterway and sea vessels;
- transported goods: all damage to transported goods irrespective of the means of transport;
- all liabilities arising from land transport;
- aircraft liability: all liabilities arising out of the use of aircraft (including carrier's liability); and
- liability for vessels (river, inland waterway and sea vessels).
Other risks, such as land vehicles (other than railway rolling stock), fire and natural forces, all other damage to or loss of property and general liability are only large risks if the insured's business fulfils at least two of the following criteria: the balance sheet total is more than €6.2 million; the net turnover is more than €12.8 million; and, on average, there are more than 250 employees during the financial year.
Consequently D&O risks, although not consumer-related, may, depending on the size of the insured's business, not be qualified as large risks, and may, therefore, be exposed to the same rules as a consumer insurance contract.
Open policies, which also allow an insurer to deviate from the provisions of the VVG (within certain limits), are insurance contracts under which certain categories of risks are insured while the individual risk that is actually covered only materialises at a later stage (Section 53 VVG) (e.g., all shipments within a particular year). Transport policies are usually set up as open policies.
Marine insurance was historically not governed by the VVG. The above considerations on the VVG's general concepts and the potential consequences of any deviations in well-established marine insurance conditions for their validity are the reasons why marine insurance practitioners were opposed to initial plans of the 2008 insurance law reform to include marine insurance in the VVG. They succeeded, and marine insurance remained completely excluded from the scope of the VVG as per its Section 209. In this respect, the official explanatory statement of the legislature for the 2008 VVG reform is noteworthy as it admits the existence of a considerable legal uncertainty if the consumer-related general concepts of the VVG applied generally on marine insurance.22 It was felt that this might disadvantage German marine insurers, so marine insurance was totally excluded from the scope of the consumer-oriented VVG. Other purely business-related insurance contracts, such as industry property or D&O, are not excluded and are therefore exposed to courts' considerations as to whether any deviations from the consumer-oriented VVG concepts are sufficiently fair (see subsection ii).
Reinsurance contracts are also exempted from the scope of the VVG as of its Section 209, so that the general rules of civil law set out in the German Civil Code (BGB) apply.
ii Making the contract
Contracts under the rules of the VVG
An insurance contract, as any contract, requires a contract offer of one party and its acceptance by the other party. Usually, the insured makes the contract offer (application) by requesting from an insurer cover for certain risks, usually by filling in the insurer's forms (which refer to the insurer's general insurance terms and conditions) and by answering the insurer's questions. This, of course, requires the insured to obtain some information from the insurer on its insurance products including application forms before making the application.
Prior to the 2008 VVG reform the insurer, when willing to insure the risk, accepted the insured's application by way of providing the insured with the policy, which sets out the risks covered, the premium, other specific conditions, and the general terms and conditions. The insurance contract was concluded on the basis of the provisions in the policy and all conditions to which it referred. Unless large risks are concerned, the 2008 VVG reform modified this procedure as follows: prior to the reform it was sufficient that the insured received information on the scope of cover, premium and especially the insurer's general terms and conditions only with the insurer's acceptance of the insured's contract application. This was called the policy model, as in insurance law it was deemed sufficient that the insured received the insurer's insurance conditions only with the insurer's acceptance of the insured's insurance application, that is, together with the insurance policy – hence, policy model. In respect of non-large risks, the 2008 VVG reform requires an insurer to provide the insured with relevant information, including the insurer's general insurance terms and conditions, prior to the insured's contractually relevant declarations (i.e., normally its insurance application). This is called the application model. In this respect, the VVG reform intended to enable the insured to make an informed decision on whether to submit an insurance application, which requires that it received sufficient information from the insurer beforehand. Further information requirements apply, mainly in respect of risks other than large risks, which cannot be summarised here (e.g., under an information regulation).23
The insurer's acceptance of the insured's application can still deviate from the insured's contract application, provided the insurer gives to the insured a conspicuous notice that the insurance certificate deviated from the insured's application and the ways in which it did so; informs the insured of its right to object to these deviations within one month; and informs the insured that its failure to object in a timely manner is statutorily deemed as the insured's acceptance of the deviations.
If the insurer complies with these notification requirements and the insured does not object within one month of receipt of the insurance certificate, the insurer's deviations are deemed accepted by the insured. If, however, the insurer does not comply with its notification requirements, the insurance contract is concluded on the basis of the insured's application.
Insurers (insofar as large risks are not affected) are exposed to further obligations prior to the conclusion of an insurance contract: they are obliged to enquire about the insured's insurance needs, to advise on these needs and on adequate insurance solutions, and to document the contents of the advice and its reasons. Apart from the exclusion of large risks from this obligation, this does not apply if the contract is concluded through an insurance broker (Section 6(6) VVG), which then has to comply with the advice and information obligations instead. The insured may, however, waive in writing its right to be advised and informed.
If the insurer fails to comply with these obligations, it may be liable to indemnify the insured for any losses caused. Moreover, the insurer's general insurance terms and conditions may not be validly incorporated into the contract.
Generally, the insured is entitled to withdraw from its contract application (so that the insurance contract ends retroactively) within two weeks of receipt of the insurance policy or certificate if properly advised on this right in text form (text form includes emails, which would not be qualified as written form under the law). Exceptions apply especially for insurance contracts for large risks, for some provisional cover notes and for insurance contracts of less than one month.
Insurance contracts not subject to the VVG
The conclusion of insurance contracts that are not subject to the VVG (marine insurance and reinsurance) is governed by the general rules of the BGB and, therefore, only require offer and acceptance without any further compliance requirements. It is sufficient to simply refer to general insurance conditions in order to incorporate them into the contract without actually providing the insurer's terms and conditions.
Disclosure and representation
Pursuant to Section 19(1) VVG, the insured is under an obligation to disclose to the insurer all known circumstances prior to conclusion of the insurance contract that (1) are relevant for the insurer's decision to enter into the insurance contract with the agreed contents and (2) that the insurer requests the insured to answer specifically in text form (text form includes emails, which would not be qualified as written form under the law). This includes a prohibition to make false representations. Usually, all circumstances that the insurer requests specifically are relevant for its decision, although there may be exceptions. As a consequence of the 2008 VVG reform, the insurer can no longer expect the insured to disclose any circumstances not specifically asked for, so there is no longer any doctrine comparable to the English concept of utmost good faith (requiring the insured to disclose anything material for the risk even without any specific questions) under the rules of the VVG.
As they are not subject to the rules of the VVG, marine insurance and reinsurance contracts may still require the insured to disclose even material circumstances without any specific questions of the insurer. For example, Section 19 of the General German Marine Insurance Conditions still requires the insured to disclose all material circumstances that are relevant for the insurer's acceptance of the risk without the requirement to submit specific questions. It should also be possible to agree on similar terms for large risks falling under the provisions of the VVG, although this has not yet been tested in court to this extent. The Hamm Appeal Court only stated in its judgment of 3 November 2010 with regard to large risks insurance contracts that pursuant to Section 210 insurers may deviate from Section 19 if this deviation is explicitly agreed between the parties.24
The insurer has alternative remedies if the insured breaches this obligation, which primarily depend on the degree of the insured's misconduct and always provided that the insurer had notified the insured of the consequences of any breach:
- The insurer may (retroactively) withdraw from the contract (Section 19(2) VVG) unless the insured did not breach its disclosure or representation obligation intentionally or with gross negligence. The insured is under the onus of proving lack of intention or gross negligence.
- If the insured did not act intentionally or with gross negligence, the insurer is entitled to terminate the insurance contract within one month (which does not affect the insurer's obligation to cover any insured losses before the termination becomes effective).
- Unless the insured breaches its disclosure or representation obligation intentionally, the insurer's right to withdraw from or to terminate the contract is excluded if the insurer had concluded the contract (even with different contents) if it knew of the undisclosed circumstances. The insurer may then only request that the insurance contract be adapted to such other conditions. This effectively means that certain risks are excluded, the premium is increased, or both.
- All of these remedies will expire within one month of receipt of knowledge of the insured's infringement of its disclosure or representation requirements (Section 21(1) VVG).
- If the insurer withdraws from the contract after an insured event occurred, it is not obliged to cover the losses, unless the insured's breach of disclosure or misrepresentation obligations refers to circumstances that were neither relevant for the occurrence of the insured event nor for the insurer's determination of the insured event and the scope of its obligations under the insurance contract.
- If, however, the insured maliciously infringed its disclosure or representation obligations, the insurer is not obliged to cover the loss (Section 21(2) VVG).
- The insurer's right to withdraw or to terminate the contract expires five years after the conclusion of the contract, unless the insured breached its obligations intentionally and maliciously, in which case it is 10 years.
- In any case, the insurer may challenge the contract in accordance with the general civil rules applicable to a malicious deception (Section 22 of the VVG).
In summary, the consequences of the insured's breach of its disclosure or representation obligation depend on the insured's degree of fault and, partly, on whether the insurer would have entered into an insurance contract (even with additional risk exclusions or with an increased premium, or both) had it known the actual facts or circumstances. The following table gives an overview on the most relevant situations. It is based on the assumption that the insured's breach of disclosure or misrepresentation obligations refers to circumstances that were relevant for the occurrence of the insured event, or for the insurer's determination of the insured event or the scope of its obligations under the insurance contract.
|Intentional misconduct||Withdrawal from the contract (retroactively). No coverage obligation (Section 21(2) VVG).|
|Gross negligent misconduct and the contract would not have been concluded had the insured not breached its obligations (i.e., informed the insurer as legally required)||Withdrawal from the contract (retroactively). No coverage obligation (Section 21(2) VVG).|
|Gross negligent misconduct and the contract would have been concluded (with different terms) had the insured not breached its obligations (i.e., informed the insurer as legally required)||Adoption of the contract as of inception of the insurance contract (e.g., by way of the insurer's request to exclude certain risks or to increase the premium, or both). If the insurer is entitled to exclude certain risks retroactively, this may exclude coverage.|
|No misconduct or simple negligent misconduct and the contract would not have been concluded had the insured not breached its obligations (i.e., informed the insurer as legally required)||Termination, which becomes effective one month after the insured's receipt of the insurer's termination declaration. No affect on coverage for any insured event that occurred or occurs before the termination becomes effective.|
|No misconduct or simple negligent misconduct and the contract would have been concluded (with different terms) had the insured not breached its obligations (i.e., informed the insurer as legally required)||Adoption of the contract as of the current insurance year (e.g., by way of the insurer's request to exclude certain risks or to increase the premium, or both). The potential affect on coverage has not yet been clarified by the courts. The retroactive adoption, if relevant risks were excluded, might have the odd result that coverage of a certain insured event might be excluded retroactively, although a simply negligent misconduct should not affect coverage at all (see box above). Judgments on this issue have not been published. However, it seems unlikely that the courts would, in this situation, allow an insurer to avoid coverage for occurrences that occurred prior to the insurer's demand to adopt the contract. The legal uncertainties of this situation raise doubts as to whether the legislature fully understood its somewhat complicated rules and their consequences.|
The above rules provide for considerable judicial discretion in potential legal disputes and corresponding legal uncertainties in applying these rules in specific cases, which the legislature nevertheless accepted for assumed fairness considerations.
iii Interpreting the contract
Insurance terms and conditions are to be construed objectively (i.e., by reference to the hypothetical understanding of an average insured that has no specific insurance or legal expertise). The starting point of any interpretation is the wording, its objective sense and the systematic context in which a particular clause is contained. All relevant contractual information, including the insurance certificate, product information sheets or other product information, may serve as an interpretation aid.
The courts tend to interpret exclusion clauses (i.e., clauses that limit the coverage for certain risks or impose certain additional limitations for coverage) narrowly as the insured does not have to expect potential gaps in the coverage that the clause does not sufficiently clarify.25
Insurance conditions are usually qualified as general terms and conditions of the contract within the meaning of the civil law provisions on unfair contract terms as set out in Section 305 et seq. BGB. Pursuant to Section 305c(2) BGB, any uncertainties as to the interpretation of those general terms and conditions (including insurance conditions) are to the detriment of the party that introduced the conditions into the contract (contra proferentem). This is usually the insurer. It follows that this interpretation method is not applicable (at least not against the insurer) if it was not the insurer who introduced certain insurance conditions into the contract. This may be the case for some broker insurance conditions if the broker developed the conditions and then obtained insurance coverage under these conditions. The Federal Supreme Court confirmed this in respect of particular D&O insurance conditions of one of Germany's leading D&O insurance brokers.26
There is a further interpretation rule that applies to the differentiation of the definition between risks and their exclusion or limitation and the insured's obligations. Pursuant to Section 28 VVG, the parties may agree on certain obligations in the insurance contract with which the insured has to comply. The consequences of the insured's breach of such obligations depend on the degree of its negligence, so that the insurer is not necessarily entitled to avoid coverage. Contrary to this, losses are not covered that are caused by an excluded risk (without any reference to negligence considerations). A clause phrased in a way that it seems to describe a risk and the objective scope of coverage may nevertheless be construed as an obligation of the insured. By way of example, the hull insurance conditions for inland waterway vessels (AVB Flusskasko 2000) exclude any damage or loss caused by a vessel not being fit for the voyage, 'especially not being sufficiently equipped, manned or laden'. In a judgment of 11 February 1985,27 the Federal Supreme Court considered this to be an objective exclusion of a risk (meaning losses caused by an unfit vessel are excluded from coverage). In a judgment of 18 May 2011,28 the Federal Supreme Court changed its previous view and found that the clause is to be considered as setting out a 'disguised obligation'. It held that the wording and systematic position of a clause are irrelevant for its qualification as either a (disguised) obligation or as an exclusion of risk. According to the Court, it matters whether the clause either describes a specific risk or whether it primarily requires a specific behaviour of the insured. Consequently, German law and practice requires a careful analysis of whether a particular clause is to be qualified as description of a risk (including limitations and exclusions) or as setting up an obligation of the insured. This analysis must not focus on the clause's wording, as the wording and systematic position of a clause (and the intention of the parties to the insurance contract) are irrelevant. The reason behind this approach is to avoid insurers circumventing the restrictive rules on avoidance of coverage for the insured's breach of obligations, so the courts are rather sceptical about potential risk exclusion clauses that could alternatively have been phrased as a clause requiring a certain behaviour of the insured (in the above case, the behaviour to commence the voyage only with a vessel that was fit for the journey).
The concept of disguised obligations is increasingly perceived as alien to the method under which contracts are to be interpreted, and is being criticised (even by Federal Supreme Court judges).29 Nonetheless, the Federal Supreme Court handed down a judgment on 14 May 2014 in which it reiterated the concept of the disguised obligation. The insured sued under aircraft liability insurance. He sought cover for an accident that occurred during the start of an air show. The co-insured pilot crashed into spectators, killing two of them and leaving several injured. The insurer rejected coverage because the pilot flew without a valid licence. Under Section 4 of the Liability Insurance Conditions, 'exclusion' cover was excluded 'if the pilot lacked the necessary permit, licence or certificate of competence'. The Court held that the clause was a disguised obligation and not an exclusion of risk because the cover depends on the conduct of the insured. Since aircraft liability insurance is a large risk pursuant to Section 210(2)(1) VVG it seems that the Federal Supreme Court applies the differentiation to all large risks and open policies.
It has not yet been tested whether the courts would apply this differentiation method in the same way on marine insurance (the insurance of inland waterway vessels is not classified as marine insurance under the law), which is not subject to the VVG rules. Therefore, the parties should be able to freely agree on whether they want an exclusion of a specific risk or an obligation that should, as usual, be determined primarily by reference to the wording of the clauses.
Types of terms in insurance contracts
The law differentiates between terms that describe the risk including risk-related objective limitations, or exclusions or other objective requirements for compensation and the insured's obligations. Clauses that do not constitute contractual obligations of the insured can simply be construed under application of the rules explained above. If the requirements set up by such clauses are fulfilled, they trigger the consequences set out in the contract. The position is more complicated in respect of the insured's contractually agreed obligations, as the consequences depend on the degree of the insured's negligence and also partly on causation issues.
The breach of a contractual obligation is not comparable with a breach of a warranty under English law. The VVG sets out a differentiated system of remedies, depending on the specific circumstances of any case, as follows (ignoring some constellations and minor formal requirements):
- The insurer is entitled to terminate the contract unless the insured's breach of a contractual obligation was not intentional or grossly negligent. For termination purposes, the insured is under an onus of disproving the assumption of intent and gross negligence (Section 28(1) VVG).
- The insurer is entitled to avoid coverage fully if it proves that the insured intentionally breached its contractual obligation.
- In cases of a grossly negligent breach of a contractual obligation, the insurer is entitled to reduce the contractual compensation promised under the contract in proportion to the gravity of the insured's fault. This was one of the crucial parts of the 2008 VVG reform that abolished the 'all or nothing' principle, which meant that the insurer either granted coverage in full or not at all. Now, the insurer is required in cases of gross negligence to compensate the losses partly to an extent that depends on the gravity of the insured's fault. In respect of coverage (as opposed to termination) the insured is to disprove the assumption of gross negligence if it intends to avoid these consequences.
- The above does not apply if the insured proves that its breach of a contractual obligation was not causal for the occurrence or determination of the insured event, or for the determination or the scope of the insurer's obligations under the insurance contract.
- If the insured breached a contractual obligation maliciously (to be proven by the insurer), causation does not matter.
The following overview clarifies the various positions.
|Malicious intent – to be proven by the insurer||No coverage; no causation considerations.|
|Gross negligent breach of contractual duties (either prior to or after the occurrence of an insured event) – in this respect, gross negligence is statutorily assumed, so that a party who wants to invoke an 'intentional breach' (the insurer) or a 'simply negligent breach' (the insured) has to prove this||The insurer may reduce the contractual compensation in proportion to the insured's fault (which may be up to 100 per cent), unless the insured proves lack of causation. Since the 2008 VVG reform came into force, a considerable number of judgments have been published as to what percentage compensation may be reduced to in various situations, which has resulted in prejudiced case law developing.|
|Intentional breach – assumption of gross negligence to be disproved by the insurer||No coverage, unless the insured proves lack of causation.|
|Negligent breach – assumption of gross negligence to be disproved by insured||Full coverage.|
Similar provisions apply in respect of an increase of risk caused by the insured that is prohibited under Section 23(1) VVG or an increase of risk not notified to the insurer (Section 23(2)). Depending on the gravity of the insured's breach, the insurer may avoid coverage, reduce the compensation or terminate the insurance contract, or both (Sections 24 and 26 VVG). Section 81 VVG expressly sets out that the insurer is not obliged to make any compensation if the insured intentionally causes the insured event. If the insured causes the insured event with gross negligence, the insurer is entitled to restrict its compensation in proportion to the gravity of the insured's negligence.
Again, these rules do not apply to marine insurance and reinsurance (Section 209 VVG). German marine insurance conditions do not have such a sophisticated system of consequences of the insured's breach of obligations. Paragraph 23 of the DTV Hull Clauses (DTV-Kasko 1978/2004), for example, discharges the insurer from liabilities caused by a vessel that was unseaworthy when the journey commenced, unless the insured could not have avoided this with reasonable care. Therefore, any fault of the insured enables the insurer to avoid coverage fully without any need to differentiate between various degrees of negligence, so that the all or nothing principle even exists for 'ordinary' negligence. This exceeded and still exceeds the provisions of the VVG before the reform in 2008.
In respect of large risks in accordance with Section 210 VVG, the parties to an insurance contract can agree that gross negligence of the insured enables the insurer to avoid coverage fully as under the insurance of large risks deviations from the VVG provisions are possible. This view was also held by the Hamburg Appeal Court in a 2018 judgment.30 It stated that the all or nothing principle for gross negligence can be agreed upon in an insurance of a large risk. It therefore remains to be seen whether this principle can be agreed upon for any negligence in a large risk or an open policy in accordance with Section 210 VVG. The Cargo Insurance Conditions (DTV-Güter 2000/2008) already restrict the all or nothing principle to cases of gross negligence and intent.
Any fault of a person who is deemed to be the representative of the insured is attributable to the insured. This includes any person to whom the insured entrusted the administration of the insured risk, so this person should comply with the insured's obligations irrespective of whether he or she is the insured's director or may otherwise legally represent the insured. As there is no easily applicable test as to whether a person is qualifies as the insured's representative in a particular situation, there are various (non-binding) precedents to determine this. The captain of a vessel, for example, qualifies as the shipowner's or insured's representative in respect of a marine hull policy, but is not the representative of cargo owners under the transport policy.
Validity of clauses
Various provisions of the VVG are compulsory in a way that they cannot be derogated from to the detriment of the insured, unless large risks are concerned.
In respect of large risks and open policies, the parties are generally free to deviate from the provisions of the VVG (Section 210 VVG). However, as already mentioned in subsection i, the VVG provides for an overall legislative concept of a fair balance between the rights of the insurer and the insured. Insofar as the VVG generally applies (including large risks and open policies, and excluding marine insurance and reinsurance), an insurer is not entitled to deviate from the provisions of the VVG without any limitation in its general terms and conditions of contract. The following two judgments on D&O insurance clauses clarify the position.
In an often-quoted judgment of the Appeal Court of Munich,31 the Court considered whether the claims-made principle contained in D&O insurance conditions was valid as it is alien to the occurrence principle of German liability insurance practice. Claims-made liability policies define the insured event in general as the actual pursuance of a claim (with modifications) irrespective of when the event that caused such claims occurred. The occurrence principle defines as the insured event the actual occurrence that led to claims, irrespective of when these claims are pursued. As opposed to the occurrence principle, the claims-made principle might disadvantage an insured insofar as it might not be entitled to coverage if claims are only pursued against it after the expiry of the liability policy even if this policy was in place when the event occurred that caused the claims. The Appeal Court of Munich considered carefully whether this disadvantage is sufficiently balanced with the advantages the claims-made policy provided to the insured and found that this was the case. Consequently, the Court confirmed the validity of the claims-made principle. However, the reason for this was only that the policy also contained the usual clause according to which claims are even covered after the expiry of the policy if they are notified to the insurer within one year of the expiry of the liability policy, and that even claims that were caused prior to the inception of the policy are covered. Today, there is no doubt that the claims-made principle, as defined in D&O insurance conditions, is valid. Nevertheless, the Munich judgment serves as a good example that German courts will always carefully consider whether any deviations from VVG provisions and its legislative concepts are sufficiently balanced.
D&O insurers were less fortunate in a dispute on which the Appeal Court of Frankfurt handed down a judgment on 9 June 2011.32 The Court considered the usual clause that the costs of legal proceedings 'including lawyers', experts', witness' and court costs are contained in the maximum amount insured' to be invalid as it found this to deviate in an unbalanced way from the overall legislative concept of the VVG according to which an insurer is to indemnify such costs in addition to the maximum liability agreed in the insurance contract. It is doubtful whether other courts will follow this approach, although the Federal Supreme Court has not overruled this position to date. However, this judgment again underlines that German law provides for considerable uncertainties in its effort to protect consumers and business entities alike. This also confirms that marine insurance practitioners were right in their successful effort to exclude marine insurance from the scope of the VVG provisions totally, which has never been an issue in respect of reinsurance.
iv Intermediaries and the role of the broker
The VVG differentiates between the insurer's agents and brokers. Agents are persons or entities that the insurer entrusted with the task of concluding or arranging insurance contracts (Section 59(2) VVG). Agents act on behalf of the insurer. Persons or entities that arrange insurance contracts between an insurer and an insured 'without doing so on behalf of an insurer' (Section 59(3) VVG) are brokers. This usually means that the insured instructs the broker to arrange coverage. Any misconduct or knowledge of the agent is attributable to the insurer, while this, in principle, is not the case for brokers. However, in 2011 the Appeal Court of Karlsruhe found that a broker's misconduct in giving improper advice to the insured was attributable to the insurer, as the latter did not have an independent distribution system but exclusively relied on the services of brokers.33 If, according to the court's reasoning, an insurer uses brokers to distribute its products, and if additionally there are no clear indications that the broker undertook to obtain coverage on behalf of the insured by choosing a suitable insurer rather than working together with one particular insurer, the broker acted as an agent would have done. The Court found that the insurer then should be treated as if the broker was an agent.
Claims are to be notified to the insurer without undue delay. Any failure to do so is a breach of an obligation subject to the sophisticated consequences set out above, so that a breach does not necessarily release an insurer from its coverage obligation. The insurer is then required to investigate the matter and decide on coverage quickly. Although the principle of good faith is a cornerstone of German civil law, its practical effects can be seen more in the way contracts are construed, and contract terms might be invalid if they are considered to be grossly unbalanced. However, there is no particular concept of utmost good faith with particular legal consequences in German insurance law. If an insured submits a fraudulent claim, the usual civil law and insurance remedies apply: the insurer may, in exceptional circumstances, rescind the contract pursuant to Section 123 BGB if it is able to prove that the insured already entered into the contract with the intention to deceive the insurer. Other cases are subject to the consequences of a breach of obligations set out above, and may additionally allow the insurer to claim damages for losses reasonably suffered, especially costs for investigating the matter.
An unjustified rejection of claims or a delayed decision on coverage has no particular consequences. The insured may then simply sue the insurer. However, any obligations owed by the insured to the insurer under the insurance contract (e.g., obligation to cooperate with the insurer, and to provide any information or disclose any document the insurer considers necessary) cease as a consequence of the insurer's rejection.
The insurer may set off any open premium claims under an insurance contract from any claims payable under such contract, even if the insured person is not the insurer's contractual partner, and therefore does not owe the premium (Section 35 VVG).
The indemnification of the insured person leads to an automatic transfer of potential recourse rights against third parties to the insurer. The effect is comparable to an assignment from the insured person to the insurer that, however, is effected automatically simply by the insurer's act of making the payment to the insured person (Section 86(1) VVG). The insured is under an obligation to protect any recourse claims and to cooperate with the insurer in enforcing such claims (Section 86(2) VVG). The insured's failure to do so may be a breach of its obligations subject to the sophisticated consequences set out above. This means that the insurer may not necessarily be able to avoid coverage as a consequence of the insured's breach of this obligation.
The main difference between an automatic transfer of rights under the VVG and a subrogation under English law is that after the transfer the insurer is the recourse claimant, so that it may sue in its own name and also becomes a party to a recourse action.
i Jurisdiction, choice of law and arbitration clauses
Pursuant to Section 215 VVG, the insured is entitled to sue the insurer at the place where the insured is based. The court at the insured's place of business is exclusively competent for claims against it. The parties are free to deviate from this in respect of large risks, although this has not yet been confirmed in judgments. In any event, Regulation (EU) No. 1215/2012 of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, which is applicable if a person domiciled in a Member State is sued in another Member State, prevails.
Any agreements on the applicable law are subject to Regulation (EC) No. 593/2008 of 17 June 2008 on the law applicable to contractual obligations (Rome I), which will not be dealt with as Germany directly applies this Regulation as part of European law.
Arbitration clauses are commonly (albeit not only) used in marine insurance and reinsurance contracts. They are rarely used in other insurance contracts, even if large risks are concerned. Arbitration clauses usually agreed to in marine insurance contracts may refer any disputes to an arbitration tribunal under the rules of the German Maritime Arbitration Association. Alternatives are the German Institution of Arbitration or ad hoc tribunals without any specific procedural rules. German arbitration proceedings are conducted in a similar way to usual litigation, although they should be quicker, and the arbitrator should be more familiar with insurance concepts and, although this has rarely been discussed, would probably not have such strong reservations as regards deviations from the VVG provisions in respect of large risks as state courts sometimes have.
Alternative dispute resolution, especially mediation, is still developing in Germany, although normally on an ad hoc basis rather than as a contractually agreed requirement.
ii Litigation and arbitration
German litigation and arbitration proceedings do not have any pretrial procedures, as there are no procedural disclosure requirements. In principle, each party is required to substantiate the facts and submit evidence without being able to obtain these facts and evidence from opponents through disclosure, although there is a duty within legal proceedings not only to object to the opponents' statements of facts flatly but to make substantiated counter submissions, and to make substantiated submissions on facts that the other party cannot know. Moreover, the judge may order the parties to submit certain documents that they consider relevant (Section 142 of the Code on Civil Procedure). Material law might also require a party to disclose information and documentation to the other party on its request irrespective of whether legal proceedings have already commenced. This is the case under insurance contracts, for example, according to Section 31 VVG, the insured is under an obligation to give any information to the insurer that it requires to determine the scope of its obligations, as well as documentation that the insured can reasonably obtain. This obligation ceases with the rejection of coverage.
Oral hearings are usually prepared by the exchange of written submissions (points of claims, points of defence, further reply submissions). The judges or arbitrators will, at the beginning of the proceedings (usually at the beginning of the oral hearing), try to induce a settlement between the parties. In this respect, they might even be quite open with their preliminary view on the facts and the merits of the case, and might hear the parties or their representatives personally. If the matter cannot be settled, the judge usually discusses the merits with the parties' counsel and explains how he or she intends to proceed further (e.g., to hand down a judgment usually a few weeks after the closure of the hearing or to hear evidence). The judge might also order the parties to make further submissions of fact that he or she considers necessary. If the matter is not ready for a decision, the hearing will be postponed. Judgments can be appealed before the appeal courts, which, however, will only reconsider the facts determined in first instance if relevant procedural mistakes have been made that might have resulted in wrong factual determinations or if there are other indications that the court's determinations were incorrect. German appeal courts are rather reluctant to set aside a judgment for potential mistakes as to the evaluation of evidence in first instance. A further appeal to the Federal Supreme Court is only permissible if such is necessary to clarify legal questions of fundamental significance, if similar legal questions are evaluated differently by different lower courts or if lower courts deviated from the Federal Supreme Court's findings on law as set out in its previous judgments.
The losing party is to indemnify the winning party for costs incurred for proceedings in accordance with statutory fee tariffs. The recoverable costs depend on the sum in dispute. Court costs are to be advanced by the plaintiff. By way of example, court costs for an action for payment of €100,000 in first instance amount to €3,078 and recoverable lawyers' fees to approximately €3,750. Disbursements such as travel costs, expert fees, etc., have to be added. The statutory fee tariffs and their effect on recoverable costs make the cost risks involved in litigation easily assessable for parties to a dispute. Similar cost principles and tariffs apply in arbitration proceedings, unless the parties agree otherwise.
Year in review
At the end of 2018 and in 2019, German courts handed down various judgments on the construction of provisions of the VVG and on consequences of the 2008 VVG reform as well as the construction of clauses in insurance contracts.
On 7 November 2018, the Saarbrücken Appeal Court held that an insured is still obligated to protect any recourse claims as of Section 86(2) VVG even if the insurer definitely and finally rejects coverage.34 In this case the insured, a lessee of a restaurant, claimed coverage under a loss of income insurance for its loss of income during damage repair works of defects of the kitchen floor. It was proven that the kitchen never met the contractual requirements under the lease agreement. Therefore, the lessee was entitled to claim for damages against the lessor. The insurer rejected coverage under the loss of income insurance. Later during negotiations, the insured waived all claims against the lessor of which the insurer became aware during the proceedings on the claim for coverage pursued by the insured. In the opinion of the Court it would be inappropriate and incompatible with the parties' interests if the insured that seeks to enforce its claim for coverage could waive any claim against third parties and not suffer from the sophisticated consequences of Section 86(2) VVG. In contrast, the obligation to provide the insurer with all necessary information on the claim shall be suspended after the insurer's rejection of coverage. With its rejection the insurer declares that further information is no longer needed, therefore the insured shall not be obliged to provide it.
In September 2019, the Federal Supreme Court issued a court order35 concerning the insured's obligation to disclose all known circumstances to the insurer and the consequences of simple negligent lack of knowledge of such circumstances. The insurer claimed for retroactive adoption of an endowment life insurance with supplementary occupational disability insurance. Prior to conclusion of the contract the insurer asked for any known accidents excluding simple fractures without joint involvement. The insured therefore did not declare a fibula fracture, as he was not aware of any joint involvement. During a detailed assessment a few years after conclusion of the contract the insurer became aware of this fracture with actual injury of the ankle. The courts of first and second instance already held that in consideration of the content of the medical's letter with regard to the fracture, the insured might be slightly negligent. The Federal Supreme Court nevertheless stated that the negligent lack of knowledge cannot constitute knowledge of circumstances. The insurer is under the onus to prove positive knowledge of the insured of all circumstances the insured has to disclose. As the insurer could not prove such knowledge, it could not claim for retroactive adoption of the insurance contract.
Outlook and conclusions
According to BaFin, the main focus of supervision in 2020 will be (1) the challenges of digitisation, IT and cyber risks; (2) the integrity of the financial system and combating financial crime; (3) sustainable business models; and (4) sustainable finance.36 Key issues of the German insurance market related to digitisation are the implementation of the insurance supervisory requirements for IT and the analysis of cyber risk insurance. In relation to sustainable business models, BaFin will focus on the following areas: analysis on how life insurers and pension funds deal with the challenges of low interest rates; analysis on real estate exposure and real estate loans of the supervisory properties; and material exposures on 'BBB', high yield or equivalent investments without rating. Furthermore. BaFin will develop a recommendation on an imposition of a capital add-on pursuant to Section 301(1) Nos. 1 and 3 VAG.
BaFin named the following further areas to be focused on by the German insurance market in the coming year:37 the transferability of own funds to insurance groups, revision of how companies deal with the requirements of Section 48a VAG for sales remuneration which deals with the avoidance of conflicts of interest of sales remuneration and entered into force on 23 February 2018, analysis of the premium situation of non-life reinsurers, review of the market-oriented valuation of the claims reserves in property and casualty insurance (best-estimate pursuant to Solvency II), and audit of technical provisions in the life sector, revision of the implementation of the insurers' statutory information obligations in the event of a deterioration of the economic situation and of the auditors in the event of risks threatening the existence of the company.
1 Markus Eichhorst is a partner at Ince & Co Germany LLP.
3 In 2018, in total 91; BaFin, p. 10.
4 In 2018, in total 823; BaFin, p. 10.
5 In 2018, only three non-EEA underwriters maintained a branch in Germany, BaFin, p. 10.
6 In 2018; BaFin, p. 11.
7 In 2018; BaFin, p. 10.
9 President of BaFin Elke König's speech of 22 January 2013 (www.bafin.de/SharedDocs/Reden/DE/re_130122_neujahrspresseempfang_p.html).
10 Munich Re press release of 12 March 2012 (www.munichre.com/de/media_relations/press_releases/2012/2012_03_13_press_release.aspx): 'Zudem geht MunichRe davon aus, dass im weiteren Verlauf der Finanzkrise und mit der Einführung von Solvency II der Bedarf für Rückversicherungslösungen steigt'.
11 Section 425 of the Companies Act 1985.
12 Judgment of 15 February 2012 – IV ZR 194/09.
13 In 2018, 550 under federal supervision and 715 under supervision of the federal states; BaFin, 2018 Statistic – Insurance undertakings and pension funds, p. 11 f.
14 In 2017, €222,353,560,000 under federal supervision and €42,352,800 under supervision of the federal states; BaFin, p. 12 f.
15 Certain EU and EEA insurers, such as mutuals with low premium income, are excluded, but nevertheless require a licence pursuant to Section 110(d) VAG.
17 'Gesetz über steuerliche und weitere Begleitregelungen zum Austritt des Vereinigten Königreichs Großbritannien und Nordirland aus der Europäischen Union (Brexit-Steuerbegleitgesetz)' of 23 March 2019.
18 This transitional period will most probably only last until 31 December 2020 as it shall not be longer than the transition period to negotiate the future relationship between the UK and the EU (cf. Draft bill on Tax Related Provisions accompanying the Withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union, Bundestagsdrucksache 19/7377, p. 29).
21 Entwurf eines Gesetzes zur Reform des Versicherungsvertragsrechts of 20 December 2006, Bundestagsdrucksache 16/3945, p. 1.
22 id, p. 115.
23 Regulation on Information Obligations for Insurance Contracts.
24 Judgment of 3 November 2010 – I-20 U 38/10.
25 Prölss/Martin, Versicherungsvertragsgesetz, 28. Auflage 2010, Vorbem. III Rn. 16; Court Order of 22 February 2018 − IV ZR 318/16, RdTW 2018, 373 para. 3.
26 Court Order of 22 July 2009 – IV ZR 74/08.
27 Judgment of 11 February 1985 – II ZR 290/83, VersR 1985, 629.
28 Judgment of 18 May 2011 – IV ZR 165/09.
29 Joachim Felsch, Verhüllte Obliegenheiten – ein Nachruf, r+s 2015, 53 ff.
30 Judgment of 8 March 2018 – 6 U 39/17.
31 Judgment of 8 May 2009 – 25 U 5136/08.
32 Judgment of 9 June 2011 – 7 U 127/09.
33 Judgment of 2 August 2011 – 12 U 173/10.
34 Judgment of 7 November 2018 – 5 U 22/18.
35 Court Order of 25 September 2019 – IV ZR 247/18.