Federal Court of Justice protects core function of D&O insurance: Insurers liable for claims against managing directors for reduction of assets

Federal Court of Justice protects core function of D&O insurance: Insurers liable for claims against managing directors for reduction of assets

In its ruling of 19 November 2025 (Ref. IV ZR 66/25), the Federal Court of Justice (BGH) made a decision that is central to the practice of D&O (directors and officers) insurance. The focus was on the question of under what conditions insurance cover is excluded due to ‘knowing breach of duty’. The Senate took this opportunity to follow up on its previous case law and ruled that exclusion clauses in D&O terms and conditions must be interpreted narrowly and may not be interpreted more broadly than their wording and economic purpose require. With its statements, the Federal Court of Justice provides necessary legal certainty and clarifies in particular that the (mere) late filing of an insolvency application does not automatically lead to the loss of insurance coverage.

The Senate's current ruling is the culmination of a long-standing development. For example, a decision by the Higher Regional Court of Düsseldorf in 2018 attracted considerable attention, in which the court ruled that so-called claims for reduction of the estate – i.e. claims against managers for payments made after the onset of insolvency – as not covered by D&O insurance, since these claims did not constitute claims for damages within the meaning of Section 1.1 ULLA (General Insurance Conditions for Financial Loss Liability Insurance for Company Directors and Executive Employees). The Federal Court of Justice (BGH) already countered this in 2020 and ruled in favour of the plaintiff insolvency administrator.

Notwithstanding the Federal Court of Justice's decision at the time, the Higher Regional Court of Cologne in November 2021 and, more recently, the Higher Regional Court of Frankfurt in January and March of this year initially ruled in favour of D&O insurers who invoked exemption from liability vis-à-vis insolvency administrators. The insurers argued in each case that the managing directors had knowingly violated key obligations of the D&O insurance contract at issue, in particular the prohibition on payments under insolvency law and the obligation to file an application in good time, with the result that the claims asserted by the insolvency administrators would be excluded from insurance coverage in accordance with Section 6 ULLA.

In these cases, the Higher Regional Court sided with the insurers and ruled that a knowing breach of duty within the meaning of Clause 6 ULLA could be assumed if a duty was disregarded with knowledge of its existence and with the awareness that it was being breached. The court classified the duty to monitor crises, to examine possible insolvency and to file for insolvency as basic knowledge of management. It ruled that anyone who ignores these duties violates the fundamentals of corporate responsibility. Members of the executive body who ‘sail blindly into crisis’ can therefore also be accused of violating the cardinal duties under the insurance contract in terms of coverage law.

Although the insurer bears the burden of proof for this deliberate breach of duty, in the case of an objective breach of so-called ‘cardinal duties’ of the insurance contract, the evidence is regularly provided – and, in the opinion of the OLG Frankfurt, the duty to file for insolvency in good time is such a cardinal duty under a D&O insurance policy.

The Federal Court of Justice (BGH) now expressly contradicts this view. The Senate first states that the exclusion of risk under insurance law must be interpreted narrowly. It only applies if the breach of duty that triggers the asserted claim was committed knowingly. The decisive factor is the positive knowledge of the board member of the specific duty and its breach. In this regard, the Frankfurt Higher Regional Court merely found ‘that the managing director had at least consciously ignored the insolvency.’ However, in the opinion of the Federal Court of Justice, (merely) conditional intent or conscious ignorance are not sufficient to justify exclusion from insurance coverage.

The Senate also criticised the Frankfurt Higher Regional Court for failing to examine the payments submitted by the insolvency administrator after the alleged onset of insolvency, so that it was not clear that the individual payments made were prohibited and that the managing director had positive knowledge of this. The (mere) assumption that the violation of the obligation to file for insolvency automatically implies knowledge of the payment violations is in any case not sufficient. While the obligation to file for insolvency is part of basic professional knowledge, the assessment of a corresponding payment prohibition, which always requires an examination of the individual case, should be evaluated differently. In the absence of corresponding findings in the judgment of the Frankfurt Higher Regional Court, the case had to be referred back.

Practical note

The decision of the Federal Court of Justice has significant practical implications: it avoids a systematic coverage gap that would have disadvantaged not only managers but also creditors as a whole. For board members, D&O protection is no longer jeopardised by blanket arguments such as the ‘cardinal duty’ doctrine. If insurance cover were to be withdrawn, claims against managing directors would often come to nothing, as their personal financial resources are often insufficient to compensate for the insolvency estate. D&O cover therefore not only serves to protect the board member, but also indirectly to secure the insolvency estate and thus satisfy creditors. This would make restructuring and liquidation processes considerably more difficult.

In practice, the ruling provides greater legal certainty in coverage proceedings and sends a clear signal for an interpretation that is in line with the interests of all parties. In crisis situations, companies should ensure that all decision-making processes are carefully documented and regularly review their insurance terms and conditions. Insurers can no longer rely on general circumstantial evidence, but must provide concrete proof of the knowledge of each individual breach of duty.