Truth be told, there are very few ‘good’ endorsements to management liability (“ML”) policies. Those that do exist tend to do so to bring cover up to the levels of others in the market, so ‘good’ is a potentially false flag. The best place to start the discussion might therefore be that ML products differ in quality and can often contain more prohibitive and restrictive terms as their default (particularly those in an e-trade environment). Price will always be important but it is an occupational hazard for the ML pace setters to be compared on cost whilst offering cover which will respond in more scenarios.
Notwithstanding this, it is always important to look to the endorsements to see what effect they might have on the policy they attach to. In some cases this can be profound, in others less so, but some of those most commonly encountered include:
1) The Major Shareholder Exclusion (MSE)
For many years this was the clutch blanket for ML underwriters and yet it achieved next to nothing in reducing risk because of the prevailing legal framework in the UK. Whilst major shareholders can sue, they can only do so (derivatively) on behalf of the organisation and claims for negligence, breach of duty, etc. cannot be personal claims by the shareholder(s), but can only made in the name of the company. Even then, successful claims are rare and court permission must be obtained to proceed. The principles underlying this are rooted in ‘reflective loss’, a key doctrine of UK company law that limits the ability of shareholders to sue for losses that merely reflect those suffered by the company.
Perhaps ironically, minority shareholder claims for unfair prejudice under section 994 of the Companies Act 2006 are common (where directors’ actions are unfairly prejudicial to the interests of minority shareholders), but the MSE does not capture these. Only in cases of fraud might a remedy exist, but this in itself presents many other procedural challenges and obstacles.
2) Parent Company Exclusions
Again, UK law also strangles the ability of a parent company to sue a director of a subsidiary in its own name for wrongs done to the subsidiary. A consequence of the principle of separate legal personality is that each company within a group is treated as a distinct legal entity. Only in situations where the actions of a director directly harmed the parent company, rather than just the subsidiary, will the parent possibly have standing to sue (typically where contractual duties exist or misrepresentation or fraud are features and which may have induced the parent to act to its detriment). Even though the parent will have all (or most) of the shares, the reflective loss obstacles still exist, so claims are rare and procedurally complex. It must also be kept in mind that the directors owe their duties to the subsidiary, not the parent.
One possible scenario is when the parent company can sue in the capacity as an employer, rather than as a shareholder. However, this can only be the case where there is a direct employment relationship and where actions exist for breach of contract, breach of fiduciary duty or misconduct/negligence which affect the business of the parent. In this scenario, a MSE fails, but a parent exclusion might stop at least some part of the claim.
3) Professional Services Exclusion (PSE)
This has the potential to profoundly affect the cover across the whole policy so careful inspection is required. The widely accepted meaning of ‘professional’ varies according to the context in which it is set, but it generally connotes ‘pertaining or appropriate to a learned and traditional profession’. It is therefore normal to see a well drafted PSE on a ML/D&O policy for a trade or profession where Professional Indemnity (“PI”) cover ought be in place and would typically be purchased. However unlikely it is that a claim could find a way to the policy, it avoids any doubt and serves to keep claims in their correct lanes.
The real difficulty lies where the language is so generic that the application of the PSE potentially extends beyond what one might reasonably contemplate as professional services for a fee i.e. within the province of a PI policy. Typical PSE language might read:
“any liability for, or directly or indirectly arising out of, or in any way connected with the giving of professional advice or service whether or not for remuneration or any act, error or omission relating thereto.”
or:
“based upon or attributable to:
– the performance of or failure to perform professional services; or
– provision of or failure to provide any professional advice to a customer or client, or to a potential customer or client, of the Insured.”
It is hard to imagine any organisation anywhere that would admit to not providing professional advice or service. Does a director of a residential block provide a ‘service’ to the other residents and would they regard that as professional? Probably. Likewise, a transport firm delivering a professional bus or haulage ‘service’ to clients? This is why the construction of the PSE is so important and should be as precise as possible, so as to minimise the potential for wider application. Some PSE exclusions can be interpreted as so preclusive there might arguably never be cover under the ML/D&O policy.
4) Products Exclusion
As is the case with the PSE, this can have far reaching consequences. The ambition of the exclusion architects is to try to keep the products liability risk off the D&O policy/section but in doing so, an over cautious approach will be unhelpful:
“This policy does not cover loss arising from, based upon, attributable to or as a consequence of the failure or effect of any product.”
As a discretionary endorsement it is quite rare, so it is often hidden from view in those forms that include it as a standard provision. Needless to say, it is undesirable and has the potential for broad interpretation.
5) Unilateral Reporting Period
Broadly, there are 2 types of Extended Reporting Period (“ERP”). The standard position is to have a ‘bilateral’ ERP, which means that either party to the policy can elect to invoke the extension following a ‘refusal to renew’ (refusing is not usually a defined term so takes an everyday meaning). This is much more policyholder friendly than the ‘unilateral’ version, which only allows the ERP to be invoked if the insurer refuses to renew. This is a crucial difference because, no matter how unpalatable the terms on offer might be, this will not constitute a refusal to renewal and hands a punishing amount of control to the insurer when cover falls due for renewal.
6) Bodily Injury Exclusion (‘Absolute’)
It has long been up for debate whether a ML/D&O policy is the correct place for this exposure. Notwithstanding, there exists a huge variety in the positions taken across the market and messy language to navigate in some forms. A typical standard policy position is as follows:
“The Insurer shall not be liable for Loss on account of any Claim for Personal Injury or Property Damage”
It is entirely legitimate to take this approach, given this is squarely a risk covered by employers/public liability. However, it is also accepted that indirect or ‘downstream’ claims can sidestep the exclusion. Health and safety claims against directors and officers will be brought under Section 7 (which imposes a duty upon employees to take reasonable care for the health and safety of themselves and of other persons) and Section 37 (directors or senior managers can be prosecuted for breaching section 37 if a health and safety offence was due to their consent or connivance or attributable to their neglect). These are claims ‘for’ breach of duty and/or breach of statute. The point at which the mechanics radically change is when the preamble switches to an ‘absolute’ version i.e.:
“The Insurer shall not be liable for Loss on account of any Claim based upon, arising from or in consequence of Personal Injury or Property Damage.”
The impact is clear and will lead to very different outcomes. This language also serves to exclude corporate manslaughter, fees for intervention, and many other indirect scenarios. Other less obvious obstacles can be present, such as only paying on non-indemnifiable losses (this frustrates most of the cover) so it is important to look at the standard position in addition to any modifications by endorsement.
As a footnote, there will be trades where the risk of bodily injury will be considered to be so unacceptably high that underwriters have little choice but to apply the exclusion (clinical trials, care homes, etc.). Comfort exists in the provision of the cover in much more specific products in these cases.
7) Pollution Exclusion (‘Absolute’)
Not all pollution language starts from the same point and all that glitters may not be gold. A policy/section limit may seem attractive, but if that limit only applies for ‘non-indemnifiable’ claims, it can dramatically restrict the capability because there is no obvious obstacle to this type of claim being indemnifiable. Indemnification provisions sit in the articles of association and permit indemnification for individual liability, save for some specific circumstances (fraud, etc.), but certainly not pollution, so a sublimit without that hurdle is arguably much more valuable.
In a standard scenario, where defence costs are given for pollution claims, the effect of applying the ‘absolute’ version of the exclusion has a similar effect to that of the BIPD. ML/D&O underwriters will generally take the position of excluding pollution on certain trades with heavy exposure, most typically those that should buy Pollution Liability cover. These will provide indemnity to individuals, often on a much broader basis.
8) Transaction to Include Insolvency
Under normal circumstances, if an organisation enters an insolvency proceeding, ownership does not change, so the ML/D&O policy should continue to protect the directors. These clauses have the effect of stopping the policy in its tracks, removing any cover from that date onwards, placing policy restrictions and limiting room to manoeuvre. What they also seek to adjust is the basis of cover from ‘any one claim’ to aggregate limits of liability on insolvency events. A recent trend has been to move this from an endorsement into the body of the wordings, making it more difficult to identify and negotiate away.
9) Insolvency Exclusion
At the risk of stating the obvious, insolvency exclusions should be avoided. There are wide variations in language with some even extending to insolvency per se, so not focussed solely on the policyholder. Examples exist of insolvency of customers and suppliers leading to claims which have been declined against the exclusion. Other restrictions exist, and can conceivably be introduced via statements of fact, typical of the online environment. Most of these contain attestations as to the financial condition of an organisation, such as “the company has sufficient financing to meet projected liabilities as they fall due for the next 12 months”, or “the company/organisation made a profit in the last 12 months”. Quite aside from the vagueness, circumstances can quickly change (part of the reason to buy ML in the first place), but this language potentially opens the door to a retro review of cover. This might involve an insolvency exclusion, particularly amongst those markets with a track record of applying them.
10) Retroactive Date
This is something of a ‘blunt instrument’ approach to ML/D&O underwriting and should be avoided. It provides a ‘bright line’ break in cover as of a specific date and excludes cover for behaviour(s) (or “wrongful acts” in policy language terms) prior to that. Claims made during the applicable policy period that result from conduct that pre-dates the prior acts/retroactive date are not covered and this constitutes a dramatic restriction in cover. Very few policyholders would consider this to be a sensible option when considering whether or not to move cover from one ML/D&O provider to another. For obvious reasons, underwriters consider this attractive, but retrodates are not generally a feature of ML/D&O wordings, save for three possible scenarios:
- if a policyholder has undergone a major change of management, and the replacements (or the underwriter) wish to insulate themselves from the behaviours of the predecessors;
- if ML/D&O cover has not been purchased previously, and the underwriter does not wish to cover past activity and behaviours;
- there has been a change in ownership and therefore in the insurable interest of the management group following this event, which is separate and distinct from that which went before. The textbook approach here is to buy/consider run off cover, and pick up the go forward risk with a prior acts/retroactive date.
More common are retroactive dates to Employment Practices Liability (“EPL”) cover. EPL has been widely available in the UK for over twenty years, so it is increasingly unusual for new buyers to emerge. Underwriters will often take a safety first approach and apply the exclusion to the first year of cover, but EPL is a short tail class of cover in a way that D&O is not. The ‘3 months minus 1 day rule’ is the legal limit within which a claim must be made to an employment tribunal. The clock starts to tick from the date of the event that triggers the claim, such as the last act of discrimination and it is vital for the claimant to adhere to this or the right to claim will be lost. Given this, it is a generally accepted approach to take on new risks.
As has already been emphasised, the place to start will always be a rigorous assessment of the base form before the impact of any endorsements are considered, as wide variations in quality exist. It is equally important to identify what is not in the forms that perhaps should be. Brevity is important, but not at the expense of clarity, and finding the balance can be difficult. Nonetheless, on a cover as significant as this, precision is vital.
