D&O cover is primarily intended to protect the director or former director where the company cannot or will not provide indemnity out of its own funds. Prudent directors often ask how much D&O cover there is before they accept appointment to a board. They know that D&O insurance is important, particularly in regulated, prudential, industries or in businesses which operate in the US. But the amount of cover is not the only question to ask. D&O cover is complex and policies differ. Small print may limit the directors’ protection. Some insurers may be slow to pay. Simply having a D&O policy in place may give false comfort if it is not suited to the directors’ needs.
Honest directors may be sued
That lesson was learned long before the recent Great Recession. One of the most expensive claims before then was a £3 billion claim brought by the new management of Equitable Life in England against former directors, including 9 non-executive directors, and auditors of the company for failure to appreciate the correct meaning of a provision in the articles of association. About £75 million in litigation costs was spent by the parties before the claim was withdrawn.
The regulator calls
Litigation is not the only risk for directors. Many public agencies now enforce corporate responsibilities in Ireland. These include Office of the Director of Corporate Enforcement, the Competition Authority (now CCPC), Health and Safety Authority and the Environmental Protection Agency. Regulators outside Ireland, particularly in other EEA countries, may investigate Irish directors too. Oireachtas and other public inquiries can summon and question directors in public.
The law’s wheels grind slowly
Most directors are conscientious and so for them, the risk of being found guilty by an Irish court or liable to pay heavy damages for failure to act properly as a director is small. However, it may take a long time to be vindicated, or for the case to be abandoned, and in the meantime the director faces worry about reputation and the possibility that he or she may be found liable. The director (or, often, the former director) will require specialist legal advice and support during that period. If sued in the United States, the need for support may be even greater, particularly if there are securities claims.
Important policy features
Severability clause: this protects innocent directors where another director has misled insurers or committed some other serious breach of the policy.
Dishonesty exclusion: this ensures that a director is entitled to payment of defence costs up to the point that he or she is found to have been dishonest by a court of law, or admits dishonesty.
Costs: payment of legal costs for advising and representing the director in investigations, trials and public inquiries is essential.
Choice of representatives: insureds need to be free to choose specialist legal advisors, subject to costs being fair and properly documented.
No delay: costs should be payable as incurred and without unnecessary delay. Delay in payment of defence costs can compromise effective legal representation.
Disputes clause: good policies provide for a speedy and fair means of dealing with disagreement between the insured and insurers.
The broker’s job
Broking a D&O policy is not like advising on routine car or fire insurance. A specialist broker should advise on cover. Each board member has a personal interest in knowing that suitable protection has been arranged and so the company secretary should ask the company’s broker to brief board members each year about the cover in place and to alert directors to what is not covered. The broker should also advise retiring directors about the arrangements to protect against late claims.