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AIDA France Climate Change Working Party

Explore the liability, implications, and exposures of directors and officers insurance (D&O) in the context of the Volkswagen scandal. Learn about the German two-tier system, pollution exclusion, defense costs coverage, and potential exposures in the UK.

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AIDA France Climate Change Working Party

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  1. AIDA FranceClimate Change Working Party The VW Scandal watched with D&o Spectacles By Dr Adolfo Paolini University of Buckingham UK and DACBeachcroft LLP Paris, December 2nd2015

  2. Volkswagen wrote to me

  3. D&O Main Features • Developed to protect Directors and Officers and not the Company • Liability Insurance: Professional Indemnity Insurance/Third Party Insurance • Liability must be established to trigger substantive cover • Claims Made Policies • D&O does not cover wilful misconduct/fraud • D&O does cover regulatory investigations • Types: Side A , Side B and Side C • Pollution is often excluded

  4. Uncontested Facts • 11/09/2015 VW made public a statement highlighting how prosperous and environmentally friendly VW was. ‘world’s most sustainable automotive group’ • Investors had purchased American Depository Receipts (ADR’s) in US/ share price lost more than a third of its value • 18/09/15 US Environmental Protection Agency served a notice of VW • VW faces billions of Dollars in fines: $37.000 per vehicle/VW set aside $ 7 Billion / Almost 0.5 million cars affected in US and 11 million worldwide.

  5. Uncontested Facts • 25/09/15 Germany disclosed that 2.8 million cars have been affected and VW supervisory board has instructed lawyers both in US and Germany to investigate the case • VW admitted liability for the use of ‘defeat devices’ to rig the emissions test/software to circumvent EPA • VW senior officers denied liability and/or knowledge of misconduct

  6. Volkswagen Scenarios • Company’s Liability for breaching anti-pollution rules • Directors’ Liability to the Company for breach of directors’ duties • Class Actions against VW by consumers • Class Actions against VW by company shareholders/investors • Attempted actions against directors by third parties • Attempted actions against directors by Environmental Agencies • Regulatory Investigations • Defence Costs Cover

  7. German Scenario and D&O Implications • German Two tier system: Supervisory and Executive Board 1. Stock Corporation Act s 111: supervisory board brings the claim, on behalf of the company, against the executive board and/or management board s 93(4)(3) 2. Shareholders could pass a resolution and force the supervisory board to proceed s 147 3. Shareholders have also the statutory derivative action/1% of the shareholding or Euro 100.000 nominal value. Leave of court is required/ suspicion of dishonesty/must be beneficial for the company/ shares must be acquired before the issue arises 3.1 Shareholders bear the cost/ claim it back if successful 3.2 unfounded actions/shareholders do not recoup costs

  8. German Scenario and D&O Implications • D&O policies ( as any other form of insurance) exclude fraud and /or wilful misconduct/ liability must be ascertained before the exclusion applies • Company’s admission of liability may not affect innocent directors/composite insurance policy/severability • Two tier system and potential conflict of interest/insured v insured (less used these days)/policy wording/policy limits • Insurer choice to defend or settle out of court/ duty to defend and indemnify • Bentham Europe Ltd: shareholder action litigation financing for breach of Securities Trading Act

  9. German Scenario and D&O Implications • Defence Costs? • Who bears that defence costs?/Policy Wording/ • Hendricks and Fassback (Howden Broking Group) proposal: • twin model tower/different limits of indemnity/supervisory and executive board • Two towers with different limits of indemnity/like excess policies • Third party notice to the SB triggers liability.

  10. The UK Strategy • One tier system/executive and non-executive directors • Directors duties owed to the company/breach of duty • Minority Shareholders derivative action • The strategy; • Rules of Attribution/directors’ misconduct attributed to the company • Jetivia v Bilta effect • Safeway v Twigger/ competition rules/ illegality/ effect

  11. Could Directors be personally Liable to third parties? Northstar Aerospace v Ministry of Environment Ontario Canada [2012] • The company knew about the polluting agent and did its best to clean the site. • The Company run out of cash to continue to clean the site and became insolvent. • Directors did not act maliciously or negligently • Directors and Officers were held personally liable to fund the cleaning up cost of company’s site. • D&O’s agree to pay up to 4.5 Can $ and the dispute was settled • D&O Insurance policy excluded pollution.

  12. Conclusions • Directors personal liability • Side C cover/policy limits • Pollution exclusion • Defence costs cover • German Two tier system • UK potential exposures

  13. Thank You adolfo.Paolini@Buckingham.ac.uk apaolini@dacbeachcroft.com

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