Directors and Officers Liability

The current economic downturn means that it is now more important than ever to ensure that your senior management have adequate insurance protection.

As a litigious business environment, management in the US face greater risks than those elsewhere. Whilst personal liabilities are not new to UK directors, the codification of duties and changes introduced by The Companies Act 2006 has clarified these duties and arguably added to them. In conjunction with the new mechanism for bringing shareholder derivative actions, directors now face a greater threat than ever to their personal assets from disgruntled shareholders, creditors, competitors, customers, employees and the government.

Directors and officers of companies have certain duties towards their company arising out of their role. Breaches of duty – or even allegations of such – can leave them personally liable for both legal defence costs and damages. A directors and officers liability insurance (D&O) policy can protect senior management from liabilities which they might incur, leaving them free to focus on running the company.

All companies have directors and officers and share some of the same exposures, albeit to a greater or lesser degree. For this reason, every company should consider buying D&O alongside their other insurances.

Where do claims come from?

• regulatory investigations
  e.g. anti-competitive practices, insider trading, misleading investors (including mis-statements), health and safety violations, data protection
• shareholder litigation
  e.g. misleading investors (including mis-statements), financial under-performance
• creditor and liquidator actions
  e.g. defaulting on a debt, wrongful trading
• claims by employees
  e.g. allegations of unfair or wrongful dismissal, harassment or discrimination
• actions by peers or customers
  e.g. anti-competitive practices

Whilst a director or officer may be indemnified by their company, should they find themselves facing legal action, companies are not always willing or able to help – in certain circumstances this is even prohibited by law. D&O can protect the individuals when they are not indemnified by their company, and reimburse the company when it grants an indemnity.

In general, a D&O policy will provide two sections of cover:

• side A: cover for the directors and officers
• side B: cover for the company when it indemnifies these individuals

Other D&O products:

• side A / side A + DIC (difference in conditions)
• entity extension
• D&O run-off