Can a simple oversight lead to a financial catastrophe? The answer might surprise you. In a landmark ruling, the German Federal Court of Justice (BGH) has shed light on a critical issue in D&O insurance litigation, leaving many executives and insurers rethinking their strategies. But here's where it gets controversial: the court’s decision challenges the long-held assumption that failing to file for insolvency automatically implies a deliberate breach of payment prohibitions under insolvency law. And this is the part most people miss—the ruling could significantly shift the burden of proof in such cases, potentially exposing insurers to greater liability.
On November 19, 2025, the BGH issued a highly anticipated judgment (case no. IV ZR 66/25) that clarifies the exclusion of coverage in D&O insurance when a director or officer knowingly violates payment prohibitions under insolvency law. The case revolved around whether a breach of the duty to file for insolvency—a cardinal obligation for managing directors—automatically signifies a knowing breach of the payment prohibition outlined in section 15b of the German Insolvency Code (InsO). The BGH decisively ruled that it does not. Instead, the court emphasized that the critical factor is whether the payment itself directly diminishes the insolvency estate, not merely the failure to file for insolvency.
Why does this matter? In D&O insurance, coverage is typically excluded for knowing breaches of duty, with the insurer bearing the burden of proving such violations. However, when cardinal obligations—fundamental professional duties—are breached, the insurer gains an advantage: the breach is presumed to be intentional. The insured must then prove otherwise. The BGH’s ruling disrupts this dynamic by requiring insurers to demonstrate, for each payment made after factual insolvency, that it was prohibited and that the insured was aware of the prohibition. This nuanced approach eliminates a blanket exclusion of coverage, aligning with the BGH’s 2020 ruling (case no. IV ZR 217/19) that claims under section 15b InsO are generally covered under D&O policies.
The controversy stems from the BGH’s rejection of the Higher Regional Court (OLG) Frankfurt’s earlier decision (March 5, 2025, case no. 7 U 134/23), which argued that a breach of the duty to file for insolvency inherently indicates a knowing breach of the payment prohibition. The OLG reasoned that both obligations are intertwined, serving the same purpose of protecting the company and its creditors. The BGH, however, disagreed, stating that a breach of one cardinal obligation does not automatically imply a knowing breach of another, especially when the intent behind the breach is conditional.
What’s next? The ruling places a heavier burden on insurers to scrutinize individual payments rather than relying on broad assumptions. This could lead to more complex litigation, particularly in cases involving numerous transactions or fluctuating financial situations. For insured directors and officers, the decision offers greater protection against unwarranted exclusion of coverage. But here’s a thought-provoking question: Does this ruling strike the right balance between protecting insured parties and ensuring insurers can manage risk effectively? Share your thoughts in the comments—we’d love to hear your perspective on this contentious issue.
