« Fraud-liability and insurability under German law »
Fraud, internal or external, can cost a corporation billions of dollars or euros and affect not just the company, but also implicate its directors and senior managers. Each country has its own approach to transferring the risk.
Herbert Palmberger
Fidelity insurance
Fidelity insurance – or more accurately infidelity insurance – has existed in England since the 19th century. However, the sums insured were very limited sums and applicable to expressly named persons only. In this shape it arrived in Germany in the middle of the 20th century, but since then the coverage has been extended continuously.
It now comprises, as standard, all willful acts committed by employees, relating to physical stealing of monies and goods, computer and systems manipulations, plus losses caused by hacking of computer systems by outsiders.
Insured are financial losses caused by “white collar” crime, theft, embezzlement, fraud (including computer fraud), unauthorised transfer or use of trade secrets and other deliberate and not just negligent acts.
Coverage includes also financial losses of third parties, and normally the sums insured comprise an amount between 5 and 20% for loss detection and legal costs in a particular case.
While this refers mainly to losses caused by own personnel, those caused by outsiders are covered as well. Those are typically data misuse by third parties, losses by outside hackers, robbery, theft, forging of payment orders, credit card fraud and the like.
A crucial point is the series of losses clause to cover in a clear and specific manner what are known as snowball or pyramid schemes and other rolling frauds. This can be done by describing certain crimes which may particularly affect the corporation. It may also be achieved by a general clause referring to the time or economic context and the typical pattern of the crime to be insured against.
D&O insurance
One may wonder about mentioning of D&O insurance in the context of fraud crimes, as these are by definition willful acts, which are excluded by D&O policies.
Nevertheless, fidelity and D&O insurance may tie in if the criminal acts were possible because the corporate control and security systems failed or even were not in place at all. If the cause of this failure lay in negligence by company’s directors and senior managers, then this is a matter for the D&O insurance.
When two US companies introduced D&O insurance into Germany in 1986 there was strong resistance from German insurers and supervisors. They felt it was unnecessary under the German legal system.
This has changed in the light of jurisprudence and legislation, in particular since the 1990s, but the typical D&O policy remains insured vs insured and not third party cover.
German fidelity insurance protects a corporation against willful acts of its employees and certain outsiders; German D&O insurance, by contrast protects the corporation against failures by its directors which caused financial damage to the corporation, not based on willful or intentional acts or omissions.
Furthermore, the fidelity insurer has a right to subrogate against the direct wrong doer, but it may also turn to the directors of the corporation for subrogation, if they negligently violated their organisational duties.
A feasible method of avoiding extensive subrogation litigation and negotiations is for German corporations to combine fidelity and D&O covers with the same insurer.
Dr. Herbert Palmberger is a partner with the law firm Heuking Kühn Lüer Wojtek. H.Palmberger@heuking.de
Jurand Honisch
« Fraud and insuring it »
FERMA member, Jurand Honisch, Senior Vice President Risk Management & Insurance Corporate Treasury and Finance
Bertelsmann SE & Co, Germany, comments:
« From a corporation´s point of view, fraud has gained more and more importance over the last years as organisations and processes have become more complex »
The likelihood of such an attack and/or loss has grown significantly. The insurance industry offers coverage but has to keep pace with the clients´ rising demand in respect to limits and capacities.”
In particular, the implementation of an international fidelity insurance programme is still almost impossible although most of the risks do not occur in the well protected and organised headquarters, but in some remote branches or office.
Dr. Palmberger´s idea to have fidelity and D&O covers combined is very clever due to the mentioned right of subrogation. But here also the question of capacity remains.
As a conclusion, fidelity insurance will become even more important within the next years and it is a great chance for the insurance industry to play a bigger role in the value-chain of the industry if capacities and coverage follow the client´s needs.