Directors risk bills for legal claims that could run into millions - McGill and Partners

Directors could face significant legal expenses and other liabilities, running into the millions of pounds, due to misunderstanding the way in which their insurance cover works, according to specialist insurance broker, McGill and Partners.

Directors and officers insurance (D&O) funds defence costs and offers protection from liability for claims against company directors arising from conduct while in office. These could be civil or criminal in nature and range from allegations of negligence to breach of fiduciary, statutory or regulatory duties.

A recent survey of more than 100 board members in the UK, conducted by McGill and Partners in conjunction with NedOnBoard - the professional body for non-executive directors and board members, found widespread misunderstanding around their D&O cover.

For instance, fewer than one-in-five directors (17 percent) understood whether they would be covered for a claim made against them after they left the company, based on allegations of misconduct while in office. More than three quarters (83 percent) failed to appreciate that such protection could not be guaranteed if the company did not continue to purchase appropriate D&O insurance after they left.

Another crucial gap in understanding among directors relates to corporate insolvency and how it impacts their D&O coverage. An insolvent company is unable to meet any obligations to indemnify its directors in respect of their legal expenses. And only 21 percent of directors understood that the D&O policy might not cover them for all their legal representation costs at this critical time.

Francis Kean, partner in McGill and Partners’ financial lines team said: “Legal claims that would be covered by a D&O policy can run into the millions which is why it’s so vital that directors understand their coverage.

“What is worryingly clear from our research is that many directors don’t understand how their cover will be affected by changes to the company. Events completely outside of directors’ control can restrict or curtail the cover available to them. This means that many could be leaving themselves open to serious financial losses, and even bankruptcy, by not understanding the nature and limitations of their cover.

“With a D&O insurance programme it may be that the recipients of the cover aren’t necessarily involved in the purchasing which could be one reason behind the knowledge gap. Unless there is a stronger connection between the product and its intended end users there is the very real risk of serious expectation gaps, or worse, emerging at the worst possible time.”

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