How to protect your management team with Directors and Officers insurance
Why D&O insurance can protect small business owners from complex legislation
Directors and Officers (D&O) insurance is a comparatively recent import from the USA but today more UK companies are choosing to protect them against complex legislation in a global marketplace.
The Companies Act 2006 introduced many changes to directors’ duties and liabilities and shareholders’ rights. And the UK is not the only country to increase its regulation of directors and officers. In the USA, the SEC imposed the Sarbanes-Oxley Act, requiring directors to certify their companies’ financial accounts, with criminal sanctions for noncompliance. Sarbanes-Oxley also applies to foreign issuers of US listed securities.
“Legislation is continually changing around the globe,” says Simon Million, UK & Ireland D&O manager for ACE European Group. “Previously, we only had class actions arising from the US. Now we are seeing such claims in Australia and Canada with other European countries beginning to allow collective actions.”
As any kind of responsible officer in a business, he says, your head is over the parapet as never before. Directors are faced with decisions and issues that they probably have never dealt with before because they haven’t had arisen since the last recession. And many directors and managers weren’t around to deal with the events of 1991.
“We are seeing many middle-sized companies, maybe looking to list on AIM or the London Stock Exchange, going through things they haven’t experienced before; things like refinancing their debt or trying to find additional capital at a time when the additional capital markets are closing down to them. So directors are faced with duties of care to their customers, their employees, their shareholders, that are new to them.”
A D&O policy will cover any claims made against individual directors or officers of the company for mismanagement or misrepresentation in any kind of documentation. Claims come from many sources, says Million; government bodies like the HSE or the FSA; from the employees for wrongful dismissal; from customers for any comments directors may make about potential competitors; and also shareholders.
“Shareholders are probably the main one. When shares lose value these days it’s probably because of the recession, but they will always ask the question as to whether it’s something one of the directors has done or said or whether they could have done something to prevent it.”
The policy is there to protect the assets of the individual director or officer. There’s no legal definition of officer in this country; it can be anyone in a supervisory or managerial role.
You won’t be covered if you are guilty of deliberate fraud, naturally enough, but the majority of claims can be defended, and your D&O policy will cover costs as well as any award or damages.
Look at your profit and loss account, he says, and consider whether your exposure to the risk of legal action is a real threat to your ability to continue trading.
Only around 25% of limited companies in the UK have D&O cover currently, says Simon, who has been writing this business for 19 years. “We see that as a great opportunity.
Risk managers are putting D&O insurance higher up on their risk register and it now ranks just behind property and casualty. The cost is minimal for the risk transfer they are seeing.”