Explanation of the term “Covered” in law
Covered is a term commonly used in German and international legal practice, describing various legal situations. Depending on the legal field, “Covered” refers to coverage or protection provided by specific regulations, contracts, or insurance policies. The exact meaning always depends on the respective context. Below, the most important areas of application and legal implications of the term are explained in detail.
Areas of application of the term “Covered”
Covered in contract law
In contract law, “Covered” generally refers to contractual protection of certain rights, obligations, and risks. This typically includes the following aspects:
Covered services
In many contracts, especially in insurance and licensing law, the term is used to specify which scope of services is protected (“covered”) by the agreement. An insurance contract, for example, may specifically regulate which damages are covered (e.g., “Theft is covered” = Diebstahl ist abgedeckt).
Liability issues
Contracts may regulate which risks and liabilities are assumed (“covered”) by a contracting party. Non-covered (“not covered”) matters are often subject to general liability law in the event of a claim.
Covered in insurance law
A key area of use for the term “Covered” is in insurance law. There, it describes the scope of insurance coverage.
Scope of coverage
The insurance contract defines which risks and claims are included (“covered risks”). This is essential for the legal assessment of claims to benefits. Only if a loss event is covered by the policy (“covered event”) does an entitlement to insurance benefits exist.
Coverage exclusions
Equally important in insurance law are coverage exclusions (“not covered events”). These exceptions determine for which situations no insurance obligation exists—such as in cases of intentional actions or gross negligence.
Covered in copyright and trademark law
In intellectual property protection, “Covered” often refers to the scope of protection rights or licenses.
License agreements
License agreements regularly specify which usage rights are “covered by the license,” meaning for which purposes or technologies licensed use is legally permitted.
Scope of protection rights
In the field of patents, “covered” means whether a particular product, process, or service is comprised within the scope of a patent. Only for “covered products” do prohibitory injunctions and claims for damages exist.
Legal implications of coverage (“Covered” status)
Enforcement and restriction of claims
Whether a claim is considered “covered” by a regulation, insurance contract, or protection right is often a point of dispute in court and out-of-court proceedings. The precise determination of coverage is decisive for
- the insurer’s obligation to pay,
- a party’s liability under contract,
- the prohibition of use under trademark or patent law.
Interpretation and contract drafting
Contract clauses regarding the “Covered” status are assessed according to principles of interpretation in the event of ambiguities. The parties’ intentions and the purpose of the contract must be determined. The scope of coverage should be clearly defined in the contract to avoid legal uncertainties.
Statutory regulations
In certain areas of law, there are statutory definitions for coverage by legal provisions, e.g., in health, liability, or social insurance. These determine which events or risks are “covered” by law and which must be regulated privately.
International relevance: Covered Agreement and Treaty
International agreements
In international law, the term is frequently used in the context of multilateral and bilateral agreements. “Covered agreement” or “covered treaty” refers to provisions or procedures expressly included within the scope of an agreement.
Examples in business law
Examples here include free trade agreements: Only measures classified as “covered measures” can be the subject of arbitration or dispute settlement proceedings. The definition of what is covered is thus central to the applicability and scope of international agreements.
Relevance in legal practice and dispute resolution
In numerous legal fields, the clear determination of whether a claim, loss, event, or measure is considered “covered” plays a decisive role in dispute resolution. Corresponding court and arbitration proceedings often concern the interpretation and applicability of the “Covered” status, as the decision can have far-reaching economic and legal consequences.
Conclusion
The term “Covered” is a central element of numerous areas of law, describing legal coverage provided by contracts, protection rights, insurance, or statutes. The precise definition of the scope of coverage and the distinction from non-covered cases is of utmost importance in practice to avoid legal disputes and uncertainty regarding performance or liability issues. Due to its wide range of applications, the term is regularly the subject of interpretation and jurisprudence.
Frequently asked questions
What legal prerequisites must be met for the conclusion of covered transactions?
For the conclusion of covered transactions—such as in the area of securities lending or covered purchase or short sale transactions—compliance with the relevant statutory provisions is essential. These mainly include the civil law provisions (BGB) regarding contract law, provisions of the Commercial Code (HGB) for market participants, as well as specific regulations of the Securities Trading Act (WpHG) and the European Market Infrastructure Regulation (EMIR). Conclusion of the contract must be established by offer and acceptance in accordance with §§ 145 ff. BGB. For financial instruments, reporting and disclosure obligations must be observed in accordance with WpHG. Moreover, specific statutory requirements—especially for covered bonds or secured transactions—require evidence of collateral, transparent disclosure, and proper documentation of the collateral provided. The parties must also prove their legal capacity as well as, where necessary, a license as a financial services institution (see Banking Act, KWG). If cross-border elements are involved, additional supervisory requirements from EU law, such as MiFID II, must also be complied with.
What role does collateral documentation play in covered transactions?
Collateral documentation provides the central legal basis for every covered transaction. It regulates in detail the type, extent, and modalities related to the provided collateral. All collateral agreements—such as mortgages, bonds, securities—and their legally compliant transfer according to §§ 398, 929, 931 BGB must be documented in writing. As part of due diligence, the legal requirements for the value, liquidity, and legal validity of the collateral are reviewed. It is also defined how and under what circumstances access to the collateral is permitted in the event of enforcement. Depending on the transaction type, additional provisions regarding insolvency safety, securing subordinated creditors, or the exclusion of rights of adjustment (such as withdrawal, contestation, or set-off) may be necessary. The collateral documents must be regularly updated and checked for new regulatory requirements.
What regulatory requirements exist for covered transactions under German law?
Covered transactions, for example covered bonds (Pfandbriefe) or securities lending, are subject to comprehensive regulatory requirements under German law. Central here are the Pfandbrief Act (PfandBG) for covered bonds and the Banking Act (KWG), which sets requirements for credit institutions and their capital requirements. In addition, the provisions of the Federal Financial Supervisory Authority (BaFin) must be respected, in particular guidelines on risk limitation, reporting obligations, and regulatory supervision. The European Covered Bond Directive, which has had direct effect since 2022, adds further qualitative requirements regarding cover assets, transparency, and investor protection. Institutions must regularly meet stress tests, valuation and disclosure requirements. Data protection provisions and compliance with the Anti-Money Laundering Act (GwG) to prevent financial crime must also be observed.
How is the insolvency protection of collateral in covered transactions regulated by law?
In the event of insolvency of the collateral provider, it is crucial whether the collateral is structured to be insolvency-proof. Under § 49 InsO (Insolvency Code), secured creditors—i.e., creditors with secured claims—have a preferential right to proceeds from the realization of insolvency assets. For covered bonds, the PfandBG specifically provides that cover assets must be separated from the issuer’s assets and transferred to a special asset pool. This special asset pool is available exclusively to covered bond holders. In other collateralization scenarios, trust solutions or security assignments must be structured in such a way that access by other creditors is excluded and that no insolvency avoidance rights can be asserted in accordance with §§ 129 ff. InsO. Contracts and collateral agreements must also be formulated to be insolvency-proof and concluded in due time before insolvency occurs.
What disclosure and information obligations exist in connection with covered transactions?
Issuers and counterparties of covered transactions are legally required to ensure comprehensive transparency. This includes, in particular, ongoing disclosure of the value of the collateral, the structure of the cover pool, as well as information about risk positions and any defaults. According to the PfandBG and the Covered Bond Directive, quarterly reports regarding the cover pool, liquidity situation, and risk development must be published. For securities lending, supplementary information obligations arise under EMIR and WpHG, such as the transmission of transaction data to trade repositories and supervisory authorities. Creditors also often receive periodic overviews on the development of the collateral pool and potential recourse options in the event of insolvency. Non-compliance with these transparency requirements can result in regulatory sanctions and civil liability risks.
What liability risks exist for contracting parties in covered transactions?
The contracting parties are, in principle, strictly liable for the proper collateralization of claims and for breaches of duty arising from the collateral agreement, including ancillary obligations (§§ 280 ff. BGB). Improper or incomplete collateral documentation may result in damage claims and claims for recourse. Regulatory provisions (PfandBG, KWG) also allow for administrative fines or loss of license if regulatory minimum standards are not met. For breaches of information obligations, creditors may claim reputational damages and losses from the issuer’s misconduct. Managing directors and executive board members of issuers are also personally liable if they breach their organizational and supervisory duties (§ 43 GmbHG, § 93 AktG). In cross-border transactions, further liability risks arise due to conflicting legal systems.
What tax aspects must be considered in covered transactions?
Covered transactions may entail significant tax consequences depending on their structure, especially in relation to income, capital gains, and transaction taxes. Under German tax law, for example, it must be assessed whether and how income from secured securities should be treated as income from capital assets (§ 20 EStG). The transfer of collateral may trigger real estate transfer tax (for real estate), VAT, or withholding tax obligations. In international transactions, double taxation treaties (DTT) may apply. The tax treatment further depends on the classification of the covered transaction (e.g., true or synthetic securities lending). Incorrect tax classification can lead to back payments, fines, or tax losses.
How are disputes arising from covered transactions legally resolved?
Disputes arising from covered transactions are generally settled by ordinary courts or—if contractually agreed—by arbitration tribunals. The jurisdiction and choice of law clauses as agreed upon in the collateral agreements are decisive. For covered bonds, industry-specific conciliation bodies also apply. In the event of a dispute, it must first be determined which party demonstrably failed to meet its contractual and statutory obligations. The provision of evidence—if necessary by expert opinion on the valuation of the collateral or compliance with regulatory requirements—plays a central role. Legal consequences range from damages to unwinding of the transaction. In cross-border cases, private international law (PIL) determines which law applies and which court has jurisdiction.
