You may have heard of Directors & Officers Liability insurance (or Management Liability insurance as it is sometimes known) but do you know what it is – and do you need it?
Here is a quick overview:
There are three key areas to a management liability policy:
1) Directors and Officers Liability –
This section of cover protects the personal wealth of you, the director and any other management staff from the legal costs and awards in defending against civil, criminal and regulatory claims or investigations.
2) Employment Practices Liability –
This covers both you, the directors and the business from claims from potential, current and former employees alleging breach of contract/employment law.
3) Corporate Legal Liability –
Claims can be made against the directors and officers and also the business itself in tandem. This cover protects the legal entity (business) from defence costs incurred relating to civil, regulatory claim or investigation.
What could happen to you without Management Liability cover?
Your company assets/funds will not be able to help you defend claims made against you and it is very unlikely that your standard commercial insurance policy (or its legal expenses insurance) will have any protection for you either. So the ramifications for you, your family and subsequently the business can be catastrophic.
Possible outcomes of not being able to defend a claim –
– Disqualification as Director
– Criminal Prosecution
– Custodial Sentence
– Personal Bankruptcy
– Loss of Job and business reputation
– Family trauma and financial hardship
How, why and who?
Claims can arise from a wide range of circumstances and it is important to remember that a claim does not have to be justified and factual to initiate costly legal defences:
– Mismanagement
– Negligence
– Unfair dismissal or discrimination
– Libel and slander
– Breach of fiduciary duty to the company (common law) Breach of statutory duties (legislative breaches, including The Companies Act), Misrepresentation/Misstatement
– Trading whilst insolvent Acting outside a manager’s authority/powers
– Sexual harassment
– Anti-competitive behaviour
– Regulatory Investigations such as the Health & Safety Executive and HM Revenue & Customs or the relevant regulatory body by industry
Litigation can come from anywhere – Employees, shareholders, your company, creditors, regulators, customers, competitors, the Government, other directors and suppliers or anyone else who feels that they have suffered a loss arising from the Director wrongly acting in their position, can potentially sue you.
Below are some examples of where a management liability policy covered a claim (and the main commercial insurance / legal expenses policy did not):
Charges of corporate manslaughter
Two motorists were killed when a driver employed by a family run haulage firm fell asleep at the wheel. The court held that the employee’s operations manager should have ensured that the driver adhered to the relevant driving regulations and that the Director to whom he reported failed to exercise sufficient control. Both incurred substantial defence costs (covered by the policy) before the organisation was convicted of corporate manslaughter.
Breach of contract
A company was accused of breaching an exclusive distribution agreement. The pleadings included international interference with the contract, tortious interference with business relations and misappropriation of trade secrets. Insured defence costs had already exceeded £200,000 by the time the Director involved was eventually removed from the action.
Property developer agreement to purchase land for development without shareholder approval
A property developer claim demonstrates director vs. director action concerning breach of fiduciary duty plus two former directors acting outside their authority. They committed the company to an agreement to purchase land for development without approval of shareholders (ie fellow directors). The evidence established that the claim was unlikely to succeed. Simply put this was a fallout between personalities with axes to grind, however, the insured still incurred legal costs to investigate allegations. Insurers defended the legal action until common sense prevailed with insured total legal costs of nearly £750,000.
Breach of health and safety regulations
A construction company suffered a near miss when a huge pane of glass fell from the fifth floor of a redevelopment project onto the pavement. Miraculously, no one was injured but the Health & Safety Executive made a site visit the following day. This revealed a number of legislative breaches. A variety of actions were subsequently brought against the directors resulting in insured costs of £45,000.
Company directors questioned over fatality
A client operated road sweeping services using motorised vehicles. Unfortunately, one of these vehicles was involved in a fatal accident. This resulted in police investigation of two company directors. One of the directors was accused of aiding and abetting the causing of death by dangerous driving. The case progressed to trial, but in view of the director’s health, proceedings were stayed. While this meant the director was never tried, insurers still incurred defence costs of over £118,000 and legal expert’s costs of over £3,000.
By now you will hopefully understand what management liability insurance covers and its value for business owners and managers. To put this cover in place, please get in touch with Anderson Smith on 01577 333177 or info@anderson-smith.co.uk.
credit: Towergate
