On 13 December 2018 the Celle Higher Regional Court ruled on a claim for cover against a liability insurer relating to a fire on a yacht that had also damaged other items.
An electrical defect had caused a fire on the plaintiff's yacht while it lay in a marina. Several other yachts and a car near the plaintiff's yacht were damaged. The plaintiff's liability insurer denied cover for all damages on the grounds that the assured was not liable for the damages. The plaintiff paid for the damage to the car and started proceedings against the insurer, claiming both confirmation of cover for the unsettled claims and indemnification for the sum paid to the car owner.
The regional court (first instance) dismissed the claim on the basis that the yacht owner had not acted negligently and was, therefore, not liable to the third parties. The higher regional court (appeal court) reversed this judgment and held that the liability insurer owed cover.
The court explained that, in general, a liability insurer can deny cover only on the basis of objections arising from the insurance contract, but not on the basis that the insured is allegedly not liable. If the insured settles a liability claim without the insurer's prior consent, the insurer is usually bound by the insured's acknowledgement of the liability claim only to the extent that the claim (by the third party against the insured, for liability) would have also existed without the acknowledgement. Under such circumstances, the liability aspect can also be verified and decided in the cover proceedings.
However, in this case, the insurer had unjustifiably denied cover and did thus not fulfil its legal defence obligation – one of the main obligations of liability insurers. Therefore, it could not invoke in the cover proceedings that the insured should not have settled the liability claim. Rather, in this case, the insurer had to compensate the insured for the settled liability claim irrespective of its justification.
The judgment confirms – and well illustrates – the so-called 'separation principle' applicable under German liability insurance law. The 'liability relationship' between the third party and the insured must be distinguished from the 'cover relationship' between the insured and its insurer. Further, cover does not necessarily mean payment to the third party, it can also mean proper defence against a third party's unjustified claims.
Liability insurers may learn from this judgment that careful consideration must be given to the reasons for which cover is denied; they could be forced to cover and indemnify for unjustified liability claims.
