Directors' and officers' cover: Potential for growth

After 85 years, could it be coming home? Forget football, tennis or other sporting trophies, the British product in question is directors’ & officers’ insurance.

It may surprise some that D&O – typically associated with the US – was a British invention. It was designed by the UK broking house Minet, albeit for American clients.

The catalyst was the Wall Street crash of 1929, when it was felt many directors could face legal action from angry shareholders. Cover was largely written in the London market and, over the years, US insurers started getting in on the action too.

While insurers have the appetite to grow this market in the UK, take up of D&O remains far higher in the US. In Britain, D&O cover is frequently held by larger companies – but it has yet to become standard cover within the SME market. It is a common misconception that legal expenses or professional indemnity insurance provide all the cover needed.

The scope of the market is considerable. At the start of 2013, there were an estimated 4.9m businesses in the UK, with SMEs accounting for 99.9% of all private sector businesses.

There are no exact figures as to how many of these have D&O cover but a recent Datamonitor survey found only 23.3% of respondents had cover – down from the previous year’s figure of 26.7%. Clearly, there remains huge potential for growth – and this is a valuable opportunity for brokers.

So, why should brokers talk to their clients about D&O? The first message to get across is that even if someone has been involved in the running of a limited liability company for years without a problem, their personal assets could still be at risk.

Personal liability
It is not just companies that are at risk. Any director, officer or employee carrying out supervisory functions can face unlimited personal liability for actions they take on behalf of the company.

Even if legal expenses and PI policies are in place, there may still be gaps in cover. For example, a legal expenses policy does not provide cover for damages, and a PI policy does not provide cover against actions pursued by shareholders or employees.

D&O is as relevant for small businesses as it is for large, publicly-traded companies. In fact, a smaller business could be more vulnerable because it may have less stringent corporate governance procedures in place.

Additionally for smaller firms, without the in-house legal and HR teams present in large organisations, defending a claim can be time-consuming, costly and complicated.

All businesses have similar obligations under law. A claim can be brought by anyone with an interest in the company; shareholders, regulators, employees, or in the case of insolvency; creditors, liquidators and administrators.

A D&O policy will typically cover: claims from shareholders against the management; employment tribunal costs; Health & Safety Executive enquiry costs; legal and defence costs; and damages arising from employment practices and discrimination.

Three notable exclusions within a D&O policy are: fraud – although defence costs would be covered until such time as fraud is proven; pension fund liability, which can often be covered separately or with a specific extension; and fines or penalties.

New legislation, such as the UK Bribery Act 2010, puts additional responsibilities on directors to ensure their companies are not involved in bribery, holding them personally liable if they have in any way consented to the offence.

In addition, tougher stances from the regulators mean the risk of investigation and fines is on the up. In 2013, fines from the Financial Conduct Authority totalled £474m – a 50% increase on the £312m its predecessor, the Financial Services Authority, handed out the previous year.

While the D&O policy may not cover the fine itself, behind every investigation there is a significant drain on management time, legal defence expenses and potential brand damage.

Against a backdrop of increasing regulation and litigation, D&O insurance is a must for a business of any size. As well as indicating it values its senior executives, D&O enables a business and its employees to focus on being successful.

Chris Dee, head of casualty insurance, Allianz Commercial