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Information obligations of lawyers: German Federal Court of Justice ends decades of discussion about direct claims of legal expenses insurance

In its ruling of February 13, 2020, the Federal Court of Justice (BGH, file no. IX ZR 90/19) confirmed a ruling of the Berlin Regional Court (file no. 5 S 22/18) that PASCHEN Rechtsanwälte had won. According to this ruling, legal protection insurers have the right to information from the lawyer who represented their policyholder, as far as questions of costs are concerned. Therefore they do not need to solely rely on the information provided by their policyholder. This means that a long and controversial question discussed between lawyers and legal expenses insurers has finally been decided by the highest court.

The starting position

The triangular relationship between policyholder/client, lawyer and insurer is usually a well-rehearsed cooperation. The lawyer as a legal professional typically also takes care of the communication with the legal protection insurance company of the client he represents. This regularly works smoothly. However, difficulties may arise if this approach conflicts with the lawyer’s interests. This can occur in particular if something has gone wrong with the cost-related handling. The legal expenses insurer, who has usually made advance payments in respect of all procedural costs, has an understandable interest in finding out what has become of the case. Was the lawyer successful? Was a claim for reimbursement of costs pursued? Is the lawyer up to date in this respect with their own settlement?

As much as lawyers appreciate being able to conduct a large number of proceedings with a solvent “cost debtor” through the existence of legal expenses insurance, who is liable for their fees even if the prospects of success are manageable or the opponent is clearly not efficient, they occasionally show little enthusiasm when it comes to representing the economic interests of the financier.

Own contractual claim of the insurer

For about 40 years, the question has been controversial whether the insurance company in this situation has its own claim against the lawyer for information about the costs of handling the mandate, or whether the lawyer may refer to his client as a contractual partner of the insurer in this respect. In a judgment of 15 January 1980 (file no. 4 U 48/79), the Düsseldorf Higher Regional Court (OLG) made the following statement:

A lawyer who, on the express instructions of his client, applies to his legal expenses insurer for cover and payment of advances on costs and in this way, independently and without the participation of his client, receives advance payments for his fees and court costs, is obliged to provide the legal expenses insurer with information on the costs of the proceedings.”

The OLG argued that the policyholder instructed the lawyer to cover the costs out of the interest of not being burdened with the costs of handling the matter. The prerogative of the lawyer was to receive payments of fees and advance requests quickly. Thus, the provision of information – owed by the policyholder according to the insurance conditions – about the cost-related settlement by the lawyer would mean “a detour in terms of work”, as the lawyer already had all the necessary information.

In this situation of interest, the order of the policyholder to the lawyer to also obtain cost coverage is to be understood in such a way that it includes the tacit conclusion of a contract in favour of the insurer within the meaning of § 328, Subsection 1, of the German Civil Code (BGB). The latter would then entitle the insurer itself to demand information from the lawyer about the cost-related settlement.

Although the lawyer’s duty of confidentiality also applies to this information, the lawyer would regularly be tacitly released by his client, the policyholder, from this duty of confidentiality with the order to obtain the cost coverage commitment.

The OLG Düsseldorf drew the limit of this claim with the question whether the policyholder had incurred claims for reimbursement of costs which the insurer could be entitled to as a result of the advance payment. According to the Higher Regional Court this was legal advice which the insurer could not demand from the policyholder and thus also not from his lawyer.

Claims resulting from the transfer of rights

In a judgment of 9 November 1998 (file no. 31 U 4403/98), the Higher Regional Court of Munich took a different approach: It adopted the reasoning of the lower court (Munich Regional Court I, judgment of 2 June 1998 on file no. 34 O 1997/98) and argued that the insurer would become the owner of the claims for reimbursement of costs, possible claims for reimbursement of unused court costs and, in particular, possible claims for reimbursement against the lawyer as a result of statutory subrogation per § 67 of the Insurance Contract Act (VVG) old version (new: § 86 para. 1 VVG). This means that the final account must also be made to the insurer. The problem of the duty of confidentiality was not discussed in this context.

Rejection by numerous courts of first instance

The Bonn Local Court (AG) expressly opposed the insurance company’s own right to information (judgment of 8 November 2006, file no.: 13 C 607/05):

According to this judgment, a lawyer would violate their obligation of secrecy according to § 43a para. 2 sentence 1 of the German Federal ‘Lawyers’ Act (BRAO) if they provided information regarding overpaid amounts after the cover note had been issued and the legal expenses insurer had been taken over by another company. The regional court considered the statutory transfer of claims pursuant to § 67 VVG (old version), § 86 para. 1 VVG (new version) as well as the resulting transfer of the right to information pursuant to §§ 402, 412 BGB (German Civil Code), to which the policyholder was previously entitled to from their lawyer, to be given. However, the court was of the opinion that the obligation of secrecy, as a more specific provision nevertheless prevented the lawyer from providing information and even from paying out collected amounts directly to the insurer. In other words, according to this view, the insurer became the owner of the right to information but was unable to enforce it because of the lawyer’s contrary obligation of secrecy. The idea of an implied release from the duty of confidentiality by requesting the handling of the communication in connection with the request for cost coverage was not discussed here.

This view has been taken up by various other courts of first instance and even bar associations (AG Aachen, judgment of 1 April 2010, Case No 112 C 182/09; AG Frankfurt am Main, judgment of 16 October 2012, Case No 30 C 1926/12; AG Brandenburg an der Havel, judgment of 14 August 2015, Case No 35 C 26/15; decision of the Board of the Cologne Bar Association of 7 November 2015, Kammerforum 1/2016, p. 3).

This case law, however, failed to recognise that the lawyer will, of necessity, regularly disclose information from the client/lawyer relationship already with the request for cost coverage, so that the duty of confidentiality is already limited at this point. It also presented lawyers with the dilemma of having to pay out third-party funds to the beneficiary without delay (§ 4.2 sentence 1 BORA) – whereby in this case this could only be the insurer – but at the same time to disclose information on the course of the mandate with the payment (see AG Bonn, loc. cit.), which was allegedly subject to the duty of confidentiality.

The view of the BGH

Against this background, the Federal Court of Justice (BGH) now had to decide in its ruling of 13 February 2020 (Ref.: IX ZR 90/19) on the request for information of a legal expenses insurer addressed directly to the lawyer of an insured party. Here, the lawyer had made the request for cost coverage, requested and received cost advances. In addition, they had repaid part of the advance costs to the insurer without further explanation.

In the proceedings conducted by members of the PASCHEN insurance team, the lower courts followed the path of the Munich Higher Regional Court and confirmed the existence of the insurer’s right to information from the lawyer as a result of the statutory subrogation of claims pursuant to § 86 para. 1 VVG. With regard to the obligation of secrecy, they decided that the lawyer had already been released from the obligation of secrecy by the policyholder by implication with the request for a cost coverage inquiry with regard to cost issues vis-à-vis the insurer (LG Berlin, judgment of the AZ.: 5 S 22/18).

The IX Civil Senate of the Federal Court of Justice agreed with this result. The BGH also assumed that the insurer had a claim arising from the statutory transfer of claims pursuant to § 86 (1) VVG in conjunction with § 86 (1) VVG. §§ Sections 401, 412 BGB analogously in conjunction with §§ 675, 666 BGB.

The court first stated that legal expenses insurance is non-life insurance to which the provisions of Section 86(1) of the VVG apply. The resulting statutory transfer of claims also covered claims that had only been created but had not yet fully arisen. This also applies to the policyholder’s claim for reimbursement of costs against the opposing party, which, according to the merits of the case, already arose when the action was filed but is subject to a decision on costs being issued.

By advancing the costs of legal proceedings, the plaintiff had “compensated the policyholder for the damage” within the meaning of § 86, Subsection 1, VVG, so that the claim for reimbursement of costs, which had arisen with the filing of the action subject to a condition precedent, had already been transferred to the insurer when payment was made.

In this context, the Federal Court of Justice also states that the claim for reimbursement of costs against the policyholder’s opposing party to the proceedings is transformed into a claim for restitution of the proceeds per Section 667 of the BGB against the policyholder’s lawyer if and to the extent that the opposing party to the proceedings reimburses costs to the latter. As a rule, the insurer must accept this payment against itself in accordance with § 407 BGB, since the opposing party of the policyholder will usually have no knowledge of the existence of the legal protection insurance.

The transfer of the claim for restitution in accordance with § 667 of the German Civil Code (BGB), which was transferred to the insurer upon payment by the opponent of the financed lawsuit, was followed by the original claims of the policyholder to information per § 666 of the BGB in the corresponding application of §§ 412,401 BGB. Since these auxiliary rights are not expressly named in § 401 BGB, but the interests are the same, § 401 BGB is also applicable to auxiliary rights such as claims for information, which are necessary to enforce the claim.

Concerning the scope of the right to information, the decision expressly clarifies at this point that this does not only include the amounts already paid out by the lawyer, but in particular, also amounts already received but not yet settled. The insurer is also entitled to know whether any further reimbursement payments have been obtained from the lawyer.

Finally, the BGH clearly states that the attorney’s duty of confidentiality does not prevent the enforcement of the right to information. Although this information – like any information obtained from the client – is in principle also covered by the duty of confidentiality, the lawyer is, however, impliedly released from the duty of confidentiality by the policyholder when he issues the order to request cost coverage.

Our conclusion

The decision of the BGH is to be approved without reservation. With the systematically well-established derivation that the right to information follows the legal transfer of the claims for compensation in accordance with § 86 (1) VVG, the BGH creates urgently needed legal certainty. This could not be achieved to the same extent as the tacit contract in favour of third parties assumed by the Düsseldorf Higher Regional Court because – in contrast to the legal transfer of claims – residual uncertainties always remain when interpreting the will of the policyholder at the moment of conclusion of the contract.

The BGH also clarifies the scope of the right to information. This refers to all information required to assert or enforce the claims of the policyholder against their lawyer which have been transferred to the insurer. In doing so, the judges expressly clarify that this right to information also includes the question of the accrual of claims for reimbursement of costs. This was denied by the OLG Düsseldorf at the time of judgment.

The decision of the BGH also correctly confirms the findings of the OLG Düsseldorf with regard to the interests of the parties involved: The granting of the legal expenses insurer’s right to information directly to the lawyer avoids unnecessary “additional workload” and the sources of error that inevitably arise when the policyholder is interposed, such as lack of expertise or any misunderstandings that may arise from this. This decision also is in line with the policyholder’s interests, the question of costs being taken care of.

Finally, the decision also means long-overdue legal certainty for the legal profession on this matter. Affected attorneys can now fulfil their obligation in good conscience to pay out to the insurer claims for reimbursement of costs realised by the opponent and to provide information on the cost-related settlement without having to fear that they will come into conflict with their duty of confidentiality. The clarification that the request for obtaining the confirmation of cover also includes the tacit release from the obligation of secrecy also eliminates the need for documentation in this regard.