Full Employee Liability Due to D&O Insurance

The employee served as Head of Global Treasury and was responsible for the company's financial operations. Even before he started his employment, the company had arranged D&O insurance cover for him with a limit of up to USD 150 million. Such insurance is generally intended to protect executives against the financial consequences of professional misjudgments.

Fraudsters contacted the employee using the phone number listed in the company's internal directory for his superior. This was made possible through so-called "caller ID spoofing", whereby the recipient sees a false calling number. The callers claimed that the superior was planning to establish a new company in Asia and that the employee would become its Chief Financial Officer. Subsequent payment instructions were sent via a messaging app to the employee's private mobile phone.

Over a period of 25 days, the employee initiated almost 60 transfers with a total value exceeding €50 million. According to the court, several circumstances should have raised immediate concerns:

• Only a few weeks earlier, the employee had personally participated in an internal training video simulating a CEO fraud scenario in order to raise awareness among colleagues.
• The group maintained a strict four-eyes principle. In addition, the treasury policy issued by the employee himself permitted transactions only with banks that had been internally vetted and approved. The fraudsters, however, provided details of unfamiliar accounts at unknown foreign banks.
• All transfers were executed manually outside the regular SAP process. The employee deliberately kept the individual providing the second approval unaware of the true circumstances. He also informed the purported superior that he was violating internal control requirements.
• In chat messages, he acknowledged transferring millions of euros without supporting documentation or detailed background information. Nevertheless, he continued to make further payments, including transfers allegedly linked to invoices that had not even been provided to him.
• Even after being contacted by the police regarding suspicious transfers and questioned by his actual superior, he continued to follow the fraudsters' instructions.

At no point did he consider it necessary to verify the instructions directly with his superior through official company channels.

Judgment: Dismissal Upheld and Full Liability

After the fraud was uncovered, the company terminated the employee's employment with immediate effect and sought damages.

In its judgment of 31 July 2026 (Case No. 8 SLa 603/25), the LAG Cologne ruled in favour of the employer. The court found that the employee had acted with gross negligence. Given the scale of the payments involved, he should have verified the instructions through established corporate channels. In the court's view, he was not entitled to rely solely on messages received via a private messaging service.

The Principle: Limited Employee Liability

The outcome is noteworthy because full liability is by no means automatic under German employment law. Employees are generally not liable for losses caused in the course of their employment to the full extent of the damage. Instead, liability depends on the degree of fault:

• Slight negligence: generally no liability.
• Ordinary negligence: liability is typically shared between employer and employee.
• Gross negligence and intent: in principle, full liability.

Even in cases of gross negligence, courts may reduce liability in exceptional circumstances. Relevant factors include the amount of the loss, the employee's income and whether insurance cover is available.

Given the loss of more than €50 million and annual compensation of approximately €300,000, a reduction in liability might ordinarily have been expected. The LAG itself acknowledged that the amount of the loss "obviously exceeds" the employee's financial means.

D&O Insurance as the Decisive Factor

This is where the court's reasoning becomes particularly significant.

According to the LAG Cologne, the employee was already sufficiently protected by the D&O insurance policy financed by the employer. As a result, the court saw no reason to further limit his liability.

In the court's view, the existence of D&O insurance did not support a reduction in liability. On the contrary, it was a factor supporting full liability.

The Federal Labor Court will have the final decision

The LAG Cologne granted leave to appeal. The case is now pending before the Federal Labour Court (Bundesarbeitsgericht) under Case No. 8 AZR 164/26.

The decision has already attracted criticism from legal commentators.

Under existing Federal Labour Court case law, the general principle has been that insurance follows liability, rather than liability following insurance. There is also the practical question of whether the D&O insurer will ultimately provide coverage at all.

No coverage confirmation had been issued when the judgment was delivered. Nevertheless, the LAG rejected this argument. In the court's view, the employee bears the burden of proving that the insurer will not provide cover in the specific case. Merely pointing to an outstanding coverage decision is insufficient.

Critics argue that this approach may leave employees fully liable before it has even been established whether insurance protection is available. That question is often only resolved in subsequent coverage proceedings against the insurer.

Practical Considerations: Review Insurance and Strengthen Processes

Historically, damages claims against employees have played only a limited role in major loss scenarios. Claims against managing directors and board members have generally been easier to pursue.

The decision may change that position. In cases involving significant financial losses, companies may increasingly examine whether recourse claims against insured senior executives are viable.

In our view, the judgment highlights three practical priorities:

• Review insurance arrangements: Determine which executives are covered under D&O policies and assess the scope of coverage in detail.
• Strengthen payment controls: CEO fraud can affect organisations of any size. A robust four-eyes principle and a strict requirement to verify payment instructions received through private channels can significantly reduce risk.
• Act quickly: Under German law, employers generally have only two weeks from becoming aware of the relevant facts to issue a summary dismissal. Internal investigations should therefore proceed without delay.

Outlook

The LAG Cologne's decision has the potential to significantly influence the established approach to employee liability under German law. If upheld, the existence of D&O insurance may result in executives being denied reductions in liability even where the losses vastly exceed their personal financial capacity.

For employers, the decision may create new opportunities to pursue recovery claims. At the same time, it serves as a reminder to review payment procedures and insurance arrangements carefully. Until the Federal Labour Court issues its decision, however, substantial uncertainty remains regarding the liability exposure of insured executives and senior managers.