Company heads’ personal responsibility: there is no need to panic, but they better be prepared

dr. Csurgó Ottó
ügyvéd
Cseri és Társai Ügyvédi Iroda

Hungary’s new Civil Code entered into force on 15 March 2014 and among other things it also regulates the personal responsibility of company heads. The new law puts such big responsibility on the heads of about 300,000 Hungarian enterprises which is unparalleled in Europe. The new Civil Code stipulates that if a head of company causes damage to the company by breaching a contract, they must compensate for the damage from their personal wealth. Another radical change from the previous regulation is the appearance of universal responsibility: a company and its head are both held liable for damages caused to a third party. Ottó Csurgó, a lawyer working for Cseri and Co. Law Firm told our magazine that it would take 3-5 or even more years before we can see what these changes in the Civil Code mean in practice. Mr Csurgó reckons that it would be a mistake to minimise the significance of worries bur the new law won’t mean the ‘end of the world’ either. Dr Péter Takáts, managing director of Polip Insurance Brokers Kft. expects stricter decisions from judges than before. In his view complicated legal matters will have to be clarified and this will probably lead to long court procedures. He definitely counts on an increase in the number of compensation cases. It must be noted that company heads’ responsibility refers specifically to matters related to decisions made in the course of managing the company – the director of a firm can’t be held liable for making bad decisions in the domain of professional responsibility. For instance a director is held liable if the company’s advertisements aim at misleading consumers but if a dentist does harm to a patient’s tooth it qualifies as a matter of professional responsibility. The problem is that the line between professional and managerial responsibility is thin. The new Civil Code also introduces the concept of ‘damages payment’. Compensation for non-pecuniary loss is discontinued with the new Civil Code, so if one’s personal rights are infringed, the fact of the infringement is enough to claim for damages (and there is no need to prove that the infringement caused a disadvantage). Another important question emerges: if damages have to be paid, what proportion will be paid by members of a company’s management and by the company? Dr Krisztina Tóth, corporate risk-taking manager of Allianz Hungária Zrt. told Trade magazin that demand for liability insurance for company heads has increased significantly since this spring – mainly from the segment of medium-sized companies. Multinational companies have had liability insurances so far, typically in an insurance scheme provided by their parent companies. Gábor Hajas, property insurance business line director of Generali Insurance Zrt. called our attention to the fact that insurance companies have relatively little experience in this form of insurance. He saw increased demand for liability insurance from the SME sector in the last few months. Péter Takáts talked to us about increased interest in liability insurance solutions from both the state and the competitive sector, but the number of actual contracts signed is much lower. Ottó Csurgó opines that one way of managing the new, increased responsibility of company heads is to perform a screening of companies’ internal rules and regulations and if necessary to redefine them. The tasks, scopes of authority and decision making competences of company heads must be defined precisely. Taking out an insurance policy also needs to be considered as these schemes not only cover damages payments, but also appoint a legal expert who evaluate the case in order to settle the dispute out of court and avoid long and costly court procedures if deemed necessary. Mr Takáts called our attention to the importance of working with professional insurance brokers, for instance in comparing the details of various liability insurance policies. Currently the Hungarian market of liability insurances offered to company heads is relatively small. Before the new Civil Code entered into force there were only 2-3 market players and now there are 6. It is a difficulty that the new regulations are far from exact and damage payments can be gigantic, ranging from HUF 10 million to almost HUF 8 billion in Allianz cases. In accordance with this, insurance fees can also be rather high. The cheapest products, offered to SMEs, start at HUF 100,000 per year but these only cover damages up to tens of millions of forints. Major companies that take out insurance policies which guarantee coverage up to billions of forints have to pay tens of millions in annual fees. The sum of the fee also depends on companies’ financial histories and lines of business.