Which legal expenses insurance does a GmbH managing director need?
In short
A GmbH managing director (Geschäftsführer) usually needs two policies: the company's business legal expenses insurance and personal manager cover. Which modules? Service contract, special criminal defence and financial loss cover, together about EUR 1,230 to 1,420 a year on an income up to EUR 50,000. You need this because German employment legal cover does not apply to a managing director's contract.
After a weak year the shareholders refuse to pay the bonus promised in the contract. The managing director sues at the regional court.
Competent court
regional court, not labour court
Private employment legal cover
no cover, service contract of a legal representative
Company's business legal cover
no cover, dispute with the policyholder itself
Service contract cover bought before the dispute
pays lawyer and court
Premium for it
about EUR 45 to 62 a month
Only personal service contract cover pays for this dispute. At the regional court the loser also pays the other side's costs, so the risk is higher than at the labour court.
Why a GmbH managing director is not an ordinary employee
A GmbH managing director represents the company and is therefore not treated as an employee by the German labour courts (§ 5 (1) sentence 3 ArbGG). Disputes about salary, bonus or termination of the service contract (Anstellungsvertrag) go to the regional court. Statutory dismissal protection generally does not apply.
The model conditions of the German insurers' association expressly exclude disputes from service contracts of legal representatives of companies and name the GmbH managing director as an example. Employment legal cover from your days as an employee will not help you as managing director.
The three modules of manager legal cover
German insurers offer special modules for managing directors, sold separately or as a package. Which you need depends on whether you hold shares, how high your salary is and which sector the GmbH works in.
Module
Typically covers
Most important for
Service contract cover (Anstellungsvertrags-Rechtsschutz)
removal from office, termination, bonus, severance, non compete
external directors and minority shareholders
Special criminal defence (Spezial-Straf-Rechtsschutz)
defence even against intent allegations, fees above the statutory scale
everyone, especially construction, transport, health, food
Financial loss cover (Vermögensschaden-Rechtsschutz)
defending damages claims over management mistakes
directors without or with thin D&O cover
Company's business legal cover (Firmenrechtsschutz)
employer disputes, damages, criminal and regulatory cases at work
the GmbH itself, the director is co insured
Company policy and personal cover: who pays for what
The GmbH's business legal expenses insurance protects the company, for example in disputes with staff. The managing director is usually co insured for criminal and regulatory proceedings arising from the job. It does not cover the director's own dispute with the GmbH, because claims between the policyholder and co insured persons are excluded.
So the managing director should take out service contract cover in his or her own name. Agree in your service contract who pays the premium.
D&O insurance and legal expenses cover for directors
D&O insurance pays when a managing director is held liable for a financial loss and also covers the defence costs. It does not cover a dispute about the director's own service contract. For a GmbH managing director the two policies complement each other.
Financial loss legal cover is mainly worth it if there is no D&O or its limit is tight, because it protects the D&O limit from being used up by defence costs.
Waiting period and prior disputes for managing directors
Manager legal cover also excludes disputes that began before the policy started. If you buy cover when the shareholders are already discussing your removal, you pay for that dispute yourself. Service contract cover usually has a three month waiting period.
The right moment for a managing director to buy legal expenses insurance is when taking up the post, while relations with the shareholders are still good.
When a managing director needs less
A sole shareholder who is also sole managing director is unlikely to sue himself over the service contract. Service contract cover is then usually unnecessary, while special criminal defence still makes sense.
Disputes between shareholders are not covered by any of these modules. Carefully drafted articles of association (Gesellschaftsvertrag) are the only protection here.
Step by step
Clarify whether you are an external director, minority or sole shareholder.
Check what the GmbH's business legal cover provides for you as a co insured person.
Take out service contract cover in your own name while no dispute is in sight.
Choose special criminal defence according to sector and liability risk.
Check the D&O limit and decide on financial loss cover accordingly.
Clarify the tax treatment if the GmbH pays the premium.
Checklist
Service contract cover in your own name
Removal from office and termination expressly included
Special criminal defence including intent allegations
Sum insured matching your salary
Coordinated with the company's D&O
Run off cover after leaving the post clarified
Common mistakes
Relying on employment legal cover from your time as an employee
Buying cover only when removal is already on the table
Assuming the GmbH's policy covers your dispute with the GmbH
Thinking disputes between shareholders can be insured
Questions and answers
Frequently asked
Is a GmbH managing director an employee in Germany?
Not for the labour courts.
As legal representative he or she is not treated as an employee;
contract disputes go to the regional court.
Does my private legal expenses insurance cover a dispute with the GmbH?
No.
Service contracts of legal representatives are excluded from normal employment legal cover.
How much does legal cover for managing directors cost?
About EUR 31 to 84 a month per module;
all three together on an income up to EUR 50,000 about EUR 102 to 118 a month.
Do I need service contract cover as sole shareholder?
Usually not, since you are unlikely to sue yourself.
Special criminal defence still makes sense.
Does D&O insurance replace legal expenses cover?
No.
D&O covers liability and defence costs for financial losses,
not disputes about your own service contract.
Is there a waiting period?
Usually three months for service contract cover.
A dispute that started before cover began stays excluded.
