Futile lawsuits in Germany: Legal expenses insurers 'may be entitled to damages'

Out-Law News | 21 Apr 2022 | 1:17 pm | 3 min. read

Following a ruling by Germany's Federal Supreme Court, experts expect a wave of recourse lawsuits by legal expenses insurers who have covered the costs of futile lawsuits and futile mass actions.

In September 2021, the Federal Supreme Court ruled that a lawyer must inform his client should the prospects of success deteriorate in the course of a legal dispute. This also applies if the client's legal expenses insurance has already agreed to cover the costs of the proceedings. A legal expenses insurance company that had assumed the costs for proceedings that had later become futile due to a decision of the highest court was awarded damages by the Federal Supreme Court for the costs it had incurred because the plaintiff's lawyers had continued the proceedings without informing their insured clients about the changed prospects.

Dorothea Müller, an expert on mass litigation at Pinsent Masons, expects a wave of lawsuits against the background of the ruling - triggered by the insurance companies, which could reclaim the costs of futile proceedings. "It is only a matter of time before the patience of the legal expenses insurers runs out and they start fighting back against the 'mass rather than class' mentality of the plaintiffs' representatives. In our daily work, we repeatedly experience examples of plaintiffs being advised neither comprehensively nor on a case-by-case basis."

In the case clarified by the Federal Supreme Court, a legal expenses insurance company had sued two lawyers for reimbursement of legal fees and court costs incurred. The lawyers had represented two policyholders of the legal expenses insurer in lawsuits against the broker of a real estate fund. In total, the lawyers filed about 1,750 lawsuits against the broker in June 2013. The legal expenses insurer agreed to bear the costs of its two policyholders. However, the Regional Court dismissed the claim due to the statute of limitations. On 12 June 2015, the lawyers filed an appeal and the insurance company again agreed to cover the costs. But six days after the appeal was filed, the Federal Supreme Court issued a ruling that established the requirements for an application for mediation proceedings which suspends the limitation period. The sample application for mediation proceedings which the lawyers had used did not meet these requirements.

In September 2016, the Court of Appeal advised the lawyers that the appeal was "manifestly unfounded". However, the lawyers did not advise the policyholders to withdraw the appeal. In November 2016, the court dismissed the appeal. Subsequently, the lawyers filed a motion for leave to appeal at the Federal Supreme Court on behalf of the policyholders. The legal expenses insurance also granted cover for these proceedings which were lost in May 2017.

The insurance company then took legal action through several court levels until it finally reclaimed the costs for the appeal proceedings and the motion for leave to appeal before the Federal Supreme Court. The Federal Supreme Court ruled the insurer had a right to compensation for the costs it had incurred after the publication of the landmark ruling dated 18 June 2015, as this was the point in time at which the lawyers should have informed their clients about the low prospects of success of the further proceedings.

The Federal Supreme Court clarified that lawyers are obliged to inform and advise their clients about the prospects of success of a case, including in respect of a change in the legal situation due to Supreme Court decisions handed down while the proceedings are in progress. In this context, it is irrelevant whether the client has a legal expenses insurance that covers the costs of the proceedings. If a legal dispute is hopeless, the lawyer must inform their client of this in clear manner and in a way that is understandable even to laypersons.

However, the Federal Supreme Court also clarified that a lawyer who has informed their client about the hopelessness of proceedings can nevertheless continue the proceedings if the client insists on it. The only decisive factor is that the lawyer has properly advised the client.

The court also clarified that lawyers would not always be obliged to reimburse costs if they failed to adequately inform their clients about the prospects of success of a case: The decisive factor is how the client would probably have behaved had they been informed about the prospects of success. In this context, it might well be of importance whether the client has a legal expenses insurance policy that has agreed to bear the costs of the proceedings, the court said, as clients are more willing to take risks in such cases. However, the Federal Supreme Court assumes that even clients covered by insurance would not pursue a completely hopeless case if their lawyer informed them correctly.

"The BGH makes it clear that plaintiffs' representatives must always advise their clients comprehensively and thoroughly and inform them if the prospects of success of proceedings change due to supreme court decisions. The fact that a legal expenses insurance company has granted coverage does not release it from this obligation, especially not in the case of objective hopelessness of the proceedings being conducted," Müller said.