Directors’ and officers’ insurance: an AIG clause favourable to policyholders enforced by the Paris Judicial Court

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Publié le 22/05/2025 par Jérôme Goy

INSURANCE LAW

In a final decision handed down on 16 January 2025 (1), the Vice-President of the Paris Judicial Court confirmed the application, in favour of insured directors, of a frequent contractual clause relating to compensation for their defence costs. Thanks to this clause, the insured executive benefits from the compensation awarded under article 700 of the Code of Civil Procedure, even though the insurer financed the lawsuit.

In this case, a company had taken out a directors’ liability insurance policy. While the debate continues as to whether or not it is possible to insure criminal and administrative fines (2), there is nothing to prevent the insurer from covering defence costs in criminal and civil proceedings.

This was the case in the summary proceedings order of 2025: the company had paid the insured’s legal fees as part of his criminal defence. The director of the insured company had first been accused of misuse of corporate assets, for which he was acquitted the first time (3); then he was accused of mismanagement. Once again he was finally acquitted, with the insurer having compensated him for costs in excess of €500,000.

The insurer sought restitution of the sums paid for the insured’s defence, as well as reimbursement of the compensation received by the insured under Article 700 of the Code of Civil Procedure. Although the judgment (4) not only acquitted the director, it also ordered the plaintiffs to pay him the sum of €100,000 – it is this sum that the insurer is seeking to recover.

1°) The insurer first invokes legal subrogation, taking the view that the insurer who has paid the insurance indemnity is subrogated, up to the amount of that indemnity, in the rights and actions of the insured (…) (5). Implicitly, the insurer considers that the insured has a liability claim against the company and may therefore be subrogated to its rights.

2°) It then argues – in the alternative – the unjust enrichment of the insured and the recovery of undue payments.

The insurer is not claiming reimbursement of the Article 700 compensation, but restitution of the sum paid to the director in this respect – a sum corresponding to costs that he did not pay personally, and which, according to the insurer, should not therefore accrue to him under Article 700 of the Code of Civil Procedure.

As for the insured:

1°) argued that he did not have a claim against the liable party; the sum paid to him under article 700 of the Code of Civil Procedure was not a liability claim against the company.

2°) above all, he invoked clause no. 8 of the insurance contract, which stipulates in clear and explicit terms that: “Defence costs and ancillary costs paid by the insurer shall not be reimbursed by the insured insofar as the claim based on the alleged fault likely to be covered under this contract gives rise :

• Either a final court decision that the person is not liable,
• or a discontinuation of proceedings against the insured,
• Or an amicable settlement accepted by the insurer“.

This clause appears in a fairly large number of directors’ and officers’ liability insurance policies.

After recalling the legal bases of subrogation (6), recovery of undue payments (7) and unjust enrichment (8), the vice-president of the Paris court recalled clause 1.2. of the policy, the purpose of which is « to reimburse the subscribing company and the insured parties for its defence costs » in the event of its civil liability being called into question in the performance of its duties as a director; and he ruled out subrogation in favour of the insurer.

The order concludes:

• on the one hand, by expressly citing clause 8, which « does not provide for the reimbursement of defence costs in the event of a final decision of non-liability »; and

• secondly, by considering that the insurer did not therefore have to be subrogated to the rights of the insured and that the latter had « has neither received this sum by mistake, nor received what was not due to him within the meaning of article 1302-1 of the Civil Code, and has not enriched himself in an unjustified manner to the detriment of others within the meaning of article 1303 of the Civil Code ». In other words, it is not possible to subrogate in the rights of the insured if the latter has no rights (i.e. the liability claim).

The benefit of this compensation under Article 700, at least in insurance contracts that include this clause, therefore remains with the insured executive. This court decision is final.