Criminal Legal Protection in D&O Insurance
Managing directors carry a high risk and can also be personally liable. D&O insurance is intended to mitigate this liability risk. It is therefore crucial that the D&O insurance comes into effect in the event of a claim and does not deny coverage. The Higher Regional Court of Hamm, with a ruling dated July 13, 2023, has strengthened the rights of policyholders and clarified that provisional criminal legal protection under a D&O insurance cannot be denied simply because the insurance company considers the policyholder’s statements to be “insufficient” (Ref.: 20 U 64/22).
Senior executives, such as managing directors, carry a high personal liability risk. Mistakes in corporate management can result in claims against the managing director from both the company itself and third parties, with the director’s personal assets at unlimited risk. To mitigate this risk for managing directors and other senior executives, taking out D&O insurance can be advisable. It is important that the scope of insurance is tailored to the individual liability risks of an executive, according to attorney Michael Rainer, a contact for corporate law at the law firm MTR Legal Rechtsanwälte. The scope of the policy can also include criminal legal protection.
Suspicion of a Criminal Offense
In the proceedings before the Higher Regional Court of Hamm, the company had taken out D&O insurance for its managing director that included criminal legal protection. The financial authorities had initiated a criminal tax proceeding against the managing director on suspicion of involvement in tax crimes. When the managing director learned of the investigations during the execution of a search warrant and the provisional arrest of a co-defendant, he applied for coverage of the defense costs from the D&O insurance.
The criminal legal protection agreed in the insurance policy provisionally applied if the managing director contested any knowledge of misconduct. However, if the crime was proven and the managing director was convicted, the insurer could reclaim the costs.
Insurer Withdraws Coverage Commitment
Initially, the insurer granted the coverage without objection. However, upon receiving the first partial invoice from the law firm handling the defense, the insurer refused to pay. The insurer also declined to cover additional defense costs.
The insurer justified its refusal on the grounds that the managing director had not provided sufficient information about the allegations. The managing director had thus violated his obligations, as he had not disclosed the facts to the insurer or allowed access to the criminal case files. Therefore, the insurer argued, there was no obligation to cover under the D&O insurance.
This argument was not successful either at the first instance or on appeal before the Higher Regional Court of Hamm. The court stated that if the accused managing director defends himself against the accusation of a crime, it should not be necessary for him to disclose information to his insurer, as this could severely limit his defense options in the criminal proceedings.
Insurer Not Authorized to “Interrogate”
The insurance company is therefore not authorized to interrogate the insured person about the allegations, according to the Higher Regional Court of Hamm. Moreover, the insurer cannot construct a breach of duty from the policyholder’s refusal to provide detailed information, and thus deny the coverage commitment, the court clarified. It is entirely sufficient if the policyholder informs the insurer that he disputes the allegation. This notification had been made.
There is no breach of duty if the insurer is not granted access to the files of the investigation proceedings, especially since the accused managing director does not have personal access to the files, and his lawyers are not permitted to hand over the files to an insurance company, the Higher Regional Court of Hamm further stated. Additionally, the insurance company had received the comprehensive indictment. It is therefore unclear why they feel insufficiently informed.
Claim for Cost Coverage
There is an insurance event, and the accused managing director has a claim against the insurance for coverage of costs. This claim is not excluded by either a knowing breach of duty or a breach of duty, ruled the Higher Regional Court of Hamm. Should the managing director be convicted of committing a tax crime, the insurer may be able to reclaim the costs.
MTR Legal Rechtsanwälte advises on issues related to managing director liability, D&O insurance, and other corporate law topics.
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