Insurance disputes in Germany are governed by the same rules as other civil law disputes, namely the Civil Procedure Rules (Zivilprozessordnung).
The Litigation Process
The litigation process in Germany is fairly contained.
Pleadings are comprehensive and append any documents relied on. They also provide the identity of any witness and identify the category of any expert evidence the party wishes to rely on.
Following exchange of pleadings, the court will consider which witness and/or expert evidence it needs to take and will make the appropriate orders.
Appeals are common in Germany.
Unlike in many other jurisdictions, it is incumbent on the court to actively explore settlement options with the parties in court.
Rules on Limitation
The general limitation period is three years, beginning at the end of the year in which the claim comes into existence, see Section 195 of the German Civil Code (BGB). Where a claim is notiﬁed to insurers, limitation is suspended until the insurer communicates its decision on the claim in writing, see Section 15 of the Insurance Contract Act (VVG).
The German Civil Procedure Rules impose a duty on judges to explore settlement options between the parties. As a result, parties are encouraged to settle their dispute in court and formalised ADR, such as mediation, which runs parallel to court proceedings, is far less common than it is, for example, in England and Wales.
Consumers can refer coverage issues to the insurance ombudsman. Such referrals are free of charge for the consumer.
Articles 10–16 of the Brussels Regulation (recast) provide the framework for insurance disputes with a European cross-border element.
Roughly speaking, those rules provide that an insured can sue the insurer at its or the insurer’s domicile or branch in the EU, or at the place where the harmful event occurred. The insurer can sue the policyholder, insured or beneficiary only at the place of their domicile.
There are restrictions on choice of jurisdiction. Article 16 clarifies that those restrictions will not apply to certain types of insurance, such as marine, cargo, and large risks.
For cross-border disputes outside the remit of the Brussels Regulation (recast), and where the defendants are based in Switzerland, Norway or Iceland, the Lugano Convention will apply, containing similar rules.
In all other cases, the domestic German Procedural Rules, together possibly with international treaties, and Section 215 of the Insurance Contract Act will provide the German courts with the answer as to whether they can accept jurisdiction. Overall, that framework is roughly similar in that it also provides jurisdiction at the place of domicile of the policyholder/insured, albeit with exceptions.
Choice of Law
Germany applies Regulation (EC) 593/2008 (“Rome I”). Its Article 7 sets out which law governs contracts covering large risks – whether or not the risk covered is situated in an EU member state – and which law applies to all other insurance contracts covering risks situated inside the territory of the member states. Rome I does not apply to reinsurance contracts.
Parties to an insurance contract covering large risks can freely agree which law should govern the contract.
If the parties do not choose the applicable law, the insurance contract will be governed by the law of the country where the insurer has its habitual residence, unless it is clear from all the circumstances of the case that the contract is manifestly more closely connected with another country, in which case the law of that other country will apply.
Risks Other than Large Risks
Parties to other insurance contracts are restricted in their choice, in that the chosen law can only be one out of a set number of options favouring the place where the risk or policyholder is situated.
Where the parties do not choose the law, the law governing the contract will be the law of the member state in which the risk is situated at the time of conclusion of the contract.
Parties to reinsurance contracts are free in their choice of law.
Foreign judgments against insurers follow the same regime as other foreign civil law judgments.
Judgments from other EU countries will be recognised pursuant to Regulation (EU) No 1215/2012.
For judgments emanating from Iceland, Switzerland and Norway, the Lugano Convention will apply.
Where the EU Regulation does not apply, and where no international treaty provides different requirements, the recognition of foreign judgments will be governed by Section 328 and their enforcement by Sections 722 and 723 of the German Civil Procedure Rules.
Pursuant to that domestic regime, a foreign judgment will be recognised and subsequently enforced if:
Features of the German Civil Procedure Rules which may come as a surprise to foreign parties include the following.
German courts will reject jurisdiction to hear a dispute if they find that the parties had validly agreed to refer the dispute to arbitration.
Germany is a party to the New York Convention, with no reservations.
Therefore, foreign arbitral awards are recognised and enforced in Germany unless a party establishes that one of the grounds for refusal listed in Article V of the New York Convention applies.
In order to enforce a foreign arbitral award, an application must first be made to the Higher Regional Court (Oberlandesgericht) for the judicial district where enforcement is sought.
Prevalence of Arbitration Agreements for the Resolution of Insurance Disputes
Arbitration is commonplace in reinsurance but less commonly seen for direct insurance, where one would expect to see arbitration agreements typically only in large international programmes and, to some extent, for financial lines policies.
Given restrictions on arbitration agreements with consumers, mass insurance policies will not contain arbitration clauses.
Rules Governing Arbitration
Sections 1025 to 1066 of the German Civil Procedure Rules set out the legal framework that applies to all arbitrations that have their place of arbitration in Germany. The parties may agree to submit themselves to the rules of, for example, the German Arbitration Institute (DIS), or similar institutions which provide more detail.
There is no provision imposing the confidentiality of arbitration in the German Civil Procedure Rules. So, while arbitrations are not public, the parties will not be bound by a duty of confidentiality as a matter of statutory law. That said, the DIS Rules, as well as other comparable rules, do contain confidentiality provisions. Where none of those rules apply, it is common to agree confidentiality between the parties.
There is no appeal against an arbitral award. However, Section 1059 of the German Civil Procedure Rules provides some limited grounds for setting aside an arbitral award, eg, where the award strays outside the remit of the arbitration agreement.
German law implies terms from various different statutes into contracts, including contracts of insurance.
The most important provisions that affect contracts of insurance are contained in the German Civil Code (BGB) and, more specifically, the Insurance Contract Act (VVG).
Various provisions in the BGB and VVG will be implied if the contract of insurance is silent on particular issues. The VVG also contains many norms which will apply to the contract of insurance and from which the parties may derogate only to the advantage of the insured in its specific contract, but not to its disadvantage.
Provisions in contracts of insurance are also subject to reasonableness tests under Sections 305 et seqq BGB.
Pursuant to the provision of the Insurance Contract Act, the policyholder is under an obligation prior to inception of the policy to disclose to the insurer all risk circumstances that are relevant for the insurer’s decision to conclude the contract with the agreed content. However, the policyholder only needs to respond to questions put to it in so-called text form. It does not need to give information for which it is not asked.
If the policyholder breaches that obligation, the remedy will depend on the severity of the breach. The insurer may step back from the contract of insurance, or, if the policyholder acted merely with a minor degree of negligence, the insurer may terminate the contract or amend its terms.
Over the last 12 months, the courts have had to consider the scope of insuring clauses in infectious disease cover policies, namely Business Closure Insurance policies, to decide whether COVID-19-related losses were covered under those policies, see 7.3 Coverage Issues and Test Cases.
Beyond such case law, there have been no particularly noticeable trends over the past 12 months.
Insurance disputes may be litigated. However, overall, coverage disputes are far less common than they are, for example, in the London market. One reason might be that most of the wording used on the German market follows long-standing model wording where the understanding of how the clauses operate is fairly settled among market practitioners.
There is no reinsurance coverage litigation. Parties to reinsurance contracts will refer matters to mediation or arbitration, if necessary. Most reinsurance issues are, however, settled without recourse to formal means.
Consumers can refer coverage disputes to the insurance ombudsman, and will do so if no agreement can be found with the insurer. To be able to file a complaint with the ombudsman, the insurer in question needs to be a member of the Insurance Ombudsman Association, which German insurers generally are. Furthermore, the consumer must have raised a complaint with the insurer first, at least six weeks before referring the matter to the ombudsman, and the complaint must not have a value exceeding EUR100,000.
Third parties cannot normally enforce an insurance contract or sue an insurer directly.
There are exceptions to this general principle for mandatory insurance only, where Section 115 of the Insurance Contract Act provides the basis for direct claims against insurers:
While principles of good faith are implied into all contracts, Germany does not have a concept of bad faith in its laws.
If the insurer does not fulfil its obligation to pay after a reasonable period of time, the insurer will be obliged to pay for the damage caused by the delay. The damage caused may include the fee for the lawyer reminding the insurer of its obligation to pay.
The broker represents and acts for the insured as its agent. If the insurance broker exceeds the scope of its instructions, the insured will normally be bound by representations made by the broker and may be able to take recourse against the broker where appropriate. However, if the broker in fact acted as the insurer’s agent, then the insurer will also be treated as if the broker had been instructed by the insurer as its agent rather than as the insured’s. In such cases, knowledge or misrepresentations of the broker will be attributable to the insurer (see OLG Karslruhe, 2 August 2011 – 12 U 173/10).
Germany has various types of insurance intermediaries. Section 59 of the Insurance Contract Act defines an "insurance agent" as anyone who is entrusted by an insurer or by another insurance agent on a professional basis to negotiate or conclude insurance contracts.
Insurance agents are common across all lines of business. A sub-type of insurance agent is the Assekuradeur. Originally, the term stood for an insurance agent acting for multiple insurers mainly active in marine insurance. Nowadays, an Assekuradeur typically has far-reaching underwriting authority not only in marine, but also property, insurance and has the right to collect premiums, underwrite risks and settle claims on behalf of the insurer.
Delegated claims handling is less common than in many other markets.
While such arrangements have given rise to litigation, primarily around calculation and payment of agents’ provisions, the German courts have seen far more litigated cases relating to the role and scope of duties of the insurance broker, ie, the intermediary who acts and concludes the insurance contract on behalf of the insured (see 4.9 Representations Made by Brokers).
Insurers have a duty to fund the defence in all types of liability insurance. The insurer’s general obligations are set out in Section 100 of the Insurance Contract Act. Lawyers’ fees, court fees, out-of-court fees and legal expenses are generally covered, provided the costs incurred are reasonable.
No change is expected in relation to the funding of defence costs.
Court and lawyers’ fees in litigation follow fixed scales that seek to ensure the cost of pursuing or defending a civil claim is proportionate to the value at stake. The scaled fees are amended from time to time.
Protection against costs risks is readily available and legal expense insurance is very common in Germany. The German data company Statista reported the existence of 23.1 million legal expense insurance policies in 2020 – in a country with 83 million inhabitants and 45.5 households.
Where and to what extent an insurer pays under an insurance policy falls under the German Insurance Contract Act, which provides for an automatic statutory assignment to the insurer of any claim the insured may have against third parties in respect of the loss.
The insurer’s right to pursue third parties is set out in Section 86 of the German Insurance Contract Act, which provides for the assignment to the insurer. The provision also imposes a duty on the policyholder to protect the claim against the third party and to assist the insurer in pursuing it.
The claim by the insurer against the third party is pursued in the insurer’s own name. Where there is a combination of insured and uninsured losses, insurer and insured will therefore appear as co-claimants.
The impact of COVID-19 on litigation, including insurance-related litigation, has been surprisingly contained. That said, the courts have seen a number of cases relating to Business Closure Insurance – see 7.3 Coverage Issues and Test Cases.
Emergency legislation that sought to contain the economic impact of the COVID-19 lockdowns meant that companies’ duty to file for insolvency, where such insolvency was due to the effects of COVID-19, was suspended, in some cases until 30 April 2021. Although such businesses were typically able to access other relief, it is expected that Germany will see an increase in insolvencies over the next 12 months.
In light of the pandemic, the courts had to grapple with the scope of cover granted by one particular type of insurance cover, namely that of Business Closure Insurance policies. These policies had been sold primarily to businesses that provide food on their premises, including healthcare providers, nurseries and restaurants.
There has been no test case as such but several cases were presented in the courts, with mixed results.
The key question in these cases was whether reference to diseases and/or pathogens listed in the German Infectious Disease Protection Act ("the Act") was sufficient. The Act’s lists contain various pathogens and diseases but did not contain SARS-CoV-2/COVID-19 until 23 May 2020. From 1 February 2020 until 22 May 2020, a regulation – but not the Act itself – stated that the new pathogen and disease were equivalent to those listed in the Act. Before then, there was obviously no mention of either.
Insuring clauses in infectious disease policies came typically:
(a) with a specific list of pathogens and/or diseases – to the exclusion of others;
(b) with a "static" reference to the Act’s lists, ie, to the lists as of a particular date; and
(c) with a "dynamic" reference to the Act’s lists, ie, to the lists as applicable at any given time, meaning the number of pathogens/diseases covered by the policy could change during the policy period.
It is now settled that insurance policies with clauses of type (a) above did not provide cover.
On the basis that a reasonable policyholder would not understand the subtleties of static or dynamic references, the courts have typically found for insureds when interpreting clauses of type (b) and (c) above, although there have been conflicting decisions.
In response to the emerging court decisions on the scope of Business Closure Insurance, the German Insurance Association (GDV) published new model conditions for such policies. Pursuant to these new model terms, only closure of a business because of individual administrative orders to prevent the spread of local infection will be covered. The new wording makes it abundantly clear that closure as a result of a national or statewide shutdown of businesses ordered by general administrative decree is not covered.
German cargo transport insurers have reacted to the pandemic with new exclusion clauses that use the administrative decree or declaration rather than the outbreak of a disease as the basis of the exclusion.
The German insurance market has also reported a higher demand for cyber-insurance products – partly as a result of an increase in home working.
Picking up, as it does, losses that are the result of climate events, the insurance industry has by its nature been at the heart of the discussion around climate change, and underwriting decisions have been encouraging/discouraging behavioural patterns in that respect for many years.
It is expected that the increasing frequency of extreme weather events will bring significant financial burdens for the German economy in the coming years. The German Institute for Economic Research (DIW) estimates costs of almost EUR290 billion by 2050.
On 14 April 2021, the German Actuarial Society published its report into the actuarial implications of climate change. It collates information on how climate change affects motor, liability, property, credit, and speciality risks.
The report highlights how the effects of climate change on insurance do not only vary from region to region, but how different facets of climate change affect different lines of business to varying degrees and therefore need to be taken into account in some form in all lines of business. For instance, rising average temperatures and the increase in extreme heat days affect health insurance (increased incidence of illness), life insurance (risk increase for insurance with mortality risks, risk reduction for insurance with longevity risks) and property/casualty insurance (eg, crop failures).
Climate change has had less of an impact on litigation.
Brexit has seen various UK insurers establishing subsidiaries in the EU. The German Insurance Association reported on 21 December 2020 that 35 UK insurers had founded branches in the EU and an estimated 29 million insurance contracts had at that point in time been transferred to the new offices, including German ones.
On 10 December 2020, amendments to the German Insurance Tax Act came into force. The overall effect is expected to be an increase in administrative burden for insurers and higher tax rates for policyholders with affiliates outside the EEA.