Insurance law and regulation in Germany

An insurer can undertake insurance activities in the Federal Republic of Germany with an insurance licence granted by the Federal Financial Supervisory Authority (BaFin). BaFin can grant a licence to a joint stock company, a European company (SE), a mutual association or a corporation under public law. The process of establishing a German joint stock company or mutual association and obtaining a German insurance licence can be costly and may take several months.

Insurers based in EU and EEA countries can undertake insurance activities in Germany on a freedom-of-services basis. This is relatively inexpensive and does not require a complex formal procedure. Insurers based in EU and EEA countries can also operate through a branch established in Germany (freedom of establishment). In both cases, the insurers do not need to obtain any special licence from BaFin.

However, the home country regulator is required to submit information to BaFin before the insurer commences its activities in Germany. If the insurer establishes a branch, the branch must also be incorporated in the local commercial register.

In March 2011, last updated in July 2019, BaFin informed about the laws and provisions insurers based in EU or EEA countries must comply with for the general good, if they carry on direct insurance business in Germany through a branch or cross-border provision of services.

Insurers from countries outside the EU and EEA can also establish a branch in Germany, but need a special licence from BaFin. ‘Home-foreign insurance/insurance by correspondence’ (insurance written in one country on property or risks located in another country) can be undertaken by insurers from outside the EU and EEA without a branch in the EU and EEA countries, as long as the policy has been taken out on the insured’s initiative. Accordingly, insurers from outside the EU and EEA cannot act on a freedom-of-services basis in Germany.

Under German insurance law there can be contractually agreed duties for the insured but these are not legally enforceable. However, the insured should endeavour to fulfil these duties, otherwise, in specific circumstances, the insurer may be entitled to terminate cover under the insurance contract.

Under the German Insurance Contract Act (VVG), there is an obligation on the insured to provide information when seeking cover. The insured must inform the insurer of all known circumstances which are relevant for the insurer’s decision to write the risk, and which the insurer has expressly asked for in ‘textform’ (as defined under German law to mean in writing, via fax or email). The insured is not obliged to disclose any circumstances or risks that the insurer did not ask for in in ‘textform’.

Case law precludes brokers from using their own forms when requesting information from a potential insured. In cases where a broker is involved in the process of a potential insured seeking cover and uses its own form, it is necessary for the insurer to at least adopt the questions as ‘its own’ and that this is clear to the insured. It is advisable for insurers to prepare questions on their own and provide brokers with their question forms.

If the insured fails to inform the insurer of all known circumstances which the insurer requested in ‘textform’, the insurer will be entitled to avoid the contract only if the insured has acted with gross negligence. In the event of an innocent breach or simple negligence on the part of the insured, the insurer will only be entitled to cancel the contract but will still be liable for claims arising out of insured events that have already occurred and have been notified.

Unless there has been deliberate misrepresentation and non-disclosure, the insurer cannot avoid or cancel the contract if, being aware of the actual circumstances, it would have written the risk albeit on a different basis. In this situation, upon the insurer’s request, the cover can be amended retrospectively.

However, if the premium increases by more than 10%, the insured may cancel the contract.

In each case the insurer must inform the insured in ‘textform’ of the possible consequences of breach of the duty to notify. Further, if the insurer was independently aware of the misrepresentation or non-disclosure, it cannot rely on the breach.

Under the German Insurance Contract Act, if there is an increase of risk, and the insured becomes aware of this, the insured is obliged to notify the insurer without undue delay.

If the insured does not comply with this obligation, the insurer may cancel the contract, demand a higher premium, or exclude the increased risk from the cover. These rights are available to the insurer for one month from the time that the insurer becomes aware of the increase in risk, and will cease if the risk reverts to its original level.

If a claim is made after an increase in risk, and the insured intentionally caused the increase in risk, the insurer is released from its obligation to provide cover. If there has been gross negligence on the part of the insured, the extent of the insurer’s release from their obligation to provide cover will depend on the circumstances of the individual case. The insurer is entitled to reduce cover in proportion to the extent of the insured’s negligence. In both cases, the aggravation of the risk must have caused the loss or the extent of the loss. The insurer remains obliged to pay if a claim is made and the insurer has not cancelled the contract within one month.

An insurance contract may contain contractual obligations to perform precedent to the insured event. (These are different from the English concept of ‘conditions precedent’, which refers to an event or state of affairs that is required before something else will occur and which must occur, unless its non-occurrence is waived, before any contractual duty arises). In German insurance law, the contractual duty of the insurer may arise even if the contractual obligation precedent to the insured event has not been fulfilled. If there is an intentional or grossly negligent breach of the contractual obligation, the insurer may cancel the contract within one month from the time it became aware of the breach.

An intentional breach of any contractual obligation of the insured (not just the conditions precedent to the insured event) will release the insurer from its obligation to perform. If there has been gross negligence on the part of the insured, the insurer is entitled to reduce cover. The breach must have caused the loss or increased the extent of the loss. The insurer must notify the insured in writing of the possible consequences of a breach in order to be able to rely on the breach.

The insured is obliged to notify the insurer without undue delay as soon as he becomes aware of the claim. However, there is no legal or statutory penalty for breach of the obligation of notification. If there is no contractual agreement between the parties, the insurer cannot decline cover. The parties need to agree contractually as to the consequences of late notification but may only stipulate the consequences of the breach of contractual obligations as provided for in the German Insurance Contract Act (see above).

The insurer cannot decline cover if he is notified of the claim by another source.

The insured (and the beneficiary in whole life assurance) has the right to raise a claim against the insurer under the insurance contract.

In third-party liability insurance, the third party is not automatically entitled to raise a claim directly against the insurer but must raise a claim against the insured. This does not apply to compulsory motor liability insurance, where the third party may raise a claim directly against the insurer of the motor vehicle as well as against the insured.

Claim monies are due when loss adjusting proceedings are finalised. If the insurer does not pay then, he can be held liable for damages according to the principles of German civil law laid down in the German Civil Code (‘BGB’). He is usually only liable for damages if he has not paid following a warning notice from the insured. Bringing an action for performance or serving a demand for payment in summary debt proceedings for recovery of debt have the same effect as a warning notice. There is, inter alia, no need for a warning notice if the insurer seriously and definitely refuses performance. The insurer is only liable, however, if he is responsible for the delay or non-payment. If the civil law requirements for default are fulfilled, the insurer is liable for all resulting damages. At least, the insured can claim default interest which cannot be less than the amount foreseen by law.

Under the German Civil Code, the limitation period is three years, commencing at the end of the year that the claim arose. When a claim under an insurance contract is notified to the insurer, limitation is suspended until the insured obtains the insurer’s decision in ‘textform’.

There are four common ways in which cover under a third-party liability policy is triggered.

• Occurrence basis: This principle is the most common one in Germany. It requires the occurrence of a loss where a third party suffers damage. It is possible to take out run-off insurance to limit the risk of late claims under an expired policy.
• Claims-made basis: The claim against the insured is covered when it is first made during the policy period, even if the event giving rise to the claim occurred prior to the policy period. In addition, the policy may extend cover to include circumstances notified during the policy period which ‘may’ or ‘are likely to’ (or some other causal link) give rise to a claim, even if the claim subsequently materialises after the end of the policy period. This is commonly known as a ‘deeming provision’. This type of cover is common in D&O insurance and in industrial third-party liability policies. The ‘claims-made’ principle is controversial but case law has recently found that the ‘claims-made’ principle can be agreed by the parties. However, there is some doubt as to whether this provides sufficient protection in professional indemnity insurance.
• Act-committed basis: This requires that the act that caused the damage is committed during the policy period. This is common in professional indemnity policies.
• Discovery basis: This requires that the damage is discovered during the policy period. This is common in environmental pollution policies.

The insured must, upon the occurrence of the insured event, ensure that the loss is avoided or minimised wherever possible. In this regard, he must follow the instructions of the insurer, where reasonable, and obtain instructions if the circumstances permit this. In return, the insurer has to reimburse the insured´s expenses, even if they remain unsuccessful, to the extent that the insured could deem them necessary. Upon request of the insured, the insurer must advance the amount of the necessary expenses.

However, the expenses are not reimbursed if the insurer is not obliged to pay the claim. If the insurer is entitled to reduce the claim, he may also reduce the amount of the reimbursed expenses. Expenses incurred by the insured on account of them following the insurer's instructions are to be reimbursed in full even if they exceed the sum insured, taken together with the other compensation.

Penalties and fines are, according to the prevailing view, not insurable. This is due to the fact that such an insurance would violate the sanction character of penalties and fines and thus would infringe the so-called morality principles and ordre public.