Financial Lines | DR. IHLAS GMBH

Financial Lines one stop shop

There are inseparable relationships between the various Financial Lines. We take care of the important reconciliation processes for you. This is difficult. Hardly any insurer offers all the products. Not every offer corresponds at least to the market standard. The products are not coordinated, although they have many interfaces. There are always other insurances that seem to be closer to the loss if a claim is reported. The general insurance conditions are revised on average every two years and there are also changes for the worse. The terms and the product structure are inconsistent. The sale of new cover components is always based on current loss experience in practice. This is sometimes, unfortunately, only a claim that can be expensive for the insured. We make this simple to save you from irritation. Our special products for our customers serve some insurers as a template for their next product revision.

Financial Lines: widespread responsibilities

Responsibility	for	Financial Lines & Claims
Creditinsurer		Commercial Crime /Fidelity
Legal expense cost insurer		Criminal Defense Cost CoverManager Legal Cost Cover
Liability Insurer Germany		Directors & Officers
Liability Insurer USA/UK		Employment Practices LiabilityPension Trust Liability
Property-/Electronic Insurer		Cyber-/Business Interruption
P&C Insurer USA/UK		Kidnapping, Ransom & Extortion connected to Security Services
Specialty Insurer USA/UK		Financial Lines package policies

The words „product” and “claims“ are for the separate departments. In financial lines, coordination and communication costs are extremely high. The fact that this is a matter for the boardroom is an additional problem. We have a lot of experience and you can only profit from it.

When we act as brokers in the Financial Lines for you, we promise you to create order in this dynamic chaos. When we deal with your D&O, we spend half of our time with the Financial Lines interfaces, gaps and misunderstandings:

Gaps in the presentation of your overall risk

Gaps in the representation of insurability
Placebo co-insurance in existing policies (eg inclusion of the pension trustee coverage in the D&O policy)
Missing policies
Double insurances
Denied claims regulation based on the priority of other financial lines
Lack of synchronization between the policies (different subsidiary definitions, differing claims made rules)
Sector delimitations in the existing policies are not recognized, not adapted and often not reported.

There are communication needs at all levels ranging from the templates for the management and executive board to the discussion about the allocation of the invoice documents with the insurers’ claims administrators.

Why is this market so complex? Why is there no well-matched Financial Lines insurance market in Germany? This would lead to improvements in all aspects among others: to better product standards, faster service, more comprehensive knowledge for advice and in case of losses, cost reduction and more overall satisfaction. The answer is simple: D&O insurance has only recently been the focus of the Financial Lines. D&O is a young class of insurance business and only little change can be expected in the near future. The establishment of an insurance company lasts for decades. With little claims experience in the beginning, the requirement for coordination is not recognized until many years later. This need for coordination and gap closure is only the beginning of a tedious and protracted process. The change management against the acquired rights in the insurance departments is, as experience shows, slow. This work has to be done in Germany. However, the speed of innovation among the Financial Lines is high and growing. These innovations come mainly from the USA. The Financial Lines are an aspect of the dynamics of the American financial market. In particular, the Directors & Officers insurance is to be seen in the context of shareholder value, compliance and corporate governance. Slimmer balance sheets with a higher vulnerability to financial losses and simultaneously increasing requirements on financial reporting, are the driving forces for the Financial Lines.

When and where the individual insurers and brokers in Germany established their Financial Lines units differs. It did not necessarily have to happen where the knowledge for the risk was the highest. Once a competence is established, it is also defended. The commercial crime insurance is an annexed product of the credit insurance sector. Top-manager legal protection products are located in the legal protection insurance. D&O insurance began in the industrial liability insurance or professional liability insurance departments. For EPL and AGG policies, the demand for purely German risks is growing only at a slow rate. Additionally, there is only a gradual interest for the fiduciary or pension trust liability in Germany. It was only in 2000 that the provisions for pensions were outsourced from the consolidated balance sheets into pension fund assets. Organ liability risks and risks from day-to-day business will increase as the number of retirees grows and interest rates shrink. The deterioration of this risk is known from the life insurance sector. Good German products with global recognition are still rare in the areas of employment practices liability and pension trust liability. In Germany, the insurance of risk-of-ransom risks is only possible to a very limited extent. D&O insurance still applies to reservations in Germany. This was last observed in 2009 with the introduction of the prohibition of non-deductible co-insurance of board members in the corporate policies of stock corporations.

Risk management is no longer possible without the integrated inclusion of the Financial Lines. It is no longer enough to just talk about the D&O insurance. An insurance case at D&O always raises the question as to whether other Financial Lines products could be affected, or whether a rejection of D&O insurance is to be expected because other products are missing. However, then it is too late. We will be happy to explain the interaction of the various products by means of the current cases in the daily press. The years of accusations of the media show why D&O insurance alone is not enough anymore.

Supervisory Board D&O Policy

We will gladly convince you that this cover is not recommended. A restraint at the end is already necessary, because this policy has only been discussed for a short time and it is not popular among the well-networked corporate customers. Academically, it is certainly exciting to discuss the two-tiered system of the supervisory board and the executive board, and it seems very cunning to recognize the difference to the one tier board system in the US. There may have been a case where a supervisory board did not have an insurance sum anymore after the board had already used up the entire D&O insurance sum. But a swallow does not make a summer. Recommendations on the use of the ceiling, given that there was just one case where the relevant gap was observed, are the everyday noise in the market of the suppliers.

We restrict ourselves to a few keywords and indications that speak against this product:

Insufficient insurance sums cannot be prevented by closing two policies instead of one. This increases the costs, but not the insurance sums.

30% of all court cases pending against members of the executive board are also directed against the supervisory board. In addition to that there are the threatened disputes and regresses posed by the executive board against the supervisory board outside of court.

The consumption of the D&O insurance sum is often preceded by a claim. The supervisory board is involved in this claim.

If the D&O insurance sum is used up by a loss which the executive board alone is responsible for, and the losses exceed the insurance sum, is a separate supervisory board policy with its own insurance sum really an additional protection for the supervisory board? Or is it another deep pocket?

The Annual General Meeting decides on the conclusion of the supervisory board policy. Which supervisory board would want to draw attention to itself by asking for something which no other supervisory board has: a double insurance in addition to the company insurance of the supervisory board.

Nobody can calculate the right amount of the insurance sum for a company. Hence, an insoluble task is not solved by doing it twice, once for the general D&O insurance and a second time for a separate supervisory board policy.

If the double insurance is to be avoided, the cover of the supervisory boards under the company policy must be lifted and transferred completely into a separate supervisory board D&O. This is possible only with the same insurers in both D&O policies but very difficult for multiple insurers. However, this can be a flawless and simple process, if no separate supervisory board policy is concluded at all.

The “prisoner dilemma” is only mentioned as a catchword. The joint defense of the executive board and the supervisory board facilitates the defense. If the community is enforced by inadequate insurance sums, it is still a commonality. If a separate defense is necessary by means of separate policies, third parties profit from this dispute. These are the lawyers and above all the injured parties. The presentation and the burden of proof is considerably facilitated by any disagreements between the supervisory board and the executive board. The joint defense system under a single company policy is endangered and weakened by separate board policies and potentially causes the opposite outcome than that which was anticipated.

Conclusion: Better one high tower only than two smaller and leaning towers.

Prospectus Liability Insurance

Prospectus liability insurance provides insurance cover for the prospectus liability risk of the issuing company and its organs as well as other responsible people at banks or law- and accounting firms in the case of an issuance of securities.

Other names are POSI and IPO. The abbreviation POSI stands for “Public Offering of Securities Insurance”. Alternatively, the IPO policy is also used for “Initial Public Offering” of securities. The term „prospectus“ may be used as a translation. It is about the prospectus liability risk of the issuing company, its organs as well as additional service providers. The corresponding products are more widespread and more common in Anglo-American countries than in Germany.

Contrary to the continuous risk of organ liability, the issuance of securities is a one-off transaction. However, then a lot of money is at stake. This indicates an increase in the insurance sum and an independent policy. The number of service providers involved in such an issue is high. The conclusion of a separate IPO / POSI policy may have been contractually agreed. The circle of insured persons and companies goes beyond that of a D&O policy. The costs for this policy are added to the cost of the issuance. The POSI also covers the liability risk of the companies, while the D&O policy is limited to the risk of the liability of board members.

Cyber

For the purchase of a Cyber Cover we first refer to the persons responsible for IT insurance. They cannot be overlooked, and they have a decisive say in risk and demand analysis.

Quite honestly, as a service provider, we continue to avoid this boom where-ever possible. The frequent allocation of this product to the Financial Lines does not alter the fact that the cyber risk and its insurance goes far beyond the Financial Lines. The cyber topic affects many fields of responsibility and interests on all sides and does not come out of the starting holes as an independent line of insurance business.

The vague term „cyber“ cannot be found in either the fidelity insurance or the D&O insurance. This also applies to other lines of insurance business. The shift of the real into the digital world does not alter the insurance conditions that have already been available for any real risks. Hence, they inadvertently covered cyber risks from the outset. The spare parts separation and almost all classes of insurance were already there before the PC and the Internet. This has not changed to this day.

Therefore, there are vested rights among insured persons and insurers. A crime insurer knows more about the cyber-crime risk than a cyber-underwriter. This also applies to the interruption of operations and other lines of business.

New cyber devisions are not to be expected any time soon. In 1984 there was the first Cyber-Police in German language. The ABCM 84 was a cover for the computer abuse risk, which was already covered in the commercial crime insurance. 1995 this separation was abolished. In other sectors, no attempt has ever been made to introduce a cyber exclusion. A market for cyber insurance cannot evolve without the delimitation of exclusions in all relevant sectors. The cyber-risk is gigantic and can even grow to an uninsurable size, e.g. The Cyber-War and cumulus risks. At present, claims for the total volume of premiums for cyber policies worldwide are below $ 5 billion. For Germany, a premium volume of less than EUR 30 million was estimated in 2016. For the US, experts estimated a premium volume of $ 3 billion. The risk of the fatigue of sales efforts to build a cyber insurance market is currently at least as great as the chance of a great breakthrough in this small market.

The cyber insurance market is not yet booming. First mover advantages are not yet recognizable. The marketing departments do not manage yet to present daily press examples, which demonstrate the need for an additional cyber cover as they do not provide more protection than existing policies. The small cyber-extras are quickly recognized and integrated through clauses in the existing coverings. The changes are included at a low premium cost and without great communication expenses. The cyber discussion improves the cyber insurance protection and the risk prevention. However, it does not yet lead to the boom of an independent class of insurance business. This is not to be expected after the great efforts of the last years. Conferences with several hundred participants only confirm that the risk is considered to a great extent but covered only decentralized within the old classes of insurance business.

The concept of cyber in the area of Financial Lines is not itself defined. Insurers use a simple way of looking at them by stating what actions are covered in their insurance conditions. The following are usually covered:

Network Attacks: This is the actual or allegedly unauthorized access to, or use of, a data processing system of insured persons, resulting in data loss, unauthorized data processing, infection or transmission of malware.

Denial-of-Service (DoS): Is an attack via a network or the Internet where a data processing system is made inaccessible to authorized users
„Phishing“ attack: Fraudulent e‑mails are sent to users in order to bait them to „bad“ websites
„Pharming“ attack: See phishing, only this is case the criminals use a pretended IP address instead of an email

Unauthorized access: This refers to the access to the network of the insured party or to information stored there, by an unauthorized person or by an authorized person in an unauthorized manner, including the theft of data storage devices.

Data loss: This is the actual or potential loss, forgery, destruction or unauthorized use of personal or confidential data.

Extortion: This is a money payment required to prevent an attack on the network, a loss of data or the violation of personal rights.

Directors & Officers Liability insurance (D&O)

D&O insurance provides coverage for financial loss on account of directors’ and officers’. Coverage is available for all types of legal entities like publicly traded AG’s, limited companies (GmbH’s), publicly owned companies, associations and non for profit organizations. Partnerships can also cover their directors’ and officers’ exposure. Coverage is extended to subsidiaries automatically. D&O insurance covers costs for the defense against unjustified claims as well as indemnification from legitimate claims for financial losses. Nowadays, before a manager enters the service of a new employer, he will ask for the inclusion of a D&O in his or her service contract. D&O is the main product of the Financial Lines. Today, it is indispensable for all management board members, managing directors and supervisory boards.

D&O Personal Policy

Germany has more individual policies and self-retention policies than most other countries. Here, about 3% of all managers have completed their own personal coverage, in addition to the D&O company policy. Over 97% of the members of the executive board and the supervisory board bear a deductible of up to 1.5 times the annual fixed salary if they are employed by a stock corporation. There are various products for the purchasers of the deductible policies: incentive model, regress model, cumulative model or the connection model. There are also genuine double insurances, which form additional cover for the manager, regardless of the compulsory deductible under the German Stock Corporation Act and without a relationship to the company policy. This is also referred to as a „hiking policy“ because it accompanies the manager in an employer change.

All these product solutions are unique in the world and still have to prove their performance. As a rule, the company taking the D&O insurance is the policyholder and the debtor. Its members are the beneficiaries of this insurance on the account of the third party, namely the premium paid by the company. In the case of the D&O single policy, a natural person is at the same time the policyholder, insured person and premium debtor. The managers thus pay for themselves the insurance of a risk that would not exist without the company. The company is only a „legal person“. It cannot act without real people, ie the directors and managing directors. The fact that they themselves pay for an insurance protection to be able to operate for the legal person, does not necessarily make sense as the managers can also act without the companies. While the companies cannot participate in legal transactions without a manager.

The Policyholder of a personal D&O‑Policy is of course the manager and not a company. The premium is paid by the individual manager. The Law about appropriate Board Member Remuneration (VorstAG 2009) created a market for personal D&O policies. Until the end of 2010 about 3.000 to 5.000 of these Policies were bought. Before 2009 there was no interest in buying D&O with private money. Then sec. 93 II S. 3 AktG was established by the VorstAG. It creates a duty for Companies traded by shares who buy D&O‑insurance, to implement a deductible for Managing Board Members of at least 10 % of the loss or 1,5 times their fixed annual payment.

A change to the Germany Corporate Governance Code followed in the same year. Sec. 3.8 of the DCGK recommends the same mandatory deductible for Supervisory board members of publicly traded AG’s. In 2008 the recommendation of the Code regarding the appropriate retention was followed by 77,8 %. There are about 15.000 AG’s and among them there are the biggest companies of Germany. The AG is the example for other types of legal entities. Some of the bigger limited companies (GmbH) already implemented this deductible voluntarily. For publicly owned entities the same deductible was made mandatory by the Public Corporate Governance Code.

Today there are too many different products. The premium calculation is a bit confusing as well. Some personal policies have a narrow scope of coverage limited to defense costs only. Others provide the same protection as the corporate D&O‑policy and provide personal limits which are even higher than the a.m. recommendations. There is an open debate on principles of compliance regarding the interaction between personal and corporate D&O policies.

In the case of D&O individual policies, the question arises whether only the top position of the manager at the parent organization or other board positions at subsidiary level as well could be included. First of all that needs to be reported to the insurer. Depending on the individual case, it is necessary to discuss how much insurance sum should be reserved for intra-group mandates. Often times insurers don´t want this extension.

D&O Coverage Dispute Legal Expense Cost Coverage (D&O‑CDC)

The D&O Coverage Dispute Cover (D&O‑CDC) is intended to finance the legal costs of an action against an unjustified refusal of the D&O insurer. If a manager is liable and does not get D&O coverage, it is probable that he also has no money to sue the D&O insurer.

If you have completed D&O‑CDC, you are often not afraid of any additional costs and are usually very trusting. We, however, recommend the notice of this insurance without any replacement. We do not offer individual optimization of the standard D&O‑CDC. We would like to give you some reasons:

If the D&O‑CDC insurer considers that the D&O insurer’s liability for reimbursement is justified and the prospectus of success for the indemnity insurance is denied, there is no insurance cover.

Worldwide there are no other lines of insurances which have a specific additional coverage dispute legal cost coverage (1). Outside of Germany the D&O‑CDC is unknown (2). In D&O insurance, refusal is extremely rare (3). Successful cover lawsuits against D&O insurers are extremely rare (4). Whether a D&O‑CDC still exists at all is questionable when the D&O cover is refused, because it can be terminated in the years preceding the refusal (5). Between the D&O insurance case and the D&O policy rejection are regularly three to seven years. During this period, the D&O‑CDC policy must be extended annually. Since the D&O insurer’s reservations are announced in writing very early, the D&O‑CDC insurer has plenty of time to consider an increase in premium or a cancellation. Thus we just want to point out that you would actually need an additional Coverage Dispute Cover against the D&O‑CDC insurer, too. If you do not trust the D&O insurer, why should you trust the D&O‑CDC insurer?

The D&O‑CDC is a very bad solution for the insured.

EPL (Employment Practices Liability insurance, EPLI)

EPL insurance affords coverage in case of claims for damages of former, present and future employees associated with:

discrimination,
sexual harassment,
wrongful dismissal and
other wrongful acts related to employment or job application.

and other legal grounds for the employment or employment relationship.

The General Equal Treatment Act (AGG) came into force on August 18, 2006, quite late and also delayed. Before the AGG the EPL was very rare in Germany. You can find an up-to-date overview of the AGG claims at the Anti-Discrimination Bureau of the Federation in the publication „Ausgewählte Entscheidungen deutscher Gerichte zum Antidiskriminierungsrecht” (“Selected Decisions of German Courts on Anti-Discrimination Law”) at:

http://www.antidiskriminierungsstelle.de/SharedDocs/Downloads/DE/publikationen/Rechtsprechungs%C3%BCbersicht/rechtsprechungsuebersicht_zum_antidiskriminierungsrecht.pdf?__blob=publicationFile

EPL is still the predominant abbreviation. EPLI (EPL-Insurance) is the common abbreviation for the worldwide cover.

In comparison to D&O‑policies EPL-policies feature some differences. The category of insured persons is beyond the scope of board members and includes all employees and staff members. The definition of loss has to be broadened, as personal damages might appear here as well. It’s extremely important to include claims solely against the company. Mixed cases have to be covered too.

For a worldwide coverage, we always recommend policies in English. To grant a worldwide EPLI coverage in the German contractual language is an ambitious undertaking against the backdrop of the highly developped case law and terminology in the USA and Common Law countries. The extensive statistical surveys of such cases in the US are prepared by the EEOC (U.S. Equal Employment Opportunity Commission) sorted by case groups and published under:

http://eeoc.gov/eeoc/statistics/index.cfm
http://eeoc.gov/eeoc/statistics/enforcement/index.cfm

It is possible to compare these elaborate activities of the authorities in the USA, which are equipped with extensive investigation rights, only with the German labor law jurisdictions. The United States does not, of course, have these jurisdictions. In addition to the EEOC, the US also has claims for damages which exceed the sum of the monthly salaries, in which the German labor law calculates, by a hundredfold. The claims for compensation for employment in the USA and increasingly also in the Common Law countries are an incalculable risk for the German companies operating there. Therefore, this requires an insurance solution. For every 1000 employees in the US there is at least one EPL claim made per year. This is a frequency risk with unlimited claims, if the professional prosecutors can submit their cases to a jury. HR training and HR guidelines are still sufficient for the AGG risk. However, in the US, such Employee Handbooks count only as much as a prerequisite for obtaining a bid for EPL policies.

EPL policies in German, which can be compared with the EPLI policies written in English, have only existed for a few years. Legal cost protection insurance policies have not been able to enforce liability insurance policies and are not recommended.

In the German D&O policies, the clauses with which solutions for the EPL risk have been offered previously, have now disappeared in favor of comprehensive EPLI policies. Here partial sub-limits were provided for the insured persons and rarely also a sublimitized EPL entity cover for the D&O insured companies.

Excess Policies

The interplay between the primary insurer and the Excess and Coinsurance policies has become the subject of increasingly differentiated agreements in recent years. We have many years of experience with major out-of-court programs at home and abroad. Only a few exceptions stipulated by insurers can be accepted without improvements.

Outside Directorship Liability (ODL)

The risk insured under ODL policies is similar to that of D&O insurance. Coverage however, is only provided for outside directorship positions in the supervisory or advisory board of an external organization. The D&O extends its coverage to all Directors and Officers of the parent organization and the subsidiaries. Outside companies are no subsidiaries. Therefore the D&O policy does not cover the outside directors. The risk of outside directorship may be included in the D&O by a special endorsement.

For medium-sized companies, ODL coverage is also included in the general D&O insurance conditions. The possibilities for designing additional covers are numerous. At the beginning, however, the risk has to be assessed. Often, it is unclear who is taking which external mandate.

Fiduciary Liability (Pension Trustee Liability)

The Fiduciary or Pension Trustee Liability insurance is a combination of D&O and E&O coverage for pension plans, trustees, administrators, the employer companies and the trustee companies.

The pension obligations of DAX companies amount to 30% of their market capitalization. The present value of the pension obligations of the DAX companies amounted to approx. € 246 billion in 2006 and € 372 billion in 2014. Accordingly the interest of analysts, rating agencies and investors regarding adequate reserves is very high.

From an international point of view it has a negative effect on a company’s financial ratio, for example the return on equity, if the pension reserves remain in its financial statements. At least the assessment of a companies’ financial performance will be harder. When the rating companies therefore started to reduce the rating of DAX companies, the outsourcing of pension liabilities and pension assets began. Without a spin-off, solid provisions for pension obligations can also increase the risk of a hostile takeover for the company.

The outsourcing has additional advantages. The separation allows for a first-time a selected management and control of the pension fund. The objectives of a pension fund differ from those of the employer.It is possible to illustrate the financial development transparently to future pensioners and candidates. In addition beneficiaries and candidates can co-operate for the first time. Members of the human resource‑, legal- and finance departments and representatives of employees and staff of companies are typically board members of legally independent pension schemes. Due to tax reasons the plans are underfunded. Operating with high long term liabilities and performing like small life insurers the trustees are facing a personal exposure.

In countries like the UK and the USA it is well known, why a separate PTL-Policy is needed and why this exposure has to be distinguished from the D&O- and E&O‑Exposure of the employer companies and their managers. There a separation of pension funds is customary and partly legally compulsory. Due to the more frequent spin-offs from the balance sheets of the German parent and subsidiary companies, PTL policies become now also more important in Germany.

PTL coverage is useful for several reasons. What reasons in particular? This has to be figured out for every single case separately:

The D&O policies have corresponding exclusions abroad, if there is already a separate management of pension funds.
Constructively these pension assets are often extracted from the group balance sheets. In Germany therefore often certified trust agreements (CTA) are created, where two incorporated societies (e.V.’s) operate as trustees, one for the administration of assets and one for the employees. The activity insured in the D&O insurance policy is equated with the company purpose. This differs from the aims pursued by pension plan assets and CTA’s. As a result, no activity regarding the management of the pension assets is insured within the D & O insurance if the party is a legal person of a company’s pension scheme.
The definition of subsidiary of the employer company does not include the trustee companies. This has tax‑, commercial- and accounting law reasons.
Economically a separation would be incomplete, if there would exist just one D&O limit. To whom should the insolvency administrator request payment?
Acting dutifully for the employer company can be also a breach of duty regarding the trustee company. The consideration of acting as directed by the employer company often raises this type of questions in respect of potential conflicts of interest.

The magnitudes of the pension provisions recognized for tax purposes may exceed the equity. In 2014 the pension liabilities of the DAX companies totaled EUR 372 billion. This topic is subject to the D&O insurance, if the liabilities and the provisions are not outsourced. The members of the governing body responsible for outsourced pension provisions are often sent by the sponsoring company to the legal entities, mostly registered associations, which are established for this purpose. This is already a conflict of interest. The pension fund directors should be insured through their own combination of D&O and E&O coverage, the so-called pension trustee liability or fiduciary liability. In the event of insolvency of the sponsoring company, these pension funds should then function as small life insurers. The problems begin with the fact that the data processing of the personnel administration and their personnel can no longer be accessed, since these belong to the insolvent sponsoring company. The pension commitments were based on positive interest rates. The pension liabilities, which are excluded from the balance sheets of the sponsoring companies, may not be fully financed. For tax reasons, the pension funds must show a deficit. It remains to be seen how they will be replenished in an environment of low or even negative interest rates. Today, even larger life insurers are in “man-marking“ and have to deliver quarterly reports to BaFin. The ongoing erosion of interest rates also represents a growing risk for pension funds. If professionally managed life insurers give up, the voluntarily active organs of pension funds should insist on the conclusion of their own PTL policy.

Initial Public Offering insurance (IPO), Public Offering of Securities insurance (POSI)

Prospectus liability insurance provides insurance cover for the prospectus liability risk of the issuing company and its organs as well as other responsible people at banks or law- and accounting firms in the case of an issuance of securities.

Other names are POSI and IPO. The abbreviation POSI stands for “Public Offering of Securities Insurance”. Alternatively, the IPO policy is also used for “Initial Public Offering” of securities. The term „prospectus“ may be used as a translation. It is about the prospectus liability risk of the issuing company, its organs as well as additional service providers. The corresponding products are more widespread and more common in Anglo-American countries than in Germany.

Contrary to the continuous risk of organ liability, the issuance of securities is a one-off transaction. However, then a lot of money is at stake. This indicates an increase in the insurance sum and an independent policy. The number of service providers involved in such an issue is high. The conclusion of a separate IPO / POSI policy may have been contractually agreed. The circle of insured persons and companies goes beyond that of a D&O policy. The costs for this policy are added to the cost of the issuance. The POSI also covers the liability risk of the companies, while the D&O policy is limited to the risk of the liability of board members.

International insurance Programs

IVPs have so far rarely been applied to Financial Lines. While no one denies the need for legal conduct and compliance, it was mainly a practical considerations that hindered the implementation of local policies. In particular, the multiple worldwide replication of an insurance regarded as a vault policy appeared to be meaningless. However, currently international companies are confronted with a considerably sensitized environment. The increased attention paid to corporate compliance in the course of corporate affairs has sharpened the focus on legal certainty worldwide, especially in insurance supervision and taxation.

With the implementation of local coverings, numerous questions arise concerning the adaptation of the policies as well as the exact coordination of the interlocking clauses. We have broad experience with the installation of such international programs in Financial Lines. There is still a debate on principles within the insurance industry. A network of local policies has significant interactions with the so-called „master“ and „excess“ policies. The need to implement a local policy has to be evaluated for every enterprise in particular cases.

We are a member of the global network UNISONBrokers AG.

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Package Policies

In the case of Financial Lines, there are many combination products which are already offered by various insurers as combined General Terms and Conditions. For individual cases there can also be individual combination solutions. There are a number of possibilities here, which generally offer cost, performance and simplification advantages. However, these must also be compared critically with the alternative single solutions. This is often the problem. A final listing is not possible. Although a lot is feasible, the starting point is the individual risk profile and insurance requirement of the customer.

Kidnap, Ransom & Extortion insurance (KR&E)

The Kidnap, Ransom & Extortion insurance provides insurance coverage in cases of kidnapping and extortion of family and company members.

Publikation Leipziger PDF (960KB)

If an employee delivers a suitcase full of money of his company to a kidnapper, he won’t get any receipt in return. Specific internal rules of competences are often missing. Directors and officers have to make quick decisions. No matter whether the money transfer had been successful or not, the question of D&O‑liability may occur. As there is the special insurance product KR&E, the claims handling under a D&O policy won’t be successful. There is no case law available and therefore this is a grey area. However, corresponding claims have already been made under D&O policies, especially in connection with material threats and threats against the company.

Regulation under the D&O policy will not be successful because there are special insurance products for these cases. Already the question whether the forced surrender of money is a financial loss will be disputed. Additionally there are many causal questions. For example the questions of knowledgable breaches of duty are also difficult to answer, such as the question about the duty of lawful behavior. Documentation requirements are hardly achievable. Furthermore, there are of course no coverage disputes in court.

The kidnapping of Charles Lindbergh’s Baby was the sad occasion for a Lloyd’s Syndicate to offer the first kidnapping policy in the thirties of the last century. Until 1998 KR&E insurance was seen as an offense against the German ordre public by the BAV (§138 Abs.1 BGB and Art. 6 EGBGB). Unlike to other countries KR&E insurance policies cannot be offered as combined products in Germany. There’s a ban on advertising and a duty of disclosure to the policy. The insured should only inform three persons about this insurance. The KR&E‑department has to be directly below the board of directors. The communication and contracts have to be done anonymously.

On the product side there is the Kidnapping and the Product Blackmail insurance. The latter has, among other things, to solve a recall cost problem, which also occurs with the self-recall. Therefore, this is partly designed as a follow-up to product liability insurance.

Risk prevention and risk management are very important topics. Questions regarding competencies and organization structures are addressed during the underwriting and as part of the policy. Independent Risk Consultants have to be involved contractually or optionally. There are few of these worldwide operating Risk Advisors. Often they require a KR&E Policy to be placed prior to their assignment.

Pension Trust Liability

See under Fiduciary Liability.

Representations & Warranties

See under W&I.

Side A D&O

A corporate D&O policy always has a Side A providing coverage for the individual directors and officers and a Side B, which covers the corporation in case of indemnification. Both insuring clauses are needed. In all cases of D&O‑liability both clauses, the personal wrongful act and the corporate duty to indemnify, have to be checked. Allocation issues regarding defense and indemnity payments and coverage extensions only for the benefit of the corporation, which are sometimes called Side C, may exhaust the limit of the policy. Usually there is only one joint policy limit for Side A and Side B.

This raises the question whether there will be enough money left to pay the personal Side A defense and indemnity costs. Capacity problems of big corporations have to be mentioned as well. Chapter 11 and other type of insolvency cases may also jeopardize the Side A coverage.

“Side A D&O” is better called “Side A only”. It is an Excess D&O Policy providing Difference in Conditions and Difference in Limits only for Side A claims. If the joint limit is exhausted “Side A only” coverage will drop down and provide an additional capacity only for the personal liability of the directors and officers.

Insured vs. insured liability falls under Side A coverage and is quite common in Germany. Therefore and for other good reasons an additional “Side A only” limit may be considered. This is particularly true if the policy has additional cover building blocks, which are in any case only good for the company.

Criminal Defense Cost Cover (CDCC)

In case of a Criminal Defense Cost Insurance (CDCC) the insurer bears the cost incurred by members of the executive management bodies and all other employees of the policyholder, if named proceedings are instigated against him like especially preliminary proceedings, criminal proceedings, proceedings for regulatory offences, disciplinary or professional association proceedings. The coverage is granted for those proceedings and costs as listed in the policy. The scope of coverage does not require a certain type of damage. Therefore the CDCC is not limited to financial losses only.

Reports on criminal investigations and proceedings against managers are part of the daily press. Environmental- and product damages are often the cause. FCPA and similar laws relating to economic offenses are other reasons for managers to care about their insurance protection. In cases of financial losses, which are also covered under a D&O‑Policy, there is an interaction between the CDCC and the D&O. In 1983 the CDCC was approved by the German Supervisory Agency for insurance (BAV). The CDCC is dealing with all costs appearing after the opening of any of the a.m. proceedings. This includes attorney fees, extrajudicial and judicial costs for experts, legal costs, joint actions costs and travel costs. The defense against white collar-crime accusations is very expensive. Of course there is no possibility of alternatively serving the sentence by a deputy and the fines are not insured either.

Some insurers offer trainings and manuals for “What to do if the prosecutor comes?”.

There is no shortage of daily newspaper reports about ongoing criminal proceedings against managers. The reasons are often environmental and product damages. In addition to these, however, economic criminal law also deals with asset degeneration. Here are interactions between the CDCC and the D&O.

Every criminal case which caused directly financial losses can also unfold relevance for the D&O insurance on the civil law side. Hence, in almost every D&O Policy the initiation of preliminary proceedings is classified as an insured event which has to be reported as a claim or circumstance.

Usually the questions regarding criminal behavior will be answered first and adjourn all other civil proceedings. Therefore, Sec. 101 II S. 2 of the German insurance Contract Law (VVG) contains information. The liability insurer can bear the expenses of the criminal defense counsel, if he wants to. This wording is repeated in some D&O forms. It should not be mixed up with a criminal defense cost coverage sub-limit, which is endorsed sometimes to a D&O‑policy. As Sec. 101 II S. 2 VVG is an optional privilege, liability and D&O insurers make use of it very rarely.

The special conditions for Criminal Defense Cost Coverage (CDCC) have been offered since 1980. They were approved by the BAV in 1983. The CDCC are much more widespread than the VRB, since there is no competitive product to them. The CDCC are also referred to as „Extended Criminal Liability insurance“ and are special conditions to §§ 1 – 20 of the General Conditions for the Legal Protection insurance (ARB). The CDCC, like every legal protection insurance, is a pure cost insurance. Like VRB, they offer only passive or negative legal protection. The criminal defense cost insurer shall bear the costs arising from the opening of the investigations. These include lawyers‘ fees, extrajudicial and judicial costs for experts, court costs, incidental costs and travel expenses.

The extent of the insurance is a critical point for negotiation at the conclusion of the CDCC due to the high attorney fees that are often far above the fee-based remuneration under the RVG (Lawyer Renumeration Law).

Penalties and fines are not insured. As a matter of principle, the reimbursement of fines and penalties paid by the company is legally permissible under civil law, but this is not to be regarded as a property damage in respect of the D&O insurance. Also, this insurance does not prevent the execution of the imprisonment. „Substitute confinement is unfortunately not possible!“. The CDCC are offered by the legal protection insurers.

The criminal responsibility of managers has been considerably tightened since the 1970s. The increasing „criminalization of management“ has mainly occurred in the fields of product and environmental responsibility. Known lawsuits for the product liability of the prosecutor are Ziegenhaar-Pinsel, Contergan, Monza Steel, Mandelbienenstich, Lederspray, Holzschutzmittel und UB-Plasma. The “Lederspray” court judgment of the Federal Court of Justice (BGH) of 6 July 1990 confirmed, for the first time, the principle of general responsibility and the all-authority of the management, which had been established in the case-law during the 1980s. The judgment is regarded as a „conceptual quantum leap“ and „a milestone in the development“ in the product liability of management. In 1970 some 1,000 environmental damages were found by the police. The figure rose to 3,500 in 1975. On 1.7.1980, environmental criminal law was included in Sections 324 – 330d in the Criminal Code. In 1987 the number was already 18,000. In 1992 the policy criminal statistics showed 25,882 environmental delicts. The public prosecutors are now certified according to the „top-down method“. The preventive effect of criminal law became apparent in the debate about a proper organisational structure for companies. In the meantime one is accustomed to the daily media reporting on investigations against employees and members of corporate bodies of companies.

The CDCC and the civil law defense cost policies as well as the D&O policies are insurances for third parties. Premium debtor is the policyholder, ie the company for which the beneficiaries are active. In contrast to D&O insurance, employees are insured at all levels by a CDCC. The policyholder usually has an expressly agreed right of objection granted under the criminal law defense cost policy. This may contradict the legal protection demand of the insured person. However, if this employee is suspected of deliberately causing a damage to the policyholder or a co-insured subsidiary, the policyholder will do so on a regular basis. Because the insured person is not in possession of the insurance policy, the insured person cannot sue the criminal defense cost insurer for performance pursuant to § 44 para. 2 VVG (75 para. 2 VVG a.F.).

The CDCC is offered by legal expense insurers. The limits provided are usually low. The size of the German CDCC market is supposed to be between 50 – 100 million €. Unlike D&O insurance an CDCC is no catastrophe cover. It covers a frequency risk for defense costs. Legal costs above the limit of € 500,000 are rare. However, occasionally there are defense costs above 1 million €. Today, some providers are finding that the increased risk and the improved conditions are no longer in line with the falling premiums. Suppliers withdraw from this small line of insurance. Others are trying to clean up their portfolios and restructure them.

The USA territory and the US law are excluded from the legal cost protection insurance. There may be Product arrest cases or SEC investigations that can quickly trigger criminal offenses that exceed the limit of € 1 million. In contrast to D&O insurance, however, it is very seldom important for the media whether there is a CDCC and whether this service has been provided. With regards to an CDCC, the company is primarily concerned with the safeguarding of the procedure, the transition from liability to cover, the know-how of the legal protection insurer and its contacts with specialized lawyers and experts. By transferring the decision regarding the cost payments to the insurers before any investigation starts, the company avoids internal and external criticism. The legal protection insurers also provide training and guidance on „What to do when the prosecutor comes?“. If finally criminal intent becomes non-appealable, the CDCC becomes invalid in retrospective.

Two Tower D&O

The “prisoner dilemma” is only mentioned as a catchword. The joint defense of the executive board and the supervisory board facilitates the defense. If the community is enforced by inadequate insurance sums, it is still a commonality. If a separate defense is necessary by means of separate policies, third parties profit from this dispute. These are the lawyers and above all the injured parties. The presentation and the burden of proof is considerably facilitated by any disagreements between the supervisory board and the executive board. The joint defense system under a single company policy is endangered and weakened by separate board policies and potentially causes the opposite outcome than that which was anticipated.

Conclusion: Better one high tower only than two smaller and leaning towers.We restrict ourselves to a few keywords and indications that speak against this product:

Insufficient insurance sums cannot be prevented by closing two policies instead of one. This increases the costs, but not the insurance sums.

30% of all court cases pending against members of the executive board are also directed against the supervisory board. In addition to that there are the threatened disputes and regresses posed by the executive board against the supervisory board outside of court.

The consumption of the D&O insurance sum is often preceded by a claim. The supervisory board is involved in this claim.

If the D&O insurance sum is used up by a loss which the executive board alone is responsible for, and the losses exceed the insurance sum, is a separate supervisory board policy with its own insurance sum really an additional protection for the supervisory board? Or is it another deep pocket?

The Annual General Meeting decides on the conclusion of the supervisory board policy. Which supervisory board would want to draw attention to itself by asking for something which no other supervisory board has: a double insurance for the supervisory board only in addition to the company D&O insurance for all D&O´s including the supervisory board.

Nobody can calculate the right amount of the insurance sum for a company. Hence, an insoluble task is not solved by doing it twice, once for the general D&O insurance and a second time for a separate supervisory board policy.

If the double insurance is to be avoided, the cover of the supervisory boards under the company policy must be lifted and transferred completely into a separate supervisory board D&O. This is possible only with the same insurers in both D&O policies but very difficult for multiple insurers. However, this can be a flawless and simple process, if no separate supervisory board policy is concluded at all.We will gladly convince you that this cover is not recommended. A restraint at the end is already necessary, because this policy has only been discussed for a short time and it is not popular among the well-networked corporate customers. Academically, it is certainly exciting to discuss the two-tiered system of the supervisory board and the executive board, and it seems very cunning to recognize the difference to the one tier board system in the US. There may have been a case where a supervisory board did not have an insurance sum anymore after the board had already used up the entire D&O insurance sum. But a swallow does not make a summer. A single case where a supervisory board lost the control over the litigation against the managing board is no good reason to recommend separate supervisory board D&O‑Policies for all Supervisory boards.

Errors & Omissions insurance (E&O)

In contrast the PI / E&O / VH cover for companies deal with the financial losses caused to assets of third parties by their own employees, hence, for which the company is liable. Therefore, service providers who conduct their business in a legal entity should complete both the VH and the D&O insurance. The classic example for this are the banks. Partially, there are also combinations of E&O and D&O for certain target groups, e.g. Private Equity or Venture Capital.

The delimitation of E&O and D&O insurance is difficult if the wrongful act occurred during a customer service performed by a director or officer.

D&O is falsely and „simply formulated“ a professional liability insurance. The profession of a board member does, however, not exist. The risk follows from the representation function for the legal person. In the case of legal, tax, financial and economic advisory activities, there are job titles. These services are excluded in the field of liability D&O insurance by a professional services exclusion. Instead it only covers the activities of the members of the executive body in their function as a body and not any activities of the insured persons.

In the Anglo-American countries, the VH cover is often allocated to the Financial Lines. In Germany this would probably have been the case too, if at the beginning of the 1970s, the VH insurers would not have decided to leave this business to the legal insurance providers. In the 70s the German E&O insurers decided not to enter into the D&O business. The D&O‑gap was filled then by the legal expense cost insurers until the middle of the 90s. We refer to the VH / PI / E&O covers as Financial Lines. Organizationally, they are assigned to the liability area in Germany or form a separate unit for larger holdings.

The E&O covers are the classic professional liability insurances. They are also available for legal entities. The General Terms and Conditions of the financial loss policies are a liability insurance, just like the D&O insurance. Other expressions for the Vermögensschaden-Haftpflicht-Versicherung are Errors and Omissions Liability insurance (E&O) or Professional Indemnity (PI).

The most commonly known professional indemnity insurances are those for lawyers, tax consultants and chartered accountants. However, other service providers and lines of business may also insure the risk of becoming liable to third parties for financial loss in their day-to-day business, under a professional liability insurance or E&O. If the risk becomes more complex as e.g. concerns financial service providers or the IT-industry the demand for professional advice increases accordingly.

Financial Loss Defense Cost Cover for D&O´s

The financial loss defense cost cover for D&O´s is similar to the D&O insurance, with the main difference that only the legal costs and not the indemnity payments are insured. Due to this limited range of services, D&O insurance has largely pushed it out. It is now interesting for non-insurable D&O risks or to supplement gaps in the D&O insurance, e.g. by exclusions or deductibles.

Crime insurance, Fidelity insurance (Bankers Blanket Bond BBB)

This risk is evaluated annually by the forensics departments of the large Audit firms. We recommend regarding the exposure in Germany:

http://www.pwc.de/de/risiko-management/assets/studie-wirtschaftskriminalitaet-2016.pdf
https://home.kpmg.com/de/de/home/themen/2015/01/forensic.html
https://www.kpmg.com/DE/de/Documents/Wikri-Studie_2014_sec.pdf
https://www.kpmg.com/DE/de/Documents/thesenpapier-wirtschaftskriminalitaet.pdf

Prevention and mitigation is closely linked to the terms compliance and IT security. The statistics cover not only the risks which can be the subject of a commercial crime insurance. The sobering result of all these investigations is that the main risks faced by businesses are the threats by economic crimes from within and not from outside the company. „Inside“ means that the damage is caused by people who have been familiar with the company, that is, its own employees, because they know the weak spots. Their imagination in the use of these security gaps cannot be opposed by insuperable obstacles.

Crime insurance covers financial loss caused by intentional tortious actions of employees, in particular embezzlement, theft, fraud, forgery, computer fraud as well as other infidelities. To some extend losses arising from computer violation by hackers are covered as well. Basically all employees are included under the scope of coverage: temporary staff, interns as well as managing directors, members of the executive board of directors, part-time employees and all other individuals performing employee-like duties on behalf of the insured organization, e.g. security‑, maintenance- and cleaning staff.

The term “infidelity” describes the policy only vaguely. The word “crime” fits a little bit better. Hence the question is: where do the big breaches of faith occur? Simply there, where a lot of money is entrusted, i.e. banks and notaries.

Reference: Publikation VSV PDF (200KB)

Warranties and Indemnities insurance (W&I), Representations & Warranties insurance

Typically a Warranties and Indemnities insurance affords coverage in case of company acquisitions or sales for the contractual guarantee bond and the liability exposure of the warrantor deriving from the sales & purchase agreement. Additionally coverage can be extended to first party and third party loss including defense costs. In the past few years such coverings have been in high demand. There are policies on the buyer and on the seller side. A lot of investment bankers are in the risk assessment area. The suggestion to conclude such covers often comes from the law firms that prepare the purchase contract. The know-how and the insurance capacities were formerly supplied by the English market. The number of insurers in Germany is now increasing. The business is very volatile, but fits into a time of investment plight.

The interactions with the D&O contract are considerable. Relatively large M & A‑actions are a notifiable increase in exposure that has to be reported to the D&O insurers. Then again the contract negotiations are often strictly confidential. The Financial Lines are often activated rather late and are under considerable time pressure.

It remains to be seen whether this insurance can be sustainably profitable. In the case of provisions for environmental liability, tax assessments or litigation risks, which cannot be assessed, the insurance is more similar to a bet than a normal insurance.

An increase in post‑M & A litigation, as it is the case in the US, has not yet been established despite the sale of many companies and an upward move in the W & I policies during the past few years. W & I insurance is particularly applicable to medium-sized transactions in order to safeguard exemption clauses in the area of taxes and contamination. Also in this financial line, the potential for controversy is considerable.