Clyde & Co recently hosted a NEDonBoard panel discussion that touched on the role of directors and officers (D&O) insurance in mitigating directors’ personal liability. During the discussion, Francis Kean, Director at Willis Towers Watson, pointed out that a company will usually stand behind its non-executive directors (NEDs) when it comes to personal liability, provided they have not acted dishonestly. However, as part of their due diligence, NEDs should check whether their actions while performing their director duties will be covered by an adequate D&O insurance taken out by the company.
What does D&O insurance cover?
Despite the name, D&O insurance covers more than directors and officers, it usually extends to employees with managerial responsibilities. In addition, it covers the insured company, which can recover any amount paid on behalf of its managers to protect them from a third-party claim. Class actions are also covered by D&O insurance.
D&O insurance grants cover only in relation to claims made while the policy is in effect or within an agreed term. Policies may also have an agreed retroactive period. NEDs should check whether the applicable policy gives them some backstop reassurance and whether the company will continue to buy D&O insurance after they cease to be NEDs.
D&O insurance covers damages and settlements, defence and investigation costs. It does not cover penalties and fines and will not cover “bad” conduct (that is, criminal, fraudulent or intentionally non-compliant conduct). Directors should argue against claw-back clauses. Neither will D&O insurance cover “any business as usual” regulatory investigation. The questions is: where do you draw the line (that is, when is a formal investigation open)?
Negotiating an indemnity
In addition to D&O insurance, NEDs should consider getting protection from the company by negotiating an indemnity. However, NEDs should be aware that, even if an indemnity is agreed, the company may refuse to provide protection under in the event of insolvency or by alleging that the director acted dishonestly.
Francis Kean pointed out that claims have significantly increased over the last 18 months. Often, active investors use the reports from regulatory investigations as the basis for bringing claims against the company and its directors. He also noted that since the financial crisis, regulators are really focusing on alleged misconduct by senior management. Alleged financial misstatements remain a common base for claims, while “event base” class actions (that is, where directors should have understood that a specific event was about to happen) appear to be on the rise.
This article was originally published on NEDonBoard. NEDonBoard is the professional body for non-executive directors and board members listed on GOV.uk. In addition to her role at Practical Law, Laura Marianello is a NEDonBoard ambassador.