Directors’ and officers’ liability insurance (D&O) covers the personal assets and liabilities of a business’s directors and key managers (officers) for alleged wrongdoing in their actions or decisions as leaders.
There are hundreds of possible offences or mistakes they could be held responsible for – ranging from violations of the Bribery Act and environmental legislation, to health and safety regulations and financial reporting requirements. Claims can come from many different sources, including shareholders, suppliers, customers, government agencies, employees and investors.
All companies with directors or key managers are at risk of these claims, yet research suggests that only 25% of SMEs are buying D&O insurance, which is a massive exposure for senior management in the UK.
It’s easy to get a D&O quote, it’s relatively cheap cover considering the broad scope of protection it offers, and there are plenty of good D&O products on the market. So why aren’t SMEs buying it? Are they unaware of the cover or do they not believe it’s for them?
Because D&O is a relatively technical product, we find it easier explaining the cover and its benefits face-to-face with clients. Here we take a look at 6 key reasons a SME should consider buying D&O.
#1 Directors of SMEs can be held personally liable for a company’s actions
There are many ways businesses are regulated and many ways a Director can be held personally liable for their actions if they don’t comply, even if they work for a limited company. Analysis of D&O claims over recent years show the focus of blame for non-compliance has shifted to individuals, rather than ‘faceless’ corporations.
One example was the introduction of deferred prosecution agreements (DPA) in criminal cases against companies. Under a DPA, a prosecutor charges a company with a criminal offence, but proceedings are automatically suspended in return for the company agreeing to certain conditions, such as paying a fine or co-operating with future prosecutions of individuals. This has increased the personal risk for Directors.
The same laws and regulations apply to companies large or small, so Directors of SMEs have the same level of responsibility as those of larger or public companies. Purchasing D&O cover can reassure and help attract senior talent.
#2 Post-Brexit legal shakeup
D&O is one of the most innovative types of insurance. Wordings have broadened out over the past few years and when a new regulation or law is introduced, its wide definition usually covers potential exposures. This will be especially important as the UK continues its Brexit journey. There is going to be a huge change in the UK’s legal environment as The Great Repeal Bill brings thousands of EU laws into British statute, and the CBI has estimated that Britain may need to set up domestic versions of as many as 34 EU regulatory agencies. Directors are going to face a tumultuous time as they get to grips with both their new legal responsibilities and trading environment.
#3 The cost of investigations can run into thousands of pounds and Directors have to pay
Although SMEs are subject to the same rules and regulations as larger companies, they typically don’t have an in-house legal team or HR department to deal with potential investigations concerning a Director. D&O policies will usually cover these defence costs, which can get very expensive very quickly if using external expertise. Even if the individual in question has not acted improperly, the cost of investigating and then defending an allegation can easily run to tens of thousands of pounds. This is a personal liability which cannot be charged back to the company.
#4 Cyber crime
Cyber and data breach issues are a real problem for SMEs, with the Federation of Small Businesses reporting 66% of small firms had been a victim of cybercrime in the past 2 years.
Directors responsible for cyber security must be able to demonstrate they are taking their digital security seriously and protecting shareholder value. This issue will become even more important when the European General Data Protection Regulations are introduced in May 2018. Data protection standards for companies operating in the EU will be tightened, and SMEs will be expected to comply with the majority of the requirements. These new rules require notification of serious data breaches as soon as possible, putting companies who have never had to do this before firmly in the spotlight. Investigations into data breaches could mean defence costs and if there is reputational damage, potential shareholder action.
#5 Health & safety concerns
The number of company directors and senior managers prosecuted for H&S offences more than trebled in the year to 31 March 2016, confirming the Health & Safety Executive’s shift to prosecuting senior individuals for H&S failings. Coupled with this, the new sentencing guidelines for H&S and corporate manslaughter prosecutions introduced in February 2016 make individuals more accountable for H&S. Senior leaders must be able to demonstrate ownership at Board level, not just delegate to others. If a Director works in a sector where there are a high number of H&S incidents, D&O offers an additional layer of protection in case of an HSE investigation.
#6 Approaching a key strategic decision
As an SME grows, the consequences of the strategic decisions its Directors make grow in importance. These can range from considering a merger or acquisition, entering or withdrawing from markets, seeking new investment or moving locations – all of which will have major impact on the future direction of the company. As the stakes grow, so does the potential for costly mistakes by Directors and an increase in those who could seek redress.
·A director signed a company cheque but omitted the word 'Limited'. The cheque was not honoured, and by the time the corrected cheque was re-presented, the company had gone into liquidation. As a consequence, the managing director was held personally liable for the value of the cheque, over £30,000.
·A claim for unfair and constructive dismissal was brought against the Finance Director of a distribution company by a former employee, alleging sexual harassment and other inappropriate activity including sending text messages out of working hours and inviting her on nights out.
Tokio Marine HCC’s D&O cover forms part of its Management Liability Insurance
Our policy is ideally suited to the SME market and includes protection for directors and senior employees; corporate liability for the protection of the company itself and corporate employment liability insurance - protecting the company from past, present and prospective employees. We can offer:
·Coverage on an any one claim basis of up to £10 million
·Local support from our worldwide underwriting, claims and legal professionals
·Customisable policies for businesses in multiple jurisdictions
Meet our Professional Risks team at BIBA 2017
If you’re attending BIBA 2017 and would like to discuss D&O or any other Professional Risks query further on behalf of your clients, please come and visit our team on stand C38.
Contact your underwriter today to discuss our ML Insurance
+44 (0)20 7702 4700