Directors and Officers liability insurance (D&O) for lawyers and tax consultants in law firms too?

D&O insurance has long since established itself in the insurance portfolios of German companies. Law firms are only now increasingly taking out this special insurance cover for their leadership staff.

Professional liability insurance does not cover D&O risks

Insurance cover within the scope of professional liability insurance against financial losses exists for liability risks arising from professional practice as a lawyer, patent lawyer, tax consultant, auditor including the statutory insurance obligation, with the insured activities being derived from the risk description of the insurance conditions.

The conditions expressly exclude activity as an executive, managing director, board member, supervisory board member or advisory board member, and it is also a matter of third-party liability insurance that does not include activities on its own account.

Risk of loss as in other types of companies

In law firms, too, there are various management tasks with regard to selection, organisation and monitoring. The respective law firm size and its complexity (locality, international nature, legal areas, client structure, use of technology, etc.) requires a certain degree of organisation. A higher degree of organisation is distinguished by cross-functional tasks being transferred to different people: Managing partners or managing directors, office managers, law firm spokespersons, special company officers for compliance in the areas of money laundering, occupational health and safety and data protection are named as examples.

Rules are ideally drawn up for the processes and quality requirements in a law firm and to maintain compliance, staff must be made aware of these rules, trained in them and monitored. The rules must be adapted if there are any changes to the legal and economic environment.

Numerous decisions are always made anew – in the application for clients and policy conclusion with clients, in liability agreements, in claims management, in the area of staffing, in the commissioning of service providers, in the area of insurance policies, suitable IT, in collaboration with networks and on many other topics. Care must be taken in each case.

With the BRAO (Bundesrechtsanwaltsordnung [German Federal Lawyer’s Act]) reform, professional practice companies became holders of professional rights and obligations – and thus also recipients of professional sanctions. This inevitably raises the question of organisational negligence and the possibility of recourse for fines and loss of revenue for management staff. Even the new scope for decision-making, which permits the reform with regard to the choice of legal form, inter-professional mergers and complex shareholding structures, requires new considerations at management level, among other things, in the lively competition for clients as well as from practical, liability and tax perspectives.

Most of the tasks described are carried out by the persons in addition to the actual activity advising and representing clients.

Errors that occur in the performance of these special tasks can cause considerable financial damage to the law firm and ultimately to the management staff and company officers. Corporate bodies are personally liable without restriction from their private assets for damages culpably caused by the law firm or third parties. More stringent legal liability rules (reversal of the onus of proof) apply to corporate bodies of German stock corporations (Kapitalgesellschaften) than to shareholders of partnerships. For the latter, however, there is a situation similar to directors’ and officers’ liability and organisational provisions in the Articles of Association are particularly relevant for their liability.

Since 01/08/2022, with the entry into force of the BRAO reform, lawyers have for the first time also had the opportunity to establish a partnership with full limitation of liability. Auditor and tax consultancy firms were previously able to select the KG (Kommanditgesellschaft [German limited commercial partnership]) form under conditions. The now also permitted GmbH & Co KG, which is expected to be very popular, is indeed a partnership, but the strict liability standards according to GmbH (Gesellschaft mit beschränkter Haftung [German limited liability company]) law apply to the general partner’s bodies, i.e. personally unlimited liability including the reversal of the onus of proof, under which culpable action can be assumed and the (former) body must exonerate itself. According to current case law, the limited partners have a direct liability claim against the management of the general partner.

For employees such as the office manager, the employee liability privilege applies in principle; however, even a small claim for damages can be painful for them and any possible significantly greater damage claim at the law firm may also seriously affect them. A D&O insurance policy for law firms should therefore also include first-party damage protection of the law firm.

Questions a law firm should ask itself

Each law firm should therefore ask itself whether it would file claims for damages internally for any possible damage event, whether it indemnifies the responsible persons from third-party claims, to what extent it can bear financial loss itself – including all costs incurred – and whether it would like to financially safeguard former, current and future management staff and employees in insurable roles, as well as their relatives, against internal and third-party claims.

A D&O insurance policy gives the parties concerned the necessary security when performing their tasks and forms an important basis for decisions and innovations.

D&O insurance should also be established in the insurance portfolio of law firms.

The insurance costs are clear; the cost of taking out a contract is surprisingly low. New special Finlex concepts with renowned D&O insurers insure law firms faster and in a more needs-based way than previous products for law firms.