Directors' and officers' liability insurance is not compulsory under German law, but obviously as well the directors as their companies enter in such agreements in order to cover the liability the directors might incur. D&O insurance is also recommended as a good practice by the German "Corporate Governance Kodex".
This Code, furthermore recommends that listed companies agree in their D&O policies upon an "adequate" deductible to be borne personally by the directors, the aim being to increase the directors' personal implication and sense of responsibility. However most of the listed companies did not apply this recommendation.
In the context of the financial crisis, Germany adopted on July 31st 2009 a new law on "the Adequacy of Managerial Salaries" (Gesetz zur Angemessenheit der Vorstandsvergütung - VorstAG), which, amongst other new regulations, now imposes this deductible to be borne personally by the directors.
This law amends the German Stock Corporation Act (Aktiengesetz - AktG), which means that the new regulation applies to all stock corporations (AG's), whether listed or not, but it is expressly not applicable to private Limited Liability Companies (GmbH's).
After § 93-2 AktG the following sentence is added: "Schliesst die Gesellschaft eine Versicherung zur Absicherung eines Vorstandsmitglieds gegen Risiken aus dessen beruflicher Tätigkeit für die Gesellschaft ab, ist ein Selbstbehalt von mindestens 10 Prozent des Schadens bis mindestens zur Höhe des Eineinhalbfachen der festen jährlichen Vergütung des Vorstandsmitglieds vorzusehen."
In a nutshell, D&O insurance in Germany now has to comply with the following rules:
- the policy must impose a personal deductible to be borne by the directors of at least 10% of the relevant loss;
- the total expose of the directors is however limited to 1,5 times their annual fixed remuneration.
Although the text of the law is not very clear, one can learn from the parliament works (Drs 16/13433) that this personal deductible is to be applied to each and every loss occurrence, but subject to the above mentioned cap, which is to be considered as an annual cap.
Only the members of the board (Vorstandsmitglieder) are concerned by this new regulation and not the members of the supervisory board (Aufsichts-ratsmitglieder).
The new law entered into force on August 5th 2009 (the day after its publication) and is applicable since then to all newly concluded D&O insurance contracts.
The existing policies have to be amended at the latest on July 1st 2010.
There are however two important "holes" in this new regulation (an exception authorized by the law and probably an omission of the law):
- for the companies which are obliged under pre-existing contracts with their directors to provide D&O insurance cover without personal deductible, the cover may remain unchanged as long is these contracts remain in force;
- the legislation does absolutely not prohibit directors from taking themselves insurance cover for the risk of this personal deductible, nor from claiming an increase of their remuneration as a consequence of this additional cost for them.
