ACE European Group: Cover Drive - Dan Holloway

Legislators are focusing sharply on corporate governance, making senior executives more personally liable for the actions of their companies. FDE spoke to ACE European Group’s Dan Holloway about how potentially huge litigation costs have led large firms to buy directors’ and officers’ insurance cover, but smaller companies have been left exposed.

From Enron onwards, corporate shocks have rocked the business world and brought corporate governance into the spotlight. The market for directors’ and officers’ (D&O) insurance is, therefore, growing rapidly as board members and senior executives realise they can now be held personally accountable for the impact of managerial decisions.

D&O cover provides protection for the assets of directors and officers of private and publicly traded companies. It is a familiar part of risk management for large companies but smaller enterprises often have insufficient protection in place.

‘There are two types of buyer; among large publicly traded companies there is an understanding of the exposure directors and officers may face and therefore an adequate level of cover is often in place. However, small and medium-sized companies are not necessarily aware that such risks exist and therefore they may not be suitably protected. They should speak to their insurance broker about the specialist D&O products available,’ says Dan Holloway, UK D&O product manager, ACE European Group.

ACE is one of the leading D&O insurers in the UK and has a long history of writing this cover. Its D&O team offers specialist cover to multinational companies and SMEs.

His experience of the market has shown Holloway that both clients and brokers need more education about the protection available through insurance products, especially as the regulatory environment grows stricter.

Last year, for instance, changes in the UK Companies Act introduced duties for directors which had never been laid out in statute before. It made directors more accountable and the onus is on them to be aware of their responsibilities under such laws.

Companies of all sizes must look to mitigate the risk of litigation, the costs of which can easily escalate.

Among the many examples Holloway gives of costly litigation is the case of two directors of a transport company convicted of manslaughter after one of their drivers fell asleep at the wheel.

The directors knew their drivers were working long hours, and both were given suspended custodial sentences.

Though a D&O product may not have changed the verdict, it would have paid the directors’ defence costs.

The need therefore is great, but the lack of appetite among SMEs for D&O insurance often stems from a misunderstanding of the cost of cover.

‘You see large premiums for public companies with greater exposures, but not for SMEs, who are likely to pay a few hundred pounds a year, as opposed to thousands,’ says Holloway.

Specialist cover

Specialist advice is crucial when buying D&O cover, not least because the regulatory landscape is frequently changing. For instance, the UK’s Corporate Manslaughter and Corporate Homicide Act 2007 forced policies to be re-evaluated.

‘The change in the Act made us review our product again and highlighted another misunderstanding people have about D&O insurance. D&O protects individuals, not companies – the policy responds if an individual is named in a corporate manslaughter case. If a company is named, then a D&O policy will not provide protection,’ says Holloway.

‘Prior to the changes in the Act, the legislation focused the liability on the individual; this proved difficult to bring successful prosecutions in practice. The changes to the Act mean the liability is that of the company, rather than the individual. The corporate entity is liable, which could lead to more successful prosecutions. Normal D&O does not provide corporate protection, but we have now added an element of protection for the corporate entity for UK private limited companies.’ The ability to understand and respond to such legislative changes comes from experience.

‘If you choose an insurer, choose one that is in this market for the long term, not one that is just capitalising on a profitable market,’ warns Holloway.

As the regulatory environment gets ever more stringent, it is time for SMEs to seek expert advice to ensure directors and officers have the cover they need.