The directors and officers of a company may, as a consequence of their position, be exposed to a claim arising from a management error or negligence, breach of duty, lack of diligence or lack of supervision. This liability is not limited to the civil sphere, but also extends to other areas such as tax liability.
Tax liability is regulated in the Spanish General Tax Act [articles 42.1.a) and 43.1.b)] where two types of liabilities are established for directors and officers: subsidiary and joint and several liability. The former applies to cases where, for example, directors do not comply with their obligations in doing what is necessary for the payment of tax obligations or implement measures that lead to non-payment. On the other hand, joint and several liability is broadly established for any person who causes or collaborates in the execution of a tax offence, which could also apply to officers.
However, although it is relatively common for directors and officers to be sanctioned for this type of offense, in many cases the D&O policies contain exclusions for any kind of tax liability. On the contrary, other policies cover this type of risk when there is good faith or, at least, there is no fraud or gross negligence in the actions of the responsible director or officer; likewise, some policies insure civil liability arising from tax infringements, such as, for example, the civil liability demanded by shareholders from the directors for the commission of a tax infringement.
Under article 8.3 of the Spanish Insurance Contract Act, exclusions must be highlighted in the policy, but they do not have to be expressly accepted by the policyholder in order to be valid clauses. On the other hand, the limitative clauses (“cláusulas limitativas”), which are those clauses that restrict the rights of the insured in a non-justified manner (i.e., they surprisingly imply that a loss is not covered, when the insured reasonably could think that it was actually duly covered) must be highlighted in the policy and, furthermore, they must be expressly accepted by the policyholder in order to be considered as valid (article 3 of the Insurance Contract Act). In other case, if they are not accepted, they will be considered as null and void.
The distinction between exclusions and limitative clauses is not an absolutely clear one: in some cases, exclusions are not considered as a negative delimitation of the risk covered by the policy, but as limitative clauses that must fulfill the formal requirements mentioned above.
Although it is generally understood that the signature of the policy by the policyholder means an acceptance of all limitative clauses, this endemic concept of the Spanish Insurance Law is truly problematic for insurers because only a very small percentage of insurance policies are signed by the policyholders. Therefore, if a clause is considered as a limitative clause, the general rule would be that it cannot be argued against the policyholder/insured because it is very likely that the policy has not been signed.
The recent decision issued by the Spanish Supreme Court on 29 January 2019 states that the exclusions of tax liability contained in D&O policies are not properly exclusions, but limitative clauses, so D&O policies will also cover tax liability when that exclusion has not been specifically agreed on by the insured (i.e., if the policy is not signed).
The Supreme Court has understood that the liability provided in the General Tax Act has been established to encourage a diligent compliance with the companies’ tax obligation and in reality it is a rather common offence. Therefore, the exclusion of the coverage of this very common risk without an express acceptance must be considered as a limitation of the insured rights and it cannot be enforceable against the insured.
Even though this is the first time the Supreme Court rules in this sense, the Section no. 15 of the Barcelona Court of Appeals has recently issued a similar judgment, on the 27 December 2018, regarding a PI policy subscribed by an economists association. In that case, the Court stated that a clause which specifically excluded the coverage of fines and administrative sanctions imposed on economists or auditors was a limitative clause and therefore null and void as it was not expressly accepted by the policyholder.
These decisions cannot yet be considered as case law, but they can change the way in which the tax liability cover of D&O policies is construed in Spain. Insurers should try to get their D&O policies duly signed in order to enforce these kinds of exclusions, but the truth is that the almost endless discussion regarding exclusions vs limitative clauses will only finish when the Spanish legislator finally modifies article 3 of the Insurance Contract Act.
Authored by Luis Alfonso Fernandez and Blanca Romero de Ory