Insurance & Reinsurance 2020

Last Updated January 20, 2020

Germany

Law and Practice

Authors



Clyde & Co (Deutschland) LLP is a leading, sector-focused global law firm with 440 partners, 1,800 lawyers, 2,500 legal professionals, and 4,000 staff in over 50 offices and associated offices worldwide. The firm specialises in the sectors that move, build and power our connected world and the insurance that underpins it; including transport, infrastructure, energy, trade and commodities, and insurance. With a strong focus on developed and emerging markets, the firm has achieved compound average annual revenue growth of 15% over the last ten years, making it one of the fastest-growing law firms in the world with ambitious plans for further growth. In 2016 Clyde & Co opened its first German office in Dusseldorf. The Dusseldorf team has since trebled in size and has been recognised as a leading practice for insurance litigation, insurance products and regulatory issues. In February 2019, Clyde & Co opened a second German office in Hamburg, providing market-leading expertise in the marine sector.

In Germany, the supervision of insurance and reinsurance is mainly governed by the German Insurance Supervisory Act (Versicherungsaufsichtsgesetz, VAG). Insurance contract law is primarily laid out in the Insurance Contract Act (Versicherungsvertragsgesetz, VVG). In addition, insurance and reinsurance contracts are generally also governed by the German Civil Code (Bürgerliches Gesetzbuch, BGB) and the German Commercial Code (Handelsgesetzbuch, HGB). Reinsurance law is not codified but governed by the contractual agreements, general contract law and market practices.

European Level: Solvency II

On 1 January 2016, the Solvency II regime came into force across the whole of the European Economic Area (EEA), consolidating and amending the previous life, non-life, reinsurance and insurance group directives as well as widely replacing previous national regulations. The Solvency II framework is made up of three levels of legislation/guidelines. At level one, there is the Solvency II Directive (2009/138/EC); level two consists of delegated Acts, implementing Acts and binding technical standards (together, the Delegated Acts); and level three takes the form of guidelines.

The Solvency II Directive follows a "three-pillar" approach that means it sets out a number of requirements for insurers and reinsurers in the EEA broadly in the following three categories:

  • capital (ie, holding sufficient assets and qualifying capital to cover insurance liabilities and risk exposure);
  • governance (ie, developing and embedding systems to identify, measure and proactively manage risk); and
  • transparency (ie, making sufficient reporting and disclosure publicly to the market and privately to the relevant regulators so that they have the information they need to undertake effective, risk-based and proportionate supervision).

The Delegated Acts address issues that are more technical in nature and contain details of the valuation of assets and liabilities, eligibility of capital (own funds), equivalence, the internal model and rules related to insurance groups. They are directly applicable across the EEA without the need to be transposed into national regulation. There are also guidelines released by the European Insurance and Occupational Pensions Authority (EIOPA) that firms and regulatory supervisors are expected to comply with, despite them not being legally binding.

German Insurance Supervision

The relevant supervisory authority for insurance undertakings, reinsurance undertakings and pension funds in Germany is the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin). Foreign insurers and reinsurers that intend to conduct business in Germany are also subject to supervision by BaFin.

Insurance supervision in Germany is mainly governed by the VAG. This act has recently been revised, transforming the Solvency II Directive into domestic law as of 1 January 2016. According to the VAG, the primary objective of supervision by BaFin 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 VAG, 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 is entitled to take certain special measures against a wide range of particular threats; ranging from appointing a special commissioner to replace the management board, 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, so-called stress tests or scenario analyses.

Besides BaFin, there are supervisory authorities at state level that are mainly responsible for supervising public insurers whose activities are restricted to the particular state in question and those private insurance undertakings that are of lesser economic and financial significance.

The Solvency II regime has been adopted in Germany through extensive revision of the VAG. Additionally, there are certain regulations (delegated legislation) by which, based on respective authorisation in the VAG, the German Federal Ministry of Finance concretises certain statutory provisions.

In order to provide guidance on its supervisory practice, BaFin issues interpretative decisions (Auslegungsentscheidungen), circular letters (Rundschreiben) or guidance notices (Merkblätter). Although not technically legally binding, the circular letters in particular are usually deemed as a clear indication of the regulator's expectations. Moreover, the publications will usually constitute a self-commitment of BaFin with the effect that BaFin has to treat similar cases alike.

BaFin can issue collective decrees (Sammelverfügungen) and the orders contained therein are binding on all insurers addressed (for example, all primary insurers authorised to conduct business in Germany).

In addition to the provisions of the VAG, (re)insurance undertakings have to adhere to a wide range of provisions of German law, for example, under Civil Law, Company Law and Data Protection Law. Based on Article 146 of the Solvency II Directive, BaFin on its website publishes a list of "general good requirements", indicating the provisions EU/EEA insurers have to adhere to when conducting business in Germany on a freedom of establishment or freedom of services basis.

BaFin is also involved in international insurance supervision. In addition to contributing to the creation of a single European financial market, BaFin is represented on international bodies such as the International Association of Insurance Supervisors (IAIS) and is therefore involved in shaping international supervisory standards. Because of its IAIS membership, and being a voting member of the IAIS Executive Committee as well as an active member of various IAIS committees and sub-committees, BaFin represents the interests of Germany as a core financial marketplace. BaFin deems the principles and standards developed by the IAIS as being of key importance for national supervisory practices.

Insurance intermediaries are subject to a different supervisory regime. The relevant authorisation requirements are set out in the German Trade, Commerce and Industry Regulation (Gewerbeordnung, GewO). Insurance intermediaries are not subject to the supervision of BaFin, but of the competent local Chamber of Industry and Commerce (Industrie- und Handelskammer, IHK) of their registered seat. International matters, such as the notification relating to an EU/EEA intermediary's intention to conduct business in Germany, are handled by the Association of German Chambers of Industry and Commerce (Deutscher Industrie- und Handelskammertag, DIHK), which is the central organisation for all chambers of industry and commerce in Germany. A bundling of all supervisory aspects with BaFin has been occasionally discussed – for example, including insurance intermediaries – but, at least so far, this is not to be expected.

In Germany, on the one hand, insurance brokers (Versicherungsmakler) acting for and representing the interests of the policyholder, and, on the other hand, insurance agents (Versicherungsvertreter) acting on behalf of the insurer must be differentiated. A licence may only be obtained as either an insurance broker or insurance agent. This general differentiation is strengthened by the German courts. According to settled case law of the German Federal Court of Justice, the insurance broker has to safeguard the policyholder’s interests and provide best advice. On this basis, the Federal Court of Justice has ruled that insurance brokers may not conduct claims-handling services for the insurer.

In general, conducting insurance business in Germany requires an authorisation. Specific rules provide a different legal framework for EU/EEA (re)insurers on the one hand and third-country (re)insurers on the other. For EU/EEA (re)insurers the so-called single-licence principle applies which means that insurance undertakings having their registered office and licence in another member state may conduct business in Germany under the freedom to provide services or freedom of establishment. Third-country insurers are subject to a stricter regime.

All insurance companies must demonstrate, inter alia, that they have an effective and orderly business organisation demonstrating that the company is managed in a sound and prudent manner. Also required are the necessary own funds to meet the capital requirements. The head office must be located in Germany.

(National or international) owners of a qualified participating interest (those who directly or indirectly hold at least 10% of the share capital or voting rights or who, by other means, are in a position that makes it possible to exercise a significant influence over the company’s management) must meet specific requirements. They have to be reliable and provide sound and prudent management. The lack of suitability of the holder of a significant interest constitutes a compelling reason for refusing permission to conduct business as an insurance undertaking. In addition, certain notification requirements in relation to the acquisition of qualified participating interests, in particular if certain thresholds are met or fallen short of (for example, 20%, 30% or 50% of the voting rights or share capital), are imposed through supervisory law.

(Re)insurers – except for small insurance undertakings – are required to provide a solvency overview according to the Solvency II regime. The solvency overview serves as a separate regulatory accounting instrument and is prepared independent of the annual financial statements in accordance with German commercial law. Assets and liabilities must always be measured at their economic value (fair value). Technical provisions – composed of the best estimate and the risk margin – must be set up for all insurance obligations towards policyholders and beneficiaries within the solvency overview. Re(insurers) are required to choose a method on their own responsibility that adequately addresses the specific risks connected to their business. The VAG rules do not contain a universal, mandatory method for calculating these provisions.

The Solvency Capital Requirement (SCR) calculation follows the basic rule that (re)insurers must procure at least enough own funds to survive a loss which statistically only occurs 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. The standard formula, however, only allows a standardised calculation without having regard to company specifics in detail.

In addition to the following absolute minimum-capital requirements, a so-called "corridor" between 25 % and 45 % of the solvency capital requirement for the minimum capital must be adhered to:

  • EUR6.2 million for insurers conducting life and non-life insurance business covered by the Solvency II Directive;
  • EUR3.7 million for life insurers, including captive insurers;
  • EUR3.6 million for reinsurers except for captive reinsurers;
  • EUR2.5 million for non-life insurers, including captive insurers (except for insurers covering third party liability, credit and deposit risks, in this case the minimum capital must be EUR3.7 million); and
  • EUR1.2 million for captive reinsurers

In Germany, insurance tax is a transaction tax. The payment of the insurance premium for an insurance relationship is taxed, however, not the insurance contract or the insurance cover itself. The basis for taxation is provided by the Insurance Tax Act (Versicherungssteuergesetz, VersStG). 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 certain types of insurance (eg, household contents insurance with fire portion: 16.15%; building insurance with fire portion: 16.34%; fire insurance: 13.2%; accident insurance with premium refund: 3.8%; hull and machinery insurance: 3%).The tax debtor of the insurance tax is the policyholder. In principle, however, the insurer must pay the tax for the account of the policyholder. The tax, which is 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 (Bundeszentralamt für Steuern) within 15 days of the end of each registration period by the person liable for payment of the tax.

As a general principle, third-country insurers need to obtain an authorisation and establish a German branch office if they wish to carry on insurance business in Germany. The VAG, which stipulates these requirements, provides for an exemption if primary insurers or reinsurers from third countries solely carry out reinsurance business in Germany through provision of cross-border services and if the EC has decided, in accordance with Article 172(2) or (4) of the Solvency II Directive, that the solvency regimes for reinsurance activities carried out by undertakings in the relevant countries are equivalent to the regime described in that Directive. This is currently the case for Switzerland and Bermuda (full); Australia, Brazil, Canada, Mexico, the USA and Japan (provisional); and Japan (temporary).

With regard to US insurers doing business in the EU, the United States and the EU reached an agreement on 22 September 2017, aimed at addressing the US lack of equivalency concerning the Solvency II directive, which entered into force on 4 April 2018. The agreement intends for US insurers and reinsurers to continue writing new business in the European market without having to establish a local presence in every European member state in which they want to be active. Moreover, the agreement streamlines group supervision requirements for insurers and reinsurers operating in both jurisdictions. The provisions of the agreement are not self-implementing but require further legislation. Full implementation is expected in 2022.

For reinsurers domiciled elsewhere, the requirements for conducting business in Germany have been controversial. A respective interpretative decision, dated 31 August 2016, by BaFin has received great attention and caused much debate as it was partly understood to have created new market barriers and protected domestic insurers. With this decision, BaFin has specified some aspects regarding the conduct of reinsurance business in Germany by insurance undertakings situated in a third country (ie, a non-EU/EEA country). This interpretative decision refers to the conduct of reinsurance business by third-country insurance undertakings only. BaFin clarified that carrying on reinsurance business in Germany does not just include the execution of legal transactions, but also the main stages leading to signing the contract and the performance of the contract. The decisive element is whether the third-country insurance undertaking deliberately targets the German market (for example, advertisement of specific products, an internet presence targeted at the German market and employees of the third-country insurance undertaking making visits to customers with the aim of concluding reinsurance contracts) to offer reinsurance contracts to German insurers or to initiate such business. Deliberate targeting is also the case if the third-country insurance undertaking uses intermediaries situated in Germany or abroad to contact German insurers or to provide offers to the German market. Such activities would be classified as carrying on insurance business in Germany and, thus, trigger the authorisation requirement.

There is, however, no authorisation requirement if reinsurance contracts are concluded by correspondence (Korrespondenzversicherung), because such activities are not deemed as carrying on business in Germany. The crucial elements here are that: (i) the initiative to conclude the reinsurance contract must come from the German insurer; and (ii) the reinsurance contract must be concluded by way of correspondence; for example, telephone, fax, email or post.

Taking into account the above clarification, for a German insurer's initiative to be given, the respective third-country insurance undertaking must not have distribution structures in Germany or have targeted the German market with, for example, advertisements. Pursuant to BaFin, insurance by correspondence also covers cases where a German insurance undertaking, on its initiative, authorises a third party, such as an insurance intermediary, to prepare and/or conclude a reinsurance contract.

Insurers should bear in mind that, by law, the supervisory authority is granted powers to order third-country insurance undertakings to cease conducting business immediately and run-off the business without delay. In addition, the operation or commencement of reinsurance business without the necessary authorisation is considered a criminal offence under German law.

In 2019, the German legislator issued provisional rules enabling BaFin to temporarily renew passporting rights for British financial institutions (including insurers) in the case of a no-deal Brexit scenario. These measures are part of a more comprehensive law addressing, primarily, tax matters (Brexit-Accompanying Tax Law: Brexit-Steuerbegleitgesetz, Brexit-StBG) and allow passporting to be extended by up to 21 months. The writing of new business will, however, be explicitly excluded and the (re)insurers will be required to terminate existing contracts, obtain a new authorisation or transfer the business to a licensed risk carrier. The relevant provision does not automatically extend passporting rights but merely enables BaFin to grant an extension by way of an administrative act and it remains to be seen whether BaFin will make use of the full 21 months when extending passporting rights. The rule also allows BaFin to issue a general decision expanding passporting rights for all British insurers by administrative decision for a certain period.

BaFin has published guidance in relation to Brexit and reinsurance through non-EU undertakings in which it states that, in principle, it does not object to substantial reinsurance being offered to another group insurance undertaking with its registered office outside the EU, provided that the proposed reinsurance stands up to supervisory scrutiny, particularly with a view to risk management. However, in this context, BaFin takes the view that a 100% reinsurance of the risks written by the German insurer is problematic. In principle, the German insurer should therefore have a significant retention (as a rule 10%) of its insurance business. However, this is not an absolute rule and the issue needs to be decided on a case-by-case basis.

In general, and as detailed in Clyde & Co's regular Insurance Growth Report, M&A activity has been increasing in the last few years following a slow-down. M&A transaction volumes – with 222 completed deals worldwide – increased in the first half of 2019, up 13% on the second half of 2018 and marking the biggest increase since 2015. The most significant increase in activity was in Europe, which saw a 40% increase in M&A, as companies apparently moved on from the diversion of Brexit preparations. Insurance M&A deals globally reached a total value of USD15.17 billion in the third quarter of 2019, with the main volume and number of deals still in North America.

In particular, the German market has seen a few large run-off transactions. Several players have become well established in the German market providing run-off platforms specialised in acquiring run-off business using different transaction instruments, such as portfolio transfer, transfer of companies, retrospective reinsurance or structured solutions in life and non-life insurance. In particular, low interest rates and the new capital requirements under Solvency II are considered relevant factors contributing to an increase in run-off activity. German insurance supervisory law does not provide for an official definition of run-off. There are special rules governing the transfer of portfolios for primary insurers and reinsurers. BaFin has to approve the portfolio transfer agreement in case of a portfolio transfer. This BaFin approval replaces the consent by policyholders that would otherwise be necessary under general civil law rules. With its decision, BaFin is supposed to ensure that the policyholders’ interests are taken into account and their contracts remain active (insurance) or, respectively, the company which is taking on the business fulfils the solvency requirements (reinsurance). Today, run-off is particularly important for life insurers as several insurers have announced that they no longer want to underwrite any new business as the low-interest environment is particularly putting pressure on life insurers. Even though in recent years BaFin has dealt with several transfers of business to run-off platforms, BaFin has stated that, currently, it does not see a particular run-off trend. A transfer of business is a complex issue, not least due to the strict legal requirements, and there are no indications of a wave of consolidation to come. Transformations of (re)insurers pursuant to the German Transformation Act (Umwandlungsgesetz, UmwG) also require BaFin approval.

Finally, technology remains the most important emerging driver of M&A activity. The number and volume of deals involving insurtech start-ups had already risen above the total 2018 level by September of 2019. Insurers and reinsurers are regularly involved in insurtech transactions. Insurtech start-ups in Germany have, on the one hand, been particularly active in areas addressing large markets such as, for example, home insurance (sometimes with the addition of insurance for – eg, bikes, smartphones, drones) or car insurance. On the other hand, insurtech or fintech start-ups have been entering the market with innovative solutions for automated services (eg, claims management, online tools or platforms). Several of the established companies in the market have reacted by creating their own incubators or innovation accelerators. Also transaction activities of insurers are not limited to the classic M&A deals, but increasingly manifest in co-operation between insurers and companies outside the insurance industry to stay competitive in light of the entrance of insurtechs in the market. Transactions involving fintechs and foreign investments are on the rise in this context. For example, Raisin (a Berlin-based fintech) Raisin in 2019 has taken over the retirement provision start-up Fairr which developed an online Riester fund savings plan. In 2018, Chinese insurance conglomerate Ping An's significant acquisition of shares in the, also Berlin-based, start-up incubator Finleap (its ventures including digital insurance broker Clark, insurer Element, Solaris bank or cyber risk expert Perseus) was widely discussed. Further increase in insurtech tie-ups, joint ventures and partnerships, and more involvement from tech companies entering the insurance market can be expected in the future.

On 23 February 2018, the Insurance Mediation Directive (2002/92/EC) (IMD) governing the distribution of insurance products by insurance intermediaries was repealed and replaced by the Insurance Distribution Directive (EU/2016/97) (IDD). The IDD is broader in scope and introduced a wide range of requirements in respect of a distributer’s registration, passporting, organisational structure, conduct of business, insurance-based investment products, sanctions and data protection. The Directive aims, overall, to afford greater protection to customers and to achieve further harmonisation in insurance distribution throughout the EU. It now explicitly also refers to the distribution of reinsurance.

The Directive only provides minimum standards, meaning that member states may implement stricter rules where they consider it necessary for consumer protection reasons, flexibility that may in the end turn out to be contrary to the goal of achieving a broad level of harmonisation and market integration in insurance distribution.

The Directive's cornerstones are set out below.

The IDD does not only apply to insurance intermediaries in the strict sense, but to insurance distributors in general. The provisions are intended to apply in cases where a customer obtains insurance coverage via an intermediary and where insurance coverage is taken out with the insurer directly or via comparison portals (except, for example, websites hosted by public authorities or consumer organisations that do not aim at insurance being taken out).

The publication of prices and costs shall become more transparent. Insurance intermediaries have to state the nature of their remuneration. They have to disclose whether they are to receive a financial incentive for the sale of a product. There is, however, no obligation to disclose the amount of a commission payment. Similar rules apply for insurers that have to state which remuneration is granted to employees for insurance distribution. The Directive does not provide for a general ban on commission payments. Pursuant to the Directive, it may rather be chosen whether there shall be a commission (paid by the insurer) or a fee (paid by the insured) as remuneration. However, the nature of remuneration must not be in conflict with the objective to obtain suitable insurance coverage for the customer.

New provisions on transparency and business conduct aim to ensure that customers only take out insurance coverage that is really needed. Furthermore, besides general status information, insurance distributors need to advise on whether consultation is offered as well. A product information sheet tailored to the relevant insurance product shall be used for all products.

In cases where products are sold accompanied by an insurance policy (cross-selling), the customers shall be able to choose whether they wish to purchase the main product with or without insurance.

The requirements for the qualification of insurance intermediaries are raised and specified. Insurance intermediaries will be obliged to undergo further and regular training. Insurers shall offer training for their distribution staff.

New rules on product oversight and governance (POG) are installed. Insurers and intermediaries that manufacture insurance products for sale to customers shall maintain, operate and review a process for the internal approval of each insurance product, or significant adaptations of an existing insurance product, before it is marketed or distributed to customers. This does not apply to large-risk insurance products.

While this does not constitute a formal external authorisation requirement for products, meaning basically general insurance terms and conditions, it does lead to an enormous administrative burden for the affected insurers and intermediaries in the conception of insurance products. There is now a tougher sanctions regime, including, for example, personal liability of directors and officers of legal entities. Special rules are provided for insurance-based investment products.

There are also rules providing concrete specification of the IDD at the European level in the form of the directly applicable Delegated Regulations from the Commission of September 2017 on the product approval process under Section 23, para 1(a) (new version) (VO 2017/2358) and on notification requirements and good conduct rules in the sale of insurance investment products (VO 2017/6229). In addition, the EU Commission has defined standards for a product information sheet (Insurance Product Information Document – IPID) with an Implementation Regulation of 11 August 2017 (VO 2017/1469). This Commission Delegated Regulation will be directly applicable in the member states and will be based on EIOPA preparations in the form of technical advice submitted to the Commission in February 2017 following public consultation.

On a German national level, the new rules have been applicable since 23 February 2018. The implementation mainly affects the GewO, as law governing insurance intermediation, but also the VAG and the VVG to the extent that there is insurance distribution by insurers. Some of the corresponding issues are described below.

In Germany, there continues to be a differentiation between two types of insurance intermediaries: insurance agents, acting on the side of the insurer, and insurance brokers, acting on the side of the insured. In addition to that, a new concept of honorary insurance consultants (Honorar-Versicherungsberater) was implemented. Authorisation may still only be granted as an insurance agent, insurance broker or honorary insurance consultant.

One issue that remains subject to debate is the prohibition on passing on commissions. According to the IDD Implementation Act, insurance intermediaries must not grant or promise insureds or beneficiaries any special compensation in relation to an insurance contract, meaning in particular that they may not pass on the commission received in whole or in part (Provisionsabgabeverbot). This is a rather surprising development because it had been widely expected that the ban on special compensations – previous provisions of which were highly controversial and subject to court decisions – would be dropped in the course of the IDD implementation. It is argued that granting or promising compensations would set the customer's focus on short-term cash incentives rather than on satisfying the customer's long-term needs. Further, the fear is that not having a ban would have a negative impact on consultation quality. It remains to be seen what the implications for the practice are; for example, how models of fintechs where commission is not forwarded to the customer but donated to a good cause will be treated in the light of such a ban or how they will change.

In its circular letter 11/2018 of 17 July 2018 on collaboration with insurance intermediaries and risk management in sales, BaFin provided information and further practical guidance on the implementation of the IDD into German law and requirements for insurers working with insurance intermediaries.

The policyholder is obliged to pre-contractually disclose to the insurer the risk factors known to him or her that are relevant to the insurer’s decision to conclude the contract and that the insurer has asked for in text form, pursuant to Sections 19 et seq of the VVG.

In general, the policyholder’s obligation to disclose only refers to risk information that the insurer has requested in writing. It is disputed whether and to what extent there might be a positive disclosure duty in the absence of a respective written risk question under special circumstances.

Remedies in case of breach depend on the policyholder’s degree of fault. As a general rule, the insurer may rescind the insurance contract. However, if the policyholder breached the duty of disclosure unintentionally, or without gross negligence, the insurer will only be entitled to terminate the contract subject to a notice period of one month. Rescission and termination are excluded if the insurer would still have concluded the contract, although with different conditions, if it had been properly informed of the non-disclosed facts. Instead, these other conditions shall become part of the contract with retroactive effect upon the request of the insurer. Furthermore, 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 duty of disclosure.

The insurer will not be obliged to provide coverage in the event of rescission after an insured event, provided that the misrepresentation or non-disclosure in question refers to circumstances causing the occurrence of the insured event or the extent of the insurer’s liability. However, this restriction will not apply in cases of fraudulent misrepresentation or non-disclosure. In the event of fraudulent misrepresentation or non-disclosure, in addition to the remedies under Section 19 of the VVG, the insurer will also be entitled to void the insurance contract with retroactive effect within one year of discovering the fraudulent misrepresentation/non-disclosure according to Sections 123 and 124 of the BGB.

One thing that has to be noted, however, is that in general, the policyholder’s duty of disclosure only refers to risk information that the insurer has requested in writing. It is disputed whether and to what extent there might be a positive disclosure duty in the absence of a respective written risk question under special circumstances.

In Germany, there are two types of insurance intermediaries: insurance agents, acting on the side of the insurer, and insurance brokers, acting on the side of the insured.

Insurance contracts are concluded in accordance with the general principles under contract law of offer and acceptance. However, the provisions on information obligations under Section 7 of the VVG and a modification of the principle of related and corresponding declarations of intent laid out by Section 5 of the VVG need to be regarded. According to Section 7 VVG, the insurer is obligated to provide customers with extensive information in writing prior to the conclusion of the insurance contract. However, whether an insurance contract has been concluded exclusively depends on the fact that two corresponding, related declarations of intent containing a consensus on the contract-typical obligations have been made and received generally without regard to whether the insurer has correctly fulfilled its information obligations. Yet, the policyholder will be entitled to revoke the policy if the policyholder was not duly informed.

One of the following two models will apply to the conclusion of insurance contracts:

  • The "application model" dominates in practice – according to this model, the policyholder applies for the conclusion of the insurance contract, which the insurer accepts (in most cases) by sending the policy and a policy accompanying letter.
  • Under the "invitatio model", the (future) policyholder invites the insurer to make an offer (invitatio ad offerendum), 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; the policyholder then accepts this offer.

It should be noted that the VVG provides for a number of so-called semi-mandatory provisions. These provisions can neither be contractually precluded nor modified to the insured's disadvantage. This restriction of the freedom of contract does not apply, however, to large risks or to open policies (Section 210 VVG). In line with European 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:

  • EUR6.2 million balance sheet total;
  • EUR2.8 million net turnover; and/or
  • an average of 250 employees per fiscal year.

If the policyholder is a member of a group of companies obligated to prepare a consolidated financial statement, the size of the enterprise is determined according to the figures in the consolidated financial statement.

The requirements for contract conclusion generally also apply in scenarios with multiple insureds or multiple beneficiaries. However, the VVG contains a number of specific rules dealing with insurance contracts involving several parties. For example, Sections 43 et seq VVG contain specific rules for insurance contracts which the policyholder concludes in his or her own name for another person (insurance for third party account). In this instance, while the policyholder is the contract partner of the insurer, the premium debtor and the only party entitled to request the certificate of insurance, the insured person is entitled to claim for coverage pursuant to Section 44 (1) VVG. However, according to section 44 (2) VVG, without the consent of the policyholder, the insured person may only dispose of the coverage claim or assert the claim in court if the insured is in possession of the certificate of insurance. According to Section 45 (1) VVG, the policyholder may dispose of the rights to which the insured person is entitled under the insurance contract in his or her own name. Moreover, the policyholder is only entitled to transfer the rights of the insured person or to accept the benefits under the contract with the consent of the insured person or if the policyholder is in possession of the certificate of insurance, Section 45 (2) VVG. Typical insurance policies on the account of third parties are, for example, legal expenses insurance, D&O insurance, business liability insurance, or mandatory car owner liability insurance. In practice, the policies are often tailored to the specific needs, deviating from the non-mandatory VVG-provisions.

In general, German insurance law does not make a distinction – regarding the general rules for contract conclusion – between consumer or business insurance and reinsurance. Consumers, however, generally enjoy far-reaching protection under German law which creates specific obligations with regard to insurance contracts. For example, Section 7 VVG contains extensive obligations on the insurer to provide customers with information in writing prior to the conclusion of the insurance contract. This obligation applies to all customers, irrespective of whether they are a consumer, but the provision is not applicable to insurance contracts covering large risks (Section 210 VVG). If the policyholder is a consumer, according to Section 4 of the Regulation on Information Obligations for Insurance Contracts (VVG-Informationspflichtenverordnung, VVG-InfoV) the insurer will be additionally obliged to provide a product information document, meeting the requirements of the Commission Implementing Regulation (EU) 2017/1469 of 11 August 2017 laying down a standardised presentation format for the insurance product information document. For insurance contracts which are concluded electronically, Section 312i BGB requires, in particular, that the policyholder is provided with reasonable, effective and technically accessible means of recognising and correcting input errors before submitting the contract declaration. An electronic (insurance) contract with a consumer is protected further and, according to Section 312j (4) BGB, not concluded if the confirmation requirement of Section 312j (3) BGB is not fulfilled. The consumer must be required to expressly confirm that he or she undertakes to make a payment. If the contract conclusion is arranged via button, this button must be clearly legible with nothing other than the words "contract conclusion subject to payment" or labelled with a corresponding unambiguous wording.

German law does not contain specific rules governing reinsurance contracts. Most provisions of the VVG are tailored to direct insurance contracts and the protection of policyholders. As such protection is not necessary, reinsurance contracts are expressly excluded from the direct application of the VVG according to its Section 209. General principles of insurance law contained in the VVG may be used in the interpretation of reinsurance contracts as long as these general principles are applicable to the special reinsurance context. Primarily, reinsurance contracts are concluded and performed according to established "reinsurance customs". These are generally considered to supplement the content of the written reinsurance contract as a customary practice. Established reinsurance customs in Germany are, for example, the reinsured's obligation to pre-contractually disclose significant risk factors (and grant access to its book and files), the "follow the fortunes" and the "follow the settlements" principles.

Alternative risk transfer (or ART) transactions between the insurance and capital markets are classified according to the exact nature of the transaction, taking into account the "substance over form" principle of the Solvency II regulation. Transfer of the actuarial risk into capital markets connects and intertwines insurance and capital markets, both of which are regulated markets in Germany. BaFin is the competent regulatory body supervising banks, insurance companies and the trading of securities. The relevant criterion to apply the rules of the VAG that relate to financial reinsurance is sufficient risk transfer. This provision is in line with Article 210 of the Solvency II regulation. Section 167 VAG explicitly only addresses financial reinsurance/finite risk reinsurance as one important ART instrument. ART transactions should, in any case, be closely co-ordinated with BaFin in order to ensure the feasibility of tailor-made solutions.

While German insurance companies recognise the importance of alternative risk transfer mechanisms as a necessary means of risk management, the business in this area is conducted outside of Germany, mainly for tax reasons.

According to relevant case law and legal literature, insurance conditions must be interpreted objectively – ie, in the way an average policyholder would understand them if they are comprehensively assessed and attentively reviewed, taking into account the recognisable context. The interpretation therefore depends on the capabilities of an insured person without special knowledge of insurance law and thus also on the specific interests. The wording of the contract is the starting point for the interpretation of insurance contracts.

Customs and trade practices are taken into account if the relevant factual evidence has been introduced into the process and if they are actually applicable to the factual context of the contract. Risk exclusion clauses must always be interpreted narrowly. 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 does not have to 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 in UK law, do not exist under German law. Regarding the consequences of a breach of duty to pre-contractually disclose material risk information, please see 6 Making an Insurance Contract.

See 8.2 Warranties.

Insurance disputes are heard in the competent courts for civil law matters. According to Section 215 VVG, a claim must be brought to the local court in whose district the policyholder has his or her place or habitual place of residence at the time of the filing of the action. In respect of actions brought against the policyholder, this court has exclusive jurisdiction. Although Section 215 VVG only addresses local jurisdiction, international jurisdiction can be inferred from this provision according to the principle of double functionality. However, Section 215 VVG only applies if jurisdiction is not determined by superior law, like EU law. If a defendant has his or her (habitual) place of residence within the EU, the Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (Brussels Ia) (or the Lugano Convention for Switzerland, Norway and Iceland) applies with special rules on jurisdiction in insurance matters. For EU cases, jurisdiction primarily depends on whether an implied (Article 26 Brussels Ia) or explicit (Article 25 Brussels Ia) agreement on jurisdiction exists. Otherwise, Articles 10 et se Brussels Ia determine international jurisdiction for insurance matters. For large risks, following Section 210 VVG, the parties to the insurance contract may agree on the place of jurisdiction, if the contracting parties are merchants (Section 38 German Code of Civil Procedure, Zivilprozessordnung, ZPO).

For claims arising from an insurance contract the general limitation period of three years applies. The period is calculated in accordance with the general provisions (Sections 195, 199 BGB). The standard limitation period starts at the end of the year in which the claim arose and the claimant obtains knowledge of the circumstances giving rise to the claim as well as of the identity of the defendant (or would have obtained such knowledge if he or she had not shown gross negligence). 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 plaintiff in text form, according to Section 15 VVG.

International insurance contract law, as part of international private law, regulates the question of which law is applicable to an insurance contract with foreign connections. This will primarily be given if the policyholder and insurer have their habitual residence or registered office in different countries or if the risk is located abroad.

Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I Regulation) applies to all contracts concluded after 17 December 2009. In addition to the general rules for contractual obligations (Articles 3–6 Rome I Regulation), Article 7 of the Rome I Regulation contains a special provision for direct insurance contracts with risk location in the EU as well as insurance contracts covering large risks (irrespective of the risk location). The general rules of Articles 3-6 Rome I Regulation in the insurance sector thus only apply to reinsurance contracts and direct insurance contracts for risks situated in a third country.

The civil court system in Germany is built in four tiers. In descending order of seniority there is a Federal Court of Justice (Bundesgerichtshof, BGH) in Karlsruhe, 24 Higher Regional Courts (Oberlandesgericht, OLG), 116 Regional Courts (Landgericht, LG) and 661 Local Courts (Amtsgericht, AG). Both Local Courts and Regional Courts serve as courts of first instance. Regarding insurance matters, the court of first instance will be a Regional Court (if the amount in dispute exceeds EUR5,000). Higher Regional Courts are competent for appeals regarding decisions of the Regional Courts and have jurisdiction in specific arbitration-related matters such as the setting aside or the enforcement of an award. There are specialised chambers consisting of three professional judges (eg, for insurance disputes) and special commercial divisions (made up of one professional judge and two lay judges) in the Regional Courts. Likewise, the senates at the Higher Regional Courts (three professional judges) and at the Federal Court of Justice (five professional judges) are focused on certain disputes.

Article 36 of Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (Brussels Ia) applies to the enforcement of foreign judgments within the European Union. Outside the European Union, the enforcement of foreign judgments in civil matters is governed by Sections 328 and 722 ZPO). A foreign judgment is declared enforceable without further review (prohibition of revision au fond) if certain minimum prerequisites are met:

  • the foreign court must have been competent according to German law;
  • recognition of the judgment must not lead to a result that is manifestly incompatible with fundamental principles of German law, in particular with fundamental rights (ordre public/public policy);
  • the judgment may not contradict an earlier foreign judgment given in Germany to be recognised;
  • a defendant who did not appear in court must have been duly served with the document instituting the proceedings in sufficient time to enable him or her to defend him/herself; and
  • reciprocity must be guaranteed.

Having adopted the UNCITRAL Model Law on International Commercial Arbitration in 1998, Germany provides for a modern arbitration regime with detailed and well-structured provisions designed to protect party autonomy and to afford effective arbitral justice. German courts and German procedural law in general are perceived to be very supportive of arbitration. Germany is a significant venue for international arbitration proceedings, being recognised for efficient and cost-sensitive organisation.

Germany is a signatory to the New York Convention and recognition and enforcement of awards follow the New York Convention's rules. The Higher Regional Court at the seat of the arbitration is competent for setting aside an arbitral award only under very narrow prerequisites.

Alternative Dispute resolution and especially mediation is becoming more popular for commercial disputes. Judges are encouraged to offer court-appointed mediation moderated by a different judge and courts have separate mediation hearing rooms for these purposes. However, mediation is a voluntary process and there is no sanction if a party refuses to mediate.

Punitive damages are not known in German law. The Federal Supreme Court has, for example, refused the recognition of US judgments on punitive damages for a violation of German public policy. Damages for late payments or improperly delaying settlement may be claimed according to general contract law.

While developments are ongoing, it can be observed that at the beginning, the majority of insurtechs were established in the fields of insurance distribution, contract management and prevention of insured events. Accordingly, to date, many insurtechs operating in the German market have taken the role of insurance intermediaries, including the activity of so-called managing general agents with underwriting authority (Assekuradeure). When acting as insurance intermediaries, insurtechs have to apply for a licence with their local Chamber of Industry and Commerce, and be registered with the insurance intermediary register. Other insurtechs intend to provide added value to policyholders, by aiding policy management, or to insurers, by offering preventive services such as cybersecurity training for the employees of insured companies.

Other insurtechs have become established as risk carriers or are in the process of doing so and obtaining BaFin approval. While some companies are already licensed and fully operational, for example, in the area of health insurance (Ottonova) and property/casualty insurance (Coya, Element), others seem to have encountered difficulties during the authorisation process. There are also full-stack insurtechs domiciled in other EU states that operate on a freedom to provide services or freedom of establishment basis and exclusively target the German market (eg, Friday, One).

Despite new market entries and business models, established insurers do not see a significant risk in these developments, not least because they have founded some of the new entrants themselves or participated in their founding.

On a general level, support for insurtechs and digitalisation-related developments has been observed. Insurtech hubs have been created in the two cities – Cologne and Munich – that particularly support the German insurance industry. In Cologne, the Federal Ministry of Economics and Energy has set up the Digital Hub Initiative and, as a competence centre, the InsurLab Germany which is intended to develop tailor-made solutions for the digitalisation needs of the German insurance industry, together with local and international start-ups. In 2017, the German government announced Munich as a location for another insurtech hub as part of a digital hub initiative.

Insurtechs have to fulfil the same legal requirements that apply to other insurance companies in their application for an authorisation as an insurance undertaking. In particular, there is no “regulatory sandbox” as in certain other jurisdictions, where businesses may test innovative products, services, business models and delivery mechanisms in the real market, with real consumers with restricted authorisation. Neither with regard to authorisation requirements nor ongoing supervision, do German supervisory law and BaFin differentiate between traditional undertakings and insurtechs. However, the principle of proportionality applies, which means that the application of supervisory rules and guidelines has to be weighed against the type, extent and complexity of the risks to which the individual undertaking is, or could be, exposed. While it is to be determined, in consideration of the particular circumstances, how and to what extent the relevant rules apply, the principle of proportionality does not allow for the rules not being applied at all; the purpose of each provision always needs to be fulfilled. However, the principle is intended to ensure that the burden placed on (re)insurers – including insurtechs acting as risk carriers – mirrors what is necessary based on the individual risks of the undertaking.

The authorisation can differ depending on the lines of business to be covered. Further, it is important for insurtechs to consider that there are particular requirements to be observed regarding the persons who effectively run the insurance undertaking or perform key tasks as regards financial resources. Furthermore, insurers, besides insurance businesses, must only conduct business activities that are directly related to the insurance business.

Cyber

Cyber has become a major risk for German companies and insurers in line with the global emergence of the risk and respective coverage. In line with that, professional awareness of cyber-related insurance coverage has increased, not least due to a rising number of publicly reported cyber-attacks.

Cyber claims can result in serious reputational and financial damage as well as regulatory action. The accountability obligation is codified in Article 24 of the General Data Protection Regulation (GDPR) requiring controllers to:

  • implement appropriate technical and organisational measures to ensure and be able to demonstrate that data processing is performed in accordance with the GDPR; and
  • review and update those measures where necessary.

From a cybersecurity perspective, almost all provisions of the GDPR become relevant through this "accountability principle". Cybersecurity measures (including technological measures and data analytics) can no longer be considered a static concept; but rather have to be progressively checked and updated. Companies will also have to ensure that their employees are adequately trained. Moreover, the German legislator has introduced legislation for critical infrastructures. Operators of critical infrastructure (eg, energy, transportation or telecommunication companies) and insurers must take organisational and technical measures to avoid errors of the availability, integrity, authenticity and confidentiality of their information technology systems, components and processes which are essential for the functionality of the operated critical infrastructures. Operators of this infrastructure must demonstrate that they meet these requirements every two years and report this to the German Federal Office for Information Security (Bundesamt für Sicherheit und Informationstechnik, BSI). In addition, financial institutions and insurance undertakings are specifically obliged to meet certain IT risk management requirements by BaFin. The German regulator published the supervisory requirements for IT in financial institutions (Bankaufsichtliche Anforderungen an die IT, BAIT) and insurance undertakings (Versicherungsaufsichtliche Anforderungen an die IT, VAIT). The BAIT/VAIT are designed to provide clarity for the executive boards of financial institutions and insurers, regarding the supervisor's expectations regarding secure design of IT systems and associated processes. Financial institutions and insurers must define a sustainable IT strategy outlining objectives and measures to achieve these objectives as these requirements form a core component of IT supervision in the German banking and insurance sector.

VAIT is divided into eight major categories of requirements, including IT governance, IT strategy, information risk management, and outsourcing. With regards to IT strategy, management must regularly deal with the strategic implications of IT for their business strategy. In the area of IT governance, VAIT requires management to define the rules for IT structure and process organisation on the basis of the IT strategy and to adapt them promptly in case of process and activity changes.

Climate Change

The effects of climate change are unprecedented and conventional risk management is challenged. Insurers have thus increasingly been addressing the market's concerns and developed streamlined solutions. Climate change risks fall into three broad categories: physical, transition and liability risks. Physical risks relate to the impact on asset values and insurance liabilities from damage to property as a direct result of severe weather events such as storms or floods, or indirectly from factors such as business interruption caused by disruption to global supply chains. Transition risks are financial risks that could arise from the shift to a lower-carbon economy as carbon-intensive financial assets are repriced, perhaps rapidly, potentially causing shocks to share prices. Liability risks come from parties that have suffered loss or damage from climate change and seek to recover losses from those they deem to have been responsible through their greenhouse gas emissions. Claims may also arise for loss or damage caused by failure to adequately adapt to, account for, mitigate or disclose climate risks (transition and physical) to businesses. In addition, there is increasing focus on the adequacy of corporate disclosures relating to climate change exposures and opportunities, particularly in the energy sector, but also in other areas such as mining, transportation and insurance. Climate change has become an important board-level issue, and corporations themselves – as well as their directors and officers – may be held accountable if disclosures are not adequate.

While wildfires, hurricanes or melting glaciers are probably the first images that come to kind and are not primarily connected to Germany specifically, recent German cases like the Peruvian farmer's environmental liability claim against German energy company RWE, alleging that RWE's greenhouse gas emissions had contributed to global warming (and therefore are causing glacial melting and thereby increasing the risk of flooding) or the claim of three farming families (backed by Greenpeace) against the German government for an alleged failure to meet its 2020 climate goals have increased public awareness of the topic and shows that liability risks for companies, their directors and insurers are increasing in this area.

Corporate Social Responsibility (CSR)

Another potential risk area with increasing significance is Corporate Social Responsibility (CSR). While the German legislator will currently not pursue a draft project to codify requirements for a prudent supply chain management system which had been circulated to the press in spring 2019, the German government will continue to address the issue according to its action plan. The Federal Cabinet had, in 2010, already adopted the National CSR Action Plan in line with the UN Guiding Principles on Business and Human Rights, the OECD Guidelines and the renewed EU strategy 2011-14 for corporate social responsibility. Companies, especially those using an international supply chain must anticipate being held to stricter standards, creating a potential claims risk for the entities and their D&Os.

Environmental Liability

There has been a significant increase in global as well as domestic environmental regulation, consisting not only of tighter new rules but also more rigorous, consistent enforcement around the world. In Europe there is, for example, an increasing emphasis on mandatory financial provision for environmental harm, while states in Asia and South America, for example, are enacting new compulsory insurance regimes. The consequences of not being prepared locally for the impact of an environmental incident are perceived to be potentially severe, especially for multinational organisations. Within the European Union, environmental regulation comprises a mixture of EU and domestic laws. The EU Environmental Liability Directive (ELD) took effect across Europe in 2009. Its purpose is to establish a framework of environmental liability based upon the "polluter-pays" principle. The ELD provides for two liability regimes. Under the first, operators of activities posing a higher environmental risk may be held liable in the event of damage to protected species and natural habitats, water damage and land damage. There is no requirement of fault or negligence and relatively few defences are available. The second regime applies to the operators of other activities and imposes obligations in the event of fault or negligence. In 2014 the European Environment Agency (EEA) commenced a multi-annual work programme, structured around the four strategic areas of: informing policy implementation (SA1), assessing systemic challenges (SA2), knowledge co-creation, sharing and use (SA3) and EEA management (SA4). Among the programme’s stated aims are to promote more frequent and consistent use of the ELD and to consider mandating financial provision across the European Union.

Cyber

In Germany, insurers started to cover cyber-risks a few years ago. As a result of different coverage approaches taken by different carriers, the German Insurance Association (Gesamtverband der deutschen Versicherungswirtschaft, GDV) developed model terms and conditions (Musterbedingungen) for cyberproducts providing guidance to small and mid-sized companies. The model wording also aims at making it easier for insurance brokers to get a sufficient market overview and provide best advice to their clients.

The GDV model wording is divided into four parts. Part one includes general information about the scope of coverage. Generally, financial loss caused by an information security breach will be covered. Like the majority of German cyberpolicies, part two of the standard policy conditions implements certain cyber-related services, such as forensic and call centre services as well as crisis communication. Parts three and four specify coverage for financial loss. While part three covers financial loss resulting from third-party damage claims based on statutory liability provisions, part four deals with certain first-party losses, such as business-interruption losses and costs incurred for data recovery. Several insurers that issued new cyberprograms in 2019 have adopted the model terms.

W&I

In recent years, warranty and indemnity (W&I) insurance and related products have gained an increasingly important role in the M&A markets. Through W&I, the seller may significantly limit its liability for warranties, giving it the opportunity to have at its disposal a large part of the sales proceeds and not have to deposit money on an escrow account for several years. On the other hand, additional investment protection is an advantage for the buyer.

Still being a relatively new product, W&I is highly complex, in particular because there is de facto no standard coverage, but any policy has to be customised. W&I is of particular relevance in transactions involving private equity firms. Challenges of the W&I business are seen in increased claims frequency and the fact that this is a single-premium business. While W&I was originally structured as coverage taken out by the seller, according to studies the great majority are now buyers’ policies.

Parametric Insurance

The use of parametric products is on the rise in the insurance sector and these products are being rapidly adopted at local, regional and national levels as they provide a solution for risk-transfer concerns. Parametric insurance, also known as index insurance, is an innovative product that pays a fixed sum when a precisely defined event takes place – for example, wind of more than a certain speed at a specified location. Parametric insurance products, often only initially designed to address adverse weather conditions, are now receive increasing attention with regard to digitalised manufacturing processes and other risks connected to the digitisation of modern economy, such as, for example, the internet of things. On 15 May 2019, Clyde & Co launched a first-of-its kind off-the-shelf connected parametric insurance contract for use by insurers through their smart contract consultancy, Clyde Code. The contract has been built in collaboration with smart legal contracts platform Clause, and according to the specifications developed by the Accord Project, although it can be deployed on other systems and platforms. It automates the performance of the policy by receiving data (in the model case weather data), calculating potential claims obligations, and producing an exportable report of insurance premiums or losses.

General Data Protection Regulation

On 25 May 2018, the General Data Protection Regulation (EU 2016/679) (GDPR) replaced the existing regime derived from the first Data Protection Directive (Directive 95/46/EC). The GDPR seeks to harmonise data protection procedures and enforcement across the EU, and achieve consistency with the existing system for ensuring privacy online. It is directly binding on data controllers in all member states immediately without the need for implementation by EEA states. Many of the new provisions have a significant impact on data controllers and processors who are active within the EEA, including those who are located outside it but who monitor the behaviours of EEA consumers, or offer them goods or services. Importantly, the penalties for breach of the new regime are much more substantial. Changes are also given with regard to the data breach notification because, under the GDPR regime, the precept of rule and exception is reversed with regard to the notification of the responsible authority. Under the previous data protection law, a duty to notify the authority applied only in the case of special data breaches and serious harm, but under the GDPR, the duty to notify the competent authority is the standard case. Moreover, under the previous law, there were equal requirements for the notification of the authority and the data subject, whereas the GDPR differentiates between these, providing more exemptions for the notification of the data subject than in the case of notification of the authority.

On a national level, a reformed Data Protection Act (Bundesdatenschutzgesetz, BDSG) came into effect in Germany on the same date as the GDPR to align German data protection with the new Regulation. The national law is of particular relevance where the GDPR provides for flexibility clauses. However, given the higher rank of the European provisions, the rules on a German national level must only be applied where they are not in conflict with European law.

Accordingly, data law compliance will become even more important under GDPR. European regulators have issued several large fines (Google, British Airways). German authorities had been reluctant to issue large fines so far, but the first larger fine (EUR14.5 million) against Deutsche Wohnen was issued in November 2019 and higher fines are expected. In this context, the data protection authorities in Germany have been working on guidelines for the application and calculation of GDPR fines which was published in October 2019. The catalogue is currently being harmonised with other EU member states. With the application of the catalogue, large fines are expected to be the rule rather than the exception.

It is still an unresolved question in Germany whether (and to what extent) fines and penalties are insurable. The decisive legal test is whether the insurance of fines and penalties is in breach of public policy as 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 only sanction (intentional) behaviour that is also punishable under criminal law. The prevailing opinion among legal scholars is, however, that 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 may interfere with its effectiveness. In practice, fines and penalties are covered in certain cases, and the respective clauses, especially in D&O insurance contracts, usually clarify that coverage is only granted if there is no statutory coverage prohibition.

Collective Redress

In light of the disadvantageous position of German car owners as compared to those in other countries regarding "Dieselgate", the German Bundestag passed the Law on Introduction of a Model Action for Civil Declaratory Judgment (Gesetz zur Einführung einer zivilprozessualen Musterfeststellungsklage) to facilitate the enforcement of consumer rights. The law came into effect on 1 November 2018. It allows qualified bodies, such as consumer associations, to (for the benefit of at least ten affected consumers) request a declaratory judgment to ascertain common issues of fact or law. Consumers have the opportunity to register their claims with the Federal Office of Justice (Bundesamt für Justiz) without the need for an attorney, with the effect of suspending the limitation period. The model action for declaratory judgment, however, is litigated exclusively between the association and the defendant. Any decision in the model action for declaratory judgment nevertheless creates a binding effect for the registered consumers for any subsequent actions brought by the consumer. Should the association and the defendant agree to settle, that settlement has to be approved by the court before it becomes binding. The consumers may – within a period of one month – opt out of the settlement. Since the model action decision is limited to the basis of the claim, consumers have to initiate separate individual proceedings regarding their individual claim (eg, concerning the amount of damages). This necessary additional step has met considerable criticism from various stakeholders who fear that the procedure will be too complicated and will not actually benefit consumers in the end.

In the notes on the draft legislation, the federal government assumes that roughly 450 model actions for declaratory judgment will be submitted annually, and it forecasts a success rate of about 50%. To date, five model proceedings have been commenced. Only the second action was the expected one against Volkswagen AG connected to the Dieselgate allegations. The first proceedings in fact were initiated against Mercedes Benz Bank AG based on alleged unclear wording of revocation clauses in consumers' car loan contracts. The Higher Regional Court of Stuttgart dismissed this claim as inadmissible, because the association representing the class was not regarded as fit. 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.

Corporate White-Collar Crime

The criminal prosecution of white-collar crimes is a much discussed topic with increasing significance in Germany. Several cases have recently received increasing public attention (especially Dieselgate and CumEx). The Federal Ministry of Justice has submitted a draft bill for a "law to combat corporate crime", the Corporate Sanctions Act (Verbandssanktionengesetz, VerSanG) in August 2019. The ongoing discussion of the necessity to implement a distinct corporate criminal law in Germany has been significantly influenced by Dieselgate. The draft provides for fines imposed on large and international corporations which can be up to 10% of their annual turnover. The bill even provides for the dissolution of the company as a measure of last resort. These plans are in line with corresponding regulations in the areas of antitrust, data protection and money laundering law.

Whistle-blower Protection

Another potentially new exposure in this context is the new Directive of the European Parliament and of the Council on the protection of persons who report breaches of Union law (the "rules on whistle-blower protection") which was formally adopted by the Council in October 2019. Companies are required to establish internal reporting channels to strengthen whistle blower protection accordingly. The first cases in which criminal proceedings were initiated after whistle-blower complaints were made through official channels set up to facilitate these complaints were handled by German prosecutors and courts.

BaFin Agreement with UK Regulator on Post-Brexit Co-operation

On 15 April 2019, BaFin concluded an agreement with the British Prudential Regulatory Authority on co-operation after the Brexit. This agreement complements an existing multilateral Memorandum of Understanding between the national insurance supervisory authorities of the remaining 27 EU Member States and EIOPA (European Insurance and Occupational Pensions Authority) and the UK supervisory authorities.

The new agreement provides for the continuation of shared financial supervision and legal supervision of companies that no longer sign new business in the host country for a certain period after Brexit. Under the agreement, the current allocation will be maintained for a transitional period of 21 months after Brexit. Complaints will continue to be handled by BaFin. BaFin will therefore continue to handle complaints about companies based in the UK which have contracts under performance in Germany. In the case of complaints about German companies that have concluded a contract in the United Kingdom, BaFin will continue to act within its legal capabilities.

IDD/VersVermV

Following the adoption of the EU Directive on insurance distribution of 20 January 2016, the German legislator had to make adjustments to the law governing intermediaries. The revised version of the Regulation on Insurance Brokerage and Consulting (Verordnung über die Versicherungsvermittlung und -beratung, VersVermV) took effect on 12 December 2018.

Special significance was attached to continuing education requirements for intermediaries, rules for initial contact with customers, and the handling of customer complaints when recasting the law. Specifically, 15 hours of continuing education annually is mandatory for all insurance intermediaries. This can be completed with in-office training, in person, or as individual study. If an insurance intermediary opts for continuing education through individual study, proof of successful learning by the entity offering the continuing-education training is required.

Intermediaries are also required to present compensation information to their clients in paper form upon initial business contact. There are exceptions to paper form submission for online sales or e-mail, though the client must have the choice. Furthermore, there is a requirement to establish a complaint management system. Policyholders should be given the opportunity to lodge complaints that are processed and managed by the insurance intermediary. The question is currently open as to how large an intermediary office must be before it must set up concrete internal processes for this.

Finally, to prevent conflicts of interest the VersVermV states that an intermediary must not create incentives to recommend an insurance product for a client that is not optimal for him or her.

Clyde & Co (Deutschland)

Dreischeibenhaus 1
40211 Düsseldorf
Germany

+49 211 8822 8800

+49 211 8822 8898

dusseldorf.office@clydeco.com www.clydeco.com
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Clyde & Co (Deutschland) LLP is a leading, sector-focused global law firm with 440 partners, 1,800 lawyers, 2,500 legal professionals, and 4,000 staff in over 50 offices and associated offices worldwide. The firm specialises in the sectors that move, build and power our connected world and the insurance that underpins it; including transport, infrastructure, energy, trade and commodities, and insurance. With a strong focus on developed and emerging markets, the firm has achieved compound average annual revenue growth of 15% over the last ten years, making it one of the fastest-growing law firms in the world with ambitious plans for further growth. In 2016 Clyde & Co opened its first German office in Dusseldorf. The Dusseldorf team has since trebled in size and has been recognised as a leading practice for insurance litigation, insurance products and regulatory issues. In February 2019, Clyde & Co opened a second German office in Hamburg, providing market-leading expertise in the marine sector.

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