The legal frameworki Sources of insurance lawThe Insurance Contract Act
The main source of insurance law in Germany is the Insurance Contract Act (VVG). It sets out the general rules for insurance contracts as well as the statutory provisions for specific insurance branches. The VVG applies to all types of insurance contracts, except for reinsurance and maritime insurance contracts (Section 209 VVG). It came into force in 1908 and remained largely unchanged until a major reform in 2008. The objective of the reform was to modernise German insurance law and improve the position of the insured person.
Important changes included:
- the introduction of a right to revoke the insurance contract by the policyholder within 14 days of the conclusion of the contract (Section 8 VVG);
- the introduction of certain advisory, documentation and information duties of the insurer (Section 6 et seq. VVG);
- the abolition of the ‘all-or-nothing’ principle in favour of the ‘more-or-less’ principle (Sections 26(1), 28(2), 81(2) VVG);
- the abolition of insurance-specific limitation periods, rendering applicable the general limitation period of three years pursuant to Section 195 of the German Civil Code (BGB); and
- the introduction of a new place of jurisdiction at the place of the policyholder’s residence (Section 215(1) VVG).
The overarching purpose of the reform was to provide greater protection to the insured person by setting out restrictions to the freedom of contract. The restrictions shall, however, not apply to large risks and open policies. Large risks are risks of: (1) certain transportation and liability insurances (such as insurances for railway vehicles, aircrafts or the transportation of large goods); (2) certain credit and suretyship insurances; and (3) certain property, liability and other indemnity insurances where the policyholder exceeds a balance sheet total of €6.2 million, a net turnover of €12.8 million or an average of 250 employees per fiscal year. These insurances are typically taken out by big companies that are not in need of protection by the VVG. All other risks are deemed ‘mass risks’, to which the restrictions to the freedom of contract apply without limitation.German Civil Code
Another source of German insurance law is the German Civil Code (BGB), which is applicable insofar as no specific provisions of the VVG apply. The area of most relevance for insurance contracts is its section on the use of standard business terms. Almost all insurance contracts contain standard business terms of the insurer, especially insurance contracts concluded with a consumer. Section 305 et seq. BGB set out the rules for the incorporation of standard business terms into the contract, the assessment of their effectiveness and the interpretation of their content. These rules apply regardless of whether the other party is a consumer or not. However, stricter requirements apply where a consumer is concerned.
Other provisions applicable to insurance law are the rules on the statute of limitations. As the special limitation periods for insurance claims were abrogated with the VVG reform in 2008, the general rules in Section 195 et seq. BGB apply. The limitation period is three years, commencing at the end of the year in which the claim arose and the insured party obtained knowledge of the circumstances giving rise to the claim (or would have obtained this knowledge if it had not shown gross negligence). An exception applies if the limitation period is suspended. For insurance contracts, Section 15 VVG provides an insurance-specific suspension rule. Where a claim arising from an insurance contract has been registered with the insurer, the limitation period shall be suspended until such time as the applicant has received the insurer’s decision in writing. All other rules for suspension are set out in Section 203 et seq. BGB.German Code of Civil Procedure
A further source of German law that is especially relevant for insurance disputes is the German Code of Civil Procedure (ZPO). It sets out the general rules for litigation proceedings and is also applicable to insurance disputes as far as no specific rules are set out in the VVG.
One of the main principles of German civil procedural law is that each party has to present the facts and prove the case upon which its claim or defence is based. Unlike in common law jurisdictions, there is no pretrial discovery or document production. In general, no party to litigation proceedings is therefore obligated to deliver to the other party the documents or evidence necessary for its case. However, there are exceptions to this principle. One example is Section 142 ZPO, which sets out that the court may direct one of the parties or a third party to produce records or documents, as well as any other material in its possession if one of the parties made reference to it. Another example is Section 422 ZPO, which stipulates the obligation of a party to produce certain documents favourable for its opponent if its opponent is entitled to demand the surrender or production of the relevant documents pursuant to civil law stipulations.
With regard to insurance disputes, the VVG stipulates specific disclosure obligations of the insured person. According to Section 31(1), the insurer may, after the occurrence of an insured event, demand that the policyholder or the beneficiary shall disclose all the information necessary to establish the occurrence of the insured event or the extent of the insurer’s liability. In addition, the insurer may demand supporting documents to the extent that the policyholder may be reasonably expected to obtain them. The policyholder is even obligated to disclose facts unfavourable to him or her. The VVG therefore sets out more extensive disclosure obligations of the insured person than it would have under the rules of the ZPO. However, Section 31 VVG does not set out any consequences for cases of non-compliance. Therefore, the insurer will usually incorporate the policyholder’s disclosure duties in its general terms and conditions and stipulate contractual consequences for non-compliance.
Another specific aspect of insurance disputes concerns direct claims of third parties against the insurer. This issue typically arises in relation to liability insurances that cover damage claims made by third parties against the policyholder. In general, a third party cannot make direct claims under the insurance contract against the insurer of the damaging party. Therefore, the third party may only enforce its damage claim against the policyholder (‘liability claim’) who may then raise a claim against his or her insurer (‘coverage claim’). However, there are exceptions to this rule. One is set out in Section 115 VVG, which provides a direct claim of the third party against the insurer if: (1) third-party vehicle insurance is concerned; (2) the policyholder has become insolvent; or (3) the policyholder’s whereabouts are unknown. If one of these requirements is fulfilled, the third party may directly claim payment from the insurer and initiate court proceedings against it without having to proceed against the policyholder first.
The ZPO also stipulates the place of jurisdiction for litigation proceedings regarding claims in connection with the insurance contract. Optional places of jurisdiction are the place of the insurer’s registered seat, the place of performance of the contract or the place of the insurer’s branch office. In general, all these venues favour the insurer. With the introduction of Section 215 VVG in 2008, the legislator established a new place of jurisdiction that favours the insured person. The policyholder can now also choose to proceed against the insurer at the court in whose district he or she has his or her place of residence. For actions brought against the policyholder, only this court shall have jurisdiction. The parties can only deviate from this place of jurisdiction to the detriment of the policyholder after the dispute has arisen or if the policyholder moves his or her domicile to a different country after signing the contract or if his or her domicile is unknown at the time the action is filed. The purpose of this change was to guarantee the policyholder access to a court near his or her domicile. This was supposed to compensate for the subject-specific and economic advantages of the insurer.ii Insurance regulationGerman Insurance Supervision Act
The main legal source for insurance regulation is the German Insurance Supervision Act (VAG), which implemented in 2015 the European Solvency II Directive. It enables the supervision of insurance companies in their legal and financial operations (Section 294(2) VAG) by the German Federal Financial Supervisory Authority (BaFin) and the supervisory authorities of the federal states. The BaFin is the competent supervisory authority for private insurance companies that operate in Germany and are of material economic significance as well as for public insurance companies that participate in free competition and operate across the borders of any federal state (Section 320 VAG). The supervisory authorities of the federal states are mainly responsible for overseeing public insurers whose activities are limited to the federal state in question and private insurance companies of lesser economic significance.
Therefore, all private and public insurance companies, pension funds and reinsurers carrying out private insurance businesses within the scope of the VAG and that have their registered office in Germany are subject to supervision. Social insurance institutions are not supervised under the VAG but regulated by other government agencies.
The primary objective of the VAG is the protection of policyholders and beneficiaries (Section 294(1) VAG). To ensure that only regulated companies offer insurance services, insurance companies must acquire a licence before commencing business operations (Section 8(1) VAG). To be granted authorisation to operate, the insurance company must fulfil a number of requirements. This includes, inter alia, that the company:
- operates in the legal form of a public limited company;
- has its legal seat in Germany;
- engages only in insurance businesses and directly related businesses and observes the principle of business segregation (e.g., a life insurance company may not at the same time provide health or property insurance);
- submits a detailed business plan that contains the company’s charter and sets out which insurance segments will be operated as well as the risks that are intended to be covered;
- demonstrates that it has a sufficient amount of its own funds as well as sufficient resources to develop the business and sales organisation; and
- has at least two members of the management board that are ‘fit and proper’ persons.
In its ongoing supervision, the BaFin monitors, among other things, whether the insurance company complies with all statutory and regulatory requirements, whether it is capable of fulfilling its insurance contracts and whether it observes the principle of good business practice (e.g., keeping proper accounting records and rendering proper accounts). In accordance with the Solvency II Directive, it also supervises the company’s solvency, in particular the fulfilment of certain capital requirements.
In the event of any undesirable conduct by an insurance company, especially non-compliance with legal requirements, the BaFin may take any appropriate and necessary measures to prevent or eliminate this conduct (Section 298 VVG). For consumers, it is also possible to file a complaint against an insurance company with the BaFin. The BaFin will review the complaint and issue a report with its legal opinion. If necessary, it may also take regulatory steps against the insurance company. However, it is not authorised to render a binding decision or give legal advice.iii Insurable risk
German insurance law differs between two types of insurable risks: socially insured risks and privately insured risks. Socially insured risks are codified in the German Social Code (SGB), which distinguishes between health insurance, unemployment insurance, nursing care insurance, pension insurance and occupational accident insurance. They are statutory insurances that do not come into effect by agreement but are taken out by law when the insured person fulfils certain requirements.
The VVG only applies to privately insured risks. Because of the freedom of contract, the parties to an insurance contract may, in principle, insure any type of risk they chose to. They are only bound by the limitations applicable to any civil law contract (e.g., the prohibition of contracts that violate public policy or a statutory prohibition). The VVG regulates the most common types of private insurance in Germany by stipulating the rules applicable to the different insurance branches. The most relevant branch in Germany is the liability insurance that insures damage claims of a third party against the policyholder. What is special about this insurance branch is that some liability insurances are on a voluntary basis while others are compulsory insurances. This is the case where the legislator deemed it especially important to insure the risk of damages to a third party caused by the conduct of another party. The most prominent example of compulsory liability insurance is the third-party vehicle insurance, from which the other compulsory insurances evolved. Other insurance branches stipulated in the VVG are legal expenses insurance, transport insurance, fire insurance for buildings, life insurance, occupational disability insurance, accident insurance and private health insurance.iv Fora and dispute resolution mechanisms
In general, arbitration and other alternative dispute resolution mechanisms (ADR) have experienced an expansion in recent years. In Germany, however, the popularity of arbitration and ADR rather depends on the type of insurance contract concerned. A distinction can be drawn between reinsurances, insurances for commercial and industrial risks and insurances for mass risks.
Disputes regarding reinsurances are traditionally solved amicably between the parties. The reason for this is a kind of ‘gentlemen’s agreement’ to solve reinsurance disputes by negotiations for amicable settlement. However, arbitration proceedings have become more and more common in the past 30 years and most reinsurance contracts now also contain arbitration clauses. This may be attributed to an increased willingness in the Anglo-American reinsurance market to refer reinsurance disputes to arbitration, which also reflects on the German market. Another reason might be the increase of disputes regarding large risks that involve higher stakes for the parties. A third factor may be that more reinsurance companies withdraw from the reinsurance market, making it less necessary to solve disputes amicably to retain ongoing business relationships.
In insurance disputes concerning commercial and industrial risks there is a rather restrictive use of alternative dispute resolution mechanisms, especially arbitration. This is a distinctive aspect of German insurance law in comparison to other jurisdictions. It might be owing to the still widely held perception by German insurers that German court proceedings are, when compared to other jurisdictions, more efficient, less time-consuming and less costly. Furthermore, German courts regularly have specialised chambers that will hear insurance law-related disputes. This ensures a qualified legal judgment that otherwise only specialised arbitral tribunals might be able provide. Benefits of this kind in German court proceedings apparently still outweigh the general advantages of arbitration for many insurance companies. However, there is reason to believe that the use of arbitration clauses in commercial or industrial insurance contracts will increase in the future. For contracts that are related to international law or written in a foreign language, or for contracts that contain unusual clauses or concern risks of a high technical nature, arbitration proceedings may, in principle, be deemed more favourable.
In German insurance contracts concerning mass risks, arbitration clauses are basically non-existent. This is owing to the fact that they are often concluded with ‘consumers’ under German consumer protection law, which significantly raises the bar for a valid arbitration agreement. Section 1031(5) ZPO states that arbitration clauses involving consumers are only valid if they are contained in a separate record or document signed by both parties that shall not contain agreements other than those making reference to the arbitration proceedings. If the arbitration agreement is included in a contract, it is only valid if it has been recorded by a notary. Both requirements are rather difficult to fulfil in practice. In addition, arbitration clauses in insurance contracts are usually part of the insurer’s general terms and conditions and therefore have to fulfil the requirements set out in Section 305 et seq. BGB (see above under Section II(i) BGB). This leads to a high risk that an arbitration clause contained in an insurance contract for mass risks could be deemed invalid by a court.
Because of these difficulties with arbitration proceedings against consumers, the German Insurance Association formed the association Versicherungsombudsmann eV (the Insurance Ombudsman Association) in 2001 to establish a mechanism for out-of-court dispute settlement of insurance disputes with consumers before an ‘insurance ombudsman’. Under this mechanism, consumers may file a complaint against an insurance company (or an insurance broker) with the ombudsman. To be able to refer an insurance dispute to the ombudsman, the insurer needs to be a member of the Insurance Ombudsman Association, which almost all insurance companies in Germany are. The complaint is only admissible if the insured person has made a complaint with the insurance company first and if at least six weeks have passed since then. The ombudsman cannot decide on complaints that: (1) have a value of more than €100,000; (2) concern healthcare or nursing care insurance; (3) have already been filed with or decided by a court or another institution; or (4) are obviously unfounded. The proceedings shall take no longer than 90 days. The insured party may refer the dispute to an ordinary court at any time. If the complaint is admissible and the value in dispute is no more than €10,000, the ombudsman can render a decision that is binding for the insurance company; otherwise, it can make a non-binding recommendation. Dispute settlement before the insurance ombudsman has proven to be quite successful. In 2017, the Insurance Ombudsman Association received 18,956 complaints, of which it settled 14,329.