Who is manager’s liability insurance worth it for?
Manager’s liability insurance offers sensible protection against liability claims in the event of managerial errors. Because if you are a high-ranking employee and you do not have such insurance, in the worst case you will lose all your private assets if you make a wrong decision.
Anyone who dreams of a career expects influence, prestige and a high salary. But what many forget: in the end, the boss is responsible for the company and, in extreme cases, responds with his own assets in case of costly management errors. The dangers of such management mistakes lurk everywhere: pandemics, inflation, cyberattacks, and climate change all harbor risks: if you mess up, you can do serious damage to the company. With Directors & Officers Insurance (D&O), there is a policy that protects executives against this.
This is a special form of property damage liability insurance. And one whose purpose sounds absurd at first glance: the companies that take out this insurance insure their own senior managers against liability claims that they themselves might one day assert. Therefore, the insurance does not protect the company that celebrates it as a contractual partner, but the private assets of its executive employees. Indirectly, however, companies also help themselves, as damage claims against managers can far exceed their financial means. What’s more: Without the protection of D&O, many managers no longer want to be involved in a high-level position.
According to the experts at Allianz Global Corporate & Specialty, the risks of management errors are increasing significantly in the current economic climate. In particular, high market volatility, high inflation, climate change and cybercrime pose great dangers to managers. At the same time, the number of lawsuits for damages is increasing. Allianz experts also expect a growing number of corporate insolvencies when Corona support measures expire this year. Bankruptcies have traditionally been one of the main causes of D&O claims.
Insurance pays for breach of duty
In principle, D&O insurance pays if the manager fails to perform his duties. Breach of duty means that you disregard the duty of care required by law in the context of your job. Specifically, this could be, for example, miscalculations or unfavorable contractual conclusions. Ignoring the statutes of limitations for financial claims is also one of the typical cases. If the manager does not have D&O insurance, then he is legally responsible for any damage that occurs as a result of his private equity.
D&O insurance protects directors from internal claims, ie from their own company, and from external claims, eg from shareholders. Important: The insured event does not occur only because of the damage, but only when the company asserts a specific claim against a manager, board member, managing director or supervisory board. The sums demanded are often in the millions. According to an analysis by the General Association of the German Insurance Industry (GDV), those responsible for insolvencies should be liable for an average of almost 7 million euros.
In addition to financial security, the D&O policy also offers what is known as passive legal protection insurance. This means that it covers the costs of lawyers, appraisers and court proceedings before compensation is paid. The reason for this is simple: “Injury claims against managers are almost always controversial. Therefore, this defense function is a very important part of D&O insurance”, says GDV General Manager Jörg Asmussen. In fact, insurance companies first try to refute the allegations in their own interest, so that they take sides against their own insured, ie the company, and in favor of the insured person, ie the manager.
No free pass due to management errors
However, D&O insurance does not cover all management errors. Anyone who intentionally causes damage to a company or knowingly violates its obligations does not enjoy insurance coverage. “D&O insurance is not a free pass for management errors or comprehensive insurance against loss,” says Asmussen. Companies also have to take typical business risks, such as miscalculated market development or the failure of a new product.
Policies are anything but cheap, and insurers are currently raising premiums across the board. According to the General Association of Insurance Companies, the D&O contribution increased last year for 80 percent of companies surveyed. 20 percent even paid surcharges of 50 to 100 percent. From the perspective of the insurance industry, this is unavoidable. Because the insurance division of D&O is in the red. “The bottom line is that there are significant losses as a result of ever-increasing liability risks for managers,” explains Asmussen. According to GDV statistics, contributions increased by around nine percent in 2020 to a recent figure of EUR 335 million, while benefits grew by 14 percent in the same period. The currently unprofitable business is also evident from the loss ratio. He describes the ratio of damage expense to insurance premium, and it is 110 percent for German D&O insurance companies.