Driving directors out of the rough

Directors and officers can find themselves in the rough as their responsibilities become more onerous and the number of claims being made against companies, for which they are ultimately liable, rise. Simon Threadgold examines the current D&O sector's swing.

It is no longer sufficient for company directors simply to do their
best. Today, when things go wrong, they risk being held accountable by
claimants who have the benefit of hindsight. In the eyes of the public,
bosses should be made to pay for management mistakes and failures. This
has led to an upsurge in sales of directors' and officers' covers, and the
claims are now starting to roll in from a wide variety of sources.

Jeremy Cottle, D&O underwriter at insurer PRI, comments: "Claims scenarios
are notoriously difficult to predict. A claim can be brought by any party
with an interest in the affairs of the company. Claimants have included
employees, clients, creditors, competitors, shareholders, prospective
shareholders and suppliers - to name just a few."

Five years ago, it was almost unheard of for a public company to be sued
by its own shareholders. Since then, collapses at WorldCom, Enron and
Global Crossing have changed the landscape. Vodafone and Cable & Wireless
are facing class actions, with the Independent Insurance, Marconi and
Equitable Life situations still rumbling on.

A fruitful area for claimants is over-optimism in connection with mergers
and acquisitions, management buyouts and initial public offerings.
"Insurers have had their fingers burnt on dubious projections in
prospectuses," notes Jim Gaskin, speciality lines manager for Zurich

All the same, it is still relatively difficult to bring shareholder
actions in the UK. Neither UK nor US class actions have so far accounted
for the bulk of D&O claims. More common are allegations of wrongful
trading, where directors face personal liability if they knew, or ought to
have known, that their company could not avoid insolvency.

Entity debate

There has been sharp debate as to whether a D&O policy should embrace
cover for the company (entity cover), as well as its directors. A fair
number of policies have been written on these lines and they are now
responding to employment practices claims not involving the directors

Consequently, the linking of entity cover with D&O is being viewed very
cautiously. The two will be written separately in future for FTSE 250
companies, with the link being preserved only for small to medium-sized
concerns that want their liability covers lumped together as far as

The expansion in claims can only partly be attributed to the fact that
there are many more D&O policies in force than five years ago. Claims have
increased not just in volume, but in cost. The rise in lawyers' fees has
aggravated the situation, as has the complexity of the law.

However, the growth in claims has not resulted in a great new income
stream for loss adjusters. Chris Hill, D&O underwriter at Hiscox, says:
"Like the rest of the market, we have a lawyer-driven approach to claims
management." Julian Elms, UK and Ireland D&O manager for Ace Europe,
comments: "We are normally notified of circumstances leading to a claim by
the broker. We handle it internally in our claims department and appoint
monitoring counsel. There are plenty of claims going on and they are not
necessarily as straightforward as you would think."

As solicitors have to be instructed anyway, most insurers see little added
value in involving adjusters in claims inquiries and settlement.

D&O bears great similarity to professional indemnity and legal expenses
insurance, neither of which are areas where adjusters have achieved much
penetration. Mr Gaskin confirms: "D&O claims tend to involve protracted
legal arguments, so it is more suitable for lawyers to do the
investigation." Chubb and AIG Europe say much the same.

Large adjusting firms like GAB Robins and Capita McLarens recognise that
it is highly unlikely an insurer will use their services for D&O work.

By contrast, lawyers such as Reynolds Porter Chamberlain and Beechcroft
Wansbroughs have D&O departments staffed by specialists.

The few adjusters who do work in the D&O field prefer to work either by
themselves or for a small company. They are paid an hourly rate, as they
cannot hive the work off to anyone else. Their instructions come
principally from Lloyd's and the London market, with insurers looking for
an individual, rather than the adjusting firm itself. If they cannot get
the person they want, they go elsewhere. If an adjuster moves to another
firm, the insurer will want existing claims files to go with him.

Quest Gates Partnership is one of the rare firms of adjusters that
foresees expansion in D&O work. "There are two areas where this may
happen," says partner Chris Hall. "The Contaminated Land Registry hasn't
given rise to claims yet, but with the government pushing for development
of brownfield sites, land surveyors and local planning authorities may
find themselves in the frame. The other area is directors' duties to
shareholders. People get upset when the chief executive gets a £1m payout
to leave while the shareholders suffer."

But, the volume of instructions received at the moment is small and
remains flat. An individual adjuster cannot live off D&O claims alone, but
probably handles a variety of other liability claims including
professional indemnity.

Ability to negotiate

Mr Hall observes: "Claims do not come in as writs. They may take the form
of a complaint against the company and anyone associated with it. An
adjuster can tell whether there is a valid claim against a director and
has the ability to negotiate. There will be costs and so forth - even if
the claim is repudiated."

As partners in the investigation, adjusters work hand in hand with the
solicitors retained by the insurer. There is a degree of crossover between
what adjusters and solicitors do. For example, it may be easier for the
adjuster to take witness statements if the solicitor does not have
external people to do this.

Another adjuster with some involvement in D&O is Clive Haslock, principal
of Haslocks. "This comes from my forensic accounting background and my
ability to write extremely detailed reports that will stand up in court,"
he says. "I've been used to collect evidence and give insurers the
background to cases."

Accounting problems currently represent a large proportion of D&O

But like Quest Gates, Mr Haslock acknowledges that while there are more
claims in the market than before, it is not an area where his firm is
expanding at present.

D&O premiums have seen a rapid rise in the last 12 months. Increases have
ranged from 20% to 200% - even more for speculative, high-risk biotech and
IT companies. Besides putting up the price, insurers have toughened up
considerably on terms, conditions and exclusions. The insured versus
insured exclusion, under which claims by directors suing each other are
excluded, had been deleted by some insurers. Having suffered nasty losses,
they are now putting it back. The failure to insure exclusion (against
employers' and public liability for example) has also made a

Some underwriters are even insisting on an insolvency exclusion for weak

D&O cover is a claims-made insurance, under which claims are only accepted
if they are notified during the year of insurance. But if either the
client or the insurer decides not to renew, run-off cover has been
available for up to 36 months at a low additional premium. Such extended
reporting facilities are now being withdrawn.

Not a knee-jerk reaction

These measures cannot be seen as a knee-jerk reaction to hardening
conditions in other sectors of general insurance. Underwriters predict a
further increase in claims as the Financial Services Authority launches
more investigations.

Mr Elms says: "Premiums are due for another rise. A purely UK company
exposed to the FSA could result in a £500,000 loss to the insurer for a
premium of only £3000. An investigation means a fairly long period for
representation to take place, and you need the best lawyers." So it sounds
as though here, too, very few individual loss adjusters will get any


- An allegation was made that directors had made mis-statements and
misrepresentations to the purchasing company, at the time their company
was sold. The case was settled out of court for approximately £4.5m. If
the case had gone to court, the costs would have been much more

- Several former directors of the Equitable Life Assurance Society are
being sued for £2.9bn, following the life office's well-publicised
financial difficulties.

- A claim was brought against two directors for sexual harassment of an
employee. The directors were found innocent, but the case demonstrates
that a director will still have to defend and fund a claim personally -
even if it is spurious.

- In a share prospectus, the directors stated they had bought insurance to
protect the company's assets. Due to an oversight, this insurance was not
purchased for all assets, so when a loss occurred, protection was not
available. A shareholder claim was brought for incorrect information
contained within the prospectus. The matter was settled for more than

- At the annual general meeting of a sports club, a dispute arose over how
its finances had been managed. As a result of the argument, a director
faces an action for libel and slander.


The Higgs report was commissioned by Trade Secretary Patricia Hewitt in an
effort to avert the kind of corporate scandals that have rocked Wall
Street. The main thrust of the report is to vastly enlarge the role of
non-executive directors. Boards would have a senior independent director -
not the chairman - who could make direct contact with the shareholders and
report back to the other non-executives. There are also recommendations
about the independence of the chairman and the number of directorships one
person can hold.

Not surprisingly, the Confederation of British Industry's members are
largely opposed to the report, on the grounds that it is a recipe for
strife in the boardroom. But there is one aspect of the proposed code that
should please insurers: Higgs recommends that all companies should take
out D&O cover.

Philip Hartley, a partner at law firm Kennedys, comments: "Non-executives
are being pushed into the limelight to save companies from corporate

In terms of claims, they have so far been largely ignored. It is the
controlling directors who have been targeted in D&O claims."
Non-executives have accepted directorships in the past without knowing the
responsibilities. This age is now over, and the duties of directors may
well be codified in a new Companies Act, though this has been a long time
coming, and may not happen until at least 2005. Such an Act would almost
certainly make it easier for directors to be sued.
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