D&O cover - Fail to prepare, prepare to fail

Almost every week, another insurer makes an announcement that their directors' and officers' cover is extended. Insurers recognise that there is potential for significant growth in the D&O market, particularly when it comes to SMEs.

Despite this, SMEs appear to be slow on the uptake; brokers need to educate them about the full gamut of new risks created by the new Companies Act (2006), as well as the implications of an aggressive regulatory climate in the US. Brokers must also understand that no standard policy exists to cover all these new exposures and advise their clients accordingly.

Following the key changes to directors' duties arising out of the new Act, the personal assets of directors and officers are now at considerable risk. For the first time, directors' duties have been codified, effectively making directors' personal assets vulnerable to litigation.

For this reason, brokers do not want to leave examining the policy wording to the moment a claim arises. Unlike professional indemnity policies, there is no standard wording or minimum terms for D&O cover: the devil is in the detail.

To give two examples: as a result of the changes brought in by the Act it is easier for shareholders to take action against company directors on behalf of the company - a standard exclusion under some current D&O policies. Similarly, brokers will want to examine the definition of 'officer' because many policy definitions are limited to executive officers or those appointed by the board officially.

Brokers will also need to consider the policy limits carefully, including legal defence costs. The plight of the NatWest three, who face combined legal costs in excess of $4m (£2m) in the US, serves to highlight the importance of the legal defence costs coverage. This high profile case is a classic example of the value of D&O insurance. It should also act as a warning to UK brokers to ensure that their clients with transatlantic business have adequate D&O cover. Even if the NatWest three had been found not guilty, they would still have faced very substantial legal defence bills. The losing side generally pays legal costs in the UK, though this is not the case in the US.

If a director does not have adequate cover and faces the threat of litigation then he or she is liable for all of the defence costs. Brokers with clients of any size selling into the US should look to provide them with comprehensive cover for their directors' potential personal liability, which is unlimited in law.

Brokers should also ensure that the policy wording provides for the payment of reasonable costs, fees and expenses (subject to policy limits) until final adjudication in order that an appeal process can be exhausted if necessary.

The choice for brokers is simple: examine your clients' D&O policy wording now or your own professional indemnity policy wording later.

- Samantha Hanson, partner and head of the professional and financial risks group, Davies Lavery.