By:NKEJANE MOFOKENG, Underwriter (PI Commercial) at SHA Specialist Underwriters
Directors and Officers (D&O) liability insurance claims have increased by four times over the past 10 years in the United Kingdom, largely as a result of increased regulation, according to a report by Marsh.
While there are no local statistics available, South Africa faces similar regulations to those in the UK under the Companies Act and so these statistics highlight the importance for all local businesses to ensure that they have appropriate cover in place.
The Companies Act stipulates that any party who contravenes any provision of the Act may be held liable for any loss or damage suffered by another party as a result of that contravention. It is therefore conceivable that if a director or officer acts contrary to his fiduciary duties, thereby causing loss to a third party, that third party can hold the director directly responsible. Thus, all directors and officers of any South African business, regardless of size, are potentially exposed to a D&O suit.
The directors and officers of a company are the custodians of the company. “The business cannot act on its own as a legal entity, thus directors and officers are appointed to act on its behalf and they are required to act in the best interest of the company at all times. The directors and officers general responsibilities are defined within the Companies Act.
In instances where the directors or officers allegedly act in a manner contrary to their general fiduciary duties or contrary to the provisions of the Companies Act in carrying out their responsibilities, anyone who suffers a financial loss has a right to claim compensation from the directors or officers of the company. Claims can come from employees, shareholders, creditors, customers, competitors, regulators or even governmental institutions.
A person taking up the position of a director or officer in a company takes on additional responsibilities more than any other employee and also puts his or her personal assets at risk if they allegedly commit a wrongful act. This is why it is imperative that a business takes out a D&O policy to protect its directors and officers.
A D&O policy covers the directors and officers of a company in the event that they are sued for alleged wrongful acts committed in their capacity as director or officer, he explains. The wrongful acts are defined as a breach of duty, error, omission, misstatement or misleading statement.
However, it is important to note that the policy will not indemnify claims arising from criminal acts, willful misconduct, breach of trust, reckless trading or breach of authority by directors. Although the policy will advance costs and expenses for the defense of such allegations, if a director is found guilty, or admits guilt, the insurer has a right to request repayment of the costs and expenses advanced.
The policy is purchased by the company on behalf of the directors and officers of the company. The policy will bear the costs and expenses of defending the director against allegations arising from his position as director or officer, and the costs of the defense will be borne out of the policy’s limit of indemnity. If the director is held liable to compensate the third party for losses suffered as a result of wrongful acts in his capacity as director, then the policy will indemnify the director or officer for compensation paid/payable to the third party for the financial loss suffered.
A D&O policy enables directors and officers to act in good faith, and be assured that when acting in the best interest of the company and within their responsibilities as defined by the Companies Act, should there be an allegation of a wrongful act committed in their capacity as director, they have insurance in place to protect their personal assets.