Better safe than sorry

Managers are only human. They make mistakes. And sometimes, those mistakes cost a company millions. Some of the more high-profile examples in Germany include a bribery scandal at Siemens and the insolvency of the retail giant Arcandor. Corporations of all sizes are beginning to take steps to protect themselves against serious mistakes by their top executives - with a "directors and officers insurance," also known as D&O.

Devil in the details

It is not always a spectacularly bad decision that gets managers into trouble. Often there are "classic omissions," says Mark Wilhelm, a lawyer specializing in insurance law in Düsseldorf. Only 20 percent of all management mistakes are based on false calculations or business transactions, he estimates. In 80 percent of cases, top executives just missed something, or disregarded rules or agreements.

Wilhelm cited the example of a manager securing a currency transaction.

"According to in-house regulations he can perhaps only make decisions for sums up to two and half million euros by himself - larger amounts require a second opinion. Suddenly though, the transaction has to be secured to the tune of five million. So if he makes a decision on his own, he's overstepped his authority," Wilhem said. By infringing on the company's policy, the manager can be held liable for damages.

More companies sue their directors

The cost for a D&O policy starts at around 600 euros ($840) - and can run into millions, according to Marcel Roeder of Aon, one of the world’s leading insurance brokers. Many factors are at play in determining the price, says Roeder, including the size of a company and what risks are associated with his business. All criteria come under scrutiny before the insurance policy is granted.

Aon has noted a significant increase in management liability losses. In 2007, there were 134 cases worldwide, last year, the number rose to 445 cases. More and more companies are suing their directors, says Roeder, citing the German bank Bayern LB, truck-maker MAN, and Arcandor.

"Some of these cases were over the billion euro mark; all of them were in the three-digit million range," he said. "I'm not confirming that they all involved D&O damages. But we're already seeing a connection with the D&O insurance, because naturally this is not the kind of money that firms can recoup from the people involved."

Stricter liability rules are not necessary

During the financial crisis, many politicians called for more management liability in Germany. But Düsseldorf trade lawyer Mark Wilhelm feels that's just populism. In Germany, the statutory provisions are strict enough, he says.

"A manager can be held responsible for any mistake he makes that is negligent and later leads to damages," said Wilhelm. "This is not dependent on whether the executive operates in a DAX company or in a limited liability company. The liability rules apply to every manager."

If a manager intentionally damages his company, a D&O insurance policy won't do much good. But the intent to do harm has to been proven first.

Author: Monika Lohmüller / smh
Editor: Rob Turner