Directors & Officers Liability Insurance – Is your limit enough?
In the ever more litigious society it is important to make sure your Directors & Officers Liability limit is sufficient.
"There is still a common mis-understanding with the belief that as a Director of a Limited Company there is no personal liability with regards to their corporate actions. In fact Personal Liability is unlimited and is not just restricted to Directors as proceedings can be issued against people in almost any managerial supervisory position within a company."
To re-cap –What is it?
All Directors & Officers of a company have responsibilities for which they can personally liable for wrongful acts. Examples include:-
- Breach of Trust
- Breach of Duty
- Misleading statement
- Wrongful trading
They can be committed or attempted by a Director or Officer whilst acting in the capacity on behalf of the company.
The Changing Society
We are in a more litigious society where access to legal help is far easier. Employees know their rights and the regulators are investigating more than ever before.
Even within a company you could have director vs director issues (or director vs shareholder), such as mismanagement claims, which could result in considerable claims costs (see the property developer claim example below).
Investigations and defence are now more expensive even if no wrongful doing is proved and good legal defence is required to help mitigate liabilities. This costs money and therefore a sufficient limit for Directors & Officers Liability is important.
Where will the claims arise from?
The claims can arise from anywhere and include:-
Regulators - Investigations from Legal bodies such as Health & Safety Executives, Department of Trade and Industry & other industry specific regulators for example GDPR are more common than ever.
Stakeholders - These could be owners of the business, investors, lenders etc. Shareholders now scrutinise Directors activities more closely and more transparencies are needed therefore any alleged wrongful acts can result in claims.
Other Directors – if they feel that another director has committed a wrongful act or not acted in the best interest of the company
Customers, Suppliers and even competitors – anti-trust, unfair trade practice? Disgruntled third parties may make spurious ‘allegations’ which although untrue will need to be rigorously defended.
Changes in legislation (e.g. Brexit) – the company must keep abreast of all the latest Directives
Creditors/Insolvency claims - At the most vulnerable time the creditors could come after the Directors
Employee Claims - unfair dismissal, failure to promote, negligent evaluations, harassment and discriminations are on the increase and can impact the Directors.
What is covered?
The policy covers the cost associated with the defence, investigation, negotiation, court award and settlement including solicitors costs, court fees and filing fees. As these costs continue to rise a review of the Directors & Officers limit is important.
Examples of Claims
- The MD and several Technical Managers were prosecuted for alleged breaches in Health & Safety Legislation which resulted in injury to 2 employees. – Defence costs alone were £890,000.
- Distributor sued a Director for deliberately breaching an exclusive agreement for using sensitive information for personal benefit. - £200,000 in defence costs were paid before the case was dropped.
- Former employee brings unfair/constructive dismissal claim against the Financial Director alleging sexual harassment and other inappropriate activity regarding sending of text messages out of business hours.
- Director v Director – Following a messy divorce, one is accused of deliberately mismanaging the finances to distort the true worth of their business by the other. Claim costs £75,000
- When a company is being sold or purchased, multiple issues and disagreements can arise months after the deal. Following an MBO of a company, claims were brought against the company and one of the directors in response to alleged breaches of two clauses in the agreement governing the buyout. Investigations and legal support led to an out of court settlement of £600,000
- Fatal RTA investigation uncovered vehicle defects known to transport manager at firm – directors investigated for manslaughter by gross negligence – total claims costs & expenses £200,000+, the premium paid was £600.
- A pane of glass fell from a 5th floor, luckily no-one injured but HSE investigation revealed legislative breaches – Costs amounted to £45,000
- Property developer purchased land without shareholder approval (fellow directors with axes to grind) – Insurer paid defence costs until common sense prevailed – total legal costs £750,000
The Limit of Indemnity
Once the limit has been exhausted, insurers have no further obligations to the insured and will not pay further costs. As defence costs are vital in the first instance then should the policy limit be spent just on these, there will be no cover for any remaining possible settlement or court awards.
Due to unlimited Personal Liability against any Director, the policy limit should take into account the assets of the Directors as claims would result in solicitors looking at where the money is in order to make the most successful claim and should the limit of indemnity be breached, the individuals will have to look at their own assets as payment.
It is therefore important to review your Limit of Indemnity to make sure it protects the Directors Asset’s.