Directors and officers insurance – are you exposed?

Please click on the link below to view the webinar:

This webinar helps you to further understand what you are exposed to and how you can ensure you’re protected.

Kate Rhodes

As ‘Directors’ of Companies you have a complex and challenging job. You make difficult decisions which are subject to much scrutiny for your actions. You can find yourself exposed to the risk of personal, civil and criminal liability associated with many aspects of your day-to-day working decisions. The personal liability of a ‘Director’ is unlimited and your personal assets are at risk

Your job is to try to make the company a success using your skills, experience, and judgement making decisions for the benefit of the company not yourself. But we are all human and we all make mistakes. It is a common misconception that a Director can expect his or her company to provide indemnity. Only in limited circumstances are companies obliged to indemnify their Directors for wrongful acts. Many Companies Articles of Association specifically stipulate that the Directors and Officers will only be indemnified in certain situations.

What if the company cannot indemnify you?

• Insufficient Funds
• Not permitted to do so under Articles of Association
• May be prevented from doing so by the provisions of the Companies Act

D&O insurance can provide financial protection to the directors, officers and senior managers of a business should a claim be made against them (rather than the company as a whole) in circumstances such as these. It covers legal costs and expenses involved in investigations and defence, as well as costs awarded to successful claimants.

Add-on options are usually available too, such as public relations crisis management; cover for non-executive directors; emergency costs and expenses; entity; and employment law protection.

Without D&O insurance, directors and officers may not be in a position to defend themselves against disqualification, civil proceedings or prosecution, or to cover the cost of any compensation owed.

Charlotte Jessop – QUESTION
What is the difference between directors and officers insurance v professional indemnity?

Tim Jones
Confusion often surrounds these two forms of insurance, which are in many ways very similar. The main difference lies in who the policy actually covers.
D&O insurance covers the personal liability of the directors and officers of a company, in the event of a claim being made against them for a wrongful act – whether alleged or actual.
Professional indemnity (PI) insurance, on the other hand, covers the company itself. It offers financial protection against claims made by customers or clients that relate to the professional advice given or services rendered by that company. PI insurance is therefore invaluable (and in some cases, mandatory) for a wide range of advice-giving businesses, from fitness instructors and IT consultants to accountants and architects.

Kate Rhodes
When I first started in insurance many moons ago Directors & Officers protected just that – the Directors & Officers of the company. Over time this has expanded and become all encompassing including employees. Why? Take an example of an employee being electrocuted by a faulty cable. The H&S executive want to undertake an investigation. The Directors & Officers are okay as they have the insurers legal teams proving advice and covering costs. If your employee is out in the cold and potentially having to pay their own legal cost they first thing they are likely to do is drop you in it to defend their own position making it more difficult for insurers to defend and increasing their costs.

Tim Jones
Directors can be held accountable for the actions of others, so whilst a Director may not have committed a particular act, the actions of a subordinate can have ramifications for the Director.

Charlotte Jessop – QUESTION
Are there sectors that D&O insurance is more relevant to or required?

Tim Jones
The obvious sectors are ones that are regulated i.e. by the FCA. An authorised person would be under increased levels of scrutiny. Any company with outside investors/shareholders and employees (EPL).

Smaller companies might not think they have an exposure but they face the same challenges of running a business as larger organisations i.e. Health & Safety issues, action by the ICO, Contractual issues.

Kate Rhodes
Shareholders, for example, have significant interest in the protection of their capital investments and annual dividends and look for reassurance that those tasked with running the business are making the right choices. If they fail in their management duties and the business suffers a loss, they are very likely to make a claim against the Company and/or an individual director if they consider them to be personally responsible for that loss.

Lucy Frost – CASE STUDY
A shareholder alleges they have been receiving insufficient management information which has created unfair prejudice, they also alleged a failure to pay dividends. The shareholder seeks damages or to be bought out. Whilst often cases like this can be unfounded or there is an ulterior motive the policy provides support with legal costs which can mount into the tens of thousands.

Kate Rhodes
Legal action could also be taken by investors, creditors, employees, third parties or regulators if a director or officer is alleged to have committed any wrongful act while carrying out his or her duties. This could be an error, a misleading statement, wrongful trading, negligence or a breach of duty or trust.

• Where negligence is suspected
• HMRC where Insolvent Trading or Misappropriation of Tax Payments is suspected.
• The Environment Agency, Local Authorities, FCA, Care Quality Commission, Serious Fraud Office and the Information Commissioners Office.
• Frivolous or malicious claims by disgruntled customers who were not happy about service received.

Tim Jones

Wrongful Acts include:-

• Breach of Trust
• Breach of Duty
• Neglect
• Error
• Misleading Statements
• Wrongful trading

Defence Costs
Even if allegations are not justified the cost of defending an action can be devastating.

Company Reimbursement
Where an individual has been or may be reimbursed by the company the insurance policy funds it = balance sheet protection.

Extensions

• Entity – Claims against the Company
• Entity EPL – Unfair dismissal, harassment, employee overlooked for promotion

Lucy Frost – CASE STUDY
An employee assaulted another member of staff at a trade function and was subsequently dismissed for gross misconduct. Despite the incident being witnessed the claimant launched an unfair dismissal tribunal and was awarded £10,000. The policy met this in addition to legal costs.

Cyber – Growing area and various ways this can be covered. D&O is one of them.
Crime – Another growing area. We are seeing two or three claims a week.

Lucy Frost – CASE STUDY
The accounts department received an urgent e-mail from their Director requesting a BACS payment to a supplier, this was paid in the region of £10,000. It later transpired that fraudsters had hacked the Directors e-mails and then created a dummy e-mail account which appeared to be genuine. The bank were unable to stop the payment and would not reimburse the funds.

Crisis and PR Costs –  To protect the reputation of the company.

Charlotte Jessop – QUESTION
Where are the most claims made under?

Lucy Frost
EPL approximately 100,000 tribunals per year at an average cost of £20,000.
Crime claims of 2 a week

Charlotte Jessop – QUESTION
What policy limit should I be covered for?

Kate Rhodes
Various limits of indemnity (i.e. the maximum amount of money the Policy will pay out) from £250,000 upwards. Generally felt that the limit should be at least equal to the Gross Assets of the company.

Tim Jones
Fines Uninsurable by Law e.g. Criminal or Punitive Fines

Fraud/Personal Profiting
An allegation of such is not enough to trigger the exclusion. Determined by the courts or an admission of guilt before the exclusion can apply.

Defence costs incurred for such a claim are typically covered up until the fraud is determined.

Bodily Injury or Property Damage
General Liability

Kate Rhodes
Ultimately the things you’ve worked so hard to achieve are at risk.
Reputation takes a long time to build but only a moment to destroy.

a) Following a routine Health & Safety Executive visit, the Company is asked to produce its Health & Safety Accident Book for inspection. The records are found to be incomplete, and personal employee data has not been kept confidential. The Company is prosecuted under the Health & Safety at Work Act 1975 and the Data Protection Act 1988.

b) An employee was made redundant and appealed the decision, alleging unfair dismissal on the basis of racial discrimination. He suggested that he had been singled out for redundancy and that a fair procedure had not been followed noting that other employees, whose roles had been made redundant, were found alternative positions within the Company. With the financial support from D&O cover, the Company reached a compromise agreement with the former employee. Insurers paid out £8,000 in respect of the settlement amount and the Company’s defence costs.

c)Negligence. The estate of a deceased employee claimed that a Director of the company employing her was responsible for arranging her death in service life insurance cover and had negligently failed TO DO SO. Defence cost : £16,000.

d) Trading while insolvent; disqualification. In the two weeks before their Company went into receivership, two Directors allowed their Company to continue to trade, although knowing that it could not avoid going down. Trading during the two weeks created a VAT liability of £50,000 which because of the receivership, was not paid to the Crown. For the trading while insolvent the Directors received orders disqualifying them from being Company Directors. They succeeded in having the orders overturned on appeal. But only narrowly the court criticised them for failing to take advice, but their incompetence was not so great that they should be disqualified. Defence costs estimate : £100,000.

e) Acquisition
The acquiring Company in a UK acquisition launched proceeds against the principal Directors of the target company, alleging negligent and/or fraudulent misrepresentation of the financial standing of the Company. The amount claimed was the entirety of the purchase price.
Loss: Estimates of the defence costs exceed several million pounds

Of all the insurances that you may wish to consider Directors & Officers is key – it’s your own personal protection.

Remember:-

• Your own Personal Assets are at risk
• Your Liability is unlimited
• Could you afford to cover even the defence costs without it?