Risky Business? The increasing risk of being a Director in 2023
Directors and officers of limited companies can have unlimited personal liability for the decisions and actions they take on behalf of their company.
Directors and Officers insurance (D&O), sometimes known as Management Liability insurance, provides legal cost protection covering a range of claims against individual senior managers and directors including actual instances or allegations of wrongful acts, errors, omissions, negligence or breach of duty.
The trend is increasingly for senior leaders to be held personally accountable for organisational issues and problems (eg cyber-attacks, environmental incidents and financial failings), making D&O insurance more important than ever.
What Factors are driving the increase in D&O Claims?
Event-driven litigation
Instances of ‘bad news’ litigation have become a frequent cause of D&O claims. These claims can occur as a result of product problems (eg recalls, malfunctions or false advertising), inadequate response to natural disasters or allegations of corporate corruption. In these cases, stakeholders will take legal action against an organisation’s senior leaders, holding them personally accountable if they failed to implement reasonable controls to prevent the disaster or lacked a proper response plan to limit the damage.
Environmental issues
In the wake of COP 26, climate change remains firmly at the top of the news agenda for 2022. The Environment Act became UK law in November 2021 and introduced wide range of measures aimed at protecting the environment. Failure to adjust operations and bolster environmental risk management could result in D&O claims from a variety of sources—including government bodies, regulators and investors.
Cyber security and data protection
Many organisations are now completely reliant on technology to trade. This reliance makes cyber-security of utmost importance and magnifies the threat posed by cyber attacks. In addition to the operational risks, regulation in the form of the General Data Protection Regulations (GDPR) requires organisations and their senior leaders to take specific steps to prevent and appropriately respond to a cyber-attack—or face hefty non-compliance consequences.
As a result, senior leaders are increasingly being held accountable for maintaining proper cyber security and data protection procedures.
Difficult economic environment
The economic environment continues to be difficult, with shock waves from the Covid 19 pandemic and the war in Ukraine driving inflation and supply chain problems. Directors of businesses facing insolvency or financial difficulties can become the target of personal litigation by fellow directors, creditors or other stakeholders.
Diversity issues
Regulators and investors now expect companies to implement measures to ensure equality in the workplace. Real and alleged failures in this area are increasingly resulting in litigation from external sources and from employees against individual senior managers.
What can you do to help your broker obtain the best possible D&O insurance terms?
These trends mean that directors and senior managers are at more personal risk of litigation than ever before. This is as much the case for small businesses as it is for major corporations. Costs, fines and damages associated with this type of litigation can be financially crippling, so D&O cover should be seen as a vital element of any organisation’s insurance portfolio.
With this in mind, what can be done to help your broker obtain the best possible terms?
Communicate with your broker
Ensure your broker has a good and up-to-date understanding of your organisation’s activities and risks so that they can help you determine your D&O cover requirements. Make sure you let your broker know about any changes in your organisation’s structure or operations to ensure any new risks are identified. This includes new product categories, new markets you have entered or significant changes in your organisational structure.
Start the renewal process early
As the insurance market hardens, insurers are requesting more detailed information about activities, exposures and risk management methods. This in turn can extend the time it takes for them to provide a quotation, so be sure to start the quotation or renewal process as early as possible. Working with an experienced broker (and giving them plenty of notice) will allow your broker to prepare your business case properly to make it as attractive as possible to the insurance market.
Invest in risk management
Ensure that your organisation has policies and procedures in place which keep pace with evolving regulatory requirements. Remember, having appropriate policies and procedures is necessary, but not sufficient – it’s equally important to ensure that robust processes are in place to ensure these are followed, and particularly when it comes to Directors and Officers' Liability, that compliance is documented.
For further information or advice regarding your D&O insurance contact our commercial nsurance team today.