INSURETALK: DIRECTORS & OFFICERS LIABILITY INSURANCE

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PROTECTING THE BUSINESS LEADERS  IN THE COMPLEX BUSINESS ENVIRONMENT

This is a continuation of our discussions on the liability insurance that companies and individuals should consider in the business world or personal capacity. Our focus this week is on the Directors and Officers Liability Insurance often called D&O. The relevance of this type of insurance and reasons why it is critical in the current environment is discussed to assist in your buying decision for such an essential cover.

What is D&O Liability Insurance? It is a necessary cover that protects personal assets of directors and officers, that is management, against liability exposures the management and the company faces in this complex environment. Decisions that are made by management are very complex, and they may result in expensive lawsuits that may be served in their personal capacity. These lawsuits come from employees, shareholders, clients, creditors, trade unions, competitors, communities,  government or any other parties for wrongful acts. In most scandals that hit the headlines in Lesotho, one way or the other it exposes the directors and management to be sued for the decisions that might have made on behalf of the company. This puts the personal assets of management at risk. It is important to note that most policies exclude fraud and criminal acts by management.


Directors’ duties and responsibilities
are well articulated in the Companies Act of 2011, section 63. Management of the company has legal obligations, often referred to as fiduciary to perform and comply with. Failure to comply with stipulated duties does pose liability exposure in terms of fines and penalties. In the scheme of things, the directors and senior management may be sued in their personal capacity for a decision that may have resulted in  losses to the stakeholders. This is why the D&O Insurance becomes a must-have because of the potential it has in for personal finance ruin. Management faces personal liability if the company suffers a loss due to their conduct, not meeting the required standard. The Companies Act is specific that directors and former directors maybe severally , jointly or individually liable.

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What is the primary source of the claims for D&O? Breach of duty and neglect is one of the primary sources of the claims. In recent times the Covid-19 pandemic caught many organisations off guard, and those that did not have the Business Continuity Plan were affected. The losses that happened were blamed on the company directors for failing to safeguard the company. In the financial sector, it is incumbent upon the director to ensure that there is a business continuity plan. Again this is a statutory requirement that any organisation implement. The failure to do so falls into the breach of duty and neglect. 

The misrepresentation for the financial performance of the company is one of the primary sources of claims. More often, third parties rely on board approved financial reports that may not be a true reflection of the financial position of the company. This area has been a thorny issue in the recent years where auditing firms have been sucked in. Directors and management may be sued for issuing such financial reports.

Financial market volatility and the economic downturn has been a source of lawsuits, especially that companies in fund management. The erosion of the pensions and other investments have created pressure on boards. The financial market for Lesotho is still growing, and reliance is much placed on South African financial markets. With the equities nose-diving at the beginning of this year, the liability exposures for most directors went up.

Mergers and Acquisitions (M&A) are a source of claims as well. It is not always the case that the identified opportunities end in value addition. In some M&A companies end up buying into liabilities or loss-making entities. Directors may be sued by for such value erosion decisions due to misleading and deceptive conduct.

The regulatory scrutiny is increasing enormously in the financial sector, and other sectors—the appetite for regulatory inspections in most industries that include telecommunications is high. In the recent past, the media has been awash with reports that the communication authority pursuing the mobile operators for alleged a breach of statutory duties. The regulator has the statutory power to impose huge fines if they identify any regulatory violations. The fines can be extended to the directors in their individual capacity. Most claims are, therefore coming from the non-compliance of the regulations. Directors need D&O insurance in these highly regulated environments to protected their personal assets. 

Company insolvency, which leads to bankruptcy is a source of many claims, and it is expected that with the Covid-19 pandemic such claims may increase as there has been an unprecedented company closures all over different markets. Liability comes in as the directors being alleged to have failed to navigate the terrain and prepare the organisation to continue operating. It is that poor decision that the stakeholders may come back for the directors.  

In summary, the D&O covers provide a solution for the intrinsic strategic risks that directors and senior management in the course of their work face daily. It is therefore essential as an organisation to ensure that you have a D&O cover in place and protect the directors. They will be able to confidently discharge their fiduciary duty without fear of prosecution or losing assets. The company that appoints directors without the D&O cover, they become over cautious and miss opportunities.

D&O claim statistics on global settings? The global market statistics show that 61% of the value of the cases relate to non-compliance with regulations. Maladministration and breach of trust are tied up in the second position of  10%. This information assists when you are buying your D&O insurance. You have to ensure that your policy adequately covers the causes of the frequent claims.

What are the main issues to check when you have D&O cover?  For those who have the covers in place, there are issues that you can quickly check if you have the right cover. Check the adequacy of the amount of cover provided, and this can be done by comparing the turnover and the sensitivity of the sector. Does the Insurer carrying the risk have a strong balance sheet because the last thing that should happen is to have the claim failing to go through and falling back on you? The deductible or retention of the D&O policy should also be checked if it is not too high. There is a possibility of buying down the deductible or retention.

Market challenges relating to D&O covers? The global market pulls premium above M300 billion; however, the claims had a sharp increase and high amounts in lawsuits. This growth in claims has made the D&O profitability be under severe pressure and is affecting the availability of cover and to a spike in the prices. It is advisable that you go to the market with at least a three months prior to the renewal date.  

Low update for D&O in Lesotho Despite the company act allowing the company to take up insurance for the directors, there is a low uptake of D&O in the market. The is need to raise awareness for the various company boards and senior management to take up this cover. The low uptake makes this vital insurance class contribute negligibly to the market insurance pool. All general insurance companies in Lesotho provide the D&O Insurance covers. However, the experience has been a low uptake. Our preliminary research reveals that there is a  general lack of awareness, especially the small to medium companies and the conglomerates have the covers on global programmes.

What to do next? In view of the rising liability exposures, it is highly advisable that directors and senior management be covered by D&O liability insurance. Your insurance broker would be very grateful to provide you with professional advice.

Amon Rupiya is an experienced insurance practitioner qualified with a Masters in Insurance and Risk Management. He writes in his personal capacity and views does not represent the company he is working for. Please note that the content provided in this article is intended as an overview and as general information only. Before making any decisions based on the information provided in this article, please use your discretion and seek advice from an insurance broker or agent. Feedback and questions send email to amonfield@gmail.com

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