Directors & Officers Liability – Claims And Insurance In 2023 - Directors and Officers - UK (2024)

Claims against directors and officers (D&O claims) are onthe rise, both domestically and across the globe. Directors andofficers, and others in key management roles within public andprivate companies, are increasingly becoming targets for civillitigation, government investigations and enforcement actions.

Whilst the company itself is usually first in the firing line,individual directors and officers are often named as defendants,and regulatory bodies are increasingly willing to take enforcementaction against individuals in positions of authority. Now, morethan ever, directors and officers are aware that their ownreputation and personal assets may be at risk.

This is where Directors' and Officers' Insurance(D&O insurance) can provide some protection – and somevery welcome peace of mind. D&O insurance can, in manyinstances, provide individual directors and officers with thefunding that they need to be able to defend themselves againstcivil claims and regulatory investigations, as well as with anindemnity in relation to any damages payable to third parties.However, D&O insurance is not always the panacea that itappears and individual directors may need advice to help themunderstand what cover is available to them as well as assistancewith any coverage issues raised by D&O insurers.

Why is D&O litigation on the rise?

Directors and officers need to consider the impact of theirdecisions on a wide range of stakeholders – shareholders,customers and creditors to name but a few – as claims cancome from all angles whether alleging serious mismanagement orsimply as a result of one poor decision by a director as part oftheir everyday role. There are also new threats on the horizon.Mounting cyber security incidents have already contributed to anincrease in D&O claims and with investors and companies beingever more concerned with climate change, reducing their carbonfootprint and ensuring board diversity, the growth in D&Oclaims in support of the Environmental, Social and Governance (ESG)agenda is only expected to continue.

We consider two particular growth areas for potential claimsagainst directors and officers below.

Creditor claims - BTI 2014 LLC v Sequana

In October 2022, the Supreme Court handed down its decision inthe case of BTI 2014 LLC v Sequana. See our alert on thisjudgment for more details – Creditor Duty FAQs: what directors need toknow. The judgment confirmed that the duty to prioritise theinterests of creditors is part of a director's fiduciary dutyto act in good faith in the interests of the company. There is noseparate duty owed to creditors, instead directors are required toconsider creditor interests as well as shareholder interests. Theweight to be given to the interests of creditors (as opposed toshareholders) will increase as a company's financialdifficulties become more serious. In effect, there is a balancingexercise that needs to be undertaken with the interests ofcreditors becoming more important and ultimately becoming paramountat the point of imminent insolvency.

This highlights important issues for company directors andofficers where a company is in financial distress and they have todetermine where the balance of competing interests should lie.Given this uncertainty and the present economic climate, thecurrent trend of bringing claims against directors is set tocontinue in the wake of Sequana giving courts the opportunity toflesh out exactly how the new creditor duty will be applied inpractice.

Environmental, Social and Governance (ESG) claims

In recent years, there has been a significant rise in ESGlitigation, but we are only at the start of a wave of litigationthat will sweep across the UK legal landscape in years to come.Directors and other officers are increasingly being scrutinised toensure they are taking the steps necessary to address and mitigateenvironmental and climate risks, as well as a multitude of emergingother risks and topics on the ESG agenda. Accountability in respectof such risks rests with the board, and there are already earlywarning signs that directors and officers will be targeted in apersonal capacity (rather than merely as the mouthpiece of theircompanies).

An article published by Zurich Insurance in August 2022 –ESG to drive a new wave of D&O liability |Zurich Insurance – highlighted the prominence of ESGclaims and warned businesses to prepare now for a surge in ESGrelated liability. The article also referenced the London School ofEconomics and Political Science's (LSE) Grantham ResearchInstitution, whose research had confirmed the clear upwardtrajectory in climate litigation and the fact that the number ofclimate change related cases has more than doubled globally since2015.

Failure by a board of directors to consider and mitigate (ortake advantage of) the impact of climate change on their businesscould lead to claims against the directors for breach of duty,particularly given the rise of activity in this area by activistinvestors, special interest claimant law firms and the support oflitigation funders. Any failure to follow the increasing number ofESG related laws, regulations and guidance – requiringtransparent disclosure – could make it simpler to establishsuch a breach. Although, having a well drafted and robust ESGPolicy in place could help directors defend claims that may bebrought against them.

Greenwashing is another source for claims against directors,officers and their companies. Where companies are misrepresentingtheir climate credentials, making false representations about theeco status of their products or failing to take action inaccordance with their stated goals, litigation and regulatoryenforcement could very well follow – as well as significantreputational damage. While the focus is currently on climaterelated issues, it is likely there will also be an increase inclaims relating to nature and social impact, pay equity, consumerrights (and many more areas). There is also going to be increasingscrutiny of boards who are not diversifying or who are makingmisleading claims around Diversity and Inclusion (D&I) issues.This in turn may lead to greater use of employment practicesliability (EPL) insurance – usually added as an extension toD&O cover, to provide cover for allegations of wrongdoing inrelation to employment related issues.

What is the impact on D&O cover?

Increasing claims against directors could also lead to anincrease in policy coverage disputes. In compiling the MactavishClaim Insurance Litigation Index – Claim Litigation - Mactavish(mactavishgroup.com), issued in October 2022, Mactavishanalysed commercial insurance claims litigation and insurancetrends and practices. The report confirmed the rate at whichcommercial policyholders sue their insurers has more than tripledin the last 10 years.

The Mactavish data suggests that legal challenges to insuranceclaims are only likely to increase. Insurers are getting tougherand are looking to shore up their balance sheet in the face oftougher market conditions.

It is therefore really important that any claims are promptlyand properly made. D&O claims must be appropriately managed andlegal advice taken when required.

What does a D&O policy cover?

It is always very important to read your D&O policycarefully to understand the precise scope of cover, but in headlineterms, a D&O policy will provide cover for losses that mayarise if a director or officer makes a mistake in discharging theirduties. It will generally cover the legal costs that will beincurred and the costs involved in compensating third parties.

Scope of cover

There are usually two core elements of cover available:

• Side A – this provides individualdirectors (and very often de facto and shadow directors andemployees in managerial positions) with an indemnity for claimsbrought against them for a "wrongful act" where thecompany is unwilling or unable to indemnify them.
• Side B – this will reimburse the companyto the extent that the company has indemnified its director.

Some policies also have Side C or entity cover,which provides cover for the company, usually in relation toliabilities incurred in trading securities on the stock exchange.If a policy also provides entity cover, it will be important forthe directors and officers to be aware that the policy limit mightbe eroded by claims against the company, meaning that there couldbe less cover available for the directors. It is important thatdirectors are comfortable that the policy limit takes this intoaccount.

Generally there will be no excess payable for Side A cover, buta large excess will usually be payable by a company under Side Bcover (including for defence costs).

Some policies include a definition of "indemnifiableloss"; normally defined as a loss for which a director couldbe indemnified by the company, save for insolvency or as a matterof law. Claims for indemnifiable loss would then be treated byinsurers as falling under the Side B cover whether or not thecompany has opted to indemnify its director. Previously, this ledto individual directors being responsible for the policy excessincluding the initial chunk of defence costs, even if they were notbeing indemnified in respect of those costs by the company. Mostmodern policies now provide that in those circ*mstances, insurerswill forward fund the director within the policy excess, and thenlook to recover the excess from the company. This means that thedirector is not out of pocket.

Potential losses

As stated above, a D&O policy will usually cover damages andcompensation payable to third parties, as well as reasonabledefence costs provided they are incurred with the prior writtenconsent of insurers. Ordinarily, a D&O Policy will allow forindividual directors to be separately represented where there is apotential conflict of interest between them, or between them andthe company.

However, a D&O policy cannot cover everything and it isworth remembering that the following losses are unlikely to becovered:

1. There will be no cover for fines and penalties which areuninsurable as a matter of law. In the UK, most fines and penaltiesare likely to be uninsurable with the probable exception only ofany fines which are imposed for a strict liability offence or wherethere is no culpability on the part of the individual being fined.Most regulatory fines, including fines by the InformationCommissioner, the Financial Conduct Authority, the Competitionauthorities and the Health & Safety Executive are thereforeunlikely to be covered.
2. A D&O policy cannot cater for non-monetary remedies,although there may still be defence costs cover available in somecirc*mstances.
3. Claims seeking an account of profits made by a directorunlawfully are unlikely to be covered. D&O policies usuallycontain an exclusion where a claim relates to personal profit madeby a director to which they were not entitled. A good policywording should, however, make this exclusion conditional on afinding of fact by a court or an admission by the director inwriting, and will still provide defence costs cover.

Allocation of loss

When looking at the structure of a D&O policy, it isimportant to be aware that defence costs are paid on a first comefirst served basis. It is therefore important for directorsclaiming under a D&O policy to act quickly before the limit fordefence claims is exhausted by other directors using the D&Opolicy to fund their own defence, or by the company making its ownclaim under the D&O policy if the policy provides Side Ccover.

Sometimes, there is a separate ring-fenced limit available fornon-executive directors (NEDs) where the policy limit has beenexhausted. A company will usually provide a NED with cover, as longas the personal liability that the NED may be subject to has notarisen as a result of dishonesty. Prior to an appointment, NEDsshould check whether their actions while performing their directorduties will be covered by an adequate D&O policy taken out bythe company, as this cannot be guaranteed.

D&O Insurance and claims – some things toconsider

• A D&O policy is usually claims made. 'Claims made'policies will cover claims made and reported in the policy period.A market standard policy will provide that if you notifycirc*mstances to insurers in the policy period, and a claim issubsequently brought against the directors after the policy hasexpired, it will be treated as if it was made in the policyperiod.
• Claims and circ*mstances should, therefore, be notified toinsurers as soon as possible. Individual policies usually havedifferent tests for when a circ*mstance has arisen. Some will referto circ*mstances which may give rise to a claim; others will talkabout this in terms of circ*mstances which are likely to or arereasonably likely to give rise to a claim. If there is any doubt asto whether a claim or circ*mstance should be notified, it is bestto err on the side of caution and notify.
• In a similar vein, and as with any insurance policy, directorsand officers have an obligation pursuant to the Insurance Act 2015to make a fair presentation of the risk to their D&O insurers.This means that it is important to disclose every materialcirc*mstance known by the directors to the D&O insurer beforethe policy goes on risk and before any amendment is made to thepolicy. The directors must also disclose information of which theyought to be aware by carrying out a reasonablesearch for that information, including any information held byother group companies, any outside entities or any third parties ontheir behalf.
• If a director or officer fails to disclose any materialinformation to the insurers in breach of the duty of fairpresentation this could, depending on the circ*mstances, invalidatetheir insurance cover and might mean that part or all of a claimmay not be paid or that the insurer is able to apply different andless favourable contract terms. It is, therefore, important that ifa director becomes aware of any issue that may give rise to a claim(including new information in connection with a historic issue)then, in addition to considering whether to notify the claim undertheir current D&O policy, they should also ensure that theydisclose the issue to D&O insurers prior to renewal or beforetaking out any new cover.
• Directors will usually have conduct of any defence when a claimis made against them for which cover is provided by insurers, butthere must be cooperation with insurers at all times. Once a claimis notified, many insurance policies will require insurers to beinformed of/copied into all material correspondence and be sentdrafts of any material correspondence in advance. Directors andofficers should not incur defence costs without consent and shouldnever admit liability without insurers' agreement.
• Directors and officers should be careful not to inadvertentlystumble into making an admission of liability informally.Particular care should be taken before entering into DeferredProsecution Agreements and insurers consulted about the terms ofany such agreements in advance. An inadvertent admission may resultin insurers declining cover for the claim or seeking to recover anymonies paid out under the policy from that director.
• Where there is a possibility that directors' interests arenot aligned, each director should make sure they have separatelegal representation. This will usually be catered for by theD&O policy. Different teams may consequently be required todeal with each director (and the company) at the insurance brokerand at the insurer. A director should try and get expressconfirmation that an information barrier is in place and thatnothing related to the conduct of their defence will be passedacross to those handling the claim on behalf of a potentiallyadverse co-director.
• Every D&O policy will have exclusions which may affect theavailability of cover. Two of these can be particularly problematicfor individual directors if they are raised by insurers. These arethe exclusions that remove cover for;
  1. any fraud or dishonesty by a director; or
  2. any personal profit to which the director was notentitled.
  Most modern policies will theoretically provide cover, at least fordefence costs, until the fraud, dishonesty or personal profit hasbeen established by final judgment or written admission. If thereis such an outcome, subject to the terms of the policy, any defencecosts paid by insurers up to that point may become repayablefollowing the handing down of the final judgment and/or admission.However, these types of claims will often give rise to a number ofother policy coverage arguments which provide insurers with scopeto reserve their position on policy coverage.
• Therefore, in practice it can be very difficult to get defencecosts from insurers when dishonesty is alleged –notwithstanding a clear entitlement to those costs in the policywording. In these circ*mstances, it can be very helpful to ask yourbrokers to assist, as they will not only have vast experience ofdealing with claims but are also usually able to flex theircommercial relationship with insurers, whilst your lawyers run anylegal arguments in parallel.
• If one director is accused of fraud or dishonesty,theoretically cover for the other directors should not be impacted.This is typically catered for in the policy wording itself but evenif it is not, a D&O policy will generally be treated ascomposite insurance which means that conceptually it is treated asif separate insurance contracts have been entered into with eachindividual insured. This means that any act or omission by onedirector, including fraud, ought not to impact cover for otherdirectors. The one possible exception to this, depending upon thepolicy wording, is a breach of the duty of fair presentation underthe Insurance Act, where if such conduct occurs during the placingof the policy, it may impact the entirety of the cover under thepolicy.
• Most D&O policies will also provide cover for investigationcosts but often only in limited circ*mstances, usually when awrongful act has been alleged and an individual director has beennamed and required by a regulatory body to provide documents orattend an interview or formal hearing to give evidence. However,you should check the terms of cover carefully. Some D&Opolicies will also provide cover for pre-investigation costs and/orthe cost of internal investigations. Even if cover under the policyfor investigation costs is not yet triggered, it is possible thatthe facts giving rise to an investigation or internal inquiryshould be notified to your D&O insurers as circ*mstances whichmay give rise to a claim.
• Before participating in a global settlement which includes anyuninsured losses, you should make sure that this is full and final.It is imperative that all claims are covered – including anyfuture claims against you by insurers, so that there is nopossibility of a further claim coming to light. There are a numberof ways in which an insurer who has paid out a claim on behalf ofthe company and/or one director may choose to bring a claim againstanother director if they believe them to be culpable for the claim.For example, they can pursue a subrogated recovery claim againstthe relevant director in the name of an "innocent"insured or they can take an assignment of a claim against thatdirector. Ordinarily, D&O policies provide that insurers willnot pursue any such claims against directors, but only to theextent that they are insured and there is usually a carve-out wherea director is found to have been dishonest. Closure may not,therefore, be achieved unless everyone is involved in settlementdiscussions.

The latest article from Mactavish published on 21 March 2023– D&O cover - the calm before the storm?– predicts that D&O cover will become more restrictiveand more expensive. For that reason, directors are best advised toreview their D&O cover now and stress test how it would respondto claims, liaising with their brokers to improve the cover ifcommercially available and appropriate. If a claim arises, it isimportant that directors and officers take legal advice on how bestto manage the relationship with their D&O insurers as soon aspossible.

Read the original article onGowlingWLG.com

The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circ*mstances.

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