Will your D&O cover really protect your executives?

The regulatory climate is heating up, and directors and officers (D&Os) are increasingly in the spotlight. Greater scrutiny, changes in regulations and more empowered stakeholders are resulting in rising claims against directors, and they can no longer necessarily rely on their company’s D&O policy to provide personal protection. David Gutteridge of ACE Bermuda International, explains that risk professionals must re-evaluate their directors personal liability risks and ensure that appropriate risk mitigation measures are in place.  

Rising regulatory risks

With the UK election looming on the 7 May, all major political parties are proposing increased tax compliance scrutiny measures to maximise tax revenues and close loopholes. For example, the so called ‘Google tax’ will mean that any diversion of UK profits overseas will have to be self-reported to HMRC.  In Ireland the ‘Double Irish’ corporate tax avoidance loophole is being phased out and multinationals seeking to minimise tax exposure in Europe via ‘sweetheart deals’ with Luxembourg are coming under fire. 

There is a new zero-tolerance approach from both politicians and the public towards hidden or legacy tax avoidance schemes. Officers of companies found to have diverted profits will, almost certainly, have to defend their actions and their companies will be subject to the 25% ‘Google tax’ charge in the UK.

The Financial Conduct Authority is beefing-up its Bribery and Corruption team, which is likely to result in anti-bribery and corruption procedures coming under increased scrutiny. Risk professionals in companies with operations and trading ties in emerging markets, where locally-accepted business practices are not always in tune with the Bribery Act’s requirements, need to be particularly alert to the dangers. Ignorance is no defence. Risk professionals must ensure that their c-suite directors adhere to best practice, no matter where in the world their company operates.

Changing risk environment

When the new European Data Privacy Directive regulations are enacted (reportedly end of 2015 or early 2016) data privacy is likely to rise up the corporate risk agenda. The regulations will levy punitive fines on companies failing to adequately protect sensitive personal information of employees or customers, and will force them to inform affected individuals of any data breach – no matter how big or small.

Directors’ personal liability can extend to losses created by an overseas subsidiary or a supplier, and data breach events often have global repercussions on share price, brand reputation and interconnected companies. Firms and stakeholders impacted by a breach are likely to come looking for someone to blame.

The recent worrying trend of ‘Lone Wolf’ terrorist attacks in cities previously considered low-risk also creates potential new risks for directors. If a firm is unable to demonstrate appropriate ‘duty of care’ measures for employees, the board could face legal proceedings. In addition, if a company’s business continuity plans fail to work and directors cannot demonstrate that the plans were adequately stress-tested, they could face ‘lack of oversight’-type allegations.

Get your insurance policies right

Directors often mistakenly assume their company’s D&O policy will provide adequate protection for their personal liability. However, without specialist, dedicated personal asset protection (’Side A’ insurance coverage) claims against a company may erode the limits of liability available for the board.  The importance of ‘Side A Excess DIC’ (Difference-In-Conditions) insurance cannot be over-emphasised as such policies are structured to offer comprehensive cover that cannot be cancelled or rescinded for any reason (except for non-payment of premium).

Coverage is set broader than the Side A part of a traditional Side A/B policy to facilitate the DIC feature, in which the DIC carrier `drops down` potentially all the wayto the primary layer in the event coverage is broader than the Side A part of the underlying insurance. Importantly, such DIC insurance is also designed to ‘drop down’ and protect board members in the event underlying carriers fail or refuse to pay for a non-indemnified loss.   

Furthermore, a single global D&O policy may not be able to respond as intended in all territories as in many jurisdictions local regulation often places restrictions or prohibition on insurance arranged out-of-country.  The practical effect of this, especially for non-indemnified risks, is that local D&O policies may need to be procured in order to maximise protection for local boards.    

Given the increasing levels of personal exposure directors now face, there has never been a more opportune moment for risk professionals to take notice of the coverage provided for the c-suite under the firm’s D&O policy. Appropriate D&O Liability coverage could be all that stands between directors and personal bankruptcy. 

David Gutteridge is professional lines manager,  ACE Bermuda International