After the United States and Australia, Germany is one of the most litigious countries in the world when it comes to D&O liability. Indeed, over the past 20 years, claims against directors and officers have spread across all sectors and all companies – from financial institutions to small and medium-sized commercial businesses.
This development has been fuelled by a number of factors, including the dot-com crash and the financial crisis, subsequent increasing regulation and compliance requirements, as well as company boards' obligation to investigate wrongdoings and pursue claims against board members, as established by the Federal Court of Justice's seminal ARAG/Garmenbeck decision in 1997. There are other peculiarities – like the dual board system consisting of a management and a supervisory board and the fact that more than 80 per cent of D&O claims are insured (policyholder, insured subsidiary) vs insured claims (insured persons) – that make German D&O liability significantly different especially from the Anglo-American common law markets.
The frequency, volume and value of D&O claims – combined with a continuous soft market – is meanwhile exerting serious business pressure on D&O insurers. According to press reports, based on data collected by the German Insurance Association (GDV), the average combined ratio reached 145 per cent in 2014 and was still 125 per cent in 2015. While there are differences between carriers, it is clear that, for a stable and profitable market, insurers will need to carefully consider limits, wordings and premium calculations.
Nevertheless, the German D&O market has been and still is attracting new market players. Typically, foreign insurers entering the market will start writing German D&O business as excess participants. The same is true for many smaller established carriers. The underwriting decision (and premium calculation) will commonly be based on the expectation that the attached risk exposure will be limited as defence costs and most losses will be picked up by the primary and possibly other underlying layers. However, over the past 10 years, it has become a common approach especially by claimants and primary insurers to seek contributions from excess layers for settlements of claims that exceed the primary layer.
One of Germany's landmark D&O cases is the Siemens case involving allegations of corruption and "black funds". This case is continuing to shape the market not only because D&O claims based on allegedly insufficient compliance management have become a frequent source of D&O litigation but, in particular, because the settlement concluded between Siemens and its D&O insurers has, at least in the eyes of many claimants, become a textbook example for involving the entire D&O programme in a settlement.
In Siemens, the primary as well as the four excess layers, each providing for a limit of EUR 50 million, contributed to the settlement amount of EUR 100 million (and certain other payments) based on different percentages, starting with 40 per cent for the primary and with reduced rates of 30 per cent for the first excess layer and 13.75 per cent, 8.75 per cent and 7.5 per cent for the following layers.
Another well-known example is the Deutsche Bank vs Breuer case which was resolved by a settlement including the primary and the following nine excess layers for EUR 100.26 million. The list of claims resolved by settlements including excess layer participants is much longer and not restricted to unique cases involving DAX listed companies, but includes claims and companies of all sizes.
Given the often high amounts claimed and the fact that it is estimated more than 90 per cent of all claims are resolved by settlement, excess insurers will need to be prepared to deal and respond to demands for settlement contributions – which substantially impacts the underwriting risk and will often require more proactive claims handling from the beginning of a claim which has potential to reach the excess layer.
When considering the background of this trend and market practice which appears fairly unique compared to other jurisdictions, first of all, it is worth noting that the typical German D&O settlement will be a combined liability and coverage settlement which is concluded by the claimant (the policyholder) and its D&O insurers, sometimes also including the insured persons, especially if they are required to make contributions to a settlement themselves.
This means that liability and coverage will be settled simultaneously at a time where a claim has been made, at least out of court or with liability litigation pending, but where no (final) court decision has been made. Accordingly, depending on the specific case, the parties to the settlement will negotiate a settlement payment based on their evaluation of liability and coverage, meaning that often a number of factors will determine the sum that is ultimately agreed.
In relation to the involvement of excess insurers, the amount claimed is usually the starting point. A typical example: Company A maintains a D&O insurance programme consisting of a primary layer with a limit of EUR 25 million, a first excess layer (EUR 15 million) and a second excess layer (EUR 10 million). Thus, the aggregate limit is EUR 50 million. A is bringing a claim against its former CEO for EUR 60 million. Assuming that liability and coverage were assessed at 100 percent, the claim would exhaust the entire D&O insurance programme. Now, if A was interested in an amicable solution, perhaps in order to avoid publicity or to receive compensation without lengthy court proceedings, and willing to give a discount of, say, 50 per cent, i.e. requesting a payment of 30 million, it can (and will) be argued that such settlement is in the interest of the primary carrier and the excess insurers alike and that the latter, hence, should contribute.
Certainly, it is clear that, without such participation, there will be little incentive for the primary insurer to settle but rather to test the (even remote) chance that the courts might come to a different finding on liability and coverage. Still, even if all insurers agreed in principle that a contribution by all seems appropriate, the individual allocation is not straight forward but may require consideration of other factors, from the primary insurer's obligation to advance defence costs to different premium rates and other factors.
This example shows that the driving consideration for contributions from excess layers is typically the liability and coverage risk for each layer. Of course, in practice, D&O cases will be far more complex than this and the assessment of liability and coverage may also differ, not only as between claimant and defendants but possibly also amongst insurers. On the liability side, it will, for example, be necessary to consider whether the damages claimed are "all-or-nothing" or whether there are various different damage positions with a different likelihood. Moreover, in considering whether contributions from excess insurers are appropriate, one may need to distinguish cases where only liability issues or only coverage issues or both are in question.
Ultimately, it appears that the answer to the question of contributions from excess insurers is neither black nor white and that there is certainly no template that fits all possibilities. Evidently, it is too simplistic to only consider the amounts claimed and whether they exceed the primary layer; a diligent analysis of liability and coverage risks will be required. While it seems desirable that insurers handle excess layer contributions rather carefully and somewhat with restraint, market practice cannot simply be ignored and will often require a more active involvement in the claims handling by excess insurers from the start of a claim. At the same time, underwriters will need to reflect the German market practice in their risk evaluations and premium calculations even earlier in striving to write profitable business.
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