UK: Directors in the Firing Line? – An Inside View on Risk and Protection

Last Updated: 23 January 2004

By Adam Epstein and Richard Nowinski

The backdrop

When it comes to directors' and officers' liability insurance (D&O), most of the UK insurance industry has focused particularly on the liabilities arising out of the US market. This is perhaps understandable given the large number of claims against directors there and the huge sums at stake. What have been less emphasised have been the claims against directors arising out of the UK market. In a recent seminar at our offices for insurance professionals dealing with D&O, speakers from this firm, and from AIG and PricewaterhouseCoopers, guided delegates through the issues facing directors in the UK. Some of these are set out below.

The survey results

The seminar was held against the backdrop of our survey of insurers and brokers. The results showed:

  • 71% have seen an increase in the volume of UK D&O claims in the last 18 months.
  • 93% expect a further increase in UK D&O claims in the next 18 months.
  • 100% expect an increase in FSA related claims in the next 18 months.
  • 71% expect an increase in the number of UK D&O policies that insurers will be unwilling to write in the next 18 months.

What these results indicate is the mood of the insurance professionals that D&O claims are very much on the up, and that they are expected to grow even more. Further, that D&O professionals have a particular concern about FSA related matters. What the seminar unlocked was the reason for that growth and the ways in which directors may effectively protect themselves against liability. The following significant points emerged.

Points for directors to note

First, shareholder activism is on the increase. Quite apart from the raft of corporate governance rules that are now in place, much of the activism is due to single institutions with large positions who have seen their investments suffer. Increasingly, it is bondholders who are taking legal action.

Second, independent/non executive directors are in a difficult position. On the one hand, more are required to be in place than hitherto, and they fulfil an extremely useful function. On the other, their position is far from straightforward; they are held to account in the eyes of the law in much the same way as executive directors (indeed there is no distinction as a matter of company law), yet they have a role that can be extremely difficult to fulfil precisely because of its non-executive nature. One issue that is often raised relates to remuneration. There is a growing body that thinks that independents/non executives should be paid more to reflect the very real responsibilities and, particularly, liabilities that they assume. Yet at the same time, many non-execs are resistant to the idea because they believe that the increase in remuneration of itself creates increased responsibilities.

Third, regulators are increasingly becoming proactive. One regulator in particular that is doing so is the FSA. The FSA clearly has extensive powers against regulated firms and individuals in connection with regulated business. What it also has amongst other things are extensive powers over companies and individuals in connection with listed companies.

Fourth, individuals must be alive to the circumstances that can give rise to possible claims or regulatory action against them. As soon as such circumstances exist, for example when the FSA starts to ask questions, the individual must recognise the need for and demand to have separate legal representation. This is because their interests will very often diverge from those of the company. If they are slow in obtaining their own advice, they may find that it is too late to put across their full defence, or if they do, they may find that it will carry little or no weight because it differs in emphasis from what was put forward at the outset.

Fifth, the new Financial Review Reporting Panel (FRRP) is increasing its activity, and becoming far more proactive. It is challenging companies' figures, and those involved in their preparation and sign off will be held to account.

Sixth, when the new International Financial Reporting Standards are introduced, this is likely to lead to the restatement of accounts and attendant personal liability.

Finally, there are all kinds of questions of insurance coverage that need to be addressed by directors seeking to protect their position through an insurance policy. For example: What happens if the insuring company sues the director (an Insured vs Insured claim)? Does coverage bite as early as the director needs it to do? Is there an allocation of insurance cover between the company and the director so that a claim against the company will not exhaust the cover available to the director? All these (and other) issues are those that a director will need to consider in assessing the adequacy of the D&O coverage he has available to him.

The issues above are all relevant to company directors. The important thing is that directors carry out their roles with their eyes open. They must realise what liabilities they face and make a calculated decision about the cover, if any, they want. Then of course they must see what cover they can get in a changing environment, one where premiums are increasing and restrictions are increasingly being written into policies.

IMPORTANT

This update is only intended as a general statement of law, and no action should be taken in reliance on it without specific legal advice.

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