Checking Your Directors and Officers (D&O) Policy in Light of Recent Company Liquidations
On 15 January, one of the UK’s biggest construction firms collapsed, going into liquidation.
Issues are reported to have arisen from risky contracts that proved unprofitable, as well as payment delays. This has led to allegations that governance at the company was inadequate and that its board may not have exercised appropriate oversight prior to the collapse, possibly acting in its own interest rather than for the benefit of the company. It has been reported that there was a relaxation of clawback conditions for executive bonuses in 2016 which has led to some top executives continuing to receive substantial salaries and benefits long after their departure from the board.
One of the fundamental duties of a director is to act in good faith, for a proper purpose. The collapse of a company will almost certainly raise questions about the intentions, motives, and beliefs of the directors and whether they put the interests of the company first. Directors may be held to have abused their powers if it is proved they used them to benefit themselves or if they have damaged the company. Breach of such duties can result in directors being held personally liable for the demise of the company, as well as to being disqualified from acting as a director.
Checking Your D&O Policy
If a company becomes insolvent, its directors are likely to seek coverage under their D&O policy for the costs of defending any investigations into their conduct. Under such policies, insurers can advance costs on a first dollar basis. However, litigation can be costly, particularly if a number of individuals are seeking coverage under the same policy for their own defence.
We recommend that insureds check their D&O insurance coverage, specifically:
- The policy does not terminate in the event of insolvency, so that executives can access vital defence costs coverage in the event they face allegations of wrongful conduct arising from an insolvency event.
- Any fraud exclusion only triggers on a final, non-appealable adjudication, so that coverage for defence costs will continue up until the point of a guilty verdict.
- The D&O programme limits are adequate. Executives should consider the benefits of purchasing a Side A Difference in Conditions policy that will step in to provide “lifeboat” cover in circumstances where the executives are not indemnified by the company and the underlying policy limits have been exhausted or coverage is otherwise unavailable.
Marsh will continue to monitor this situation, and issue updates as warranted.