What are the obstacles to successful claim settlement?

How smoothly does claims handling work in commercial insurance in Germany? As lawyers, we are the wrong people to ask. Most of the insurance matters that reach our desks are precisely those in which matters have not proceeded smoothly. Our perspective is therefore inevitably skewed when it comes to assessing the overall quality of claims handling. Nevertheless, the cases we advise on provide valuable insight into the pitfalls that can arise in the handling of major commercial insurance claims and into the steps companies should take in their claims management processes to avoid disputes wherever possible. 

So where do the greatest areas of conflict currently lie in the German commercial insurance market? A look across our desks at some of the key problem areas in selected classes of commercial insurance. 

D&O Insurance 

Directors’ and officers’ liability insurance and the legal issues it raises are widely discussed in Germany. What tends to receive less attention is the fact that claims handling in D&O disputes is probably the most personal, and therefore the most emotional, area of commercial insurance. Executives who until recently were at the helm of a corporate group must suddenly devote their full attention to defending a claim that could ruin them personally. Decision-makers who worked together only yesterday may abruptly be required to bring one another into the proceedings. The handling of claims arising from directors’ and officers’ liability is a severe test for everyone involved. 

It is therefore unsurprising that, in many D&O matters, the option of assigning the manager’s insurance claims to the allegedly injured company is now at least discussed. Where the company would generally like to continue working with the manager, an assignment may offer a constructive solution and help preserve internal working relationships. 

Quite apart from this, conflicts with the insurer often arise at an early stage of a D&O claim. Insurers often resist the selected defence counsels or refuse to approve their hourly rates. For the insured manager, who understandably wants a professional defence of his or her personal assets, this may result in months of uncertainty. Many insureds are ultimately left to bear part of their defence costs themselves. 

Such delays place the manager facing a claim at a disadvantage. Another current problem in D&O claims handling is the “first come, first served” principle. If several board members or managing directors face claims at the same time, the insurer may allocate the available limit on that basis. This is generally highly unsatisfactory for most of the managers involved. There is often insufficient transparency as to how much of the limit remains available at any given time and to whom payments have already been made. The issue becomes even more acute where the D&O policy also reimburses criminal defence fees under its criminal-law cover. In such cases, the primary limit may be exhausted before the civil liability proceedings have even begun, as the Wirecard case illustrates. 

In addition to disputes over defence costs, insurers in D&O cases frequently argue that the manager knowingly breached his or her duties. Disputes concerning this defence account for a large proportion of coverage litigation in D&O matters. Current discussions about supposed “cardinal duties” of management add further fuel to the debate, although legal scholarship has fortunately imposed doctrinal limits on this misconceived standard allegation.[1] Developments in directors’ and officers’ liability will in any event remain worth watching. 

Cyber and Fidelity Losses 

In both cyber and fidelity claims, we regularly encounter disputes about an alleged failure by the policyholder to prevent the loss. Yet this is inherent in both classes of insurance: without a weakness in IT security, there would be no cyber loss, and without a weakness in compliance, there would be no fidelity loss. If such weaknesses could be ruled out entirely, both forms of insurance would be redundant. 

The allegation that the policyholder caused the insured event through gross negligence, due to inadequate IT security or compliance, can significantly delay claims handling. Encouragingly, more recent policy wordings often exclude this defence, an approach we have long advocated in relation to fidelity insurance.[2] 

Well-intentioned external reports designed to analyse the course of the loss and identify weaknesses in order to prevent future incidents may, during claims handling, provide ammunition for the insurer’s arguments. At best, however, investigating the cause of the loss can also assist the policyholder. Only such an investigation makes it possible to prove that the loss would have occurred even if the alleged deficiencies had not existed. 

Cyber claims also give rise to disputes as to whether the policyholder complied with all technical and organisational measures stipulated by the insurance contract. Another recurring issue is whether all questions asked by the insurer about the policyholder’s risk situation were answered correctly when the policy was placed and whether the questionnaire was signed by a person deemed to represent the company for insurance-law purposes. 

Claims handling in cyber insurance is further complicated by the relative youth of the insurance line. All parties lack experience; hackers’ methods change constantly; and new vulnerabilities and problems emerge almost weekly. This creates a particular challenge for policyholders, insurers and insurance brokers. Claims management can improve if all sides continue to learn. 

Product Liability 

Product liability claims give rise to a wide variety of disputes. Initially, the main focus is usually the defence of liability proceedings, in which the insurer and the insured manufacturer or distributor should ideally act in concert. Questions of recourse against third parties, such as component suppliers, also arise in this context and may delay the final resolution of the claim. 

Because of their technical complexity, product liability cases usually take years to resolve fully. Against that background, it is unsurprising that the longest-running matter in our claims practice is a product liability case in which, for more than 13 years, we have defended an insured company against a multimillion-euro claim on the instructions of its product liability insurer. 

One positive aspect for the insurer is that the courts have jurisdiction in Germany, even though the German courts have not exactly advanced the case expeditiously. Product liability cases in the United States typically generate defence costs many times higher. Substantial invoices from US law firms frequently strain the relationship between a German liability insurer and its policyholder, sometimes leading to disputes over whether the defence costs are reasonable. Similar disputes also arise under commercial criminal legal expenses insurance. 

Coverage disputes may also emerge during the defence phase of a product liability case. We regularly encounter reliance on the “testing exclusion”, with the insurer alleging that the product placed on the market had not been adequately tested. In the case of complex, bespoke products, the policyholder and insurer may disagree about what would have constituted sufficient testing according to the current state of science and technology. One example from our litigation practice involved a client that manufactured industrial coatings in numerous formulations. Different colour mixtures made an almost unlimited number of compositions conceivable. Did every composition require separate testing and, if so, to what extent? Questions of this kind can hardly be resolved between the parties without external technical expertise. 

Property and Engineering Insurance 

We continue to see the largest loss amounts in property and engineering (EAR) insurance, particularly under construction all-risks, erection all-risks, and traditional fire and business interruption policies. Burnt-down production facilities and delayed construction projects can quickly generate losses running into many millions, increasing with every passing day. This places enormous pressure on all parties. In addition to the policyholder and insurer, these often include further co-insured companies, especially under project insurance programmes. The principal challenge in managing major losses of this complexity is therefore constructive cooperation and negotiation among everyone involved. 

Alongside insurance coverage issues, extensive construction and installation projects also require consideration of potential liability implications between the project partners. If several insurers with differing views on critical coverage questions are involved, this may lead to further delays, sometimes lasting several years. 

In major property and business interruption claims, the detailed quantification of the loss is a particular source of conflict. The sheer number of cost items poses a challenge for claims handling. Insurers and policyholders regularly dispute which costs are covered and whether the expenditure was necessary and reasonable, for example where reinstatement proves significantly more expensive than expected. Unfortunately, even a jointly instructed expert determination procedure is no longer a guarantee of harmonious claims handling. 

As one might expect, property insurance claims may also involve disputes about alleged breaches of obligations. Broad clauses making cover conditional on compliance with all statutory and regulatory safety requirements regularly provide insurers with a gateway to reduce payments. Rebutting such general allegations consumes considerable time and resources for insured companies already burdened by a major loss. Even managers of companies that organise all technical and financial aspects of claims management well often underestimate the time and cost involved in the administrative and legal handling of the claim. 

Conclusion 

For reasons of space, the examples above can cover only a small part of the issues that may become contentious after a loss. The list of disputed insurance-law questions could be extended almost indefinitely, particularly where cross-border aspects arise or where the dispute intersects with other fields such as corporate, construction or criminal law. Insured companies are therefore well advised to obtain external advice from different disciplines, including engineering, finance and the relevant areas of law, at an early stage after a loss. 

Across all classes of insurance, two factors in particular can help prevent conflict: documentation and communication. Policyholders that comprehensively document their internal processes both before and after a loss, and make that documentation systematically retrievable, have a clear advantage. Good documentation can help rebut allegations of a breach of obligations, facilitate the quantification of the loss, and clarify what was insured, to what extent, and on the basis of which arrangements. 

Constructive communication is equally indispensable in avoiding misunderstandings between insurer and policyholder. It is especially important immediately after a loss, for example to coordinate loss-mitigation measures or agree a joint roadmap for swift claims handling. Even where disputes arise, the prompt and complete resolution of the claim should remain in the interests of all parties. 

This is an automatically generated translation of an article by Fabian Herdter that was first published in Die VersicherungsPraxis 6-2024, p. 3

References 

[1] Korch/Lüttringhaus, “Kardinalpflichten und D&O-Versicherung: Ein kardinales Missverständnis?”, VersR 2024, pp. 537–550. 

[2] Herdter/Winkler, “Kein Vertrauen in die Vertrauensschadenversicherung von Unternehmen: deckungsschädliche Einwendungen der Versicherer im Schadenfall”, BB 2016, p. 2056.