New Insurance Risks For Directors & Officers In Germany

Author:Mr Tyrone Childress, Jason B. Lissy and Ralf Ek
Profession:Jones Day
 
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The Situation: Claims brought by insolvency administrators under Section 64 of the German Limited Liability Companies Act are not only among the most common, but also the most financially significant, claims faced by the directors of distressed German companies.

The Development: In a landmark decision, the Higher Regional Court of Düsseldorf recently determined that claims brought under Section 64 of the GmbHG are not covered by insuring provisions found in many D&O insurance policies.

Looking Ahead: Commercial policyholders with German operations should proactively review and, if necessary, consider modifying their D&O insurance programs to guard against the risk of similar future rulings.

Claims brought by insolvency administrators under Section 64 of the German Limited Liability Companies Act (Gesetz betreffend die Gesellschaften mit beschränkter Haftung, "GmbHG") are among not only the most frequently asserted, but also the most financially significant, claims faced by the directors of distressed German companies.

Pursuant to Section 64 of the GmbHG, managing directors of limited liability companies are personally liable for any payments by the company after the onset of insolvency unless made with the "due care" of a prudent businessperson - a stringently applied standard that has proven difficult for German directors to satisfy. Analogous provisions apply to the management board of German stock corporations under Section 92(2) of the Stock Corporation Act (Aktiengesetz).

Yet, in a landmark decision that could significantly impact the insurance landscape for German insolvency proceedings, the Higher Regional Court of Düsseldorf (OLG Düsseldorf) recently held that claims brought under Section 64 of the GmbHG are not covered by insuring provisions commonly found in the insurance policies of many directors and officers ("D&O") (OLG Düsseldorf, Ref. I-4 U 93/16).

The Higher Regional Court of Düsseldorf's Decision

In the case in question, a managing director had sought indemnification from her D&O insurer for a €221,801.47 judgment in connection with Section 64 claims successfully brought against her by the company's insolvency administrator. In response, the D&O insurer denied coverage, maintaining, among other things, that the claim was barred by the policy's exclusion for "knowing and intentional" violations of the law.

In the ensuing insurance coverage proceeding, although determining that the D&O insurer had failed to establish that...

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