Check Your Clients’ Directors and Officers Policies in Light of Recent Company Liquidations

In recent times, issues are reported to have arisen from risky contracts that proved unprofitable, and caused payment delays. This has led to allegations that governance at affected companies was inadequate and that their boards may not have exercised appropriate oversight prior to the collapse, possibly acting in their own interest rather than for the benefit of the company.

This is, of course, in contravention of one of the fundamental duties of a director - to act in good faith, for a proper purpose.

Personally Liable

The collapse of a company will almost certainly raise questions about the intentions, motives, and beliefs of the directors and whether they put the interests of the company first.

Directors may be held to have abused their powers if it is proved they used them to benefit themselves or if they have damaged the company. Breach of such duties can result in directors being held personally liable for the demise of the company, as well as to being disqualified from acting as a director.

Checking Your Clients’ D&O Policies

In the unfortunate event that one of your client businesses becomes insolvent, its directors are likely to seek coverage under their D&O policy for the costs of defending any investigations into their conduct. Under such policies, insurers can advance costs on a first dollar basis. However, litigation can be costly, particularly if a number of individuals are seeking coverage under the same policy for their own defence.

We recommend that you help your clients check their D&O insurance coverage, specifically making sure that:

  • The policy does not terminate in the event of insolvency, so that client executives can access vital defence costs coverage in the event they face allegations of wrongful conduct arising from an insolvency event.
  • Any fraud exclusion only triggers on a final, non-appealable adjudication, so that coverage for defence costs will continue up until the point of a guilty verdict.
  • The D&O programme limits are adequateIt is worth considering the benefits of purchasing a Side A Difference in Conditions policy that will step in to provide “lifeboat” cover in circumstances where the executives are not indemnified by the company and the underlying policy limits have been exhausted or coverage is otherwise unavailable.

 

Eleni Petros

Employment Practices Liability Insurance Practice Leader, Marsh UK and Ireland

Marsh ProBroker’s parent company

Marsh