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Germany changes law on D&O Insurance

The Bundesrat is expected to ratify Gesetz zur Angemessenheit der Vorstandsvergütung – VorstAG today, following its approval by the Bundestag on 18 June 2009. The new law will then come into effect upon its publication in the German Federal Law Gazette (Bundesgesetzblatt).

One key change resulting from the Act, which translates as  the Act on the Adequacy of Managerial Salaries, will be that companies who purchase D&O insurance for their executives will be required to impose a personal deductible to be borne by the directors equivalent to at least 10% of the relevant loss, up to an annual maximum figure calculated by reference to the fixed remuneration of the director from time to time. The annual cap must be set at not less than one and a half times the annual fixed remuneration of the director.

To date, German companies have been subject to a recommendation of the German Corporate Governance Code that that listed companies agree in their D&O policies upon an “adequate” deductible to be borne personally by the directors protected by the policy. Few companies however complied with this provision and explanations (typically boilerplate) have generally been forthcoming in the annual reports of companies for their non-compliance.

Some legal practitioners have suggested however that the reforms will simply give birth to a new line of business in the form of D&O deductible insurance.

Other provisions introduced by the new Act include the strengthening of rules on incentive remuneration and will give shareholders of listed companies a non-binding say-on-pay vote.

What do you think?