Olaf Hartenstein and Carolin Schilling-Schulz, Dabelstein & Passehl, Germany
Introduction
On January 14 2016 the broker law division of the Federal Court of Justice ruled on a case (I ZR 107/14) where the Cologne Bar Association had filed an injunction against an insurance broker because the broker had attempted to settle a claim with the damaged party on behalf of his client’s liability insurer. The bar association alleged that a broker settling claims on behalf of insurers would render unauthorised legal services.
In principle, only registered persons such as lawyers or certain other qualified companies are entitled to render legal services under German law. Nevertheless, there is an exemption for auxiliary activities. If a certain legal service forms an accessory activity to the field of activity of a nonregistered person, this person will also be entitled to render such legal service, provided that it at no time interferes with the fulfilment of the person’s main performance obligation. In the past, the vast majority of brokers were authorised by insurers to settle minor claims with the damaged parties on behalf of the insurers. This was and still is common practice and has greatly facilitated claims processing for insurers. Therefore, the situation which led to the verdict might sound minor, but it has had a significant effect on brokers as well as insurers and their process of claims handling of minor everyday damages.
Facts
A client of a dry cleaning service claimed compensation for a ruined article of clothing. The dry cleaner forwarded the matter to its broker (the defendant) which had arranged the liability insurance. The broker was authorised by the liability insurer to negotiate and settle minor claims. The broker denied the claim, for the most part referring to German law. The bar association (the claimant) gained knowledge of the case and called on the courts for an injunction due to unauthorised legal services. The first and second-instance courts rejected the claim. However, the Federal Court of Justice granted the injunction.
Decision
The Federal Court of Justice ruled that claims settlements by brokers on behalf of liability insurers constitute a violation of the Legal Service Act. The settlement of claims for insurers does not qualify as an accessory activity of the main activity of a broker, because – according to Section 59(3) of the Insurance Contract Act – a broker’s main activity is to safeguard the assured’s interests. After placing the insurance contract, the broker must take care of adjustment requirements and extensions, as well as supporting the assured in claims handling (eg, ensuring the notice of claim). According to the court, it is not possible to represent the insurer’s and the assured’s interests simultaneously, as the law forces insurance intermediaries to state clearly whether they are brokers (representing the assured’s interests) or agents (representing the insurer’s interests). The court further elaborated that the interests of the liability insurer and the assured may not always be identical. The insurer has an interest to pay as little as possible, whereas the assured may have an interest in not upsetting the damaged party, possibly a good client or customer. The court therefore ruled that there would be a conflict of interest if the broker were to take care of claims handling on the insurer’s behalf.
Comment
The Federal Court of Justice ruled that insurance brokers are banned from claims settlement on the insurer’s behalf in liability insurance. This verdict heavily influences broker practice. It would apply where legal services are rendered in Germany by insurance brokers for insurers. The territorial applicability of the Legal Service Act – and therefore this verdict – is not clearly defined, but on the basis of earlier judgments, the place of the broker’s office is not decisive. On the other hand, there must be significant links to Germany.
For further information on this topic please contact Olaf Hartenstein or Carolin Schilling-Schulz at Dabelstein & Passehl by telephone (+49 40 31 77 970) or email (o.hartenstein@da-pa.com or c.schilling-schulz@da-pa.com). The Dabelstein & Passehl website can be accessed at www.dapa.com.