Why Covid-19 makes D&O Insurance Vital

Directors and officers of Limited Companies have unlimited personal liability for the decisions and actions they take on behalf of their company.

The Coronavirus lockdown has created a high risk environment with increased likelihood of legal action against Directors and officers relating to breaches of Health and Safety regulations and employment law. The market is likely to respond to increasing claims by “hardening” with restrictions in cover and increasing premiums, so now is the time to ensure appropriate cover is in place.

The role of Company Director of a Limited Company brings with it serious legal and regulatory responsibilities. Whilst the Limited status of a company limits the financial exposure of shareholders in the event of insolvency, Directors have unlimited personal liability in law suits brought against them in civil courts, and can be subject to criminal prosecution; company Directors can and regularly do face civil and criminal actions, and can lose their homes and savings as a result of prosecution or damages awards.

D&O insurance cover

Fortunately this exposure has resulted in the development of “Directors and Officers” insurance, sometimes called “Management Liability” which provides broad cover for civil fines and legal defence costs:

Covers Directors against personal lawsuits in civil courts –defence costs and any damages awarded.
Covers Directors against any personal criminal defence costs (but not any fines or penalties imposed).
Can be extended to cover Directors, officers and the “entity” for employment disputes

The risk to Directors and officers of SMEs

Almost all “Blue Chip” corporates now buy D&O insurance, but the Directors of many SMEs remain exposed with no cover – sometimes due to the misconception that the risks relate to larger companies. Directors of Limited Companies of any size share the same duties and responsibilities (see the Companies Act 2006 for more detail: http://www.legislation.gov.uk/ukpga/2006/46/part/10/chapter/2).

In fact, Directors of SME’s are often at more risk as there may be a less formal / collaborative processes for decision making in small companies. Individuals who make decisions which are not discussed with the Board or formally minuted leave themselves wide open to personal legal action.

If they fail to exercise their role with due care and skill, there are a range of common situations which often result in legal action against Directors of small businesses:

Liquidators of insolvent companies may take legal action against former directors, particularly if they judge that creditors’ interests were not properly protected while the company was struggling to stay solvent.
New boards or company owners may take action after a takeover if there are unexpected issues which emerge once they own the business.
The Health and Safety executive regularly prosecute individual Directors for breaches following accidents or near misses (between 2015 and 2016 HSE prosecutions against individual Directors following accidents or near misses TREBLED). Defence costs in these circumstances can be very expensive. In a recent case involving a GRP Group broker client, the Directors of a haulage business were prosecuted following a motorway accident involving their company vehicles – defence costs covered by their D&O insurer ran to several a million pounds.
Controversial transactions or poor decisions (for example failing to place appropriate insurance cover!) can result in legal action by fellow Directors.
Tax disputes with the HMRC may often result in actions against individuals, rather than the company.

Why has the Covid 19 crisis made claims more likely?

Covid 19 is having repercussions which are likely to increase the number of claims against individuals, here are a few possible examples:

Furloughing is an untested area in terms of case law, and is likely to prove fertile ground for legal action against Directors, either by employees who feel they have been treated unfairly, or government regulators if the rules were not properly observed.
An employee asked to return to the workplace could resign, then claim constructive dismissal if they were concerned about safety because social distancing measures have not been properly implemented.
The Health and Safety Executive could take action if a cluster of Covid 19 cases were traced back to a specific work place, and they consider that required social distancing measures have not been properly implemented.

Sadly it is likely that the lockdown will result in an increase in insolvencies. Where a company becomes insolvent, claims are much more likely against individual Directors where the Company has no assets to pay creditors.

The D&O insurance market is hardening

Insurers are aware that the current crisis will result in more claims, and the market is already hardening, with covers being withdrawn and premiums increasing – we anticipate that this trend will continue, so buying insurance now, even if other covers in a company insurance programme are not due for renewal makes sense to minimise cost and ensure the required cover is available.

Insurance buyers are personally at risk for a decision not to buy D&O

If a director fails to take out D&O insurance without consulting the board, or lapses an existing policy without consulting the board, they could face a personal lawsuit from the entity or other directors.

This can happen if at a later date it can be shown that had the D&O cover been in place, an individual director or the entity would have gained some form of protection from the policy.

To protect against this, the officer responsible for buying insurance should ensure that the decision not to buy is formally agreed and documented.

To help protect our clients, GRP brokers request that a declaration confirming the decision not to buy D&O has been agreed by the Board. This declaration can then be held on our file as evidence in the event of a future dispute.

D&O insurance has always been an important insurance for the Directors to consider – as the economy struggles with the covid-19 lock down, this cover is more important than ever, so our suggestion would be to not wait until the next renewal of your insurance programme but act now and contact your broker to discuss the risk and request a quotation.