The new Corporate Manslaughter and Corporate Homicide Act prompted myriad policy endorsements to hit the directors' and officers' liability market - but do these cater for the issues most likely to arise? Rachel Gordon reports
Insurers are a canny lot when it comes to spotting a sales angle. Earlier this year a flurry of announcements emanated from directors' and officers' liability insurers, primarily regarding specific endorsements to policies that would respond to legal action linked to the new Corporate Manslaughter and Corporate Homicide Act, which came into force this April.
The policy changes are largely related to covering 'both sides' - namely a D&O insurer will now offer an agreed limit for the company as well as its individual directors and officers. Ace Europe, for example, announced an entity endorsement of up to £1m for the insured company to its Elite IV D&O policy. Product manager Dan Holloway claims this is an attractive feature for smaller companies and, in addition to legal expenses, public relations costs to help manage negative publicity are included. "We see the UK becoming more litigious as a result of this Act and it now means that brokers can ensure their clients can benefit from broader cover."
But do brokers agree they can now be confident their clients will be fully covered if they recommend such policies? And are these endorsements actually needed? When the 'Natwest Three' case was in full flow, a number of insurers announced they were including cover for extradition costs - later it emerged that this was in fact already covered and insurers were simply engaging in marketing spin.
David Ritchie, a D&O specialist and director with Heath Lambert, says the Corporate Manslaughter Act has reawakened interest from companies. "The Act is about the entity and this is why insurers have responded with these endorsements. But, generally, we will stay away from policies containing these because they can, in effect, mean a reduction of cover. We look to try and set our own terms that are as generous as possible for clients."
For his part, Mark Shreeve, chief executive at Angel Underwriting, comments: "A lot of these endorsements are just window-dressing. If anything, brokers now need to be checking to see if there is dual insurance - which in the event of a claim is something that just causes confusion."
He says the key issue for brokers is to assist clients in identifying which members of staff need cover. For example, talking to line managers and scrutinising job descriptions is a good starting point and then recommending these employees receive adequate training as well as ensuring there is a strong health and safety culture within the business.
Conflict of interests
However, several market commentators have recently suggested the Corporate Manslaughter Act could result in conflict of interest difficulties - and raised the question of how insurers and brokers should best respond.
If a death occurred in the workplace and it was felt negligence was involved, a police investigation with a view to prosecution - using the manslaughter legislation - could be launched. Simultaneous and complementary investigations would most likely be run by the Health and Safety Executive.
In terms of insurance, the legal costs of defending any such allegations would likely be picked up by an employers' or public liability policy. However, on the back of this, it might be decided that individual employees were culpable - or they may be interviewed under caution as potential witnesses against their employer.
This would arguably result in a conflict of interest for the lawyer, instructed by the company, as they could not represent both parties effectively. So do D&O policies or the new endorsements address this problem? Would the need for separate legal representation and, consequently, higher legal bills be covered?
Equally, if a number of employees are interviewed by the HSE, would they be covered by D&O if they are not in senior roles? And what would happen if a group of managers were questioned and then subsequently accused each other of wrongdoing - could the same law firm fairly represent each person?
These are just some of the issues currently being discussed by law firms. Chris Green, partner at Weightmans, comments: "I am aware of a case where an Eastern European worker within a food manufacturing company was injured because he did not switch off a machine - he had not understood verbal instructions. The HSE is involved and although there was not a death in this case, if there had been, the Corporate Manslaughter Act could have been invoked. But, even under other HSE legislation, the stakes are high, whether in terms of a jail sentence, fines and director disqualification. Brokers do need to go through the 'what if' scenarios with clients and look out for any gaps in cover."
Having commercial legal expenses insurance in place would potentially provide the blanket cover necessary and be more effective at addressing these issues than endorsements to D&O policies. Dominic Thomas, partner with Davies Lavery, comments: "We're currently providing advice to an insurance trade body on the role of legal expenses cover and how a D&O insurer could provide this. What is important is that legal expenses insurance requires separate Financial Services Authority authorisation and so we are talking to the regulator. If legal expenses is a bolt-on, for example, it may not be necessary to have the authorisation but it is likely to be necessary if it is stand-alone. We hope to provide clarity on this in a few weeks."
He reiterates that the legal expenses insurance would be there to offer protection in the event of a civil claim on the back of a corporate manslaughter case. "The Corporate Manslaughter Act has made it easier to prosecute and insurers have picked up on this. Where you have endorsements, brokers have said there are now tighter limits, although they obviously are pushing for the most open-ended cover."
Richard Miller, associate director with broker Miller, explains: "Insurers are looking to impose more sub-limits and this is an area we are keeping a watchful eye on. Some of these endorsements can be quite good - but there have been cases where, if you look at the wording, the cover is already there. To some extent, this is just a way of trying to win more business as there is adequate capacity and the market is soft."
Paying legal costs
Mr Thomas adds that although D&O is there to pay for legal costs - it is a different animal compared to commercial legal expenses insurance. "For example, a legal expenses policy allows the insured the right to choose their own lawyer - with D&O the insurer will have their own specialists. Selecting your own legal representative could be problematic - and the result could be affected if the lawyer chosen is insufficiently experienced."
Others are quick to point out that a D&O policy is already wide enough to cover most employees under the wider 'officers' term and that legal expenses insurance is of limited value.
John Taylor, UK commercial manager of financial lines at CNA, explains: "Commercial legal expenses may seem like an affordable option but if D&O can be provided as an alternative, then this is likely to be more generous. With legal expenses, the claims criteria is more rigid and the claimant will probably have to contact a helpline first to see if the claim is valid. An underwriter then has to decide if there are 'reasonable prospects' to win the case. It is not really an alternative and, what is more, D&O is generally affordable - brokers are increasingly selling it online to smaller clients."
Callum Taylor, management liability underwriting manager for insurer Hiscox, agrees that legal expenses insurance is generally more restrictive and that the insurer may refuse to pay a claim if the chances of success are not high enough. "D&O has changed and we have deliberately sought to target the SME market. You can have a D&O policy that can respond to both sides in a claim and we also offer separate limits rather than an aggregate one - this ensures that a number of employees can receive legal representation. An HSE investigation can go on for months and an employee would want a good lawyer on their side at the outset."
Meanwhile, Philip Tracey, partner with Beachcroft, says there are conflicts of interest - and the HSE must bear some responsibility. "If you have a number of employees who are being questioned following a death, then feelings are likely to be running high. I am aware of cases where the HSE has sought to drive a wedge between the employer and staff caught up in the investigation. It is difficult for the lawyer appointed and we would benefit from clearer Law Society guidelines in these cases. Potentially you are looking at some substantial claims and each person being investigated may need appropriate representation."
Nik Rochez, partner with Dewey and LeBoeuf, is also keen to emphasise this point: "There are some first-rate brokers in this market and there are also some who have less understanding. If there is conflict with other directors then, clearly, separate representation is much better. I would question if clients are buying sufficiently high levels of cover as you could have a case where limits are exceeded. Now is the time to consider doing this as the market is so soft - because if we see some big claims you can expect to see premiums pushed up quickly."
Mr Rochez has a track record in the market when it comes to representing insurers in D&O litigation and is currently involved in the Northern Rock litigation. And, although there are differences in D&O policies, he says he does not expect to see huge conflict of interest problems. "Largely, the Act is to be welcomed - it has been a while coming and is now on the books. But, otherwise, things are not going to change that much; financial mis-selling is still likely to produce more claims."
Indeed, behind the scenes, most experts say that financial services and litigation emanating from the sub-prime crisis is more likely to cause high value claims rather than corporate manslaughter.
Areas of concern, however, include the construction industry - although safety has improved - and the haulage industry. In terms of general D&O claims, Mr Taylor says employment tribunals are likely to cause ongoing activity. But Craig Watson, D&O underwriter for Brit, comments: "It is clear that the Corporate Manslaughter and Corporate Homicide Act has reinvigorated broker interest in D&O cover. For those clients, particularly in the construction trades, who have previously baulked at the need for this cover the Act has presented the perfect sales opportunity."
He says cover should extend to all employees and points out: "It tends to be the individuals at the coalface who witness the death and their evidence will form a key part of the initial HSE investigations."
In common with other insurers, Brit has extended its D&O offering to provide cover for the corporate entity where it is pursued under the Act. "Any such action is likely to progress following the HSE investigation and the cover should recognise the need for separate legal representation to ensure there is no conflict of interest," he says. "Corporate killing has been on the agenda for many years now. We cannot predict the numbers of claims and actions this legislation will create. What we can predict with some confidence is the spiralling costs of expert health and safety consultants, specialist lawyers and barristers."
Andrew Farr, D&O underwriter for Sagicor at Lloyd's, adds: "We would expect prosecutions to rise in number as the Act should make it simpler to prove the necessary component of gross negligence in causing a death." He says the Act is also likely to spark further changes to cover. "It is likely that we will see enhancements of coverage in the D&O programmes to pick up the potential 'remedial and publicity orders' that the company may incur, rather than the unlimited fines - which could be up to 10% of turnover - as it would be against public policy to cover these."
He adds: "A capping of limits offered to defend the corporation in such cases is also expected, with potentially full limits for the individuals as, after all, the D&O policy is fundamentally a defence costs policy."
Clarity is key
He says brokers will increasingly want to see clear and concise wordings on defence costs for individuals to remove any ambiguity in the case of a claim, just as happened with extradition clause wordings in the aftermath of the Natwest Three. Martin Butterworth, partner with law firm Davies Arnold Cooper, says the key effect of the Act will be "to force directors and officers to concentrate on exactly where their safety management responsibilities lie". And he stresses that although any claim made against the company can only result in a fine, the original common law manslaughter offence for individuals still remains - which is where D&O steps in.
Insurers including AIG, Chubb and Novae have all made endorsements to their D&O policies, citing the Corporate Manslaughter Act as creating a need. Beyond this, free standing legal expenses cover is also available - although D&O insurers insist the efficacy of this has yet to be tested. With claims under the Act yet to be brought, it is impossible to know what insurance option will most effectively cover litigation flowing from a corporate manslaughter investigation.
But in this fiercely competitive market, brokers and their clients can be reassured that any claim that does result will place the spotlight firmly on that insurer - indeed it is more than the claimant's reputation that will be on the line.
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