As Irish law does not permit a director to exclude his or her liability to the company nor can a company indemnify a director in respect of his/ her liability to third parties this brings Directors and Officers Insurance (D & O Insurance) in to sharp focus.
The purpose of D & O Insurance is to protect the directors and officers of a company in the event of a claim being made against them that the company will not, or cannot, indemnify against from the company’s own resources.
It is important to emphasise that D & O Insurance is a complex area of insurance and that it would be important for a company and its directors to take specialist advice from a suitably qualified person. It should also be stressed that a director’s liability may not cease upon their retirement or resignation from their position of director and that the level of cover available to a director should provide protection against potential “late claims” arising.
An appropriate D & O Insurance policy can cover:
- claims by the Office of the Director of Corporate Enforcement or shareholders of companies for breach of duty under the Companies Act 2014;
- breach of contract claims;
- claims under environmental legislation;
- claims under health and safety legislation;
- claims under data protection legislation;
Important features of a D & O Insurance policy to be aware of include:
- disputes: it would be important for the policy to provide for an effective and equitable dispute resolution mechanism in the event of a disagreement between the insurer and the insured;
- severability: the purpose of this clause is to protect innocent directors for a breach of the policy by another director;
- choice of representative: this clause gives the insured the option to choose their legal advisors;
- no delay: this provides for the payment of any legal costs and expenses in a timely manner; and
- dishonesty: the objective of this clause provides protection for situations where allegations of dishonesty are made against a director, that the insurer will continue to be liable for costs incurred in the defence of a claim until it is proved by a court that the director was dishonest or until the director admits as much.
The need for an appropriate D & O Insurance policy has been heightened by the Covid-19 pandemic.
Covid-19 is presenting new and unique challenges for companies and their directors which has the potential to increase the risk of claims and litigation against the officers of a company. If a company finds itself in an insolvent scenario, the actions of its directors will come under even more focused analysis and scrutiny and indeed the duties owed by the directors to the company will be owed to the company’s creditors. It would be important to highlight however that the law does not punish a director who has acted responsibly and honestly where a company has found itself in financial difficulty. It would be prudent for companies and their directors to review their D&O policies in light of Covid-19 to assess the exact cover provided.
A prime example of the potential benefit for taking out of D & O Insurance cover was evidenced by the 2005 UK case of, Equitable Life Assurance Society v Alan David Hyman  1 ALL ER 961. In this case nine former directors as well as the auditors of a company were sued for £3 billion. A settlement was reached, and the case was withdrawn but not before the defendants had incurred legal costs and expenses of over £75 million in defending the case.
While it is true that most directors are unlikely to be successfully sued for their actions as directors of a company the Equitable Life Assurance Society case provides an example that even where a claim against directors is successfully defended it can come at a significant cost to the directors both reputationally and financially. It is therefore vital that a director has the peace of mind to know that they will be appropriately protected by the policy for the duration of any litigation or investigation.
Where a D & O Insurance policy is being renewed care needs to be taken to ascertain of the policy purports to exclude claims arising from the Covid-19 pandemic from cover.