It has been a common practice for company managers to be covered by D&O insurance. This increases the freedom to perform key functions in corporate bodies. The company itself also benefits from taking out this type of insurance.
1. What is D&O insurance and what does it cover?
D&O insurance is also commonly called company directors and officers liability or management board liability insurance. It aims to safeguard the financial interests of the management board member and the company itself if a management board member causes damage to the company while performing his or her duties. A management board member will be liable to the company for loss caused by an act or omission contrary to the law or the company’s articles of association unless he or she is not at fault (Article 293 § 1 of the Commercial Companies Code and 483 § 1 of the Commercial Companies Code). Such a wrongful act may be, for example, the failure to file a bankruptcy petition on time (Article 299 of the Commercial Companies Code) or exposing the company to significant financial damage (Article 296 § 1a of the Criminal Code).
Sources of liability of management board members of companies can be found not only in the provisions of the Commercial Companies Code, but also in the Civil Code, the Labour Code, the Tax Code, the Bankruptcy Law, the Reorganisation Law, and in the company internal acts, i.e. the articles of association.
2. What to remember to benefit from D&O insurance?
From the point of view of the harmed company’s interests, it is more beneficial to enforce the amount of the loss incurred directly against the insurer, as the insurer guarantees solvency. However, to successfully obtain insurance proceeds, several formal prerequisites set out in the legal regulations and in the insurance contract (including the GTC) must be met.
First, the loss incurred must be reported (the harmed party files a claim for payment or files a lawsuit) within the deadline specified in the contract or the GTC. Failure to meet this deadline does not exclude the insurer’s liability, however, it may result in a reduction of the proceeds (Article 818 § 3 of the Civil Code).
Second, it is important to know when the insurer’s liability is excluded. Usually, the insurer is not liable, for example, for a loss arising from a criminal offence, an extension of civil liability beyond the scope set out in the legal provisions, fiscal penalties or fines, or penalties or fines the coverage of which would violate the legal order.
3. What to do when a company has lost its policy?
It happens that a company is the policyholder, but the policy document has been lost. What to do in this situation? If a company knows the insurer’s details, it can, for example, request a copy of the concluded contract and the GTC from the insurer. However, if, as a result of personnel changes, the company does not have the insurer’s details, the company may, for example, approach its accounting department to find the confirmation of the insurance premium payments, which should include the policy number and the details of the entity to which the transfer was addressed.
4. What to do if the insurer refuses to pay?
The practice of claiming insurance payments repeatedly proves that insurers make all efforts to exempt themselves from their obligation to pay. Please bear in mind that although a company may sue an insurer, courts sometimes agree with insurers’ arguments. This was the case, for example, in the judgment of the Court of Appeal in Katowice of 24 October 2017, case No. V ACa 38/17, in which the Court found that since the event causing the loss occurred before the conclusion of the insurance contract and the claimant knew about it at the time of the contract conclusion, but did not disclose this fact, the insurer’s liability was excluded.
The refusal to pay the insurance proceeds also turned out to be justified when a claim was reported to the claimant (the insured) after the lapse of the deadline for reporting a claim specified in the insurance contract (judgment of the Court of Appeal in Gdańsk of 18 May 2020, case No. I ACa 895/19). Therefore, it is important to review the insurance terms and conditions and all required formalities (e.g. procedure for reporting a claim, definition of loss) beforehand.
However, insurers’ actions and arguments are not always successful. The case law knows examples of won cases against insurers that concerned D&O insurance. Such an example is the case heard by the Regional Court in Katowice (case No. XIII GC 522/18), where a company acted as claimant. The sued insurer argued that the conduct of the management board member (who was sued together with the insurer) in making the out-of-assignment transfers was not unlawful or contrary to the company’s internal regulations and therefore the insurer was not obliged to pay. However, the court disagreed with this argument and found that the management board member’s actions were covered by the insurance as they breached not only the law (e.g. Article 512 of the Civil Code) but also the company’s articles of association. The Court also found that the president’s unintentional fault amounted to gross negligence, and although, as a rule, under Article 827 of the Civil Code, the insurer is then free from liability, this was not the case here, as the parties had contractually extended the insurer’s liability to include this type of fault. Therefore, the Court held that the insurer and the management board member were obliged to pay the ordered amounts.
This shows that a refusal to pay proceeds under D&O insurance does not necessarily have to prevent a company from pursuing a claim against an insurer and it is worthwhile to carefully analyse the situation and the chances of obtaining a court judgment against the insurer (especially as it has a status of a solvent debtor). An analysis of case law shows that companies, if properly prepared, stand a chance in disputes against insurers.
5. What must be demonstrated in a lawsuit against an insurer? 
What legal steps should the harmed company take? First of all, it can sue the member of a corporate body, the insurer or both of them together. The company should demonstrate, among other things, the following:
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- when suing the insurer – conclusion of an insurance contract,
- culpable act or omission contrary to the law or the articles of association,
- loss (actual as well as lost profits, e.g. income – cf. judgment of the Administrative Court in Szczecin of 19 November 2020, case No. I AGa 67/20), and
- causal link between the culpable conduct and the loss.
Importantly, Article 293 § 1 of the Commercial Companies Code and Article 483 § 1 of the Commercial Companies Code provide for a presumption of fault on the part of a member of a corporate body, which means that it is the wrongdoer who, in order to be released from liability, must prove that he or she is not at fault for the loss incurred (judgment of the Administrative Court in Katowice of 26 September 2022, case No. V AGa 407/22).
If only a member of a corporate body is sued as the wrongdoer, he or she can (and sometimes even must) take certain legal action for the insurer to join the proceedings.
If you have any questions or doubts about pursuing a D&O insurance claim or protecting yourself against claims with insurer involvement, please feel free to contact our experts attorney-at-law Kinga Zagrajek and attorney-at-law Wojciech Bazan.
Contact:
Wojciech Bazan – adwokat | Partner, Litigation and Arbitration, Infrastructure and Construction Industry
wojciech.bazan@jdp-law.pl
Kinga Zagrajek – adwokat | Associate, Litigation and Arbitration, Infrastructure and Construction Industry
kinga.zagrajek@jdp-law.pl