D&O insurance worldwide contain coverage exclusions for wilful breach of duty, German policies making no exception. In Germany, this exclusion is by far the most important – and most successful – means for insurers to deny coverage. Conversely, it is of utmost importance for the insureds to have legal certainty regarding the circumstances under which the exclusion applies. As with other D&O-specific topics however, not much German High or Supreme Court case law exists to interpret the provision. The following case (docket no. IV ZR 90/13), which was first tried by the Higher Regional Court of Celle (docket no. 8 U 203/12), depicts just how much a clear guideline through Supreme Court case law is needed.
The policyholder was an insolvency administrator and had taken out a special professional liability insurance, which contained an exclusion clause for wilful breach of duty identical to the one used in D&O policies. After having been held liable, the policyholder sought coverage which was denied by the insurer for wilful breach of duty.
In its judgment regarding coverage, the Higher Regional Court held that the burden of proof for the applicability of the exclusion clause generally lied with the insurer. In advance, however, the policyholder would have to assert and make plausible why he breached his duties. In the present case, the submission of the policyholder was held insufficient to meet these obligations and the Higher Regional Court dismissed the policyholder’s claim for coverage. Although clearly – and rightfully – stating that the burden of proof lied with the insurer, the Higher Regional Court de facto reversed it by demanding initial submissions of the policyholder. This contradicting reasoning even of an Appellate Court is symptomatic for the prevailing insecurities with such insurance and exclusion clauses. This is especially true for the exclusion for wilful breach of duty, referring to the inner decision-making of the insured person which is always difficult to determine.
As no surprise, the Federal Court of Justice (“BGH”), Germany’s Supreme Civil Court, overturned the lower court’s judgment upon appeal. In its judgment dated 17 December 2014 (IV ZR 90/13), the BGH however also took the opportunity to give general guidelines on the burden of proof regarding the exclusion for wilful breach of duty, which can be utilised for the D&O-insurance exclusion as well. The BGH held that the insurer has to assert a factual background that at least suggests a wilful breach of duty. In addition, the insurer has to present connecting facts which can be classified as convincing circumstantial evidence for the wilfulness of the breach of duty. Only after these requirements have been met by the insurer, the policyholder is obliged to give further explanations regarding his breach of duty.
The BGH however also set out an important exception to this general rule, thereby creating other legal uncertainties; if the policyholder breaches a cardinal duty, the insurer shall not be required to present additional connecting facts. The BGH defined these duties as elemental obligations that are expected to be known by professionals in the relevant sector. As an example, the BGH mentioned the rather obvious attorney’s duties to attend court hearings, prevent default judgments against his clients and inform them of the status of the proceedings.
Regarding the liability of company officers, the courts have already held that the disclosure and booking of previously unknown assets from slush funds as well as a supervisory council’s (German stock company’s “Aufsichtsrat”, which monitors the board of director’s activities) obligation to take out an independent risk analysis regarding crucial activities are cardinal duties. Surprisingly, the BGH once held in an older judgment dated 2003 that cardinal duties would also comprise respecting statute law and the articles of association of the company. As every breach of duty constitutes a breach of statute law or the articles of association, the differentiation between ordinary breaches and cardinal ones would be rendered meaningless. It will therefore be of paramount importance to check whether a classification of a duty as cardinal under liability law can be transferred to the assessment of coverage.
The above showcases that even some of the most basic legal aspects regarding the D&O insurance are still not fleshed out by the courts. We will see whether this will change in the future. The status quo is neither satisfying for the insured nor for insurers.