Policies of this kind cover the losses – namely defence costs and compensation – arising from a claim for damages based on a management error or an error by a company officer that is brought by a third party against a director or officer.
There must be:
- An error on the part of a director.
- Damage caused by that error.
- A causal link between the error and the damage.
The purpose of the insurance is to protect directors’ personal assets by covering their personal liability. Such a policy differs from other types of insurance in that it does not cover the policyholder itself, but the personal assets of the directors and executives of the legal entity taking out the insurance.
Such a policy is characterised by its broad description of the insured. The policyholder is always the company. The insured are:
- Legal directors of the company and its subsidiaries (former, current and future directors).
- De facto directors.
- Directors in external entities.
- Employees (with respect to employment matters or when they are held liable together with a director).
- Legal entities, management companies and their permanent representatives.
- Heirs and spouses/cohabiting partners.
The amendment to the law allows a co-contractor of a legal entity to hold the entity’s director extra-contractually liable for an error made by him or her in the implementation of the agreement with the co-contracting company (concurrence). The director is no longer protected in these circumstances by the quasi-immunity of the implementing agent/auxiliary person. There are no changes in terms of cover in the directors’ liability policy. If a director is accused of committing an error, the policy will in principle provide cover.
As the new rules extend the liability of the director or officer towards third parties, this could potentially lead to more claims and higher defence costs. The effect of this on insurance conditions, such as premium increases, remains to be seen. As things stand, insurers are not yet making any moves along these lines, but the situation may look different some time after the entry into force of the new Book 6 of the Civil Code.
Note that the cover for management error is always substantive, regardless of the legal grounds (contractual or extra-contractual) on which the director is held liable. This, together with the broad definition of the term ‘insured’ in these policies, means that they do not need to be modified at present.
For more information about the impact of this change on civil liability policies, read this article.
