It is 'business as usual' for a lawyer, but highly emotional and a heavy strain for any managing director: shortly before the end of the year, managing directors may receive a registered letter claiming damages in the millions on the ground of an alleged breach of duty. There rarely is any reason for such claims at Christmas time. After all, there is only a very small risk of a managing director's liability becoming time-barred at the end of the year.
It happens just before Christmas, preferably on 23 December. The doorbell rings and a friendly postperson hands a registered letter to the managing director. The registered letter reads - in a more subtle way, but usually in exactly the same tone: 'Dear Mr Managing Director, you have breached your duties and have a liability towards the company of 10 million euros. Please remit the amount to the following bank account no later than by 27 December. Sincerely'.
At a first glance, such letters seem grotesque. What individual has several million euros available in their private banking account at short notice and would be willing to transfer them within a few days? At a second glance, they seem comprehensible at least from a legal point. They are not aimed at the managing director's private banking account, but at the D&O insurance policy taken out for the benefit of the director. Only a letter addressed to the managing director can trigger insurance coverage and also default interest. Yet, it does not take much to visualise what such a letter shortly before the Christmas holidays will do to the managing director receiving it.
Upon receipt of this kind of letter, the managing director must immediately report the claim to the D&O insurer. Failing to do so is a breach of the director's obligations under insurance law, something a managing director often is not even aware of. But more on that later. In the worst-case scenario, the managing director will lose insurance cover by failing to report the claim. The managing director will also try to find a suitable lawyer for his defence before the Christmas holidays.
Claimants often demand that the statute of limitations be waived at short notice to avoid a lawsuit. Such waiver also needs to be discussed with the D&O insurer and the director's own lawyer. This is often not an easy task during the Christmas season. It is a time that is often highly emotional and overwhelming for the director concerned. There goes Christmas. The holidays are overshadowed by dealing with the accusations and worries about a possible personal insolvency.
But is it necessary? From a legal perspective, it is normally not necessary to make a claim at the end of the year. Claims based on the managing director's liability expire after five years (section 43 (4) of the German Limited Liability Companies Act (Gesetz über die Gesellschaften mit beschränkter Haftung, GmbHG)). The limitation period, however, does not begin at the end of the year in which the claim arose.
As section 43 (4) GmbHG makes no provision for the start of the limitation period, the limitation period commences immediately when the claim arises, regardless of the company's knowledge or grossly negligent lack of knowledge of such claim (section 200 sentence 1of the German Civil Code (Bürgerliches Gesetzbuch, BGB)). According to the ruling of the German Federal Court of Justice (Bundesgerichtshof, BGH) dated 29 September 2008 (case no. II ZR 234/07), any knowledge of the injured party is irrelevant. The question of why many claims, including demands for waivers of claims, are made at the end of the year can only be explained by the claimants' ignorance of the limitation periods.
Foresight secures claims
Irrespective of the above, the question remains as to why the claimants mostly use a very harsh tone and why there is no explanation that the claim is being made primarily with regard to the D&O insurance. It is an open secret that the claim against the managing director is usually aimed exclusively at the D&O insurance, as the managing director's private assets are rarely sufficient to satisfy the claim.
D&O insurance is maintained precisely to protect the director against such claims. Why is this not disclosed to the managing directors to ease their worries? There are only a few claim letters that make any reference to the existence of D&O insurance and, more importantly, to what specifically needs to be done to fulfil the obligations imposed by insurance law. The obligations are set out in the terms and conditions of the D&O insurance policy, which the managing director does not usually know.
At the same time, it is also in the claimant's interest that the insurance cover is not unnecessarily jeopardised by not meeting obligations. Without insurance cover, the claimant’s only option would be to fall back on the managing director's private assets, which are usually not worth millions.
This article is meant to be an appeal for mutual respect at Christmas time. From a legal perspective, it is normally not necessary to make a claim at the end of the year. If it is, however, it can be worded and timed in such a way that it will not become a Christmas disaster for the managing director and everyone else involved. Particularly in complex D&O cases with several parties involved, economically sensible solutions can often be found for all parties through a settlement process. The comparison and consideration of the different interests in a mediation approach requires good judgement and foresight and − right at the beginning of a dispute − good etiquette.
Dr Florian Weichselgärtner
This article was first published in the Versicherungsmonitor magazine on 9 December 2024. Here you can find the original article.
