D&O Liability Insurance - David Walters, Miller

Will increased exposure inevitably lead to an increase in D&O premiums? asks David Walters, director - professional risks, Miller Insurance Services Ltd.

On 1 November 2005, the Company Law Reform Bill was introduced to the UK House of Lords and is likely to become law in 2006/07. The principal focus of the bill is to:

• Simplify administrative matters for smaller companies
• Improve investor/shareholder rights
• Update the law relative to directorial duties

REDRESS

In the bill, the procedures for allowing shareholders to sue company executives are set out in detail and aim to make the process for shareholder redress simpler. Currently, for UK shareholders to sue the board, they must show that the company itself has suffered as a result of the actions / lack of action of the directors. They then have to force the directors of the company to make a claim against themselves in the name of the company – not a likely scenario!

Failing this, minority shareholders may seek to bring a ‘derivative action’ on behalf of and in the name of the company. Clearly these rules are confusing and have meant that the executives who sit on the boards of UK companies have not been subject to the torrent of litigation faced by their peers in other territories, most notably in North America.

SAFEGUARDS

The new proposals envisage claims being made by shareholders where the claim is enforcing the rights of the company over those of the directors. Crucially, the new measures will not allow investors to seek compensation for themselves. Any potential claim must promote the success of the company for the benefit of the majority of its members. This means that the UK will not be forced down the same road as the US, where claims against directors are astronomical.

However, some lawyers have taken issue with measures that could be taken by investment funds that are concerned with the performance of company directors.

CORPORATE GOVERNANCE

The second area that the bill looks at is that of corporate governance. The bill sets out the duties owed by directors to their company for the first time. These include the fiduciary duty and the duty of a director to act in good faith, where he or she considers that the actions will benefit the members of the company as a whole. When making decisions, they must take into account:

• The long-term ramifications of any decision
• The interests of the employees of the company
• The company’s relationships with its customers
• Potential environmental impact
• The need to treat all members of the company fairly
• Maintenance of the reputation of the company

PERSONAL RESPONSIBILITY

When making decisions, a director must now consider these ‘statutory factors’. In addition, directors have to exercise independent judgment, avoid conflicts of interest, refuse benefits from third parties and disclose interest in any transaction. This obligation signifies the ongoing drift towards increased personal responsibility, but will this drift have any impact on the provision of and the cost of D&O liability insurance? The D&O market is currently going through a benign cycle and premiums have steadily decreased since the spike of 2002.

NEW MARKET CAPACITY

The concerns that caused insurers to restrict the cover they were prepared to offer and increase premiums still remain, but the effect of an influx of new market capacity has seen prices reduce and coverage expand. New wordings are being developed, reflecting the legal experiences of both company directors and insurers alike.

So despite a potential increase in personal exposure, the D&O market is currently offering broad cover at reasonable premium levels. Of course, the detailed negotiations that take place between client / broker and underwriter are critical to the process and may well determine if a claim is paid or not. For this reason I recommend that close scrutiny is applied to this most complex class of insurance. FDE

SOURCES

• CMS Cameron McKenna, Law-Now
• Financial Times, 2 November 2005