Employee liability and D&O are two terms that at first glance seem to have little in common. Yet a recent ruling by the Cologne Higher Labor Court (Landesarbeitsgericht) shows how closely they are connected. The court decided on July 31, 2026 (Ref. 8 SLa 603/25) that an employer-funded D&O insurance excludes the liability relief under the principles of limited employee liability. This means: employees who act with gross negligence can be held fully liable with their entire assets in a worst-case scenario — even if they have such insurance. Understanding employee liability D&O insurance is now more critical than ever.
Employee Liability and D&O Insurance: Basics and Limits
Employee liability is a complex area of law that unsettles many employees. The basic rule is: if an employee causes damage while performing their work, they do not automatically bear full liability. Case law has developed the principle of limited employee liability. This states that employees are only fully liable for gross negligence in work-related activities, proportionally liable for ordinary negligence, and not liable at all for slight negligence. These principles aim to prevent employees from facing incalculable risks when fulfilling their duties.
A D&O insurance (Directors and Officers) is a professional indemnity policy primarily taken out for executives. It covers damages claims brought against board members or senior managers. In many companies, the employer pays the premiums for this insurance. That fact now has far-reaching consequences for employee liability.
The Case Before the Cologne Labor Court: Employee Ordered to Pay Millions
In the underlying case, an employee had arranged several transfers totaling millions of euros to various entities, causing the employer substantial financial loss. The Cologne Labor Court (Arbeitsgericht) initially ordered the employee to pay, prompting an appeal to the Cologne Higher Labor Court. The Higher Labor Court largely upheld the decision and dismissed the appeal. The employee must now pay several million euros in total to the employer — exact amounts vary by transfer, but the sum reaches the double-digit millions.
The court found the employee’s conduct to be grossly negligent. He had apparently violated his duty of care to a considerable degree by executing the transfers without adequate verification. The fact that the employer had taken out a D&O insurance for him played a decisive role in the liability assessment.
Why the D&O Insurance Excludes Liability Relief
The first guiding principle of the ruling states: “An employer-funded D&O insurance excludes liability relief under the principles of limited employee liability.” This means: if the employer covers the cost of such insurance, the employee can no longer invoke liability relief. The reason lies in the protective function of the insurance. It is meant to shield the employee from the financial consequences of their professional decisions. Once this protection exists, limiting liability to protect the employee is no longer necessary.
The second guiding principle adds: “An existing employer-funded insurance that eliminates the risk of existential ruin removes, at the very least, the grounds for an exception to full liability in a case of gross negligence.” In other words: if the insurance covers the risk that the employee loses their livelihood through liability, there is no longer any reason to spare them in cases of gross negligence. They then bear full liability — even if their private assets are at stake. The link between employee liability D&O insurance and full exposure is now legally confirmed.
When Does Limited Employee Liability Apply?
Limited employee liability is not codified in statute but was developed by case law. It applies to all employees who cause damage that is “work-related” — meaning the damage must be connected to their work. The liability relief does not apply to intentional acts and, as the Cologne Higher Labor Court has now clarified, not to gross negligence either — at least not when a D&O insurance exists.
The liability gradation generally works as follows: for slight negligence, the employee bears no liability. For ordinary negligence, liability is shared proportionally, taking into account factors such as salary, length of service, and the difficulty of the task. For gross negligence, the employee is principally fully liable, unless full liability would threaten their existence and would be unreasonable. Precisely this exception ceases to apply when an employer-funded D&O insurance exists, because the existential risk is then covered.
Practical Tips: How to Protect Yourself from Liability Risks
What does this ruling mean for you as an employee? First, be aware that a D&O insurance is not only a benefit but can also increase your liability exposure. If your employer has taken out such insurance for you, you should work with particular care and avoid risky decisions. Here are concrete tips:
- Document your decisions: Record in writing why you made a specific decision. This allows you to demonstrate, if necessary, that you did not act with gross negligence.
- Seek advice when uncertain: If you are unsure about an important decision, consult your supervisor or a colleague. A second opinion can protect against costly mistakes.
- Do not exceed your authority: Act only within your competencies. If you are not authorized for transfers or contracts, leave that to the designated persons.
- Review your insurance: Find out whether a D&O insurance exists for you and what exactly it covers. You can check your employment contract or ask HR.
- Be especially careful with financial transactions: When authorizing payments, verify all details meticulously. A single error can cause immense damage.
Just as the Cologne Higher Regional Court ruling protected creditors against manipulated bank details, this ruling underscores how crucial diligence is when handling money. Anyone who acts carelessly here risks not only their job but also their private assets.
Conclusion: What to Take from the Ruling for Your Daily Work
The Cologne Higher Labor Court ruling is a clear warning to all employees in positions of responsibility. Limited employee liability is no free pass for negligence. If your employer has taken out a D&O insurance for you, you must expect full liability in cases of gross negligence. In extreme cases, this can mean the loss of your entire assets.
To protect yourself, perform your duties conscientiously, document decisions, and seek clarification when in doubt. If you nevertheless find yourself in a liability situation, it is advisable to consult a specialist employment lawyer early on. Such a lawyer can assess your rights and, if necessary, prepare a claim before the labor court. Even when enforcing rights after a dismissal, continued employment during litigation after dismissal may play a role. RechtStark as a litigation funder can finance such proceedings if the prospects of success are sufficient.
The interplay of employee liability D&O insurance will remain a key topic going forward.
The ruling is not yet final, as an appeal to the Federal Labor Court (Bundesarbeitsgericht) has been permitted. It remains to be seen whether the highest judges will confirm the decision. Until then, take the principles of employee liability seriously and, when in doubt, ask one question too many rather than one too few.
Note: This article is for general information purposes only and does not replace individual legal advice. For a free initial assessment of whether litigation funding may be an option for your case, you can contact RechtStark.