The ‘nuts and bolts’ of D&O insurance in Germany

April 2017 | SPECIAL REPORT: MANAGING RISK

Financier Worldwide Magazine

Most multinational corporations have placed directors and officers (D&Os) liability insurance policies with worldwide cover in their home country. This can leave D&Os serving on supervisory and executive boards of subsidiary companies in Germany exposed. The following article explains why an additional and separate standalone local D&O insurance cover in Germany is highly recommended.

D&O claims handling in Germany

In an insured event, claims are processed and dealt with in German language and German law. Insurers based in Germany and their in-house claims department are highly experienced and familiar with the bespoke German legal system. To handle a German D&O claim’s case out of a foreign jurisdiction is very difficult because of the language barrier and the different legal systems. For the insured persons, a claims handling via a foreign D&O policy would have major drawbacks. A local German D&O policy provides comfort. Being personally sued can be crippling for individual directors or officers. Just the risk of lawsuits in Germany might cause qualified individuals to refuse to take director or officer positions, or it could motivate existing officers or directors to act with excessive caution in pursuing a corporation’s interests.

The limit of cover is reserved for local German management

It has to be borne in mind that – particularly in the framework of a corporate group structure – the insured limit needs to be shared between many insured persons. The equivalent wording in D&O insurance policies reads as follows: “Within one period of insurance, the insurer’s duty to provide indemnification is limited to the overall insured sum for each insured event and for all insured events in the aggregate”. For instance, the executive board members of a holding company in a foreign country can consume the entire limit of insurance cover with one single insured event. Should a managing director of a subsidiary company in Germany then commit a breach of duty within the same period of cover, this managing director can stand without any protection and, thus, may be totally exposed.

Broad definition insured persons in German D&O policy wordings

Compared to international standards, German D&O policy wordings protect a wide range of insured persons: insured persons are present, former (including those who have quit service before the inception of the policy) and future appointed and de facto members of the management bodies (including interim managers) and of the supervisory bodies, as well as managing limited partners and their representatives, permanent representatives (section 13e of the German Commercial Code), special representatives in accordance with sections 30 and 86 of the German Civil Code, members of the representative assembly (section 43a of the Act Concerning Industrial and Trading Cooperative Societies), authorised representatives and managers – for the definition of managers, the interpretation applies which is the most favourable to them in each individual case under employment law, shareholders and their representatives, employees and other employed persons – if a claim is made against them together with the insured persons referred to above, or in their capacity as authorised representatives for the compliance, data protection, money laundering, security or environmental division and comparable legally defined representative functions, liquidators of the policyholder and its subsidiary companies – as long as they are not working on the basis of an external contract for services or in insolvency proceedings.

Network of D&O – expert attorneys

The D&O insurer’s core benefit promise under the policy is to defend unjustified claims made against insured persons and to indemnify insured persons against justified claims. Executive board members and managing directors have a key and fundamental interest in keeping their clean reputation and fully clearing their name, spoiled by allegations of breach of duty, by successfully defending the claims. Therefore, the best possible defence is required. In order to succeed, the executive board members and managing directors should be able to appoint the best attorneys in the field of executive liability and D&O insurance. With regard to the quality of the D&O cover, it is crucial that the insurer actually pays the attorney bills of the top-class lawyers. Such specialist lawyers bill on hourly rates rather than on German statutory rules for the remuneration of lawyers. As a basic principle, the insured persons under D&O insurance policies do not have the free choice to select any lawyer they want. In order to ensure that the insured persons have access to the best lawyers, a good German D&O policy wording stipulates that prior consent and agreement with the insurer is not required with regard to the attorney selection and the attorney fee arrangement if the attorney is introduced to the insured person by way of a preselected expert attorney network.

Arbitration proceedings

The policyholder and the insured persons can avoid the publicity of a court proceeding (District Court up to the German Federal High Court) and media attention with adverse effect by referring the matter of executive liability to an arbitration court. It needs to be borne in mind that the proceedings before the public civil courts can last for many years and become a huge burden for the involved parties. Therefore, best quality D&O policy wordings stipulate that the insured person can request that the issues of executive liability are subject to an arbitration proceeding, should claims for financial losses be made. The court of arbitration should be assembled by expert lawyers from a highly professional network of corporate litigation attorneys. Even in complex matters of litigation, the timeframe for an arbitration proceeding should be significantly shorter than proceedings before the public civil courts.

Operational activities shall be insured

D&O policy wordings can contain hidden and invisible exclusions of cover. This applies in particular, for instance, in the area of operational activities of managing directors and executive board members. In the event a managing director ‘picks up a calculator and causes errors in calculation’ with a severe impact, the D&O insurer denies coverage by arguing that the D&O policy is only applicable for management decisions and the D&O insurance cover is not designed for failure in day-to-day business. Good D&O wordings expressly stipulate that operational activities are insured.

Cover in the event of set-off

Evermore frequently, it is noted that the policyholder declares that claims relating to employment contracts, claims which are directly connected to them, in particular relating to salaries and pension benefit (salary demand), and claims which arise from severance and termination contracts, are to be offset against liability claims which would be insured within the scope of the terms of the D&O policy. This can result in severe financial liquidity problems on the part of the insured persons. Therefore, good D&O policy wordings include provisions which enable continuing salary payments and assume severance payments.

Guarantee of continuity

At the time of placing the D&O policy, no insured person can know and trust whether the scope of insurance cover both with regard to terms and conditions and the limit of indemnity will still be in existence at some point in the future when a claim is actually made. In the event that the insurer – in the framework of annual D&O renewal negotiations – demands restrictions on the D&O policy wording terms and conditions, such as exclusions of cover for corruption and cartel behaviour, and the insurer may even at the same time reduce the limit of indemnity, then the restricted cover is applicable retroactively for breaches of duty in the past. High quality D&O wordings stipulate that old liability remains covered and that if the policy is continued with restrictions on its conditions or a reduced limit of indemnity, then, with regard to breaches of duty committed prior to the commencement of the amendment, the original scope of cover applies as agreed immediately prior to the restriction of cover and/or the reduction in the limit of indemnity.

Extended reporting period

The executive board members and managing directors have to keep in mind that they will be leaving the company – for whatever reason – at some time in the future. On the last day in office the executive board members and managing directors can still commit a breach of duty. Management liability claims for managing directors of a limited liability company and executive board members of a stock company become time-barred and lapse in five years. In the event the company is listed on the stock exchange, the claims lapse in 10 years. Claims made by financial institutions against their directors arising from the management service agreement or the position in the corporate board due to breach of duty also lapse in 10 years. Notably, the period of limitation begins once the financial loss caused by the breach of duty occurs. The D&O policy needs to be maintained and upheld or, in the event the policy is terminated, the extended reporting period in the D&O policy wording needs to be sufficient.

Claims advisory

Should the insured event occur, the policyholder, as well as the insured person, should have immediate access to a D&O claims specialist. As a result, the flawless and proper function of the D&O insurance cover will be safeguarded.

For the reasons outlined above, additional and separate local D&O insurance cover in Germany is better suited and recommended for corporate officers and directors of German subsidiary companies of large multinational corporations to mitigate risk and to seek protection, compared to a single worldwide D&O master cover policy placed by corporate headquarters outside Germany.

Dr Burkhard Fassbach is a lawyer at MRH Trowe and Dr Carsten Wettich is a partner at Berner Fleck Wettich. Dr Fassbach can be contacted on +49 152 5438 6727 or by email: fassbach@fassbach.de. Dr Wettich can be contacted on +49 211 2006 7816 or by email: wettich@bfw.law.

© Financier Worldwide

Dr Burkhard Fassbach

MRH Trowe

Dr Carsten Wettich

Berner Fleck Wettich

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