Insurance law

Walter Reichard | Insurance law

One of the focuses of our insurance law practice is coverage issues for business liability insurance and for product liability insurance in particular with issues concerning the product liability model (especially terms and conditions and description of risks for product liability insurance of industrial and trading businesses).

1. In an insurance case involving standard terms and conditions for liability insurance (AHB)
the German Supreme Court in its decision dated 26 March 2014, IV ZR 422/12 noted that the definition of an insurable event in standard liability insurance terms and conditions (Allgemeine Versicherungsbedingungen für die Haftpflichtversicherung) was neither void nor unclear due to vagueness.

The German Supreme Court declined to review the scope of an insurable event as defined in the AHB. The Court noted that in promulgating the Insurance Contracting Act (VVG) the legislature consciously decided not to prescribe the procedure for defining a liability insurance event but rather left this to general principles of contract law. Thus, the definition of an insurable event belongs at the core of the description of contractual performance and for that reason it is not subject to the special judicial scrutiny otherwise applicable to standard terms and conditions (AGB) under § 307 of the German Civil Code.

In the specific case before the court, a sump pump seal installed by an oven manufacturer came loose and caused water damage.

According to the German Supreme Court, a damage event can only be one that is of a nature to trigger liability claims against the insured. Thus, according to the Court, this eliminates time of delivery and acceptance of built-to-order performance since delivery and acceptance itself did not cause any damage.

Neither did commencement of operational use trigger any claims. Not until the water escaped were compensatory damage claims asserted against the insured. An insurable damage event can only be one that is of a nature to trigger liability claims against the insured.

2. Insurable event under the extended product liability model
It is important to realize that under the German product liability model (i.e. in the special terms and conditions and descriptions of risk for product liability insurance of industrial and commercial companies) one must include one’s own definition of an insurable event related to the respective event description. Thus, an insurable event related to build-out and build in costs (replacement costs) occurs at the time of the build-in of defectively manufactured or delivered products and thus departs from the definition of an insurance event in the AHB.

3. Distinguishing between property and financial damages
Under §1.1 of the AHB damage events occurring during the validity of the insurance policy that e.g. have as a consequence physical damages or destruction fall within the scope of insurance coverage. False specifications related to the quality of one‘s own performance that merely lead to the manufactured item not operating as planned was not property damage that fell within the scope of business liability insurance. The manufacture of a defective item (product) is not a damage to property of this item (product). Liability for the cost of rebuilding a defective product (here: an oven) is a purely financial damage that, however, was not insured under §1.1 of the AHB (German standard terms and conditions for liability insurance), ruling of the German Supreme Court of September 29, 2004, file number IV ZR 162/02.