Based on the legal liability situation, directors and officers insurance is an existential insurance for managers, supervisory board members, executives, companies, association boards and foundation bodies.
There are important points to consider when purchasing D&O insurance (Directors and Officers insurance), as in the event of a claim, the insured person is liable with all their private assets. The clauses and individual statutes must therefore be examined carefully, and the insurance cover tailored accordingly.
While a shareholder of a limited liability company in Germany (UG, GmbH) can largely stay out of the management of the GmbH, the managing director is the body of the company that is responsible for managing the business. In fulfilling this duty, the managing director must “exercise the diligence of a prudent businessman”, Section 43 (1) GmbHG (Limited Liability Company Act). In the event of a breach of these duties, the managing director is generally only liable to the company, § 43 Para. 2 GmbHG (Limited Liability Company Act). If the company has several managing directors, they are generally jointly responsible for the management of the company.
Even an internal allocation of responsibilities for the managing directors (departmental responsibility) does not in principle override the principle of joint responsibility of the managing directors but may in individual cases limit the liability of the individual managing director for damages in the department not assigned to him. According to the case law of the Federal Court of Justice, such an agreement on departmental responsibility can also be made verbally between the managing directors.
Furthermore, the managing director is also liable in accordance with § 64 GmbHG (Limited Liability Company Act) for all payments made after the occurrence of a reason for insolvency (inability to pay or over-indebtedness). This only does not apply if these are payments that are “compatible with the diligence of a prudent businessman” even after this point in time. As a rule, this is only the case for payments whose omission would lead to serious consequential damage even in the event of insolvency (e.g. turning off the electricity in a cold store with perishable goods, etc.). The liability of the managing director for payments made after the company has become insolvent may even apply (depending on the individual case) if overdue taxes and duties are paid or materials are purchased to continue the unprofitable business operations.
D&O insurance for foundation bodies and association board members
D&O insurance based on private foundation law, the German Civil Code (BGB) and the German Limited Liability Companies Act (GmbHG) is also important for associations and foundations. The heads of these legal entities (board members/executive committee members/managing directors, etc.) are also liable for errors within the scope of the duties incumbent upon them under the law/statutes/business regulations.
In association law, Section 31a of the German Civil Code (BGB), which came into force on October 1, 2009, has eased liability to a certain extent, but only with regard to liability towards the association and its members, provided that no fee of more than 500 € per year is received for the activity (not towards third parties) and unless the articles of association stipulate otherwise. According to general legal opinion, this also applies to foundations via Section 86 (1) BGB.
D&O internal liability: practical examples of claims
The managing director of a small mechanical engineering company had neglected to request a police clearance certificate when hiring a controller. The man, who had several criminal convictions, embezzled several €100,000. The D&O insurance paid compensation.
- Selling goods on credit without first checking the buyer’s liquidity
- Damage is caused because the person responsible for the decision failed to seek the advice of an expert for complicated contracts despite a lack of expertise
- Settling claims that are already time-barred or vice versa: allowing justified claims to expire
- Acquisition of unsuitable equipment (e.g. IT) due to insufficient inquiries
- Falling for an investment fraudster due to carelessness
D&O external liability: examples of claims in practice
Claims for damages against the company / managing director arise due to errors in dealing with the employee’s share of wage tax, errors in the advance VAT return or non-payment of social security contributions.
- Non-payment of taxes and duties
- Violations of capital maintenance obligations
- Violations of customs regulations
- Failure to file for insolvency in good time in the event of imminent insolvency: The managing director is personally liable for all payments made after the occurrence of insolvency or over-indebtedness
- Production of anti-competitive advertising material (infringement of competition or trademark rights)
- Fault upon conclusion of the contract, culpa in contrahendo
- Contractual liability, personal assumption of debt
- Violation of protective laws
- Liability in connection with subsidies
D&O insurance covers the following risks, among others:
- Financial losses in internal and external liability (internal liability = liability towards the company and shareholders, external liability = towards stakeholders)
- Insolvency
- Payment to heirs (for shareholders)
- Criminal law protection Cut-out cover
- Continued payment of salaries of insured persons
- Protection in the event of offsetting liability claims of the policyholder against claims of the insured persons under the employment contract (usually managing directors)
- Public relations costs in the event of damage to reputation affecting careers
- Costs for security deposits
- Claims in connection with the General Equal Treatment Act (AGG), also known colloquially as the Anti-Discrimination Act
Directors and officers insurance claim examples:
D&O claims example 1.
The board of directors decides to convert an “assisted living” residential unit into an indoor swimming pool. As a result, the swimming facility is not used by the senior citizens and the unit is converted back into “assisted living”. Loss amount due to the bad investment €50,000.
Cover in the form of defence cover.
The relevant question in claims handling is therefore liability. Did the Management Board act with the due care of a prudent and conscientious manager when making its decisions and can it prove this?
The claims handler has formulated this question as follows:
“In the course of managing the business, misjudgment to the extent that the limits within which entrepreneurial action based on a sense of responsibility, oriented exclusively towards the company’s welfare and based on careful determination of the basis for decision-making, were exceeded.”