Germany: Landmark decision on loss adjustment services by insurance brokers
The German Federal Court decided on 14 January 2016 that loss adjustment done by an insurance broker on behalf of an insurer is illegal. The written verdict on that case is now available, and confirms that in claims handling broker authorities can no longer be relied upon without the risk of becoming subject of criminal proceedings.
This decision was surprising for the entire insurance industry. Until the date of the judgment, it was generally assumed in Germany that loss adjustment by an insurance broker on behalf of an insurer was legal, and both the majority of legal authors and the courts of lower instances have consistently held the same view. But now this widespread and long-time practice has become obsolete. For German insurance brokers, loss adjustment on behalf of an insurer is no longer feasible. The German Federal Court closed this lucrative business model for them. Additionally, insurers have to adapt their business practices to this decision and are forced to look at alternative business models. It remains to be seen whether or not related parties of the broker also fall within the scope of the prohibition, and whether outsourcing of claims handling to tied agents will be possible as an alternative. Also, it is possible that the decision may be attacked by brokers conducting claims handling from entities incorporated in other EU member states.
In the respective case the defendant (an insurance broker) mediated an insurance contract between a P&C insurer and a company for dry cleaning (policyholder). A customer of the policyholder claimed damages. The insurer had granted a loss adjustment authority to the broker for this type of claim. The broker made use of this authority and determined the insured loss on the basis of general principles.
The German Federal Court ruled that the claims handling authority constitutes both a breach of the German Act Against Unfair Competition and of the German Legal Services Act. The defendant and the courts of lower instances argued that the objected procedure related to the insurance contract and therefore can be qualified as an ancillary service to the mediation of insurance; this would make it legal within the meaning of section 5 German Legal Services Act. Furthermore they argued that there is no breach of section 4 German Legal Services Act because there is no risk of any non-fulfillment of contractual obligations towards the policyholder and the insurer.
The German Federal Court did not follow this line of argument.
The Court held that the function of an insurance broker is defined in section 59(3) of the German Insurance Contract Act. An insurance broker is someone who mediates insurance on the instructions of the policyholder and without, at the same time, acting on behalf of an insurer. A dual agency does not correlate with the legal requirements of the German Insurance Contract Act because of the risk of a conflict of interest. Such conflict of interests can occur in every case because the interests of the insurer and the interests of the policyholder are not necessarily aligned. In most cases the insurer is interested in keeping the loss adjustment as low as possible. This interest may at times, but not always, be aligned with the interests of the policyholder, who is in certain cases also interested in quick claims handling and in a higher loss adjustment in order to satisfy the claims of its customer. Only when the broker conducts loss adjustment on behalf of the policyholder is there no risk of conflict of interest. Furthermore, the broker will be obliged to advise the policyholder to change insurer in cases of unsatisfactory loss adjustment. This gives rise to a number of situations where there is direct conflict of interest, whereas section 4 German Legal Services Act requires there to be a complete absence of conflicts in any activity aimed at providing legal advice.
The German Federal Court stated that the relevant arrangement will not qualify as an ancillary service within the meaning of the German Legal Services Act, as the main activity of the broker only requires a legal knowledge of contract law; whereas legal knowledge of liability law will not be necessary. This means that the term “ancillary service” – as an exception to the requirement to hold a permit as an attorney – should be interpreted narrowly.
In the opinion of the German Federal Court, this narrow interpretation complies with both European law (in particular with the Freedom of Services and Establishment) and with the fundamental freedom to choose and exercise any occupation as stated in the German Constitution. The transposition of the new Insurance Distribution Directive into German law by February 2018 is unlikely to change this situation. Contrary to earlier drafts, the adopted version excludes loss adjustment from the scope of the directive (recital 14 and Art. 2 (2) lit. b of the Insurance Distribution Directive).
It should be noted that any use of claims handling authorities by brokers may constitute a criminal offence, both by way of providing legal advice without a permit and by breach of fiduciary duties towards the policyholder. As a consequence, insurance brokers also risk losing their permit under the German Trade Act and being excluded by insurers from further cooperation, as insurers are legally obliged to select and monitor the lawful conduct of their intermediaries.
As a result of this decision, insurers must no longer instruct German brokers to undertake loss adjustment. Such instructions will be invalid as are the actions carried out by the broker on the basis of the claims handling authority and, as has been decided previously, any corresponding power of attorney granted to the insurance broker. Using brokers qualified as attorneys does not proffer a solution as in Germany an attorney must not represent two clients.
AIG v OC320301 LLP  EWCA Civ 367
In these declaratory proceedings brought by AIG against a firm of solicitors (“ILP”) and others, the Court of Appeal has provided guidance on the construction of the aggregation wording in the Minimum Terms and Conditions annexed to the Solicitors Indemnity Insurance Rules 2013 (the “MTC”), which must be incorporated into all solicitors’ professional indemnity policies in England and Wales.
ILP was approached in 2004 by a UK property development company, Midas International Property Development Plc (“Midas”), to provide property law advice in relation to the financing of property development schemes abroad. ILP was instructed to devise a mechanism whereby Midas could solicit investments in the property developments, by way of loans or direct purchase of holiday homes, and those investments could be held on security for the investors.
ILP proposed a structure whereby investment funds would be held in an escrow with ILP as escrow agents, and a Deed of Trust would be granted in respect of each scheme in favour of the investors as beneficiaries. Funds were to be released only when the value of the security held in the Trusts was at least the same as the total amount of the investments to be protected (the cover test).
Midas successfully attracted investors to the scheme, and signed agreements in 2007 for the purchase of development land in Turkey and also for the purchase of a Moroccan-based company which owned a large area of land near Marrakech. ILP authorised the payment of monies from the relevant escrow accounts in 2007 and 2008. However, Midas was unable to complete contracts for the purchases, and went into liquidation in 2009, whereupon it was discovered that all invested monies held in the escrow accounts had been paid out and that the security established over the property developments was inadequate to protect the investors.
The Trustees of the two Trusts issued proceedings against ILP on behalf of the 214 investors in 2013, alleging that ILP had failed to apply the cover test and was liable for negligence, breach of fiduciary duty, misrepresentation and breach of escrow agreements. The Trustees claimed over £10 million.
ILP had professional indemnity insurance for the relevant period with AIG (with a limit of £3 million), which, of course, was subject to the MTC, clause 2.5 of which provides that:
“(a) all claims against any one or more insured arising from:
- one act or omission;
- one series of related acts or omissions;
- the same act or omission in a series of related matters or transactions;
- similar acts or omissions in a series of related matters or transactions
(b) all claims against one or more insured arising from one matter or transaction
will be regarded as one claim”.
AIG issued proceedings against ILP and the Trustees in the Commercial Court in March 2014, seeking a declaration that the underlying claims against ILP should be considered to be one claim, on the basis that they arose from “similar acts or omissions in a series of related matters or transactions” (in line with clause 2.5(a)(iv) of the MTC).
At First Instance in August 2015, Teare J found for the Trustees, holding that, although the claims arose from “similar acts or omissions”, they were not “in a series of related matters or transactions” because the transactions in question were not “dependent” on each other.
AIG was granted permission to appeal this decision. In addition, while the Trustees’ primary case remained that each investor’s claim was a separate claim and that the claims did not aggregate (in line with the First Instance decision), they were granted leave to argue on appeal, in the alternative, that there were two claims (one in respect of the development in Turkey and one in respect of the development in Morocco).
Court of Appeal decision
On appeal, AIG argued that the wording, “series of related matters or transactions” did not require a degree of inter-dependence between the matters or transactions in question. The Solicitors Regulation Authority, who intervened in the appeal, submitted that the wording intended to imply a “relationship” between the matters or transactions, but that the wording had a wider connotation than “inter-dependence”.
In its Judgment, the Court of Appeal reasoned that the word “series” implied a connection between the events or concepts which constituted the series, and that the word “related” made it even more obvious that there must be such a connection. The Court held also that this relationship must be “intrinsic”, i.e. in this case, there needed to be some inter-connection between the circumstances of the escrow payments in question – extrinsic factors such as geography or the identity of the solicitor involved would not suffice. Indeed, the Court noted that, had the clause intended to aggregate claims with any degree of relatedness, however remote, it would have been worded more widely (in line with the broad and widely used “originating cause” aggregation wording). The Court referred to the speech of Lord Hobhouse in Lloyds TSB General Insurance Holdings Ltd v Lloyds Bank Group Insurance Co Ltd  UKHL 48, which noted that aggregation clauses come in different and well-established forms and, if the widest wording is not chosen, the parties’ choice must be respected.
Importantly, however, the Court found that Teare J had gone too far in finding that the aggregation wording in question required an inter-dependence between the relevant transactions.
The Court did not make any findings of fact as to whether the escrow payments made by ILP were intrinsically related (and therefore whether the claims aggregated), and remitted the case to the Commercial Court for such findings to be made.
Interestingly, the Court also set aside Teare J’s finding that the claims arose from “similar acts or omissions” (i.e. the first part of the aggregation clause in question), deciding that the new trier of fact should not be inhibited in reaching its own decision on this point.
We await the Commercial Court’s decision with interest. In this regard, while the Court of Appeal did not wish to inhibit the Commercial Court in reaching its determination on the facts, it did indicate that:
- if the contracts in respect of one investor referred to the contracts or escrow accounts of other investors there might be an “intrinsic relationship” between the transactions sufficient to aggregate the claims; but
- if there was a requirement that investors’ funds were to be held in separate accounts, that might militate against the finding of such an “intrinsic relationship”.
In the meantime, the Court of Appeal’s Judgment serves as a reminder that, when drafting aggregation clauses (outside of the context of the mandatory MTC), parties must be mindful of the range of wordings available and the nuances between these, which can significantly alter their scope. Indeed, the Court will not look at aggregation clauses in a vacuum but in the context of a factual matrix in which parties are expected to have paid keen interest to questions of limits, layers and aggregation at the drafting stage.
Italian Supreme Court on the validity of the claims’ made clauses
A further episode of the Italian saga of public liability policies was recently played in early 2016, when the Supreme Court was called to resolve a conflict between local courts on the validity of the claims made clauses.
While some courts have recognised the validity of these clauses commonly adopted by the Italian market over the last 20 years, claims made clauses are still considered invalid by other courts, on the basis that:
- a claim should not be made prior to an insured risk being in existence;
- such clauses limit the insurer’s liability, therefore being invalid if no specific and separate approval is given in writing by the policyholder; or
- the Italian Civil Code defines public liability coverage on a loss occurrence basis and therefore it is arguable that this trigger cannot be derogated from by the parties.
Most of these argument were dismissed by the Supreme Court (whose precedents, it is worth reminding, are non-binding to other courts, although providing directions to them).
The Supreme Court, in particular, strongly rejected the first two arguments, claiming that: even where the negligent conduct of the insured party is committed before entering into the policy, a risk still exists if the facts underlying liability are unknown and/or no claim is submitted yet; furthermore, a claims made clause does not limit the liability of an insurer, but rather merely provides a different triggering event.
In relation to the third argument, a distinction was however made by the Supreme Court between two types of clauses:
- Validity was confirmed in relation to “pure” claims made clauses, i.e. those clauses ensuring full retroactive coverage;
- Some concerns were raised with regard to “mixed” claims made clauses, where retroactivity is limited to a short period of time, or the policy requires that both the negligent conduct and the claim occur during the policy period. In this case, according to the Supreme Court, the validity of the clause shall be assessed by taking into consideration a number of elements, such as:
- whether the insured party has an interest in covering pre-existing facts (NB no such interest will exist in relation to start-ups);
- whether the insured party is a consumer (in which case the Court should assess whether there is a balance between the rights and obligations of the consumer);
- the existence and the length of any retroactivity period.
The decision of the Supreme Court has therefore finally rejected some of the arguments used against the validity of the claims’ made clauses.
A door remains open however for the courts to decide whether (in particular for consumers) claims made clauses are unfair to the insured party: uncertainty therefore survives the Supreme Court decision, especially concerning professional liability policies. According to the Supreme Court, recent laws requiring professionals to buy liability coverage, require (in the interest of third parties) purchasers to buy the most favorable loss occurrence coverage. In a sentence issued on 17 June 2016 the Court of Milan actually agreed on this last position and declared the nullity of the claims made clause, “where such clause is not covering claims notified during the policy period and relating to events occurred in the 10 years before the beginning of the insurance period”; should this trend be confirmed by other courts, ca va sans dire, insurers operating on the Italian market will see a dramatic increase in their loss ratios.
An accident victim obtains damages of $1.2 million in the Quebec Superior Court despite a pre-existing medical condition
On 30 March 2016, the Quebec Superior Court awarded more than $1.2 million to a man who is now paralyzed after falling in the parking lot of his apartment.1 In making this award, the court had to consider the vulnerability of the victim due to a serious pre-existing condition which may have contributed to his injuries, in accordance with a principle known as the “thin skull rule.”
On the morning of 28 December 2006, Jacques Guichard had to clean the snow from his car before going to work. He succeeded in cleaning the hood and roof of his car without incident, but while cleaning the rear windshield, he slipped and fell on a patch of ice that was hidden beneath the snow. After two unsuccessful attempts to stand up, he finally got into his car by crawling on hands and knees to the driver’s door.
In the weeks following the accident, Guichard felt he was gradually losing control of his limbs. He was admitted to hospital and underwent spinal surgery in February 2007. From that time on he never recovered his ability to walk. Both of his legs and his right arm are paralyzed and he only has use of his left arm and hand to 40 per cent of their capacity.
Guichard sued his landlord, Domaine de Parc Cloverdale, which in turn brought an action in warranty against Daniel Da Silva, the snow removal contractor it had hired for the winter.
At trial, Guichard alleged that the landlord’s negligence in maintaining the parking lot was the cause of his fall. According to the lease, the landlord was responsible for snow removal in the parking lot. The landlord had in fact hired Da Silva for this purpose. However, the landlord admitted that it had not asked Da Silva to spread abrasive between the parked cars. Da Silva was thus found not to be liable by the Court.
The evidence revealed that there were numerous potholes in the parking lot as well as a drainage problem that allowed water to accumulate and freeze. Justice Mark Peacock considered that the landlord should have paid special attention to this problem as it was aware of the condition of the parking lot and of the weather conditions.
The victim’s pre-existing condition
In its defence, the landlord denied any liability, arguing that Guichard’s pre-existing condition was the cause of his injuries. Indeed, Guichard had suffered from cerebral palsy as a child. Although he was quite fit before the accident and enjoyed physical activity, particularly walking and bicycling, he walked with a certain instability and needed a cane for balance if he walked more than a kilometre. According to the physicians who gave expert testimony at trial, it is probable that even if Guichard had not fallen on the ice, he would eventually have suffered from progressive cervical myelopathy and could have been paralyzed by the age of 50. However, one of the experts suggested that if Guichard had not fallen, the deterioration in his health could have been stopped by laminectomy surgery.
The Court thus had to determine whether Guichard’s injury was caused by the fall. Although in the circumstances it was probable that Guichard’s condition would eventually result in paralysis, surgery could have prevented such an outcome. As a result, the Court found that Guichard would not have sustained the injury if he had not fallen on 28 December 2006.
The Court ordered the landlord to pay Guichard damages of $1,234,820.49, including $459,731 for the loss of past revenues and $538,129 for the loss of future revenues. The Court also mentioned an award of non-pecuniary damages of $218,795, although this amount was not referred to in the conclusions. The plaintiff was also awarded legal costs and an amount of $18,165.49 for the costs of two experts.
This decision underscores the principle according to which the frailty of the injured person is not a defence in a civil liability case in Quebec. The Court’s determination of causality and the quantum of damages will thus give little weight to a victim’s pre-existing condition.
Guichard c. Domaine de Parc Cloverdale, 2016 QCCS 1384.
Global: What’s on the horizon for insurance companies in 2020?
The following guide brings together summaries of the top legal concerns for the remainder of 2020 for insurers from a number of different regions.