D&O insurance policies need not cover illegal payments made following onset of insolvency
It is not necessary for a D&O insurance policy to cover payments made by the insured managing director after the onset of insolvency. That was the verdict of the Oberlandesgericht (OLG) Düsseldorf, the Higher Regional Court of Düsseldorf.
We at the commercial law firm GRP Rainer Rechtsanwälte note that managing directors who go on to make payments following the onset of their company“s insolvency or over-indebtedness are obliged to indemnify the company to the extent that the payments were not informed by the due diligence expected of a prudent businessman. Many businesses take a proactive response to reducing this substantial risk by taking out a D&O insurance policy for their managing directors and executive bodies. However, the D&O insurance policy does not need to pay out if the managing director goes on to make illegal payments following the onset of insolvency. That was the verdict of the Oberlandesgericht Düsseldorf in a landmark ruling from 20 June 2018 (Az.: I-4 U 93/16).
In the instant case, an insolvency administrator had successfully brought a claim against the managing director of a GmbH, a type of German private limited liability company, on account of the company having executed payments amounting to 200,000 euros after the onset of insolvency. The managing director asserted her rights under her D&O insurance policy in relation to this claim and demanded indemnity.
Her action was unsuccessful. The OLG Düsseldorf held that a liability claim pursuant to sec. 64 of the GmbH-Gesetz, Germany“s Limited Liability Companies Act, is not comparable to an insurance claim for compensation arising from financial loss. It ruled that it is an indemnity claim of a sui generis nature that is designed to serve exclusively the interests of the creditors of an insolvent company as a whole. The Court stated that the company ultimately does not suffer a financial loss as a result of payments made after the onset of insolvency in breach of insolvency law, since an existing claim is settled; payments to preferential creditors were said to be detrimental only to the remaining creditors. The Court noted, however, that D&O insurance is not meant to protect the interests of creditors.
It went on to cite the fact that various possible objections that are recognized under tort law are not provided for in sec. 64 of the GmbH-Gesetz as another reason why a liability claim pursuant to sec. 64 of the GmbH-Gesetz is not comparable to a claim for compensation. The OLG concluded that even though this legal position could lead to coverage gaps in the D&O insurance policy, the insurer does not need to pay out.
In light of this ruling by the OLG Düsseldorf, existing D&O insurance policies ought to be reviewed to ensure the best possible protection for executive bodies. Lawyers who are experienced in the field of company law can advise businesses and managers.
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