Cologne Higher Regional Court finally provides clarification with current ruling
in the area of D&O direct litigation

A new exciting ruling from the world of D&O insurance. The proceedings dealt with the question of who bears the burden of proof if a company does not first take action against the managing director in an internal liability case, but instead takes direct action against the D&O insurer(s) (so-called direct action). This is possible if the defendant has assigned his/her indemnification claims against the D&O insurer to the company. But what happens in this case to the privileged distribution of the burden of proof under section 93 (2) sentence 2 AktG? The Cologne Higher Regional Court has now provided some clarity here.

How is it basically?

In the normal case of an internal liability case, the managing director must prove that he/she has fulfilled his/her duty if he/she is sued by the company for damages for an alleged breach of duty. This benefits the suing company, as this is associated with hurdles in practice (keyword: documentation - see also our webinar with Fides Technology) . This applies in particular if the breach of duty was not (allegedly) committed recently, but years ago and now leads to a claim via the statutory subsequent liability. In legal terms and in practice, the company therefore enjoys a considerable privilege with regard to documentation standards in many companies when it comes to the distribution of the burden of proof under Section 93 (2) sentence 2 AktG.

What has now been decided?

The uncertainty was whether the company would have to demonstrate and prove the breach of duty in the event of a direct action against the D&O insurer(s), which would make such direct proceedings considerably more difficult. As a result, the company would follow in the footsteps of the directors and inherit their disadvantages in terms of the burden of proof. 

The Cologne judges have now clarified that the same rules apply in direct proceedings against the D&O insurer(s) as in "classic" directors' and officers' liability proceedings. This means that the insurer must prove that the insured manager has fulfilled his duties. The insurer therefore takes on the role of the manager. 

The ruling (case no. 9 U 206/22) fundamentally strengthens the position of companies that want to take direct action against their D&O insurers. It therefore becomes more attractive not to take legal action against the responsible managing director, but directly against his insurer. The prerequisite, however, is that the managing director assigns his insurance claim to the company beforehand or, in other words, also relinquishes control over the proceedings. In addition to the transfer of control by the managing director concerned, there are other issues to consider, such as the effects specifically on public limited companies in the strict AG regime or disadvantages generally associated with the "direct action" with reference to insurance contractual obligations in the event of a claim, so that Risk Partners will continue to follow the developments surrounding the direct action intensively for our clients.  

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