Division of responsibilities and the principle of trust as defenses against allegations of board misconduct & assignment of indemnification claims to the company
This article examines, in light of the procedural allocation of the burden of pleading and proof in directors’ and officers’ liability litigation, the circumstances under which board members may invoke a functioning division of responsibilities and the principle of trust as defenses. Drawing on recent case law, it highlights why careful documentation and well-structured governance frameworks are indispensable for demonstrating compliance with fiduciary duties.
In addition, the article considers the implications of assigning a director’s indemnification claim under a D&O insurance policy to the company, with particular regard to the burden of pleading and proof in coverage disputes between the company and the D&O insurer.
Allocation of pleading and evidentiary burdens in board liability proceedings
In directors’ liability litigation, case law has developed a tiered allocation of the burden of pleading and proof. The claimant company must allege conduct by the director that may constitute a breach of duty. It must further demonstrate the extent to which such conduct, within the director’s sphere of responsibility, has caused the company harm. Here, the company bears the full burden of pleading and proof, although it may benefit from the evidentiary relief provided by Section 287 of the German Code of Civil Procedure (ZPO), which allows the court to estimate damages.
Once the company has met this burden, the director bears the full burden of pleading and proof to show that he or she exercised “the care of a prudent and diligent business manager” (e.g., Section 93(2) sentence 2 AktG), was not at fault, or that the loss would have occurred even if duties had been duly performed. This allocation is justified by the director’s closer connection to the facts, as the director is in a position to assess and present the circumstances of his or her own conduct, including factors supporting its compliance with fiduciary duties. Otherwise, the company would regularly face insurmountable evidentiary difficulties.
This allocation of the burden of pleading and proof applies in principle even to directors who have already left the company.
Reliance on an effective division of responsibilities as a defense in directors’ liability proceedings
In directors’ liability litigation, (former) board members frequently invoke the defense that they were not responsible for tasks improperly performed by another board member and that they relied on the responsible colleague to fulfill his or her duties properly.
As illustrated by the most prominent recent liability action against further members of the management and supervisory boards of Wirecard AG (see Regional Court of Munich I, partial judgment of 5 September 2024 – 5 HK O 17452/21, NZG 2024, 1605), a breach of duty or fault can only be refuted on the basis of an existing allocation of responsibilities and reliance on the principle of trust under very strict conditions.
When assessing whether the conduct or omission of a board member without direct departmental responsibility complies with fiduciary duties, the allocation of the burden of pleading and proof outlined above applies, subject to the following specific standards.
Fundamental principle: collective responsibility and allocation of duties within the management board
As a matter of principle, each member of the management board bears responsibility for the management of the company as a whole. This applies without restriction to management measures that must be undertaken by the board collectively.
That said, collective responsibility does not preclude the allocation of tasks and responsibilities among individual board members. Such an allocation of responsibilities is typically set out in the board’s internal rules of procedure. Provided that the allocation meets the requirements developed in case law and legal literature for a functioning division of responsibilities, the result is a differentiation of liability among board members. Each member with departmental responsibility bears full responsibility for his or her designated area, while the allocation of responsibilities leads to a “weakened” duty of oversight with respect to the areas overseen by other members of the collegial board.
A functioning allocation of responsibilities as a prerequisite
Where a functioning allocation of responsibilities exists, each board member bears full departmental responsibility for his or her designated area of management. Accordingly, “intervening” in another board member’s department is impermissible unless there are indications of that member’s failure to exercise due care.
According to the case law of the Federal Court of Justice, a functioning allocation of responsibilities requires:
(a) a clear delineation of management tasks;
(b) an allocation of tasks endorsed by all board members;
(c) assurance that all management tasks are carried out by individuals who are both professionally and personally qualified; and
(d) preservation of the board’s collective responsibility for non-delegable tasks (see Federal Court of Justice, judgment of 6 November 2018 – II ZR 11/17, NJW 2019, 1067).
“Weakened” duty of oversight with respect to the activities of other board members with departmental responsibility
Furthermore, where a functioning allocation of responsibilities exists, the relationship between the company and a board member without departmental responsibility is characterized by a limited oversight duty. Such board member is only obliged to monitor the management of other board members with departmental responsibility for legality and appropriateness. According to the case law of the Federal Court of Justice, this duty to intervene arises only where there are specific indications that the responsible board members can no longer be relied upon to fulfill their duties (see Federal Court of Justice, judgment of 14 March 2024 – III ZR 133/22, NZG 2024, 910 para. 18; judgment of 9 November 2023 – III ZR 105/22 para. 17 with further references; judgment of 6 November 2018 – II ZR 11/17, NJW 2019, 1067).
The scope and intensity of this oversight duty cannot be equated with the stricter supervisory duties owed by board members in relation to subordinate employees of the company. Instead, it is to be understood as a mitigated duty of oversight.
Reliance on the principle of trust as an exculpatory argument
In this context, a board member without departmental responsibility benefits from the principle of trust: in the ordinary course of business, he or she is generally entitled to rely on the proper performance of duties by the respective board member with departmental responsibility.
In particular, a board member may assume that other members of the board duly discharge the tasks assigned to their departments and provide the collegial body with accurate information. The information received must, however, be assessed by non-responsible members for plausibility and completeness in light of the company’s current situation.
Moreover, it is generally sufficient for the proper conduct of a non-responsible board member not to undertake further inquiries regarding business processes with which he or she is not directly entrusted, as long as those processes withstand a cursory plausibility review. Figuratively speaking, a board member is not required to “call for the files” from other departments on a regular basis—indeed, given the departmental responsibilities of fellow board members, such intervention is only permissible to a very limited extent.
Accordingly, in the ordinary course of business there is no need for continuous monitoring; it suffices that board members follow the developments and activities in neighboring departments during meetings of the collegial body.
An intensified duty of oversight for members of functionally related departments is rejected by the prevailing and persuasive scholarly opinion, contrary to an isolated decision of the Administrative Court of Frankfurt (judgment of 8 July 2004 – 1 E 7363/03[1], WM 2004, 2157).
Circumstance-based intensification of supervisory duties
An event-driven intensification of the duty of oversight in cases of breach of the legality obligation by the responsible board member arises only where there are concrete indications of misconduct. The strict criminal law standard of an “initial suspicion” may serve as a useful benchmark. Compliance with the legality obligation by the responsible board member cannot be ensured passively by merely receiving information but must instead be actively verified through the evaluation of documents and other facts that have become known. This, however, entails a significant—and therefore ideally avoidable—intervention in both the collegial relationship and the respective department of another board member.
The intensity of the oversight duty is otherwise determined by the circumstances of the individual case, in particular the size of the company, its organizational structure, its business activities, and the identity of the board member concerned.
The shorter the period during which a board member has performed his or her assigned duties, the more careful the oversight must be; conversely, the requirements for monitoring decrease where there has been a proven long-standing working relationship.
Allocation of the burden of pleading and proof where responsibilities are divided in directors’ liability cases
Accordingly, where a board member without departmental responsibility is sued, he or she bears the burden of pleading—and, if contested, the burden of proof—with respect to the existence of a functioning allocation of responsibilities and the absence of specific indications of misconduct by the responsible board members.
Thus, reliance on the defense of lacking departmental responsibility and on the principle of trust will succeed only if the non-responsible board member provides substantiated submissions regarding the existence and implementation of a functioning allocation of responsibilities and the absence of concrete indications of improper performance by the responsible member. If the director is able to establish this—that is, if there were no specific indications of misconduct by other board members—then there is no breach of duty in the non-intervention of the non-responsible member.
Impact of the assignment of D&O indemnity claims on the allocation of pleading and evidentiary burdens
Companies frequently maintain directors’ and officers’ (D&O) liability insurance. A D&O policy is structured as third-party insurance: while the company (as policyholder) pays the premiums, the claim under the policy accrues to the directors and officers (as insured persons). As a result, the injured company can ordinarily proceed against the D&O insurer only indirectly—by first pursuing the director and, on the basis of a judgment, garnishing the director’s claim against the D&O insurer.
It is also possible, however, for the director to voluntarily assign his or her indemnification claim against the D&O insurer to the company in satisfaction of the liability, thereby enabling the company to proceed directly against the insurer. The Federal Court of Justice has confirmed that such an assignment of the director’s indemnification claim under a D&O policy to the injured company is permissible (see Federal Court of Justice, judgment of 13 April 2016 – IV ZR 304/13, NJW 2016, 2184).
Only through such assignment can the company bring a direct claim against the insurer. Once the coverage claim has been assigned, it is transformed into a payment claim. Where the company pursues the assigned claim directly against the insurer, the coverage litigation necessarily involves a preliminary assessment of the underlying liability of the director, as this question determines the insurer’s duty to indemnify.
It has not yet been conclusively decided by the Federal Court of Justice whether such an assignment results in a shift in the burden of pleading and proof to the detriment of the company and in favor of the insurer. This uncertainty is one reason why the assignment route has thus far been rarely pursued. Critics of a burden shift argue that the insurer—despite existing rights to information—cannot be placed in the same position as the director and therefore lacks the director’s proximity to the facts relevant to assessing compliance with fiduciary duties. Moreover, the insurer’s litigation position is complicated by the fact that, following assignment, the director tends to align economically with the company as claimant: the director has an interest in the insurer satisfying the assigned claim, whereas in a direct liability action the director would vigorously defend against the company’s claim.
Others counter that the legal position of the insurer is not altered by the assignment and that coverage can only be granted where liability exists. Accordingly, the burden of pleading and proof regarding liability must continue to follow the underlying statutory provisions (such as Section 93(2) sentence 2 AktG). A shift of evidentiary rules “in favor” of the insurer would contradict the general principle applicable in incidental proceedings, under which the court must independently examine how a preliminary question decisive for the outcome of the case is to be resolved.
In a recent judgment, the Higher Regional Court of Cologne (judgment of 21 November 2023 – 9 U 206/22, r+s 2024, 27) considered these arguments in detail and rejected any reallocation of the burden of pleading and proof. The general tiered allocation of pleading and evidentiary burdens applies equally in litigation against the D&O insurer.
Practical guidance
Both recent decisions are equally noteworthy with respect to the allocation of the burden of pleading and proof.
The judgment of the Regional Court of Munich I in the Wirecard board liability proceedings has once again highlighted the liability risks that arise from insufficient oversight of departmental responsibilities and from uncritical reliance on the performance of fellow board members. At the same time, the strict standards applied to ensure a functioning allocation of responsibilities and compliance with oversight duties must not result in the practical erosion of the principle of trust.
For practice, this means:
- A functioning allocation of responsibilities remains key to mitigating liability risks for board members.
- The principle of trust applies only where there are no specific indications of misconduct.
- The burden of pleading and proof follows a tiered system that, on the one hand, alleviates the company’s burden, but, on the other hand, allows board members to defend themselves against allegations of misconduct—or exculpate themselves—by presenting a precise account of the allocation of responsibilities.
- Careful documentation, regular evaluation of the allocation of responsibilities, and a conscious approach to the design, monitoring, and exercise of information and reporting duties are essential.
The Higher Regional Court of Cologne has also addressed important issues relating to the burden of pleading and proof in directors’ liability litigation. This decision is likely to make it more attractive for companies to seek the assignment of indemnification claims held by directors against their D&O insurers. However, it must be borne in mind that a final ruling by the Federal Court of Justice on the allocation of the burden of pleading and proof is still pending, and companies must carefully assess the circumstances of each individual case before pursuing a direct action against a D&O insurer on the basis of an assigned claim.
Cologne, 23. September 2025
Dr. Klaus Felke | Luca Forresu | Nico Weis