It’s definitely worth looking into.
This is because the target company may already have D&O insurance, which is typically structured as a corporate policy and—depending on the terms of the policy—may remain in effect despite your acquisition as a new shareholder and may not automatically terminate.
If the D&O insurance does terminate automatically or if there is not yet a policy in place for your company, you should ensure that a new policy is taken out as soon as possible.
D&O insurance is a specialized form of professional liability insurance for, among others, GmbH managing directors.
Don’t you need it? Because the GmbH is a limited liability company and you—or your hired external managing director—are therefore not personally liable?
Unfortunately, this is a common misconception.
According to Section 43 of the German Limited Liability Companies Act (GmbHG), a GmbH managing director is generally personally liable, to an unlimited extent, for any financial loss incurred by the GmbH as a result of a simple breach of the managing director’s duty of care.
Of course, there are a number of ways to minimize this very broad statutory liability in the employment contract or in the articles of association. However, liability for gross negligence or willful misconduct remains. And with it, the possibility of asserting claims for damages against the managing director.
A claim for damages is generally asserted by the shareholder against the managing director. If there are at least two shareholder-managing directors, the one accused of a breach of the duty of care is considered biased and has no voting right in the decision regarding whether claims will be brought against him or her.
Even if you are the sole shareholder-managing director, D&O insurance can be particularly helpful in the event of insolvency, especially if the insolvency trustee asserts claims for damages against you as a shareholder-managing director—for example, due to a delay in filing for insolvency.
D&O insurance serves two functions for the managing director. First, it provides defense coverage, meaning the insurer covers legal fees and court costs to defend against the claim asserted against the managing director. Second, it serves a compensation function, meaning that if the claim is justified, the financial loss asserted will be compensated—up to the sum insured—after deducting the defense costs.
If you are “only” an investor and have delegated management to a third party, then the third function of D&O insurance is important for you: the so-called balance sheet protection function. With a D&O insurer, you have a solvent payer that can compensate your company (and thus your assets) for financial losses culpably caused by the managing director, subject to the terms of the insurance policy.
To ensure that D&O insurance provides coverage in the event of a claim, it is important to check IN ADVANCE which coverage components are included in the policy terms and whether, for example, insolvency is covered by the insurance. Once a claim has occurred, there are virtually no options for making adjustments.
A coverage analysis and, if necessary, a market survey conducted by a consultant specializing in D&O insurance can help provide an overview of your insurance coverage and identify any potential need for adjustments.
Karin Baumeier is an attorney who specializes in advising on directors and officers (D&O) liability insurance and other types of executive insurance. She advises, among others, company executives and insurance brokers. She is a partner at omegaconsulting GmbH and a D&O trainer at the Deutsche Makler Akademie gGmbH.
