In a recent decision, the Higher Regional Court of Cologne dealt with the extremely topical issue of the distribution of the burden of proof in a direct lawsuit brought by a company against its D&O insurer.
The Decision of the Higher Regional Court of Cologne
In the case decided by the Higher Regional Court of Cologne, a limited liability company (GmbH) insured its managing director with a D&O insurance policy. After an event occurred which was presumed by the GmbH to be covered by insurance (involving inadequate fire insurance taken out by the managing director), the company did not take action against its managing director itself but had the claim of the insured managing director against the D&O insurance assigned to it and instead made a claim against the insurance on the basis of the assigned right.
The Higher Regional Court of Cologne now had to deal with the question of whether the same burden of presentation and burden of proof applies to the suing GmbH and the defending D&O insurance, compared to the imagined case that the injured GmbH would have initially made in a claim against its managing director.
In the latter case, the burden of proof would be reversed in accordance with Sec. 43 Para. 1 of the German Limited Liability Company Act. According to this section, the board member against whom a claim is made must demonstrate and prove that he is not in breach of his duty of care or that he acted without fault. In this respect, it was questionable whether this reversal of the burden of proof also applies in relation to the D&O insurer or whether the general distribution of the burden of proof applies, according to which the claimant generally bears the burden of presentation and proof for all facts substantiating its claim.
The Higher Regional Court of Cologne ruled that the reversal of the burden of proof also applies in direct proceedings brought by the company against the D&O insurer, meaning that the insurer has the same burden of presentation and proof for the lack of breach of duty by the insured corporate body as the body would otherwise have in liability proceedings directly with the company.
The Higher Regional Court of Cologne justified this result by stating that in terms of liability law the D&O insurer takes the place of the managing director who assigned his coverage claim to the company. Thus, the D&O insurer would be bound by the result of the liability proceedings even if the proceedings were conducted separately (i.e. if the company first asserted a claim against the responsible managing director and then the managing director asserted his coverage claim against the D&O insurer) without being involved in the legal dispute.
What are the Practical Implications of this Decision?
Regarding the allocation of the burden of presentation and proof in direct proceedings, the Higher Regional Court of Cologne has positioned itself in an intense dispute in the literature on the side of those who argue in favor of applying the reversal of the burden of proof also in direct proceedings of the injured company against the D&O insurer.
With this in mind, the decision initially appears to result in a considerable deterioration of the procedural situation for D&O insurer in direct proceedings against the injured company. At the same time, direct action by policyholders against D&O insurers now appears to be more attractive. After all, the allocation of the burden of presentation and proof is often decisive in practice. However, there is at least one important objection to this. In this situation, the insurer has the option of providing evidence through testimony from the insured corporate body, i.e. the acting managing director, who is not himself a party to the legal dispute and can therefore act as a witness. The practical significance of this evidence can already be seen from the facts of this case as the rejection of the appeal in this case is largely based on the fact that the Higher Regional Court of Cologne believed the testimony of the managing director of the plaintiff.
