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Managers seek individual policies as German companies reject D&O cover
26/08/2008
LENA SAUER warns that recent high-profile German directors’ and officers’ claims are just the tip of the iceberg, and that there are many other claims that never become publicly known as insurers seek to keep the sale of individual policies quiet
THERE have been a number of high-profile examples where managers of large German corporations have been caught up in spectacular losses - Jürgen Schrempp of DaimlerChrysler, Peter Hartz of Volkswagen and Jürgen Sengera of WestLB are three that spring to mind.
In cases such as these, it is the directors’ and officers’ (D&O) insurer that has to pay.
There will be more high-profile payouts to come. Electronic and engineering giant Siemens has recently announced that it will seek compensation from a number of recent members of its senior management. The action is likely to result in D&O claims of up to E250m ($370.91m).
These cases are only the tip of the iceberg, and most claims never become publicly known. There are some companies who decide to do without D&O policies. Some believe them too expensive, others feel the policy is not needed or of no use. Even large car manufacturer BMW, listed in the German blue-chip index DAX, decided against such cover, feeling that it would not be in line with the company’s view on compliance.
In many family-controlled medium-sized enterprises, even when a manager hired from outside may wish to have D&O cover, this wish can be greeted with mistrust.
Owners often do not foresee that the friendly atmosphere between them and the mostly younger man or woman from outside can suddenly change into a less friendly relationship - for example, when mistakes have led to massive losses for the company, and to a claim of the owner or owners against the manager.
In order to protect themselves from financial ruin, managers can buy D&O cover individually. Normally this is done by the company for the management board and the supervisory board, covering the members of these bodies against claims arising from losses which they caused through an action taken in their professional capacity. These claims can be made either by a third party or by the manager’s own company.
The persons covered are the decision-makers in the firm, and the premium is paid by the company. If the leading staff members do not know the details of the policy - primarily the exclusion clauses - it could be risky for them. If he takes out a D&O policy himself, the manager is fully in the picture regarding the terms. But he also pays the premium.
If the company does not buy a D&O policy, the manager should take out D&O cover immediately, advises Rainer Willmanns, chief executive of the managers’ association Deutscher Manager-Verband (DMV): "The individual D&O is the only insurance cover which really works." Some 4% of his association’s members have such a contract, he said - but the association does not disclose the total membership figure.
DMV is helping its members to find cover, but managers can easily find such a policy elsewhere - although hardly any insurer advertises this possibility. "Some insurance companies sell individual policies," said Lars Heitmann of the insurance broker Funk. Insurers do not really like such policies, "but when the reasons are laid out, many insurers are prepared to do it."
Demand has been small, though, in Heitmann’s experience.
German underwriting agency Dual has had different experiences. The young Cologne-based company, which insures risks for the European operation of Bermuda-based Arch Insurance, notes a growing demand for individual D&O contracts. "For around 5% of our policies, premiums are paid by the individual manager," said Dual’s managing director Udo Pützer.
The classical case is that of the family business where the owner retires and is replaced by a manager from outside the family. He then asks for insurance cover. "The owner assures the manager that nothing will happen to him, but he prefers not to rely on that," Pützer explained.
Premiums for individual D&O are based on numerous criteria such as company size, sector, international activities and listing on the stock exchange. But the price is set on the characteristics of the insured as well as work experience and the scope of his work. "With a good risk we sell an insured sum of E1m for well below E2,000," said Pützer.
Other insurers also sell D&O policies directly to the manager, but prefer not to say so publicly. "The problem is the joint and several liability," said José David Jiménez of insurer
Broker Heitmann recognises the problem of the joint and several liability. But the insurers are not necessarily left with the total loss, it believes. "They pay the sum out first, and then reclaim the money from the other managers," it said. For the insurer, the risk remains that this recourse is unsuccessful.
In order to prevent companies from making claims against managers because they have insurance, Dual includes a discretion clause in its contracts. The client is not allowed to inform his employer about the existence of an insurance. "Normally, an individual D&O is as expensive as a policy for the whole company would be," said Pützer. With a guarantee of discretion, Dual grants a 30% rebate.
