Directors’ and Officers’ Insurance in the UK

Way before the 2008 financial crisis, high-profile cases against directors such as the Equitable Life Assurance Society v Bowley [2003] BCC 829, caused the realisation that directors are under significant risk of litigation and therefore need Directors’ and Officers’ (’D&O’) insurance.  The global financial crisis increased awareness that directors need D&O insurance cover in order to be protected against likely claims from third parties.  This realisation led to the conclusion that it would be a brave director who would choose not to have such cover. The force of that conclusion is examined in my paper by discussing the significance of D&O policies both as legal and commercial tools for directors.

The legal and commercial distinction turns on whether a D&O policy would indemnify a director against: (a) a pecuniary award made against him, and (b) the costs in defending a claim against him.  Where, for example, a D&O policy will pay the cost for defending criminal conduct, but will not pay pecuniary award by way of criminal fines, I argue that the D&O policy would be reduced from a legal to a commercial tool.  In a third party claim for negligent misstatement, for example, where a director has not assumed personal responsibility, liability does not arise and a D&O policy need not respond as a matter of law. As such, a D&O policy stripped of defence costs cover, just like an oral contract, is not worth the paper that it is written on.

Examining the significance of D&O insurance policies in the UK, my paper argues that the significance of D&O policies lies in D&O policies being commercial, rather than legal, tools for directors. As a legal tool, where third parties sue the director, unless a director assumes personal responsibility (where this assumption is an element of the civil wrong), English law does not impose personal liability against the director, and a D&O policy may not respond. Moreover, as a legal tool, it may not be necessary, as defence costs can be provided to directors under company indemnity. As commercial tools, D&O policies provide directors with defence and investigation costs, and in criminal cases defence costs until the final judgment or admission of dishonest conduct. Moreover, as a commercial tool, unlike under company indemnity where directors would repay defence costs if unsuccessful, defence costs will usually be covered off by a D&O policy in the event of a negative judgment.

The paper discusses three broad categories of potential liabilities for directors: claims for breach of directors’ duties; insolvency claims; and criminal and regulatory investigations.  In each category, it discusses the value of D&O policies as either legal or commercial tools, and the rating of significance of D&O policies.  It also examines the provisions in the Companies Act 2006, which provide for company indemnity and court’s relief to directors.  It observes that the protection for directors under company indemnity is outmatched by better terms of defence costs under D&O policies rendering D&O policies indispensable.

Available data suggests that D&O claims in the UK have been rising.  The reason for this trend in D&O claims is because UK and EU regulators, particularly in the financial sector, have become more active since the global financial crisis, and cross-border co-operation between regulators adds to the complexity of regulatory activities.  In dealing with D&O claims, insurers, unconcerned themselves with legal niceties that the law may not attach personal liability to directors, are willing to indemnify under D&O policies.  Considering that the majority of allegations against directors are settled before they reach court, insurers may commercially indemnify without a finding of liability.

Notwithstanding that D&O policies are commercial tools, their effectiveness is limited by law and will not cover (a) liability arising by reason of the director’s dishonest, fraudulent or criminal conduct; or/and (b) criminal fines or regulatory penalties. In effect, even as a commercial tool, a D&O policy is a defence costs insurance.

To conclude, the view taken in my paper is that, while D&O policies as legal tools may give an illusory cover, they are indispensable as commercial tools due to their defence costs cover.

Jonathan Mukwiri is Associate Professor of Corporate Law at Durham Law School.