German D&O ruling means insurers still liable after insolvency

A recent ruling by Germany’s Federal Supreme Court, the Bundesgerichtshof (BGH), which overturned a decision made back in 2018, means directors and officers (D&O) in the country will still be able to claim on D&O policies even after their company becomes insolvent. The ruling is of particular interest currently because German insolvencies are expected to increase once the relaxation of insolvency rules introduced to help cope with the fallout of Covid-19 are relaxed. The downside for German risk and insurance managers is that this ruling will likely further stiffen the resolve of German D&O insurers to maintain the hardening terms and conditions offered in recent times following big losses. Cologne-based corporate law firm MTR Rechtsanwälte has issued a note that explains the good news provided by the judgment, which was originally issued at the end of last year. The law firm explained that a German managing director is personally liable for any payments they arrange after the company is already insolvent, with the insolvency administrator able to reclaim the relevant amounts from them. “This could threaten the managing director’s livelihood. The ruling in question by the BGH affords managing directors greater security by providing that the insurer must pay out on the D&O policy in such cases,” it confirmed. MTR explained that the duty of D&O insurers in the case of insolvency has been a contentious matter in Germany. In a judgment made on 20 June 2018, the Higher Regional Court of Düsseldorf ruled that the insurer was not liable for payments arranged by the insured managing director after the company became insolvent. “The court found that cases like this do not give rise to a liability claim for damages within the meaning of the terms and conditions of the insurance policy, but rather a claim for compensation sui generis [in a class by itself],” explained MTR. However, the good news for German managing directors is that the BGH took a different view. It ruled that the company’s right under section 64 of the German Limited Liability Companies Act to compensation for payments made after the company becomes insolvent, or its over-indebtedness is established, amounts to a liability claim for damages. “In the… case before the BGH, an insolvency administrator asserted claims against the insurer with whom the managing director had taken out a D&O insurance policy. The insurer did not wish to pay out, justifying this course of action with reference to the terms and conditions of the policy. This line of reasoning was not upheld by the BGH. The Karlsruhe judges held that the issue of whether or not the claims amounted to insured claims for damages was to be judged based on the perception of the average policyholder without specialist knowledge of insurance law,” explained MTR in its note. “The BGH went on to state that while the typical D&O policyholder is versed in business and familiar with general terms and conditions, their interpretation of the relevant clause and their understanding of the purpose behind the policy would lead them to view the rights arising from sentence one of section 64 GmbHG as an entitlement to claim damages within the meaning of the terms and conditions of the policy. The court noted that said individual would construe the clause as meaning that the insurance would cover any financial losses,” it added. The original Düsseldorf ruling unsurprisingly sent shockwaves through the German director community. Dr Bernd Meyer-Löwy, Carl Pickerill and Dr Josef Parzinger, of law firm Kirkland & Ellis International, explained at the time that the original decision could lead to big losses for directors without recourse to their D&O coverage.

German D&O ruling means insurers still liable after insolvency

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