The German D&O market remains one of the most litigious markets globally. Current developments could fuel litigation activity further, increasing D&O insurers’ exposure in a continuing soft market.
A number of factors are responsible for the current position. Firstly, the legal landscape: board members of German companies are liable for damages to their companies for negligent breach of duty. While the Business Judgement Rule provides a certain safe harbour, the burden of establishing that there was no breach and/ or no negligence is on the board member. Additionally, quantum is not capped by statutory law and limitation of liability clauses are uncommon and only permissible under narrow circumstances. This broad legal responsibility has been accompanied by the landmark decision in “ARAG / Garmenbeck” (Federal Court of Justice in 1997) which held that, against the backdrop of the dual-board system, supervisory boards are, in principle, obliged to investigate and pursue damage claims against management board members if the supervisory board members are to avoid a liability themselves (and vice versa). Following this decision, particularly driven by the breakdown of the New Economy in the late 1990s/ early 2000s and then by the financial crisis which began in 2007/2008, litigation activity has continuously been on the rise.
Recent developments are a catalyst to ligation activity: a major source of D&O litigation is recourse claims brought by companies against their board members with regard to fines imposed on the companies by, in particular, the cartel authorities – either the European Commission or the national Bundeskartellamt. These fines have been at a record high with fines in 2016 reaching record levels (see the European Commission’s EUR 2.93 billion fine imposed on truck producers). In addition to breaches of antitrust rules, non-compliance in other areas of the law – from corruption over embargoes to environmental regulations – show similar developments, both domestically and abroad. Against this backdrop, a key issue is whether and to what extent companies are permitted to seek recourse for fines imposed on them from their board members. In the so-called “railway cartel”, the Regional Labour Court in Dusseldorf found last year that such recourse is not permitted for public policy reasons, similar to the English decision in Safeway v Twigger. However, the ruling is not easily reconciled with other judgments by the Federal Court of Justice, and it remains to be seen how the case will be decided by the Federal Labour Court.
Another recent decision by the Federal Court of Justice, in April 2016, may severely impact D&O insurers’ risks. Since the reform of the German Insurance Contract Act in 2008, it had been heavily disputed whether an insured person under a D&O policy could assign the coverage claim to the company pursuing the claim for damages against that person. The court held such assignments were permissible irrespective of the moral hazards that come along with that in a market dominated by insured vs. insured claims. It is quite likely that more board members and their companies will use that template in the future and that D&O insurers, as a result, will need to prepare for an increased number of direct claims for payment made by policyholders and their insured subsidiaries against the insurer. Against this background, D&O insurers are encouraged to revisit their current D&O policies in order to insert necessary safeguards and to get ready to become more directly involved in litigation with the need to defend liability and coverage simultaneously.
In summary, the German D&O market remains challenging. For D&O insurers, there is no reason, however, to adopt an ostrich strategy; the best way to cope with these challenges continues to be to confront them actively – in underwriting discussions, policy wording updates and though proactive claims handling.
