LIABILITY INSURANCE FOR DIRECTORS & OFFICERS

If a director or officer of a company is found to have inadvertently acted outside their terms of reference and this gives rise to a claim, any compensation and legal fees can be covered by Directors and Officers Liability Insurance.

WHAT’S COVERED BY DIRECTORS & OFFICERS LIABILITY INSURANCE?
Insurance cover is provided for claims arising out of actual or alleged breach of trust, breach of duty, neglect, error, omission, misstatement, libel, slander, breach of warranty of authority and wrongful trading. Furthermore, Directors & Officers Liability Insurance also protects the value of a director’s personal holding in the company by covering the substantial expense of funding its own defence.

WHY YOU NEED DIRECTOR’S & OFFICER’S LIABILITY INSURANCE
The legal environment for directors and officers in the UK is becoming increasingly hostile. In recent years, both the government and shareholders have become more willing to bring actions for breach of duty against directors and officers of companies.
As a director or officer of a company, you should consider the following:

Since 1993, actions against directors by the Department of Trade and Industry have increased by over 400%!
The Companies Act (1985) incorporates 257 civil and criminal offences with which directors can be charged.
As a Director or Officer, you act as an agent for the company, and are legally responsible for your actions. You cannot hide behind the veil of incorporation. Directors and Officers personal assets are exposed to claims against them arising out of their business activities.
Claims can be brought by any party with an interest in the affairs of the company. Directors owe a duty to the company who are ultimately the present and future shareholders. In addition, this is extended to creditors in the event of insolvency.

LEGAL RESPONSIBILITIES OF DIRECTORS AND OFFICERS IN THE UK
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.
Directors and officers of companies and other organisations have various duties, responsibilities and powers in connection with their position. Director’s duties are set out in a combination of case law and relevant sections from various statutes and regulations.
Consequently, directors and officers can be held responsible for a range of issues including:

Fraud
Negligence
Health and safety
Data protection
Maintaining satisfactory accounts

Directors are often unaware of what their duties are. Ignorance is no defence.

DIRECTORS & OFFICERS LIABILITY INSURANCE CLAIMS EXAMPLES

The following examples highlight the importance of directors and officers liability insurance.

DIRECTORS CONVICTED OF CORPORATE MANSLAUGHTER
In October 1997, two motorists were killed after a company driver fell asleep whilst driving for a haulage company. The court held that the operations manager should have ensured that his driver adhered to the relevant driving regulations and also that he had 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.

DIRECTOR ORDERED TO PAY £1,000,000+ FOR FALSE ACCOUNTING
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.

CREDITORS AWARDED £800,000 AS DIRECTORS PROFIT FROM THEIR POSITION
Two directors were held liable for payments made to another director shortly before the company went into liquidation. The creditors of the company successfully argued that they should take precedent over the director and were awarded £800,000. Directors have a fiduciary duty to take the correct course of action and as such should not profit from their position.

SUBSTANTIAL COSTS AWARDED FOR NOT ACTING WITH DUE CARE & DILIGENCE
Three former directors of a company incurred substantial costs after they were fined by The Securities and Futures Authority for their respective roles in an aborted hostile take-over bid. 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.

DIRECTOR SUCCESSFULLY SUED BY LIQUIDATORS
The director of a business that failed, with losses of £1.5m has been sued by liquidators. The director genuinely believed the firm to be profitable but the case was still found in the liquidators favour , due to the directors negligence in failing to ensure accurate financial records were kept.

DIRECTORS HELD RESPONSIBLE FOR COMPANY ACCOUNTS
All 14 directors of a privately owned business incurred substantial legal fees and were banned following a DTI investigation into company insolvency. Despite the fact that only two directors ran the business on a day to day basis, all 14 were found to be responsible for the books and records not being up to the necessary standards and for a lack of working capital.

WHAT'S THE WORST THAT CAN HAPPEN?

Imagine the scenario. You have spent the best part of your working life building up your business. Then, you receive a letter from a regulatory body, announcing you are being investigated and ultimately prosecuted for what you thought was a minor incident a couple of years ago.

Sounds like your worst nightmare but you would be surprised how true this matter really is. People are now more prepared and likely to sue. At the same time laws are becoming tougher and access to litigation becoming easier. Increasingly actions are being brought against both the company and the individual who made the initial decisions.

Under current legislation as a Company Director you can be held personally liable for your actions. Your company has limited liability, you have unlimited personal liability. Basically, all of your personal possessions and property that you have worked hard for at risk.

WHAT WOULD A DIRECTORS & OFFICERS INSURANCE POLICY RESPOND TO?

Actual or alleged Wrongful Acts.
Negligence, error, omission or any other act wrongfully attempted.
Matters claimed by virtue of your position as a director and officer.

WHAT'S COVERED BY DIRECTORS & OFFICERS LIABILITY INSURANCE?

Legal defence costs.
Fund appeals
Representation costs at official enquiries.
Damages, settlements and awards.

WHAT'S NOT COVERED BY DIRECTORS & OFFICERS LIABILITY INSURANCE?

Fraud & dishonesty
Direct claims for bodily injury and property damage.
Pollution.
Prior & pending litigation known when the policy was incepted.

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