What is Directors’ and Officers’ Insurance?

A D&O policy is an insurance policy which insures company directors against the losses (including legal defence costs) associated with claims they face due to their actions as directors of a company.

Why is a D&O policy particularly important upon insolvency?

Most company articles of association permit the company to indemnify directors against actions taken in the course of fulfilling their duties to the company. However, such an indemnity ranks as an unsecured claim in a company’s insolvency, meaning that in practical terms the company’s indemnity is worthless to the director following the company’s insolvency.

On the other hand a D&O policy in place at the time of the claim offers the director a valuable source of funds to fight claims brought by, for example, disgruntled creditors of the company and/or insolvency practitioners.

In particular, the growth of specialised businesses which purchase claims from insolvent companies has meant that the number of claims faced by directors is increasing. These businesses have deep pockets to fund the litigation process meaning that without a D&O policy to fall back on a director may feel forced to settle a claim he/she would have defended if funds were available.

The period prior to an insolvency is a time when director conduct is heavily scrutinised. Often decisions, which seemed justifiable at the time, in hindsight look like they may form the basis of a claim for breach of a director’s duty. An insolvency practitioner is under a duty to investigate the affairs of the company and its directors. This means that although a claim may not actually be issued at Court, a director may regardless face a period of legal correspondence in relation to his/her actions. In such cases, it is important the director’s responses are carefully considered and based upon legal advice to avoid the director unwittingly providing a statement which sits ill with the ultimate defence. A D&O policy can provide the funds for legal advice on that initial correspondence (as well as through a trial) which may ultimately result in the investigation being dropped before a claim is issued at Court.

Who pays for D&O cover?

It is often within the company’s power to pay for the D&O cover on behalf of the directors, meaning there is no financial cost to the directors in taking out the policy.

What to look out for?

Each D&O policy is different and its terms should be read carefully. In particular, where a policy is in place covering a group of companies it is important to understand what “group” means in the context of the corporate structure. For example:

• Does group cover only wholly owned subsidiaries?
• Would it cover a joint venture company?
• Are there any companies sitting outside of the structure which you think are covered, but are not captured by the “group” definition?

It is important for directors to stay on top of the D&O policy. Although you may have seen the original policy, a well-informed director will ask to see the renewal certificate and evidence of the premium paid each year. If the company is insolvent and therefore unable to pay for the renewal premium, it may be advisable for a director to consider (i) funding the renewal for a further year to see if any officeholder claims are likely to be brought or (ii) putting the insurer on notice of any potential claims threatened or being investigated so as to bring them within the current policy.

It is equally important to understand, at a basic level, when and how notification of potential claims needs to be given so that the insurer is not able to avoid the insurance for lack of notification within the relevant time.

The Current Market

The continuing effect of the coronavirus on the economy means that there is presently expected to be a wave of corporate insolvencies taking place sometime in 2021. The eventual lifting of the moratorium upon landlords’ ability to obtain possession for unpaid rent and the eventual lifting of restrictions on winding up petitions are likely to be key triggers for businesses to consider formal insolvency. However, the actual date of the company’s insolvency (perhaps on a balance sheet basis rather than cash-flow) may well already have passed, particularly, as companies load up on government backed debt. The significance of this is that the period under which a director’s conduct is under scrutiny is likely to be longer than normal, resulting an increased risk of a claim being found and brought.

It should be noted that the presumptions in a director’s favour against a wrongful trading claim have not been renewed, meaning that directors now face the same wrongful trading risk as they did prior to the Coronavirus, but with possible increases in the risk factors such as higher debt, lower income and an uncertain Christmas trading period.

Added to this are the risks associated with a possible no deal Brexit which may affect businesses to varying degrees in early 2021.

In this context D&O cover may become more expensive as we progress through 2020 or be withdrawn from some businesses all together. So it is advisable to explore the existing cover now and check an insurer’s position in relation to renewals.