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Insured Capacity –
does it come with guarantees?

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  • Insured Capacity – does it come with guarantees?

Insight

D&O/Management Risks

    ‘Insured capacity’ is a frequently visited subject and continues to be a central aspect in many discussions around the scope of D&O policies. Often conjoined with this is the area of personal guarantees. Given the potential complexity of D&O cover, it’s never wise to be prescriptive, but there are a few common observations that can be made.

    In general terms, for cover to be triggered under a D&O policy, any supposed loss must arise from wrongful acts that were allegedly committed by an insured person whilst discharging those duties for which they have been retained, appointed or employed by an organisation (their ‘insured capacity’). Potential complications arise when directors (or partners/members) may also be shareholders or owners of the organisation, or certain activities may be considered to be outside of the scope of that insured capacity. Straightforwardly, activity as a shareholder, as opposed to a director, shouldn’t expect to be picked up under what is clearly defined as a policy for management (as a shareholder, a person is an owner/investor in an organisation, not one of its managers). On a parallel level, disputes over partnership/LLP agreements wouldn’t be funded by a D&O policy (or derivatives of D&O forms calibrated to those types of organisation). However, where more surgical analysis might be required is where disputes involve multiple allegations. Supposed losses may be incurred by the same individual but arise from his/her capacity as a shareholder (i.e. in a personal capacity) or as a director (i.e. in an insured capacity). In these circumstances, insurers and insureds must rely on the D&O policy’s allocation provisions in order to agree what is and is not covered.

    This point on insured capacity is a vital ingredient in understanding the position on personal guarantees. A typical requirement of these is that the directors’ guarantee jointly and severally the performance of the company’s financial obligations under such an agreement. Critically, however, an organisation is liable for its debts, the directors are not. Therefore, by agreeing to assume an obligation to guarantee performance of a company’s debts, the directors are consenting to something they are not required to agree to as directors. And whilst they might only have provided these guarantees because they were the directors of the company, that potential liability under a guarantee that secures the indebtedness of the organisation, is not taken on in an “insured capacity”, but in their personal capacity. And, if you think about it, if the execution of the guarantee was in an official capacity, this results in the organisation guaranteeing its own indebtedness, negating the very purpose of the exercise (effectively, directors are being asked to perform, under the terms of a contract, the obligations of the company where the company is unable to do so).

    Complications can also arise because of the requirement for a ‘wrongful act’ policy trigger. So, putting aside the issue of whether they were acting in an insured capacity, and notwithstanding whether the guarantees were, or were not, personal in nature, there is often nothing specifically alleged that would pull such a trigger.

    The central premise of D&O insurance is to protect individual directors and officers, but that cannot extend to everything those individuals might do. Although the lines of demarcation between actions undertaken in an official capacity and actions undertaken in a personal capacity may not always be bright, it is necessary to separate the motivation from the action. Signing a guarantee obligates the individual, not the organisation, and this is a separate, personal undertaking, often evidenced by the fact that guarantees are frequently secured against personal assets. For that reason, repayment of such a personal contractual obligation does not generally present as a loss under a D&O insurance policy. It might also explain, and have contributed to, the emergence of specific personal guarantee insurance.

    Neil McCarthy

    Written by

    Neil McCarthy

    Insight

    Social Engineering Fraud –
    a perfect storm

    Underwriters don’t like surprises. We like the predictable and the foreseeable. Yet, every now and then, a theme emerges that wasn’t predicted or foreseen.

    Language Matters

    The Significance of
    Extended Reporting
    Periods

    It is abundantly clear that not all Management Liability (“ML”) policy wordings are of the same quality. The difference is perhaps more acutely observed when comparing off line language with e-traded/statement of fact based policies.

    Insight

    Employment Practices: Cover in D&O Policies and in Insolvency Scenarios

    Directors and Officers Liability (“D&O”) policies (or D&O sections of Management Liability (“ML”) policies) do not usually exclude cover for employment claims. However, such cover is only of minimal use and is rarely triggered in disputes between employees and employers.

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    MPR are Chartered Insurance Underwriting Agents

    MPR Underwriting Limited is a company incorporated in England and Wales. Registered Address: 10th Floor, Chancery Place, 50 Brown Street, Manchester, M2 2JG. Company Number: 10529758. Authorised and regulated by the Financial Conduct Authority.

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