Breach of duty by the insolvency administrator upon terminating existing D&O insurance without prior announcement to the insured persons

The claimant was appointed insolvency administrator of the company’s assets in February 2010. The defendant, meanwhile, had been executive director of the insolvency debtor since April 2008 with sole power of representation and was covered by D&O insurance arranged by the company, which the insolvency administrator terminated in September 2010. The insolvency administrator demanded damages from the director according to section 64 subsection 1 German Limited Liability Companies Act, as the defendant should have noticed the company was on the brink of insolvency in late 2008 and ensured that no more payments were made to an in-debt account from this point onwards.

The director then submitted a third-party counterclaim against the insolvency administrator with the reasoning that the insolvency administrator, by terminating the D&O insurance in favour of the director, had made the director liable for damages to the insolvency administrator under section 60 subsection 1 German Insolvency Code. Regarding a possible breach of duty by the insolvency administrator, Higher Regional Court Hamburg determined that a breach of duty by the insolvency administrator can be considered if the latter terminates the director’s D&O insurance without discussion and without any notification. It continued that the insolvency administrator should have informed the director of the intended termination of the insurance policy in advance, to give him the chance to possibly pay the insurance premiums out of his own pocket.

However, Higher Regional Court Hamburg ultimately dismissed the director’s counterclaim, as he had incurred no damage at all from the termination of the D&O insurance. Although the insurance contract contained a clause saying that the otherwise applicable three-year late registration deadline is excluded in the event of an insolvency application being filed for the company, in other words in the event of the insolvency application being filed according to the “claims made” principle, only such claims as are submitted before termination of the insurance contract are covered by the insurance. Thus the director’s insurance coverage would have expired on the date of termination of the insurance contract. However, in the panel’s view the complete exclusion of a late registration deadline for organs of joint-stock corporations, especially in constellations with high liability risks such as filing for insolvency, is void. According to it, the three-year late registration deadline still exists and the managing director suffered no damage due to the termination of the insurance contract.