4.7.5 Indemnification and insurance

Indemnification

The possibility of having the company indemnify its directors is not mentioned in Dutch legislation. In practice, certain companies have included such a possibility in their articles of association. This is a practice that has been borrowed from the US.

It is generally assumed that indemnification is not possible where a director has breached article 2:9 DCC. Likewise, under article 2:9 DCC and relevant case law, a director is liable towards the company only where there has been improper management (onbehoorlijk bestuur) on his part for which serious blame (ernstig verwijt) attaches to him. In other words, a director is not liable to the company and third parties for ordinary negligence, which is something that can be contractually excluded. It is questionable whether liability for an act involving greater culpability than ordinary negligence can be excluded by contract. On the other hand, a director will be able to rely on an indemnification where it covers legal defence costs for false claims.1

Shell, Unilever and Philips have indemnification clauses for their directors in their articles of association.2

Professor J.B. Wezeman suggests that more extensive indemnification should be possible in BV companies with the approval of a quorum of shareholders. This would be a further point of convergence with the US. It is also a subject for Dutch law studies to focus on, especially those that favour greater protection for directors. The Delaware exculpation clauses have helped directors in the US.

In view of the legal constraints on indemnification, D&O insurance is preferable. In particular, it should be noted that a director will have no recourse under an indemnity in the case of the company's bankruptcy. However, it can be to the advantage of directors to have both, given the limits on the insurance coverage, the possibility that an insurer may unjustifiably refuse to pay out under the policy, termination of the policy, failure to pay premiums and the possible insolvency of the insurer.

Directors' and Okers' insurance

US, UK and other insurance companies issue D&O policies in the Netherlands. In addition, a so-called BCA policy ("Bestuurders-Commissarissen Aansprakelijkheids-verzekering" or Directors-Supervisory board members Liability Insurance) has been set up by 11 large insurance companies in the Netherlands.

The company concerned is the policyholder and pays the insurance premiums. The insured persons are the present, former and future management board members and supervisory board members of the company. In view of the collective responsibility of the boards, the members of such a board can usually only be insured collectively. The territorial applicability of the coverage, the size of the company, the number of directors, the financial situation of the company, the number of exclusions and the insured amount are factors that will determine the premium to be paid. It should be noted that the premium paid by the company is deductible for corporate income tax purposes. The insured amount is the maximum amount to be paid by the insurance company per claim and per insurance year for the insured parties individually and collectively.

If the insurance company is notified of circumstances that could lead to a claim but no claim is actually made until after the policy expires, this claim too will be covered.

It should be noted that coverage provided under a policy is composed of the description of the insured interest, the description of the insured parties and any inclusions and exclusions, all of this being read in its mutual context.

The coverage provided under the policy may be limited due to a large number of exclusions. Liabilities arising out of the accounting obligation and the obligation to file the company's annual accounts may be excluded from coverage. Liabilities resulting from the failure to notify or properly notify the competent authorities of the company's inability to pay taxes, social security premiums etc. under the Second Insolvency Abuse Act are also not covered. In accordance with the general rule of Dutch law, liability caused by an individual director's intent falls outside the scope of the insurance.

In the event of the company's bankruptcy, both the liquidator and the directors are entitled to buy extended coverage. During a period of three years back from the date of bankruptcy, claims made against an insured party and filed within this period are covered if they are based on acts committed during the term of the original policy. An additional premium must then be paid.