Recent pronouncements by the Federal Financial Supervisory Authority have raised further questions about the handling of insurance claims in Germany. The story begins in early 2016 when the German Supreme Court delivered a judgment with far reaching consequences for insurers and brokers operating in Germany. Prior to this decision, it had been normal for brokers to be instructed by insureds and at the same time handle claims on behalf of the insurers. In its judgment, however, the Supreme Court ruled this to create a conflict of interests detrimental to the insured.
Under German law, legal services may not be provided if it may potentially cause conflicts of interest with any other activities or services carried out by the same service provider. Claims work is considered to be legal work.
According to German statutory law, the business of an insurance broker is characterised by pursuing the interests of the insured person, for example providing expert advice and the negotiation of contracts and renewals on behalf of the insured are typical duties of brokers. They act as “trustees” of the insured. Insurance agents on the other hand are expected to act exclusively for the insurers. This strict differentiation between insurance agents and insurance brokers, which is set out in the statutory law, is often overlooked in practice. There are many brokers which do pursue claims or underwriting work on behalf of insurers and at the same time undertake instructions for insureds.
The Supreme Court feared that this double function would endanger the insureds’ interests. The Court was concerned that brokers would be tempted to favour insurers’ interests because – put simply – a big insurance company will generally bring more profit than a lone insured.
This judgment has been severely criticised by insurers and insurance brokers alike and brokers have had to think about alternative solutions for pursuing their business. One of these solutions has been for brokers to process claims documents but leave the final coverage decisions to the insurer. In this way a broker is not tempted to decide against the insured but it can still undertake work for the insurer. This allows brokers to be compliant with the Supreme Court judgment – but it may be too soon to celebrate!
The Federal Financial Supervisory Authority (BaFin) recently commented on the issue as well and went one step further than the Supreme Court. Although BaFin is not directly responsible for the regulation of insurance brokers, it was concerned at the possibility of compliance violations by insurers when instructing brokers to handle claims. According to BaFin the mere preparation of claims on behalf of insurers by brokers, even without deciding on coverage, is to be deemed to create a conflict of interest and not to comply with the law. That conclusion must, however, be open to dispute and it seems likely that the issue will have to go back to Court for the last word.