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Why is Directors’ and Officers’ (D&O) Liability Insurance important?
Changes to legislation introduced by the Companies Act (2006), which came into force in early 2008, coupled with a spate of high profile claims and strict regulation by UK and EU courts, has greatly increased the personal risks involved in being a director or an officer of a UK business.
Directors can now be sued by employees, shareholders, their own company, creditors, regulators, customers, competitors, government or anyone else who feels they have suffered a loss arising from the director acting wrongly in their position.
D&O insurance has become vital for all companies but research shows many private limited firms remain without cover. In fact, a recent report by market analyst Datamonitor* found that 68 per cent of SME’s remain unaware of directors’ and officers’ cover.
What are the risks if you run without cover?
A common myth is that a company’s limited liability status will protect directors against being sued by shareholders, employees, clients or any of the other interested parties who may now sue due to changes in legislation.
Directors are personally liable to defend any claims and their personal assets are now at risk. Even their partner or spouse could be held liable.
The consequences of such legal action can be devastating:
Disqualification as a director
Criminal prosecution
Personal bankruptcy Loss of job and reputation
Family trauma and financial hardship
Cases can also be brought from a variety of sources: Mismanagement Negligence Unfair dismissal or discrimination Libel and slander Breach of duty Anti-competitive behaviour.
Here are somerecent examples of claims that have been made recently:
Clothing Manufacturer
Company directors face disqualification proceedings issued by Secretary of State for trading whilst insolvent. Also alleged failure to maintain accounts in a manner satisfactory to enable receivers to carry out their duties. Creditors, including HM Customs and Excise, left unpaid
£50k+ defence costs paid
Engineers
An engineering manufacturing company was alleged to have used money owed to a claimant for a factoring arrangement to pay other creditors following the company’s entry into administration.
Director Personally Sued £300,000
Shipping Agents
Shipping agents were required to hold all goods held on behalf of the claimant in a separate account, but following their liquidation, it was discovered that this was not the case, and the claimants would have to recover their goods as a normal creditor.
Directors sued for £61,000.
Manufacturing Company
Action against directors of a manufacturing company by the Health and Safety Executive following their refusal to respond to a notice to control dust emissions. Directors responsible had failed to adhere to deadlines so action taken against both the company and the directors responsible.
Incurred over £110,000 in defence costs, with a further £60,000 outstanding
Makers of timber products
HSE prosecution following serious injuries suffered by a machine operator in clearing a blockage in a stamping machine. There should have been a safety cut out stopping the machine operating with the access panel open, but this had been broken or disconnected.
Defence costs incurred of £25,700
Glass Manufacturers
Action taken against the directors of a glass manufacturing company by Trading Standards following allegations of pre-stamping of safety glass before it had passed the necessary testing procedure.
Costs incurred £25,718
Clothing Retailer
An allegation of slander was made by a customer against an officer of a company (a clothing retailer). Allegedly comments were made by the manager in public, which supposedly damaged the reputation of the customer. A threat to take the manager to court was made unless a settlement was forthcoming. Settlement negotiated at £26,500
Gross Misconduct
Claimant was employed as a field service & support engineer. He was ‘on call’ the night of the company Christmas party, where he became significantly drunk and unfit to deal with any ‘calls’ (although none arose). Claimant admitted he was drunk but explained that a colleague had agreed to cover his ‘shift, although this had not been approved by management. Although the dismissal was not deemed ‘Unfair’ it was deemed ‘Wrongful’ due to delays (1 month) between the incident and dismissal.
Paid £8,085
Redundancy
Insured lost a major contract and made an employee redundant without following correct procedures. Paid £8,000
Racial Abuse
A clerk was subjected to racial comments by colleagues, including abusive racial terms and racially motivated songs. Although each incident was reported, the company failed to investigate. It was recognised by the tribunal that the employee’s concerns were not dealt with and found in their favour.
The employee received compensation for injury to feelings and for psychiatric illness.
Claims Costs £12,000
What exposures do directors of private companies face?
Directors of private limited companies usually have a greater exposure because: They usually have a financial stake in the company, resulting in exposure to the potential costs which may be incurred defending and/or settling any legal action A large proportion of private companies cannot afford their own risk management teams such as in-house legal advisers or an HR department Private companies don’t tend to have a complex structure so it is easier for regulators, investigators or third parties to apportion blame back to a decision taken by a director.
