Finance directors should add this question of business insurance to their list of urgent items to review and ensure they are in a position to answer such a question knowledgeably.
When times are tough, people tend to look for others to blame for business failure or underperformance, which is why business insurance is so important. Decisions taken by directors in the heady times of a few years ago when looked at with the benefit of hindsight now may appear questionable or foolhardy, raising the likelihood of business insurance claims being made against the directors of a company personally for losses suffered by others.
This is no longer a remote possibility. A raft of legislation during the past few decades, culminating with the Companies Act 2006, has steadily increased the legal and regulatory burden on directors. The rationale behind this has been that by applying sanctions on directors rather than on, or in addition to, the company itself, corporate behaviour will improve.
It’s not only civil claims that can be made against directors: criminal prosecutions can be brought as well. The possibility of having to write out a cheque personally as compensation may seem bad enough but directors could end up with a criminal record and, indeed, go to jail if they don’t have adequate business insurance in place. It must not be forgotten that as well as the time and strain of defending such actions, the legal and other professional costs that will need to be incurred can be prohibitively expensive. A serious case could cost hundreds of thousands or even millions of pounds to defend.
To make matters worse, the recent Companies Act prohibits a company itself underwriting its own directors’ liability for negligence, default, breach of duty or breach of trust in relation to the company except in limited circumstances. However, the act makes it clear that a company may purchase and maintain business insurance for a director against such liabilities.
A well thought out corporate regime is essential but even with this in place, directors can’t eliminate entirely the risks of being sued or prosecuted. By putting in place a suitable directors and officers business insurance policy, some protection and comfort for directors and other officers of the company will be provided.
However, the protection is only as good as the business insurance actually in place. Although many companies have business insurance policies in force, the level and extent of cover is reviewed infrequently and is often woefully inadequate. Older business insurance policies will almost certainly not reflect current market practice.
The board of directors will need advice from the finance director, company secretary or in house counsel on the corporate governance issues they need to consider before deciding what indemnities the company itself can provide and what D&O cover the company should provide for its directors and officers.
The directors and officers will also require advice on what business insurance is in place, what their obligations are and on what is and what is not covered by the business insurance. It may be prudent to take external legal advice on the drafting of any indemnities to be given by the company.
Most important of all is that once business insurance is in place, it is thoroughly reviewed every year to ensure it is fit for purpose.