October 30th, 2012 / Insight posted in

Directors and Officers Liability – escalating duties

The actions of company directors, be they executive or non-executive, are now subject to tighter scrutiny than ever before. If you think your firm’s Limited liability status will protect you, think again.

Executive and non-executive directors have a complex and challenging job. They make difficult decisions and are subject to significant legislative control, meaning that they face unprecedented levels of personal responsibility for decisions they make on behalf of the company – putting their personal assets at risk if those decisions are tested in the courts.

Legally, the directors of a company are separate entities to the company itself and so both may be defendants, separately or jointly, in any legal action or prosecution. To protect the personal assets of individual directors and managers and, crucially, to cover the costs of legal defence, “D&O” insurance is now a pre-requisite. Claims can come from shareholders, creditors, staff, customers, regulators, prosecutors, liquidators and even fellow directors.

Modern D&O policies also extend to protect the company itself, rather than leaving it to fund its own defence, thereby acting as a mechanism that protects the value of a director’s personal holding in the company. The policy won’t simply insure “directors”, but extends to protect retired directors and all employees acting in a managerial or decision-making capacity.

In the UK alone there are now over 200 pieces of labyrinthine legislation heaping burdensome duties and responsibilities on corporate managers. The Companies Act 2006, which came into force on 1 October 2009, was the first fundamental overhaul of company law since 1985 and has simply served to codify many of these onerous duties. Those firms doing business in North America face even greater exposure – as evidenced by the US Justice Department’s recent use of anti-terrorist legislation to extradite UK businessmen to face fraud charges.

All this has greatly increased the already onerous liability on directors of companies, whose actions can very easily be measured against an agreed set of wide ranging, very detailed, prominent and highly enforceable guidelines.

Bearing in mind that your company may be unable or unwilling to assist you, could you stump up the cost of a barrister’s full legal defence, possibly lasting months or even years, let alone any eventual compensation awarded against you?

If you would like more information, please get in touch with your normal Kingston Smith contact or alternatively Matthew Clark, Director of specialist technology insurance practice, La Playa Limited. He can be contacted on 01223 200667 ormatthew.clark@laplaya.co.uk.