Dusseldorf. The Cologne Regional Labor Court (LAG) surprises with a ruling with a completely new argument and a U-turn that is more disadvantageous for employees than before if they make mistakes. If they have acted with gross negligence, they could have to pay compensation to the company for all the damage - and risk their economic ruin: "The court is swapping cause and effect, in the end employees will be worse off than before if the Federal Labor Court confirms this Cologne ruling as the next and final instance," says David Schwintowski, lawyer at the Freshfields law firm. The insurance expert criticizes that it cannot be the case that coverage leads to liability.
What had happened? The head of global financial management of a company producing and selling industrial carbon black had initiated almost 60 transfers totaling more than 50 million euros in 25 days. In 2024, cyber fraudsters led him to believe that the orders for this came from his superior. Apparently the money was to be used to found a subsidiary in Asia, of which he would become CFO.
During the first, manipulated call, the manager's phone number from the work telephone directory appeared on the manager's display, and the further transfer instructions came via messenger to his private cell phone. Communication with the fraudsters also took place via his private email address.
During the entire time, over three weeks, the CFO never once asked his superior personally. The supposed superior had told him not to communicate on this topic, not even with himself, otherwise he would be violating the financial regulator's guidelines.
He is only allowed to use the supervisor’s private WhatsApp channel. The address of the law firm involved, which the manager was supposed to contact, did exist. But the fraudsters had given him a fake email address that was themselves.
When the fraud case came to light, the company terminated the manager without notice and demanded more than 50 million euros in damages from him. The judges found the man to be grossly negligent. “According to previous case law, employees are usually liable for this for up to three months’ salary,” says lawyer Schwintowski.
When the manager filed a dismissal protection lawsuit against his company, the judges of the Cologne Regional Labor Court made the verdict: Even though he was not a member of the management, the manager should be liable for the entire damage in full. The reasoning surprises even experts: Simply because the company has taken out a D&O policy, a manager's liability insurance, the employee should have unlimited liability. In doing so, the LAG wants to pave the way for the company to receive the entire 50 million euros from a solvent insurance company. And not just three months' salary of their finance manager.
“The verdict is a catastrophe,” sums up manager liability expert and lawyer Michael Hendricks. “The employment judges have completely wrong ideas about how this highly complex insurance works.” In rare cases, insurers also pay even if there is actually no liability. But this happens as part of settlements behind closed doors. However, this is not the normal case, as the Cologne judges assume. Neither does the recognition of a legal obligation, says Hendricks.
The Cologne judges have undermined the previous case law, according to which employees are not liable at all for minor negligence and are liable proportionally for gross negligence - to the detriment of the employees. “They are now sitting between all stools,” says Schwintowski. The so-called liability privilege, which has always been granted to them by the courts according to established case law because they are not entrepreneurs and do not receive salaries as high as board members and managing directors, is no longer applicable. At the time when companies claim compensation, it is completely unclear whether the insurer will even pay the damage later.
It will be difficult for employees to prove that insurance does not adequately protect them, points out lawyer Max Staudacher from the Norden law firm. How is an employee supposed to evaluate the coverage of a policy that they have neither negotiated nor purchased – and perhaps do not even know about? D&O insurance is not a standard contract like household contents or liability insurance, explains Schwintowski: Every contract looks different, is negotiated individually and is also renegotiated every year - with new exclusions, prices or other changes.
The lawyer expects the insurers to react to the verdict. They will recalculate their risk and write new exclusions into the terms and conditions the next time they take out a new company D&O policy - or increase the price of the policy, predicts Schwintowski. Current D&O contracts for which companies can still report damages from the past seven years are not affected.
Schwintowski does not rule out the possibility that some insurers will remove the second management level from their insurance coverage. Some insurers may exclude only the heads of the compliance department because they are exposed to greater liability risks than, for example, managers responsible for production.
The judgment is not final and the Federal Labor Court must decide on it as the next instance.
