D&O insurance for supervisory board members

Insurance for members of supervisory boards

Supervisory board D&O insurance is necessary because of the strong potential for conflicts of interest between the supervisory board and the management board during a claim scenario.

Disputes are commonplace, and attributing blame to the supervisory form often forms a key part of the management board’s legal defence strategy.

In an “active liability defence”, which is often encouraged by insurers, the defendant may claim contributory negligence by the supervisory board. The management board may bring forth allegations stating that the supervisory board is jointly responsible, had knowledge of the alleged breaches of duty and supported or approved them.

In this way, the management and supervisory boards can find themselves locked in a protracted legal battle. Then, if the management board is convicted by a final court decision, there may be a further right of recourse against the supervisory board.

Do supervisory boards need separate insurance?

Without specific insurance arrangements that are separate to those of the management board, situations can arise where the insurer issuing the corporate D&O policy cannot fulfil its fiduciary duty to the management board and the supervisory board at the same time.

In order to counter these conflicts of interest and potential for disputes, it is a good idea for the company to take out a separate insurance policy to cover the supervisory board.

It is important that the insurance for the supervisory board is taken out with an insurer who is not involved in the programme of the D&O corporate, either at primary or excess level. 

How can supervisory boards protect against D&O claims?

In order to reflect the two-tier board system, a twin tower concept is one solution.

In Tower 1 with Insurer A, only the management board members are insured.

In Tower 2 with Insurer B, only the supervisory board members are insured.

The downside of this model is that it can involve quite substantial premiums.  

Another more cost effective option is to build a programme that includes arrangements for the supervisory board. It is more complex in its design, but with Howden hendricks’ expertise and experience it can save significant sums of money compared to the twin tower option.

Howden hendricks “Two Tiered Trigger” model – how does it work? 

Our Two Tiered Trigger (TTT) model provides companies with another option, and a policy that triggers only in specific scenarios where standalone insurance for supervisory boards is absolutely necessary.

The Two-Tiered Trigger policy always has the same scope of conditions as the company's D&O insurance, but additional specified triggers are responded to by a separate insurer. Clean separation and demarcation of insurers means strong independence between the supervisory board and the management board. This defuses potential conflicts of interest.

The coverage amount is self-selected and is only available to the members of the supervisory body.

The TTT policy therefore meets today's requirements for "best practice" and "corporate governance".

There are four triggers:

1. Exhausting the coverage amount of corporate D&O policy

The first trigger is the exhaustion of the coverage amount of the D&O corporate policy. Here, the two-tier trigger policy has the effect of an excess insurance policy. As a result, the supervisory board has an additional independent coverage amount at its disposal. This trigger ensures in particular the independence of the supervisory board mandate.

2. Notice of dispute

If a dispute between the management and supervisory board is notified, the supervisory board policy is immediately triggered, due to significant conflicts of interest.

3. Challenge

Another trigger is the contestation of the D&O corporate policy. For example, if a member of the management board made false statements to the insurer in the warranty statement, there is a risk that the insurer will declare the contract void, leaving all insured persons unprotected - including the supervisory board members.

4. Special representatives under Section 147 of the German Stock Corporation Act (AktG)

Finally, a conflict of interests can arise if a special representative simultaneously asserts claims against the supervisory board and the management board.

The core of the dispute between the two bodies then always revolves around the question of whether the management board informed the supervisory board or provided sufficient / full information? Or were supervisory board sufficiently informed or even hoodwinked?

The picture is often not black and white – this trigger exists for such situations.   

With our Two-Tier Trigger Policy for supervisory boards, the design of D&O insurance programmes in Germany is finally also in line with the dualistic system of the two-tier board system.