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2017 | OriginalPaper | Chapter

Corporate and Insurance Law

Author : Adolfo Paolini

Published in: The Dieselgate

Publisher: Springer International Publishing

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Abstract

The purpose of this chapter is none other than to assess from the angle of Directors’ and Officers’ Liability Insurance to what extent the VW investigations and admissions of liability could affect the D&O insurance market. There are several scenarios that, in one way or another, will impact D&O insurance for example: company’s liability for breaching anti-pollution rules, directors’ liability to the company for breach of directors’ duties, class actions against VW by consumers, class actions against VW by company shareholders and investors, actions against directors by third parties, actions against directors by environmental agencies, regulatory investigations, product recall, to say nothing of one of the most neuralgic areas ‘Defence Costs Cover’.
Arguably, the German two-tier board system will soon be providing answers should the supervisory board decide to bring proceedings against the executive directors of VW. On the other hand, the UK D&O market is still attentive and awaits further developments.
This chapter aims therefore to provide some responses to the proper construction of a D&O policy and assess whether the liabilities incurred by potential VW wrongdoers are covered under standard insurance wordings of this type.

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previous chapter Civil and Consumer Law
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Footnotes
6
Lüftenegger (2016).
 
7
Paolini and Nambisan (2008).
 
8
Paolini and Nambisan (2008).
 
9
Merkin (2014).
 
10
Post Office v Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363.
 
11
Astrazeneca Insurance Co Ltd v XL Insurance (Bermuda) Ltd [2013] EWCA Civ 1660.
 
12
[2013] EWCA Civ 1660.
 
13
In fact, in Astrazeneca Insurance Co Ltd v XL Insurance (Bermuda) Ltd, the defence costs claim was not disputed.
 
14
Merkin (2014).
 
15
Ring fencing, different limits of indemnity.
 
16
Omega Proteins Ltd v Aspen Insurance UK Ltd [2010] EWHC 2280 (Comm).
 
17
City Equitable Fire Insurance Co Ltd, Re [1925] Ch 407.
 
18
Companies Act 2006, s 174.
 
19
Ibid.
 
20
[2000] 1 BCLC 523 at 535.
 
21
[2000] 1 BCLC 523 at 535.
 
22
Secretary of State for Trade and Industry v Baker and Others [1998] BCC 583: “It is right that that should be so, because status in an organisation carries with it commensurate rewards. These rewards are matched by the weight of the responsibilities that the office carries with it, and those responsibilities require diligent attention from time to time to the question whether the system that has been put in place and over which the individual is presiding is operating efficiently, and whether individuals to whom duties, in accordance with the system, have been delegated are discharging those duties efficiently…. It would, I think, be quite rare to find a case where there have been serious continuing failures on the part of individuals of which the senior executive officers could disclaim responsibility on the ground that they did not know, and were not told of the failures … the responsibilities that go with the high office held by [the director in question] … carry with them the obligation of diligent supervision.”
 
23
[1998] 2 All ER 124.
 
24
Re Faure Electric Accumulator Co (1888) 40 Ch D 141; Re New Mashonaland Exploration Company [1892] 3 Ch 577 at 585; Sheffield and S York Permanent Building Society v Aizlewood (1890) 44 Ch D 412 at 455–460.
 
25
See in this book Schmid C, Chapter “Germany”, section 3.3.
 
26
Paolini (2016).
 
27
Equitable Life Assurance Society v Bowley and Others [2003] EWHC 2263 at 41; Bonham Carter v Situ Ventures Ltd [2013] EWCA Civ 47.
 
28
Dorchester Finance Co Ltd v Stebbing [1989] BCLC 498.
 
29
[2009] EWCA Civ 117.
 
30
Newcastle International Airport Ltd v Eversheds LLP [2012] All ER (D) 20; Australian Securities Commission v Healey [2011] FCA 717; Secretary of State for Trade and Industry v Swan and Others [2005] EWHC 603 (Ch).
 
31
UK Corporate Governance Code 2014 A.4 Non-Executive Directors, Supporting Principle.
 
32
See in this book Schmid C, Chapter “Germany”, section 3.3.
 
33
According to section 261 of the Companies Act 2006, leave of court is required to proceed with a derivative claim.
 
34
[1998] 2 All ER 577.
 
35
Before becoming Supreme Court following the judicial reform in 2009.
 
36
Cases that followed Williams: Fashion Brokers Ltd v Clarke Hayes [2000] PNLR 47; Electra Private Equity Partners v KPMG Peat Marwick [2001] 1 BCLC 589; Noel v Poland [2001] 2 BCLC 645; Merret v Babb [2001] EWCA Civ 214; European International Reinsurance Co Ltd v Curzon Insurance Ltd [2003] EWHC 321.
 
37
[2003] 1 All ER.
 
38
Prudential Assurance Co Ltd v Newman Industries Ltd (No2) [1982] Ch 204.
 
39
De Jong Bas (2013).
 
40
Companies Act 2006 s 260: “Derivative claims (1) This Chapter applies to proceedings in England and Wales or Northern Ireland by a member of a company—(a) in respect of a cause of action vested in the company, and (b) seeking relief on behalf of the company. This is referred to in this Chapter as a “derivative claim”. (2) A derivative claim may only be brought—(a) under this Chapter, or (b) in pursuance of an order of the court in proceedings under Section 994 (proceedings for protection of members against unfair prejudice). (3) A derivative claim under this Chapter may be brought only in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company. The cause of action may be against the director or another person (or both). (4) It is immaterial whether the cause of action arose before or after the person seeking to bring or continue the derivative claim became a member of the company. (5) For the purposes of this Chapter— (a) “director” includes a former director; (b) a shadow director is treated as a director; and (c) references to a member of a company include a person who is not a member but to whom shares in the company have been transferred or transmitted by operation of law.”
 
41
Companies Act 2006 s 994.
 
42
Insolvency Act 1986 s 122(g).
 
43
“Duty of care and responsibility of members of the management board.
(1) In conducting business, the members of the management board shall employ the care of a diligent and conscientious manager. They shall not be deemed to have violated the aforementioned duty if, at the time of taking the entrepreneurial decision, they had good reason to assume that they were acting on the basis of adequate information for the benefit of the company. They shall not disclose confidential information and secrets of the company, in particular trade and business secrets, which have become known to the members of the management board as a result of their service on the management board. The duty referred to in sentence 3 shall not apply with regard to a recognized auditing agency pursuant to § 342b of the Commercial Code within the scope of the audit.
(2) Members of the management board who violate their duties shall be jointly and severally liable to the company for any resulting damage. They shall bear the burden of proof in the event of a dispute as to whether or not they have employed the care of a diligent and conscientious manager. If the company takes out an insurance covering the risks of a member of the managing board arising from his work for the company, such insurance should provide for a deductible of no less than 10 per cent of the damage up to at least an amount equal to 1.5 times the fixed annual compensation of the managing board member.
(3) The members of the management board shall in particular be liable for damages if, contrary to this Act:
1. Contributions are repaid to shareholders; 2. Shareholders are paid interest or dividends; 3. Own shares or shares of another company are subscribed, acquired, taken as a pledge or redeemed; 4. Share certificates are issued before the issue price has been paid in full; 5. Assets of the company are distributed; 6. Payments are made contrary to § 92 (2), 7. Remuneration is paid to members of the supervisory board; 8. Credit is granted;
9. In connection with a conditional capital increase, new shares are issued other than for the specified purpose or prior to full payment of the consideration.
(4) The members of the management board shall not be liable to the company for damages if they acted pursuant to a lawful resolution of the shareholders’ meeting. 2 Liability for damages shall not be precluded by the fact that the supervisory board has consented to the act. 3 The company may waive or compromise a claim for damages not prior to the expiry of three years after the claim has arisen, provided that the shareholders’ meeting consents thereto and no minority whose aggregate holding equals or exceeds one-tenth of the share capital records an objection in the minutes. 4 The foregoing period of time shall not apply if the person liable for damages is insolvent and enters into a settlement with his creditors to avoid or terminate insolvency proceedings.
(5) The claim for damages of the company may also be asserted by the company’s creditors if they are unable to obtain satisfaction from the company. 2 However, in cases other than those set out in (3), the foregoing shall apply only if the members of the management board have manifestly violated the duty of care of a diligent and conscientious manager; (2) sentence 2 shall apply analogously. 3 Liability for damages with respect to the creditors shall be extinguished neither by a waiver nor by a compromise of the company nor by the fact that the act that has caused the damage was based on a resolution of the shareholder’s meeting. 4 If insolvency proceedings have been instituted over the company’s assets, the receiver in insolvency shall exercise the rights of the creditors against the members of the management board during the course of such proceedings.
(6) For companies that are listed on a stock exchange at the point in time of the violation of duty, claims under the foregoing provisions shall be time barred after the expiration of a period of ten years; for other companies, claims under the foregoing provisions shall be time barred after the expiration of a period of five years.”
 
44
Arsalidou (2003).
 
45
Ibid.
 
46
Gerner-Beuerle and Shuster (2014).
 
47
Schwarz (2008).
 
48
Du Plessis and Ruhmkorf (2015).
 
49
[1999] 1 Lloyd’s Rep 262.
 
50
Paolini and Nambisan (2008).
 
52
Lotz (2011).
 
53
Schwarz (2008).
 
54
German Corporate Governance Code 2014 Foreword.
 
56
Du Plessis and Cordes (2015).
 
57
Ibid. See also The Stock Corporation Act s 112(1).
 
58
Marine Insurance Act 1906 s 55(2) (a): “The insurer is not liable for any loss attributable to the wilful misconduct of the assured, but, unless the policy otherwise provides, he is liable for any loss proximately caused by a peril insured against, even though the loss would not have happened but for the misconduct or negligence of the master or crew.”
 
63
Paolini and Nambisan (2008).
 
64
Youngman (1999).
 
65
[2012].
 
66
981 F2d 596 (1st Cir, 1992).
 
67
Post Office v Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363.
 
68
Merkin (2014).
 
69
Astrazeneca Insurance Co Ltd v XL Insurance (Bermuda) Ltd [2013] EWCA Civ 1660.
 
70
Silberman v. CGU Insurance Ltd [2003] NSWCA 203.
 
71
Wilkie v. Gordian RunOff Ltd [2003] NSWSC 1059; [2005] HCA 17.
 
72
Wyeth v. Cigna [2001] Lloyd’s Rep IR 420.
 
73
New Zealand Insurance Company Ltd v New Zealand Forest Products Ltd and another (1995) 8 ANZ Ins 75, 769.
 
74
Merkin (2014) at 20-081; see also Thornton Springer v. NEM Insurance Co Ltd [2000] Lloyd’s IR 590.
 
75
Poole Harbour Yacht Club Marina Ltd v. Excess Insurance Co [2001] Lloyd’s Rep IR 580.
 
76
Paolini and Nambisan (2008).
 
77
[2010] EWCA (Civ) 1472.
 
78
These rules purport to attribute the acts or omissions carried out by company directors to the company itself. The outcome would be that it would be the company, along with its controllers, that who may have breached the law. It is necessary that the wrongdoer is in a position of control, so his/her acts can be attributed to the corporate body. See Stone & Rolls Ltd (In Liquidation) v Moore Stephens (A Firm) [2009] UKHL 39. However, company directors cannot use the use of attribution to stop a claim brought by the company itself against them, for breaches of directors’ duties. Bilta (UK) Ltd (In Liquidation) v Nazir [2015] UKSC 26.
 
79
Inconsistency with the rationale of penalties for breaching fair competition rules. Or indeed financial regulation, e.g., Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 A.C. 500.
 
80
Safeway v Twigger at para. 29: “Once it is appreciated that the claimant companies are (personally and not vicariously) liable to pay the penalties exigible under the 1998 Act, those companies cannot invoke the Hampshire Land principle to say that they were not ‘truly’ liable. The principle gives them no defence to the [Office of Fair Trading’s] claim for the penalties; they are personally liable to pay those penalties and it would be inconsistent with that liability for them to be able to recover those penalties in the civil courts from the defendants. The statutory scheme has attributed responsibility to the claimant companies and the Hampshire Land exception to the ordinary rule of attribution can have no import on the application of the ex turpi maxim.”
 
81
Companies Act 2006 section 170.
 
82
Companies Act sections 260 and 261.
 
Literature
Arsalidou D (2003) Objectivity vs flexibility in civil law jurisdictions and the possible introduction of the business judgment rule in English law. Comp Law 24(8):228–233
De Jong Bas J (2013) Shareholders’ claims for reflective loss: a comparative legal analysis. E.B.O.R. 14(1):97–118
Du Plessis JJ, Cordes N (2015) Claiming damages from members of management boards in Germany: time for a radical rethink and possible lessons from Down Under. Comp Law 36(11):335–353
Du Plessis JJ, Ruhmkorf A (2015) New trends regarding sustainability and integrated reporting for companies: what protection do directors have? Comp Law 36(2):51–64
Gerner-Beuerle C, Shuster EP (2014) The evolving structure of directors’ duties in Europe. E.B.O.R. 15(2):191–233
Lotz S (2011) Directors’ duties with regard to creditors in German and UK (core) company law. I.C.C.L.R. 22(8):264–269
Lüftenegger K (2016) The VW claim a call like any other, DAR 3/2016 Literature
Merkin R (2014) Colinvaux’s law of insurance, 10th edn. Sweet & Maxwell, London
Paolini A (2016) Non-executive directors in financial institutions: a demanding standard of care. In: Paolini A (ed) Research handbook on directors’ duties. Edward Elgar Publishing, Cheltenham
Paolini A, Nambisan D (2008) Directors’ and officers’ liability insurance. Informa Law, London
Schwarz F (2008) The German co-determination system: a model for introducing corporate social responsibility requirements into Australian law? Part 2. J.I.B.L.R. 23(4):190–199
Youngman I (1999) Directors’ and officers’ liability insurance. A guide to International Practice. Woodhead Publishing, Cambridge
Arab Bank Plc v Zurich Insurance Co [1999] 1 Lloyd’s Rep 262
Astrazeneca Insurance Co Ltd v XL Insurance (Bermuda) Ltd [2013] EWCA Civ 1660
Australian Securities Commission v Healey [2011] FCA 717
Bilta (UK) Ltd (In Liquidation) v Nazir [2015] UKSC 26
Bonham Carter v Situ Ventures Ltd [2013] EWCA Civ 47
Re Barings Plc (No 5) [2000] 1 BCLC 523 at 535
City Equitable Fire Insurance Co Ltd, Re [1925] Ch 407
Dorchester Finance Co Ltd v Stebbing [1989] BCLC 498
Electra Private Equity Partners v KPMG Peat Marwick [2001] 1 BCLC 589
Equitable Life Assurance Society v Bowley and Others [2003] EWHC 2263 at 41
European International Reinsurance Co Ltd v Curzon Insurance Ltd [2003] EWHC
Fashion Brokers Ltd v Clarke Hayes [2000] PNLR 47
Re Faure Electric Accumulator Co (1888) 40 Ch D 141
Re New Mashonaland Exploration Company [1892] 3 Ch 577 at 585
Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 A.C. 500
New Zealand Insurance Company Ltd v New Zealand Forest Products Ltd and another (1995) 8 ANZ Ins 75, 769
Newcastle International Airport Ltd v Eversheds LLP [2012] All ER (D) 20
Northstar Aerospace v Ministry of Environment Ontario Canada [2012]
Omega Proteins Ltd v Aspen Insurance UK Ltd [2010] EWHC 2280 (Comm)
Poole Harbour Yacht Club Marina Ltd v. Excess Insurance Co [2001] Lloyd’s Rep IR 580
Post Office v Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363
Prudential Assurance Co Ltd v Newman Industries Ltd (No2) [1982] Ch 204
Secretary of State for Trade and Industry v Baker and others [1998] BCC 583
Secretary of State for Trade and Industry v Swan and Others [2005] EWHC 603 (Ch)
Sheffield and S York Permanent Building Society v Aizlewood (1890) 44 Ch D 412
Silberman v. CGU Insurance Ltd [2003] NSWCA 203
Standard Chartered Bank v Pakistan National Shipping Corporation [2003] 1 All ER
Stone & Rolls Ltd (In Liquidation) v Moore Stephens (A Firm) [2009] UKHL 39
Thornton Springer v. NEM Insurance Co Ltd [2000] Lloyd’s IR 590
Wilkie v. Gordian RunOff Ltd [2003] NSWSC 1059; [2005] HCA 17
Metadata
Title
Corporate and Insurance Law
Author
Adolfo Paolini
Copyright Year
2017
Book
The Dieselgate

Print ISBN: 978-3-319-48322-1

Electronic ISBN: 978-3-319-48323-8

Copyright Year: 2017

DOI
https://doi.org/10.1007/978-3-319-48323-8_7