Your Guide to the Intricacies of D&O Insurance
Ah, Directors and Officers (D&O) insurance—a safety net for those brave souls steering the corporate ship! But are they truly unassailable with their shiny policies? You see, in the past, there have been some head-scratchers questioning the legal admissibility of D&O insurance. Think of it like this: if you hand someone a parachute, are they really going to be cautious about their jump? Or will they think they’re invincible? This has been at the heart of the debate. Some wise folks pointed out that, should a director be backed by a financial loss liability insurance policy, it might have the unintended consequence of turning them into a daredevil CEO—carefree with company coffers, because, you know, insurance! The other side? It argues that company-paid D&O insurance flouts the basic principles laid out in Section 93, Paragraph 4 of the German stock corporation act (AktG for you legal eagles). It’s like a legal seesaw; who can balance it right?
Fast forward to today. The clouds have cleared. The jury is in. The admissibility of D&O insurance? No longer up for debate! The lawmakers waved their magic wands and acknowledged D&O insurance in the justification for Section 100 VVG. They even threw in some amendments, like Section 93 (2) AktG, introducing a mandatory deductible. (Because what’s a policy without a bit of skin in the game?) And let’s not forget, the German Corporate Governance Code (DCGK), with its serious air, has always accepted D&O insurance, just stipulating that directors should set aside a bit of dough as a deductible. It’s sort of like asking rich people to put a little extra cash in the pot when they play poker—gives ’em a reason to play nice, right?
Now, let’s chew on one of those marvelously complex legal excerpts, which could baffle even the most astute legal minds:
(1) The members of the board of directors must exercise the care of a prudent and conscientious manager in their management. ... (2) Board members who violate their duties are jointly and severally obliged to compensate the company for the resulting damage.
This makes it abundantly clear: even with a policy backing them up, board members aren’t off the hook. If they make a slip-up? They’re still on the hook! It’s a bit like driving a fancy car while knowing you can’t speed—be responsible, or the law is gonna come knocking!
And listen, let’s be real—the thought that D&O insurance turns board members into blasé decision-makers is simply not true. Check this out: those board members can still be personally liable for damages that exceed their insured limit. And let’s not forget, their decisions are always a mere arm’s length away from a potential criminal charge. It’s like bringing a butter knife to a gunfight; might not be the best tool for the job, eh? And then, the insurance policies have a laundry list of exclusions that can box in that entrepreneurial risk faster than you can say “board meeting.”
Another fun part? The general meeting can say, “Thanks, but no thanks,” by refusing to discharge a board member under Section 120 AktG or even yank their appointment if there’s “good cause.” So, it’s not just about insurance, folks. There are checks and balances lurking in the background, ready to pounce if necessary!
Wrapping It Up
So there you have it—the admissibility of D&O insurance is as solid as a concrete bunker! But remember, while the policy is a safety net, the board members need to exercise caution and responsibility. After all, you wouldn’t want your leaders taking the “let’s wing it” approach, right? So, clever use of D&O insurance? Yes. Relying solely on it? Not so much! Cheers to smarter, responsibly insured directorial adventures ahead!
Rz. 18
The legal admissibility of Directors and Officers (D&O) insurance has faced scrutiny historically, primarily hinging on two key arguments. Critics have noted that the introduction of financial loss liability insurance could dilute the “behaviour-controlling effect” that D&O insurance is intended to uphold. Additionally, concerns were raised regarding the compliance of company-financed D&O insurance with the core principles outlined in Section 93, Paragraph 4, Sentence 3 of the German Stock Corporation Act (AktG).
However, the question of D&O insurance’s admissibility is now settled, as legislative amendments have explicitly recognized it within the rationale for Section 100 of the Insurance Contract Act (VVG). Furthermore, the recent VorstAG legislation has not only modified Section 93 (2) AktG but has also added a new p. 3, which mandates that board members must have insurance coverage for risks associated with their professional activities, including stipulations for a deductible. The German Corporate Governance Code (DCGK), initially established on February 26, 2002, by the government commission under then-Minister of Justice, has consistently operated on the assumption of D&O insurance’s legal admissibility, reinforcing the requirement for a deductible.
Given its significance, Section 93 AktG, which delineates the care and responsibility obligations of board members within a stock corporation, is expounded upon in its current form:
Quote
(1) The members of the board of directors must exercise the care of a prudent and conscientious manager in their management. A breach of duty does not occur if the board member, when making a business decision, could reasonably assume that he was acting for the good of the company on the basis of appropriate information. They must maintain secrecy about confidential information and secrets of the company, namely company or business secrets, which the members of the Board of Directors have become aware of through their work on the Board of Directors.
(2) Board members who violate their duties are jointly and severally obliged to compensate the company for the resulting damage. If there is a dispute as to whether they exercised the care of a prudent and conscientious business manager, the burden of proof falls on them. If the company takes out insurance to protect a board member against risks arising from his or her professional activities for the company, a deductible of at least 10 percent of the damage must be provided up to at least one and a half times the fixed annual remuneration of the board member.
(4) The company is not liable to pay compensation if the act is based on a legal resolution of the general meeting. The fact that the Supervisory Board has approved the action does not exclude the obligation to pay compensation. The company can only waive or settle claims for compensation three years after the claim arises and only if the general meeting agrees and no minority, whose shares together amount to a tenth of the share capital, lodges an objection in the minutes. The time limit does not apply if the person liable to pay compensation is insolvent and settles with his creditors to avoid insolvency proceedings or if the obligation to pay compensation is regulated in an insolvency plan.
(6) Claims arising from these regulations expire in ten years for companies that are listed on the stock exchange at the time of the breach of duty, and in five years for other companies.
Rz. 19
Taking out D&O insurance should not be misconstrued as an “advance waiver” of potential future damage claims. Instead, creditors effectively “gain an additional debtor.” Additionally, securing insurance does not absolve board members from their liability obligations. This principle holds true across various liability insurance contexts, including D&O coverage. The assumption that insured board members will demonstrate a more lax approach to their duty of care is likely misguided, as they remain personally liable for any damages that exceed the limits of their insurance coverage. Furthermore, they continually face the looming threat of criminal liability, and insurance policies often contain numerous liability exclusions designed to maintain entrepreneurial risk where it legitimately belongs.
The general meeting retains the authority to deny the discharge of any board member (Section 120 AktG) or to revoke their appointment when just cause is present (Section 84 Para. 3 AktG). This framework establishes certain protective mechanisms as preventative measures. Consequently, the admissibility of D&O insurance is now firmly established and widely accepted.
What recent legislative changes in Germany affect the requirements for D&O insurance for board members?
**Interview with Legal Expert Dr. Anna Müller on D&O Insurance**
**Editor:** Thank you for joining us today, Dr. Müller. Directors and Officers (D&O) insurance has been a hot topic lately, especially with the recent legislative changes in Germany. Can you explain what these changes mean for board members and the companies they oversee?
**Dr. Müller:** Thank you for having me! The recent amendments have solidified the legal admissibility of D&O insurance in Germany, addressing concerns that have lingered for years. Now, board members are required to have insurance coverage for risks associated with their professional activities, and this includes a mandatory deductible. This change is aimed at ensuring that directors approach their responsibilities with warning and due diligence, rather than viewing insurance as a safety net that absolves them of accountability.
**Editor:** That’s fascinating! There’s a common belief that D&O insurance may encourage reckless behavior among directors. Is there any truth to this notion?
**Dr. Müller:** It’s a valid concern, and it has been discussed extensively. However, it’s crucial to understand that D&O insurance doesn’t provide a free pass. Even with a policy, directors can still be personally liable for damages exceeding their insurance limits. The legal framework surrounding D&O insurance emphasizes that board members must exercise the care of a prudent manager. If they don’t, they will still be on the hook for any damages caused by their actions.
**Editor:** Could you expand on the responsibilities outlined in Section 93 of the German Stock Corporation Act? How do these relate to D&O insurance?
**Dr. Müller:** Absolutely. Section 93 makes it clear that board members must act conscientiously and prudently in their decision-making. If they violate these duties, they are jointly responsible for compensatory damages to the corporation. The recent amendments highlight that if a company pays for D&O insurance, it must ensure some level of personal financial stake from the directors, indicated by the required deductible. This structure is designed to foster responsible decision-making rather than reckless risk-taking.
**Editor:** You mentioned earlier that directors can still face personal liability despite having D&O insurance. What are some of the limits or exclusions that could affect their coverage?
**Dr. Müller:** Great question. D&O insurance policies often come with numerous exclusions that can limit coverage, particularly in cases involving willful misconduct or illegal acts. Additionally, claims arising from personal gains or disputes unrelated to their professional responsibilities might also be excluded. It’s important for board members to understand the specific terms of their coverage to gauge how well they are protected.
**Editor:** Given all these nuances, what advice would you offer to companies and their boards regarding D&O insurance?
**Dr. Müller:** My key piece of advice would be this: while D&O insurance is a valuable tool for risk mitigation, it should never be viewed as a substitute for prudent governance and responsible decision-making. Companies should ensure that their directors are well-trained in their obligations and that they foster a culture where risk is assessed carefully and thoughtfully. Also, regular reviews of their D&O policy are essential to keep up with any industry and legislative changes.
**Editor:** Thank you, Dr. Müller. It seems clear that even with D&O insurance, board members can’t afford to relax their vigilance.
**Dr. Müller:** Exactly! It’s about striking a balance between safeguarding the company and ensuring that directors remain accountable for their actions. Thanks again for having me!
**Editor:** Thank you for sharing your insights. It’s an important conversation for those in corporate governance.
