The major risk factors that may expose directors to liability have been widely discussed in the industry, and include increased stakeholder activism, increased awareness of directors’ duties, the rise of digital risks (and the Protection of Personal Information – POPI Act), and the fall-out of the COVID-19 pandemic.
Notwithstanding the increased risk exposures flowing from the COVID-19 pandemic, the results from our 2020 Annual Specialist Risk Review were encouraging.
The results revealed that 86% of company directors ensured that their shareholders were aware of the impact of the pandemic on their businesses, while another 73% now have contingency plans for dealing with pandemics and future lockdowns.
This article looks at what directors need to do, when a claim is made against them, and when to notify their insurer.
The trigger for a D&O policy
Directors & Officers (D&O) policies generally provide cover for damages claimed from directors and for costs incurred by directors in defending against such claims. The policy is called into action when the claim alleges a wrongful act against a director while the director was acting in a capacity as a director.
A wrongful act is defined widely, and includes allegations of a breach of duty, error, omission or misstatement made by a director acting in such capacity. For the purpose of defence costs, this includes allegations of criminal and willful actions.
The cost of legal representation for a director, during an investigation by a regulatory authority into the affairs of the company, are included in many D&O policies. The trigger in such instances is when the director receives notice to attend such an investigation, whether allegations of a wrongful act are made or not.
Notifying the insurer
Policies usually require the director to notify the insurer as soon as possible after:
- A written demand is made against the director, in which ever form, alleging a wrongful act (or becoming aware of the intention of any person to take such action);
- Receiving notice of criminal prosecution against a director;
- Receiving notice of an official/regulatory investigation; or
- Any fact, circumstance, or event that a director reasonably believes may give rise to such demand or action at any future time.
There is a difference between the director’s duty of disclosure during the underwriting process, and the director’s obligation to notify a claim. In the latter instance, it is only when there is a reasonable belief that certain facts may give rise to a claim, whereas the former includes disclosing relevant risk factors and particular circumstances of that director or board of directors.
Objective decisions
In many instances, a director of a company may feel that the chaos of war has descended upon them, when allegations of wrongful acts are made. The heightened emotions involved in such scenarios may lead a director to make decisions that could prejudice the director’s defence and coverage under the policy. It is, therefore, critical for the director to partner with their insurer to ensure compliance with the policy conditions, and to ensure that the director’s interests are protected. Insurers have dealt with many similar matters and have access to the most appropriate legal resources to assist the director with the circumstances, and often bring an objective perspective to the table. It is useful to remind directors that the insurer’s interests are aligned with the director’s interests- to minimise the risk of or extent of a damages award.
When a claim is made against a director, it is best to call the broker, who will ensure that the necessary notification is made, so that the D&O policy may be accessed to assist them.
By Pierre Lombard
Senior Claims Specialist (Financial Lines)
