directors’ & officers’ liability training presentation zurich uk commercial jim gaskin,...
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Directors’ & Officers’ LiabilityTraining presentation
Zurich UK Commercial
Jim Gaskin, Financial Lines ManagerZurich UK CommercialAugust 2005
2© Zurich - Zurich UK Commercial / Jim Gaskin, Speciality Lines Manager / August 2005
Topics to be looked at
• Current market
• Background and history
• The cover
• How liability arises
• Statutory duties / the law
• Sources of claims
• Underwriting / financial analysis
• Conclusion
3© Zurich - Zurich UK Commercial / Jim Gaskin, Speciality Lines Manager / August 2005
D&O - current market place
• 2005 market situation:- Last 24 months moved from soft to hard to soft market.- Rates increased – small private companies 20-30%.- Larger organisations – 200-300%.- 2005 rates now flat with some pressure to discount.
• AIG and Chubb early dominance diluted by newer entrants RSA, ACE, Markel, St Paul, Zurich and others.
• 2004 saw severe US losses plus some significant UK losses which drove price increases, capacity shrinkage and cover withdrawal but 2005 has seen some return to a softer environment.
• Loss experience increasing but capacity also increasing, targeting SMEs via online facilities.
4© Zurich - Zurich UK Commercial / Jim Gaskin, Speciality Lines Manager / August 2005
D&O - the UK market
• Size of the UK marketplace:
- 2004: £385 million (20% growth over 2003)
- 2009: £749 million
5© Zurich - Zurich UK Commercial / Jim Gaskin, Speciality Lines Manager / August 2005
Market changes
• Premium rate increases now flattening.
• Variation in wordings by sector such as tailored cover for charities.
• Withdrawal of additional covers (Insured vs Insured by some).
• New capacity has entered the market place in the last 18 months targeting SME business.
• A cautious approach to risk selection still exists.
• SME is the new battleground.
• Online quote tools allowing brokers to quote and bind online, thereby simplifying the process.
6© Zurich - Zurich UK Commercial / Jim Gaskin, Speciality Lines Manager / August 2005
D&O - recent SME survey findings
• Zurich 2004 SME survey - findings:- Only 50% of companies are aware of D&O cover.- 20-30% expected growth for 2005.
• Drivers are:- claims inflation- increased risk exposure- an increase in take up of D&O first time buyers- publicity generated by Higgs* report in 2004. (* see next slide)
7© Zurich - Zurich UK Commercial / Jim Gaskin, Speciality Lines Manager / August 2005
Higgs report 2004
• Report that looked at the role and duties of non-executive directors.
• Feeling that in the past they did not show enough independent thought and failed to provide sufficient challenge to the executive directors.
• The report put forward a number of recommendations including the minimum number of non-executives on a board and the availability of D&O insurance to protect their liabilities and so encourage a larger pool to draw from.
8© Zurich - Zurich UK Commercial / Jim Gaskin, Speciality Lines Manager / August 2005
History and background to D&O cover
• Initially purchased by USA companies.
• UK companies first bought in early 70s driven by their USA exposure.
• Demand has grown from FT 100 companies down to PLCs, then to private companies, now non-profit entities.
• Exposure increasingly driven by:- legislation- increasingly litigious society- greater number of shareholders who are much more aware of
their rights to challenge directors, and more willing to use the courts.
9© Zurich - Zurich UK Commercial / Jim Gaskin, Speciality Lines Manager / August 2005
The cover
• Extensions:- Outside positions – covers directors and officers when sitting on
the board of Associated Companies.
- Pollution - defence costs and shareholder actions for any loss e.g. loss in value of shares.
- Company cover for shareholder costs – order of court to cover shareholders costs in pursuing a claim against an insured person in the company.
- Employment claims – covers past, current and prospective employees (deals with discrimination in the interview process)
10© Zurich - Zurich UK Commercial / Jim Gaskin, Speciality Lines Manager / August 2005
How the cover operates
• Claims made policy i.e. claims made in the policy period regardless of occurrence date.
• Aggregate limits - costs inclusive (as opposed to costs in addition).
• Advancement of defence costs by the Insurer so the directors are not out of pocket.
11© Zurich - Zurich UK Commercial / Jim Gaskin, Speciality Lines Manager / August 2005
The cover - who is covered?
• Directors of the company including non-executive directors and shadow directors.
• Officers of the company including Company Secretary, Chief Accountant, Personnel Manager.
• Managerial and supervisory positions.
• Employees when joined as co-defendant.
• Persons appointed by the company as liquidator administrator.
12© Zurich - Zurich UK Commercial / Jim Gaskin, Speciality Lines Manager / August 2005
The cover - what is covered?
• Civil awards, judgements and legal defence costs arising out of wrongful acts committed, or alleged to have been committed.
• Allegations of a criminal nature are covered but only for legal defence costs incurred - if proven then any fines or penalties imposed are not covered.
13© Zurich - Zurich UK Commercial / Jim Gaskin, Speciality Lines Manager / August 2005
The cover - what is not covered
• Proven fraud and illegal profit.
• Pension trustee exposure.
• Insured versus insured. Cover will vary in response to directors suing fellow directors.
• Professional indemnity. A director who also acts as an engineer is not covered for their advice as an engineer under a D&O policy.
• Prior circumstances and litigation e.g. situations aware of in advance purchasing the policy.
14© Zurich - Zurich UK Commercial / Jim Gaskin, Speciality Lines Manager / August 2005
How does liability arise?
• Duty of skill and care:- Common law duty.- Test of reasonableness which is subjective.
• City Equitable (1925) - “a director need not exhibit in the performance of his duties a
greater degree of skill than can reasonably be expected from a person of his knowledge and experience. A director of a life insurance company does not guarantee that he has the skill of an actuary or a physician”
15© Zurich - Zurich UK Commercial / Jim Gaskin, Speciality Lines Manager / August 2005
How does liability arise?
• Fiduciary duties:- Common law duty and embedded in corporate governance.
- Directors are in a position of trust, act honestly, in good faith and act in the best interests of the company with their first duty towards shareholders.
- Conflicts of interest must be managed in the best interests of the company – e.g. non-executives who serve on two companies trading together.
- Enron in the USA was good example of a breakdown in these duties.
16© Zurich - Zurich UK Commercial / Jim Gaskin, Speciality Lines Manager / August 2005
Statutory duties
• Continually evolving- Companies Act 1985 & 1989 – Patricia Hewitt, misleading
auditors 2 years, unlimited fines.
- Insolvency Act 1986 – fraudulent/wrongful trading.
- Health & Safety at Work Act 1974 – unsafe working practices.
- Environmental Protection Act 1990 & 1995 - pollution.
- Employment legislation e.g. ageism.
- European legislation – who knows? What’s next?
17© Zurich - Zurich UK Commercial / Jim Gaskin, Speciality Lines Manager / August 2005
Who are the duties owed to?
• Firstly to the shareholders – example Claims Direct faced a £200m claim from its shareholders.
• The Company itself and minority shareholders. Future legislation may enable minority shareholders to hold directors accountable.
• Creditors - allegations of wrongful trading can be made in the event of insolvency.
• Employees including employment issues – unfair dismissal/discrimination etc.
• Other companies - disposals and acquisitions.
• Regulatory authorities e.g. health and safety issues
18© Zurich - Zurich UK Commercial / Jim Gaskin, Speciality Lines Manager / August 2005
Consequences of directors failing in their duties
• Criminal prosecution - fines and/or prison.
• Civil proceedings leading to fines.
• Civil proceedings leading to an award for damages or other remedy e.g. injunction.
• Official enquiry, investigations etc - costly.
• Disqualification of directors.
19© Zurich - Zurich UK Commercial / Jim Gaskin, Speciality Lines Manager / August 2005
U.S.A. Company law
• Securities legislation:- Securities Act 1933- Securities Exchange Act 1934- Racketeer Influenced & Corrupt Organisations Act 1970.
• Recently the Sarbanes-Oxley Act - executive certification of financial statements plus other governance rules and increased penalties. This may have an impact on UK directors.
20© Zurich - Zurich UK Commercial / Jim Gaskin, Speciality Lines Manager / August 2005
Company indemnification
• The Companies Act states that the company cannot indemnify its directors unless the director is found to be innocent of the allegations - but it also allows the company to purchase insurance to offset that risk.
• Therefore directors are on their own in terms of:- funding their defence- payment of civil awards- damages and settlements (all covered)- payment of fines- penalties- jail sentence (not covered).
• This was the position up to April 2005.
21© Zurich - Zurich UK Commercial / Jim Gaskin, Speciality Lines Manager / August 2005
Update on indemnification
• Companies (Audit, Investigations and Community Enterprise) Act 2004 - effective 1st April 2005.
• Allows the Company to now indemnify directors only, (not other insured’s as covered in a D&O policy) when there is permitted indemnity.
• In other words it allows Companies to indemnify directors in respect of actions brought by 3rd parties for legal costs and the financial cost of any adverse judgement.
• Except for:- criminal penalties- penalties imposed by regulatory bodies- legal costs of unsuccessful defence of criminal proceedings- legal costs in any civil proceedings brought by the Company or any
Associated company when judgement is against the director.
22© Zurich - Zurich UK Commercial / Jim Gaskin, Speciality Lines Manager / August 2005
Update on indemnification
• So, in conclusion:- Directors are only protected by the Company in certain
situations.
- The Company is only able to indemnify and is not required to.
- Only directors are protected not officers or other insured persons.
- Directors and officers are still at risk for which both the Company and its D&O’s would seek to transfer that risk to a D&O policy.
23© Zurich - Zurich UK Commercial / Jim Gaskin, Speciality Lines Manager / August 2005
Where do claims come from?
• Shareholders - when they feel the company has been mis-managed to the detriment of their share value.
• Share issues and listing on stock exchanges.
• Creditors e.g. wrongful trading.
• Employees e.g. discrimination, wrongful dismissal.
• Libel and slander.
24© Zurich - Zurich UK Commercial / Jim Gaskin, Speciality Lines Manager / August 2005
Where do claims come from
• Regulatory and Government bodies e.g. Corporate manslaughter.
• Competitors e.g. unfair competition as dealt with under the Enterprise Act.
• Customers e.g. Holidays abroad and customers left stranded.
• Mergers, acquisitions and disposals e.g. hostile takeovers.
25© Zurich - Zurich UK Commercial / Jim Gaskin, Speciality Lines Manager / August 2005
What do underwriters look at to assess the risk
• Report and accounts - key documents:- chairman’s statement – insight into future strategy
- directors report –statutory requirement
- auditors report – ‘true and fair view’
- profit / loss account – what has been happening
- balance sheet – snapshot of assets and liabilities
- notes to the accounts / contingent liabilities e.g. in dispute with the Inland Revenue. Provisions in the accounts for bad debts.
26© Zurich - Zurich UK Commercial / Jim Gaskin, Speciality Lines Manager / August 2005
Underwriting factors
• Financial performance and strength – the better it is the less likely a claim.
• Share price performance if applicable – is it out of line with the industry sector.
• Overseas exposures especially USA and Australia – amount of assets is the key measure.
• Industry sector.
• Length of establishment – longer in existence the less risk.
• Acquisitive – Nature of business, aggressive acquisition strategy.
• Future strategy – credibility of strategy.
27© Zurich - Zurich UK Commercial / Jim Gaskin, Speciality Lines Manager / August 2005
Underwriting factors
• Experience of Board of Directors e.g. some directors attract greater profile.
• Recent changes at senior management or board level – churn rate of directors.
• Changes in auditors – too cosy, challenging, poor relations/why?
• Representation at proceedings – how often does this happen?
• Previous claims / circumstances – number of previous claims, history.
• Employment issues / layoffs / closures, e.g. failing strategy?
28© Zurich - Zurich UK Commercial / Jim Gaskin, Speciality Lines Manager / August 2005
Rating
• Traditionally assets have driven the rate - US assets carry a far higher rate.
• U/W factors then load or discount premium but financials are the most important factor.
• Other sources of info would include press coverage, credit rating services etc.
• Turnover is an alternative but only suitable for small companies with low risk.
29© Zurich - Zurich UK Commercial / Jim Gaskin, Speciality Lines Manager / August 2005
Conclusion
• Directors’ & Officers’ Liability is an ever changing product responding to an ever more threatening legal landscape and driven by an expanding market place.
• Cover needs to be examined carefully.
• Please log in to the sales section of www.zurich.co.uk/commercial for more information on D&O cover including case studies.
• Please contact your local Speciality Lines Underwriter with any questions.