Two recent judgments (German FCJ, 13 April 2016, IV ZR 304/13 and IV ZR 51/14) answer a so far controversial question: whether to allow the assignment of coverage claims which have not been decided on by court (alleged coverage claims) against D&O insurances in internal liability (‘Innenhaftung’) cases. In the context of insolvency proceedings, these rulings could facilitate the assertion of claims, benefitting insolvency administrators. In most cases, the coverage claims against D&O insurers are more likely to be recoverable than claims against the officers and directors themselves.
In both cases, the plaintiffs were insured entities asserting alleged coverage claims against D&O insurers after the insured individuals had assigned their claims to them. The insurance companies argued that the assignment of alleged claims was invalid because the insured entity was not the ‘damaged’ third party under the terms of section 108 Abs. 2 Insurance Contract Act (‘Versicherungsvertragsgesetz, VVG’).
The Federal Court held that the insured entity can itself be viewed as the third party suffering loss in internal liability cases. It decided that there has to be a wide definition of ‘third party’ under the terms of section 108 Abs. 2 VVG. As D&O insurances are held for the benefit of a third party and therefore differ from regular liability insurances (section 100 VVG) the court also stated that there is no risk of abuse linked with the assignment of claims to the insured entity. The ruling also held that there is no obligation for the third party to primarily seek compensation from the liable officer or director.
The ruling creates legal certainty in view of the assignment of coverage claims in internal liability cases.
Several follow-up questions, for example the question of how the burden of proof is allocated in a law suit against the insurer based on an assigned coverage claim, have not been clarified by the rulings.
However, we expect insolvency administrators to make use of this ‘new tool’ in their endeavours to enlarge the insolvent’s estate.