At a time when pandemic-related Directors and Officers Liability claims are already being filed in the US courts, should UK company directors be fearing the same? This article takes a closer look at some of the claims which we expect to see during this turbulent period.
Businesses across the globe had to react swiftly as COVID-19 took hold. Office closures, redundancies and furloughing, collapses in supply-chains, fall in consumer demand, travel restrictions and remote working are just a few of the issues senior managers have had, and continue, to grapple with.
Although the vast majority of company’s owners, stakeholders and employees appreciate the job business leaders have had to accomplish in such trying circumstances, in times of such stress and with the value of many businesses constricting significantly, allegations of miss management are sadly inevitable. These claims may come from disgruntled shareholders, employees, suppliers, customers or regulators.
The benefit of hindsight
Of course, hindsight is a wonderful thing. When questions are being raised about the government’s own management of the crisis, many will argue that directors could not have foreseen the occurrence of a pandemic, the impact it would have on their business, or have reasonably done more to protect themselves. For this reason, it seems unlikely that claims based on lack of preparedness, poor contingency planning or general mismanagement will succeed.
Allegations made and their merits
More specific claims may well have merit however and it is these which cause greater concern. For example, companies making statements – even in good faith, about their ability to fulfil orders or provide services which in time proved to be unrealistic. Similarly, representations made about a business’s financial strength and contingency planning, when the reality fell short of these bullish statements, also opens the door for legitimate claims against directors.
An example of the latter would be Zoom, a video conferencing platform many of us will have got familiar with over the last few months. A class action has been brought against them by a collection of investors, accusing the company and its senior managers of concealing shortcomings in the App’s security.
The wave of UK class actions predicted by many has not materialised in the last few years, however it is inevitable that companies will wish to reassure investors and other stakeholders around their ability to recover from this crisis and quickly. Directors need to be careful such statements do not overstep the mark from optimism to mis representation, a difficult balancing act to achieve!
Increased home working can also lead to enhanced cyber exposures as previous control procedures are set aside. If this results in data breaches or other losses, directors may be held responsible.
The increased risk of wrongful trading
If it is difficult to identify the precise point in time at which insolvency cannot reasonably be avoided under normal circumstances, now it has become even harder.
Revenues are under pressure for many companies and clients may be slow to pay bills. A director who continues with normal trading past a point when liquidation or administration cannot be reasonably avoided may be liable for wrongful or (more unusually) fraudulent trading.
Broadly speaking, a claim is only valid if it becomes clear that the company or its creditors are worse off as a result of the continuation of trading. While we commonly consider the availability of sufficient cash and an ability to pay debts when they are due, directors also need to consider the future financial prospects of the company.
The role of Insurance
Directors & Officers Liability Insurance (D&O) is intended to protect a company’s board of directors and senior officers against claims, investigations and associated defence costs relating to their decisions and actions in the course of managing the company.
As D&O is a ‘Claims Made’ cover, it only covers claims and/or circumstances notified to insurers during the ‘policy period’. Therefore, the sooner cover is put in place the better as claims in respect of actions taken before the policy inception date would not be covered.
Employment Practices Liability (EPL) insurance provides cover for claims alleging employer or third-party violations of employment law. This includes any type of discrimination, sexual harassment, wrongful termination or deprivation of a career opportunity brought by employees, former employees, or potential employees.
An EPL policy will likely cover investigation and defence costs, along with compensation that might ultimately be payable.
Types of claims arising from Covid 19
In due time we anticipate a significant number of COVID-19 related claims under these insurances, which could include;
o Allegations of discrimination, unfair or constructive dismissal
o Poor or inconsistent communication to employees
o Failure to have adequate systems and technology in place
o Failure to comply with legislation and regulation
o Supply chain weakness
o Lack of cyber security
o Weak checks and/or preventative measures in relation to fraud
o Inadequate arrangement of insurance
About RK Henshall
Established in 1976 RK Henshall remain an independent, chartered insurance broker. We currently employ around 40 staff many of whom have been with us since they left education. Our Chartered title means a lot to us. It was not easily achieved, and it takes continuous investment and commitment to maintain.
Directors & Officers Liability Insurance is a key purchase, not least because it is one of the few insurance policies which protect your own personal assets and reputation.
At RK Henshall we understand its importance and complexities. Unlike many brokers we are not tied to one specific insurer for this line of coverage, pushing this at the expense of what is best for you. We independently pick from a wide panel of policies, choosing the coverage which best suits your individual circumstances, business and budget.
For a Directors & Officers Liability Insurance quotation or for further assistance please do not hesitate in contacting RK Henshall Chartered Insurance Brokers on 01270 758070 or email email@example.com.