The origins of ‘entity cover’ as an extension to Directors and Officers Liability (“D&O”) policies dates from the late 1990’s. At that time, D&O was a relative newcomer to the UK insurance market and was predominantly purchased by publicly traded and larger private organisations. As an attempt to encourage demand in the private company demographic, entity cover emerged as a travel companion to the D&O product.
Entity cover is often referred to as ‘Corporate Legal Liability (“CLL”)’ or ‘Company Insurance’, and the terms are used interchangeably. The idea was borne of a base characteristic of substantially most private organisations, that of director ownership. Directors and shareholders were often the same thing and a claim against the organisation (as opposed to a director/officer) that resulted in an uninsured loss could, by extension, be considered to be a parallel loss of the directors by virtue of that ownership interest. The cover therefore found a natural position alongside D&O for private companies because of where those financial impacts might ultimately fall. This social history also explains why it is not available on public companies, because at this level there is a complete (or much greater) divergence between ownership and control, and the supporting logic falls away (it is possible to get entity cover for securities claims for plcs, but this is typically as far as it goes). And because the evolution of entity cover has been parasitic to D&O, it has never been available in isolation. In the context of private organisations, the size at which the cover is available varies across the market, but it tends to be around a threshold of £250m, above which the correlation between ownership and control begins to degrade.
Even though entity cover has been available for over 25 years, there are clear differences in what it does from contract to contract, but it is always important to recognise that it was never designed to replace established classes of cover. The generally acknowledged position was that entity cover would act as a contingent provision for those organisations that didn’t have the need, or the exposure, to buy a stand-alone insurance policy for certain areas of risk. Evidence of this can be seen in defence costs sublimits in areas such as intellectual property and pollution, where fully developed markets exist for more expanded insurance solutions. As one would expect, all of the territory covered by established products for ‘entities’ would also be excluded, such as professional indemnity, employment practices and pension liability. The supply led heritage of entity cover, combined with the market inconsistency, also limited the ability to charge any meaningful premium, even though it did provide some tangible advantages in the absence of any other product. Defamation cover and, perhaps more obviously, corporate manslaughter/health and safety, are good examples of where entity cover can plug holes in programmes with minimal effort or cost.
Challenges still remain for underwriters. There is a need to scope out and define a competitive and relevant proposition without invading or duplicating other classes of cover. A line also needs to be drawn between fortuity and inevitability, or simply happen as part of the business cycle and operating an organisation. Claims from regulators are a good example where tension exists between trying to be relevant whilst avoiding straying into trade risks where the essential ingredient of fortuity may be absent. It is therefore usual to see many regulators with investigatory powers excluded by policy language (FCA, Competition and Markets Authority, The Pension Regulator and HMRC, for example) and it will only be in areas where fortuity exists and the risk sits outside more established classes of cover that entity cover can potentially step in to pick up the pieces.
As with all management liability products, careful inspection is needed as no two products are alike. However, entity cover is not “D&O for the organisation” and has nowhere near that range or scenario capability. What is clear is that entity cover has an established position and is now considered a core component of management liability covers, despite some of the evident limitations and inconsistencies.
