German Federal Supreme Court: Liability of a lawyer in the event of reliance on the client’s statements

In its ruling of 14 February 2019, the German Federal Supreme Court dealt with the question of the extent to which a lawyer may rely on the information provided by his client regarding the time of receipt of a termination letter.1 The Court decided that the lawyer must obtain clarity about the time of receipt himself, since the time of receipt is determined by the legal evaluation of an actual event.

The case in question was based on a termination notice by the plaintiff’s employer dated 22.12.2011 and marked “by messenger”. It was delivered into the plaintiff’s mailbox by a messenger on the same day in the morning. The action for dismissal protection which was fi led by the defendant, the lawyer acting on behalf of the plaintiff, on 13 January 2012, was dismissed due to the expiration of the time limit for fi ling suit. The plaintiff’s husband had previously informed the lawyer that the letter of termination had only been delivered on 23 December 2011.

In accordance with established case law, the German Federal Supreme Court held that the lawyer’s duty to provide correct and complete advice requires clarifi cation on the facts of the case. An attorney in general may rely on the accuracy of information provided by his client without having to carry out his own review, provided that he does not or need not know the inaccuracy of such information. However, in the case of information provided by his client containing a legal assessment, a lawyer must expect that the client may not evaluate these facts correctly. In this respect, the lawyer is obliged to independently further clarify legal facts communicated by the client. 

In the present case, the German Federal Supreme Court decided that information on receipt (in this case receipt of the termination letter) concerned legal facts that had to be clarifi ed further. Here, because of the addition “by messenger”, a possible receipt of the letter of had to be assumed on 22.12.2011 and the lawyer was therefore obliged to clarify the actual factual background for the legal evaluation.

German Federal Supreme Court: clientlawyer relationship in liability insurance / confl ict of interest and its consequences for multiple engagements in the same case

In its decision of 10 January 2019, the German Federal Supreme Court ruled on the client-lawyer relationship in cases when lawyers are representing a person covered by third-party liability insurance and on the prohibition to represent confl icting interests in these cases.2

The background to this legal dispute was a claim for lawyer’s fees for the representation of several planning associations acting as third parties following a third party notice in independent proceedings for the taking of evidence. These proceedings were conducted to gather evidence on an incident involving water and soil entry during a construction project in a long-distance railway tunnel.

Two of the three planning associations had held a projectrelated liability and construction insurance with, among others, the sued insurer, as part of a consortium. The insurance contract contained a clause according to which the policyholder, in the event of a lawsuit concerning the liability claim, had to leave the litigation to the insurers and grant power of attorney to the lawyer appointed or designated by the insurers. The planning associations in the case at hand chose the lawyer and concluded a fee agreement, then informed the insurers and recommended to appoint this lawyer. The insurer (defendant) agreed to appoint the lawyer and paid an advance invoice in full and a further invoice in part. Later, the planning associations assigned their claims against the insurer to the lawyer.

The German Federal Supreme Court dismissed the lawyer’s claim for compensation just like the previous instances had done before. 

The Court first held that no agreement had been concluded between the lawyer and the insurer (or the consortium). Whether a lawyer represents a liable insured person on his behalf or on behalf of the liability insurer depends on the circumstances of the case. The insurer’s obligation to grant legal protection to the insured person by appointing a lawyer does not make the insurer a contracting party. Payments made by the liability insurer to the lawyer representing the interests of the policyholder against an injured party are generally regarded as performance of the insurer’s contractual obligations to bear such costs.

The Court found the contract between the lawyer and the planning associations to be null and void due to representing conflicting interests. A lawyer violates this rule by representing a number of joint and several debtors if the scope is not limited to defending the claim in the joint interest of the debtors and a conflict of interest actually arises according to the specific circumstances of the case. Like in the case at hand, a lawyer usually is deemed to represent conflicting interests when he, in independent evidence proceedings for damages between the builder-owner and the construction company, advises with an unlimited scope several experts who have joined the proceeding as third parties and who acted both with respect to planning and construction supervision.

Finally, the Court ruled out a compensation claim based on unlawful enrichment in cases in which the conclusion of the client-attorney contract violates the prohibition of representing conflicting interests, if the lawyer deliberately violated this rule or recklessly failed to acknowledge such violation. 

German Federal Supreme Court: Requirements for effective allocation of responsibilities at management level

In its decision of 6 November 2018, the German Federal Supreme Court ruled on the allocation of responsibilities within the management board. The Court decided that a clear and unambiguous allocation of management tasks which have previously been assigned and are supported by all board members is required. The allocation of responsibilities must ensure the comprehensive performance of management tasks by professionally and personally suitable persons and, irrespective of the responsibility of an individual managing director, maintain the responsibility of the entire board, in particular for key management duties which cannot be delegated.3 An allocation of responsibilities that meets these standards does not necessarily require written documentation.

The plaintiff as insolvency administrator demanded reimbursement of payments made by one of the two managing directors of the company after factual insolvency. According to the internal allocation of responsibilities, the managing director and defendant in this case was the so called “artistic” managing director, while the other managing director was responsible for the commercial, organisational and financial side of the business. The artistic director indicated that he had no knowledge of the factual insolvency. He claimed that the other managing director had deliberately concealed this from him.

The German Federal Supreme Court with this decision has confirmed its settled case-law that the obligations arising from section 64 of the German Limited Liability Companies Act (here dealt with in its previous version) constitute personal obligations of all managing directors of a limited company which cannot be transferred to individual managing directors by way of allocation of responsibilities. Each managing director is individually obliged to ensure an organisation which enables him at any time to have the necessary overview of the company’s economic and financial situation in order to fulfil his duties. Although an allocation of responsibilities is generally possible and depending on the size of the company even necessary, this allocation will not excuse any managing director of his own responsibility for the proper management of the company’s business.

The recognisability of the factual insolvency is generally difficult to assess in cases in which a responsible managing director does not provide or deliberately withholds the information required by the other managing directors to assess the factual insolvency. Nevertheless, the recognisability of factual insolvency can only be denied if it would not have been noticeable when exercising proper care and supervision. Regular monitoring of account balances or holding regular (weekly) meetings is not sufficient in this regard. Rather, a plausibility check of all information provided by the responsible -managing director, followed by necessary inquiries by each of the managing directors and tailored to the actual economic situation of the company is necessary.

Higher Regional Court of Cologne: Multiple insurance with equivalent subsidiarity clauses

The Higher Regional Court of Cologne decided on 26 February 2019 that in cases of multiple insurance with identical secondary liability clauses, reimbursements between the insurers would take place in accordance with section 78 of the German Insurance Contract Act.

Two travel cancellation cost insurers argued about the internal reimbursement in a case of multiple insurance contracts. Both contracts contained a secondary liability clause. The conditions applicable between the policyholder and the insurer as defendant in this case contained a clause according to which this insurance contract was to be applied “strictly secondarily”. This would also apply if other insurance contracts in turn contained a secondary liability clause. With regard to these other insurance contracts, the insurance coverage under these (other) conditions had to be considered as the more specific one, unless the services provided by third parties were insufficient to cover the costs. In this case, an insurance contract would be assumed for the remaining costs.

The previous instance had sustained the claim of the other insurer for compensation of costs pursuant to section 78 subsection 2 of the Insurance Contract Act. The defendant withdrew its appeal after a preliminary ruling (“Hinweisbeschluss”) of the Higher Regional Court of Cologne.

The Higher Regional Court of Cologne stated that the clause in the defendant’s terms and conditions was not a “qualified” but a simple secondary liability clause. Simple secondary liability clauses are characterized by the fact that the user is not liable if the policyholder received refunds from another insurance contract which covered the same risk. In contrast, for so called “qualified” secondary liability clauses, it is irrelevant, whether the insured actually has the benefit of coverage under the other insurance contract. It is only decisive whether another insurance contract exists at all. In the Court’s view, in the case at hand, the defendant’s clause merely affirmed the validity of the secondary liability clause in relation to conflicting clauses.

The fact that two simple secondary liability clauses level each other out and in consequence section 78 of the Insurance Contract Act is applicable has already been decided by the German Federal Supreme Court in its judgment of 19 February 2014 (case ref.: IV ZR 389/12).

Higher Regional Court of Saarbrücken: Relevant point in time for the insured event

The Higher Regional Court of Saarbrücken decided on 19 December 2018 on the relevant point in time for the insured event in case of a water pipe burst.5 The insured event within the framework of a residential property insurance providing insurance coverage in the event of a pipe burst is set to the point in time of the damage to the pipe which led to the water leakage and not to the point in time when the water damage caused by the pipe burst becomes obvious. The policyholder bears the burden of proof that the insured event falls within the liability period if there are indications that the damage to the pipe already existed at the time the insurance contract was concluded.

In contrast to damage caused by water leakage, which is characterised by the fact that it regularly extends over a longer period of time and in which the damage increases with increasing duration as a result of the constantly running water, a pipe burst is usually a punctual event. The insured event occurs with the pipe burst as such and not with the consequence of a visible damage. The fact that the insured event falls within the contract period must be proved by the policyholder in accordance with the general principles. In the specific case at hand, the policyholder was not able to provide proof, which is why the Higher Regional Court of Saarbrücken dismissed the claim against the insurer.

Higher Regional Court of Düsseldorf: Broker’s liability – False information on coverage

If an insurance broker before taking out a patent legal protection insurance declares that the defence against patent invalidity suits is also covered, even though this is actually not the case, he is liable to pay damages if the policyholder, trusting in the existence of a corresponding legal protection, files a patent infringement claim and then, as is common practice, is sued in return within an action of annulment of the patent. It is irrelevant whether the defense against patent invalidity actions is insurable at all.” This was decided by the Higher Regional Court of Düsseldorf in its decision of 16 November 2018.6

The patent owner and policy holder filed suit against the broker who had arranged a patent legal protection insurance for him. Upon the plaintiff’s specific inquiry, the broker had stated that the defense against actions for invalidity of industrial property rights was insured under the premium policy, although this was not actually the case. In connection with judicial patent infringement proceedings, the opposing party filed an action for annulment against the plaintiff before the Federal Patent Court. In the case at hand, the plaintiff claimed the costs of these proceedings as damages against the broker. 

The Higher Regional Court of Düsseldorf accepted a claim for damages for breach of an obligation resulting from the brokerage agreement concluded between the parties. The decisive factor was not the obligation to provide advice under section 61 Subsection 1 of the Insurance Contract Act, but the contractual secondary obligation not to make any incorrect statements, the basis for the claim consequently being section 280 Subsection 1 of the German Civil Code

Higher Regional Court of Hamburg: Underwriting agent’s right to conduct legal proceedings; suspension of statute of limitations by bringing an action.

In its decision of 25 October 2018, the Higher Regional Court of Hamburg ruled on the power of the underwriting agent (“Assekuradeur”) to conduct legal proceedings and, in this context, on the suspension of the statute of limitations due to the filing of an action by the underwriting agent.7

The plaintiff was the underwriting agent of the transport insurer of the policyholder. The policyholder had commissioned the defendant to transport a container loaded with handbags from the port of Hamburg to the policyholder’s warehouse. The container was burgled into on a motorway rest area and parts of the cargo were stolen. The Court dismissed the claim for compensation brought forward by the underwriting agent in authorization to pursue a claim in a law suit on behalf of another person on the grounds that it was statute-barred, just as the previous instance had ruled earlier. 

The Higher Regional Court Hamburg stated that the filing of a claim by an underwriting agent is generally permissible. The right to file a lawsuit is the right of a party to initiate court proceedings in one’s own name on the basis of the alleged right, without there being a need for a substantive legal relationship to the subject-matter of the dispute. The underwriting agent also had an own economic interest in conducting the lawsuit for the insurers.

However, to suspend the statute of limitations according to section 204 subsection 1, no. 1 of the German Civil Code, it is necessary that the claim is filed by the initially entitled party. This can also be the arbitrary litigant, but only if his role as arbitrary litigant is disclosed. A disclosure at a later point would not have retroactive effect.

Higher Regional Court of Düsseldorf: No protection against indirect reduction of the enterprise value

The Higher Regional Court of Düsseldorf ruled on 21 September 2018 that there is no protection under a fidelity insurance for a reduction in the company value caused by a confidant by transferring poached employees and business secrets of the insured company to a competitor.8 The concept of indirect loss, which constitutes an effective exclusion of risk in the context of a fidelity insurance for companies, has to be distinguished by assessing which financial interests were negatively impacted by the actions of the confidant. The plaintiff, in this case the insolvency administrator of the policyholder, sued for performance under a fidelity insurance policy after two members of the policyholder’s management board poached a large number of the policyholder’s employees and together with individual former employees stole data with and finally opened a competitor company together with these former employees.

The Higher Regional Court of Düsseldorf classified the damage as indirect damage within the scope of the risk exclusion. The reduction in the value of the company as a result of the departure of the key employees was directly only caused by the employees’ own will and only indirectly by the influence of the members of the Management Board as insured confidants. The loss of manpower and know-how is the direct damage, while the effects on the value of the enterprise (as presented as damage in the lawsuit) are only indirect in nature. 

Furthermore, the Higher Regional Court of Düsseldorf stated, in distinguishing the German Federal Supreme Court ruling on the invalidity of the exclusion of cover for indirect losses in fidelity insurance policies of the chambers of notaries (German Federal Supreme Court, decision of 20 July 2011, case ref.: IV ZR 75/09), that the present exclusion was effective in the context of privately and autonomously concluded fidelity insurance policies. The ruling of the German Federal Supreme Court of Justice referred to the purpose of compulsory insurance (here: compulsory insurance for notaries), so that it does not apply to fidelity insurance outside the compulsory insurance