Director and officer liability insurance

The complexities of running a business have increased over recent years, resulting in more opportunities for directors to get things wrong, or for shareholders and others to think that they have. Apart from the problem of increased competition, legislation is now international, trade barriers have fallen, and there is a greater awareness of consumer and shareholder rights.

It is clear that directors and officers liabilities are increasing all the time. The world is becoming more litigious. Being a director used to be something a gentleman could do for a few hours a day. Now it is a profession as onerous and demanding as accountancy or the law and, just as few accountants or solicitors would dream of not being protected by a professional indemnity policy, so directors need to think the same way about using directors and officers liability insurance to protect their personal assets.

The world over, regulations and laws are being made or amended in an attempt to codify the duties and responsibilities of directors. Often the aim is to make directors responsible for their actions and inactions. Even where countries have attempted to protect directors from allegedly frivolous actions by shareholders and others, the creativity of lawyers and courts has overcome the changes; it is not unknown for attempts to simplify the position of directors or to protect them to backfire. Looking at director and officer actions across the world, there is only one group of winners, the lawyers.

Who is a director?

The answer to the question of who is a director sounds obvious, but is often totally misunderstood. A whole host of people who are not full time executive directors can be regarded as directors. Similarly, many employees can be regarded as officers of a company.

The intention of any director and officer liability policy is to protect the personal liabilities of anyone who could be subject to a director and officer action against them. Those most in need of cover are full or part time executive directors of a board. This can be the main board, the board of a subsidiary or, as is often the case in Germany, a separate supervisory board.

Logic of Providing Cover

The logic of providing cover is that there are situations where it would be unfair to remove protection from directors, for example it is often difficult to argue that statements made, or knowledge of facts possessed, by one director should have been known to others.

Insurers realize that cases arise where a director may deliberately have hidden information. Since the whole purpose of the insurance is to cover directors for liabilities, it is unfair to penalize the innocent by removing their cover just because one of their fellows is guilty. Also, it is possible for the person signing the proposal to leave fellow directors in the lurch by not asking for all relevant information. Some insurers, but not all, will allow the severability to be bought back on both policy and proposal. Even if severability cover is given by the insurers, the company is still required to maintain a high standard of disclosure.

The policy wording is complex but, when cover is given, the insurers say basically that statements by each director are taken on their own merit and not automatically assumed to be known by any other director or officer. Claims in this area are usually very complicated and insurers and the courts often have to referee disputes between individual directors.

Some insurers will automatically include it for the policy but not the proposal; with others will include it for the proposal but not the policy.

It is important that each individual director and officer should be able to claim the benefit of the policy without reference to the company or colleagues. To provide severability of the policy, it is necessary to frame the cover in such a way that it provides composite cover and not joint insurance. This way, each director protects his or her own rights and interests since each director's circumstances and right to indemnity are considered separately and not prejudiced by the act, knowledge or claim of any other person.

Property damage

'It used to be common practice to exclude claims arising from damage to property, but this happens less frequently now. The wording may differ between insurers as to exactly what is or is not covered.

Seepage and pollution

Seepage and pollution has become almost a standard exclusion and it is likely that the whole market will soon move to exclude it but will offer it as a buy back on a full review of anti-pollution measures. Any cover that is given will be quite restrictive.

Personal guarantees and warranties

It is becoming less common to exclude actions resulting from guarantees or warranties given by directors. Such cover as is given does usually exclude guarantees or warranties contained in a sale or purchase agreement, as separate cover is available in these circumstances. Also, cover may be provided only for breach of a warranty of authority. Problems can arise over the interpretation of a guarantee which may even have been an oral one given to a bank or shareholder. This is an exclusion which directors would rather not have.

Failure of products

One might expect failure of products to be excluded from director and officer liability insurance as it is rightfully the province of product liability. Many policies do exclude it, but others offer it automatically, using the logic that product liability covers the risk of damage or injury to third parties whereas the director and officer policy covers damage to shareholders.