Partner Guy Robson considers the implications of VW Group’s €270m D&O payment and what it means for ‘Dieselgate’ D&O coverage, in Insurance Post.
Guy’s article was published in Insurance Post, 19 July 2021, and can be found here.
The VW Group has recently recommended agreeing to settle claims against four of its former executives relating to the ’Dieselgate’ emissions cheating scandal, during which 11 million vehicles produced by the VW Group were fitted with “defeat device” software that allowed them to pass emissions tests. If approved, the VW Group will receive €288m (£247.5m) in settlement of these claims against some of its former executives, which include the former CEO of the VW Group, Martin Winterkorn and the former CEO of Audi AG (a VW Group company), Rupert Stadler.
According to a report from law firm Gleiss Lutz, which was commissioned by the Supervisory Board of the VW Group, “negligent breaches of duty” occurred in the upper echelons of the VW Group management shortly before use of the defeat devices were publicly admitted by the company. Neither Winterkorn or Stadler are being accused of involvement in the development of the defeat devices.
The VW Group said €270m of this settlement will be met by the VW Group’s directors’ and officers’ insurance policies, which protect the company against certain actions or inactions taken by its senior management, while the remainder of the settlement amount will include payments from the four executives themselves, including a payment of €11m from Winterkorn and €4.1m from Stadler. The terms of the settlement will require formal approval at the VW Group’s annual general meeting, due to be held on 22 July. The first €25m of the D&O policy pay-outs will be borne by the VW Group’s lead insurer, Zurich, with other layers due to be paid out by Axa XL and a variety of Lloyd’s of London syndicates.
The proposed compensation that VW Group will receive under the D&O policies is noteworthy on several accounts.
First, assuming it is ratified later this month, it will be one of the largest compensation payments of its kind in European history. However, it may not be the only one of its kind, as it is now clear that the Dieselgate scandal goes beyond actions by the VW Group and that many other major vehicle manufacturers are accused of having used defeat device software during the same period to allow their diesel vehicles to pass emissions tests.
One of the most high profile of these manufacturers is Daimler AG, which is now involved in litigation in the UK and is accused of using defeat devices in many of its Mercedes-Benz diesel vehicles. Daimler has recently settled similar litigation in the US and has been compelled by authorities to recall many diesel vehicles across Europe. It will be interesting to see the extent to which future D&O policy claims may be made by other vehicle manufacturers against their senior managers and executives as a result of Dieselgate issues and the extent to which such companies’ D&O policies will be engaged.
Second, while the level of compensation payable under the D&O policies may by themselves be huge, such payments will be eclipsed by the level of the fines, legal costs and potential product recall costs that manufacturers facing Dieselgate claims will likely face. For example, the VW Group has incurred fines and legal costs amounting to over £32bn since the Dieselgate scandal broke at the end of 2015 – a figure that does not take into account ongoing litigation in the UK and other jurisdictions over Dieselgate or claims made against the company by its shareholders.
Third, the fact that the VW Group is looking to receive a payout now may suggest that it is looking to put the past and its involvement in Dieselgate behind it. However, its ability to do so will be hampered while litigation is ongoing and consumers in the UK still are yet to receive any redress for their losses and while its former CEO is about to stand trial in Germany in September for fraud charges.
One thing is for certain, the insurance industry will be watching this carefully and it remains to be seen the extent to which these factors may lead to changes in the terms of and increases in the costs of future D&O insurance for vehicle manufacturers.