Under German law, company directors have a statutory duty to file for insolvency once the company has become insolvent or over-indebted. Company directors can be held personally liable for any payments they make after that point of time unless they prove that they exercised reasonable care, skill and diligence. After the German Federal Court of Justice (Bundesgerichtshof) clarified that standard terms and conditions of German D&O insurance contracts cover this directors’ liability, many D&O insurers have tried to find new ways to avoid their coverage.

Decision

One common argument of D&O insurers which was approved by the Higher Regional Court of Cologne (Oberlandesgericht Köln) is that a director commits a knowing breach of duty by making payments after the company has become insolvent or over-indebted.

Usually, the insurer bears the burden of proof of any contractual exclusion of coverage such as demonstrating a knowing breach of duty. In this case, however, the court held that the payments made by the director had been in breach of a major directors' duty and there was, therefore, a rebuttable presumption of a knowing breach of duty.

Key takeaways

It remains to be seen whether other courts are willing to follow this lead. It may be difficult for an insured director (or an insolvency administrator) to rebut a presumption of a knowing breach and show that the director did not act knowingly. Directors should meticulously document their efforts to monitor the company’s financial situation and seek professional advice to fend off claims for damages and to secure their insurance’s coverage.