The upheaval over the last few weeks in the financial markets has again placed Directors & Officers ("D&O") insurance in the spotlight. With the move towards a climate of increased regulation globally, exposures for directors, and the companies by which they are employed, has increased greatly. In the UK such additional exposures have followed the enactment of legislation such as the Environmental Protection Act 1990, the Financial Services and Markets Act 2000, the Companies (Audit, Investigation and Community Enterprise) Act 2004, the Companies Act 2006 and more recently the Corporate Manslaughter, Corporate Homicide Act 2007.
D&O cover, of course, protects a director or officer (and the company) against those potentially significant liabilities which may arise from their actions. Such cover is also important to attract high calibre personnel who may otherwise be wary of taking such positions, particularly for large multi-national companies exposed to multi-jurisdictional regulation and legal systems.
Following on from 1 October 2007 when the majority of the director duties as codified in the 2006 Companies Act came into force, on 1st October 2008 certain additional duties of directors will take effect including: a duty to avoid conflicts of interest be it direct or indirect (although there are provisions for such conflicts to be authorised); a duty not to accept benefits from third parties; and a duty to declare an interest (direct or indirect) in proposed transactions or arrangements.
In addition to the duties on conflicts of interest, the other duties for directors which have been codified by the 2006 Companies Act include: to act in a way which they consider in good faith is likely to promote the success of the company for the benefit of members as a whole (directors have to take into account six separate factors including interests of the company's employees and the impact of the company's operations on the community and the environment); to act in accordance with the constitution of the company and to exercise powers for purposes conferred by the company's memorandum and articles of association; to exercise independent judgement; and to exercise reasonable skill, care and diligence.
It is therefore now more important than ever to consider what D&O cover is in place in terms of cover and financial limits. The other type of issues which may arise include the extent of claims control given to the director/company/insurer; the scope of cover available for multi-jurisdictional claims (e.g. cross border extradition actions); and whether defence costs are funded in advance and not at the end of civil or criminal proceedings.
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.
