Liability and Directors’ and Officers’ Liability Insurance
Liability towards the Company
Liability of board members towards the company is one of the core themes of corporate governance. Directors and members of management and supervisory boards are unlimited liable under German Law if they violate their duties (duty of care and duty of loyalty) and therefore the company suffers a damage.
Third Party Liability
Only in some cases directors and board members may be liable towards a third party. In particular, in case of insolvency of the company if its creditors’ claims has arisen only after the company had become illiquid or over-indebted. Moreover third party liability of directors and board members is possible in cases of tort. If the board members are acting this way at least negligently they may be liable directly towards the damaged party. Members of the supervisory board have to be aware that their behavior may be interpreted as incitement or at least aiding and abetting to commit any tort by a director or member of the management board.
Prevention of Liability
In many cases personal liability may be prevented. Therefore directors and board members have to prepare their business judgement very well. In order to do so, a wide range of information has to be collected and interpreted correctly in particular. Because board members only may exercise their discretion if their decision-making has been finished without any mistake. If they conduct pursuant to these requirements which is called Business Judgement Rule (BJR) they will not be obliged personally to pay for a damage the company has suffered on the basis of their judgment. But directors and board members have to be aware that the BJR is only applicable to business judgement but not to bounded decisions. If a conduct is prescribed by law the board members have to meet the respective requirement without any discretion. Of course, they have also to be well informed in these cases. Thus it is recommended to consult an attorney, a tax adviser or another expert depending on the issue.
Conduct in Times of Crises
If directors or board members suspect that the company is over-indebted or illiquid they ought to urgently instruct a tax adviser or charged accountant as expert in order to deliver an opinion. If they do not and instead of continuing to operate they regularly cause personal liability. In a lot of these cases they are obliged to pay a huge amount to the insolvency administrator already after a short period of over-indebtedness or illiquidity of the company.
Directors’ and Officers’ Liability Insurance as “Must Have”
Every director or board member should be protected by a so called Directors’ and Officers’ Liability Insurance (D&O). Depending on the specific form the insurance coverage varies. But in any case the D&O guarantees the directors and board members that their personal assets are not at risk in case of negligently violating their duties .