The general nature of Directors and Officers (“D&O”) liability insurance has not changed since the concept was first introduced in the United States, where both the nature and extent of the potential liability of directors, particularly to shareholders in class actions, remains greater than risks in the United Kingdom.
The ready availability of D&O coverage in the London insurance market, the fact that the company can make payment of the premium, the increased corporate and regulatory responsibilities placed upon directors, and the added public emphasis on good corporate governance have all meant that very few listed companies, in particular those with an international dimension, would operate without D&O insurance.
The main cover has two elements:
- to meet the liabilities of a director to a third party, when the company itself is unable or unwilling to pay (“side A” coverage); and
- to reimburse the company for any liability of the director of the company which it has met on his behalf (“side B” coverage).
Claims under Side A are usually subject to a zero or very limited deductible, whereas the company reimbursement provision is usually subject to a more sizeable deductible. The appropriate level of cover to buy is not a scientific assessment, but as the directors of Equitable Life found a few years ago, cover of £5m is entirely inadequate.
There are numerous insurers providing D&O cover, and AIG (notwithstanding its difficulties) remains one of the largest players in the European market. Market information is that premium levels for commercial businesses are flat or declining slightly, although premium levels for financial institutions have substantially increased in the last 12 months.
The market tends to be reactive in relation to policy wording changes. For example, in relation to the extradition of the so called “Natwest Three” a few years ago, the market changed wordings to ensure that cover was available for extradition costs, and added on cover for appeal costs, bail bonds, foreign living expenses, and even the cost of stress and marriage guidance counselling required in such matters.
On the other hand, the Madoff scandal has given rise to some insurers imposing blanket exclusions in relation to so called “Ponzi” schemes.
There are no decisions in the United Kingdom courts as to the meaning of D&O policies although there are known to be claims which have been settled on behalf of individual directors.
The changes arising from the Companies Act 2006 and the new causes of action available to dissatisfied shareholders, as well as the recent introduction of legislation relating to corporate manslaughter detailed in the previous article, provide an opportunity to review current wordings.
In particular, the insured needs to keep cognisant of:
- The policy provisions as to notification, as to what has to be notified and when. The definition of a “claim” and a “circumstance” (meaning an event which may give rise to a claim in the future) for notification purposes can differ between various policies. If the notification provision is a condition precedent, then unless insurers are notified promptly the insured will lose any entitlement to claim under the policy.
- Whilst D&O insurers will usually allow the insured to appoint their own solicitors to act (and subject to supervision from the insurers’ lawyers) an important benefit of the policy is an obligation to advance legal costs on the part of insurer rather than merely a discretion to do so. The payment of costs on a current basis is often the most practical benefit of the policy.
- The scope of the legal costs coverage needs to be considered. Apart from High Court proceedings, it should cover all forms of regulatory and criminal investigations that may be undertaken. Financial Services Authority investigations are often very time-consuming and expensive. Regulatory fines cannot be insured but the costs of defending such proceedings are insurable.
- The exclusions need to be checked. There is often an exclusion for pollution or contamination claim (which can be insured separately) and for claims bought by the company itself (the so-called insured v. insured exclusion), although claims brought by insolvency practitioners for breach of duty are usually covered. The likelihood of claims following insolvency (such as those for wrongful trading or breach of fiduciary duty) is of principal concern to directors.
- An insured must remember that the cover is only available for liability incurred as a director; any liability incurred as a shareholder or in any other capacity is not covered.
- The policies are written on a “claims made” basis, meaning that the cover needs to be renewed annually to maintain effective protection. Subject to that, it covers past and present directors, shadow directors and often the spouses or partners of directors as well.
- The policy usually includes a professional services exclusion, so directors who may give legal and accounting advice based on their professional expertise need to be sure that professional indemnity policies remain in place.