The policy is designed to mitigate the personal liability risk of corporate officers and senior executives, both in their external dealings with creditors and business partners and in their internal relationship with the company, arising from claims for damages due to breaches of duty or detrimental executive decisions.
Increased Risk in Corporate Distress
Should a company enter a state of economic crisis, the risk of personal liability for its directors and management board members escalates significantly. Pursuant to Section 15b (4) of the German Insolvency Statute (Insolvenzordnung – InsO), should they effect payments on behalf of the company subsequent to its statutory insolvency (i.e., illiquidity or over-indebtedness), and such payments are not consistent with the due diligence of a prudent business manager, they shall be obliged to reimburse these sums.
Clarity on Reimbursement Claims
For a protracted period, legal uncertainty prevailed in jurisprudence and legal scholarship as to whether such reimbursement claims constituted claims for damages that were covered by a D&O insurance policy. The German Federal Court of Justice (BGH) subsequently dispelled this ambiguity (Judgment dated 18 November 2020, IV ZR 217/19). The Court ruled that such a claim is a compensable claim within the ambit of the D&O insurance—notwithstanding the fact that the judgment was rendered based on the former statutory provision.
Consequently, numerous insurers have revised their policy wordings and incorporated explicit provisions to obviate future misinterpretation in such circumstances.
Recent BGH Ruling on Policy Termination Clauses
A more recent determination by the BGH (Judgment dated 18 December 2024, IV ZR 151/23) is likely to similarly compel insurers to re-evaluate and amend their contractual terms.
This judgment specifically addresses the proper construction and interpretation of certain clauses within D&O insurance contracts, particularly those stipulating the automatic cessation of coverage upon the filing of an insolvency petition. The central issue revolves around the legal efficacy of such stipulations and their resulting consequences for the insurance protection afforded to corporate officers during times of corporate distress.
Factual Matrix
An Aktiengesellschaft (stock corporation) and its former board members entered into D&O insurance policies with the D&O insurer in 2013 and 2014, respectively. The policies were subject to General Conditions of Insurance (AVB), which contained, inter alia, the subsequent clause:
“The insurance contract shall automatically terminate upon the expiry of the insurance period in which the change of control, merger, or liquidation has taken effect, or in which the petition for the opening of insolvency proceedings over the assets of the policyholder has been filed.”
In the case at bar, insolvency proceedings over the company were opened in February 2016, following the company’s own petition filed in November 2015. A premium was subsequently remitted to the D&O insurer from the remaining insolvency estate, prior to the insurer notifying the insolvency administrator in March 2016 that the insurance contract had automatically lapsed at the end of the 2015 policy year—that is, immediately subsequent to the lodging of the insolvency petition.
In April 2019, the insolvency administrator asserted claims against the former board members of the debtor corporation for impermissible payments made after the onset of material insolvency. A settlement was reached, whereby the former board members undertook to remit a sum of approximately EUR 870,000 to the insolvency estate. Subsequently, the insolvency administrator notified the D&O insurer of the insured event. The insurer, however, disclaimed all liability, invoking the AVB provision that the contract had automatically terminated upon the filing of the insolvency petition, thus asserting that no coverage was in force.
The insolvency administrator of the insolvent stock corporation then brought legal action against the D&O insurer, based on assigned rights stemming from the D&O policy maintained by the insolvent company and a former board member.
The BGH Determination
The IVth Civil Senate of the BGH held that a clause in the General Conditions of a D&O insurance policy providing for the automatic termination of the contract at the end of the policy year in which an insolvency petition was lodged is null and void. The Senate deemed such a clause to constitute an unreasonable disadvantage to the policyholder within the meaning of Section 307 of the German Civil Code (Bürgerliches Gesetzbuch – BGB).
The Court opined that the clause contravened fundamental legal principles enshrined in the German Insurance Contract Act (Versicherungsvertragsgesetz – VVG), specifically Section 11 (1) and (3). This statutory provision stipulates that ordinary termination by the insurer is generally permissible only upon a minimum notice period of one month. This period is intended to afford the policyholder sufficient time to react to the contract’s cessation—for example, by diligently seeking replacement coverage. This protective provision is semi-mandatory, meaning that while derogation is permissible, it may not be to the detriment of the policyholder.
In the Court’s reasoned view, the automatic termination of the insurance in the event of insolvency—without any notice period whatsoever—stands in clear contradiction to this underlying statutory principle of protection. Such a stipulation would abruptly and unilaterally expel the policyholder from the contract without prior warning, a consequence irreconcilable with the balance of interests intended by the legislature.
Conclusion
The recent BGH ruling underscores the legal significance of D&O insurance within the corporate sphere and concurrently enhances legal certainty for managing directors, board members, and supervisory board members by declaring unilateral termination of coverage upon insolvency to be ineffective. Particularly in scenarios of corporate distress, the D&O policy can assume a pivotal role in shielding a director from personal liability—such as in the context of reimbursement claims pursuant to Section 15b InsO.
Leadership demands fortitude—especially, and indeed, precisely during challenging phases. An executive who is cognisant that they are not entirely exposed in the face of breaches of duty and detrimental decisions is more likely to make necessary commercial judgements.
Nonetheless, comprehensive legal counsel remains indispensable, particularly during corporate crises. Only this ensures a well-founded appraisal of the liability position and the accurate classification of regulatory provisions pertaining to insurance, corporate, and insolvency law. The meticulous coordination of insurance coverage and legal strategy is paramount for reconciling executive capability with responsible stewardship.