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Directors and officers operate in an increasingly demanding environment. In addition to the 1,600 or so prosecutions brought against Directors and Officers each year for failure to file accounts to Companies House, many more run the risk and are prosecuted for failure to comply with corporate governance regulations, employment law and health and safety duties.
However, there is a safety net in the Companies Act 1989 which allows companies to take out insurance on behalf of the directors and pay the premiums.
These policies, known as Directors’ and Officers’ (D & O) Liability Insurance, are designed to protect directors, shadow directors, former directors and officers of a company from financial losses resulting from claims made against them in the discharge of their duties.
As a result of changes seen in the Companies Act 2006, D & O liability insurance has become a core component of corporate insurance. The relevant sections of the Act embrace highest risk areas including; the duty to promote the success of the Company and the duty to exercise reasonable care, skill and diligence.
The issue is further compounded by a greater awareness on the part of employees and shareholders of the duties and responsibilities of company Directors and their rights
D & O policies cover “losses” from “wrongful acts” committed as a director, officer or employee of the Company. “Wrongful Act” will usually cover breach of duty, breach of trust, negligence, error, mis-statement, mis-leading statement, omission, libel, slander, breach of warranty and authority or wrongful trading.
However, many companies have still to review their policies to take account of recent changes in the law under the 2006 Act or the Corporate Manslaughter and Corporate Homicide Act 2007. This could result in legal action being taken against individual directors under section 174 of the 2006 Act.
Policies are frequently limited cumulatively, which means there is limited money available to cover all claims within a specified period. Consequently, a number of claims could exhaust the cover. However, many D & O policies contain a wide range of exclusions including the payment of fines, penalties and punitive damages.
The need for insurance cover has never been greater and Directors should, as a matter of policy, annually review the cover provided. And companies trading abroad should take particular care because of the increasing risk of prosecution under the laws of foreign jurisdictions.
In association with our carefully chosen partner MG Insurance, Pearson Hinchliffe Commercial Law can advise directors and officers on D & O liability insurance and act on behalf of plaintiffs in professional negligence cases.
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