Claims under section 64 German Limited Liability Companies Act included in D&O insurance coverage

In a long-awaited decision handed down on 18 November 2020, which has now been published, the Fourth Civil Senate of the German Federal Court of Justice, which has jurisdiction for insurance law matters, has clarified whether a company’s right to compensation for payments made after the company has become insolvent or after its over-indebtedness has been established, as provided for in section 64 sentence 1 German Limited Liability Companies Act (GmbHG), against its directors constitutes a statutory right to compensation for damages within the meaning of normal market D&O insurance conditions. In any event, the German Federal Court of Justice answered this question in the affirmative for the insurance contract at issue there, set aside the decision to the contrary of the Frankfurt am Main Higher Regional Court and referred the case back to the appeals court for a new hearing and decision.

The German Federal Court of Justice’s judgment marks the provisional conclusion of a long-standing controversy relating to D&O insurance. This discussion was initiated by a decision of the Dusseldorf Higher Regional Court of July 2018 (Case No: 4 U 93/16). The court senate there with jurisdiction for insurance law disputes held, with detailed reasoning, that the insurance cover of a D&O insurance policy did not cover claims of the company under section 64 sentence 1 GmbHG and expressly upheld this opinion in a recently published judgment from June 2020 (Case No: 4 U 134/18). This case law was predominantly rejected in the insurance law literature. A complaint against denial of leave to appeal filed in the meantime has been withdrawn.

I. Procedural course and decision content

In this dispute, the Frankfurt am Main Higher Regional Court also held the opinion that the insolvency debtor’s claim against the managing director in that case under section 64 sentence 1 GmbHG was not included in insurance coverage according to the relevant insurance contract. The court cited the 2018 judgment of the Dusseldorf Higher Regional Court in the grounds for its decision and endorsed its findings. It stated that the claim under section 64 sentence 1 GmbHG did not constitute any statutory liability claim, but was a “separate claim for compensation of its own kind”. According to the court, the claim was, even taking the interests of the insured person in the broadest possible protection into account, not to be equated with a claim for damages in accordance with the terms of the insurance policy. The German Federal Court of Justice has now rejected this view.

In the case at issue, the plaintiff, i.e. the insolvency administrator of a limited liability company under German law (GmbH), asserted a claim against the defendant based on assigned rights to insurance benefits under a D&O insurance policy. The relevant insurance policy terms and conditions described the insurance coverage as follows:

“The Insurer grants insurance coverage in the event that claims are made against an Insured Person due to a breach of duty committed while acting as an executive officer of the Policyholder, a subsidiary or an undertaking co-insured upon request based on statutory liability provisions for any financial damage incurred by the Policyholder or a third party (this also includes the insolvency administrator).”

The Fourth Civil Senate held that these requirements had been met. Its reasoning can be summarised as follows:

• The starting point of the considerations are the principles formulated in settled case law, according to which general insurance terms and conditions are to be interpreted in such a way, as an average, reasonably informed policyholder understands them with circumspect assessment, observant inspection and under consideration of the recognisable context of their meaning.
  
  
• According to the past judgments of the Fourth Civil Senate, liability provisions are those which attach legal consequences to the occurrence of an event covered by the clause, irrespective of the intent of the parties involved. These requirements are met in section 64 sentence 1 GmbHG. The provision attaches the legal obligation of the managing director to reimburse the company for payments made after insolvency which lead to a reduction of the insolvency estate, irrespective of the intent of the parties involved.
  
  
• For the scope of the liability insurance cover in question, it is not a question of the dogmatic classification of the claim under section 64 sentence 1 GmbHG as “damages”, but solely of an interpretation based on insurance contract standards.
  
  
• Based on the wording of the disputed clause and the purpose of the D&O insurance that is recognisable to him, the average policyholder/insured person will regard the claim under section 64 sentence 1 GmbHG as a claim for damages within the meaning of the insurance terms and conditions. In particular, the term “damages” used in the general terms and conditions of insurance does not refer him to the area of legal language because there is no concept of damages precisely defined there. In common speech, the term generally describes the compensation of a disadvantage suffered. According to this understanding, the policyholder/insured person will expect insurance coverage at any rate if the claim made against him, as in this case, is directed towards compensation for the damage that has occurred by way of restoring the condition that existed prior to the damaging event.
  
  
• For the average policyholder/insured person, insurance coverage depends crucially on the fact that, as in the case of section 64 sentence 1 GmbHG, he must restore the situation prior to making his payments in breach of duty, regardless of whether this benefits the company or the company’s creditors.
  
  
• The fact that the possibilities for defence against a claim under section 64 sentence 1 GmbHG may be limited does not call into question the classification as a claim for damages in accordance with the insurance policy terms. The average policyholder/insured person expects insurance coverage from a liability insurance policy precisely even if his options for defending himself against the claim brought against him in a liability suit are limited.
  
  
• Finally, the inclusion of claims arising from section 64 sentence 1 GmbHG in the insurance coverage is also in line with the purpose of the insurance contract that is apparent to the policyholder/insured person. As third-party insurance, the D&O insurance policy serves to protect the insured persons. The insurance coverage does not primarily protect the financial interests of the policyholder, but those of the insured persons. The average insured person expects that the D&O insurance policy, as liability insurance, will protect his interest in not suffering any financial loss as a result of claims for damages directed against him. He will therefore not assume that precisely the liability risk under section 64 sentence 1 GmbHG, which is significant for him and could potentially destroys his existence, should be excluded from the coverage of the D&O insurance policy because a financial loss has occurred not for the policyholder but for its creditors.

II. Conclusion

The judgment of the German Federal Court of Justice is one of its rare rulings on D&O insurance. After the two parallel decisions on the assignment of insurance coverage claims from 2016, the present decision provides legal certainty in another essential field of legal advice. This applies in particular to old contracts. While the market for newer policies has already reacted to the ruling of the Dusseldorf Higher Regional Court from 2018 and has regularly included claims under section 64 sentence 1 GmbHG expressly in the insurer's promise of benefits by way of clarification, this additional passage is regularly missing in older insurance contracts. This is where the ruling of the German Federal Court of Justice comes in.