07.03.19 Does directors & officers (“d&o”) liability insurance become redundant following the limitation of directors’ liability?
1. The new limitation of directors’ liability
On 28 February 2019, the new Company code was finally approved in the Belgian Parliament. It will enter into force on 1 May 2019.
An important innovation is the limitation of directors’ liability. The main features of these new rules are as follows:
- The amount of directors’ liability is limited in function of the size of the legal entity, which is calculated based on its turnover and balance sheet total. The liability of directors in the smallest legal entities is limited to EUR 125,000 and in the largest legal entities (e.g. public-interest entities) to EUR 12 million;
- The limitation of liability applies to all directors jointly and to both legal entities and third parties, irrespective of the legal grounds of the liability claim, and per alleged default(s), irrespective of the number of plaintiffs or claims;
- Exclusion or indemnity clauses by which a legal entity exempts its directors from or indemnifies them against any liability in advance are not permitted;
- Directors’ liability can also not be limited further (in advance) than the legal limit.
2. Impact on D&O liability insurance?
The insurability of directors’ liability was initially one of the key reasons for introducing a legal limitation of directors’ liability. However, prior to this, such risk could fairly easy be insured in the insurance market given the considerable capacity of and competition in this section of the market.
The new limitation of directors’ liability does not in principle have much impact on the necessity and use of entering into a D&O liability insurance. On the contrary, the limitation of liability may even create a false sense of security.
Firstly, the limitation of directors’ liability does not apply in the following cases:
- Repeated (non-accidental) minor faults, important faults and personal intent (to cause damage);
- Statutory warranty obligations of directors in the context of capital increases;
- Joint and several liability for unpaid social security contributions, VAT and advance tax payment;
- Joint and several liability following bankruptcy ("wrongful trading").
Hence, little remains of the limitation of directors’ liability, which will only apply to "accidental minor faults".
Secondly, these new rules do not apply to foreign legal entities, as a result of which the state of affairs for directors of these legal entities remains unchanged.
Thirdly, directors will continue to contest their liability, among other things to protect their reputation. A D&O liability insurance therefore remains useful to cover often substantial defence costs. The same applies to the defence costs incurred in the context of investigations by the FSMA, NBB, the FASFC, etc.
Directors should not be complacent following the new limitation of liability. Taking out appropriate D&O liability insurance is no unnecessary indulgence.