Trouble at the top?
New laws mean that comprehensive D&O cover is more important than ever, as Jason Woolfe findsTime to run for cover – company directors will soon face a raft of new rules that increase the risk of being targeted in hostile legal actions.
Savvy clients are already checking their directors’ and officers’ (D&O) cover, but most British companies do not insure their managers against lawsuits.
Adrian Jenner, managing director of Directors & Officers Liability for HSBC Insurance Brokers, says: “We’re certainly seeing an uptake in terms of inquiries from our clients.” He claims that bigger companies are concerned about extradition – highlighted by the high-profile case of the ‘NatWest 3’ bankers accused of fraud in the US – but for small and medium-sized businesses, the most common risks were employment disputes.
The risks will increase next year as new rules come into force following legislation such as the Companies Bill (formerly known as the Company Law Reform Bill). Corporate finance lawyer Jill Gauntlett, a partner with London-based law firm Norton Rose, says that despite anti-abuse mechanisms in the bill, activist shareholders could pressurise managers with the threat – or the reality – of expensive legal action. She says: “Our view is that it will lead to increased actions, especially for quoted companies with activist shareholders.” But all companies, big or small, should take heed. “Even if the actions aren’t successful, you’ve still got the cost of fighting them.”
Revolution from within
Directors could even find themselves targeted by their own companies as a result of the European Transparency Obligations Directive, due to be implemented by the FSA later this year. It governs public companies’ disclosures of periodic financial information such as annual, half-yearly and quarterly financial reports, and means that if shareholders successfully sue a company for publishing misleading information, it could then sue its own directors.
Hiscox D&O Underwriting Manager Callum Taylor says Hiscox is one of the only insurers offering separate limits for a company and its directors and officers. Without such separation, directors could find themselves with reduced cover – or even none at all – if a policy’s benefits went to the company first.
But D&O cover isn’t just important for companies with shareholders. New rules against age discrimination could increase claims relating to recruitment and retirement – areas covered in HR management support available to Hiscox policyholders (see below).
Callum expects most claims will revolve around health and safety and employment practices. While most of the 115,000 cases accepted for employment tribunal in 2005 were unsuccessful, the figure showed a rise of 34 per cent on the 2004. He also warns that about 220,000 UK companies lack D&O cover, which could have a devastating effect on their finances: “The cost of mounting even a successful defence can be substantial.
Your suit of armour
The Hiscox Management Liability Portfolio (MLP) is designed to protect UK companies from litigation. Cover is available for directors’ and officers’ liability, employment practice liability and corporate legal liability. Separate limits are available for each section, lessening the chances of conflict between directors and the company.
Policyholders also get free access to businesshr, which provides an online audit of their existing employment policies as well as access to a wide range of HR policies, procedures and documents that can be customised and downloaded.
