Directors & Officers Liability Insurance

What is Directors and Officers Liability Insurance?

Directors and Officers Liability Insurance cover protects companies’ directors, officers and senior managers against claims arising from their decisions and actions taken whilst managing their business. 

What are a Director’s Responsibilities?
The duties of a director have been established through statutes, regulations and case law in the following areas: 

Duty of Care and Skill    
This is a common law duty requiring Directors to act with ‘the care an ordinary man would take in the same circumstances on his own behalf’ and with the skill expected from someone with his ‘particular knowledge and experience’. Where duties are delegated the Director must ensure that the person to whom the duties are delegated is sufficiently experienced/reliable/honest.
 
Fiduciary Duty    
Directors must act honestly, in good faith and in the best interest of the company and must ensure that he does not have any conflict of interest.

Statutory Duty    
There are many statutes that affect the conduct of Directors and Officers including the Companies Act 1985, Insolvency Act 1986, Financial Services Act 1986, Environmental Protection Act 1990, Health and Safety at Work Act 1974, to name but a few. 

How Can Claims Arise?
If a Director is perceived to have failed in any of his duties then a claim could come from any one of a number of third parties including: 
Creditors                        
Liquidators             
Government and Regulatory bodies             
Customers/Suppliers
Employees                     
Auditors                

Why Buy Directors and Officers Liability Insurance?
 
In a claim situation the Director’s personal assets are at risk. Directors cannot rely on the company indemnifying them. Often such an indemnity from the company will be in contravention of the Companies Act. Regardless of the stipulations of the Companies Act in the event of insolvency there will be no prospect of the company indemnifying the Directors and Officers.

The Directors and Officers Liability Insurance Policy will pay on behalf of the Director his legal costs and expenses and any civil damages awarded against him. 

Typical Claims Scenarios
 
Liquidation – Following bankruptcy the Directors are accused of wrongful trading by the Department of Trade and Industry.

Environmental – Following spillage of a pollutant proceedings are brought by the Environment Agency against the Directors.

Health and Safety – Following a fatal accident involving breaches of Health and Safety procedures, the Managing Director is identified as being the ‘Controlling mind and will’ of the Company, and is therefore prosecuted for Corporate  Manslaughter.

Employment Practices – An employee takes action against a supervisor for harassment and discrimination. 

Actual Claims
1) A manufacturer’s cooling systems became contaminated resulting in several employees contracting Legionnaires disease. The MD was accused of negligently failing to implement the correct maintenance procedures and prosecuted for Corporate Manslaughter. The director's legal costs amounted to several hundred thousand £s which were paid by the D&O policy.

2) Following the insolvency of a furniture company charges were brought against two directors alleging Wrongful Trading. Although charges were ultimately dropped substantial legal defence costs had already been incurred and paid for by the D&O policy. 

The Changing Environment
Some Points to Consider:

• Regulation is increasing

• There is a greater awareness on the part of third parties of the duties and responsibilities of a Director

• Shareholders and other third parties are becoming more aware of their rights

• Lawyers are now able to act on behalf of plaintiffs on a no win no fee basis.