Question: Can a D&O policy be used to cover trustees?
There are three departments in Camargue that write trusts:
- Pension fund trustees (PFT) department.
- The trusts written in this area are those typically governed by the Trust Property Control Act 57 of 1998.
- Medical schemes trusts and pension funds trusts are the preferred types of trusts written in this area.
- Charitable trusts and employee benefit trusts are sometimes written but only as accommodation business.
- In order to write this business the trust would need to be legally constituted and a trust title deed would need to be in place.
- D&O department.
- The trusts written in this area are those typically governed by the Companies Act 71 of 2008 or by the Sectional Titles Schemes Management Act 8 of 2011.
- Technically, the Companies Act does not refer to trusts but instead it provides for other similar structures such as ‘not for profit’ companies. These are sometimes referred to as section 21 companies (a reference from the old Companies Act).
- The trustees of organisations such as sectional titles, home owners associations, schools etc. can also be covered under a D&O policy.
- FiPi division
- Where a trust has been created as an investment vehicle, it would be written by Camargue’s financial institutions division.
- Camargue does not write
- Family trusts
- Funds held in trust for others (e.g. a lawyer holding money in trust)
Question: What is the difference between a D&O policy and a General Trustees Liability policy? (Pension Fund Trustees Liability)
- A General Trustees Policy resembles three policies combined into one:
- a D&O policy in that it covers the trustees for their personal liability arising out of allegations of mismanaging the trust.
- a Professional Indemnity policy, in that it covers the Trust itself against liability arising from wrongful acts.
- a Commercial Crime policy which protects the fund against theft by employees and other parties which includes cyber crime.
- D&O policies cover the directors and management of companies and other organisations against allegations of mismanagement. By contrast a General Trustees Liability policy is for trusts only.
Question: Does the Insolvency clause contradict the Estates and Legal Representatives clause?
- The Insolvency clause excludes claims arising out of the Insured’s Insolvency.
- The Estates and Legal Representatives clause (amongst other things) covers claims made against the legal representative of an insolvent Insured.
- Is there any benefit in covering the claims made against the legal representative of an insolvent Insured if policy contains the Insolvency clause?
- Yes, because the legal representative could be held liable for mismanagement claims which are unrelated to Insolvency.
- Example: the insolvent Insured’s legal practitioner failed to renew a trading licence on time. As a result the value of the Insured’s estate was further eroded and benefit payable to creditors was even smaller. The creditors sued the legal practitioner for that drop in benefit.
Question: What about the Public Finance Management Act of 1999 (PFMA)?
- Sometimes underwriters will limit the definition of the Insured Person when underwriting public bodies and organs of state. (In some cases, only the CEO would be covered.) This extension would ensure that the Insured Persons include the accounting officer and the accounting authority.
- If the accounting officer and the accounting authority are not employees, then their professional services would be excluded under this policy. This extension would restore that cover.
The following are examples of Public Bodies and Organs of State -
- Organs of State specified in Schedule 1 of the PFMA include:
- Parliament, national or provincial government departments, municipalities and provincial legislatures.
- The Commission on Gender Equality
- The Commission for the Promotion and Protection of the Rights of Cultural, Religious and Linguistic Communities
- The Financial and Fiscal Commission
- The Human Rights Commission
- The Independent Communications Authority of South Africa
- The Independent Electoral Commission
- The Municipal Demarcation Board
- The Pan South African Language Board
- The Public Protector
- Public Bodies specified in Schedule 2 of the PFMA include Telkom SA Limited, SABC, ESKOM, SA Post Office Limited, Transnet Limited, the Airports Company of South Africa Limited, DENEL, Armscor, the Development Bank of Southern Africa and the IDC. Public bodies may also include any subsidiary or entity under the ownership control of these public bodies.
Question: What is Money Laundering?
- Money laundering is the process of taking the proceeds of criminal activity and making them appear legal.
- Money laundering usually consists of three steps: placement, layering and integration.
- Placement is the depositing of funds in financial institutions or the conversion of cash into negotiable instruments. Placement is the most difficult step. The easiest way to begin laundering large amounts of cash is to deposit them into a financial institution. However, under the Financial Intelligence Centre Act 38 of 2001 (FICA), financial institutions are required to report large deposits in cash made by an individual in a single day. To disguise criminal activity, launderers route cash through a "front" operation; that is, a business such as a check-cashing service or a jewellery store. Another option is to convert the cash into negotiable instruments, such as cashier's checks, money orders, or traveller’s checks.
- Layering involves the wire transfer of funds through a series of accounts in an attempt to hide the funds' true origins. This often means transferring funds to foreign countries that have strict bank-secrecy laws such as the Cayman Islands, the Bahamas, and Panama. Once deposited in a foreign bank, the funds can be moved through accounts of "shell" corporations, which exist solely for laundering purposes. The high daily volume of wire transfers makes it difficult for law enforcement agencies to trace these transactions.
- Integration involves the movement of layered funds, which are no longer traceable to their criminal origin, into the financial world, where they are mixed with funds of legitimate origin.
Question: Is defamation covered by the D&O policy?
- Defamation is a false statement of fact made to someone other than the victim which harms the reputation of the victim.
- The policy does cover defamation claims made by employees against the Insured Persons (i.e. directors, managers and supervisors of the company).
- The policy does not cover defamation claims brought by third parties(i.e. non-employees). This would be covered under a general liability policy.
Question: Why are ‘unqualified’ financial statements necessary?
- When auditors review the company’s financial controls and records, they generally respond with
- An unqualified opinion, which means that the company’s financial statements give a true and fair view of the company’s financial condition.
- A qualified opinion, which means that the auditor finds that one or more areas of the financial statements do not conform with proper accounting practice, but that this does not affect the rest of the financial statements from being fairly presented when taken as a whole.
- An adverse opinion, which means that the auditor found the company’s financial statements to be materially incorrect, unreliable, and inaccurate.
- A disclaimer of opinion which means that the auditor was unable to form an opinion on the company’s financial statements.
- D&O underwriters are generally reluctant to insure companies that do not have an unqualified audit as this usually points to poor financial controls which are a potential source of mismanagement claims against the company’s management.
Question: What is a start-up?
Camargue considers a company to be a start-up during its first 18 months of trading.
Question: What is a derivative action?
- A derivative action is a lawsuit brought by a stakeholder, on behalf of the organization, against the directors, management or other shareholders of the organization.
- This type of suit often arises when there is fraud, mismanagement, self-dealing and/or dishonesty which are being ignored by the organization’s directors and officers.
- In effect, the suing stakeholder claims to be acting on behalf of the company, because the directors and management are failing to exercise their authority for the benefit of the company and all of its shareholders.
- At common law, the principle is that where a wrong is done to it, only the company as a distinct entity in law may sue for damages. This right does not extend to shareholders and other entities.
- In a move away from the common law position, s165 of the Companies Act (2008) gives interested parties the right to initiate legal action on behalf of the company where the company has suffered loss or damage.
- A significant difference between the old Companies Act (1973) and the new Companies Act (2008) is that the ambit of interested parties who can bring an action on behalf of the company has been expanded from just the shareholders to include directors, officers and trade unions.
Question: What retroactive date is applied to a D&O policy?
The retroactive date would mostly be the start date of the policy. However, where the Camargue policy replaces and existing D&O policy, the Camargue underwriters usually agree to follow that policy’s retroactive date.
Question: Does Insuring Agreement B get the same excess as A?
It’s common practice in the industry to stipulate a higher excess for Insuring Agreement B (or Side B as it is often called). Most Camargue D&O policies have no excess (first amount payable) at all.
Question: Is it necessary to ask for cover for Insuring Agreement B?
No. The policy automatically provides cover for Insuring Agreement B up to the same indemnity limit as there is for Insuring Agreement A.
Question: Are indemnity limits combined?
Both Insuring Agreement A and Insuring Agreement B have indemnity limits. Are these two limits combined when paying the claim?
- No. Insuring Agreement B only covers defence costs and the policy Conditions stipulate that defence costs are “part of and not in addition to the limit of indemnity”.
- Similarly, the indemnity provided by the extensions provides wider cover but does not actually increase the indemnity limit.
Question: What is the Turquand Rule?
- Suppose a party completes a transaction with the company only to later discover that the person representing the company lacked the authority to bind the company. The company may be forced honour the transaction if the transaction was completed in good faith by the other party.
- The rule is based on the English case of Royal British Bank v Turquand 1856 119 ER 886 and has been accepted into South African law
Question: Dishonesty imputed to others
- If any director or officer is unaware of the dishonesty of others, then the policy will not prejudice the cover of that innocent party.
Question: What is Judicial Management?
- This option is only available for companies.
- The court will appoint a judicial manager to run the company and to pay off the company’s debts as and when money becomes available.
- Companies sometimes apply for judicial management in order to prevent creditors from bringing a court action to have the company declared bankrupt and subsequently liquidated.
- The new Companies Act (2008) provides a better alternative in the form of business rescue proceedings.
Question: Illustrate the Professional Indemnity exclusion on a D&O policy (PI)
Consider, for example, an Insured Person who is an attorney. He is also a sole trader which manages the affairs of various trusts. Can the D&O policy be used to cover liability arising out of the mismanagement of these trusts?
- Probably not because this would fall under the professional services exclusion on the policy.
- There are two levels to this relationship
- The attorney manages the running of the business (albeit a sole trader)
- The business offers a service to clients
- In this case the Insured Company is the sole trader and the Insured Person is the attorney himself.
- The D&O policy would cover the attorney’s mismanagement of the sole trader e.g. failing to renew his legal practitioner’s trading licence on time.
- By contrast, a Professional Indemnity policy is intended to cover liability arising out of the professional services that the sole trader provides e.g. mismanaging the trusts.
Question: Does a D&O policy provide Professional Indemnity cover? (PI)
- No the policy does not give PI cover.
- In simple terms, D&O policies are designed to protect individuals when they sued for their poor work. By contrast a PI policy protects the company when the company is sued for poor work.
- Mostly D&O claims arise out of allegations made by shareholders and creditors. By contrast, PI claims usually arise out of allegations made by the company’s customers.
- In a way, a D&O policy is a form of ‘personal’ PI policy, where directors are insured against mistakes they make in performing their management duties.
Question: Who is protected by a D&O policy?
- Unlike other commercial insurance policies, the main beneficiary is not the company itself, but the directors, managers and supervisors of the company. Although D&O policies may refer to the company as ‘the Insured’, this is done for administrative purposes so that there is one centralised point of communication between the Insurers and all the policy’s beneficiaries.
- Almost all of the policy’s cover is designed to indemnify the Insured Persons (whether directly or indirectly through the reimbursement of legal expenses). The policy defines Insured Persons as the company’s directors, managers and supervisors.
- Other people also covered by the policy include:
- Anyone named as a co-defendant in a legal action brought against an Insured Person. If the manager and his secretary are both sued, then the secretary is automatically also covered.
- The Insured Person’s spouse. If the Spousal Liability extension is selected then the policy will indemnify 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.
- The Spousal Liability extension covers the loss that the spouse of an insured person (but only in their capacity as the spouse of the wrongdoer and not for their own wrongful acts).
- The company does nonetheless have some cover:
- It will be reimbursed for the amounts which it has paid as legal defence costs of a claim brought against the directors and officers.
- If the Company Securities extension has been selected then there is cover for claims brought against the company for its alleged unfair dealing it is shares and other securities.
Question: Who are the officers in a D&O policy?
The officers are the company’s managers and supervisors.
Question: Do the directors and officers need to be named?
No, they do not need to be named.
Question: Do directors and officers of a Section 21 company need D&O cover?
Yes, many D&O claims are not brought by shareholders but are instead brought by creditors, employees, suppliers or even by state authorities.
Question: What are Outside Directorships and are they covered? (Detailed answer)
- An outside entity is an organisation:
- in which the company holds a shareholding of 50% or less, or
- which is a charity, trade association, or tax exempt non-profit entity (not necessarily associated with the Insured).
- The Insured company may require that an Insured Person works in an outside entity as a director, manager, supervisor or trustee. Although the term ‘directorship’ has been used, the cover has been defined to include other management related roles as well.
- The policy would cover the Insured Person’s liability arising from wrongful acts committed while working at the outside entity, provided that the Outside Directorships Liability (ODL) extension has been selected.
- This cover is subject to the same exclusions that would apply had the Insured Person committed a wrongful act while working for the Insured (company).
- The ODL extension only covers the Insured Company’s representatives at the outside entity and not the outside entity’s own staff.
- The outside entity ought to have its own D&O liability insurance. This policy will only pay if there is no other insurance to cover the Insured Persons.
- If there is another policy then that policy’s cover will substitute this policy’s cover. This policy’s cover will not be in addition to the other policy’s cover.
Question: What are Outside Directorships and are they covered? (Quick answer)
- The Insured company may insist that an Insured Person represents its interests in another organisation.
- Although the term ‘directorship’ has been used, the cover has been defined to include other management related roles as well.
- Cover for the Insured Person’s duties in the outside entity is provided under the Outside Directorships Liability extension.
Question: Is there cover for the subsidiary companies?
- Yes. The directors and officers of the subsidiaries of the Insured will be indemnified in the same way that the directors of the Insured are.
- A subsidiary is an organisation in which the company holds a controlling share. In other words, more than 50%, but not necessarily 100%.
Question: What are Wrongful Acts?
The policy’s definition of a wrongful act is very wide and includes any error, act or omission committed by the director or officer while working for the Insured company.
Question: What about s247 of the (1973) Companies Act?
- Section 247 of the old Companies Act limited the extent to which a company could indemnify a director for the director’s liabilities.
- The Act did make a concession in that it allowed the company to pay the D&O insurance premiums as well as reimburse the directors for their legal costs in defending themselves (provided that they were not found guilty).
- An equivalent clause can be found in section 78 of the 2008 Companies Act
Question: Is a D&O policy is necessary if the company will bail the director out?
Yes. The D&O policy is still necessary. There are several problems with assuming that the company will come to the director’s rescue:
- The company might not be in a financial position to do so
- The errant director may no longer be in a position to influence the company’s decisions
- In many cases it is illegal for the company to assist in paying the director’s liabilities (s 78 Companies Act, 71 of 2008).
Question: What are JVs and is there cover?
- A joint venture is not a separate legal entity. It is simply an agreement between two more parties that they will work together.
- A joint venture is defined as an association of persons, natural or juristic, who agree to engage in a common undertaking by combining selected property, expertise or resources without forming a partnership or corporation.
- Unlike a partnership, each participant in a JV is only responsible for their own liabilities (and is not jointly responsible for all the debts as in a partnership).
- JVs are typically used where the parties concerned intend to pursue a single venture only. Outside of the JV the parties may well compete against each other.
- Unlike a company, no formalities are required in setting up a JV. It would, however, be most unwise not to specify what contribution each party is going to make (e.g. expertise, equipment or even a financial contribution) and how the benefits are going to be distributed.
- This policy covers the Insured Person while they are working in the JV on behalf of the Insured company.
Question: Are retired directors covered?
- Yes. The policy covers retired directors and officers in the same way as those who are still working for the Insured Company.
- Retirement does not mean the Insured Person has reached retirement age, it simply means that he/she is no longer a director or officer of the insured company. Directors that were disqualified from serving as a director are not considered as being retired.
Question: What cover exists after the period of insurance ends?
- Once a claim has been made against the Insured Person, any subsequent claims, which arose out of the same event, will be treated as if they had been made on the date as the first claim (even though they might have been made some time after the policy lapsed).
- Once the Insurers have been notified of an event which could lead to a claim, there is no time limit on bringing the actual claim against the Insurers.
- Example: The director made a serious management error and immediately notified the insurers. The shareholders only sued the director several years later. The policy paid despite the final claim being brought long after the policy had lapsed.
- The Discovery Period extension allows a claim to be made in the 12 months after the Period of Insurance. The event causing the claim must have occurred after the Retroactive Date but before the end of the Period of Insurance.
- If the Retired Directors’ or Officers’ extension provides cover for up to a further 6 years for directors who retired during the period of insurance.
Question: Are out of court settlements covered?
Yes. However the Insurer’s consent must be obtained first.
Question: If found guilty of a criminal act, must the D&O refund the legal defence costs?
- The policy draws a distinction between mistakes and the ‘willful violation’ of laws.
- If the Insured Person is guilty of breaking the law, but it can be shown to be a mistake, then if found guilty, they would not need to repay the legal costs.
- However, if the Insured Person was found guilty of deliberately breaking a law then they would need to repay the legal defence costs.
Question: Are claims arising out of insolvency covered?
- The insolvency clause excludes claims arising out of the company’s insolvency.
- Although the policy contains an insolvency exclusion, this clause only applies if the schedule specifically states that it should apply.
- The insolvency clause is likely to be added when the company is a start-up or has a poor solvency margin, or in some other way poses a high insolvency risk.
Question: Is there cover if a shareholder sues the Insured? (Major shareholder exclusion)
- Yes, the policy does cover claims made against directors and officers by the shareholders.
- However there would not be cover if the claim is made by a shareholder who also had significant influence over the bad decision. In other words, it is not the policy’s intention to indemnify a major shareholder for bad decisions they participated in.
- The policy’s major shareholder exclusion would exclude claims where shareholders owning 50% or more of the company hold the directors liable.
Question: What is an unfair labour practice?
- An unfair labour practice includes
- Unfair dismissal
- Sexual harassment
- Failure to promote
- Inaccurate job references
- Racial or disability prejudice
- It is also referred to an employment related wrongful act
Question: Is there cover for unfair labour practices?
- Yes, if the action is brought against the director or officer in their personal capacity.
- Cover includes claims brought by past, present or prospective employees.
- There is no cover for unfair labour practice claims made against the company. That cover can be found under an Employment Practices Liability policy.
Question: Who could sue a director or officer?
The following stakeholders could hold the directors and offers of the company liable for bad decisions:
- Shareholders, if the results of the business and hence the dividends or value of shares drop.
- Creditors, if they are not paid.
- Employees, if they were to lose their jobs.
- Customers who are seriously prejudiced when the company no longer provides supplies vital to the customer’s business.
- Suppliers, especially those who incurred considerable expense to supply the company.
- The company itself – in the form of a derivative action
- State authorities, who could bring criminal charges for negligently failing to take the required steps to prevent accidents, injuries, damage or harm to the environment.
- Other parties who believe they have suffered a loss as a result of negligence.
Question: How do D&O claims arise?
The following may be grounds for a D&O claim
- Inadequate financial controls
- Failure to attend board meetings – wrong decisions being made in the absence of the director’s input
- Directors or officers acting beyond the scope of their authority
- Recklessly continuing to trade when the company is insolvent
- Failure to exercise due diligence in an acquisition or merger
- Breach of confidentiality
Question: D&O on claims-made basis (claims made)
The D&O policy is only available on a claims-made basis and not on a losses-occurring basis. This means that:
- All events giving rise to a claim must happen on or after the retroactive date and before the end of the period of insurance.
- The Insured must first become aware of a possible claim during the period of insurance (and notify the Insurers as soon as practicable).
Question: What is a D&O policy? (Policy layout/construction)
The policy provides cover through two Insuring Agreements and several extensions.
- Insuring Agreement A - provides protection to directors, managers and supervisors for wrongful acts committed whilst carrying out their duties associated with the management of the company.
- Insuring Agreement B – refunds the company for the legal and other expenses it paid in defending the directors and managers.
- Policy extensions – augment the cover provided by the policy. For example, the Reputation Protection Expenses extension pays costs in communicating an award which declares the Insured Person innocent.
Question: What is a D&O policy? (Overview of cover)
The Directors’ and Officers’ liability policy covers the directors, managers and supervisors of the company if they are liable in their personal capacity for mismanaging the company. Cover is provided for
- The costs of personal legal representation incurred by individual directors and officers in their defence against any civil or criminal proceedings.
- If the company employing the directors and officers pays the legal costs associated with that claim, then the Insurers will reimburse the company.
- Damages, including claimant’s costs, awarded against directors and officers. The policy will also cover out of court settlements.