Directors and Officers liability insurance (D&O) is specifically designed to protect the directors, officers and employees of an organisation. The insurance covers defence costs and awards made against directors, officers and employees following claims arising from actions undertaken in their capacity as a director, officer or employee.
The Limited status of a company may not eliminate individuals from claims made against a company. It is not unusual to find directors who are under the impression that their limited status covers them so they do not need Directors and Officers insurance cover. Directors should not rely on the company indemnifying them. Without the protection of D&O, individuals are putting their own personal wealth and belongings at risk.
There are various different acts, rules and regulations that companies have to abide by. As a consequence of that, there are a raft of people able to press claims – namely regulators, creditors, employees and shareholders. Claims to the fore would be across:
- Health & Safety
- Bribery, corruption and fraud
- Sexual, racial or age discrimination
- Wrongful dismissal
- Wrongful trading
- Financial reporting
- Competition law
- Breach of copyright
- Cyber and data protection
- Unpaid taxes
- Environmental damage
What will insurers pay for?
- Claims for breach of duty, breach of trust, negligence, defamation, breach of warranty of authority;
- Allegations of involuntary, constructive or gross negligence manslaughter or claims under health and safety legislation;
- Legal representation costs for individuals at other official examinations, enquiries or investigations;
- Claims arising from pollution.
These are troubled times for insurers and buyers of D&O protection.
UK D&O landscape
The availability of insurance protection, cost and limits has to be seen as firstly impacted by increased class actions, a changing regulatory and legal environment globally, and an absolute focus on the need to find someone to blame. We could look to the USA for the surge of securities class actions as the bang of the preverbal gun and a whole host of other issues but fundamentally right here, right now, the impact of Covid-19 is the catalyst for concern.
There is every reason to fear that insolvencies will rise exponentially as business’s ability to obtain government support wains and debts become unsustainable. It is a simple fact of business life that the dire economic environment will mean business failures and this means the pursuit by investors, customers and employees of directors to blame.
Expect to see a real focus on financial management of a business and financial disclosures by businesses. It is widely understood the Government are actively considering audit reforms that will make directors, rather than boards, personally responsible for the accuracy of company financial statements. It means directors who could face fines or temporary bans if standards fall short of what they should be. Insurance cover does not provide cover for fines as they are uninsurable.
I am minded of some corporate business cultures…
“We don’t have a blame culture but it’s your fault”
Nothing ventured nothing gained, so we will see a whole host of muck thrown at directors, lots of legal costs and general chaos. Investigation costs are a huge element of a D&O insurer’s profit and loss. This will hurt. Decency and honesty should be business staples but that may not always be readily apparent. Expect to see additional focus misleading financial statements and health and safety responsibility.
What is happening?
The view from the hill looks bleak from where I stand – the market is seeking and getting significant increases in premiums, excesses and cover restrictions in all sectors and all sizes of businesses. We are seeing insurers exit the market completely, others being very selective and double digit pricing increases the norm. It is as tricky as a tricky thing can get but directors must focus on being adequately insured despite market conditions. Having Directors and Officers insurance protection is now as critical as anything a business can consider in the risk transfer arena – take shelter from the storm.
