Working Life > Employee > Manager > Directors' and Officers' Liability

Directors' and Officers' Liability

Definition, Explanation

In case of problems in the business, directors, managers and executives can be sued for damages by the company, by shareholders, by competitors, by clients or former employees, respectively can be forced to assume liability. In the extreme case, they will be liable with their complete private assets, limitlessly. This is what is called the Directors' and Officers Liability (Managerhaftung). Legal bases in Germany are § 43 GmbH-Gesetz (Limited-Liability-Company Act) and § 91 Aktiengesetz, AktG (Company Act), as well as the Gesetz zur Unternehmensintegrität und Modernisierung des Anfechtungsrechts, UMAG (Act on Companies Integrity and Updating of the Rescission Act).

When, for instance, there is doubt whether the directors board of a company have been acting as in duty bound, then the supervisory board can (and ought to) take action as a controlling authority. In particular, it is to be investigated then, whether the directors board have accessed the relevant information and whether they have acted wantonly negligent. A directors board's being held liable by the supervisory board is called internal liability. If the managers cannot disprove the accusation, they can be held liable for damage payments amounting up to millions.

Legislation may protect managers for any decision they have made to the best of their knowledge and in all conscience, even if, later, it turns out to be a fault of business. Yet, such is hard to delineate. Judges therefore always have a hard time adjudicating. Also, supervisory boards eschew holding their directors board liable for faulty decisions, since such is often difficult to prove, and besides, it is a manager's job to take risks.

Risks are:

• Large investments
  • expensive real estate
  • neglecting invitations to tender
  • missing approval by other boards
• Faulty risk management
• Insolvency
  • debts are still paid although the company is due to be declared insolvent
  • insolvency-delaying
  • deals that cause insolvency
• Mistakes of employees
  • accounting errors
  • corruption
  • missing market research for new products
    Managers are liable for such mistakes if they are found to result from their organizing of processes
• Lacking diligence in
  • Recruiting
  • Control
  • Organization of processes
  • Competition
  • Product development
  • Adhering to deadlines

Means of a manager to protect oneself from managers accountability charges are:

• Logging by memos
• Counselling by lawyers and advisers
• Contracting of Directors-and-Officers-liability insurance, D&O

Often, the companies contract directors-and-officers-liability insurances for their directors, managers and supervisory staff, which are then usually part of the employment contracts with those persons.

Any D&O insurance contracted should cover internal liability (being held liable by the supervisory board). Also, the policy should cover non-lapsable extended reporting periods, since sometimes there are years in between the incident of breach of duty, the growing of damages, and the reporting of damages. Principally, insurances do not cover deliberate breach of duty.

About 1/10 of all D&O policies are utilized for a reported damage. Only 5% of all damage cases are settled without contestation. It is often tried to abuse the D&O insurance for compensating business losses. Insurances try to prevent this by dismissing-clauses: for a damage to be reported, the alleged responsible authority (e.g. the directors board) or the respective person must be dismissed.

Tips, Checklist

• As a manager, you should contract a Directors-and-Officers-Liability insurance (D&O)
• If your employer has contracted a D&O-policy, you should inform yourself precisely about the conditions (insurance sum, maximum annual power). Make sure that the protection lasts for the years of your occupation
• Make sure that the D&O insurance covers internal liability, concerning the directors board's being held liable by the supervisory board
• Every year, be handed out a copy of the D&O insurance contracted
• Consult an expert, examining the contract on how it might be disadvantageous for you, and re-negotiate if necessary
• Do not accept co-payment, respectively make it a low maximum amount to pay on your own
• Mind any risk exclusion. Especially damages resulting from deviation from law, bylaws, instruction, without any intention of damaging the company
• Get yourself freed of any liability risks if your employer does not insure you
• Mind clauses related to you D&O insurance in your cancellation agreement. The police should cover even those events that are reported after your dismissal (claims-made principle)
• Think about it well whether a change of insurances is advisable. Some insurances refuse to insure certain persons
• Choose a big insurer which you reckon to still be on the market in 10 years
• An international insurer is recommendable for abroad liability. Such insurers mostly provide a lawyer in the respective country

Last update: 08/12/2010