I equate insurance to a safety net. While the fall might still cause trauma and physical injury, and we still need plans to get the person out of the net and back on their feet, it should prevent the very worst injuries.
Of course, health and safety professionals are usually more interested in stopping people from falling… and we would probably ask, ‘do we actually need to expose ourselves to a risk of falling?’ Nonetheless, insurance is a useful (and sometimes mandatory) risk management tool that swaps the uncertainty of future losses with the certainty that some of those losses will be covered, in exchange for a premium.
While we may be familiar with a number of insurances – such as motor, property and employers’ liability insurance – directors’ and officer’s liability insurance (D&O insurance) is less well known. The reason it exists is because the director’s position carries a swathe of responsibilities and duties. If they fail to meet these, directors can find themselves – as individuals – facing both civil and criminal action.
Some health and safety professionals will be directors themselves, others will be advising directors. With a basic understanding of how exposed individual directors can be, I have found that it is possible to offer much more persuasive arguments to boards and managers.
In the simplest terms, a director is an individual who helps manage a company. Collectively these directors are known as the officers of the company.
A common misconception is that the company will be held responsible if one of its directors carries out a ‘wrongful act’ in the conduct of their duties as a director. This is not the case. The company is a separate legal entity from its management. Directors face unlimited personal liability for their own wrongful acts.
When directors say that they have ‘limited liability’ what they probably mean (whether they know it or not) is that they have limited liability for the company’s debts. It is worth reiterating that directors face unlimited personal liability for their own wrongful acts. I suspect that this could be an eye-opener for many directors. It would certainly be an interesting topic to explore in a senior executive training session.
The definition of a ‘wrongful act’ is fairly broad and includes actual or alleged breaches of duty or trust, neglect or omissions, incorrect or misleading statements or overstepping their authority.
Many scenarios could therefore give rise to a personal claim against a director. For instance, a director wrongly withholds a payment to a supplier, which goes out of business. Another scenario could be that one company acquires another, but soon discovers that material facts have been withheld or misrepresented. Alternatively, a customer alleges that a company director has slandered them. Yet another scenario could be that an employee claims that a director has wrongfully terminated their contract. D&O insurance is designed to help cover the costs and awards associated to these claims.
Regulators can also take action against directors. The Companies Act 2006 codifies directors’ duties, for example, requiring them to promote the success of the company and avoid conflicts of interest. Poor business decisions or practices by a director could lead to their prosecution.
Health and safety professionals will probably be most aware of the individual exposure of directors in relation to health and safety breaches. Section 37 of the Health and Safety at Work etc. Act 1974 enables a director, manager, secretary or similar officer to be prosecuted if an offence was committed with their consent, connivance or neglect. The recent prosecution and imprisonment of Siday Construction’s commercial director for gross, negligence manslaughter highlights the issues.
Needless to say, no insurance policy can pay financial penalties or sit in a prison cell on someone else’s behalf. The legal costs by themselves can be considerable (and more than the fine in some instances). Depending on the wording and extensions, an existing insurance policy may, or may not, pay the legal costs for a director in a prosecution. D&O insurance can help to plug the gaps.
The likelihood and magnitude of any of these events can, of course, be reduced by robust corporate governance and effective management systems.
D&O insurance, like any other insurance policy, needs to be properly understood and the detail is best discussed with insurance professionals.
If you are thinking more holistically about risk, it may prove useful to start exploring these issues. For example, what are possible sources of claims against individual directors? What’s stopping our directors from falling or are we putting too much reliance on a safety net? Do we actually have a safety net and what state is it in?
A broader and better understanding of personal liability is a small and yet important factor that helps keep directors’ attention on managing risks throughout a business. This can only be a benefit to health and safety.
Nick Bell is owner of Nick Bell Risk Consultancy
