A Landmark Ruling Shakes Up D&O Insurance: What Directors Need to Know
In a highly anticipated decision, the German Federal Court of Justice (BGH) has clarified a critical issue in Directors and Officers (D&O) insurance litigation, specifically regarding the exclusion of coverage for knowing breaches of duty. But here's where it gets controversial: the court ruled that a breach of the obligation to file for insolvency does not automatically imply a knowing breach of the payment prohibition under insolvency law. This decision, handed down on November 19, 2025 (case no. IV ZR 66/25), overturns a lower court’s ruling and sets a new precedent that could significantly impact how insurers and directors approach D&O claims.
The Core Issue: Burden of Proof and Cardinal Obligations
In D&O insurance, coverage is typically excluded for knowing breaches of duty by insured directors. Generally, the insurer bears the burden of proving such breaches. However, when it comes to cardinal obligations—fundamental professional duties—the insurer gains an advantage: the breach is presumed to be knowing, shifting the burden to the insured to prove otherwise. One such cardinal obligation is the duty to file for insolvency under Section 15a of the German Insolvency Code (InsO). The question before the BGH was whether a breach of this duty also implies a knowing breach of the payment prohibition under Section 15b InsO, which bars payments that reduce the insolvency estate.
The Lower Court’s Controversial Take
The Higher Regional Court (OLG) in Frankfurt had previously ruled (March 5, 2025, case no. 7 U 134/23) that a breach of the obligation to file for insolvency does indicate a knowing breach of the payment prohibition. Their reasoning? Both obligations are intertwined, serving the same purpose of protecting the company and its creditors. Thus, evidence of a knowing breach of one obligation should imply a knowing breach of the other. This interpretation, while logical, raised concerns about overbroad exclusions in D&O coverage.
BGH’s Game-Changing Decision
The BGH disagreed, stating that a knowing breach of the payment prohibition cannot be inferred solely from a breach of the duty to file for insolvency. The court emphasized that the decisive factor is whether the specific obligation breached—in this case, the payment prohibition—was knowingly violated. For claims under Section 15b InsO, the focus must be on payments made after factual insolvency occurred, not on other breaches like the failure to file for insolvency. This ruling aligns with the BGH’s earlier stance that claims under Section 15b InsO are generally covered under D&O policies (November 18, 2020, case no. IV ZR 217/19).
Practical Implications: No Blanket Exclusions
The BGH’s decision means insurers can no longer rely on a blanket exclusion for payments made after factual insolvency. Instead, they must prove, on a case-by-case basis, that each payment was prohibited and that the director was aware of the prohibition. This could complicate claims handling, especially in cases involving numerous payments or fluctuating asset situations. And this is the part most people miss: the court did not address whether the payment prohibition itself qualifies as a cardinal obligation, leaving room for future debate.
A Thought-Provoking Question for You
Does the BGH’s ruling strike the right balance between protecting directors and ensuring insurers aren’t unfairly burdened? Or does it create unnecessary complexity in D&O claims? Share your thoughts in the comments—we’d love to hear your perspective!
