How are managing directors and other managers liable for damages in the performance of their duties?

What are the risks for managers in case of a mistake?

Members of the board of directors, supervisory boards, managing directors and other executives are all liable for their actions under the Civil Code and the Companies Act. The concept that plays a role at the moment is the so-called duty of care – that is, the duty to act loyally, with due care and the necessary degree of information.

If a manager breaches this duty and the company or a third party suffers any damage, then the manager can be sued personally for compensation. This is up to the amount of the damage caused, and regardless of the amount of salary or benefits associated with the position. In these cases, it is often not even intentional damage, but managers in their positions make hasty decisions, omit something or make an administrative error. This is why these people in office should take out public liability insurance.

What is executive liability insurance and how does it work?

Also referred to as Directors and Officers Liability Insurance (D&O insurance), managers’ liability insurance covers financial loss that a manager or member of an authority may cause in the course of their duties. This insurance therefore always protects specific individuals, it does not protect the company as a whole.

So what does this policy cover:

• Compensation for damages caused by a wrong decision or omission,
• legal defence costs (including out-of-court settlements),
• recourse claims – i.e. cases where the company itself compensates for the damage and then recovers it from its representative.

Public liability insurance can usually be arranged either individually (for example, for the CEO) or collectively for the entire management of the company. Both large and smaller companies often arrange executive liability insurance on their own for the benefit of their executives. This protects not only their own reputation and stability, but also that of the company.

What all can be covered by management liability insurance?

Of course, each insurance policy is individual and the management liability insurance is no exception. However, we can say from experience that the scope of coverage usually includes:

• investment decisions, contracting and personnel policy,
• breaches of law or internal regulations,
• compliance and GDPR errors,
• lack of control over internal processes,
• damage to shareholders, creditors or employees.

Sometimes the insurance also includes liability coverage towards government authorities (this is useful for example in case of administrative offences) or extended coverage to affiliates or branches abroad.

Although management liability insurance offers quite broad coverage, there are important exclusions that it does not cover. The most common ones include:

• willful misconduct,
• criminal offences (e.g. embezzlement),
• situations where a person has exceeded his or her authority,
• older events that have not been reported (retroactivity),
• internal disputes between insured persons (e.g. between board members),
• insolvency of the company – some insurers reduce or refuse benefits here.

Therefore, it is always necessary to read the insurance terms and conditions thoroughly and ideally also have them assessed by a lawyer who is familiar with the issue and will warn you of any potential risks. We will be happy to help you with this part, just contact us.

What does it look like in practice?

The CEO of a small technology company has entered into a contract with an external IT services provider. But he didn’t check the supplier’s creditworthiness properly before doing so and the supplier went bankrupt. This bankruptcy caused the technology company to incur over CZK 800,000 in damages. The company initially paid the damage to its client, but subsequently claimed recourse against the managing director, to which it was fully entitled. However, the managing director had taken out a management liability insurance policy, so the insurance company paid the sum of CZK 800,000 on his behalf.

In another case, a member of the board of directors of a property development company forgot to report a change in the terms of a zoning plan. As a result of his omission, the entire project had to be delayed for several months. The investor logically claimed damages of several million crowns. Again, the board member was lucky to have liability insurance. Thanks to this, the insurance company awarded the claim and paid not only the compensation to the investor, but also the costs of the board member’s legal representation.

Management liability insurance in the Czech environment

While in Western Europe or the USA, directors’ liability insurance is a common practice even in smaller companies, in the Czech Republic it is still building its position. However, the situation is changing rapidly, especially in recent years, when lawsuits against statutory bodies for violation of the law or internal rules of the company have been appearing. This is also due to changes in the Civil Code and the Companies Act, which have tightened the liability of members of corporate bodies.

Today, D&O insurance is a standard part of the compliance policy of larger companies, but it is also starting to appear in startups and family-owned companies. This is despite the fact that the cost of insurance can reach tens of thousands per year.

Personal liability for managers: when is insurance not enough?

It is important to emphasise that, despite the existence of management liability insurance, a manager’s liability remains very personal and can have fatal consequences in certain situations. This is because insurance never functions as a “blank cheque”, so it does not provide protection in cases of gross misconduct, deliberate breach of the law or in situations where the person has acted in breach of his or her powers.

Particularly dangerous are cases where the statutory officer is completely inactive – for example, he or she fails to deal with the impending bankruptcy of the company, fails to keep proper accounts or fails to file an insolvency petition on time. In such situations, the insurer may be entitled to refuse to pay and the entire loss will fall on the shoulders of the individual. This applies not only to commercial decisions but also to ordinary administrative proceedings.

Another risk that is often underestimated by managers is the possible overlap with criminal law. If their decisions turn out to be unethical or illegal (for example, entering into a contract without the knowledge of the other board members or “covering up” accounting irregularities), criminal prosecution may be initiated – and at that point insurance cannot help. Criminal liability is non-transferable in the Czech Republic and no D&O insurance can replace the legal consequences of a crime.

What do we recommend?

This is why prevention is essential alongside insurance. Managers should have access to legal advice, receive regular training on their liability, the company’s internal rules and current legislation. Similarly, clear rules should be set for decision-making processes, collective approval of important actions and a system of internal control.

Our recommendation is therefore: insurance is an important element of protection, but it must go hand in hand with consistent personal and company prevention. This is the only way to minimise risks and protect both the company and its management.

Summary

Managers and members of statutory bodies are personally liable for their decisions, which can have serious financial and legal consequences – even if they do not act intentionally. This is why directors and officers (D&O) liability insurance is now increasingly seen as a necessity in the Czech Republic, not a super-standard. It covers damages caused by mistakes in office, legal defence costs and recourse claims, but does not cover deliberate or criminal acts. However, insurance alone is not enough – prevention is also key: legal support, training, internal controls and clear decision-making rules. Only the combination of these elements truly protects both the company and its management.