Ready for lift off

Gavin Dollings, Casualty manager, Allianz Commercial

After more than 70 years, could it finally be coming home? Forget football or other sporting trophies, the British product in question is Directors' and Officers' insurance.

It may surprise some that D&O, which has so many connotations with the US, was a British invention. It was designed by the UK broking house Minet, albeit for American clients. The catalyst was the Wall Street Crash of 1929, when it was felt many directors could face legal action from angry shareholders. Cover was largely written in the London market and, over the years, US insurers started grabbing more of the action too.

However, while insurers have the appetite to grow this market in the UK, take up of D&O remains far higher in the US. In Britain, D&O cover is frequently held by larger companies but it has yet to become a standard cover within the small to medium-sized market. It is often a misconception that legal expenses or professional indemnity insurance provides all the cover needed.

Great potential

The scope of the market is considerable. According to the Department of Trade and Industry Small Business Service there are some 144,000 SMEs with a combined turnover of £651bn. These firms have an average turnover of £4.5m. There are no exact figures as to how many of these have D&O cover but some estimates suggest as little as 10% and, although take up is increasing, there remains huge potential for growth. Clearly this is a valuable opportunity for brokers.

So, why should brokers talk to their clients about D&O? The first message to get across is that even if someone has been involved in the running of a limited liability company for years without problem, their personal assets could still be at risk.

It is not just companies that are at risk. Any director, officer or employee carrying out managerial or supervisory functions can face unlimited personal liability for their actions and decisions on behalf of the company.

Even if legal expenses and professional indemnity policies are in place, there may still be potential gaps in cover. For example, a legal expenses policy does not provide cover for damages and a PI policy does not provide cover against actions pursued by shareholders or employees.

Small and vulnerable

D&O is as relevant for small businesses as it is for large publicly traded companies. In fact, a smaller business could be more vulnerable as it may have less stringent corporate governance procedures in place.

All businesses have similar obligations under the law and a claim can be brought by anyone with an interest in the company, such as shareholders, regulators, employees, or in the case of insolvency, creditors, liquidators and administrators.

A D&O policy will typically cover: claims from shareholders against the management; employment tribunal costs; Health and Safety Executive inquiry costs; legal defence costs; legal representation expenses; costs for claims against heirs, spouses and domestic partners; damages arising from employment practices and discrimination; defence and appeal of extradition proceedings; and cover for prior acts - as policies operate on a claims made basis.

Three notable exclusions within a D&O policy are: intentional or deliberate breach of duty - namely fraud, although defence costs would be covered until such a time as fraud is proven; pension fund liability; and fines or penalties.

The new Companies Act, much of which comes into force in 2008, is just one of the reasons why directors could face more claims. It now clarifies exactly what directors are responsible for and makes it easier for shareholders to sue if they feel the business is not being run in their best interests. It forces companies to be more transparent, requiring them to disclose information about how their decisions affect the interests of the community, environment and their suppliers.

It will also include a new criminal offence of recklessly or knowingly causing audit reports to include any matter that is misleading, false or deceptive.

The Corporate Manslaughter and Corporate Homicide Bill, currently before parliament, will put further pressure on companies and could lead to a growing number of directors facing criminal action.

The development of EU legislation is another consideration for directors and senior managers and recent directives involve issues such as age, discrimination and the environment.

Right offering

If more companies are to buy D&O cover, the offering needs to be right for the client and it needs to be available in a wording and format that is easy for brokers to recommend. Being quick and simple to process and competitively priced, D&O is easy to trade.

The Higgs Report, commissioned by the DTI to avert US type corporate scandals, recommended that all companies take out D&O cover.

The message for brokers is that D&O is fast coming into the mainstream as an accessible and affordable part of the commercial insurance package for every British company - and that is something to cheer about.

WHY YOUR CLIENTS REALLY NEED DIRECTORS' AND OFFICERS' INSURANCE:

Rising volume of claims

- Companies large and small are increasingly seen as targets for criticism, which may include mischievous allegations.

- Risk management can be lacking

- Smaller firms can rarely afford the same risk management systems and resources as larger corporations, which may make them more vulnerable to errors.

- Personal liability - everything could be lost

- D&O claims can pose a real threat to directors' personal assets, namely their homes, other possessions and investments.

- Health and Safety Executive - more inquires

- The HSE is carrying out more audits and investigations across companies of all sizes - these can be lengthy and costly.

- Legal expenses are insufficient

- This can be seen as an alternative but limits are generally lower and provide for defence costs only rather than damages as well.

- Rising employment practice liability exposures

- These are increasing and as a result, senior employees may be reluctant to join a business if there is no D&O protection in place for them.

- Ignorance is not a defence

- Ignorance of decisions made by others in the boardroom is not a valid defence.

- Family feuds

- Smaller firms may be in family ownership. Family disputes are not uncommon and this can lead to intra-shareholder rifts and corresponding greater exposure to litigation.

- Rising number of disqualified directors

- According to the Department of Trade and Industry, some 1200 directors were disqualified in the year to March 2007. Disqualification can result in reputations and credit ratings being permanently damaged.