D&O Insurance for Executives
Executives and Supervisory board members must be able to rely on the protection of their Directors & Officers (D&O) insurance because their personal financial security may be at stake. With the increase in damages and insolvencies due to the Covid-19 pandemic, it's essential for executives to evaluate their insurance coverage.
Liability Risk
Executives are typically the first to face liability in case of corporate or investor damages, but supervisory boards also face similar risks, as they are responsible for overseeing executives. According to the German Federal Court of Justice (BGH) in the ARAG/Garmenbeck ruling, supervisory boards can be held liable if they fail to pursue claims against executives on behalf of the company. Recent rulings have extended the statute of limitations for claims against supervisory boards, making it clear that their independence could be compromised.
Alternatives and Additions to Standard Corporate Insurance
Typically, a joint D&O insurance policy is obtained for both executives and supervisory boards, but this can lead to conflicts of interest since supervisory boards often don't have a separate coverage limit. In cases where the coverage limit has been exhausted due to executive claims, supervisory boards could be left to cover liabilities with personal assets. To mitigate this risk, some insurers offer a "Two-Tier Trigger Policy," providing additional coverage specifically for supervisory boards, but this remains rare in the market.
Insurance for Former Board Members
Supervisory board members often face liability after they have left the company, but they lose control over their insurance once they resign. Special policies, such as those offered by e.g. Allianz and AXA XL, have been designed to cover former board members, ensuring continued protection.
Large Claims
In cases involving large damages, such as the Diesel scandal, standard D&O coverage is often insufficient. For instance, Volkswagen’s D&O policy with a €500 million limit pales in comparison to the billions of euros in claims. One contributing factor is the inclusion of defense costs in the coverage limit. Some solutions include setting sub-limits for defense costs or obtaining excess insurance coverage.
Supervisory Board Deductible
Although recent revisions to the German Corporate Governance Code (DCGK) emphasize the independence of supervisory boards, there is no longer a provision requiring a deductible for supervisory board members. However, many companies have increasingly adopted such deductibles to ensure that board members bear some personal responsibility. The deductible should be smaller than that for executives, reflecting the typically lower compensation of supervisory board members.
Conclusion
Supervisory board members should review their D&O insurance early on to ensure adequate protection, including securing independent coverage. A customized insurance concept, tailored to the specific risks they face, is essential for comprehensive protection. Along with a solid compliance system, this can effectively manage the liability risks for supervisory board members.
Are you already member of a Board of Directors or Supervisory Board, or have you been offered such a position? Safeguard your leadership with tailored guidance from a dedicated manager liability and insurance consultant. Gain clarity on your liability risks and ensure you're fully protected, so you can focus on making confident decisions for the future: executive@dr-feh.com
