Investigations, especially those by regulatory or governing bodies, are one of the largest contributors to claims under a Directors & Officers (D&O) policy – and with various industry sectors coming under increasing focus, combined with Directors’ codified duties making them much more exposed – this is a key area of cover.
Regulators are often duty-bound to investigate any complaints made about a company, or indeed an entire industry – even if such allegations are false. The financial cost of such investigations can be considerable.
Legal Costs and Specialism
D&O insurance is designed to pay for legal defence costs as and when they are incurred. Moreover, directors and officers will want access to specialist lawyers who have experience in such matters and can guide them through a potential minefield.
Whilst the company may have the resources to defend itself, Directors’ personal assets – their houses, savings and pension funds – are all at risk. Recent changes to legislation have stated that company directors with assets more than £37,000 have no access to legal aid so are likely to find themselves in need of representation at a very early stage.
It is against public policy to insure against dishonest or fraudulent acts. However, D&O insurance fund defence costs unless and until the point that guilt is established, or an admission is made.
The Small & Medium Enterprise (SME) set-up
SMEs are fast, flexible and energetic but sometimes such firms do not have access to an adequate risk management infrastructure (in house legal, risk managers or compliance managers) and few formal control processes. This means they can be exposed to and struggle to keep up with the fast paced changes in legislation.
Changing Regulatory Landscape
Continual changes to regulatory environment, such as those seen in updates to the Companies Act, have codified certain duties for Directors which makes them much more accountable, and place the onus on Directors to be fully aware of such duties. The result is that there is more potential for claims to be made against Directors.
Actual or Alleged Allegations
Directors can face allegations, unfounded or otherwise, which they will be forced to defend, and even unfounded allegations can be extremely expensive, time-consuming and stressful to defend.
Past, Present and Future (Run Off Cover)
Protracted claims can (and often do) follow Directors for years (into new jobs or even into retirement) and these are increasingly expensive, time consuming and stressful. Even after death, Directors’ estates, heirs or spouses could be brought into the claim.
Inadequate Cover? Do not rely on a Legal Expenses policy
Legal Expenses policy limits tend to be much lower, which is inadequate for larger protracted actions which can take years. Additionally, a Legal Expenses policy may only respond when an insured has reasonable prospects of success. So in the hour of need, the Director may face uncertainty as to the extent of cover available to them and how they are going to pay. A D&O policy, by contrast, responds when a claim is first made during the policy period.
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