Claims arising from a D&O (Directors & Officers) insurance policy can be ceded to the employer. That was the verdict of the Bundesgerichtshof (BGH), Germany’s Federal Court of Justice, in its ruling of April 13, 2016 (Az.: IV ZR 304/13).
GRP Rainer Lawyers and Tax Advisors in Cologne, Berlin, Bonn, Düsseldorf, Frankfurt, Hamburg, Munich, Stuttgart and London conclude: Many companies take out a D&O insurance policy for their governing bodies such as executive boards and managing directors as a way of securing themselves against risks. Having said that, things frequently devolve into disputes in the event of a claim being raised. One big stumbling block here is when the insured parties cede their claims arising from the D&O insurance policy to their employer. This is being resisted by insurers. They argue that the companies are not at all interested in making a claim against their governing bodies but are instead intent on collecting the insured sum, i.e. such claims are not to be taken seriously.
Notwithstanding this, the insurers suffered a major setback before the BGH. In the case in question, a company raised a claim for damages against one of its managers for breach of duty. The latter ceded in his capacity as the insured party his right of indemnity stemming from the D&O insurance policy to his employer. The insurance policy covered what is referred to as “internal liability”. The terms and conditions of the policy stated, among other things, that ceding the right of indemnity to the aggrieved third party was permissible. The insurer nonetheless refused to pay.
It reasoned that this assignment of rights was ineffective because the company did not represent an injured third party. It went on to say that the company raising the claim was only interested in triggering the insurance coverage despite the fact that the insured manager had not breached his duties. The insurance company claimed that no serious claim had been raised by the insured party, and that recourse should only have been made to the insurance benefit.
However, the Karlsruhe judges took a different view. The company that had taken out the D&O insurance policy for its employee was said to be capable of representing an aggrieved third party in cases involving internal liability and the insured party’s claims could thus be ceded. The judges held that the risk of abuse in the case of D&O insurance was no higher than in relation to any other type of liability insurance. The fact that the primary aim was to have the insured sum paid out did not exclude the possibility that the claim was serious, as this did not constitute an element triggering the insured event.
Lawyers who are experienced in the field of company law can advise on choosing and concluding a D&O insurance policy as well as assist in enforcing claims in the event that raising a claim gives rise to legal disputes with the insurer.
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