Liability with good interest rates: up to the insured amount and much more
The article was first published in Versicherungsmonitor on October 28.
Halloween is just around the corner, and thanks to this American cultural import, fear and terror are also booming in this country. This is reason enough to take a look at a little-noticed interest rate risk that lurks in many liability insurance policies. Here, too, a mistake regarding the question of liability can lead to a costly nightmare scenario. But that doesn't have to happen.
It is in line with the guiding principle of the Insurance Contract Act (VVG) that the sum insured in liability insurance only limits the compensation claim, but not the interest payable on it. According to Section 101 (2) sentence 2 VVG, this shall apply in any case if the interest burden on the policyholder is attributable to a delay in settlement caused by the insurer. The implications this may have for multiple insurance have already been examined in this format.
However, it has not been conclusively clarified in case law when the insurer has "caused" a delay in settlement. According to one view, it is sufficient for this that the insurer does not satisfy the third party's claim "in good time" but conducts an unsuccessful defense process. In this respect, the fault of the insurer is irrelevant.
The idea behind this is that extending the insurer's obligation to pay benefits to include interest serves to distribute the risks arising from the defense against liability claims against the policyholder in an appropriate manner. The policyholder will not normally acknowledge the damage without the insurer's consent. He would therefore bear the full risk of the insurer's misjudgment regarding the validity of the liability claim if he had to reimburse the third party himself for the interest exceeding the sum insured.
About costly mistakes…
This means that the insurer may already be liable for the interest if it has misjudged the expected outcome of the liability proceedings.
If the insurer decides to defend a liability claim that far exceeds the sum insured and the validity of the claim is only clarified after a long legal dispute, the interest burden may significantly exceed the sum insured. Such situations are common in practice. An example: If the sum insured amounts to EUR 2.5 million and a liability claim of EUR 10 million is asserted against the policyholder, the liability claim will accrue interest of approximately EUR 860,000 at the current interest rate and at 5 percentage points above the base rate per annum. In this example, the interest for three years alone exceeds the sum insured.
Since proceedings lasting five or ten years are not uncommon in complex liability cases, such a lawsuit can prove to be a bottomless pit for the insurer.
…and vague insurance terms and conditions
The fact that the insured interest claim could be based on the amount of the justified liability claim is a risk that is often overlooked. Insurance terms and conditions could provide a remedy in this respect. According to prevailing opinion, the provision of Section 101 of the German Insurance Contract Act (VVG) is of a dispositive nature and can therefore be waived in insurance terms and conditions, subject to the limits of general terms and conditions law.
Admittedly, it would be too far removed from the legal model if the insurer were to pass on the interest risk entirely to the policyholder. However, limiting the interest burden so that the interest is apportioned in proportion to the justified liability claim and the sum insured is likely to raise far fewer concerns.
However, many sets of terms and conditions – such as the model terms and conditions of the German Insurance Association (GDV) for liability insurance – only contain such a provision for legal costs. They stipulate that the insurer only bears these costs in proportion to the sum insured in relation to the total amount of the justified liability claims. The interest owed by the policyholder to the third party as an ancillary claim cannot be covered by this provision.
To take the fear out of the "interest specter," it is therefore worth taking a critical look at gaps in existing terms and conditions, and not just on Halloween.
