What is Directors & Officers Liability?

Directors of all companies are now held, at an unprecedented level, to be personally responsible for any actions and decisions they make on behalf of the company – putting their personal assets at risk if those decisions are tested in the courts.

Legally, the directors of a company and the company itself are separate entities and so may both be defendants, separately or jointly, in any legal action or prosecution. To protect the personal assets of individuals and, crucially, to cover the costs of their defence, Directors & Officers Insurance is widely used.

Furthermore, Directors & Officers Insurance extends to protect the company itself, rather than leaving it to fund its own defence, thereby acting as a mechanism that also protects the value of a director’s personal holding in the company.

Modern insurance policies will not simply insure directors and senior managers, but will also extend to protect all other employees too.

How does the insurance policy operate?

The basic cover provided by the policy is in two parts:

firstly, the insurer will indemnify (reimburse) any director, officer or employee for their liability for any wrongful act , and

secondly, the insurer will indemnify the company itself where it has reimbursed a director, officer or employee for such liability.

Wrongful act has a wide definition under a Directors & Officers policy and will include any actual or alleged breach of duty, trust, neglect, error, misstatement, omission or breach of authority committed by a director, officer or employee.

The policy period is 12 months and is underwritten on a “claims made” basis meaning that the insurance responds to claims first made against the company/employees during the policy period.

The policy will pay up to the Limit of Indemnity, which is an annual aggregate limit, and a deductible or excess may be applied to each claim.

Statutory Exposures (Typical)

– Companies Act (over 200 offences)
– Insolvency Act (“Wrongful Trading”)
– Health & Safety at Work Act
– Data Protection Act
– Consumer Protection Legislation
– Company Directors Disqualification Act
– Financial Services Act
– Company Securities (Insider Dealing) Act
– EC Directives and Regulations
– Racial & Sexual Discrimination Legislation

Taking into account the exposures highlighted, a Director has to be mindful of all these when considering the following circumstances which quite often give rise to claims or legal proceedings

Circumstances

– Sale of Assets/Divestments
– Acquisitions/Investments
– Poor performance
– Share Issues/Change of share ownership
– Expansion Plans or Rationalisation
– Liquidation
– Failure to supervise
– Adverse publicity
– Dishonesty of fellow directors
– Safety and emergency regulations

Claims Examples

UK Private Company Claims Examples

The legal environment for directors and officers in the United Kingdom is becoming increasingly hostile, with shareholders more willing to bring actions for breach of duty coupled with regulatory bodies and government clearly wishing to hold directors personally responsible for their actions. Consider the following:

. The Companies Act (1985) has over 257 civil and criminal offences with which directors can be charged
. The Office of Fair Trading will see an increase of over 62% in its budget in the next 3 years
. The recent White Paper entitled ‘Modernising the Companies Act’ (Jul-02) proposes increased sanctions against directors in the event of wrongdoing
. Actions against directors by the Department of trade and industry have increased by over 50% in the last 4 years and since 1993 they have increased more than four-fold.

The examples below show just some of the situations in which directors and officers of private companies in the United Kingdom have faced legal actions:

. A director of a company, which imported and distributed wine to off-licences was disqualified for 12 years and ordered to pay a sum in excess of £1 million in connection with wrongful trading offences. Although acquitted on criminal charges the director faced a long civil case brought by the liquidator, whilst the Official Receiver simultaneously brought disqualification proceedings. The case centred on false accounting of invoices to a factoring company which had allowed the Company to continue trading whilst insolvent.

. The director of two storage and distribution companies who allowed the businesses to become closely mingled and failed to set up a proper system of inter-company billing was found to be in breach of his common law duty of care when one of the companies became insolvent. A shareholder brought a claim for compensation against the director under Section 212 of the Insolvency Act 1986. Although the director believed that the informal financial and structural arrangements were to the mutual benefit of both companies, the court found this belief to be unreasonable. The director was ordered to pay substantial compensation to the shareholder.

. An advertising agency was successful in bringing a claim against its former managing director for diverting parts of the business and its opportunities to his new company. The court held that the managing director had misused the property of the agency, therefore breaching his fiduciary duty, that he was personally accountable to the company and that he should provide equitable compensation.

. In October 1997 a driver fell asleep whilst driving for the family-run haulage company for which he was employed. Two motorists were killed. The court held that the operations manager should have ensured that his driver adhered to the relevant driving regulations. He had also failed to keep in close touch on these matters with his co-director. Both directors incurred substantial defence costs before being convicted of corporate manslaughter.

. A company, and two of its directors, were charged with offences under the Health & Safety at Work Act 1974 in connection with a contract to remove an asbestos roof from the company’s premises. It transpired that the stripping of asbestos had been done with inadequate equipment and precaution leading to contamination of the premises, posing a threat to both employees and members of the public.

. The Securities and Futures Authority fined three former directors of a well-known residential estate agency and provider of financial and property services for their respective roles in an aborted hostile take-over bid for a family of co-operative businesses. Each director admitted that they had failed to act with due skill, care and diligence in their dealing with confidential information received in preparation of the hostile bid. Each director incurred substantial costs.

. 14 directors of a privately owned delivery business were banned following the company’s insolvency and subsequent DTI investigation. Although only two directors ran the business on a day to day basis, all were found to be responsible for the books and records not being up to the necessary standards and for a lack of working capital. Considerable defence costs were incurred to defend action against directors.