Directors and Officers Liability Insurance
Definition:Directors and Officers Liability Insurance (often called D&O) is liability insurance payable to the directors and officers of a company, or to the organization(s) itself, as indemnification (reimbursement) for losses or advancement of defense costs in the event an insured suffers such a loss as a result of a legal action brought for alleged wrongful acts in their capacity as directors and officers.
(i) What is Directors and Officers Liability Insurance?
Directors and Officers Liability Insurance cover protects companies’ directors, officers and senior managers against claims arising from their decisions and actions taken whilst managing their business.
(ii) What are a Director’s Responsibilities?
The duties of a director have been established through statutes, regulations and case law and can be broken down into the following areas:
- Duty of Care and Skill
This is a common law duty that requires Directors to act with ‘the care an ordinary man would take in the same circumstances on his own behalf’ and with the skill expected from someone with his ‘particular knowledge and experience’. Where duties are delegated the Director is responsible for ensuring that the person to whom the duties are delegated is sufficiently experienced, reliable and honest.
- Fiduciary Duty
Directors must act honestly, in good faith and in the best interest of the company and must ensure that he does not have any conflict of interest.
- Statutory Duty
There are many statutes that affect the conduct of Directors and Officers including the Companies Act 1985, Insolvency Act 1986, Financial Services Act 1986, Environmental Protection Act 1990, Health and Safety at Work Act 1974, to name but a few.
(iii) How Can Claims Arise?
If a Director is perceived to have failed in any of his duties then a claim could come from any one of a number of third parties including:
- Government and Regulatory bodies
(iv) Why Buy Directors and Officers Liability Insurance?
In a claim situation the Director’s personal assets are at risk. Directors cannot rely on the company indemnifying them. Often such an indemnity from the company will be in contravention of the Companies Act. Regardless of the stipulations of the Companies Act in the event of insolvency there will be no prospect of the company indemnifying the Directors and Officers.
The Directors and Officers Liability Insurance Policy will pay on behalf of the Director his legal costs and expenses and any civil damages awarded against him.
(v) Typical Claims Scenarios
- Mergers and Acquisitions (1)
Following takeover the acquired company’s shareholders commence legal action against its former directors alleging that they were misled about the terms of the acquisition.
- Mergers and Acquisitions (2)
Following the sale of a division of the company the acquirer commences legal action against the Directors alleging that some aspect of the activities and performance of the former division had been misrepresented to them.
Following a bankruptcy filing the Directors are accused of wrongful trading by the Department of Trade and Industry.
Following the spillage of a pollutant proceedings are brought by the Environment Agency against the Directors.
- Health and Safety
Following an accident resulting in the death of an employee it is established that there were breaches of Health and Safety procedures, as a consequence the Managing Director, who has been identified as the ‘Controlling mind and will’ of the Company, is prosecuted for Corporate Manslaughter.
- Employment Practices
An employee takes action against a supervisor for harassment and discrimination.
- A manufacturing company’s cooling systems became contaminated resulting in several employees contracting Legionnaires disease and dying. The MD of the company was accused of negligently failing to implement the correct maintenance procedures and was prosecuted in connection with Corporate Manslaughter. The director’s legal costs amounted to several hundred thousand pounds which were paid in full by the D&O policy.
- Following the insolvency of furniture company charges were brought against two directors alleging Wrongful Trading. Although charges were ultimately dropped substantial legal defence costs had already been incurred and paid for by the D&O policy.
The Changing Environment
Some Points to Consider:
- Regulation is increasing.
- There is a greater awareness on the part of third parties of the duties and responsibilities of a Director.
- Shareholders and other third parties are becoming more aware of their rights.
- Lawyers are now able to act on behalf of plaintiffs on a no win no fee basis.