The insurer behind a D&O policy is liable for payments made after the onset of insolvency. That was the verdict of the Bundesgerichtshof (BGH) – Germany’s Federal Supreme Court – in a judgment from November 18, 2020 (Az.: IV ZR 217/19).

A managing director is personally liable for any payments they arrange after the company is already insolvent, with the insolvency administrator able to reclaim the relevant amounts from them. This could threaten the managing director’s livelihood. The ruling in question by the BGH affords managing directors greater security by providing that the insurer must pay out on the D&O policy in such cases.

Whether the insurer behind a D&O policy is obliged to pay in cases of this kind has been a contentious issue to date. For instance, in a judgment from June 20, 2018, the OLG Düsseldorf – the Higher Regional Court of Düsseldorf – ruled that the insurer is not liable for payments arranged by the insured managing director after the company became insolvent (Az.: I-4 U 93/16). The court found that cases like this do not give rise to a liability claim for damages within the meaning of the terms and conditions of the insurance policy, but rather a claim for compensation sui generis.

However, the BGH took a different view, ruling that the company’s right under section 64 of the German Limited Liability Companies Act (Gesetz betreffend die Gesellschaften mit beschränkter Haftung, GmbHG) to compensation for payments made after the company becomes insolvent, or its over-indebtedness is established, amounts to a liability claim for damages.

In the instant case before the BGH, an insolvency administrator asserted claims against the insurer with whom the managing director had taken out a D&O insurance policy. The insurer did not wish to pay out, justifying this course of action with reference to the terms and conditions of the policy. This line of reasoning was not upheld by the BGH. The Karlsruhe judges held that the issue of whether or not the claims amounted to insured claims for damages was to be judged based on the perception of the average policyholder without specialist knowledge of insurance law.

The BGH went on to state that while the typical D&O policyholder is versed in business and familiar with general terms and conditions, their interpretation of the relevant clause and their understanding of the purpose behind the policy would lead them to view the rights arising from sentence 1 of section 64 GmbHG as an entitlement to claim damages within the meaning of the terms and conditions of the policy. The court noted that said individual would construe the clause as meaning that the insurance would cover any financial losses.

Lawyers with experience in the field of company law can advise on matters pertaining to D&O insurance.

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