Insuring your management
Jacek Węgrzynowski is the resident director of the Katowice office for Miller, Canfield, Paddock & Stone.
Partnerships, limited liability companies and joint-stock companies, each referred to individually as a "legal person," are, to one degree or another, liable to third parties for the actions of their directors. What some executives may not realize, however, is that they too may be personally liable for their actions, or in some cases, their failure to take action. As such, individual members of a management board or supervisory board may, in certain circumstances, be personally liable for the debt of the company to a third party creditor. In particular, the Civil Code stipulates that "anyone, who acting as a body of Legal Person, concludes a contract in its name without being its body or exceeding the scope of authorization of that body, shall ... redress any damages which the other party has incurred..." Liability is not limited to merely acting beyond the scope of one's authority. In a registered partnership, for instance, each partner is personally liable, without limits, for the obligations of the entire partnership. In a limited liability company, management is liable not only to the company itself for "damage inflicted through an action or omission contrary to the law or the deed of the company" but also to third party creditors if "execution against the company has proved ineffective."
The scope of personal liability is wide-ranging. Civil liability is not only regulated by the Civil Code and Commercial Companies Code, but also by the Tax Code, the Accounting Act, the Suppression of Unfair Competition Act, the Protection of Competition and Consumers Act, the Bankruptcy Code and the Economic Activity Act. Criminal liability is regulated by the Criminal Code and the Tax Criminal Code.
Liability is not dependent upon acting beyond the scope of one's authority or not acting when necessary. A wrong decision may also lead to personal liability. For instance, with respect to a limited liability company, a member of management must "discharge his duties with a degree of diligence proper for the professional nature of the activities." As such, personal liability may arise for simply making a mistake.
Personal liability differs between a joint-stock company and a limited liability company. As stated previously, management of either legal person is liable for any damage caused by acting beyond the scope of its authority. Management in a limited liability company, however, has an even greater exposure to personal liability under the legal mechanism of subsidiary liability. Under subsidiary liability, management in a limited liability company can be held jointly and severally liable for the company's debts if the company is unable to satisfy its debt obligation to a third party creditor. Personal liability may only be avoided if it can be proved that the company filed for bankruptcy in a timely manner or that arrangement proceedings were initiated in due course. Failure to take proper action may only be excused if the failure was not the fault of the individual, such as being absent due to illness.
Can a member of management protect herself against such personal liability? The answer is, to a certain degree, yes. Protection is available from insurance companies. Directors' and officers' insurance, otherwise known as D&O insurance, may be purchased to protect not only the management board of a legal person, but also its supervisory board, board of auditors, proxies and senior directors. D&O insurance may cover specific individual members of management, or may cover an entire body, in which case coverage will continue to apply in the event of personnel changes.
In general, D&O insurance will indemnify an individual against personal liability for acts taken within the scope of her authority, but it does not protect an individual against liability for intentional acts taken against the interests of a legal person. A typical D&O policy excludes, among other things, damages resulting from the intentional act of an individual, the disclosure of confidential information, tax obligations, contractual indemnities and court fines.
Furthermore, D&O policies will include a cap on the amount of coverage, which, along with the guarantee amount, will be defined in the policy. Any payment made under the terms of a D&O policy to a third party will be reduced from the remaining guarantee amount. The insurer's liability to indemnify the individual member of management will terminate upon either the payment of the guarantee amount or the lapse of the time period of coverage. The guarantee amount will include the payment of attorneys' fees and other costs associated with defending the individual from a third party claim.
However, personal liability cannot be entirely guarded against. I always advise members of senior management to obtain D&O insurance in order to limit the degree of personal exposure for damage caused by their potential mistakes in judgement or failure to take appropriate action when necessary. But before you purchase a policy, make sure you understand exactly what the policy protects against, and what it does not. The number of exclusions varies greatly among the policies currently available.
One final note: Unlike other areas of national law that will be subject to EU regulations, such as trade, agriculture and the environment, insurance law will remain subject to the law of each member state. As such, Poland will not be required to alter its current insurance laws upon accession to the EU.
