Directors gather assets which are easy to identify and therefore easy to insure. If you own a house you insure it. If you own a yacht you insure it. This is obvious and straight forward. But what about insuring against hidden risks that you can’t see? There are people out there ready to sue you for anything and everything. The following is a guide to protecting yourself by way of transferring the risk to Insurers.
When you have the cover and you don’t even know:
Director’s son (13) cycling on the pavement hit a car – it was clear it was his son’s fault. Damage was only £2,000 but it could have been a lot more.
Household contents policies include personal liability cover for the policyholder and their immediate family. So in this case, the damage was covered.
Whilst playing golf, you slice the ball off course and hit someone.
Again the household contents policy picks up the bill (providing you are not playing professionally). So to protect yourself against someone trying to sue you for property damage or personal injury, ensure you have household contents insurance that includes a realistic level of personal liability cover.
When you think you are covered but you are probably not:
What about someone who tries to steal your identity? Banks are trying to wash their hands of any responsibility for identity theft and acknowledge only a fraction of the claims customers make against them. And while some high net worth household policies include cover against this sort of eventuality designed to help you get your credit ratings back and meet the costs of clearing your name, most household policies do not.
Credit card companies love to give higher limits for us to spend, spend, spend. This is very well until the card is stolen and this gives someone else the opportunity to spend your money. Again high net worth policies normally cover these transactions provided you report the loss to the credit card company within 24 hours, but other policies may not.
In both these cases, however, specific cover is easy to obtain and many directors may find that they have it via insurance they already have in place but may not know it. The lesson, of course, is to check before it is too late.
So turning to business life, there are covers out there to protect you as a director and as a person.
Again, it is easy to see the assets a company has and the need to insure them. But what happens if someone tries to sue you in your own capacity as not fit to be a director?
In business, directors have a duty to perform and can be sued in their own personal capacity if they fail to discharge that duty. Directors and Officers (D&O) insurance, paid for by the company, gives protection to past and present directors in their own capacity to fulfil their duty
Here are four scenarios that any director could face. Would you be covered?
Claim Example 1: Tribunal win but you end up with a large legal bill
A large manufacturing company made the decision to reduce its staff levels – business had declined and this was the only way forward. Following this decision, several members of staff consulted an “employment practice lawyer”, and they began a legal action against the company and the individual directors responsible for their dismissal.
Were they covered? The Directors and Officers policy was called upon and defended the allegations against the individual directors. An allocation of costs was agreed for the defence of the company and the defence costs for the “insured persons” i.e. directors. The company defence costs were met by the Legal Expenses policy that was also in force. At the subsequent employment tribunal, the individual directors were cleared of any wrongdoing.
Claim Example 2: The share slide
It is interesting to note that larger or public companies merging, acquiring or selling always want to ensure that Directors and Officers insurance is in place first.
One company made a bid to take over another. The chairman wrote to all its shareholders advising them to take no action as the share price offered was less than that recommended. However the offer was finally accepted with the share price less than the original offer.
One investor therefore considered an action in respect of the loss suffered as a result of acting on the chairman’s advice. Any shareholder suffering a loss would be able to take action against the Company Board.
Were they covered? A Directors and Officers Policy would defend the Board for their liability in respect of any losses.
Claim Example 3: Call of duty
Directors have a duty of care that can sometimes be stretched when other directors take responsibility for actions.
Claims from shareholders often follow a poorer than expected financial performance of the company.
A large wholesale company suffered two large losses 1) an employee was injured on a business trip and due to non-disclosure of information at renewal the insurers declined to pay and 2) a large client went into administration with a massive debt owing which without credit insurance in place wasn’t covered.
The total loss to the company was near £600,000. The Board of Directors in person, received a claim from its shareholders for poor performance. This alleged that one or more directors were in breach of their duty to act in the best interests of the company when they failed to ensure that the company had a reasonably comprehensive insurance programme in place to protect its assets.
The individual director on the Board responsible for “risk management” received a claim in person from the company shareholders.
Were they covered? Directors and Officers underwriters agreed to consider the claim on the basis that the alleged “wrongful act” required a defence. Directors and Officers underwriters agreed that although the claim could be defended, there was a significant chance the shareholders would be successful in bringing their action so the case was settled out of court.
So ask yourself, can you afford NOT to be covered for eventualities like these?
Stephen Ehrhart is a founding Director of Dorset-based commercial insurance and risk management specialists, Lansdowne Woodward. He has more than 20 years’ experience in the insurance industry and specialises in larger commercial insurance. Outside of work, Steve is a keen sailor and fitness fanatic.