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Time to review your D&O insurance and directors’ indemnities?

Business Meeting 8 Print publication

04/02/2016

Now is a good time for companies to review their Directors’ and Officers’ (D&O) insurance. Recent and continuing changes to the corporate and regulatory landscape make it possible that existing cover might not go far enough.

As part of the same exercise, companies that have not entered into deeds of indemnity with directors and officers should check they are still comfortable with that position. D&O insurance and indemnities overlap, but they are complementary rather than alternatives. Each fills gaps that the other cannot address. In particular, D&O cover may contain surprising or non-obvious exclusions to cover or the cover may be vitiated by, for example, non-disclosure, even in some cases, innocent non-disclosure.

Changes to the corporate and regulatory landscape

The recent and continuing changes to the corporate and regulatory landscape referred to above, include:

  • new powers under the Small Business, Enterprise and Employment Act 2015 (the SBEEA) for liquidators or administrators to assign causes of action, including claims against directors for fraudulent or wrongful trading, to third parties. Unlike a liquidator or administrator, the third party will not be constrained by the obligation to consider whether bringing a claim is in the best interests of all the creditors. Coupled with the market for litigation funding becoming increasingly competitive, this seems likely to generate more claims against directors
  • where a director is disqualified for misconduct, the court now has power (under the SBEEA) to order the director to compensate creditors who have suffered loss by reason of the director’s misconduct. Policy wording should be checked to establish whether this would be a covered loss and, if it is, whether it ought to be
  • the increasing likelihood of regulatory action, for example for breaches of the UK Bribery Act 2010. The UK regulators are increasingly bestowed with enhanced powers – for example the powers of the Competition & Markets Authority considerably outstrip those of its predecessor, the Office of Fair Trading. Directors of UK companies can be personally liable for offences relating to health and safety, the environment, financial reporting and breach of international sanctions, amongst other things. The risk of regulatory action against directors will increase further as the Government moves to facilitate cross-regulator sharing of information
  • the cap on the fine that could be imposed by a magistrates’ court for a criminal offence has been removed (as we reported here). This could include, for example, health and safety or environmental offences or offences under the Companies Act 2006 (the Act)
  • the growing risk of enforcement action from overseas regulators, whose reach can extend across jurisdictions (especially US regulators).

These changes mean that now is a good time to review your D&O and indemnity arrangements to make sure you have adequate cover in place.

D&O insurance – some key points to consider

  • Who is covered? Policies will typically cover the main board and directors of subsidiaries. They will not necessarily extend to directors of joint venture companies or companies in which the company has a minority shareholding or to officers (a company secretary, employed solicitors and other senior managers).
  • Is there run-off cover so that a director remains covered for a sufficient length of time (normally at least six years) after he leaves the company in respect of actions which took place while he was a director?
  • Which, if any, group companies does the insurance cover? Commonly, directors of a company and its subsidiaries at the date of inception of the policy will be covered. Check that subsidiaries acquired after this date are also covered.  Some policies will automatically cover future acquisitions; others will not. Check also that subsidiaries in overseas jurisdictions are covered; certain jurisdictions may be excluded.
  • Does the level of cover factor in the possibility of claims being brought against all the directors of the company and each director needing separate advice? Directors could be left exposed if the sum insured is exhausted by one or more large claims.

Indemnities

A company’s articles will usually include a power for the company to grant indemnities to directors to the extent permitted by the Act. The Act does not make specific provision for a company to protect officers other than directors (for example, a company secretary, employed solicitors and other senior managers) from liability, but indemnity provisions in the articles can be extended to these persons.

The relevant article typically provides for the grant of indemnities to be permitted (the company may indemnify) rather than obligatory (the company shall indemnify). In our experience, directors are not always aware that the relevant provision in the company’s articles, even if drafted as an obligation, is, on its own, insufficient. This is because the articles are deemed to be a binding commitment between a company and its members; a director is not a party to this commitment unless he is also a member, and, even then, he will only be able to enforce those provisions in the articles which confer rights on him in his capacity as a member. It is for this reason that the indemnity itself needs to be provided in a separate contract between the company and the director, often in a separate deed of indemnity.

When entering into an indemnity, a company should consider the following:

  • whether, in giving directors indemnities, the company is acting in a way that would be most likely to promote the success of the company for the benefit of its members as a whole.  This is particularly the case where the company is indemnifying directors of group companies.  Generally such indemnities will be justified on the basis that companies need to give indemnities in order to recruit and retain directors of the right calibre
  • whether the indemnity should extend to directors of other group companies including in jurisdictions where a wider indemnity may be permissible than is the case under English law
  • if persons who are not directors (for example, the company secretary) are to be indemnified, whether it is appropriate for the deed to include the same level of protection for those persons, because they will owe fewer duties to the company than directors
  • any indemnity, including any granted by a company to directors of group companies, must be disclosed in the directors’ report (section 236 of the Act) and a copy must be made available for inspection at the company’s registered office for a year after it is made (section 237).

Please contact your usual contact in the Walker Morris Corporate Group if you think there may be gaps in your D&O cover that leave your directors and officers unprotected. It may be that you need to consider updating your existing cover and/or, if you have not already done so, entering into deeds of indemnity with your directors and officers.

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