Why directors and officers liability insurance is more important than ever

Article by Maurice Logie

Moreland Insurance Brokers

Directors and officers of businesses and franchises are, in general, very acutely aware that they have statutory duties and responsibilities, but it would be wholly understandable if they sometimes felt encircled by the forces of self-seeking ill will.

In recent years, the burden of regulation, particularly employment legislation, has become overwhelming and, at the same time, shareholders and other third parties have become ever more conscious of their rights, encouraged by no win no fee lawyers.

Directors and officers are directly and personally responsible for a bewildering array of issues, including health and safety, data protection, maintaining satisfactory accounts, environmental protection, fraud and negligence - and, in the case of franchises, a duty of care to franchisees.

Within these arenas, claims can be made against them by an equally large range of third parties, including government and regulatory bodies, employees, ex-employees, shareholders, co-directors, customers, suppliers, creditors, auditors, liquidators and prosecution authorities.

So it is an enduring puzzle that the take-up of directors and officers (D&O) liability insurance - designed specifically to protect against the personal risks involved in running a business - is currently so limited. The majority of UK directors and company officers may not have adequate liability insurance in place or even have purchased the cover.

An optimist might presume that there are valid reasons for this: he might feel that, at all times, directors and officers have full confidence in each others' decision making; will never make a mistake; and will have a complete and up to date knowledge of all legal obligations.

He might also assume that they comprehensively understand their duties and responsibilities; have funds available to defend any allegations of wrongdoing; are unconcerned about unlimited personal liability for their actions; and are quite convinced that parties to whom they owe a duty of care will never make allegations of negligence against them.

But that would be optimistic. The more rational explanation is a simple lack of awareness of the D&O products currently on the market and the benefits they are structured to provide.

If a director or officer is found to have accidentally acted outside his or her terms of reference, and this results in a claim, legal fees, expenses and any civil damages awarded against him will be covered by the D&O policy.

This includes allegations of a lack of duty of care or skill - a common law duty that requires 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.

Within the franchise sector, there have been high profile cases recently in which franchisees have taken the franchisor to court over alleged discrepancies between respective understandings of the franchise agreement.

In any claim scenario, the director or company officer's personal assets - including the family home - are at risk and it is unrealistic to rely on the company for indemnity, which may, in any case, be in breach of the Companies Act.

Even if charges are laid, and then subsequently dropped or dismissed during or following court proceedings, directors could be liable for substantial legal defence costs - which would be covered by the D&O policy.

Last Updated: 20-June-2012