Wednesday, April 24, 2024

THE ISSUE: No business as usual for corporate players

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Should corporate directors and executives pay more attention to their liability?

The duties and responsibilities of corporate directors and executives are many and varied. Depending on what transpires in the execution of their mandate, these individuals operate in an environment that is potentially costly.

Corporate governance has always been important, even if it did not go by that phrase many years ago. It has evolved in recent years, influenced by the changing business landscape, requirements from regulators, and in some instances a reaction to some corporate financial scandals.

In such an environment, the need for executive and non-executive directors, and officers from the chief executive officer down, to ensure they are not personally exposed to liabilities, especially the financial variety, is important.

It is only now coming to attention in Barbados through the efforts of a group of leading players in the insurance industry, but insuring against such potential calamities is something that is a feature of a number of other markets.

In essence, directors and officers’ insurance coverage protects these individuals against damages caused by negligence or wrongful acts while executing their duties. It also covers business expenses incurred when defending lawsuits caused from alleged wrongful acts by its directors and officers.

Commenting on the issue, the Insurance Bureau of Canada said: “Directors and officers have a duty to exercise due diligence in overseeing the management of the organisation that they serve. They are required to act in good faith and in the best interest of the organisation. Claims or potential claims must be promptly reported.

“Organisations with paid or volunteer boards should be aware that directors and officers have very specific duties and obligations. Directors and officers should be given all of the appropriate information that is required to perform their duties effectively.”

While new to Barbados, such issues have been in the forefront of countries in Latin America for some time. In a 2011 interview with Financier Worldwide, Alejandro M. Guerrero, of insurance broking and risk management firm Marsh, said: “There are clear indicators that [directors and officers]s are facing more personal liability cases”.

“We carry registers of cases along with several insurers and the number of cases is growing. We do not consider that exposures have necessarily increased; instead it is the awareness of claimants that is causing the increase,” he said.

“More often than before we find that cases that normally would have been addressed solely to the companies are now including the [directors and officers] as well, as a strategy to generate more attention and obtain higher or faster settlements.”

Asked about the types of claims that were being brought against directors and officers, Guerrero said: “We still see employee-related claims topping the list of claims involving [directors and officers], with consumers claims close behind. There have been some claims related to allegations of lack of compliance with new administrative rules, such as money laundering procedures and other types of financial transactions under enhanced scrutiny by government authorities.”

Information published two months ago by blog.willis.com showed Barbados and the region were now playing catch up with directors and officers liability insurance. It said Lloyd’s of London began writing such coverage in the 1930s following the Wall Street crash of 1929 and the introduction of United States securities laws in 1933 and 1934.

For the next three decades, however, it remained a niche class of insurance. This changed in the 1960s when, resulting from new interpretations of corporate law in the United States (US), directors and officers themselves could more easily be held liable for the results of their actions.

After directors and offices liability insurance entered the “mainstream” of US in the late 1970s, it did likewise in the United Kingdom, Canada, South Africa, Australia, Ireland and Israel in the early 1980s. Later that decade, France, Belgium, the Netherlands, Spain and Switzerland also began introducing such coverage. It spread to the rest of continental Europe and Japan in the early 1990s.

It is estimated that in these countries nearly all publicly traded companies have some degree of directors and officers liability insurance cover. It was therefore only matter of time before Barbados and the Caribbean got on board.

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