For well capitalised companies with strong balance sheets the risk of insolvency may seem remote. That said, the standards of diligence and care expected of non-executive directors in the oversight of a company are high and often become the subject of intense scrutiny and controversy in protracted and expensive investigations and proceedings following collapse. What is more, problems can emerge quickly from a clear blue sky. Indeed, given the speed and growth of 24-hour news and media coverage, that risk is perhaps even greater now than ever. Sudden corporate collapses such as that of Silicon Valley bank, British Steel, Greensill Capital and before them, Carillion, bear witness to this.
Arguably, the risk reward ratio for non-executive directors of public companies has become less attractive. For example, the Insolvency Service spent some £11 million bringing disqualification proceedings over a four-year period against former board members of Carillion (including five non-executive directors) who will have had to spend similar sums to defend themselves. That being the case, there is much to be said for non-executive directors taking a lively and personal interest in the insurance protections which may be available to them in the event the worst happens.
We set out below a checklist of potential coverage issues under Directors & Officers (D&O) liability insurance policies which all directors might wish to discuss with their advisers and the companies on whose boards they sit.
1. Once the policy period has expired (and unless all future claims have been validly notified as circumstances) the whole tower of insurance expires and the entire protection evaporates at that point. This is a function of the fact that D&O policies operate on an annually renewable “claims made” basis. This risk can be mitigated by purchasing appropriate extended reporting periods built into the D&O programme.
2. Once the policy has expired (assuming the directors remain in office as is often the case during the insolvency process) there will be no ongoing cover for wrongful acts committed during this time. Again, it is possible to buy such advance protection as part of the D&O programme.
3. The limit of liability under D&O policies is generally shared between all insured persons and (in certain circumstances) the company itself. Claims are generally paid on a first come first served basis. What this means is that the limit can be eroded and/or exhausted by prior competing claims. The risk is especially acute for non-executive directors who are often the last in line to face civil or regulatory claims or complaints. Steps can be taken to preserve ring-fenced limits both for the main board in general and for non-executive directors in particular.
4. D&O cover is usually purchased by the company on behalf of its directors and officers on the working assumption that the company will manage the relationship with insurers and deal with any coverage issues which may arise. This assumption falls away in the context of an insolvency, leaving the directors to deal with insurers themselves. This can make it more difficult to collect insurance proceeds to fund the ongoing defence of claims. It is possible to purchase D&O insurance programmes specifically tailored to address this situation.
Francis Kean is Partner at McGill and Partners, a specialist risk solutions business serving international corporates. Francis in their Financial Lines team which focuses on exposure analysis across a broad range of industry sectors, policy coverage and claims handling.