Insurance is not a topic which sets the world on fire, but it is one of the most important areas for Non-Executive Directors (NEDs) to pay attention to. Unfortunately, this is an area that is frequently ignored. It is much discussed and often referred to but in my experience, rarely fully understood by either the insured or the regulator. However, insurance, like nuclear weapons, is something that you buy but hope never to have to use.
So why do NEDs pay little attention to the insurance coverage which may give them the lifeline they need to pay for the legal expenses involved in defending claims? The coverage which is so often ignored, is known as 'directors and officers liability insurance' (D&O) (as distinct from 'professional indemnity insurance'). This coverage provides protection from claims that may arise against individual directors for failing to discharge their duties. I've noticed several issues which may account for why many NEDs lack this coverage:
- NEDs may have a number of directorships and do not have the time to individually analyse each policy
- The wording is full of jargon and written in the language of the insurance market
- Directorships are provided to entities run by regulated financial services businesses who 'must have the right level of cover in place'
- The headline coverage numbers meet the regulatory minimum requirements.
This is coupled with the fact that the purchasers of the policy are often executives of the financial services business that provides the executive directors, and so they are often keen to achieve the desired coverage levels (which are often at the regulatory minimum) for the lowest premium possible. This is all well and good when there are no claims, but when a claim is received the discussions with the brokers start to reveal holes.
Underwriters are only just beginning to appreciate the nuances of the offshore market. This means that their historic approach to pricing, which large uses a history of claims and notifications made, is actually fairly poor. When claims arise in the offshore financial services arena they often dwarf the size of the balance sheet of the insured (thus rendering indemnities given by the company of limited value). They also do not tend to follow the pattern or regularity of quantum associated with, for example, car insurance claims. It is not unheard of for claims to exceed the £5m regulatory minimum in Jersey for trust company business – Far from it!
Effective D&O policies also provide for payment of legal fees resulting from regulatory or other investigations by the authorities. In an increasingly intrusive and enforcement-led environment, both in the UK and Jersey, the ability to recover legal fees as a result of advice taken in relation to investigations into directors' actions is extremely important for a director under attack. This is also allied to policies which provide for the advancement of defence costs for directors without any risk of claw-back other than in cases of fraud or dishonesty. Facets such as these give directors peace of mind that they will be able to fund an effective defence at a crucial time. Policies that do not provide real time cover for legal expenses are unlikely to be of much value unless the director is a person of means.
However, NEDs are still not free of risk when they retire from the board. Many claims are received years after the losses which are alleged to have arisen out of an act or a failure to act. Run-off cover for a minimum of six years is something NEDs should always put in place as a condition of accepting a board position. Finding out that you have to fund a defence from your own pocket is not an enticing prospect!
So next time you are offered a board position, check the fine print and take professional advice on the D&O policy that is in place.
This article was published in Connect Magazine, in November 2016 here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.