Coverage disputes in insolvency – challenges for D&O insurance and board liability.

Coverage disputes in insolvency – challenges for D&O insurance and board liability.

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Various coverage disputes in the insolvency of the policyholder are playing an increasingly important role in legal consulting practice at the interface between D&O insurance, board liability and insolvency law.

After the Fourth Civil Senate of the Federal Court of Justice, which is responsible for insurance law, decided with convincing reasons in a judgment of November 18, 2020 the previously controversial question that claims of the company against its managing directors for compensation for payments made after the insolvency stage (see now Section 15b Para. 4 InsO) represent a statutory claim for damages within the meaning of the standard market D&O insurance conditions, a focus is on coverage law Disputes today regarding the question of whether the board member in the specific case can be accused of a knowing breach of duty with regard to a late filing for insolvency (see Cologne Higher Regional Court, judgment of November 16, 2021 - 9 U 253/20). This question usually only becomes relevant when the board member or the company (based on assigned rights) demands exemption from the D&O insurer because of the claims asserted. As part of the defensive cover, there is usually at least provisional cover for the insured board member until a legally binding determination of a knowing breach of duty is made.

However, D&O insurance contracts sometimes also contain so-called insolvency exclusion clauses. These clauses stipulate that the insurer is exempt from liability for certain breaches of duty that were committed after the insolvency event occurred or that are in any case related to a late filing for insolvency.

In one ofNoerrAs far as can be seen, the Cologne Regional Court decided for the first time on the interpretation of a so-called insolvency exclusion. This was based on the following facts.

1. Regarding the facts

The plaintiff is the former chairwoman of the supervisory board of the insolvent debtor. In the (still pending) damages process, the insolvency administrator is asserting claims against the plaintiff in her capacity as the former chairman of the supervisory board of the insolvency debtor. The insolvency administrator alleges alleged breaches of duty by the plaintiff in connection with the monitoring of the insolvency debtor's former CEO during the conclusion and payment of a loan in the amount of EUR 4.2 million. The insolvency administrator claims, among other things, that the payment of the loan was in breach of duty. The supervisory board allegedly failed to examine the borrower's financial circumstances and the value of the loan repayment claims. In addition, the insolvency administrator argues that the supervisory board allegedly failed to obtain independent legal advice on, among other things, the question of whether the policyholder was even allowed to grant a loan to the borrower according to its articles of association. In addition, the insolvency administrator argues (which the plaintiff has disputed) that the insolvency debtor was already insolvent at the time the disputed loan was concluded. According to the insolvency administrator, the plaintiff and the supervisory board members sued with her had therefore violated their duties to monitor the board of directors when filing for insolvency in a timely manner. The D&O insurer took the insolvency administrator's accusation as an opportunity to deny the supervisory board members insurance coverage for the actual claim against the insolvency administrator with reference to an insolvency exclusion agreed in the insurance contract. The insolvency exclusion read in part as follows:

“The insurance cover does not extend to insured events that are based on a breach of the obligation to submit an application to open insolvency proceedings over the assets of the policyholder or a subsidiary or on a breach of the obligation to monitor the timely submission of the application.”

2. Decision of the Cologne Regional Court

According to the application, the Cologne Regional Court ordered the defendant to grant the plaintiff insurance coverage in accordance with the conditions.

The regional court considered the substantive requirements of the insolvency exclusion clause to be not met in the specific case. According to the decision of the Cologne Regional Court, the exclusion only applies under the condition that the claim is basedalonethe violation of the obligation mentioned there to monitor timely insolvency proceedings