Is it time to review your D&O Insurance?

Director and officer liability insurance (D&O insurance) provides personal cover for directors and other executives for losses resulting from claims made against them by third parties. Read on to find out why you need to make sure you’re covered. With the implementation of the Companies Act 2006, the Corporate Manslaughter and Corporate Homicide Act 2007 and the continued development of blame culture in the UK, the regulatory burden on companies is mounting. It therefore follows that there is an ever-increasing possibility that directors or senior employees may be held personally responsible for regulatory breaches i.e. they can no longer hide behind the corporate veil. The Companies Act 2006 has codified many of the common law and equitable duties owed by directors and company officers. General duties such as the duty to promote the company’s success and the duty to exercise reasonable care, skill and diligence now apply to all directors, including ‘de facto’ directors and shadow directors. Although the legislation is still in its infancy, it is anticipated that the biggest rise in claims brought under the 2006 Act will be derivative actions brought by shareholders against directors and company officers. As a director’s general duties are owed to the company, it is the company alone which has the right to enforce those duties. Of course, persuading directors to sanction action against themselves is easier said than done. However, under the 2006 Act, the company’s shareholders can bring an action on the company’s behalf against a director for an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust. The action can be brought against the director for breach of duty regardless of whether or not that director has received any personal benefit from the breach. Given the potential financial consequences of a claim brought against the directors of a company under the 2006 Act, the D&O insurance policy wording will need to be considered to make sure that it covers the new requirement to promote the success of a company and the extension of directors’ duties. The Corporate Manslaughter and Corporate Homicide Act 2007 does not bring any new personal criminal liability on directors, but it does means that an organisation can now be convicted for corporate manslaughter under statute. Previously, the standard wording in a D&O policy limited cover for a director or senior officer of a company to legal action for management failings leading to the death of an individual. Consequently, it would be advantageous for a company to review its policies to ensure that it has sufficient cover in place in the event of a prosecution against it under the 2007 Act. It remains open for directors to still be prosecuted personally for gross negligence manslaughter at common law if there is sufficient evidence to support such a case. The increased investigation activities that are likely under the 2007 Act could easily lead to an increase in such prosecutions. D&O policies should be reviewed to ensure that adequate cover is in place to take account of the potential increased risk from legal action against directors and other company officers under UK legislation or at common law. About the author This article was prepared by Aaron & Partners LLP. For details of Aaron & Partners’ full range of legal services click here. How the FPB can help Members of the FPB can take advantage of our comprehensive and cost-effective D&O insurance, with optional cover for employment practice liability and crime and a limit of idemnity of up to £5 million. Click here to find out more.