German D&O insurance coverage – Federal Court of Justice confirms company directors are covered

Quick read

In a recent judgment on directors’ liability (Bundesgerichtshof, 18 November 2020, IV ZR 217/19), the German Federal Court of Justice (Bundesgerichtshof) has clarified the scope of D&O insurance coverage, holding that company directors are entitled to its protection.

Background

Section 64 of the German Limited Liability Companies Act states that directors are obliged to compensate a company for any payments they make after it becomes insolvent up until the subsequent application for insolvency. Previously, insurance companies have successfully argued before lower courts that the standard terms and conditions (T&Cs) of German D&O insurance contracts didn't cover this scenario.

The decision

The key issue the Court had to decide was whether the directors’ duty laid down in section 64 qualifies as a "statutory right of the company to claim damages", which the standard T&Cs of German D&O insurance contracts limits insurance coverage to.

If this was the case, directors would be entitled to reimbursements by D&O insurers after indemnifying their company in accordance with section 64.

Ultimately, the Court found that a reasonable and informed director with commercial experience would expect insurance coverage under the standard T&Cs, making them eligible for insurance coverage.

Key takeaway

This judgment is a welcome clarification that directors of insolvent companies enjoy the protection of D&O insurance if they negligently fail to stop payments after the point of insolvency.

Since section 93 of the German Companies Act and section 130a of the German Commercial Code provide identical duties to that in section 64, this decision also applies to German board members and representatives of general partnerships.