A guide to Risk Coverage for Businesses in Germany

If you are thinking about setting up a company in Germany, or looking at insurance policies for an existing company, then there are a number of key points to consider as part of good risk management.‍

There are significant potential penalties to getting this wrong. In certain situations, company owners, managers and Boards can find that their own income and personal assets are put at risk if they are named in claims made against the company or themselves individually in a professional capacity.

For this reason, it is essential to have a good awareness of the specific issues for risk management and the laws that relate to them in Germany. The market can be complex, and it is important to seek professional help on in-depth issues to ensure the company is sufficiently protected - as well as the people running it.

An initial example: asset protection insurance

Most owners and managers of a company know that an asset protection insurance policy will typically cover any losses relating to the destruction of office or factory equipment, machinery, stock, raw materials and finished goods in any instances of theft, water damage, storms or fire. Around 78pc of firms will have a risk coverage for business in Germany policy that provides this level of cover (source: YouGove Psychonomics Survey, 2010.)

But this is where risk lies, because to describe something as providing 'asset protection' does not encompass the contractual clauses and particulars that can mean a world of difference between usable, sufficient cover - and a level of perceived cover so low that it actually provides very little in reality.

As an example, this type of protection insurance can in theory be heightened to include damage from power surges, flooding, rioting, strikes and even risks that are unspecified for the purpose of the insurance policy. Loss of equipment compensation is an issue. A second is dealing with ongoing running costs that would still rack up if you owned a factory and it was gutted by a fire, for example.

Remember, if serious flooding, a fire or a storm causes damage that prevents your workforce from operating - the law in Germany does not automatically allow the employer to terminate their employee contracts.

However, it will be dealing with associated issues such as a loss of credit worthiness, which makes bridging loans difficult to come by to financially cover a loss of production capacity. This can result in a serious financial shortfall and is a situation that is typically and routinely ignored by the majority of companies.

The post-disaster reality

In instances where firms have been obliged to cease production following a disaster at the premises, 71pc end up insolvent within just two years. This is particularly the case where fire has taken place at the premises. This situation can be prevented where integrated or standalone business protection policies designed to cover loss of profit and business interruption are in place. However, less than half of all German firms have this type of cover in place.

Note too that it is also possible to have risk coverage for businesses that extends to the same kinds of incident occurring with your key suppliers, and in the instant that your firm is affected negatively as a knock on result of their own production stoppages.

Contrasting situations - liability insurance

At the other end of the scale however, around 95pc of German companies do have sufficient liability insurance in place, designed to protect the company against any third party injury claims and property damage claims, as well as provide protection against any resulting financial losses that may occur following such claims.

But what does this actually translate to in practice? It is relatively straightforward and simple in appearance to assess harm liability for products that one's own company has produced. But in reality, the reasons behind a lawsuit are often varied and ambiguous - and in Germany, the manufacturer is obliged to produce the evidence that shows his product cannot cause harm as the result of poor construction, manufacture, bad design, lack of quality control or even poorly written instruction manuals.

The situation is made even more complex by European Union regulations which state that if finished products or parts have been imported from outside of the EU, then the importing company becomes directly responsible for any damage or harm caused by dangerous or defective resulting products.

An example in practice

Let's see how this might look in a case study. If, for example, your firm sold electrical adaptors, and imported component parts from a supplier located in India. And let's say that a defect occurred on one of your products after five months of use, and damaged the customer's appliance. As the company selling the product, the ons is on you to evidence that the adaptor was in complete working order at the time of sale, and that the damage was actually caused by an unrelated cause, such as the customer failing to follow user instructions and use it for longer periods of time than recommended. You can see how incredibly difficult this burden of proof can be!

However, you can avoid this situation in Germany by having adequate recall and product liability insurance as a safeguard. Liability cover of course also works as a form of passive legal insurance. If a claim cannot be justified, then the costs of covering and fighting it will be covered by the insurance company, and extend to court costs as necessary.

Environmental factors

However, many German company owners fail to realise that their corporate liability also incorporates environmental damage. In this instance, other corporations or individuals are unable to claim directly for any compensation - but local authorities, often following up on complaints lodged by individuals or green pressure groups - do have the right to lodge a claim. There is no doubt that the country takes its environmental credentials seriously - with over 300 protected animal and plant species and 5,000 protected nature preserves. This means that the vast majority of Germany's corporations are located ten kilometres away from a natural reserve area, and at risk of such claims. The repercussions can be far reaching. One example concerns a corporation employee who used a forklift truck without due care during the course of their employment, and damaged a chemical holding tank. This resulted in a leak which affected the water table and killed a local fish population.

The company was ordered to pay for a complete bed and soil replacement and to ensure the area was fully repopulated - and the costs were huge. The implications for insurance are sobering. Yes, 68pc of German corporations will have legal insurance in place - but the vast majority of these policies do not include costs associated with public prosecution. Furthermore, for environmental claims, the prosecution is directed personally towards the company owners, management and board - not the corporation itself. This can lead to huge risks for individual employers, who are essentially legally responsible for their employee's actions on the job at all times.

Let's take a look at another example. Staff operating cars on the job must have a valid driver's license. Of course, that license can be lost out of work at any time - say because of traffic violations such as speeding or a DUI charge. In theory therefore, the employer is obliged to check every licence daily. In practice of course, this could be argued as unworkable. However, the law is clear; if that staff member is caught driving on the job without a valid licence, the employer will be held liable.

The vast majority of corporation owners and managers may well be law-abiding, conscientious and highly ethical individuals who work extremely hard to follow Germany's letter of the law - but even with extreme care, the sheer complexity and volume of regulations and rules, combined with an unfamiliar legal culture for foreign owners, can result in a nasty surprise.

Health and Safety

As a potential business owner in Germany, could you say for example that you were fully up to speed with every regulation involved with German health and safety - and EU regulations on the same topic? Be mindful that if one of your employees were hurt or killed in the course of their work, the public prosecutor would get involved.

Managers and owners are held directly responsible for workplace safety in Germany, and suspected negligence will also result in court action. Furthermore, if found guilty, it will be the prosecuted individual that will be obliged to pay fines from his or her personal assets - and prison sentences can even be imposed.

Insolvency cases and other risk cases

Criminal proceedings may also be lodged against owners, managers and boards that fail to register bribery infringements, patents, tax fraud and insolvency. Even more worryingly, an accusation may be lodged from an unhappy former employee, disgruntled customer or even former spouse - and the wheels of legal proceedings will be set in motion. Attempting to stop the process can result in extremely high costs that represent a severe business threat in their own right, even if the case is subsequently dropped. In these situations, an adequate legal insurance policy is absolutely essential to provide the right level of cover.

Increasingly, shareholders and business in Germany claims compensation directly from individual owners, board members and managers for any omissions or errors that later lead to corporate financial loss. All failures relating to the correct recruitment and supervision of staff, following of social security and tax law, and any errors relating to corporate expenditure are just some areas where those accused on an individual can find their own personal assets at risk of being forfeited. Again however, a comprehensive D&O policy can provide effective protection.

Getting the right help

These points above do provide a broad insight into the types of issues that investors should look at when weighing up the possibility of direct investment in the German business market. In order to protect oneself against the risks of operating in an unfamiliar business context in Germany, it makes sense to use the services of a local and appropriately qualified insurance specialist with particular expertise in the corporate field. The investment will be paid over many times if a claim were ever to be lodged, and potentially save the investor's individual assets in the process!