Inadequate company insurance can lead to D&O liability


In a case involving the decision of a director of a construction company not to pay an insurance premium, the Dutch 's-Hertogenbosch Court of Appeal issued a ruling on 13 October that this failure opened the director to personal liability for any losses incurred from an industrial accident. (See ruling Gerechtshof 's-Hertogenbosch 13-10-2020, ECLI:NL:GHSHE:2020:3156).

Director's obligation to take out insurance

In this case, the court decided that the employer company was obliged to take out liability insurance since the business it operates is considered dangerous, which is a remarkable decision given that the Supreme Court had previously ruled (ECLI:NL:HR:2011:BR5215 and ECLI:NL:HR:2011:BR5223) that a company's insurance obligation arising from good employment practices (article 7:611 Dutch Civil Code) is limited to accidents occurring from the risks of taking part in road traffic.

In the 13 October judgment, the court went a step further and deemed the insurance obligation of an employer involved in dangerous activities to be so important that failure to comply can lead to personal liability for the director. In its judgment, the court referred to standard case law in regard to D&O liability under article 6: 162 DCC, which states that if a company commits an unlawful act, in principle only the company is liable for the losses. The court, however, extended this interpretation and ruled that the company director can also be held liable under special circumstances and classified providing lack of adequate insurance for employees as one such special circumstance.

Board liability

To be personally liable based on article 6: 162 DCC, a director must incur personal blame tantamount to serious reproach. (See HR December 8, 2006, ECLI:NL:HR:2006:AZ0758).

The court reasoned that it is the task of a director to organise his business in such a way that insurance premiums are paid in time in order to prevent coverage from being suspended. The court considers that a director is ultimately responsible for ensuring that the company pay insurance premiums and that internal checks are carried out to confirm that these payment were made. Another factor the court considered is that employees operated under the assumption that they were insured against losses for work-place accidents.

According to the court, the company's failure to pay the premiums to the insurance company, resulting in suspension of coverage, constituted a serious personal reproach on the part of the director for which he could be held personally liable for damages.

According to the judgment, in order to minimise personal risks all D&Os should carefully consider the nature of their companies' activities and all associated risks.

Conclusion: adequate risk management recommended

In conclusion, under Dutch law directors must ensure that adequate insurance coverage is in place within their companies.

Every director should exercise adequate risk management, which means taking into account the nature of a company's operations and the associated risks, and ensuring that company insurance reflects these risks. In the absence of alternatives, insurance coverage may be needed to limit other risks, such as through contracts and governance. Under certain circumstances, inadequate insurance coverage can lead to director liability for uninsured losses.

Despite the cash-flow issues many companies are facing during these difficult times amid the COVID-19 pandemic, we still advise that insurance premiums continue to be paid as part of cash management.

For more information on this ruling and how to protect yourself from liability, contact your CMS partner or local CMS experts.