Column "My Verdict": When an Insurance Company Tightens Manager Liability

A recent FAZ column highlights how D&O insurance policies, intended to protect executives from liability, can paradoxically exacerbate it. A new court decision shows that this supposed protection, contrary to expectations, increases individual manager liability.

Column "My Verdict": When Insurance Increases Manager Liability

A recent decision sheds new light on the supposed protective function of D&O insurance for executives and its potential impact on personal liability. Companies take out so-called Directors and Officers insurance to protect themselves against financial losses that may arise from management errors by their executives. Surprisingly, in certain cases, such coverage can lead to a manager's individual liability not being mitigated, but actually increased – a development that could have far-reaching implications for corporate governance and the risk appetite of decision-makers.

The basic premise of how D&O insurance works is clear: it is intended to protect executives from the financial consequences of errors or breaches of duty in the course of their activities. On the one hand, this is intended to encourage risk-taking in the interest of corporate success and, on the other, to make filling leadership positions more attractive. The insurance industry has developed complex contractual frameworks for this purpose, which regulate the scope of coverage and exclusions in detail. This usually involves breaches of duty in internal relationships, for example towards the company itself, or claims by third parties.

The underlying issue touches on central aspects of commercial law and business management. Understanding these complex relationships is of great importance, particularly for aspiring executives who are completing or aiming for an MBA degree. The curriculum of many MBA programs includes modules on corporate governance, risk management, and commercial law, in which precisely such cases are analyzed. The ability to identify legal risks and weigh personal liability risks is becoming increasingly important for managers and is one of the core competencies that should be taught in a high-quality degree program.

The recent decision suggests that the existence of D&O insurance could be interpreted by courts in individual cases as a factor that lowers the threshold for taking certain risks, as a financial buffer appears to be present. If an error is then committed that leads to damage, the expectation regarding the manager's duty of care could be assessed differently in hindsight. This is a critical reversal of the actual intention of the insurance and calls for a reassessment of risk strategies in many companies.

This development underscores the need for managers and those who wish to become managers not only to be professionally excellent but also to develop a deep understanding of the legal framework and the potential pitfalls of their decisions. A sound understanding of D&O contract terms, the limits of insurance coverage, and one's own duties is essential to effectively manage personal liability. Companies are called upon to critically review their guidelines and insurance contracts and to inform their executives comprehensively.