The existence of a directors and officers liability policy is not sufficient to assert a direct action against the insurance com | In Principle

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The existence of a directors and officers liability policy is not sufficient to assert a direct action against the insurance com

The Warsaw Court of Appeal has held that an insurance company may be liable for a loss caused by an insured as a member of a corporate management board only upon compliance with certain formal conditions.

Warsaw Court of Appeal judgment of 30 August 2011 (Case No. VI ACa 1273/10)

Under Art. 293 or Art. 483 of the Commercial Companies Code, a member of the management board of a limited-liability company or joint-stock company is liable to the company for a loss caused by a culpable act or omission contrary to law or the corporate charter.

Because the value of potential claims by the company against its management board members may greatly exceed their financial capabilities, companies in Poland more and more often decide to take out liability policies covering their management board members in the event of a loss suffered by the company in connection with performance of the duties of the management board.

Because D&O coverage is a relatively new product on the Polish insurance market, there are still certain practical issues surrounding the conditions for asserting a claim under such policies, as demonstrated by the Warsaw Court of Appeal judgment of 30 August 2011 (Case No. VI ACa 1273/10).

In that case, a joint-stock company sought payment from the insurance company under a D&O policy insuring the members of its management board against liability, including liability for losses arising out of conclusion of unfavourable currency futures designed to hedge against credit taken out by the company in foreign currency.

As the company was in a position to demonstrate that the management board was negligent in entering into the currency futures contract, the company sought compensation from the insurer.

In the justification for its judgment, the court of appeal held that taking out a D&O policy and proving mismanagement by the board were insufficient for the company to assert a claim against the insurer. It is also necessary for the shareholders of the company to pass a resolution instructing the company to assert a claim for damages against the members of the management board (under Commercial Companies Code Art. 393(2) and 483 §1 in the case of a joint-stock company, or Art. 228(2) and 293 §1 in the case of a limited-liability company).

As the court of appeal stressed, a joint-stock company may make a declaration of intent only through its corporate authorities, and the authority with exclusive competence to adopt a resolution on this matter is the general assembly of shareholders. The lack of the relevant resolution cannot be made up for by refusal to grant a release to the members of the management board for performance of their duties, or a comparable allegation by the management board itself in the statement of claim filed with the court.

The court also held that because the company is liable for the acts of the members of its management board or supervisory board, the failure to adopt a resolution instructing the company to pursue claims against the officers or directors releases the insurance company from the obligation to pay the claim.

In denying the claim, the court of appeal also found that the company had neglected the obligation of the insured under Civil Code Art. 815 to notify the insurer of occurrences creating a risk that the insurer might face a claim under the policy, and the insurer will not liable for the consequences of occurrences for which the insured was required to notify the insurer but failed to do so.

Anna Dąbrowska and Maciej Szewczyk, Mergers & Acquisitions practice, Wardyński & Partners