UK: The Future For Directors’ And Officers’ Liabilty

Last Updated: 9 July 2007
Article by Jessica Mance

This article was first published in Issue 128 (June) of Sweet & Maxwell’s Insurance and Reinsurance Law Briefing.


The directors’ and officers’ (‘D&O’) liability insurance market has been disappointing for insurers since approximately 2004: rates have been stunted whilst coverage has expanded. Some insurers are even offering policies under which they promise to pay where third-party policy limits are exhausted or compromised.

For the future, there are at least two forecasts: insurable exposures will augment, and average settlement values will elevate.

Insurable exposures

Some of the most modern insurable exposures may be categorised as follows:

  1. Environmental
  2. Reporting obligations
  3. Companies legislation
  1. Environmental

    The potential for corporate environmental liability could be pandemic. For instance, it is suspected that radiation from wi-fi technology and mobile telephones injures bees. If this is substantiated, there may well be claims against companies from beehive-owners. Further, because natural pollination relies on bees, many others in agriculture might also seek to sue.

    Directors and officers are liable on their own account to third-party claims under the general law, including the laws of negligence, agency and breach of warranty. Of course, the law of negligence only rarely compensates a third-party for economic loss, but directors’ statutory exposure to their own company circumvents many of the negligence principles. Quoted companies must specifically include information about environmental impact in their business review; and any director should address such impact as a factor of his or her duty to promote the success of the company. In theory, shareholders could mount a derivative action on the putative behalf of the company in which they assert that directors have under- or over-prioritised the environment contrary to the promotion of the company’s success; although the courts are likely to be wary of such actions as discussed under the heading Companies legislation below.

    As regards affirmative environmental action, there may be generic (alleged) business interruptions if legislation compels companies to curtail their emissions.

    Individual directors and officers are especially at risk in circumstances of an "environmental incident": i.e. the unlicensed release of pollution or waste into the environment. Any director, manager or equivalent office-holder is liable to criminal prosecution where an environmental incident constitutes an environmental or health and safety offence committed by the company with the consent or connivance of the individual or is attributable to neglect on the part of the individual. Environmental regulatory entities are also empowered to require individuals and their employers to rectify environmental casualties such as by cleansing contaminated land, recycling waste and restoring watercourses. Directors and officers will be grateful that hitherto they have seldom personally been convicted in environmental proceedings or charged with clean-up costs, but prosecutions by the Environmental Agency are on the up.

    From 1 July 2007, the inimitably-named WEEE Directive is to be fully implemented in the United Kingdom. It is one of a series of directives from the European Union that renders businesses responsible for how EEE (i.e. electrical and electronic equipment) is disposed of. In short, where a business manufactures, brands, sells, imports, treats, dismantles or merely stores any EEE anywhere within the European Union, it must promote the eventual treatment and recycling of the EEE, so that the products do not simply surface in landfill sites.

    Insurers will be relieved that environmental risks are often excluded from D&O cover, but such exclusions are often themselves subject to an exception for defence costs.

  2. Reporting obligations

    The Companies Act 2006 and the listing and disclosure rules of the Financial Services Authority (‘FSA’) both reflect the obligations under the European Union’s Transparency Directive which has been in force since January 2007. The directive stipulates that issuers of securities that are traded on a regulated market in the European Economic Area must publish periodic financial reports that, at minimum, review the issuer’s business fairly and that disclose the principal risks and uncertainties that it faces. Further, if the report contains a false or misleading statement or omission of a material fact, and a director or senior executive who is responsible for the report knows the statement to be untrue/misleading or is reckless as to whether it is untrue/misleading or knows the omission to be a dishonest concealment of a material fact, then an investor who suffers loss consequent on the misstatement or omission has a cause of action for compensation. The conditions of dishonest/reckless mens rea and the need for the claimant to quantify its consequent loss may mute some claims, in particular where the issuer reports on novel or evolving matters such as the company’s environmental policies.

  3. Companies legislation

    On the face of the Companies Act 2006, Parts 10 and 11 of the Act may appear alarming to companies and their insurers. These Parts regulate directors’ general duties and derivative actions respectively. Part 10 enumerates directors’ general duties for the first time in statute, as opposed to simply at common law and in equity. Part 11 facilitates an action by shareholders against directors in the name of the company for negligence or breach of duty. With the exception of the conflict of interest rules, the provisions will be in force from 1 October 2007.

    However, it is improbable that there will be an immediate tide of D&O lawsuits and claims. There are safeguards in the Act. For example, the court must grant leave to the claimants in a derivative action to proceed. The court’s evaluation will entail inter alia whether the claimants are acting in good faith. The absence of good faith is likely to preclude a derivative action by political or environmental campaigners who have only just purchased shares in the company and who are presenting the action primarily to vindicate their political/environmental cause. The English courts have also pronounced a ‘business judgment rule’ which defers to directors’ decisions made in good faith for the best interests of the company. In addition, the claimants pay their own legal costs during the proceedings; and any recovery in favour of the claimants is payable to the company so that litigants should not be tempted by an instant personal windfall.

    By contrast, companies and insurers should expect some gradual escalation in litigation. This is for several reasons.

    First, the statutory codification of directors’ duties and the electronic communication of company material will advance shareholder awareness.

    Second, any shareholder can mount a derivative action under the Companies Act 2006 no matter how minimal their stake in the company. Indeed, the shareholder may now own only a single share.

    Third, it is not certain that the codified duties in fact replicate the common law and equitable rules: shareholders may seek to explore or exploit the dissonance in court.

    Fourth, it is predicted that the epidemic of class actions will infect Europe. Institutional investors have already become more active in supervising and policing corporate governance and performance. Litigation-funding firms have proliferated. The pharmaceuticals industry may be particular prey, above or alongside the com-tech businesses. In addition, directors in com-tech may be subject to suits in respect of back-dated share options; and their D&O insurers are likely to have to reimburse the defence costs.

    It will be illegitimate for companies to indemnify directors for any adverse awards in a derivative action: insurers should be cautioned that directors may resort to their D&O cover instead.

    Further, insurers should not ignore regulation of themselves: especially where non-resident insurers purport to provide domestic cover in non-European Union overseas’ jurisdictions. There may be internal legislation which penalises the foreign insurer, although the insurer is rarely excused from indemnifying the insured under the policy. Latin American companies are especially notorious for expensive fines, at multiples of up to ten times premium.


As average settlement values escalate, insurers will become more aware and more wary of whether and how they indemnify any settlement of the underlying claim against a director or officer. For instance, there may be issues such as:

  1. whether it is a condition precedent of the D&O policy that the insurer may participate in any settlement of the action; and if so, whether this condition affords the insurer more than the right to attend the inter partes negotiations;
  2. whether the insurer must consent to any settlement; and if so, whether the insurer must not unreasonably decline consent; and if so, what does ‘unreasonableness’ imply;
  3. whether all of the claimant’s causes of action against the individual are within the scope of the D&O policy;
  4. whether the insured has substantiated that he or she was in fact liable to the claimant for at least as much as the settlement sum.

A typical example of the last two of these issues is where the insured has settled several claims against it, only some of which are subject to the insurance, or where the insured has contributed to a global settlement with other defendants who were not insured. The case law once mandated that the settlement itself distinguish the insured’s indemnifiable liability from the other non-insured claims/defendants: Lumbermens Mutual Casualty Co v Bovis Lend Lease Ltd [2004] EWHC 2197 (Comm), [2005] 1 Lloyd's Rep 494. By contrast, the recent jurisprudence has been more liberal and more practical: the insured can now ascertain the quantum of its insurable loss by any evidence in the settlement agreement or elsewhere: see Enterprise Oil Ltd v Strand Insurance Co Ltd [2006] EWHC 58 (Comm), [2006] 1 Lloyd's Rep 500 and AIG Europe (Ireland) Ltd v Faraday Capital Ltd [2006] EWHC 2707 (Comm), [2007] 1 All ER (Comm) 527.

For the future, pursuant to these latest authorities, it is likely that insurers will query any ex post apportionment of the settlement sum, and will invoke their right not to be bound by any settlement to which they were not party. Conversely, sensible insureds should invite the insurer to engage in the inter partes negotiations and to confirm the settlement in advance, and ideally should verify the amount of the insurer’s prospective indemnity prior to signing the settlement.

The fact that settlement sums are soaring does not denote that it is ‘safer’ for insurers for their insured to be in court. In the case of Plymouth & South-West Cooperative Society Ltd v Architecture Structure & Management Ltd [2006] EWHC 3252 (TCC), [2006] Lloyd’s Rep IR Plus 3, the defendant’s professional indemnity insurer was not party to the action between the claimant and their insured client. Yet, the insurer funded and instructed the client’s substantive defence which the judge rejected. Subsequent to the judgment, the successful claimant sought to recover its costs from the non-party insurer, given that the insured was insolvent, on the basis of the insurer’s self-interested interposition in the proceedings. His Honour Judge Anthony Thornton Q.C. awarded one million pounds’ worth of costs against the insurer in favour of the claimant under section 51(3) of the Supreme Court Act 1981. The insurer was ordered to pay this sum in addition to the coverage limit of £2,000,000 under the policy: which thus multiplied the insurer’s maximum budgeted exposure by 150%. In the future, insurers which are notified of litigation are advised to: explore the insured’s solvency; if the insured is financially insecure, elicit as to whether or not the insured retains any interest in resisting the claims; and in any event, collaborate with the insured and any excess layer insurer or re-insurer in directing the defence.


Since approximately 2003, the United Kingdom has enjoyed a bull market. Yet, this is bound to terminate sometime, and probably sometime soon given that this is the fourth year of the boom. If and when share prices do slump, shareholders may seek to challenge corporate conduct in court: including pursuant to the Transparency Directive and Companies Act remedies described above.

In order to define and to price cover properly, insurers should question the prospective insured in the proposal form or renewal notice as to all of the matters above: e.g. including the company’s environmental policies.

From the perspective of directors and officers, they should verify that their new responsibilities are within their existing policies. Notwithstanding the current soft market, it has been identified that small and medium sized enterprises in the United Kingdom often lack modern covers such as employment practices liability insurance, which reimburses the insured in the event of discrimination and similar claims by employees.

It was observed at the outset of this text that D&O premiums have scarcely risen recently. In part, this is insurers’ own ‘fault’: more insurers are issuing more policies, and underwriting more risks. It is wondered whether the new legal and ancillary exposures will quell insurers’ generosity.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.