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.
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:
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).
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.
COVID19 is having repercussions which are likely to increase the number of claims against individuals, here are a few possible examples:
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.
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are aware that the current crisis will result in more claims, and the market is already hardening, with covers being withdrawn and premiums increasing – we anticipate that this trend will continue, so buying insurance now, even if other covers in a company insurance programme are not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.
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 lockdown, 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 us to discuss the risk and request a quotation.
