The introduction of the revised Companies Act has sparked off a sharp increase in the appetite among listed and private companies for Directors’ & Officers’ Liability Insurance covers.
‘D&O’ has always been a consideration on the corporate scene, but the introduction of the revised Companies Act and the advent of the King III code of corporate governance raises the stakes in terms of such liabilities.
This cover has become an absolute necessity for the protection of the personal interests of directors, officers and other employees charged with supervisory and managerial responsibilities and who can be held liable for wrongful acts which may occur in their day-to-day management activities. The climate for litigation against directors and officers has changed. Common law responsibilities for D&O have been codified into the amended Companies Act to some extent which will allow greater recourse against them for wrongful acts. The risk therefore is that litigation levels will increase.
Moreover, globally, reporting standards for companies are evolving due to minimum levels of accounting and triple bottom line reporting, having to do with financial, environmental and social responsibility obligations.
The focus therefore is on sustainability and good corporate governance as embodied in King III, which, while not being statutory, is nonetheless a factor taken in the context of D&O insurability.
Greater accountability of companies and their stewards in general has raised a heightened awareness among the general public of their rights of recourse against companies and directors in their personal capacity, where the business is perceived not to have been conducted or managed in a responsible manner. South Africa is no exception to these trends.
The personal risks for corporate office bearers and the reputational risks for corporates themselves are therefore significant. The good news, however, is that the risks can be mitigated through correctly scoped D&O liability insurance. D&O policies available locally are adapted from international norms to apply local jurisdiction. They are therefore relatively traditional in nature and insurers have not had to change the basis of their covers as a result of the legislative changes. Typical, locally available D&O liability insurance includes two main insuring clauses which deal with personal liability of directors and officers and which address company’s reimbursement where the company has first indemnified the director or officer.
Conditionality is very much to the fore, however. Before a company is able to reimburse a director, certain requirements must be satisfied in that the director or officer must have acted reasonably and honestly and, having regard to the circumstances, the director or officer therefore ought fairly to be excused for negligence, default, breach of duty or breach of trust.
One of the main developments under the amended Act is that indemnification of directors and prescribed officers under the company reimbursement section of the policy can be activated with fewer formalities and that’s obviously a positive.
Also, the introduction of a new ‘Business Rescue’ section may serve to reduce the number of reckless trading actions against directors for companies that have traded under insolvent conditions.