News & what's on - Written by on Sunday, February 12, 2012 10:08 - 1 Comment

The million dollar question: Are you covered? D&O insurance – the Top 10 things you need to know

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We are delighted to include a guest post today by our colleague, Colin Read a partner in our insurance group.

With the SFO targeting senior officers and costs in mounting which could exceed 1 million US$ UK£’s Directors & Officers should ensure that they have in place a suitable Directors & Officers insurance policy to pay for costs and expenses which they may incur flowing from Bribery Act investigation and enforcement activity.

By Colin Read, Partner Pinsent Masons

The introduction of the Bribery Act has proved a perfect opportunity for the directors’ and officers’ insurance providers – and brokers – to remind directors of the value of this form of cover.  Advisors costs in defending a criminal prosecution can reach seven digit sums. Even a well heeled director would be well advised to have in place good D&O cover.

The premium for D&O is invariably paid for by a company along with employers’ liability, public liability and perhaps professional indemnity and products liability cover.  And that is before moving on to spend by companies of keyman cover, property cover, business interruption insurance and so on.  D&O cover though tends to focus minds.

Unlike the other forms of insurance it is personal to the director, not the company.

Even after retirement, D&O can provide a director with some comfort.

Brokers, insurers and lawyers often find they are not in the first round of those “in the know” when it comes to investigations.  In the early hours and days of an investigation, insurance is often not high up the priority list.  But for company secretaries and risk managers this is an obvious potential mitigant to the new risks haring around an organisation.

Occasionally, a review of the D&O can demonstrate that the cover is not quite what was thought to be provided.  If you want to minimise that risk, we suggest a review of our top 10 tips and if necessary a “healthcheck” review to stress test your D&O against likely scenarios to be faced by your organisation.

Who is your parent?

Directors – executive and non-executive – in the UK have become ever mindful of their duties – helped, no doubt, by the Bribery Act and the surrounding publicity.

In checking your D&O, you may find, of course, that your company is a subsidiary of a non-UK headquartered entity.  No doubt that parent company takes out D&O for its top directors and directors of subisidiaries.

Two nations divided by a common language

But does that policy in, say, the US, fit easily with the UK legislative framework?

Some “head” D&O policies will be mindful of the specific issues faced by local subsidiaries.  US D&O, for example, often leaves open the choice of law to reflect the position in the relevant subsidiary’s home country.  At the very least, directors in the UK will want their parent’s administrative staff responsible for buying D&O to alert the broker to UK-specific concerns and wordings (eg shadow director, the Bribery Act and extradition concerns).

Local cover increasingly popular

D&O market players in London have seen a trend of directors – especially non-executive directors – of UK based subsidiaries preferring to avoid this work by demanding payment of a local English law D&O cover.

10 Essential things you need to know about your D&O cover

1.      What is the limit of indemnity?  Is it inclusive or exclusive of defence costs?  Does it have a per claim limit?  Are the limits sufficient for the directors given factors such as the number of directors, the changing nature of the company’s business and its geographical extent?

2.      Does the policy cover claims against former directors?  What about shadow and non-executive directors?  Does the policy cover directors after they have retired/ resigned?

3.      Does the policy cover directors of all the companies in the group, including associated or joint venture companies (i.e. where the policyholder may have a minority shareholding)?

4.      Does the policy contain any significant jurisdictional exclusions or limitations so that coverage may not extend to claims brought in foreign courts, for example in the US or Canada?  Are these exclusions a relevant consideration for the company given its scope of operations?

5.      How does the policy deal with acquisitions during the policy period?  Does it automatically extend cover to the directors of acquired companies? How about changes in the corporate structure during the policy period, for example will any mergers or takeovers affect coverage?

6.      What exclusions does the policy have and how might these impact in the event of a claim?

7.      Does the policy cover a director’s costs of fighting extradition proceedings to other countries where they might face criminal charges?

8.      Does the policy cover a director’s costs of dealing with an investigation by a regulatory authority, as well as defending subsequent enforcement/disciplinary action?

9.      Do you fully understand when it is necessary to notify insurers of circumstances or claims to ensure cover under the terms of the policy?  What has to be notified to insurers, when, how quickly and in what form?

10.     Does the company have in place the appropriate risk management systems for detecting and promptly notifying circumstances or claims against directors to insurers?

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