Why you should consider 'Run Off' D&O Insurance
Directors' and Officers' Liability (D&O) insurance protects Company Directors, other senior executives or managers, officers of charities, boards or committees from certain personal liabilities which they may face on the company’s behalf, incurred as a result of their personal negligence, default, breach of duty or trust.
Liability arises in much the same way as that imposed by statute for example, Health and Safety at Work etc. Act 1974 and directors can be held liable under civil, criminal or regulatory law. While you cannot avoid the challenges and risk exposures that arise, you can take steps to protect your own personal assets.
A change of control in a company, such as acquisition by another entity or private equity firm, has important implications for the D&O insurance held by the directors and officers of such company. In such circumstances, D&O policies typically go into “run-off” and significant residual exposures may remain to face the erstwhile directors of the company being acquired. These exposures may be amplified by the fact that the company for which they acted as directors no longer exists and therefore they are unable to be indemnified by it for any claims made against them.
What are the exposures?
Sources of claims against directors whose companies have been acquired could include:
1. Alleged misrepresentations, errors or omissions by directors to the counterparty in the transaction. (Counterparties could sue for loss.)
2. Alleged misrepresentations, errors or omissions by directors to regulators in respect of the transaction. (Regulators could take action.)
3. Alleged collusion between directors and the counterparty in order to secure a lower price for the company. (Original shareholders could sue for financial loss.)
4. Claims brought by Liquidators under the Insolvency Act 1986 alleging ‘wrongful trading’ which could result in attempts to claim a personal contribution from directors. Once a company is insolvent, claims can be pursued by the administrator or liquidator under the Insolvency Act 1986. Section 212 does not create a cause of action but allows claims to be pursued in the office holders` name in the insolvency under a streamlined procedure. It is routinely pleaded in conjunction with other claims. It applies to claims against:
- Current and former officers
- Former liquidators and administrative receivers
- Any person who is or has been concerned, or has taken part in, the promotion, formation or management of the company
Where any of the above (IRO Point 4) has:
Misapplied or retained, or become accountable for, any money or other property of the company, or been guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company. (See Re Produce Marketing Consortium (In Liquidation) 1989)
How long can these exposures last?
• When put into run-off, D&O policies typically carry a policy duration of 6 years, as this period reflects the standard statutory limitation periods prescribed in the UK for tortious and contractual claims.
• Time does not run in cases of fraud, concealment or when the action is for relief from the consequences of a mistake, until after the claimant has discovered or should reasonably have discovered such circumstances. In each case a director can be sued for up to six years after such discovery or expected discovery – no matter how far in the future this might be.
• The time limit for bringing contribution claims does not start to run until the right to bring such claim accrues to the claimant. This right may accrue when the claimant is found liable by judgment, award or agreement. Such a finding of liability may not occur until well after six years, as court cases can often take years to resolve, particularly if the original claim against the claimant is not brought until immediately before the expiry of the six year limitation period. Therefore, if the court hearing of the original claim takes 5 years to hear to final resolution, then the contribution claim against the director may not be brought until just short of 11 years after the alleged wrongful act occurred. A 2 year time limit then applies
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