Definition and Legal Classification of the Term Underwriter
The term Underwriter refers in German and international law as well as in finance to a person or company that assumes risks in exchange for payment of a premium and, in particular, operates in the placement of securities, insurance, as well as in the shipping and credit industries. The tasks and obligations of an underwriter are diverse and are detailed both by law and by contract. The following provides a comprehensive overview of the legal foundations, areas of responsibility, contractual structures, as well as the respective rights and obligations.
Historical Development of Underwriting
The origins of underwriting date back to the 17th century, particularly in the context of the London insurance market. The practice of “underwriting” arose from the need to allocate economic risks, for example in maritime trade, on a cooperative basis. To this day, this historical evolution forms the foundation of numerous legal regulations and business practices.
Legal Framework for Underwriters in Germany
Underwriting in Insurance
Legal Basis
In German law, the activities and functions of the underwriter in the insurance sector are primarily governed by the Insurance Contract Act (VVG) and the Insurance Supervision Act (VAG). As underwriters, insurance companies assume the risk of indemnity in exchange for the payment of insurance premiums.
Duties of the Underwriter in the Insurance Contract
An underwriter professionally assesses the risk to be insured and, based on this, decides on acceptance or rejection as well as the conditions of the insurance contract. Core duties include:
- Risk assessment: Careful review of application data and risk factors.
- Premium calculation: Adjustment of premium amount and contract terms to the risk situation.
- Assumption of liability: Assumption of contractual liability in the event of a claim.
Supervision and Regulation
Insurance underwriters are subject to government supervision by the Federal Financial Supervisory Authority (BaFin). Licensed insurance companies must meet strict requirements regarding solvency, risk management, and capital resources.
Underwriting in Securities Issuance
Legal Basis in Securities Business
On the capital market, underwriting primarily involves the assumption and placement of securities, particularly in the context of IPOs or capital increases. The legal basis is found, in particular, in the Securities Prospectus Act (WpPG), the Securities Trading Act (WpHG), and the Commercial Code (HGB).
Contractual Arrangement – Underwriting Agreement
In the so-called underwriting agreement, the underwriter (usually a bank or investment firm) undertakes to take over a specified number of securities either directly or on a “firm” basis and to place them on the capital market. The legal basis is an obligational contract, often referred to as an “issue agreement”.
Risks and Obligations
- Placement risk: If the underwriter bears the risk of not being able to sell all the securities on the market, this is referred to as a “firm commitment”.
- Guarantee commitment: The underwriter often guarantees a certain proceeds from the issuance.
- Liability: Includes breaches of disclosure, due diligence, or publication obligations (e.g., in the securities prospectus).
Prospectus liability
Prospectus liability of the underwriter is of essential importance. Faulty, incomplete or misleading information in the securities prospectus can result in extensive claims for damages (§§ 9 ff. WpPG).
International Underwriting and Relevant Regulations
European Legal Requirements
Companies with underwriting activities in the European internal market are subject to numerous regulations, primarily the provisions of the EU Prospectus Directive, Regulation (EU) No. 575/2013 (CRR) on prudential requirements for credit institutions, and the Solvency II Directive in the insurance sector.
Transnational Aspects
In cross-border cases, international agreements as well as private law standards apply, for example in the sector of Lloyd’s of London (insurance underwriting) or the provisions of the International Capital Market Association (ICMA) regarding securities issuance.
Types of Contracts and Legal Design Options
Underwriting Agreement (Übernahmevertrag)
The “Underwriting Agreement” is a contract under the law of obligations between the issuer and the underwriter. This agreement in particular includes terms on
- Scope of the assumption obligation,
- Extent of liability,
- Maturity regulations,
- Withdrawal rights,
- Duties of information and cooperation.
Consortium business
Often, several institutions act jointly as a consortium to accompany issues on the capital market. The consortium relationship and allocation of liability must be regulated precisely by contract. The legal basis is found mainly in the provisions on civil law partnerships (GbR) pursuant to §§ 705 ff. BGB as well as in commercial law provisions.
Tasks, Rights, and Duties of the Underwriter
Duties of care
Underwriters are subject to particularly high standards of due diligence in risk assessment, contract drafting, prospectus review, and when handling confidential information.
Disclosure and Information Obligations
As part of their responsibilities, underwriters are subject to extensive disclosure and information duties. This includes, in particular, the correct and timely provision of information to contracting parties and authorities concerning all risk-relevant aspects.
Liability
Legal consequences of breaches of duty can lead to far-reaching obligations to pay damages (e.g. §§ 280, 311 BGB, prospectus liability, product liability in insurance).
Summary Legal Assessment
The underwriter plays a central role in the insurance and financial sectors in both German and international law. The activity is shaped by a multitude of legal regulations, primarily in insurance, securities, corporate, and supervisory law. The contractual relationships are characterized by a complex web of liability, examination, and disclosure obligations, with prospectus liability in the securities business and risk assessment in insurance being particularly prominent.
In conclusion, the drafting and execution of underwriting agreements demands the utmost legal diligence and expertise in the relevant statutory, regulatory, and contractual provisions.
Sources:
- Insurance Contract Act (VVG)
- Insurance Supervision Act (VAG)
- Securities Prospectus Act (WpPG)
- Commercial Code (HGB)
- Civil Code (BGB)
- Regulation (EU) No. 575/2013
- EU Prospectus Directive
Frequently asked questions
Which legal regulations govern the activities of an underwriter?
The legal requirements for underwriters in Germany are set out in particular in the Insurance Contract Act (VVG), the Commercial Code (HGB), as well as special statutory provisions depending on the sector (e.g. Securities Trading Act – WpHG for capital market transactions). Underwriters must comply with supervisory requirements, in particular the German Banking Act (KWG) and insurance supervision under the Insurance Supervision Act (VAG), provided they operate in financial services or insurance. For international transactions, EU regulations, such as Solvency II in the insurance sector, and various directives (e.g. MiFID II in the securities sector) must also be observed. Additionally, there are obligations to prevent money laundering (Money Laundering Act, GwG) and comply with data protection requirements (GDPR). When drafting contract documents and policies, the Civil Code (BGB) as well as, in particular for standard terms, the law governing General Terms and Conditions (§§ 305 ff. BGB) are also decisive.
What liability risks do underwriters face from a legal perspective?
Underwriters face both civil law and supervisory liability risks. Civilly, they may be liable to insurers, clients, or other parties for advisory errors, misinformation, and breaches of contractual duty, as well as for pre-contractual damages (pre-contractual obligations, culpa in contrahendo). Typical liability cases are faulty risk assessment, failure to observe obligations, or exceeding underwriting authorities. From a supervisory perspective, violations of statutory requirements (e.g. reporting obligations, documentation duties) may result in fines or even revocation of the license. In the banking sector or in securities issuance, there are also sanctions under the WpHG or the Market Abuse Regulation (MAR).
What reporting obligations does an underwriter have towards authorities?
Underwriters are required to fulfill various statutory reporting and notification obligations. This includes, on the one hand, the obligation to report certain transactions and contract conclusions to the competent supervisory authority, such as BaFin for insurance companies. In cases of suspected money laundering, the obligation to report under the GwG applies irrespective of the sector. In addition, supervisory requirements may mandate ongoing reporting (e.g., under Solvency II reporting), transparency regarding large exposures, as well as ad-hoc notifications in capital market-relevant transactions. Breaches of these obligations can result in significant sanctions and supervisory measures.
To what extent do data protection regulations apply to the activities of underwriters?
The underwriting process requires the processing of large amounts of personal and sometimes particularly sensitive data (e.g. health data with life or health insurance). According to the General Data Protection Regulation (GDPR), such processing must have a clear legal basis (legal basis: contract fulfillment, legitimate interest, if necessary, consent for sensitive data). There are extensive information and documentation obligations towards the insured parties, and processing must be restricted to what is strictly necessary (principle of data minimization). Violations can result in significant fines, and careful monitoring and documentation of all processing activities is required.
Which specific breaches of duty may lead to withdrawal or contestation of the contract?
When reviewing applications, underwriters must carefully and completely ascertain the relevant circumstances. If this is done in violation of statutory requirements, such as by ignoring policyholder disclosure duties in accordance with §§ 19ff. VVG or by intentional or grossly negligent misjudgment of the risk, there is a risk that insurance companies may withdraw from or contest the contract. This applies especially in cases where pre-contractual disclosure obligations have been violated, false statements made, or risk-relevant circumstances have not been disclosed. Correct documentation of the review process is therefore essential.
Which regulations apply to cross-border underwriting activities?
In cross-border underwriting activities, private international law must be observed; as a rule, the applicable insurance contract law is determined in accordance with the Rome I Regulation. In addition, the relevant supervisory requirements of the countries of establishment must be considered—such as notification and licensing obligations for activities in other EU countries (“European Passport”) or compliance with national market standards. Data protection requirements also demand that a corresponding level of protection be ensured in the respective states involved. In cases of doubt, foreign law may apply in addition to, or instead of, German law and must be observed concurrently.
What is the significance of the documentation obligation in the underwriting process?
The documentation obligation is a central legal requirement because it serves as evidence in the event of a dispute, for audit security, and for meeting supervisory requirements. Under § 28 VVG and other industry-specific provisions, underwriters must record all information, decisions, and risk considerations relevant for review in a traceable manner. This includes both acceptance and rejection decisions, as well as any subsequent adjustments or special arrangements. Failure to comply with documentation obligations can result in the burden of proof shifting against the insurer or supervisory sanctions. In practice, a complete and properly maintained documentation system is therefore essential.
