A shield against lawsuits - Why Smaller Companies are looking at Directors & Officer Insurance cover

A shield against lawsuits

How would you cope if your company was sued in our litigation-minded society? Even if you’ve done nothing wrong, a large legal bill to defend yourself could wreck your business.

It only has to be an employee’s thoughtless comment on Twitter or Facebook to get the legal letters dropping through your letterbox.

Help is at hand, says Key Insurance Group of Longridge, in the form of Directors and Officers (D&O) liability insurance.
Key Group owner Clive Turner said: “Many people think that Directors and Officers (D&O) liability insurance is only suitable for large corporate organisations and PLCs.

“Whilst the larger corporates do purchase D&O, the bigger the organisation, the higher the risk – so they pay for that.

“Small and medium-sized enterprises have reduced levels of exposure. There can be many benefits in buying D&O cover, which is often a low-cost but worthwhile addition to any insurance portfolio for smaller private limited companies.

“Potential claims come from many sources and are often unjustified, resulting in no payments being made. Yet they can be costly to respond to and defend – costs that could significantly impact the cash flow of a small company, let alone be very stressful for the individuals concerned.”

A Directors and Officers policy offers peace of mind from costly legal bills and will in many cases pay both awards and claimants’ costs if the court decides against you.

Many smaller companies do not have a HR department or in-house legal teams - the helpline advice provided by Legal Expenses insurers can be invaluable.

Potential pitfalls:

Health and safety: Every business owner is responsible for Health and Safety but even something simple like running a vehicle can be fraught with peril if employers’ management systems are not robust. You could fall foul of the newly updated Corporate Manslaughter laws, exposing management to a custodial sentence.

Libel and slander: What if a slip of the tongue at an industry event or a badly-worded article naming a competitor led to a solicitor’s letter and perhaps a writ? And we all cringe at posts on social media such as Twitter or Facebook .Even if one of your staff made the comment or blogged, the management team could be held responsible for failing to supervise and implement correct procedures.

Finance: Lenders are one of the most common claimants against the directors of private businesses. Should you rely on funding from a bank, private shareholder, venture capital or other sources, you can be exposed to claims or pressures to sell or restructure the business so these agencies can get at their money.

Shareholder disputes: If financial organisations hold shares and are unhappy with the running of the company, this can trigger shareholder actions against the company, as can marital breakdowns, leading to the need for shares to be sold, splits between business partners, disputes among directors (perhaps relating to salary or benefits), sleeping shareholders and minority shareholders.

Reputation: A firm’s reputation takes years to build and moments to lose. Bad things happen to good businesses but often how you handle the situation makes the difference between survival and failure. So after that fatality on-site when the Press call, what are you going to say? No Comment is not an option. With Crisis Management insurance in place, you can protect your business’s reputation through a proper PR campaign, giving you the right thing to say at the right time.

If you would like to speak to someone about Directors and Officers (D&O) liability insurance, use the contact form here.

Application of Directors and Officers Insurance in the real world:

Here are over 10 real life examples showing what could go wrong for a director, officer or senior manager, all of which would normally be covered under a D&O policy

  • Allegations that the alleged wrongful acts and omissions of 3 directors, had caused and/or contributing to company debts of £6,000,000.
  • Claims against the directors of a shop fitting company in liquidation; in particular in relation to a claim by the liquidator for £320,900, due under a purportedly novated contract. This involved alleged misappropriated of company property and transactions at an undervalue. This resulted in proceedings against the directors personally under Section 212 of the Insolvency Act 1986 relating to acts of misfeasance and breach of any fiduciary or other duty by directors of companies in liquidation.
  • The Managing Director of a plastics factory was prosecuted for manslaughter, following an outbreak of Legionaries' disease, emanating from its water cooling system, which lead to the deaths of several people visiting a neighbouring shopping centre. The director was involved in a lengthy criminal trial, which eventually collapsed. His substantial defence costs were paid by D&O insurers.
  • A director of a niche telecoms company authorised a large payment to its major supplier without who's services the business could not continue. At the time the company was having cash flow difficulties and it went into Liquidation shortly after the payment was made. The DTI brought proceedings against the director under the Company Directors Disqualification Act (CDDA). The case concerned allegations of possible Wrongful Trading, but the CDDA proceedings were successfully contested, with the support of specialist lawyers appointed by D&O Insurers to advise the director.
  • The directors of a factory faced an investigation by the Environment Agency, following the inadvertent release of a small amount of radioactive material into a stream. The directors attended interviews, under caution, with the Environment Agency. Ultimately the directors did not face prosecution because the company itself pleased guilty to the strict liability offence involved.
  • An insured venture capital company invested in an internet company based in Sweden and one of its directors joined the board of that company, which later became insolvent. The directors of the internet company, including the English director, faced investigations by the Swedish liquidators. Typically D&O policies provide cover for the directors, when sitting on the boards of such "outside entities " (as part of their job) and in this case the D&O insurers funded the English director's legal expenses in such insolvency proceedings.
  • The directors of a South African company faced court proceedings by the Liquidators and a major creditor, following their disposal of a subsidiary company which subsequently went into liquidation. The Liquidators alleged that monies from the sale were wrongly diverted away by the directors so that the creditors were prejudiced in the insolvency. The creditor claimed that the alleged diversion of funds amounted to a fraud on the creditors.
  • The Company and several named directors of a furniture business faced allegations of unfair dismissal and disability discrimination in the form of an Employment Tribunal claim by an ex employee. The ex employee claimed damages for injury to feelings and loss of earnings. The claim was covered by the Employment Practices Liability cover included within the D&O policy.
  • The directors of a Right to Manage Property Company faced allegations relating to the making of false and fraudulent representations to Companies House, acting unlawfully in disregarding the Companies Act 2006 and unlawfully and unilaterally purporting to amend the company's Articles of Association.
  • The directors of a website provider and developer, in liquidation, faced an investigation into the affairs of the company and relating to the provision of allegedly false information and accounts, and a failure to assist the administrator during the administration process. The liquidator's investigations, pursuant to sections 235 and 236 of the Insolvency Act 1986, had to be dealt with in order to head off subsequent disqualification proceedings against the directors.
  • The directors of a fishery, and the Company itself, faced a private nuisance claim, and an application for an injunction in respect of odour problems emanating from their factory. They faced a class action made up of local residents and a significant claim for damages.

Key Insurance Group Ltd are independent Insurance Brokers based in the North West of England specialising in providing clients with a personalised insurance solutions - advising upon, arranging and administering insurance policies on behalf of both Business and Personal clients. Key Insurance Group Ltd is authorised and regulated by the Financial Conduct Authority under register number 305599 and holds Interim Permission as a Credit Broker (interim permission number: 519612 ). Key Insurance Group Ltd does not charge any fees to customers in relation to Credit Broking activities. You can find us on the FAC Register here :- http://www.fca.org.uk/register





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