D&O insurance: No cover for “straw man” managing director

If a managing director is merely acting as a “straw man”, he is obliged to proactively inform the insurer of this fact when taking out a D&O policy. Otherwise, the insurer may refuse cover in the event of a claim. This was decided by the Hamm Higher Regional Court in a reference decision dated February 28, 2024 (case number: 20 U 224/23).

Facts of the decision

A police officer and founder of a German limited liability company (GmbH) resigned from his position as managing director for official reasons under public services law. Instead, the plaintiff was entered in the commercial register as a “straw man” managing director, while the founder retained power of attorney and managed the business de facto.

In May 2020, the plaintiff took out D&O insurance without disclosing the actual business relationships to the insurer. After insolvency proceedings were opened against the GmbH in 2022, the plaintiff demanded indemnification from the insurer, as he was held liable for payments made after the company became insolvent. However, the insurance company refused cover due to fraudulent misrepresentation.

What did the court decide?

The Hamm Higher Regional Court ruled that the plaintiff was not entitled to insurance cover as he had fraudulently misled the defendant when concluding the contract. The plaintiff had failed to inform the defendant of his actual role as only a formal managing director, although this would have been relevant for the insurer.

The court based its decision on the explanatory memorandum to Art. 19 (1) VVG (German Insurance Contract Act), which does not exclude rescission in the event of fraudulent intent. It is true that the policyholder only has a duty of disclosure with regard to significant risk circumstances that were queried by the insurer. However, a spontaneous duty of disclosure exists if there are obvious, risk-relevant circumstances which are so rare or unlikely that the insurer is not obliged to request information about them.

In the specific case, the court found that the plaintiff, who formally acted as managing director, and the de facto managing director, who was bound by his other professional obligations, were unable to fulfill their duties as directors and thus significantly increased the risk for the company. The insurer would probably not have concluded the contract if it had been properly informed. As the court assumed intent, it affirmed the existence of fraudulent misrepresentation, as a result of which the plaintiff was not entitled to insurance cover.

Practical consequences for companies and insurers:

1. High risk for straw-man managing directors: there is a risk of liability with private assets.
2. Transparency is crucial: managing directors should disclose all relevant information about their actual role and any conflicts of interest to the insurer.
3. Awareness of liability pitfalls: company management should regularly scrutinize its own actions in order to identify and avoid liability risks.
4. Insurers must check: insurance companies should pay even closer attention to full disclosure of actual business relationships when reviewing D&O insurance applications.

For companies and managing directors, the decision means that transparent communication with the insurer is crucial in order to remain covered in the event of a claim. Full disclosure is the only way to guarantee insurance cover. For “straw man” managing directors, the risk is particularly high.

Even if they completely refrain from managing the respective company, they may be liable for social security contributions (BGH, decision of October 13, 2016 - 3 StR 352/16) or the company’s tax debts.

If there is no insurance cover, they are liable for the claims with their personal assets (e.g., in accordance with Art. 43 (2) GmbHG (German Limited Liability Companies Act)).

Against this background, an entry in the commercial register should always be carefully considered. Please contact us if you have any questions on this topic!