Cologne Regional Employment Court: D&O insurance can exclude reduced liability for finance managers

 

An international industrial company lost around €50 million as a result of “fake president fraud”. Cologne Regional Employment Court (Landesarbeitsgericht Köln) upheld the summary dismissal subsequently imposed on the company’s “head of global treasury” and affirmed the manager’s extensive personal liability.

Facts of the case

The claimant before Cologne Regional Employment Court (judgment of 31 July 2026 – 8 SLa 603/25) was “head of global treasury” at an international industrial company, with extensive powers in the area of payment transactions. His employer had taken out D&O insurance for him with cover of up to €150 million per claim.

In July and August 2024, the claimant fell victim to a professional fraud scheme (“fake president fraud”). Using caller ID spoofing, the fraudsters used the telephone number of the group’s CFO listed in the telephone directory and pretended to be establishing a confidential holding company in Asia, in which the claimant was to become CFO. After this, communication took place exclusively via private channels; the use of work-related communication channels was expressly to be avoided.

The claimant subsequently arranged for just under 60 manual bank transfers totalling over €50 million to be made to foreign recipients within three weeks, in some cases even involving a colleague, so as to formally comply with the dual-control principle.

Once the fraud had been uncovered, the employer gave notice on the manager’s employment contract with immediate effect and filed extensive claims for damages in a counterclaim. The manager, on the other hand, denied gross negligence and relied primarily on the limited liability of employees and the limitation period set out in his employment contract. He also argued that the D&O insurance should not increase his liability and had to protect him instead.

Decision by Cologne Regional Employment Court

Cologne Regional Employment Court, acting as the appeal court, upheld the summary dismissal. In the court’s view, gross negligence had occurred at the latest when the claimant stated in a chat on 18 July 2024 that he was transferring “around 9-10 million Euro neither with any kind of proof nor without any reasonable details about the overall transaction so far”. The appeal court considered that the threshold for gross negligence was only crossed from the transfers made on 18 July 2024 onwards, departing from the assessment made by Cologne Employment Court at first instance, which had already assumed gross negligence in relation to the first transfer on 15 July 2024. Another significant factor was that the claimant himself had taken part in a training video on CEO fraud schemes just a few weeks earlier. The appeal court considered a written warning to be unnecessary: trust had already been irreparably destroyed, not least because of the enormous scale of the loss.

In the context of the counterclaim, Cologne Regional Employment Court then ordered the claimant to pay a substantial portion of the damages and expressly rejected any reduction in liability. It held that the claimant had breached key due diligence requirements of treasury management to an exceptional degree over an extended period.

The decision is of particular practical relevance with regard to D&O insurance. The regional employment court applied the principles developed by the Federal Employment Court for contractually agreed compulsory insurance to employer-funded D&O insurance: as with compulsory insurance, the insurance therefore takes precedence over the principles of limited employee liability. In any event, where the insurance excludes the risk of financial ruin (as in the present case, according to the appeal court’s findings), the regional employment court considered that there is no basis for a reduction in liability, even where gross negligence is involved. The existence of relevant D&O insurance is thus taken into account in the court’s assessment of whether the employee faces a claim that threatens their livelihood and whether a reduction in liability may be considered on these grounds.

The claimant’s objection that the insurance cover was unclear failed to convince the court. It found that the burden of proof regarding financial hardship, especially the absence of valid insurance cover, lies with the employee. Despite the claimant’s objections, the regional employment court also recognised that the limitation period under his employment contract had been observed. It stated that, given the complex facts of the case, the employer was not guilty of culpable delay and that the damage had to be sufficiently ascertainable and at least sufficiently quantifiable before a claim could be brought.

Practical implications

The decision is significant in several respects. It tightens the requirements regarding the duties of care of senior executives and shows that even technically sophisticated fraud schemes do not relieve them of their own obligations to verify and double check. Companies with D&O schemes should first and foremost analyse their insurance policies’ structure, coverage and implications for the internal allocation of liability. Special attention should be paid to whether gross negligence is covered and whether personal liability that could threaten to financially ruin an employee can be covered by the policy.

Managers should be aware that employer-funded D&O insurance does not necessarily limit their liability; instead, according to the regional employment court’s reasoning, in certain cases it may rule out any exceptional mitigation of liability on the grounds of financial hardship.

At the same time, the ruling highlights the importance of compliance training on specific fraud scenarios, in particular fake president fraud, as well as consistently adhering to internal control mechanisms. These also include the dual-control principle and use of official communication channels.

The final word has not yet been spoken; an appeal on points of law to the Federal Employment Court has been granted (Case 8 AZR 164/26). The ruling will be of far-reaching significance for companies with D&O schemes and the executives insured under them.