D&O coverage dispute: Commercial Court considers issues of German and English law

German England flags
In Woodford v AIG Europe, the Commercial Court ordered the insurer AIG to indemnify the claimants insured under a D&O policy for legal costs incurred in defending a claim against them for breach of directors’ duties. The policy in question was subject to German law and the judgment is of interest both from a German and an English perspective.

The German angle: coverage

AIG argued that coverage under German law was to be denied and relied on a couple of coverage arguments which are often raised by German D&O insurers when dealing with a D&O claim. Ultimately these were dismissed by the court and coverage was granted.

As the issue of cover was subject to German law, the court heard expert evidence from two eminent German insurance law professors and decided that the insurer could neither deny coverage on the grounds advanced by AIG (1) that the claimants had knowledge of the alleged breaches of duties and also knew that the conduct giving rise to the breaches was wrongful; nor (2) because the insureds failed to comply with their duty to provide information to the insurer on request.

As to (1), the court decided that the claimants did not have knowledge of the alleged breaches at the relevant time. As to (2), AIG was not entitled to deny coverage because of allegedly deliberate breaches of a duty to provide information during the claims handling process where the claimants relied partly on legal advice and legal privilege when deciding to restrict the information.

The decision is in line with German insurance law and shows how strict German law is when it comes to denial of coverage.

The English angle: assessment of the costs

The court also had to consider how the costs incurred by the claimants in defending the D&O claim should be addressed. AIG argued that, relying on principles laid down in earlier authorities about a contractual entitlement to litigation costs, that the contractual indemnity in the D&O policy should be reflected in an order for costs, to be dealt with by way of detailed assessment by a costs judge, rather than being determined by the trial judge as a matter of the quantification of the insureds’ claim.

The judge rejected this argument, noting that the cases on which AIG sought to rely were cases in which one party to proceedings was seeking to recover its costs of those proceedings from the other party pursuant to a contractual entitlement. In such circumstances the court had discretion as to the award of costs and detailed assessment was the usual method of assessing them. The current case was different, however, in that the claimants were claiming under an insurance policy which indemnified the claimants against losses arising out of their role as directors and officers, including an indemnity for their legal costs. Having determined the validity of the claim under the policy (the German coverage angle), Mrs Justice Moulder held, perhaps unsurprisingly, that it was for the court also to determine the quantum of the claim which included the costs liability. They were not to be referred to a cost judge for assessment.

Having determined costs were payable under the policy, the next issue was how the quantum of the costs should be calculated. The policy provided that “…the Insurer shall bear the costs incurred….provided that these are reasonable with regard to the complexity and significance of the case”. AIG argued that this wording meant that the amount of the costs which had been incurred in the underlying dispute should be assessed using “standard” costs assessment principles rather than the “indemnity” principle – terms ordinarily used in the assessment of litigation costs. An indemnity award is always greater. The judge rejected AIG’s arguments. The policy simply provided an indemnity as long as the costs were reasonable, as set out in the policy. If that requirement was satisfied then the incurred costs were recoverable without having to be viewed through the prism of a “standard basis assessment”. On the facts she considered that the legal costs claimed had been incurred and were reasonable.

Comment

This case is an interesting example of the direct application of foreign law at trial in an English court, a relatively infrequent occurrence.

In light of this decision, German D&O insurers would be well advised carefully to consider their strategies and consider alternative settlement techniques and forms of dispute resolution, such as mediation, instead of litigating possible coverage arguments.

Stefan Segger
Ben Ogden