Fortunate times for D&O insurers? German Court rules on fundamental duty breaches

Quick read

D&O insurance policies regularly contain clauses that exclude D&O insurers' liability for paying compensation for breaches of duty committed knowingly by directors. The court has recently considered the requirements for D&O insurers to prove that the managing director was aware of his breach of duty.

Decision

The Higher Regional Court of Frankfurt am Main specified that an insurer must present the facts that merely suggest a knowingly committed breach of duty. No additional presentation of facts is necessary if the breach of a 'fundamental duty' is obvious.

The court held that both the breach of the obligation to file for insolvency and inadequate monitoring of the company’s liquidity constituted such a 'fundamental' breach of duty. It also found that a breach of the prohibition on payments is usually caused by a breach of the obligation to file for insolvency.

The court concluded that evidence indicating a breach of any of these fundamental obligations indicates a deliberate breach of the other obligations.

Key takeaways

The ruling is likely to lead to a reduction in the burden of proof for D&O insurers. The insurer must merely argue that the obligation to file for insolvency was knowingly breached.

The judgment has been criticised for lowering the burden of proof and the lack of distinction between different breaches of duty.

As an appeal has been granted, it remains to be seen how the Federal Court of Justice may rule.