As we all know, the majority of recruitment agencies purchase combined insurance packages that include directors and officers liability insurance (D&O) or they purchase stand-alone D&O policies if they require higher limits. However, there are a significant number of agencies that do not fully understand what D&O insurance is or whether they need this particular cover.
Directors and officers have specific duties, responsibilities and powers due to the position they hold. These responsibilities are usually set out in their job description. If a director or officer of a company is found to have acted outside of these powers then terms of reference, civil, criminal or regulatory proceedings can be brought against them by a number of people: shareholders, investors, employees, regulators or third parties.
This is when D&O insurance is vital, as this type of insurance provides cover for the cost of compensation claims made against the directors and officers for these alleged wrongful acts as well as the cost of defending proceedings against them. These wrongful acts include breach of trust, breach of duty, neglect, error or omissions, misleading statements and wrongful trading.
If directors and officers do not purchase this type of insurance, then they face a greater risk of not being able to defend themselves against disqualification from holding the position of director, civil proceedings which can lead to hefty legal costs and awards for damages or criminal prosecution which can lead to fines and possible imprisonment
As we have already mentioned, D&O liability covers claims made by regulators, shareholders or investors, e.g. for failure to act in the company's best interest, creditors, breach of European legislation, insolvency and if employment practices liability is also included in the D&O policy there is cover for employee discrimination claims, e.g. for unfair dismissal, harassment, or failure to promote a person.
2020 & COVID-19 Effect on D&O Insurance
Currently the insurance market for D&O is a very difficult one with a number of insurers no longer providing D&O insurance to certain sectors, reducing level of indemnity they are willing to provide, restricting cover, applying exclusions such as insolvency and increasing premiums considerably. The reason why this particular market has changed so much and is getting harder is mainly due to COVID-19 and the claims or potential claims from this pandemic. Insurers believe that the likely claims that they could receive are due to regulators questioning an agency's financial disclosure and transparency, insolvency of a company (especially in the hardest hit sectors), fraud, false accounting, failure to keep proper accounts and records and employment practice claims from employees that suffer due to changing working practices during this crisis.
Insurers are paying particular interest in a number of actions of directors and officers are currently taking.
The main concern of insurances in these challenging times is insolvency of businesses. As more and more businesses, especially in specific sectors, struggle financially because of COVID-19 restrictions, there is a real danger directors will face claims from shareholders if the business becomes insolvent. While the government has relaxed the wrongful trading rules, this change does not remove the obligations a company has with regard to fraudulent and reckless trading, for which a director or officer can be personally and criminally liable.
In addition to this as business owners struggle financially, some directors have or could succumb to furlough fraud and tax evasion which will then lead to a number of claims. Also, there have been a number of cases of bribery through corruption and tax evasion which have been exacerbated by the increase in home working.
Health and safety of your own staff and visitors is also a concern to insurers at the moment. Does a business have robust and appropriate measures in place to protect staff and others? Insurers are particularly concerned about potential HSE investigations and employment practice incidents (such as mandating attendance to the workplace, or not following government guidance in relation to the pandemic).
What Can Directors Do?
Our advice is that all directors and officers need to continually review their practices and identify any exposures quickly. At all times be prepared and well-informed. Make sure you have in place an accurate, real-time overview of the company's financial strength, as well as how that strength is being affected by the pandemic. If you do this then others will be confident you can continue to trade.
Some useful actions to take would be to review key business contracts and scaling back, preserve cash with limited expenditure on essential items, talk to suppliers and customers constantly around issues and potential disruption areas, communicate well and all the time with creditors, review the terms of your banking obligations and finally make sure you have access to appropriate professional advice and being able to demonstrate that you acted on their advice.
Make sure your business continuity plan is robust, works well and is up to date. Ensure that you share points with your customers and suppliers as well as third party consultants with a clear audit trail. Doing this will serve as due diligence against any claim that might arise in the future.
Finally, undertake a review of your existing policies and procedures to ensure they're relevant for the novel risks brought in by the pandemic. Keep the momentum going with regular, well-documented board meetings. Be mindful of what you're writing and signpost your decision making logically, sensibly and clearly.
So as D&O insurers are reducing cover, withdrawing from the market and increasing premiums it is paramount that you ensure as a company that you continually review your potential risks and reduce your exposures as much as possible. Also, it is vital that you review the D&O policies you purchase to identify any deficiencies in cover. Sometimes it is better to pay more for a policy that has less exclusions so your core exposures are covered. This is a volatile market with terms being issued late and cover being withdrawn at renewal. So please make sure that you plan ahead in good time and when you are happy with the cover purchase the policy straight away.