November 10th, 2011

Continental European Legislative and Judicial Trends: Federal Court of Justice of Germany Decision: Binding Effect of Liability Judgment for Coverage Proceedings

Posted at 1:00 AM ET

David Lewin, Managing Director
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Introduction

In German liability law, the injured party may bring a claim against the injuring party (the insured), but not against the injuring party’s liability insurer. Questions of liability and insurance coverage are handled separately. First, the liability judgment must include a determination of whether, and to what extent, the injuring party (the insured) is liable for causing the injury to the injured party. Once determined, this liability cannot be questioned in the court of the coverage proceedings. This is referred to as the “binding effect of the liability judgment for the coverage proceedings.”

Therefore, the injured party pursues a claim by bringing an action against the injuring party (the insured), initiating liability proceedings.” If there is a question of whether an insurer is obligated to provide coverage, the injuring party(the insured) separately brings an action against the insurer, initiating “coverage proceedings.”

Even though the injured party has no direct claim against the insurer, the injured party can be the claimant of the coverage proceedings against the insurer. This occurs if the injured party prevails in the liability proceedings, then seizes and collects the alleged coverage claim of the injuring party (the insured) against the insurer, and then files this coverage claim against the insurer. If the insurer is unsuccessful at the end of the coverage proceedings, the insurer must reimburse the injured party for the damage caused by the injuring party (the insured).

The question about the extent to which a liability judgment has a binding effect in coverage proceedings was the subject of a recent decision of the Federal Court of Justice of Germany (Bundesgerichtshof, High Court) (1).

Facts of the Case

Liability Proceedings

In the liability suit, the injuring party (the insured) was a former notary public who was contracted by the injured party, a German company. The liability court condemned the notary public to pay damages to the German company because he breached his contractual duties. He failed to deliver the German firm’s money in a timely fashion to a Spanish company. The liability court argued that the notary public was liable to pay damages pursuant to Section 280 German Civil Code. Liability pursuant to Section 280 German Civil Code requires a breach of duty, regardless of whether it is committed during performance of professional activities. By contrast, liability pursuant to Section 19 German Federal Act of Notaries Public (Notaries Public Act), on which the liability court did not base its decision, does require a breach of duty committed while notarial activity is being performed.

Coverage Proceedings

After prevailing in the liability proceedings, the German company seized the coverage claim of the notary public against his professional liability insurer and filed the coverage claim against the liability insurer.

The Appellate Court dismissed the German company’s case, arguing that delivering its money to the Spanish company was not part of the notarial activity of the notary public. Therefore, he did not breach his duty while exercising his professional activity in accordance with the underlying General Conditions for the Liability Insurance for Financial Losses (General Conditions). According to the General Conditions, the liability insurance only provided coverage for financial losses when they were due to a breach committed while professional activities were being performed.

The Appellate Court argued that, because the notary public was held liable in the liability judgment pursuant to Section 280 German Civil Code, which does not require the performance of professional activities, there was a binding effect for the coverage proceedings as to the fact that no professional activities were performed. If professional activity had been included in the judgment, the liability court would have held the notary public liable in accordance with Section 19 Public Notaries Act, rather than Section 280 German Civil Code.

The German company decided to appeal to the High Court.

Findings

The High Court found that there was a binding effect for the coverage proceedings as to the fact that the notary public had not delivered the money in time and, thereby, breached his fiduciary duty. As to the question of whether the insured had breached his duty while exercising his professional activities as a notary public, the High Court stated that the liability judgment had no binding effect for the coverage proceedings. In this regard, the High Court found that the question of professional activity was not decisive in the liability judgment.

The notary had breached his duty to deliver the money on time. Therefore, he was liable whether he was exercising his professional activity or not, and there was a breach of duty that was sufficient to condemn him.

The High Court found that the Appellate Court had misinterpreted the extent of the binding effect when the Appellate Court stated that it was determined in the liability judgment with binding effect for the coverage proceedings that the notary did not exercise a notarial activity when he failed to deliver the money on time.

Contrary to the opinion of the Appellate Court, the High Court held that the notary had breached his fiduciary duty while exercising his notarial activities. Therefore, there was a breach of duty while exercising professional activities, according to the General Conditions. Ultimately, the High Court set aside the judgment of the Appellate Court and remitted the case to the Appellate Court to examine the question of the notary’s intentional behavior.

Summary

The High Court’s actions helped clarify the “binding effect of the liability judgment for the coverage proceedings.” In this case, the liability judgment was only binding for the coverage proceedings in its determination that the notary did not deliver the money in time, thereby breaching his contractual fiduciary duty. The liability judgment had no binding effect for the coverage proceedings concerning whether the notary breached his duty while exercising professional activities. There was no binding effect because the question of exercising professional activity was not decisive in the liability judgment. Only facts that are decisive for both the liability judgment and coverage¬† proceedings can have a binding effect for the coverage proceedings.

Note:

1. Federal Court of Justice of Germany, December 8, 2010 - IV ZR 211/07

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