D&O insurance is provides indemnity for the complex legal liabilities that may be encountered by Company directors and for employees who may be deemed to be a director.
To add to the complexity, most insurers divide the insurance policy is divided into two parts:
The first part covers the Insured Persons (the directors) for their legal liability arising from Wrongful Acts in the course of their duties as a director.
The second part covers the Insured Organisation (the Company) for its liability, if any, to indemnify the Insured Person for costs and damages arising from a Wrongful Act.
To all intents and purposes the insurance is to indemnify for the Wrongful Acts of directors. The only insurance protection for the Company, per se, is for its liability to indemnify a director. If the company has no liability to so indemnify a director then the director still has the direct protection of the insurance.
A company may only indemnify its directors and employees or arrange D&O insurance if expressly authorised to do so by its constitution, and with the prior approval of its board.
Responsibilities of Directors [including but not limited to]
A.The responsibilities of Directors are set out in the Companies Act 1993. These responsibilities are wide ranging. They include:
B.Acting in the best interests of the Company and its employees
C.Exercising a level of care that would be expected of a director.
D.Acting in good faith.
E.Making proper enquiries.
F.Disclosing any conflict of, or related party, interest.
G.Not entering into obligations that cannot be met.
H.Not trading recklessly.
I.Not breaching the Companies Act.
Wrongful Act
Wrongful Act in the policy means any error, misstatement, act or omission neglect or breach of duty committed by a director in the course of his/her duties for the Company. Defence costs may be advanced in a criminal proceeding for a Wrongful Act but must be repaid if there is no acquittal.
Sum Insured
The sum insured under the policy must be sufficient to cover all directors for claims arising from the one event, i.e. it does not apply individually to each director. The sum insured must also be adequate to cover the defence costs for all directors. Defence costs are not necessarily in addition to the sum insured.
Excess
Each claim is subject to an excess which must be paid by an insured person. The excess applies to Defence Costs.
Claims Made Basis
A claim notification must be made in the period of insurance that you first become aware it. There is no guarantee of cover if you notify the potential claim after the insurance period has expired.
If the event giving rise to the claim preceded the period of the insurance it will only be covered if the retroactive date of the insurance extends back sufficiently to pick it up.
Extensions to Cover [available to be included]
•Continuous cover (A late reported claim may be accepted if you were with the same insurer)
•Outside non-profit directorships
•Employment practices. Unjustified dismissal, harassment and demotion
•Your Estate (in the event of your death)
•Extended reporting period (if the cover is not continuing)
•Insured vs. Insured (If claims are brought by joint insured’s)
•Official Investigations (Costs only)
•Joint ventures
•New subsidiaries (prompt advice required)
•Old previous directorships (Run off cover)
•Prospectus liability (but not for IPOs)
•Preservation of Indemnity (if the Insured company is in liquidation)
•Spousal liability (Protects your spouse as well)
•Automatic reinstatement of the sum insured following a claim (usually one only)
•Current outside directorships (only if held at the request of the insured company)
Exclusions (mainly those pertinent to D&O insurance)
•Injury or illness
•Pollution
•Refund of overpayments or profits
•Insider trading
•Dishonesty
•Fines or penalties
•Failure to insure
•Professional duty breach (other than as a director)
•Claims made by shareholders with more that 15% of shares
•Issue of prospectus, shares or debentures. (Some insurers differ on this)
•Building failure or deterioration.
Claim examples
The past few years have seen a raft of prosecutions against company directors, largely in the financial sector. Because of the significant sums involved and the large number of victims these prosecutions have received wide publicity. However, the underlying causes can be applied to many occupations where directors have failed to understand the issues, have been poorly advised, didn’t make the right enquiries or were simply inexperienced or, perhaps, incompetent. The criminal verdicts are well known but many claims were settled out of Court for significant sums.
Feltex shareholders have a claim against directors for misleading statements.
The widow of a commercial vessel skipper that foundered with loss of his life and his passengers was successfully prosecuted for breaches of her duties as a director of the company that owned the vessel.
Companies trading whilst insolvent. Directors pursued by creditors.
The Pike River Coal chief executive was prosecuted for breaches under the Health & Safety Act.
Conclusion
These days a company directorship is no sinecure. You may personally feel that you are conscientious, honest, knowledgeable and experienced. Hopefully you will have the same confidence in your fellow directors and senior staff.
Even so, many executive directors are very focused on their business, which makes it difficult to be able to keep abreast of all aspects of the law relating to a directorship, judgement can be subjective and errors can occur. Non-executive directors usually have a different/special skills to bring to a board but may not have the same insight into the business as the executive director. He or she deserves to the comfort of the protection offered by a D&O policy.
This summary has, of necessity, been brief. It is not a complete description, or even a complete summary as some of the details of exclusions, or others that are common to many insurances, have not been mentioned. We will be pleased to go over it in more detail if you wish or answer any questions