Directors and Officers Liability Insurance
Good morning everyone & welcome to our second six weekly newsletter for 2015. In this issue I would like to discuss insurance for Directors & Officers plus the need to be aware of liabilities we can be exposed to & the importance of liability insurance should the need arise. As a director, CEO or other executive officer, you need to be aware of what these responsibilities are & observe your obligations with the highest level of rigour, self-responsibility & integrity.
Personal liability is imposed on directors under legislation & common law, which means personal assets & professional reputations can be exposed. The liability of directors & officers is personal. If uninsured, personal assets are at risk.
Statutory obligations are included in the Companies Act 1993, Financial Reporting Act 1992 & other laws, many of which are sector-specific. As a director or senior officer, you must not abdicate responsibility, or rely heavily on fellow directors, managers & outside experts, effectively allowing them to make decisions for you. Whilst seeking expert advice is not a breach of duty in itself, relying so heavily on it you do not take responsibility for decisions is. Ignorance of responsibilities is no excuse in court.
Directors & officers insurance should be viewed as an investment in risk management.
A company may, if expressly authorised by its constitution, provide indemnity for a director against claims brought against them through a deed of access & indemnity. Under the deed, the company generally indemnifies the director against claims made against them in respect of the time they are a director & seven years after they cease to be a director. Indemnity does not cover criminal acts, a breach of duty of good faith or a breach of fiduciary duty to the company.
The meaning of indemnity:
An insurance policy is agreed on the principle the insurer will restore the insured to the financial position they were in before the loss occurred. For a liability policy, indemnity cover should be the commensurate extent of your legal liability, as determined by law.
Liability insurance programmes for directors & offices have traditionally been arranged in two parts:
- Company reimbursement policy – this covers the company for any legal liability incurred by directors (including legal costs) as a consequence of claims made against it; &
- Directors’ & officers’ liability policy – this should cover directors & officers for claims made against them.
D & O Liability insurance protects individual directors & officers against legal costs & possible damages when defending legal allegations of wrongful acts or omissions when acting in their capacity as a director.
D & O policies are claims made insurance policies & are only triggered by claims &/or circumstances which could give rise to claims first made, commenced, threatened or intimated against the insured persons (directors or officers) during the current period of insurance. If you become aware of a claim, or any circumstances which may give rise to a claim in the future, notify your insurer & seek legal advice immediately. Under the Companies Act 1993, the company is permitted to pay the insurance premium.
Insurance policies are entity-specific. If you have multiple directorships a director should ensure each entity has arrangements for its directors. Standard policy forms are unlikely to address the specifity of your circumstances.
Board members are the key beneficiaries of D & O policies alongside the company but priority of payments between them may not be clear. In some instances cover for claims against the company may have the capacity to erode or exhaust cover for individuals.
While covering the company’s assets, D & O insurance has always been primarily intended to protect individual’s personal assets. Accordingly, board members should be satisfied their own assets are well looked after? Directors need to understand D & O options available to them.
Typically, it can take between seven & ten years from notification of a claim to settlement. This requires careful consideration of what is an acceptable policy limit (particularly given it will generally be shared with a number of other insureds) & the ability to cover tomorrow’s legal costs. Facing the threat of litigation is very stressful & traumatising. This is not the time to be having insurance worries as well.
In December 2013 the Supreme Court overturned the Court of Appeal decision in Steigrad & Bridgecorp, meaning directors could be denied access to claim defence costs if there is a third party claim on a policy with a combined limit for liability & defence costs – effectively freezing all the proceeds of any insurance available.
This means directors need to ensure the structure of liability policies can safeguard defence costs cover. For example, by ring-fencing defence costs within a liability policy or having a separate policy for defence costs.
The decision did not only affect D & O insurance, it also affected professional indemnity policies & employers’ liability. If not structured correctly, it could prevent advancement of defence costs in any prosecution which could result in reparations for a third party.
Under the Health & Safety in Employment Act 1992 directors can be held personally liable for any failure to comply with the Act if they are held to have “directed, authorised, assented to, acquiesced in, or participated in” a failure to comply.
The Health and Safety Reform Bill, currently before Parliament is due to come into effect late this year. It proposes a personal obligation of positive due diligence on directors, board members & other officers of a PCBU (a Person Conducting a Business or Undertaking, eg. the company) to ensure the PCBU complies with its duties & obligations so far as is reasonably practicable.
Directors can discover in the worst case scenarios:
- their interests & those of the company might diverge; or
- a personal liability is no more effective than one offered by the company.
One of the key observations is “claim events” usually coincide with extreme corporate & personal stress. Emotions are charged at board & management level. Blame can be freely attributed. At this time some decisions & discussion can have a critical impact on the path of a claim. It is hard to imagine enduring litigation without effective insurance.
A company should undertake a review annually & establish a protocol to deal with potential claims from the earliest stage onwards. Litigation is more about money than merit. Insurance enables you to fund your defence & contribute to settlement – you need financial staying power to last the distance.
Directors & Officers insurance is complex & this brief is an overview, it does not purport to be comprehensive & it does not constitute legal advice.
As always, any enquiries or assistance required, please contact me accordingly.