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Cover your assets, directors — and that means sides A and B Attorney SARAH COUTTS explains the niceties (and nastiness) of insolvency protection
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WHILE the past decade initially saw a decrease in the number of insolvencies, after a peak in 2009, there has been a steady increase once again, particularly in the UK retail, hospitality and travel sectors. Companies purchase D&O to provide cost protection for directors and officers from investigations and claims which may arise from the decisions taken by them in their capacity as directors or officers of the company they are helping to run. As they can be held personally liable for their decisions, the policy protects their personal assets. The most notable rise is in the number of Side A claims being made under directors and officers (D&O) insurance policies. There is a growing need to ensure that insured individuals are able to fully access their D&O insurance cover. Side A provides cover for the personal liability of insured individuals. It is usually triggered if the policyholder company refuses to, or is unable to, protect or indemnify its D&O risks. It may also be triggered in an “insured versus insured” situation if the company has to take action against its own directors or officers. There is no excess payable under Side A, meaning that the policy will provide an indemnity to D&O risks from the ground up. Side B provides company reimbursement cover, where the company steps in and indemnifies the director or officer in the first instance — either in line with its Articles, due to statute or regulation, or due to prior contractual agreement. Under
Take cover when there is a dispute... Side B, an excess is usually payable; this is an amount payable by the policyholder company before insurers are liable to provide an indemnity. There is a significant amount of legislation and regulation setting out the extensive duties and responsibilities directors and officers owe to the company they work for and its shareholders. These include promoting the success of the company, acting within their powers, exercising independent judgement, exercising reasonable skill, care and diligence, and avoiding conflicts of interest. In a litigious environment, these prescriptive lists of directors’ duties can leave them increasingly exposed to action from a variety of third parties, including the regulators themselves. Globalisation means that international organisations face claims from a variety of
jurisdictions, and regulatory activity has increased in the wake of the financial crisis. It is therefore only right for directors and officers to expect the company they run to indemnify them when claims are made against them. While they may have this obligation memorialised in the company’s Articles or by a Deed of Indemnity, in reality that indemnification may not be as forthcoming. Directors face additional exposures in the event of insolvency, as the duties they owed to the company’s shareholders shift to the company’s creditors, and the creditors themselves will be searching for avenues to recover their resultant losses. A very recent English court decision has confirmed that directors’ duties survive a company’s entry into administration. The director in the claim was found to have breached his duty to act in the
