The fall-out from Covid-19 will inevitably give rise to scrutiny of executive decisions made by directors during the pandemic. Those decisions were often made at great speed, and in unprecedented circumstances, but have potentially far reaching consequences for the company and the directors.
We now expect light to be shone on directors’ conduct during the pandemic by regulators, governmental agencies, employees, creditors, and investors alike. Questions will likely be asked about how well the directors prepared the company for a crisis. How were customers treated during the pandemic, was employees’ welfare safeguarded, did the directors follow any regulatory guidance and how accurate was the company’s financial information provided to investors?
The economic downturn may see a significant rise in the number of insolvencies in industries badly hit by Covid-19. That will turn attention to directors’ conduct from insolvency officeholders and governmental agencies.
For example, did the directors ensure that the position of the creditors was in no way worsened or prejudiced when the company was, or could have been, insolvent? If the company then entered a formal insolvency procedure, and the directors had failed to consider the creditors’ position, this could find an officeholder pursuing claims against the directors for breach of duty and wrongful trading (although this provision of the Insolvency Act 1986 has been temporarily suspended as a consequence of the pandemic).
All of this can only lead to an uptick in third party claims against directors and regulatory investigations that focus on their conduct. We have already started to see that in the USA, with some high-profile shareholder actions connected with Covid-19, how the company responded and the directors’ actions.
Directors’ exposures had increased significantly in recent years. But Covid-19 has amplified them. The world now looks an increasingly risky place for executives. So, an effective Directors & Officers’ liability (D&O) insurance programme is an essential part of the board’s risk management plan.
Our advice is that directors must get their arms around the company’s D&O insurance programme, and any indemnities provided to them by the company against third party liabilities. They need to understand what coverage they may have against personal exposures that could otherwise lead to unlimited liability for executive decision making. Adequate D&O insurance is paramount in all of this, especially as company indemnities may prove worthless if the company becomes insolvent.
Now is the time for directors to investigate the rigour of their D&O insurance. Here are our top ten tips for directors to focus on when they review the policy:
- How long does the policy run for and when is renewal? Have the company’s circumstances changed since the last renewal which need to be discussed with brokers and presented to new insurers?
- Who does the policy cover? Does it include past, present, and newly appointed directors, as well as de facto and shadow directors? What about company secretaires and senior managers?
- Is the limit of indemnity sufficient? Remember that this is a common, shared pot of money to cover all claims (and costs) made against all the directors in a policy year.
- Do you understand the important terms in the policy, especially those that typically act as a trigger for insurance coverage? Who, and what, is covered by terms such as: “wrongful act”, “claim”, “loss” and “insured”?
- Is there a per claim excess or deductible imposed by the policy and who pays it? This may be especially important if the company becomes insolvent and cannot pay the excess on the director’s behalf.
- What are the policy exclusions? If a policy has been, or is about to be, renewed, insurers might look to exclude Covid-19 related claims. But are there any other exclusions that may be important, for example in respect of claims that relate to USA activities or cyber or pensions related liabilities?
- How wide is the insurance for regulatory and governmental investigations into directors’ conduct, say by the FCA, HSE, HMRC, Insolvency Service?
- What does the policy say about third party claims based on alleged fraud by directors? These are increasingly common, and directors need to ensure that an allegation of dishonesty does not in any way curtail policy coverage.
- Covid-19 led to more corporate transactions through M&A activity, consolidation or divestment as companies looked to save costs or take advantage of cheaper borrowings. How would these types of actions affect the policy? Would they bring cover to an end or might the policy only cover claims that relate to pre transaction period?
- If a claim is made under the policy, to whom must notice must be given, of what, when and with what level of detail?
D&O premiums have risen in recent months and we are in a much harder insurance market compared to a few years ago. So, ensuring that directors understand the coverage provided by the D&O policy, and maximizing the prospects of the policy paying out in the event of a claim, is more important than ever. That is also true when it comes to negotiating with insurers over the terms of the policy at renewal to try to achieve the best possible protection.