Directors and Officers Liability

If the company’s directors or managers are sued in their personal capacity for mismanagement of the company, then this policy will pay the Damages as well as the legal costs.

Question: Brief overview of policy layout and cover provided

The cover provided by the policy is found in two Insuring Agreements and a number of extensions.

  • Insuring Agreement A provides cover for the company’s directors, managers and supervisors should they become personally liable for a wrongful act such as mismanaging the company.
  • Insuring Agreement B will reimburse the company for legal expenses that it has paid on behalf of the directors and officers
  • The following is a brief summary of the extensions available on the policy
    • Estates and legal representatives

If the Insured Person dies or is sequestrated then this policy will cover the estate as if it were the Insured Person.

  • Spousal liability

This extension indemnifies the Insured Person’s spouse if they suffer loss as a result of being married to the Insured Person. Example: If two people are married in community of property, there is a risk that the spouse could also lose their assets when the Insured Person’s assets are seized by the sheriff.

  • Discovery period

This extension allows a claim to be made in the 12 months after the Period of Insurance. The event causing the claim must have occurred on or after the Retroactive Date but before the end of the Period of Insurance.

  • Retired Directors’ or Officers’ cover

If this policy lapses and is not replaced, the cover continues for 6 years for retired directors and officers, provided that the retirement occurred during the Period of Insurance.  Retirement does not mean the Insured Person has reached retirement age, it simply means that they are no longer a director or officer of the insured company.  This extension does not apply to directors that were disqualified from serving as a director.

  • Corporate manslaughter

These claims arise out of allegations of gross negligence or breach of statutes in relation to health and safety. Corporate manslaughter is normally a corporate offence which does not affect individual directors and officers, however, individuals may subsequently be held liable as a result of the investigation’s findings.

This extension covers the Insured Person’s legal costs in defending themselves during a corporate manslaughter investigation. Should a charge of manslaughter be brought against the insured company it will, inevitably, involve individual directors and officers but because there is no actual charge brought against them personally the D&O policy in its standard form will not respond. This extension expands the cover to provide for costs they will incur in using legal counsel to advise them during the legal proceedings.

  • Extradition costs

Covers the Insured Person's expenses in resisting an extradition application made by a foreign government

  • General Counsel liability

Covers legal advisors in the Insured Company’s full time employ. Liability arising out of professional services is one of the policy’s exclusions. However, where the lawyer works exclusively for the Insured company, they are not excluded from this policy’s cover.

  • Emergency Costs

Covers legal expenses incurred before it was possible to obtain the Insurers’ permission. Example: opposing an urgent matter over a weekend.

  • Deprivation of Assets

The Insurers will pay some of the Insured Person's necessary living expenses for up to 12 months after the Insured Person’s assets have been seized.

  • Public relations expenses

Pays the expenses of public relations consultants who mitigate negative publicity arising out of charges brought against the Insured Person

  • Reputational protection expenses

Pays the expenses of public relations consultants to publicize the Insured Person’s ‘not guilty’ finding

  • Pollution defence costs

Mostly this extension is included automatically with an indemnity limit of R250,000. This means that, despite the pollution exclusion, there is cover for liability arising out of pollution – but only for legal defence costs incurred in defending a pollution charge.

  • Reinstatement of limit of indemnity

When the limit of indemnity is reduced by a claim, this extension will automatically reinstate it to the original amount. This process will continue until the policy has paid twice the original limit of indemnity. This extension does not increase the limit in respect of any one claim or series of claims arising out of a single wrongful act or related acts.

  • VAT exclusive

A significant benefit of this policy is that the indemnity limit is VAT exclusive and VAT is paid over and above the indemnity limit.

  • Non-executive directors protection

If a non-executive director are unaware of any dishonest practices in the company then their cover will not be affected by the dishonesty of other directors or officers.

  • Special excess protection for directors

This extension provides additional legal defence costs when the policy’s indemnity limit has been reached and Insured Company is insolvent or is legally prohibited from paying the Insured Person’s legal defence costs

  • Tax, COID and UIF extension

This extension covers an Insured Person if they become personally liable for the Insured company’s unpaid taxes. It would only apply if that Insured Person did not intentionally commit any wrongdoing and if the company is insolvent.

  • Injury and Damage defence costs

Normally the Insured’s public liability policy would cover employees for their liability arising out of the Injury or Damage they cause in the course of their employment duties. That cover would therefore be excluded from this policy.

Where the Insured company has purchased, and paid the premium, for a general liability policy and that policy failed to pay a legitimate claim, then this extension would cover the Insured Person’s legal defence costs if the Insured company was unable to pay them.

  • Fines and penalties extension

This extension provides limited cover for certain fines and penalties provided that such cover is not contrary to public interest

Question: What are the significant standard exclusions on a D&O policy?

The following are key exclusions on the policy:

  • Injury and Damage - the policy only covers pure economic losses
  • Money laundering. Money laundering is the process of taking the proceeds of criminal activity and making them appear legal.
  • Bribes and commissions. Claims arising out of ‘incentives’ paid to others are excluded.
  • Professional services. Suppose the Insured Person fulfils two roles. He is a director of the Insured company and he is also an independent IT consultant to the Insured company. There would be cover for his mistakes as a director, but not for those as an IT consultant to the business.
  • Failing to buy insurance. The D&O policy is not intended as a substitute for other insurance policies. The following illustrates why this exclusion is necessary:
    • To save money the company’s management don’t buy the necessary insurance. Instead they only buy a D&O policy.
    • When the company suffers a loss which ought to have been insured, one of the directors is blamed for failing to arrange insurance and is sued for the amount of company’s loss
  • Insured vs Insured. Claims made against the Insured by the company, or by one of the other insured persons is not covered
    • In other words, there is no cover if the directors sue each other for mismanaging the company
    • There are some exceptions to this. There is cover, for example, if the claim is brought in terms of a derivative action. There is also cover for claims involving unfair labour practices.
  • Employee related benefits. There is no cover claims related to pensions, profit sharing, share options or similar employee benefit programs
  • Pollution. One of the policy’s extensions does provide cover for legal costs incurred in defending a pollution claim.
  • Insider trading. This is the illegal practice of trading on the stock exchange to one's own advantage through having access to confidential information.

The following exclusions are also common to other types of liability policies:

  • Fines, penalties and taxes – for example, liability arising for a fine which the court imposed on a company for maintaining poor safety standards. The Fines and Penalties extension does provide limited cover for fines and penalties.
  • Deliberate acts by the Insured
  • Self-enrichment - where the Insured gained personal profit out of the wrongful act
  • Admission of Liability – if the Insurer’s liability increases because the Insured admitted to being at fault, then the policy would not pay for the increased liability
  • Defamation – saying or writing untrue and harmful statements is not covered.
  • Material changes to the Insured’s risk which the Insurers were not advised of
  • War, terrorism, nuclear materials or asbestos related claims are excluded
  • Known losses – claims or possible claims that the Insured was aware of before the policy started
  • Retroactive Date - events giving rise to a claim which occurred prior to this date
  • Period of Insurance – there is no cover unless the Insured first became aware of the possibility of a claim during the Period of Insurance
  • First amount payable – (sometimes referred to as the ‘deductible’ or as the ‘excess’) that portion of the claim falling within the first amount payable is paid by the Insured and not the Insurers.