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Risk Coverage for Businesses in Germany

The purpose of this article is to make the reader who is either considering setting up a company in Germany or is reviewing existing company insurance policies aware of some key points to watch out for as far as risk management is concerned. In some cases, as will be shown, company owners and their boards and managers may be faced with risks to their personal wealth and income as a result of claims made against them in their professional capacity.

The aim is to sharpen awareness for issues that may be handled quite differently in your country of origin. In view of the complexity of the market and the varying demands of the customer relating to specific company needs this article can be no more than a selective overview and is by no means exhaustive.

Let's start with an example: Most company owners and managers are aware that asset protection insurance usually covers loss and destruction of office and factory equipment and machines, as well as finished goods and raw materials as a result of fire, water damage, theft or storm. About 78% of companies have this kind of cover in Germany. (All statistics are taken from YouGov Psychonomics survey 2010)

The broad heading "asset protection" says nothing, however, about the multitude of clauses and other aspects of a contract that can mean the difference between adequate cover and an existentially threatening lack of it. For example this kind of insurance can be extended to damage caused by flooding, power surges, strikes, rioting and even "undefined risks".

Compensating loss of equipment is one issue. Another is coping with running costs that still mount up even though the factory is burnt out. Just because a workforce is unable to continue production after a fire or serious flooding has destroyed the plant does not entitle the German employer to terminate job contracts. At the same time the company frequently loses its credit worthiness that makes it difficult to get a loan to bridge a total or partial loss of production capacity. This is a shortfall that is seriously neglected by many companies.

71% of companies in which production has been stopped for a significant period, especially as a result of fire, are insolvent within two years after the event. Stand-alone or integrated insurance packages to cover business interruption and loss of profit are the answer here. Only about 48% of all companies have the necessary insurance cover.

By the way, it is also possible to take out cover in the event that one of your key suppliers is the victim of a disaster of this kind and your company is unable to carry on production as a result.

By contrast 95 % of companies have liability insurance. This, as you are probably aware, aims to protect the company against claims for injuries to third parties and damage to their property as well as against the costs of subsequent financial losses.

Liability for harm caused by one's own products seems straightforward and reasonable. But often the reasons for a claim are far from clear-cut. And the onus is on the manufacturer to prove that his product is not harmful as a result of inadequate design, construction, manufacturing, quality control or even unclear instruction manuals.

Even trickier is the fact that EU legislation also stipulates that if parts and finished products are imported from countries outside Europe the company doing so is deemed responsible for any harm caused by defects or dangerous properties.

Let's say your company sells adapters for electrical equipment and imports parts from a supplier in the Far East. Because of a defect five months after purchase an adapter damages a customer's electrical appliance. It is up to you to prove that at the time of sale the adapter was in perfect working order and that the damage had another cause, for example the customer used it for an excessively long stretch at a time. Tricky!

Product liability and recall insurance can compensate this. And remember liability cover works as a passive legal insurance. If the claim is not justified the insurance company will cover the costs of combating it - in court if necessary.

However, you may not be aware that company liability also extends to responsibility for damage to the environment. Here individuals or other companies cannot directly claim for compensation. Instead it is the responsibility of local authorities, often acting on the initiative of an environmental pressure group or following up on accusations by private individuals, to make a claim.

Germany has some 5,000 nature reserves and there are 300 protected species of plants and animals. This means that by far the majority of companies are less than 10 km from a protected area.

The consequences of a claim in this context can be far-reaching for the company affected. An example: During careless use of a forklift truck an employee damaged a tank containing chemicals. These leaked in to the ground, reached the water table  and also ended up in a nearby stream seriously decimating a fish population.

As a result the company was ordered to replace the soil and the bed of the stream and pay for its repopulation with fish. The costs were immense.

68% of companies have legal insurance. However, in many cases this does not extend to protection in the case of public prosecution. Prosecution is not directed at the company but at the owners, the board and management - personally! The incalculable risks for an employer becomes apparent when you consider that  he or she  is responsible for ensuring that staff comply with legal stipulations at all times.

A simple example is that staff driving on job-related tasks have to have a current driving license. The loss of a license because of traffic violations in a private context such as drunk driving can occur at any time so it is theoretically necessary for the management to check licenses daily. In practice this is hardly ever done. However, in the event that a staff member is caught driving without a license - usually as the result of an accident - this can have serious repercussions for the employer.

The owners of companies and their managers are usually conscientious law-abiding individuals and they take considerable efforts to comply with regulations. But despite any amount of care, the sheer volume of rules and regulations coupled with a foreign legal culture in Germany can lead to very nasty surprises.

Can you honestly say you are aware of all the EU and German regulations connected with health and safety at work? In the event that a member of your staff is injured or, worse still, killed in the course of his duties you can expect a visit from the public prosecutor.

Management is held responsible for safety issues and if negligence is suspected this can have serious legal consequences. Not the company but the individual manager, board member or owner can - if found guilty - face fines to be paid from personal income. In the worst instance a prison sentence may be imposed!!

Failure to register insolvency in a timely way, bribery, tax fraud, patent infringements - to name but a few examples - can all lead to criminal proceedings. Worse still, an initial accusation (often from a recently fired employee, a dissatisfied customer or an ex-spouse)  is sufficient to set proceedings in motion. Stopping them can result in extremely high legal costs that represent an existential threat in themselves - even if at the end of the day the case is dropped. In such situations it is essential to ensure that cover is provided by the company's legal insurance policy.

Increasingly business - and shareholders - claim compensation from their managers and board members for mistakes and omissions that have lead to serious financial loss for the company. Failure to adequately supervise or recruit staff, comply with tax and social security legislation and errors of judgment in connection with expenditure are just a few examples where personal wealth of those accused is seriously at risk. This is a case where a D&O policy can offer protection.

As stated above, the points raised here can only provide a glimpse of some issues worth looking at when assessing company risks in the German market. In order to avoid unforeseen risks in a foreign environment is advisable to seek the advice of a qualified local insurance specialist. The time invested will be repaid many times over in the event of a serious claim!

Contributed by Graham Waters
Internet: www.waters-allianz.de
Email:graham.waters@allianz.de