Company directors, partners, officers, and managers are likely to have significant responsibilities including the way they conduct themselves and the trust placed in them. Actual and alleged breaches of duty, neglect, misstatements, errors and omissions may result in claims against them.
If the business does not have Directors & Officers Liability (D&O) insurance in place, civil proceedings against the directors and senior employees can result in costly legal fees and compensation payouts. In extreme cases, there might be criminal prosecution which could lead to fines and even imprisonment.
This is why it is essential to have an appropriate Directors and Officers Liability policy in place.
Below are some examples of how a policy of this type protected not just the company but the individuals involved.
Additional Defence Costs for Directors
A small shareholder in a private company took action against its directors alleging that, over a period of several years, the directors had abused their positions by paying themselves excessive salaries but paying low dividends to the shareholders. The shareholder applied to the High Court for a review of the directors’ actions and this resulted in the court upholding the shareholder’s allegations to be true. The directors were ordered to repay over £1m back to the company; however, their insurance
policy only provided for a limit of indemnity of £500,000. A reinstatement was not provided in this case unfortunately.
Compensation for Court Attendance
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.
The finance director of the same board was required to attend the court tribunal on several occasions to testify as a witness to the court. The insurance policy provided compensation to the finance director for each day he attended court.
Corporate Killing or Manslaughter
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 with his co-director on these matters. Both directors incurred substantial defence costs before being convicted of corporate manslaughter – Manslaughter.
In a situation like this, D&O insurance would cover the defence costs.
The board of 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 accounting books and records not being up to the necessary standards and for a lack of working capital.
Considerable investigation defence costs (which are covered by a D&O policy) were incurred to defend the legal actions against the directors.
Mental Anguish or Emotional Distress
The director of an advertising company was taken to court following an allegation made against him by a former female employee, alleging sexual discrimination and harassment. The former employee claimed she suffered from emotional distress and mental anguish.
The defence costs of the allegation were covered under their defendant’s Directors & Officers Policy.
A director, at the request of his company, had been asked to sit on the board of a third party company as a Non-Executive Director (NED).
His responsibility to the third party company as a NED was to ensure that the financial information reported by the company was accurate and that financial controls and systems of risk management were robust and defensible. However, the company reports were inaccurate and this led to an investigation.
The directors as well as the non-executive directors were investigated by the Financial Services Authority as it was deemed that the NEDs had as much responsibility in this area as those who were active in the day-to-day running of the company.
The primary company’s own D&O policy will cover these costs only if it is extended to include outside directorships.
Shareholder Action Deriving from Pollution
Following an accident and subsequent chemical spill/damage to the environment, the shareholders of the insured brought an action against the directors (Insured) for breach of fiduciary duty and corporate waste.
The complaint alleged that, despite numerous other prior safety and environmental concerns, the defendants elected to cut costs, including safety and manufacturing expenditures in pursuit of profitable results. Their Directors & Officers policy was able to cover the costs involved with defending the claim against the shareholders.
Minority shareholders brought a derivative action in the name of the company, against the directors of a subsidiary, claiming that the directors should have accepted a higher bid for the company when it was sold.
The directors defended their actions saying that the company making the accepted offer was better for the long-term interests of the company – despite this the shareholders still had a legitimate claim.
Legal fees would be covered by the main limited company’s D&O policy.
Two directors of a company were held liable to creditors for sums representing the total payments made to one of the directors in the period before the company went into insolvent liquidation.
It was successfully argued by the company’s creditors that these payments should not have been made whilst the company had not paid off its debts. The directors were held personally liable and their personal assets were seized by the court.
This included one of the directors’ homes which he jointly owned with his wife.
The D&O policy covered the legal fees however personal assets are not covered.
The insured, a management consultancy company, had gone into administration. Two weeks later, the insured notified their insurers of a potential claim, due to an action brought by shareholders because of a sharp drop in share price value.
Unfortunately, the insurance policy had expired as a result of the insolvency and the company no longer existed.
However, the company had included an extended discovery period in their D&O policy which enabled the claim to be covered.
A director failed to report the company Reports and Accounts on time. Due to this omission, the board of directors were investigated and thus investigation defence costs were incurred on the directors’ part.
On this occasion, the Company had no funds to reimburse the defence costs to the directors as the company was in fact in administration.
Investigation defence costs are covered by a D&O policy.
Company Reimbursement Cover
A fraudulent director of a company committed a number of crimes such as embezzling funds illegally for his own benefit and implicated another innocent board member. Both directors were accused of these crimes and subsequently investigated by the authorities.
However, it was not in the company’s best interests to pay for the director’s defence costs against these allegations due to the risk of potential harm the company’s good reputation may suffer. Since a fraudulent activity had occurred, the non-executives were also subject to an investigative action for not ‘policing’ the board.
A D&O policy would cover the defence costs of the non-executives being investigated.
Directors and Officers Liability Insurance
As you can see from the examples shown above, Directors and Officers Liability insurance can cover the management team at your business in multiple scenarios. A suitable policy can save your business and individuals from large defence costs and compensation payouts.
Please get in touch with us if you would like to discuss how this type of policy can protect you and your business.