MPR offers D&O insurance to private companies to protect against the escalating risks and costs facing these organisations
The D&O insurance policy for private companies addresses risks that organisations have been exposed to for many years. It also incorporates design developments to accommodate many of the newly emerging litigation trends and themes, leading to comprehensive policy content for all types of private company.
Why do your clients need D&O insurance?
- The number of potential offences continues to rise as new and existing legislation develops. A wide range of parties who might act against directors and officers include employees, shareholders, customers, creditors, liquidators, competitors and regulatory bodies.
- Directors and officers have often done very little wrong, and sometimes nothing wrong at all. An average of 65% of D&O loss spend is consumed by defence costs, evidencing significant expense to fend off all kinds of accusations.
- Specialist lawyers do not come cheap. Depending on the nature of the allegations, hourly rates can be many hundreds of pounds.
What does the policy cover?
- The purpose is to insure directors and officers (and in some cases other employees) for defence costs and legal liability incurred because of claims and prosecutions against them in their role in their organisation. Also, to insure them for representation costs in investigations of them by regulators and other authorities.
- The policy will cover loss resulting from covered claims against insured persons alleging wrongful acts, error or omission, misstatement, neglect and breach of duty.
What limits are available?
Up to £10 million for any one claim.
What does an underwriter like to see?
- Financially sound organisations with consistent and experienced management.
- Established businesses that have been operating for more than three years.
- Good corporate governance procedures.
- UK or European based companies.
Is there anything an underwriter wouldn’t insure?
- Some businesses or trades are intrinsically exposed to more risk. Underwriters will therefore necessarily exercise a more cautious approach in certain areas, such as professional sports clubs, natural resources and biotechnology companies.
- Where an organisation has only recently started trading, underwriters may want to understand the business plan to get a better feel for the nature of the risk.
- If an underwriter doesn’t understand what an organisation does, they shouldn’t insure it. Some of the more recently emerging types of businesses may therefore merit closer attention.
Why choose MPR?
- Deep experience over many years in all the products we underwrite.
- Simple and clearly stated policy language with the removal of ambiguity.
- A straightforward, broker focussed, technical and service based proposition.
- Strong financial rating.
- Worldwide coverage
- A feature of some D&O claims is that there may be no indication of what is about to happen. There are examples of directors arriving at airport immigration checks and being arrested for offences they may not have even known existed, let alone that they might have been accused of breaching. In these cases, worldwide cover was an important benefit to have.
- Any one claim limit of liability
- For many years, and until very recently, the D&O market was characterised by an aggregate limit of liability standard, which meant that the limit stated was the most the insurer could ever pay in a policy year. Multiple D&O claims in any one policy year are rare, and unlikely, but the ‘any one claim’ approach removes the possibility of running out of policy limits if that unlikely situation does eventuate.
- Extra cover limits for directors and officers
- The legal landscape and competitive developments are as unpredictable as they ever were. The good news is that D&O policy sophistication has improved significantly in the last 5 years, and features such as extra limits are an example of this. Two extra amounts are available:
- Where an indemnity from an employer is not available in respect of a claim made against a director or officer; and
- For an additional amount of defence costs up to 10% of the main policy limit.
Although they may never be needed, they remove some of the unpredictability that, for example, an insolvency event or a court decision can create.
- Previous policy cover option
- Moving D&O insurance carrier is a lot easier than it used to be. Whilst there has never been any obvious impediment to switching to a stronger product offering, bewildering use of jargon and statements of product capability can nonetheless create some room for doubt. Allowing an optional ‘look back’ provision in a policy permits a previous policy to be used to interpret a claim made on a superseding form. It is a far from perfect science, but it can provide some comfort where it is required.
What can go wrong?
A company that traded profitably for more than 30 years took on a large contract. There were obvious risks attached to the contract, not the least of which was that it was overseas, but the directors (7 individuals) considered it in line with their capabilities and experience. Unfortunately, the project encountered complications and the cash flow forced the company to enter administration.
When a company experiences an insolvency event, even if the administrators believe the directors acted negligently, money is still needed to pursue the claims. There may be insubstantial capital in the insolvent estate to fund litigation, so the insolvency practitioner is faced with several options. One of these is the increasingly common route of sourcing a third-party litigation funder, and in this case the rights to sue were sold under a purchase agreement for a nominal amount, but with a conditional agreement to split the proceeds on any success.
This was essentially an allegation that the directors made bad business judgments. Even though the courts will not generally expose a director to personal liability for a bad business decision, there are no hard and fast rules on this. Despite legal and tactical difficulties in bringing a case, the case was settled at over a million pounds.
The European Commission conducted an unannounced inspection at the premises of a UK business investigating whether Article 101 of the Treaty on the Functioning of the European Union was violated (the treaty prohibits cartels and other agreements that could disrupt free competition). Surprise inspections are a preliminary step in investigations into suspected cartels. The fact that the European Commission carries out such inspections does not mean that the companies are guilty of anti-competitive behaviour, nor does it prejudge the outcome of the investigation itself. In this case, an individual was named in the investigation, which culminated in a fine. The fine was not covered by the D&O policy, but the legal costs of more than £500,000 were.
Competition authorities often cast the net wide in investigations, and whether any involvement exists, inspections and demands for information cannot be ignored. A review of prior investigations reveals some surprising results. Canned mushrooms, optical disc drives, cement, envelopes, power cables, plastic pipe fittings, sugar, bathroom fittings, freight forwarding and shrimps have all been targets in recent years.
Robust regulation of economic activity is crucial but getting the balance right is not always easy. More regulation means more regulators and more regulatory breaches. Any D&O claims professional who is asked to characterise any recent trends will almost certainly identify regulatory activity as a headline.
A minority shareholder, who was not a director of the company, alleged that directors used a company fundraising as a mechanism to enhance their own rights as preference shareholders at the expense of the other common shareholders. It was alleged that external funding was rejected in favour of materially less attractive and shorter-term facilities offered by the preference shareholders. Maintaining a weak financial position, it was alleged, limited the funding options to those that could be rushed through on worse terms, which were invariably those of the existing preference shareholders. This created a conflict of interest and an abuse of position to their own benefit.
Excluding claims from ‘major’ shareholders was a standard underwriting approach for many years. Ironically, those kinds of claim are both legally and technically very difficult to plead. Much more likely and much more common are claims from minority shareholders, brought under the Unfair Prejudice provisions of The Companies Act.
Whilst the law is very clear on the principle of majority rule and courts are reluctant to intervene in internal disputes, it is necessary to have some legislative protection. However, these claims can be impossibly complex and intractable, based often on rumour and suspicion. Whatever the pattern of facts may be, they can be eye-wateringly expensive and it is rare that a case that progresses involves anything less than a 6 figure spend on costs, sometimes closer to 7.