Your company would like to claim for damages against a manager?
We assess the chances of success of claims for damages against current or former directors or officers and assert legitimate claims on behalf of your company before German courts.
In a settlement or by assigning insurance claims we often find solutions that take into account the interests of the aggrieved company and all decision-makers involved.
What you should know
regarding German Liability Law.
- What happens when a company brings claims against a (former) board member in Germany?
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A typical manager liability case in Germany usually begins with the company discovering a loss that was allegedly caused by a board member through a breach of duty. By internal
investigations, the company first tries to clarify the reason for and extent of the loss incurred.
If the aggrieved company takes the decision to pursue the claim against the manager, it will have a law firm prepare a claim letter in which it states which breach of duty the manager committed and which compensation is requested from him. At the same time, the claim also triggers the insured event under the D&O-insurance.
After notification of the insured event by the insured person and after examining the case, the D&O-insurer either decides to defend the manager or to compensate the company’s loss (the so-called indemnification of the board member).In the majority of cases, the D&O-insurer decides to defend. Unless the parties find a settlement out of court, a liability proceeding follows. Years may pass until the claim is finally settled.
- What requirements have to be fulfilled in order for the company to be able to hold a board member liable for a loss?
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Under German law, for the liability of a board member (managing director, member of the executive or supervisory board), it is necessary that the company suffered a loss due to a breach of
duty by the management. In the liability proceeding, the aggrieved company bears the burden of proof of the loss and its causation by a breach of duty. The manager then may defend
himself/herself by proving that he/she complied with all due diligence obligations.
The occurrence of a financial loss following a management decision alone does not justify any liability of the decision-maker as long as he/she can prove that he/she acted for the good of the company, on the basis of the available information, free of conflicts of interest and in good faith (the so-called "Business Judgment Rule").
In many cases, such proof is difficult to supply. Even simple negligence leads to unlimited liability of the decision maker.
- How much time for claiming has the aggrieved company after the breach of duty by the decision maker?
- Claims for compensation against the managing director of a limited liability company (GmbH) regularly expire after five years. For members of the executive board of listed stock corporations (AG) an extended limitation period of ten years applies (for other stock companies five years). The limitation begins regardless of the company’s knowledge at the earliest with the occurrence of the loss.
- The aggrieved company is in insolvency proceedings in Germany. Are there particularities the insolvency administrator has to take into account when bringing claims against board members in this situation?
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If an insolvency administrator seeks damages from a former decision-maker of the insolvent company, he should consider the following: Breaches of duty the manager committed shortly before the
insolvency of the company can justify a liability claim against the manager. However, D&O-insurance claims on such basis are often not enforceable afterwards, because in times of crisis,
decision-makers sometimes deliberately act contrary to duty – in the belief that they are saving the company. Loss resulting from such knowing breaches of duty is usually not insured. In
addition, some D&O policies exclude any claim related to insolvency of the policy holding company.
Furthermore, the legal basis for the claim for damages is decisive. Claims against the manager for reimbursement of payments made after the insolvency of the company or after determination of its over-indebtedness (Sec. 64 GmbHG) are not useful since D&O insurers refuse cover for such claims unless explicitly agreed as insured within the insurance contract.
Another pitfall: Often, D&O-insurance contracts are automatically terminated when the company becomes insolvent. A notice of termination of the insurer as a warning to the administrator is missing in this case. Deadlines for notification of a claim after termination of the insurance contract usually run between six and twelve months. Thus, in many cases, insolvency administrators bring claims against a manager too late to assert D&O insurance cover.
It is the task of the insolvency administrator to clarify a potential liability of a board member or director and related coverage issues at an early stage during the insolvency proceedings. Otherwise, the insolvency administrator may himself be liable for damages.
- What are the legal fees for examination and/or enforcing claims for damages?
- Our fees for the examination and assertion of the liability claim depend on the scope and complexity of the case, but they are in an economically reasonable relationship to the (possible) value in dispute of the proceedings.
regarding the company's duties and those of its board members.
- Is there a duty of the executive board or the supervisory board under German law to assert claims for damages?
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Yes, at least in stock companies. The task of the supervisory board is to control the executive board. The German Stock Corporation Act (sec. 116 AktG) stipulates that the supervisory board
has to examine claims for damages against executive board members and, if necessary, pursue them. The decision of the supervisory board about claiming against a member of the executive board
is therefore not a discretionary decision, as the German Federal Court of Justice clarified in 1997 (cf. BGH, judgment of 21 Apr 1997 - II ZR 175/95, so-called "ARAG / Garmenbeck
decision").
The supervisory board may only exceptionally refrain from asserting reasonable claims for damages against a member of the executive board acting contrary to duty if important interests and concerns of the company clearly argue in favor of accepting the loss without compensation.
If the supervisory board waives a claim for no good reason, its members will be liable for the loss themselves.
- Does the aggrieved company have to provide the insurer with all documents and information requested by the insurer?
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Pursuant to German insurance law, the company as policyholder has to provide the insurer with all requested and available records and documents - usually even if the documents are
confidential. If the company does not comply with its obligation to provide information, the insurer may be wholly or partially released from payment.
The company may then be liable for the loss of the manager’s insurance coverage. Only under certain circumstances, for example in case the insurer joins the liability litigation on the part of the manager, we assume that the company no longer has a duty to submit information to the insurer.
In case you have a problem with providing specific documents, it is urgently recommended to consult your legal advisors.
regarding your options.
- Is there a possibility to resolve the matter quickly and silently?
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In order to avoid a long lasting and possibly reputation-damaging public proceeding, it is advisable to reach an early out-of-court settlement involving all parties (aggrieved company, board
member and D&O insurer).
If an early settlement is not possible, it may under certain circumstances be advisable for the manager to assign his/her claim for indemnification to the aggrieved company in order to speed up proceedings. Arbitration, too, usually shortens claims settlement. We are happy to discuss the possibilities.
- Does it make sense to conclude a termination agreement with the manager responsible for the loss?
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In principle, any agreement between an aggrieved company and a board member claimed against should be drafted by lawyers specializing not only in labor law but also in D&O liability and
insurance law. This is because such an agreement can not only affect the outcome of any liability proceeding, but also affect the insurance coverage of the manager - with negative
consequences for the company, which may then not realize the full compensation.
Sometimes the parties try to agree that a liability claim against the manager of the company will only be pursued by the company if the D&O-insurer indemnifies the manager. From the company’s point of view, however, such agreements are problematic, as they may violate German stock corporation law, and endanger insurance coverage. The insurer might object that there is no cover without a valid liability claim against the insured.
We would be happy to advise you on drafting an ironclad agreement with a manager.
- Is the company as policyholder entitled to assert the insurance claim against the D&O insurer itself?
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Pursuant to German insurance law, only the insured person is entitled to claims under a D&O-insurance policy (claim for defense/indemnification against claims for damages), not the
policyholder.
However, in liability insurance the injuring party can assign its claim for indemnification to the aggrieved party. D&O liability insurance is no exception, as the German Federal Court of Justice confirmed in 2016 at our instigation.
The assignment of a claim under D&O insurance is though only practicable and useful in certain constellations. We would be happy to check whether the requirements for such assignment exist in your case.
- We would like to further employ the decision-maker despite an ongoing liability proceeding. Does this harm the liability claim or insurance cover?
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Although various insurance companies regard continued employment as an indication of a "friendly" claim (i.e. as a possibly fictitious insurance claim), nothing is opposed to continuing
employment – neither from a liability nor insurance related point of view – as the German Federal Court of Justice clarified at our instigation.
On the contrary, liability insurance has the purpose of maintaining the relationship between the aggrieved party and the tortfeasor despite the insured event. The aggrieved company does not necessarily have to fire a good manager only because of one breach of duty.
You have further questions regarding manager liability and insurance in Germany?
Contact us without obligations.
In good hands.
Compensation claims against directors and officers have substantial value for companies suffering a loss. But only with expertise in liability and insurance law, a realization is possible.
D&O liability and insurance are our daily business for more than ten years now. Being involved in most manager liability cases covered by the German media in recent years we achieved important decisions before the Federal Court of Justice for insured managers and companies.
What others say:
Known among others from Handelsblatt, Wirtschaftswoche and Frankfurter Allgemeine Zeitung.
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