Directors and Officers
Directors and officers of companies of all sizes have certain
personal liabilities with the fiduciary duties of their
position.
When directors are accused of breaching these duties, actions may
be brought against them personally with devastating consequences
even if they have done nothing wrong. A common misconception is
that directors of limited liability companies have limited personal
liabilities. But this is not the case – directors’ personal
liabilities can be unlimited.
D&O insurance provides a pool of money for the directors of a
company that can be drawn on to fund defence and settlement costs
and the cost of legal representation at investigations. Most large
UK companies buy D&O for their directors. The exposures are so
onerous that business people operating at this level may be wary of
accepting a board position without first reviewing the company’s
D&O policy.
The exposures for smaller companies are the same as they are for
large ones – and in some respects are actually higher. Government
bodies such as the DTI, HSE and SFO are increasing their focus on
SMEs and the number of investigations of companies in this sector
is rising rapidly.
Claims Scenarios
Directors can face financial liabilities from
a number of scenarios - here are just a few.
An HSE investigation into a fatality at work
turned into a full-blown public enquiry which the Director was
required to attend. The policy funded his legal representation at
the enquiry and enabled him to demonstrate that the fatality had
not arisen out of any negligence or wrongful act on his part.
A director was sued by a group of his
shareholders for negligence after the company’s fortunes declined
rapidly. After consultation with lawyers, it was decided that the
best course of action was to settle out of court. The D&O
insurance funded the final settlement as well as the legal costs.
The sums involved would have been sufficient to personally bankrupt
the director in question.
A company in administration sued 2 of its
directors and 9 of its non executive directors for breach of
contractual duty of care, wrongful trading, and negligence in
respect of trading losses. This was accompanied by DTI
disqualification proceedings. D&O covered settlement and
defence costs.
The FSA investigated a company’s possible
breach of UK listings rules and its failure to make a timely
announcement of price sensitive information. Directors of the
company were required to attend interviews. D&O insurance
covered the costs of their legal representation.
A director of a UK company was sued by one of
his distributors. It was alleged that he had deliberately breached
an exclusive distribution agreement and that he had used
commercially sensitive information within this agreement for
personal benefit. Eventually the distributor dropped the case, but
not before the insurers had funded some £200,000 of defence
costs.
Reasons why companies should purchase
D&O?
Directors’ personal liabilities can be
unlimited and in the course of carrying out everyday duties for a
company, directors are exposing themselves personally to lawsuits,
investigations and criminal prosecutions. Without insurance,
directors can end up having to re-mortgage their home, just to pay
legal fees.
When a director needs to defend lawsuits,
investigations and prosecutions, being able to draw on insurance
funds to hire the best law firms in the country is going to help
achieve the best possible outcome.
There are an increasing number of government
bodies that can investigate a company – the DTI’s Companies
Investigations Branch, the Health & Safety Executive (HSE), the
Serious Fraud Office, the Disability Rights Commission just to name
a few – and an increasing focus on smaller businesses. Even when
there is no initial allegation that a director has done anything
wrong, having the funds to obtain legal representation at these
investigations enables directors to gain the best possible
outcome.
In one year*
(a) Over 1,500 directors were disqualified for
between 2 and 15 years.
(b) The DTI’s Companies Investigation Branch
looked at almost 5,000 companies.
(c) The HSE issued over 11,000 notices and
prosecuted 982 cases.
Although D&O insurance policies for large
companies can cost very large sums, we can provide D&O cover
for small and medium size enterprises at highly realistic and
affordable premium levels.
* DTI’s annual publication on Companies
provides more details.
To obtain a quotation for D&O insurance
cover, simply download the form on the right hand side of the page,
complete and return to us by fax, post or email.