Fine recourse against managers – latest developments in case law and insurability of fines in D&O

Contrary to the opinion previously held in case law and in parts of the literature, the Regional Court of Dortmund (https://openjur.de/u/2471461.html) decided in its decision dated 21/06/2023 – Case no. 8 O 5/22 that a company’s right of recourse against its managing director for compensation of damage incurred by the company is to be recognised if the managing director participated in an antitrust violation attributable to the company and the company was subsequently fined and confronted with indemnity claims.

The decision could have a significant impact on previous legal practice and D&O insurance.

Previous case law

It must have been a relief to both D&O insurers and managers alike when the Regional Court of Saarbrücken, in its two rulings on the sanitary cartel in 2020, took the opportunity to deny, in an obiter dictum, the liability of executive boards and managing directors for cartel fines imposed on a company by the EU Commission. The Regional Court of Saarbrücken had once based its ruling on the efficiency requirement developed by the European Court of Justice, according to which the deterrent effect of corporate fines intended by the European competition authority should not be weakened by German law. If the company that was fined under the European Union law regime could pass on fines to managers and thus ultimately to D&O insurers, this would be contrary to EU law. As a result, the Regional Court of Saarbrücken declared fines to be non-recoverable.

Decision of the Regional Court of Dortmund

This obiter dictum was now contradicted by the Regional Court of Dortmund, which relied on general principles of liability law: Just as third parties would have to be liable to the company in the context of a breach of contractual duties to advise, the managing director would also have to be liable if he breached his duty as a member of the executive body to refrain from or prevent breaches of the law. And since the sanctioning of the breach of duty by the company would only be possible after the fine had been imposed on the company, the fine recourse would also be the only possible sanctioning measure against the corporate body.

The Regional Court of Dortmund consistently rejected the arguments that had previously been put forward against fine recourse: It neither considered the primary payment obligation of the fined company to be in question, nor that the company could regularly be completely discharged due to the recourse. The company had to make advance payments and was thus exposed to the insolvency risk of its institution. The deterrent and preventive function of the fine would thus continue to be preserved.

The Regional Court of Dortmund also considers the risk of passing on the fines to the D&O insurer not to be harmful. Due to their amount alone, fines could not be recovered in full from the managing director, as the coverage amounts of D&O insurances would regularly be exceeded, if they were applicable at all in such cases – the exclusion of intent is called to mind here.

Fine recourse as a mandatory sanctioning measure against managers?

With its decision, the Regional Court of Dortmund clearly opposes the hitherto prevailing view in case law and considers the recognition of recourse for fines against corporate bodies to be a mandatory sanctioning measure.

The view taken by the Regional Court of Dortmund is thus also likely to be accompanied by new legal principles. For example, the NIS-2 Implementation and Cyber security Strengthening Act [NIS-2-Umsetzungs- und Cybersicherheitsstärkungsgesetz] – in addition to a comprehensive expansion of cyber security obligations – also provides for direct liability of management bodies. It explicitly regulates that managing directors are liable for breaches of their respective duties towards the company (§ 38 para. 2 of BSIG [Gesetz über das Bundesamt für Sicherheit in der Informationstechnik [Act on the Federal Office for Information Security]) V.2. This essentially corresponds to the law already in force. What is new, however, is that, according to the explanatory memorandum, claims for fines are also to be included in the concept of damage. In any case, this clear legislative assessment supports the findings of the Regional Court of Dortmund and paves the way for the proponents of recourse liability of management bodies for corporate fines.

The new development in case law and legislation with regard to the sanctioning of corporate bodies through the recourse of fines is likely to worry managers and D&O insurers alike. It should be obvious that a company will seek recourse precisely when there is a solvent D&O insurer behind a manager who is personally held liable. The question of the insurability of fines for which recourse is sought will therefore become all the more important.

Fines and D&O 

Just as controversial as the question of whether an internal recourse for fines is possible at all under liability law is the question of whether fines imposed on companies for which recourse is sought internally against executive bodies are insurable under D&O. This cannot be answered in a blanket way, and different aspects of the scope of D&O have to be considered. In particular, it must be differentiated whether insurance cover is to be granted for the defence of the fine for which recourse is sought or whether the insurer indemnifies the institution in the amount of the fine claimed against the company.

Defence coverage

There are no legal reservations about the admissibility of defence coverage aimed at defending the fine claimed against an insured person. In D&O, the insurer provides defence coverage by rejecting the (unjustified) indemnity claim against the claimant. In this case, the insurer bears the costs of a lawyer specialising in the defence against liability claims as well as the other costs of the court proceedings for the insured person. Defence cost coverage is at the core of every D&O policy and protects the executive bodies from unjustified claims.

Particularly in light of the fact that – despite the decision of the Regional Court of Dortmund – there is still no supreme court case law that unequivocally affirms the recourse of fines in the internal relationship, the defence of the claim asserted against the insured person will remain in the foreground in the future.

Costs for PR consulting and psychological support

In addition, in some special concepts (e.g. the Finlex special concepts), further costs that insured persons may incur in the course of a claim are borne according to the conditions.

Insurance coverage is provided e.g. for the costs of defence against or mitigation of (imminent) reputational damage to an insured person due to a breach of duty (alleged) in media reports. If, in the course of the fine recourse, the service body the claim is made against becomes the target of a media campaign, for example, the insurer shall bear the costs of a PR agency acting on behalf of the insured person.

The same shall apply to any psychological counselling that may be required for the institution the claim is made against. Here too, under certain conditions, the insurer will cover the costs of care for the insured person with the aim of stress management with a recognised psychologist or psychiatrist.

Insurability of fines (indemnification) 

The question of whether the fine itself is also insurable has to be assessed differently. Here, the Finlex conditions stipulate that insurance coverage exists for internal relationship claims of insured companies against insured persons which are asserted on the basis of a fine imposed on an insured company. Cartel fines, GDPR fines, fines within the meaning of the German Supply Chain Duty of Care Act [Lieferkettensorgfaltspflichtengesetz] and other fines for which recourse is sought against insured persons internally are therefore insured in principle.

The insurance coverage is, however, subject to the proviso that the indemnity with regard to the fine is only covered insofar as insurability is not precluded by a statutory prohibition of insurance. Whether such a prohibition exists is highly controversial from a legal point of view. According to what is probably still the prevailing legal opinion, a fine imposed is not insurable in Germany, because insurance protection could thwart the legal purpose of prevention. In the literature on insurance law, however, it is also argued that a different approach should be taken here. According to this, a distinction would have to be made according to the type of fine, and it would depend in particular on the degree of fault (intent, gross negligence or slight negligence) that is relevant for the violation.

Whether the fine itself is insured can therefore neither be affirmed nor denied as a general rule. As long as the legislator does not provide clarity on this, or the highest court decides on the question of the insurability of fines, it remains uncertain whether insurance coverage exists for fines or not.

Effect of the decision of the Regional Court of Dortmund on the D&O 

It remains to be seen whether the decision of the Regional Court of Dortmund is the first of many steps to establish fine recourse against managers in legal and thus inevitably also in corporate practice. This would have the consequence that D&O policies would also be increasingly burdened with the defence against or indemnification of recourse for fines. The dispute that still persists as to whether fines imposed on companies for which recourse is sought internally against executive bodies are insurable in D&O could thus gain new momentum.

Finlex D&O Special Concepts 

With Finlex D&O policies, however, you are well prepared until then, as these policies provide insurance cover for the fine itself, provided that there is no statutory insurance prohibition to the contrary. In addition, insurance cover is always provided within the scope of defence cost coverage as well as for any PR consultancy costs and costs for psychological support for managers who are held liable.