Criminal and regulatory offences committed by a corporation can lead to massive penalties, in particular in case of cartel law infringements. If the cartelist participated in the cartel due to a wrongful act or omission of its management—whether the management actively participated in the cartel on behalf of the corporation or the management insufficiently supervised the business organization— the question arises: Can the company seek recourse from its management for a fine imposed on it?
In England, the Court of Appeal answered this question in the negative in its 2010 decision in Safeway Stores Ltd v. Twigger, based on the principle that claimant are prevented from using the courts to obtain compensation for loss which they have suffered due to their own illegal or immoral act.
In contrast, in Germany this question is still open. To date, only the Local Labor Court of the city of Essen has dealt with this issue in a lawsuit involving a damage claim by Thyssen Krupp against a former managing director for recovery of cartel fines in the amount of EUR 191 million. The court suggested, in a rather short obiter dictum, that the managing director could be held liable in principle, but that the amount should be capped at EUR 1 million in order not to deprive the managing director of his economic means of existence. The court did not consider the questions of whether such recourse could be covered under a D&O insurance policy and whether insurance coverage could influence the amount recoverable from the management without depriving it of the economic means of existence. The court did not have to rule on these issues as it found no infringement of any management duty in the first place. Currently, an appeal is pending with the Regional Labor Court of the City of Düsseldorf. It remains to be seen if the Regional Labor Court will rule on the recoverability of fines at all or whether it will dismiss the appeal on the basis that management obligations have not been violated.
Among German law professionals, it is highly debated whether fines are recoverable from management and, if so, to what extent.Whereas it is largely accepted that under the provisions of German civil and corporate law, such fines can be passed on to management in the first instance, many scholars perceive it as unfair and overly burdensome that managing directors would face unrestricted liability even for slight negligence. For this reason, various legal concepts are proposed which exclude or at least restrict liability for fines. However, it remains to be seen if the courts are prepared to follow this approach. Indeed, it is questionable whether any restriction of liability is consistent with the law as it currently exists. The courts may well find that any restriction of liability would require a change of the law by the legislator.
To the extent that a fine absorbs illegally obtained profits, such amount does not constitute a damage for the company because the company would not have obtained this profit if no breach of law had occurred. However, if the administrative order imposing the fine does not explicitly state to which extent it absorbs illegal profits—as is the case with cartel fines—the burden of proof for the amount of the illegal profits rests with the managing director. In the absence of discovery and disclosure proceedings under German civil procedural law, this burden is hard to overcome in practice.
As a result, under the prevailing law there is a high risk for managing directors that they can be held liable to the full amount of damages if a fine is imposed on the company. In this case it would be consistent to find that such recourse is covered under the D&O insurance policy to the extent the insured person did not act intentionally. Such insurance coverage would also not be excluded by a possible exclusion of criminal and regulatory fines in the policy (as you can see in some wordings) as, technically, the company does not forward the fine to the managing director but seeks compensation for the loss caused by the fine.
D&O insurers should monitor this development in the German market carefully and consider appropriate wording in their policies. It should be noted that most wordings used in the German market do not explicitly refer to coverage of recourse claims regarding fines.