The Directors & Officers Liability Insurance (D&O Insurance) certainly is one of the key businesses insurance products available in the market. Companies of any size and nature will one day or another consider the need to arrange those insurances for the benefit or their managers.

While the product is today widely distributed in the Luxembourg market, it remains nevertheless a quite complex subject. Not only are the rules affecting directors’ liability scattered over various pieces of legislation, but the insurance market itself is also offering an enormous array of insurance solutions that is difficult to navigate.

Considering the need for directors and officers to correctly insure their personal liability, it is of prime importance that they understand the ins & outs of what could eventually be a major asset in their defense against claims.

Let us therefore have a closer look at those ins & outs in a series looking at trends and developments in the D&O insurance market. After a brief recall of the legal framework and the alternative mitigation tools, we will focus on those of the issues that, in our experience, are key in your D&O insurance contract.

A complex and evolving legislative and regulatory landscape

The subject of directors’ liability is abundantly covered in Luxembourg and we do not intend to provide here a comprehensive overview of the matter. It is however worth remembering some of the framework principles allowing us to conclude that directors and officers today are particularly exposed to liabilities.

Directors and officers are agents of the company (contrat de mandat). As a consequence, they do not enter into any personal engagement concerning the company’s obligations and the actions of a director should be treated as being the actions of the company itself. This principle, set out in article 58 of the Luxembourg Law of 19 august 1915 on commercial companies (the Companies Act), is the first line of defense available to directors & officers, allowing them to protect their own personal assets from claims against the company. Nonetheless, the shelter from personal responsibility is far from absolute. Directors will indeed be held personally liable towards the company or third parties for errors, negligence or even omissions in the performance of their duties.

To put it simply, we distinguish between three sources of general civil liability:

– In fist instance, directors are accountable to the company for mismanagement in the performance of their contractual duties (article 59(1) of the Law of 19 august 1915). The company is in principle the only party entitled to invoke such contractual liability, in his quality as principal in the agency relationship. Eventually, it will have to take action against each of the directors separately, as the liability is not joint and several. Frequent errors of mismanagement include not attending to the board meetings, lack of supervision of delegates, entering into important contracts on terms detrimental to the company, various omissions and negligence such as dismissal of an employee without valid reason or even not providing for adequate insurance;

– Article 59(2) of the Law also establishes an aggravated liability of directors & officers to both the company and third parties (such as creditors) for breach of the Law or the company’s articles of association. This action may be founded either in contract or in tort, depending on whether the claimant is the company or a third party. The law here provides for a rebuttable presumption of joint and several liability of the board of directors. To avoid liability, the directors must prove that they did not commit any tort and that they gave notice of the alleged facts to the general meeting of shareholders as soon as they knew them. Such liability may for instance be invoked when directors delay the approval or filing of the annual financial accounts, do not convene the general meeting of shareholders, or breach the statutory distribution of competencies between the company’s bodies.

– Finally, directors & officers may also, in limited circumstances, be held liable to third parties for damage under the general rules of tort law (article 1382 of the Civil Code), but only when the directors have engaged in tortious conduct (as opposed to a mere management fault). Some examples here include the abusive continuation of a loss-making activity or the undertaking of obligations that the company is obviously not able to meet.

Next to those general civil liability principles, directors and officers can incur many other liabilities under specific laws.

In first instance, the Luxembourg tax administration may hold managers personally liable for the payment of the company’s own taxes. As far as direct taxes are concerned, the source law is to be found in articles 103 & 109 of the Abgabenordnung. The tax authorities must notably prove that the managers refrained from paying the taxes (such as the withholding tax on salaries and wages for instance) in a fault-based way. Newly appointed directors are even liable for events occurred prior to the start of their mandate, if they were made aware of them. Same applies in the frame of indirect taxes, where following the Luxembourg TAX reform for 2017 directors are now also jointly liable for the VAT due by the company in the event of a culpable breach of VAT compliance obligations and/or non-payment of the VAT (articles 67-1 to 67-4 of the VAT law). All those liabilities are primarily imposed on the directors in charge of the day-to-day management of the company, whether de jure or de facto. The issue of directors and officers being held liable for company’s taxes is certainly not limited to Luxembourg. Many other jurisdictions, including Belgium, Germany and Italy, have introduced similar provisions in their tax legislations.

Furthermore, directors and officers are also exposed to various administrative or criminal fines and penalties.

In the tax field again, the law now distinguishes between three forms of tax offenses in the area of both direct and indirect tax: simple tax fraud (avoidance of taxes or benefit from undue reimbursements); aggravated tax fraud (when the amount of tax evaded is substantial); and tax swindle. Whereas simple tax fraud is subject to administrative sanctions to be imposed by the tax authorities, the other two offences are criminally prosecuted. Those entrusted with the daily management of the company would be well advised to closely monitor the fulfillment of any of their tax obligations.

In another vein, directors and officers may also be subject to criminal sanctions and administrative fines for breach of laws on privacy protection. The foregoing applied in Luxembourg to directors who violated the right of privacy of employees (such as the secrecy of correspondence), or to directors whose company used a video-surveillance system without the prior approval of the NCDP (National Commission of Data Protection).

The law of 10 August 1915 on commercial companies also imposes, next to the civil liability regime, criminal penalties on the directors and other officers in case of abuse of company assets, abuse of power and votes, failure to call a general meeting, non-presentation of accounts. Just as other more specific legislations do, such as securities laws (prospectus legislations, market abuse), insolvency laws (reckless or fraudulent bankruptcy), money laundering laws, environmental laws and anti-trust laws.

And liability does not end there: the duties and liabilities of corporate directors at companies in Europe is a factor both of domestic and European legislation. Initiatives such as the General Data Protection Regulation (severe penalties against directors for non-compliance with the higher organizational standards in terms of their use of personal data), the e-Privacy Directive, the Cybersecurity Directive, the Environmental Liability Directive will put even more pressure on the directors and officers.

An increased shareholder and regulatory scrutiny

It is therefore stating the obvious to say that directors and officers now face more scrutiny than ever before.

Today, regulatory and other investigations and enquiries are considered to be the greatest risks facing directors in most jurisdictions. In Luxembourg for instance, the CSSF is playing an increasingly active role by ways of on-site inspections, formal requests, recommendations, injunctions and even fines imposed on directors & officers. One need only look to the annual reports published by the CSSF on its website to find out the many real case examples of investigative measures and sanctions against directors and officers. The CSSF has been constantly recruiting new agents over years, notably in the area of supervision. No doubts therefore that the pressure won’t be reducing in the next years. While much of this has indeed been felt in the financial sector, other sectors are seeing an increase as well, including energy, high tech, telecommunications, pharmaceuticals, manufacturing, real estate development and construction.

Shareholder litigation is another rising issue, with the recent examples of class action claims against directors and offcers, especially in listed companies. Derivative or securities actions – where shareholders sue directors or officers on behalf of the company – are the most common form of shareholder litigation in most European countries. Mergers and acquisitions (M&A) and initial public offerings (IPOs), where there are increased reporting requirements, are common causes. Lawsuits typically challenge the price, process, deal protection provisions and disclosures.

Reducing Directors’ Legal Risk

A lot of legitimate questions therefore arise in directors and officers’ minds: how to protect against the eventuality of a claim ? what are the … Let’s take some time to remember the guiding principles in this area.

Firstly it should be noted that directors and officers must act in a professional way. Needless to say for example that absenteeism is not an excuse, and that one should hold sufficient physical meetings in order to manage a company efficiently. In the same way, directors should document with evidence all the decisions they take and review/comment meeting minutes, review important contracts or prospectuses, understand the business of the company… In short, directors must act diligently and professionally.

The discharge given by the General Assembly is of course very important and will contribute in discharging the directors of their liability to the shareholders for what they did during the year and disclosed during the General Assembly. But it does not discharge their liability to other stakeholders or for material facts not presented to the Assembly.

The discharge given by the General Assembly is of course very important and will contribute in discharging the directors of their liability to the shareholders for what they did during the year and disclosed during the General Assembly. But it does not discharge their liability to other stakeholders or for material facts not presented to the Assembly.

Directors are also encouraged to enter into an indemnification agreement from the Company or from the sponsor they represent at the Board. In that case the sponsor or the company will keep their director harmless and indemnify on their behalf any pecuniary claim. Nevertheless, it can preclude other shareholders or creditors introducing a claim. In addition, the company granting indemnification could be unable to pay (ex: bankruptcy) or unwilling to pay.

Directors can also rely on sponsor or main shareholder D&O’s insurance policy. They will then have a regulated third party able to indemnify independently of the company or the sponsor. Nevertheless, that insurance program is out of the director’s control. It could happen that the insurance premium was unpaid, that the insurance limit is exhausted via claims in other group’s companies or that the director leaves the group and lose access to the insurer.

Navigating the D&O insurance

Directors’ and Officers’ (D&O) Liability insurances have been first marketed in the 1930s by Lloyd’s and the scope of coverage has evolved steadily in the last decades. Besides, a very large number of players are active in the market, all of them proposing their own particular policy wording which deviates from those of others.

Any comparison in the context of a bidding process is therefore very difficult to make for non informed directors and officers. Purchasers of D&O insurance will therefore be well advised to rely on the technical experience of experts, whose ambition must be to ensure a perfect match between the real exposures of a particular board of directors and the proposed insurance policy wordings.

As a way of introduction, let us say that the primarily scope of the D&O insurance is to cover the personal liability of company directors and officers as individuals against claims which may arise from the decisions and actions taken within the scope of their duties (Side A or Individual Protection Cover).

Often, such policies also cover the loss of the company in case it has paid the claim of a third party on behalf of its managers in order to protect them (Side B or Company Reimbursement Cover).

If so wanted, D&O policies can also provide cover for claims against the company itself for a wrongful act in connection with the trading of its own securities (Side C or Securities Entity Cover).

Next to those three pillars of the D&O insurance, the policy comes with a wide range of extensions, most of which have become standard in the market. The policy will for instance cover the directors as well as their families, if and when they incur a personal loss in respect to the claim against the insured. The definition of “directors and officers” will also typically be extended to include a number of people that, in a way or another, could incur some personal liability in their respective capacities (non-executive directors, legal counsels, liquidators, employees…). Many policies will provide coverage for claims introduced worldwide as a consequence of the many rules granting long-arm jurisdiction in an international context. Good wordings will insure the board of directors of the company taking out insurance, but also those of the subsidiaries which are directly controlled by it.

Why chose ABIL S.A. as your risk adviser or insurance broker?

ABIL is a Luxembourg based company specialized in risk management, advisory and insurance brokerage services, focusing in particular on companies active in the financial, advisory and technological sectors, as well as on large multinationals.

ABIL will have you engaged with a selection of specialized “tax liability” insurers and will be advising in a first stage on responsiveness, experience in tax liabilities, and reputation for claims payment. We will also review your insurance contract with a particular focus on the scope of losses included and excluded, the impact of knowledge qualifiers, the term of coverage, operational restrictions and potential subrogation provisions.

We are at your disposal to address any question regarding and respond to any request for quotation.


The material contained in this publication is designed to provide general information only, and is not exhaustive. It is not legal advice nor can it take account of your own particular circumstances. Whilst every effort has been made to ensure that the information provided is accurate, this information is provided without any representation or warranty of any kind about its accuracy and ABIL S.A. cannot be held responsible for any mistakes or omissions.
ABIL S.A. is authorized by the Commissariat aux Assurances in Luxembourg and registered under number 2016CM010.

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