Published on Lexology
Trends and prospects
What are the current trends in and future prospects for the insurance and reinsurance markets in your jurisdiction?
The EU General Data Protection Regulation (2016/679) (GDPR) and the relevant national law have a broad impact on insureds and their insurers, particularly with regard to directors' and officers' (D&O) insurance. In particular, the GDPR contains:
- strict data management rules;
- new liability exposures; and
- far-reaching tools for imposing fines on companies and their managers.
The GDPR entered into force on 25 May 2018. It not only provides stricter requirements for companies dealing with personal data, but has also introduced new standards for data breach notifications and drastically increased potential fines in the event of a violation of these requirements. Accordingly, data law compliance has become even more important under the GDPR. European regulators have issued several large fines on infringing companies (eg, Google and British Airways). Although the German authorities have been reluctant to issue large fines to date, the first larger fine (€14.5 million) was issued in November 2019 against Deutsche Wohnen and additional higher fines are expected in future. In this context, in October 2019 the German data protection authorities issued guidelines on the application and calculation of GDPR fines. The guidelines are currently being harmonised with those of other EU member states. With their application, large fines are expected to be the rule rather than the exception.
The question of whether and to what extent fines and penalties are insurable in Germany remains largely unanswered. The decisive legal test is whether the issuance of fines and penalties breaches public policy. Any legal transaction that is contrary to public policy is void. There is some debate on the issue, with some suggesting that civil law should penalise only behaviour that is also punishable under criminal law and, therefore, intentional. However, the prevailing opinion among legal scholars is that the coverage of fines and penalties is contrary to public policy. The main argument is that the coverage of administrative fines can impair the preventive purpose of the fine and interferes with the GDPR's effectiveness. In practice, fines and penalties are covered in certain cases. The respective clauses in D&O insurance contracts usually clarify that coverage is granted only if there is no coverage prohibition.
In the context of the GDPR and IT security, cyber risk is a key emerging trend. The awareness of this risk and related insurance coverage has increased in recent years.
In Germany, insurers have covered cyber risks for only a few years. Cyber risks can be covered under a variety of policies. As in many other countries, there is an increasing demand for cyber policies in Germany and an increasing number of coverage claims. However, other policies, such as crime and liability policies, can also be triggered – either under affirmative or silent cyber coverage. Because of the different coverage approaches taken by different carriers, the German Insurance Association has developed model terms and conditions for cyber products, which provide guidance to small and medium-sized companies.
The market is expecting more cyber-related litigation, including with regard to D&O insurance. It is increasingly difficult for insurers and their insureds to properly understand, manage and allocate cyber risks between various insurance policies. In particular, the Federal Financial Supervisory Authority (BaFin) has been investigating the IT security and governance of insurers, as well as their cyber exposure.
Cyber claims can result in serious reputational and financial damage and regulatory action. For example, Article 24 of the GDPR codifies the accountability obligation, requiring controllers to both:
implement appropriate technical and organisational measures to ensure and demonstrate that they process data in accordance with the GDPR; andreview and update those measures as necessary.
Through this accountability principle, almost all GDPR provisions are relevant from a cyber security perspective. Security measures, which include technological measures and data analytics, can no longer be considered a static concept, but will have to be progressively checked and updated. Further, companies must ensure that their employees are adequately trained.
In addition, the German legislature has introduced further legislation for critical infrastructure. Operators of critical infrastructure (eg, energy, transport and telecoms companies) and insurers must take organisational and technical measures to avoid errors in the availability, integrity, authenticity and confidentiality of their IT systems, components and processes which are essential for the functionality of the operated critical infrastructure. Operators of this infrastructure must prove to the Federal Office for Information Security that they meet these requirements every two years.
Financial institutions and insurance undertakings must meet special IT risk management requirements imposed by the regulator. BaFin has published the IT supervisory requirements for financial institutions (BAIT) and insurance undertakings (VAIT). The BAIT and the VAIT intend to provide clarity for executive boards of banking institutions regarding the banking supervisors' expectations with respect to the secure design of IT systems and associated processes. These requirements form a core component of IT supervision in the German banking and insurance sector. Financial institutions and insurers must define a sustainable IT strategy outlining objectives and measures to achieve these objectives. The BAIT and the VAIT require companies to implement information risk and security management and a user access management plan.
Fuelled by 'Dieselgate', and in light of the disadvantageous position of German car owners compared with those in other countries, the German Bundestag passed the Law on the Introduction of a Model Action for Civil Declaratory Judgment to facilitate the enforcement of consumer rights. The law came into effect on 1 November 2018 and allows qualified bodies, such as consumer associations, to request a declaratory judgment to ascertain the common issues of fact or law for the benefit of at least 10 affected consumers. A model action for declaratory judgment is litigated exclusively between the association and the defendant. However, consumers can register their claims with the Federal Office of Justice without the need for an attorney, with the effect of suspending the limitation period. Any decision in the model action for declaratory judgment creates a binding effect for the registered consumers for any subsequent actions brought by the consumer. Should the association and the defendant agree on a settlement, it must be approved by the court before it becomes binding. Affected consumers have one month to opt out of the settlement. Since model action decisions are limited to the basis of a claim, consumers must initiate separate individual proceedings regarding their individual claim (ie, concerning the amount of damages). The model action has been met with considerable criticism from various stakeholders which fear that the procedure will be too complicated and not actually benefit consumers.
In the notes on the draft legislation, the federal government assumed that roughly 450 model actions for declaratory judgment will be submitted annually and forecast a success rate of approximately 50%. To date, five model proceedings have been commenced. The first proceedings were initiated against Mercedes Benz Bank AG based on the alleged unclear wording of revocation clauses in consumer car loan contracts. The Stuttgart Higher Regional Court dismissed the claim as inadmissible. The association representing the class was not regarded as fit. The judicial assertion of consumer interests may play only a subordinate role in the daily practice of the institution to be regarded as a qualified institution. This requirement was not fulfilled according to the court. The second action was the expected one against Volkswagen AG regarding the Dieselgate allegations. Further proceedings have been initiated against:
- a rating agency for misleading ratings;
- a residential apartment complex owner for raised rent; and
- a local German bank for incorrect interest adaption in consumers' savings accounts.
What is the primary legislation governing the (re)insurance industry in your jurisdiction?
(Re)insurance supervision in Germany is mainly governed by the Insurance Supervisory Act. Insurance contract law is primarily governed by the Insurance Contract Act. (Re)insurance contracts are generally also governed by the Civil Code and the Commercial Code. Reinsurance law is not codified but governed by general contract law and market practices. Since 2016, the prudential and supervisory Solvency II regime has applied.
Which government bodies regulate the (re)insurance industry in your jurisdiction and what is the extent of their powers?
All private and public insurance undertakings which carry on private (re)insurance business within the scope of the Insurance Contract Act and have their registered office in Germany are subject to supervision by the Federal Financial Supervisory Authority (BaFin) or the supervisory authorities of the federal states. Insurance undertakings which have their registered office in another EU member state or in a state party to the Agreement on the European Economic Area and conduct business in Germany on a cross-border basis are primarily subject to supervision in their home country. However, BaFin does consult foreign supervisory authorities if it identifies a breach of general German legal principles. BaFin is an independent public law institution which was established in 2002 and is subject to legal and technical oversight by the Federal Ministry of Finance.
Insurance supervision in Germany is mainly governed by the Insurance Supervisory Act. This has recently been revised, transposed the EU Solvency II Directive into domestic law as of 1 January 2016. According to the Insurance Supervisory Act, the primary objective of BaFin's supervision is to protect policyholders and beneficiaries. To fulfil this objective, BaFin monitors all business operations of (re)insurers within the framework of legal supervision in general and financial supervision in particular. Subject to the prerequisites set out in the German Insurance Supervisory Act, BaFin may take measures against insurance undertakings that are appropriate and necessary to prevent or eliminate undesirable developments that threaten to harm the interests of policyholders – for example, if a (re)insurer does not comply with the statutory and supervisory requirements for conducting (re)insurance business. In addition to this general authorisation, BaFin can take certain special measures against a wide range of threats, ranging from appointing a special commissioner to replace the management or supervisory board or other governing bodies of the company to revoking a (re)insurer's authority to carry out business. BaFin may also conduct ad hoc surveys, stress tests and scenario analyses.
Supervisory authorities at the state level are mainly responsible for supervising public insurers whose activities are restricted to the particular state in question and private insurance undertakings that are of lesser economic and financial significance.
Germany adopted the Solvency II regime through an extensive revision of the Insurance Supervisory Act, which applies to (re)insurers in Germany. In addition, there are certain regulations (delegated legislation) by which, based on respective authorisation in the Insurance Supervisory Act, the Federal Ministry of Finance concretises certain statutory provisions.
In order to provide guidance on its supervisory practice, BaFin issues interpretative decisions, guidance notices and circular letters. Although not technically legally binding, circular letters in particular are usually deemed a clear indication of the regulator's expectations. Moreover, the publications will usually constitute a self-commitment of BaFin that it will treat similar cases alike.
In individual cases, BaFin can issue collective decrees, which are binding on all insurers addressed (eg, all primary insurers authorised to conduct business in Germany).
In addition to the provisions of the Insurance Supervisory Act, (re)insurance undertakings must adhere to a wide range of German law provisions (eg, civil, company and data protection law). On its website, based on Article 146 of the EU Solvency II Directive, BaFin publishes a list of general good requirements, indicating the provisions to which EU and EEA insurers must adhere when conducting business in Germany on a freedom-of-services or freedom-of-establishment basis.
Ownership and organisational requirements
Ownership of (re)insurers
Are there any restrictions on ownership of or investment in (re)insurers in your jurisdiction, including any limits on foreign ownership/investment?
Specific requirements apply to (national or international) owners of a qualified participating interest – namely, those who directly or indirectly hold at least 10% of the share capital or voting rights or who are by other means in a position that makes it possible to exercise a significant influence over the company's management. The owners of a qualified participating interest must be reliable and meet the requirements of sound and prudent management. As part of the application to set up an insurance undertaking, certain documents relating to owners of qualified participating interests must be submitted to check suitability – in particular, annual accounts for the previous three financial years for stakeholders required to provide annual accounts, together with a group structure and consolidated financial statements for the previous three financial years where the stakeholder belongs to a group of companies. The lack of suitability of the holder of a significant interest is a compelling reason for refusing permission to conduct business as an insurance undertaking.
Further, supervisory law provides for certain notification requirements in relation to the acquisition of qualified participating interests, particularly if certain thresholds are met or fallen short of (eg, 20%, 30% or 50% of the voting rights or share capital). The notification must be made without undue delay.
On the German insurance market, significant investment can be seen at present, particularly in the insurtech field.
What regulations, procedures and eligibility criteria govern the transfer of control of/acquisition of a stake in a (re)insurer?
The acquisition of an insurer is subject to strict legal requirements aimed at safeguarding the interests of policyholders. In essence, no policyholder may be put at a disadvantage by the sale of a company. If the interests of the policyholders are not sufficiently safeguarded, the Federal Financial Supervisory Authority (BaFin) (as the competent regulatory authority) can prohibit the planned acquisition. BaFin examines every notification of an intended acquisition of an insurer. The acquirer must submit extensive information before BaFin will formally ascertain that the notification is complete and open the so-called 'owner control procedure'. During this procedure, BaFin will examine, among other things, the acquirer's business model and general reliability. In particular, it will evaluate whether the acquirer offers an effective risk management system. In addition, BaFin will review the acquirer's solvency and ability to sufficiently capitalise the insurer. Another focus of this audit is the technical and operational feasibility of the transaction in order to ascertain the acquirer's ability to adequately manage the acquired portfolio. The duration of the procedure depends on the individual acquisition.
Must (re)insurers adopt a certain legal structure in order to operate? If no mandatory company organisation applies, what are the common structures used?
Permission to set up an insurer may be granted only to public limited companies, including European companies, mutual insurance associations and public bodies and institutions.
Do any particular corporate governance requirements apply to (re)insurers, including any eligibility criteria for directors and officers?
In general, (re)insurers must establish an effective and adequate transparent organisational structure with a clear allocation and appropriate segregation of responsibilities. (Re)insurers must have written guidelines in place, taking into account their specific risk profile. To monitor compliance regarding administrative and accounting procedures, an internal control framework with appropriate internal reporting arrangements at all levels of the undertaking must be established. (Re)insurers within the framework of the requirements may decide which organisational structure is appropriate for them. The process organisation must ensure that processes and their interfaces associated with risks are adequately controlled and monitored. This initially requires that all processes must be assessed from a risk perspective. The documentation of the organisational and process structure must be maintained, kept up to date and archived for at least six years. The entire executive board must regularly assess the business organisation and ensure that necessary changes are implemented in due course. While outsourcing of business tasks is generally possible, the (re)insurer remains responsible for complying with the requirements at all times and on all levels.
Persons who effectively run the undertaking or perform other key functions (ie, members of the management and supervisory board or other persons appointed to represent the undertaking, as well as persons who are responsible for the four mandatory key functions) must be reliable and professionally qualified (ie, fit and proper). The four mandatory key functions are:
- the independent risk management function;
- the compliance function;
- the internal audit function; and
- the actuarial function.
Professional competence is measured on professional qualifications, knowledge and experience, adequate theoretical and practical knowledge of insurance business and sufficient managerial experience to ensure the sound and prudent management of the enterprise.
The number and succession of board membership is also regulated. Any person who already acts as managing director of two insurance undertakings, pension funds, insurance holding companies or insurance special purpose vehicles cannot be appointed as managing director, except for companies of the same group of companies (appointment in this case is subject to BaFin approval). In addition, former management board members cannot be appointed as supervisory board members if two former managing directors of the enterprise are already members of the same supervisory board. Finally, more than five supervisory board mandates with companies under BaFin supervision are prohibited, except for companies within the same group.
Which (re)insurers must obtain authorisation from the regulator before operating on the market and what is the procedure for doing so?
Setting up a new (re)insurer requires – subject to exceptions (first, under the EU single passport regime and second, in case of the equivalence of a foreign legal supervisory regime) – the company to obtain authorisation from the Federal Financial Supervisory Authority (BaFin). The company must demonstrate, among other things, that:
- it has an effective and orderly business organisation reflecting that it is managed in a sound and prudent manner;
- it has the necessary funds to meet the capital requirements; and
- its head office is located in Germany.
Foreign insurers and reinsurers must comply with preconditions of German insurance regulatory law in order to write German (rei)nsurance business. Under the EU single passport regime, EEA insurers and reinsurers can write German (re)insurance business either via a domestic branch or under the freedom to provide cross-border services without requiring separate authorisation in Germany. In contrast, primary (re)insurers from third countries (ie, countries that are not EU member states or signatories to the EEA Agreement) are subject to authorisation by BaFin and must, as a general rule, establish a German branch office if they wish to carry on primary (re)insurance business in Germany.
With regard to reinsurance business, the legal situation changed when the Act to Modernise the Financial Supervision of Insurance Undertakings came into force in 2016. First, an exception to the licence agreement applies if the reinsurer is domiciled in a country whose solvency regime is deemed to be equivalent to that of the European Union. In other cases, a third-country reinsurer may conduct reinsurance business in Germany only by way of correspondence as explained in BaFin's interpretative decision of 31 August 2016. Insurance by correspondence applies to reinsurance business if, at the instigation of an undertaking domiciled in Germany, a reinsurance contract is concluded by correspondence with an insurer domiciled abroad without one of the parties being assisted by a professional intermediary in Germany or abroad but acting as an intermediary in Germany.
What are the minimum capital and solvency requirements for (re)insurers operating in your jurisdiction?
In general, the so-called 'corridor' between 25% and 45% of the solvency capital requirement for the minimum capital must be adhered to. In addition, the following absolute minimum capital requirements apply:
- €2.5 million for non-life insurers, including captive insurers (except for insurers covering third-party liability, credit and deposit risks, in which case the minimum capital is €3.7 million);
- €3.7 million for life insurers, including captive insurers;
- €3.6 million for reinsurers excluding captive reinsurers;
- €1.2 million for captive reinsurers; and
- €6.2 million for insurers conducting life and non-life insurance business covered by the EU Solvency II Directive.
Do any other financial requirements apply?
(Re)insurers, except small insurance undertakings, must provide a solvency overview according to the Solvency II regime. The solvency overview is prepared independently of the annual financial statements in accordance with German commercial law and serves as a separate regulatory accounting instrument. Assets and liabilities must always be measured at their economic value (fair value). Within the solvency overview, technical provisions must be set up for all insurance obligations towards policyholders and beneficiaries. These are composed of the best estimate and the risk margin. The Insurance Supervision Act rules do not contain a universal, mandatory method for calculating these provisions. Rather, (re)insurers must choose a method that adequately addresses the specific risks connected to their business.
The calculation of the solvency capital requirement follows the basic rule that (re)insurers must procure at least enough own funds to survive a loss which statistically occurs only once in 200 years. For this purpose, (re)insurers may either use an internal model approved by BaFin or the standard formula provided by the Solvency II framework. However, this allows only a standardised calculation and does not allow for company specifics in detail.
Are personnel of (re)insurers subject to any professional qualification requirements?
Key personnel must meet the fit and proper requirements set out in 'Ownership and organisational requirements'.
What rules and requirements govern the business plans of (re)insurers?
- attach an operating plan to their application;
- disclose the purpose and structure of their business and the region in which it is to be conducted; and
- clearly state the conditions which will enable their future liabilities to be fulfilled at any time.
The operating plan must include, among other things, the articles of association, as well as information about the insurance classes which the insurer intends to carry on and the risks which are to be covered by each insurance class. Further, the operating plan should evidence the existence of own funds in the amount of the minimum guarantee fund and provide estimates for the first three financial years with respect to:
- commission and other current operating expenses;
- expected premiums; and
- expected charges for claims incurred and the expected liquidity situation.
For health insurance and the coverage of certain risks, additional information is required with regard to:
- the intended reinsurance arrangements;
- the estimated costs of setting up the administration and sales network; and
- managers' and directors' reliability and qualification.
What risk management systems and procedures must (re)insurers adopt?
The corporate governance requirements set out in 'Ownership and organisational requirements' apply to the entire management system of (re)insurers.
Reporting and disclosure
What ongoing regulatory reporting and disclosure requirements apply to (re)insurers?
BaFin must ensure that the obligations arising from the insurance contracts can be fulfilled on a permanent basis for all business activities – in particular:
the solvency and long-term risk-bearing capacity of the insurer;
- the formation of sufficient technical provisions;
- investment in appropriate suitable assets;
- compliance with commercial principles, including proper business organisation; and
- compliance with the other financial foundations of business operations.
The supervisory review process includes the assessment of:
- qualitative requirements with regard to business organisation;
- the assessment of risks to which companies are or could be exposed; and
- the assessment of the ability of companies to assess and withstand these risks taking into account the respective business environment.
The review process applies to both the individual insurance undertaking and the insurance group.
(Re)insurers must provide all necessary information to enable this task. Insurers must provide only the information needed to ascertain their economic and financial status. BaFin will, either regularly or as necessary (as it deems fit), carry out on-site inspections at the undertaking's registered office or in other EU or EEA countries. At these inspections, BaFin staff must be presented with all documents and information on demand.
Do any other operating requirements apply in your jurisdiction?
The corporate governance requirements set out in 'Ownership and organisational requirements' apply to the entire operation of (re)insurers.
What are the consequences of non-compliance with the operating requirements applicable to (re)insurers?
The supervisory authority may take any measures in respect of (re)insurance undertakings, their management board members and other business-controlling persons which are appropriate and necessary to prevent or remedy irregularities. Any conduct of an insurance undertaking which contradicts the supervisory objectives gives rise to such measures.
In addition to this general clause, the Insurance Supervision Act provides BaFin with special and far-reaching competence to avert certain typical threats. For example, it can carry out ad hoc surveys to determine specific issues. The supervisory authority may appoint a special representative to replace the management board, the supervisory board or other bodies of the company. It may even revoke a company's operating licence.
What general rules, requirements and procedures govern the conclusion of (re)insurance contracts in your jurisdiction?
Like all contracts, insurance contracts are concluded in accordance with the general provisions of offer and acceptance. However, the provisions on information obligations under Section 7 of the Insurance Contract Act and a modification of the principle of related and corresponding declarations of intent set out in Section 5 of the Insurance Contract Act shape the course of events at the end of which the contract is concluded. Section 7 of the Insurance Contract Act imposes extensive obligations on insurers to provide customers with information in writing prior to the conclusion of the insurance contract. Whether an insurance contract has been concluded does not depend on the fact that the insurer has correctly fulfilled its information obligations, but rather exclusively on the fact that two corresponding declarations of intent containing a consensus on the contract-typical obligations have been made and received. That said, as long as the required information has not been provided by the insurer, the revocation period does not start to run, so the contract is only provisionally valid.
Insurance contracts will be concluded under one of the following models:
- the application model (which dominates in practice) – under this model, the policyholder applies for the conclusion of the insurance contract, which the insurer generally accepts by sending in return the policy and an accompanying letter; or
- the invitatio model – under this model, the (future) policyholder asks the insurer to submit to it a specific offer which the insurer then prepares on the basis of the risk and contract-relevant information provided with the invitatio ad offerendum and forwards to the policyholder in the form of a policy with the necessary consumer information.
Are (re)insurance contracts subject to any mandatory/prohibited provisions?
The Insurance Contract Act provides for a number of so-called 'semi-mandatory provisions' (ie, provisions which can neither be contractually precluded nor modified to the insured's disadvantage). However, Section 210 of the Insurance Contract Act provides that such restriction of the freedom of contract will not apply to so-called 'large' risks or open policies. In line with EU law, such large risks include certain transport, liability and credit insurances, as well as certain property, liability and other indemnity insurances if the policyholder exceeds at least two of the following characteristics:
- €6.2 million total balance sheet;
- €2.8 million net turnover; and
- an average of 250 employees per fiscal year.
If the policyholder belongs to a group which must prepare a consolidated financial statement, the size of the enterprise is determined according to the figures in the consolidated financial statement.
Can any terms be implied into (re)insurance contracts (eg, a duty of good faith)?
The starting point for the interpretation of insurance contracts is the wording of the clause. According to relevant case law and legal literature, insurance conditions must be interpreted objectively (ie, in a way that an average policyholder can understand them if they are comprehensively assessed and attentively reviewed and the recognisable context of meaning is taken into account). The interpretation therefore depends on the capabilities of an insured person with no special knowledge of insurance law and also on the specific interests. With regard to business insurance, the policyholder's customs and trade practices are generally taken into account if they actually apply to the categories of persons involved in the contract and if the relevant factual evidence has been introduced into the process. Risk exclusion clauses must be interpreted narrowly. In the case of such clauses, the interest of the policyholder is usually to ensure that the insurance cover is not reduced further than the discernible purpose of the clause requires. According to settled case law, the average policyholder need not anticipate gaps in insurance cover without a clause making this sufficiently clear.
The concepts of conditions precedent to the insurer's liability or warranties as reflected in UK law do not exist under German law.
What standard or common contractual terms are in use?
German (re)insurers usually draft their own standard terms and conditions for the respective business lines. The Association of the German Insurance Industry has issued model standard terms and conditions for various business lines.
What is the state of development in your jurisdiction with regard to the use of 'smart' contracts (ie, blockchain based) for (re)insurance purposes? Are any other types of financial technology commonly used in the conclusion of (re)insurance contracts?
The government published an AI strategy in November 2018. By 2025, €3 billion will be made available and 100 new university chairs dealing with AI topics will be created. It is foreseeable that AI will play an important role in three key areas:
- the automation of insurance processes;
- risk analysis; and
- efficient customer contact.
The Federal Financial Supervisory Authority (BaFin) has questioned whether all technical possibilities are compatible with the existing supervisory and data protection regulations. In an exploratory project, insurers under the umbrella of the Association of the German Insurance Industry analysed suitable areas of use for blockchain. However, it is still uncertain how possible blockchain application cases can be reconciled with the applicable legal framework. Under the EU General Data Protection Regulation (2016/679) (GDPR), the right to be forgotten stands in the way of the fundamental technical construction of blockchain. Further, there must be no legal uncertainty regarding the recognition of transactions and identities for blockchain solutions in the insurance sector. Future binding standards for relevant loss event data will most likely be defined in order to create a suitable legal and regulatory framework.
What rules and procedures govern breach of contract (for both (re)insurer and insured)?
The German Insurance Act contains a distinctive system of pre-contractual, contractual and various special obligations connected to – for example – risk increase or during an insured event. Connected to these obligations is a similarly distinctive system of remedies available to the insurer, depending on the policyholder's degree of fault. For any remedies to apply, the insurer must have warned the policyholder in writing in separate correspondence of the consequences of any breach of the disclosure obligations.
The insurer's main obligation is to grant coverage within the scope of the insurance contract. If the insurer fails to perform, the insured may claim coverage – ultimately in court.
What consumer protection regulations are in place to safeguard the rights of purchasers of insurance products and services?
In revising the Insurance Contract Act in 2008, the legislature aimed to promote consumer protection. Accordingly, most provisions of the Insurance Contract Act which concern consumer protection are mandatory. In addition to the Insurance Contract Act, insurance contracts are governed by the Civil Code. Even where the Insurance Contract Act leaves room for party autonomy, standard insurance terms and conditions are subject to Sections 305 et seq of the Civil Code. Accordingly, provisions which are so unusual that the other party to the contract would not expect to encounter them do not form part of the contract. This may apply, for example, to foreign provisions inserted into German policies. Further, any doubts over the interpretation of standard business terms are resolved against the user. Further, provisions in standard business terms will be ineffective if they unreasonably disadvantage the insured. While this scrutiny plays a predominant rule in consumer insurance, it is also relevant for business insurance.
What general rules, requirements and procedures govern the filing of insurance claims?
The same rules that apply to all commercial matters apply to insurance matters.
What is the time bar for filing claims?
Claims arising from an insurance contract are subject to a limitation period of three years. The period is calculated in accordance with the Civil Code. If a claim from the insurance contract has been filed with the insurer, the limitation period is suspended until the insurer's decision reaches the claimant in written form.
Denial of claim
On what grounds can the (re)insurer deny coverage?
The grounds for coverage denial vary from case to case and can generally be of a legal, contractual or factual nature. In contractual terms, the breach of an obligation by the insured or increased risks are common grounds for denying coverage. From a factual point of view:
- the risk that occurs may not be insured;
- exclusions may prevent payment (especially in property matters); and
- the damaged items may not be insured in principle or at the place of loss, or the place of loss may not have been agreed as the insured place.
What rules and procedures govern the insured's challenge of the denial of a claim?
No specific rules govern these claims in Germany. In particular, the concept of bad-faith litigation (which is common in the United States) is unknown in Germany. However, following a coverage denial, the insured will be freed of any obligations under the policy to cooperate with the insurer and may also claim for additional damages.
On what grounds can a third party file a claim directly with the (re)insurer?
As a general rule, only an insured has a claim for coverage against an insurer. However, there are exceptions, particularly for liability insurance. For compulsory liability insurance, Section 115(1) of the Insurance Contract Act entitles third parties to bring a direct action against an insurer:
in the case of compulsory liability insurance (eg, third-party
motor vehicle insurance);
if insolvency proceedings have been opened in respect of the assets of the policyholder; or
if the policyholder's whereabouts are unknown.
Moreover, Section 108(2) of the Insurance Contract Act states that liability insurers cannot rule, on the basis of general insurance terms and conditions, that an insured assigns its claim for indemnification to a third party bringing a damage claim. A prohibition of assignment may thus be agreed only individually or in the case of a large risk. In the latter case, the prohibition must withstand scrutiny of general insurance terms and conditions according to the Civil Code. If the assignment is valid, the third party will be entitled to demand indemnification directly from the insurer.
In terms of reinsurance, policyholders generally do not have a direct claim against a reinsurer unless, for example, a cut-through clause is agreed.
Are punitive damages insurable?
German law does not recognise punitive damages. The Federal Supreme Court has refused the recognition of US judgments on punitive damages for a violation of German public policy.
What regime governs (re)insurers' subrogation rights?
Upon indemnification by the insurer, if the insured is entitled to claim damages from a third party regarding the insured loss, this claim will be assigned by law to the insurer. The insured is required to safeguard its claim for damages or a right serving to safeguard this claim in accordance with the applicable form and time requirements and must assist the insurer whenever necessary in asserting such claim or right. If the policyholder intentionally breaches this obligation, it will not be obligated to indemnify the insured insofar as the insurer cannot, as a result, claim recourse from the third party. In the event of a grossly negligent breach, the insurer will be entitled to reduce indemnification according to the severity of the policyholder's fault.
How are the services of insurance intermediaries regulated in your jurisdiction?
Insurance intermediaries are not subject to the supervision of the Federal Financial Supervisory Authority (BaFin), but rather the competent chamber of industry and commerce of their registered seat. The relevant authorisation requirements are set out in the Commercial Code. International matters, such as the notification of an EU or EEA intermediary's intention to conduct business in Germany, are handled by the Association of German Chambers of Industry and Commerce, which is the central organisation for all chambers of industry and commerce in Germany. A bundling of all supervisory aspects with BaFin has been discussed on occasion, but this is not expected.
In Germany, a differentiation is made between insurance brokers acting for and representing the interests of policyholders and insurance agents acting on behalf of insurers. A licence may be obtained only by an insurance broker or agent. This general differentiation has been strengthened in the German courts. According to settled Federal Court of Justice case law, an insurance broker must safeguard policyholders' interests and provide suitable advice. On this basis, the Federal Court of Justice recently ruled that insurance brokers cannot conduct claims-handling services for insurers.
What tax liabilities arise in the conduct of (re)insurance business?
Insurance tax is a transaction tax. Neither the insurance contract nor the insurance cover itself are taxed, but rather the payment of the insurance premium for an insurance relationship. The tax debtor of the insurance tax is the policyholder. However, in principle, insurers must pay the tax for the account of the policyholder. The tax incurred with the payment or receipt or due date of the insurance premium must be calculated, declared and paid to the Federal Central Tax Office within 15 days of the end of each registration period by the person liable to pay the tax. The basis for taxation is provided in the Insurance Tax Act. The current tax rate for insurance tax has been in force since 1 July 2010. There is both a general tax rate (currently 19%) and special tax rates for individual types of insurance (eg, fire insurance (13.2%), building insurance with fire portion (16.34%), household contents insurance with fire portion (16.15%), accident insurance with premium refund (3.8%) and hull and machinery insurance (3%)).
What regime governs the insolvency of (re)insurers?
As soon as an insurer becomes insolvent or its assets no longer cover its debts, the management board must notify the supervisory authority accordingly.
Only the insurance supervisory authority may file an application to open insolvency proceedings against an insurance undertaking (insolvency filing privilege). If the supervisory authority has received a notification or has otherwise concluded that an insurer is insolvent, it may file an application to open insolvency proceedings with the insolvency court, with no applicable time limit. The insolvency court is not bound by the supervisory authority's request.
There is a special feature for insurers that belong to a security fund according. In such cases, the supervisory authority must immediately decide whether to transfer the insurance portfolio to the security fund. The opening decision must be accompanied by a form to be sent to the creditors. The form is published by the Federal Ministry of Justice and Consumer Protection in the Federal Gazette and will contain the following information:
- applicable deadlines and the consequences for not meeting these deadlines;
- the recipient responsible for the application;
- further measures;
- the significance and scope of a potential claim for preferential or secured creditors;
- the general effects of the insolvency proceedings on the insurance contracts; and
- the date from which insurance contracts will cease to have legal effect.
Effect on insureds
How does a (re)insurer's insolvency affect insureds and the (re)insurer's obligations to insureds?
If insolvency proceedings are opened against an insurer's assets, the insurance relationship automatically ends one month thereafter. The relationship remains effective against the assets involved in the insolvency proceedings until this time.
In the event of the insolvency of an insurer with the promise of benefits of particular socio-political significance (eg, a life insurer or substitutive health insurer), the contract will expire on the opening of insolvency proceedings. These insurers must belong to a security fund which will continue to manage the contracts. The security fund will continue all affected insurance contracts and restructure the portfolio of contracts taken over. After the restructuring, the relevant policy portfolio can also be transferred by the respective security fund to another German insurer. Such a further transfer is possible only with the approval of the Federal Financial Supervisory Authority, which ensures that the interests of the insured are safeguarded.
Are there any compulsory or preferred venues for insurance litigation in your jurisdiction?
Insurance disputes are heard in the courts competent for civil law matters. These are – in descending order of seniority:
- the Federal Court of Justice in Karlsruhe;
- the 24 higher regional courts;
- the 116 regional courts; and
- the 661 local courts.
Apart from the local courts, all courts usually have specialised chambers or senates for insurance matters. Both the local and regional courts are courts of first instance. In insurance matters, the first-instance court will be the regional court if the amount in dispute exceeds €5,000.
How are insurance disputes with a cross-border element handled in your jurisdiction?
The jurisdiction of the German courts is established by the general rules on jurisdiction. Section 215 of the Insurance Contract Act stipulates that a claim must be brought to the local court in whose district the policyholder has their habitual place of residence when filing of the action. In respect of actions brought against a policyholder, the court in which they are brought has exclusive jurisdiction.
Within the European Union, Article 36 of the EU Brussels Regulation (1215/2012) applies to the enforcement of foreign judgments. Outside the European Union, the enforcement of foreign judgments in civil matters is governed by Sections 328 and 722 of the Code of Civil Procedure. A foreign judgment will be declared enforceable without further review (prohibition of revision au fond) if certain minimum conditions are met:
- the foreign court must also have been competent under German law;
- the defendant which did not appear in court must have been duly served with the document instituting the proceedings in sufficient time to enable it to defend itself;
- the judgment cannot contradict an earlier foreign judgment given in Germany or an earlier foreign judgment to be recognised;
- recognition of the judgment must not lead to a result that is manifestly incompatible with fundamental principles of German law – in particular, fundamental rights (ie, public order and public policy); and
- reciprocity must be guaranteed.
On questions of foreign law relevant for the specific case, the German courts will seek expert opinions on how to interpret the foreign law.
What issues are commonly the subject of insurance litigation?
In insurance disputes, the courts deal with the entire range of possible issues. The scope of the insurance contract, obligation breaches and exclusions (especially the exclusions for knowingly breaching a duty or deliberately causing damage) are among the most common issues in insurance litigation.
What is the typical timeframe for insurance litigation?
The duration of proceedings depends on the complexity of the individual case. The approximate average duration of German court proceedings is comparatively moderate. For example, based on statistics for 2018, approximately 45% of first-instance proceedings before the regional courts were resolved within six months and approximately 75% were resolved within 12 months. The average duration of first-instance proceedings before a regional court is 16 months for proceedings concluded by judgment and 10 months for those terminated otherwise. Appeals on questions of law to the Federal Court of Justice in 2018 took less than 12 months in approximately 15% of cases, one to two years in approximately 60% of cases and more than two years in approximately 20% of cases. Of course, in complex (re)insurance matters, particularly when extensive evidence taking is involved, proceedings will often take longer than average.
What regime governs the arbitrability of insurance disputes?
Most insurance contracts do not contain arbitration clauses and arbitration proceedings are therefore mostly used in reinsurance disputes. However, insurance disputes are fully arbitrable in Germany. In business insurance, arbitration agreements are still the exception, although they are on the rise, particularly for technical or international risks, such as aviation or maritime insurance, as well as other risks, (eg, warranty and indemnity insurance). By contrast, cedants and reinsurers typically prefer settling any disputes in a private, confidential forum and by self-chosen neutrals with the necessary industry experience and know-how. In line with worldwide practice, German reinsurance contracts therefore usually contain an arbitration agreement. While most agreements provide for ad hoc arbitration, parties increasingly use institutional rules.
In accordance with the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the United Nations Commission on International Trade Law (UNCITRAL) Model Law, any arbitration agreement must be in writing.
In consumer insurance, arbitration agreements are the absolute exception. Under German arbitration law, an arbitration agreement must be contained in a document personally signed by the parties. Hence, a strict written form requirement applies.
In business (re)insurance, the arbitration agreement must generally fulfil the written form requirement. However, the form requirements under German law are much more lenient than those under the New York Convention and the UNCITRAL Model Law. The arbitration agreement may be contained not only in a document signed by the parties, but also in an exchange of letters, faxes or other means which provides a record of the agreement. Further, the form requirement is deemed to have been complied with if the arbitration agreement is contained in a document transmitted from one party to the other or by a third party to both parties. If no objection is raised in good time, the contents of such document will be considered part of the contract in accordance with common usage. Moreover, reference in a contract complying with the written form requirement to a document (eg, standard insurance terms and conditions) containing an arbitration clause also constitutes an arbitration agreement, provided that the reference makes that clause part of the contract.
In order to supersede the courts' jurisdiction, parties must, in an arbitration agreement, submit to arbitration all or certain disputes which have arisen or may arise between them in respect of a defined legal relationship, whether contractual or not. In general, the parties should also specify:
- the number of arbitrators;
- the place of arbitration;
- the language of the proceedings; and
- the applicable law.
Arbitration institutions, such as the German Institution of Arbitration and ARIAS Europe, provide model clauses which parties may incorporate into their contracts.
Law stated date
11 December 2019.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.