Should corporate directors and executives pay more attention to their liability?
If you are on the board of a company, you could be personally liable for defence and settlement costs as a result of lawsuits for claims made against you. That is, unless you have the proper coverage through your insurance risk management programme.
All too often, however, the only thing standing between directors and officers (D&O) and a massive personal financial hit is a directors and officers liability insurance policy.
Firstly, there is the duty of care or diligence. Directors are to act honestly in good faith and in the organisation’s best interests.
This is contained in our Companies Act. Secondly, the duty of loyalty, in other words, directors are to place the interests of the organisation before their own.
Then there is the duty of obedience, to act within the scope of applicable by-laws, articles or unanimous shareholder agreement by the company.
And finally there is the duty of compliance, to act within the four walls of the legislation, and in particular I am talking here about the Companies Act. So directors and officers have a number of fiduciary duties that they must comply with.
So what is directors and officers insurance? A directors and officers insurance policy will, amongst other things, compensate for pure financial losses for claims made against directors for wrongful acts, for breach of trust, breach of duty, neglect, error, misleading statements or wrongful trading.
Why would companies want to purchase D&O coverage?
We have seen throughout the world, and certainly in Barbados, evolving corporate governance.
There is a greater disclosure and communication to shareholders and the public, there is increased focus on the role of the non-executive directors, disclosure of remuneration packages, proper authorisation procedures.
And, of course, there is the expanding personal liability of directors and officers for mismanagement and non-disclosure and these all point towards increased exposures for directors and officers.
This is not something that directors and officers should take lightly.
Under the policy, all future current and past directors are covered, non-executive directors are also covered.
The officers of the company and its subsidiaries can be covered and in very specific cases like securities claims the policy can even be extended to provide coverage for the company itself.
The policy grants cover on a claims-made basis and by that it means that the claim has to be made during the period of the policy and that is different from our normal non-liability type policies where losses are covered based on an occurrence basis.
The policy can be extended for a reporting period of up to 72 months. So you have a fairly long reporting period and we can have an agreed on retroactive period as well, and this can be discussed with you on a case by case basis, there is no one-size-fits-all.
Secure your personal assets.
Whenever you sit on a board, whenever you are invited to sit on a board, I would want to recommend that one of the conditions would be that the entity has directors and officers liability.
Without that, you can be personally liable.
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Nigel Adams is executive manager, Guardian General Insurance Limited. Guardian, Sagicor, and Empirical Insurance Brokers Inc. and have teamed up on an initiative to ofer the type of coverage outlined by Adams.
