Normally, the launch of formal criminal and/or civil investigations into the affairs of the company at which directors are required to attend for interview or produce documents would trigger cover in the form of reimbursement of the directors’ legal costs. But this is not a normal case and even if coverage is triggered, it may not mean that all such costs would be paid. Although we have no information as to this, the facts perhaps make for an interesting live case study.
How did they get here?
The board of P&O Ferries led by its CEO Peter Hebblethwaite took what they described as a “very difficult but necessary decision” to sack its 800 sailors in order to “secure the future viability of our business, which employs an additional 2,200 people, and supports billions in trade in and out of the UK”.
The decision and the manner in which the redundancies were carried out caused a media furore and public outcry, the full force of which may have taken the board by surprise.
In evidence to the Transport and Business Select committee of the House of Commons, Mr Hebblethwaite came under intense pressure. He said: “There’s absolutely no doubt we were required to consult with the unions. We chose not to do that.” He was asked whether he had chosen to break the law to which he replied: “We chose not to consult … and we will compensate everyone in full for that.”
What laws may have been broken?
It seems likely that the board of P&O Ferries will have been advised that under UK law, where an employer proposes to dismiss more than 100 staff, consultation must start at least 45 days before the first dismissal. Also, where collective consultation applies, a company is obliged to inform the government in advance of redundancy consultation so that the Insolvency Service can help employees facing redundancy. The failure to serve the relevant form on the government without good cause is a criminal offence and can result in a fine not just for the company but also for its directors.
There may also be potential claims for wrongful and or unfair dismissal against the company (if and to the extent the offers of compensation made to the employees are not accepted) which again it seems likely the board would have been able to anticipate.
What stance might D&O insurers take?
The first point to make is that no two D&O policies are alike and therefore coverage outcomes may vary considerably. That said, there are likely to be a range of potential coverages issues associated with most civil and criminal investigations, several of which we identify in the checklist below. Perhaps the more interesting factor in this case is the apparent admission of criminal activity by the company. What effect (if any) might that have on coverage?
It is a general principle of insurance law that you cannot insure against your own criminal conduct. So for example you cannot insure your house, set fire to it and then claim under your policy. But it is doubtful this principle will be of any application to these facts in the absence of additional specific exclusionary language (as is sometimes seen) in respect of “all criminal acts or omissions” or “all deliberate or wilful acts” of the Insured.
This is a complicated area of the law which has recently been subject to scrutiny by the Supreme Court in Burnett or Grant v International Insurance Company. This was an employers’ liability claim in which a door steward through actions which were held to be “badly executed but not badly motivated” caused the asphyxiation and subsequent death of one of the customers at a bar who had become violent.
The policy excluded liability arising from “deliberate acts wilful default or neglect”. The Court held that the act in question would have had to have been carried out with an intention to injure. This was not the case here. It also concluded that deliberate acts did not include reckless acts. So, it may be the case that exclusionary language in respect of deliberate or wilful acts even if it existed in the D&O policy might not materially restrict cover.
Checklist of other coverage issues
- What is the precise trigger for cover in respect of investigations? Does there need to be a legal requirement to attend a formal interview and/or does the director need to be a target of the investigation or is a simple request to attend for interview or produce documents sufficient?
- Is there any cover for directors who are likely to be summoned to an investigation but have not yet received a request to attend or other communication from the investigators?
- How does the policy address the issue of allocation between the legal costs incurred by the company and those on behalf of the directors personally?
- Does the policy allow for multiple representation of the directors or only in the event of a “material conflict of interest”?
- Are all the insured persons given the benefit of the doubt such that all costs are paid unless and until there is any formal written admission or finding of criminal conduct (see above.)
- Does the question as to whether the company is indemnifying the directors (or has agreed to do so) have any bearing on cover and if so what?
- Do insurers commit to advance legal representation costs and if so, how absolute is such a commitment? For example, is it limited to only those costs to which the insurers have specifically consented and in respect of which they are satisfied that the relevant invoices contain all the information and detail they require?
The likelihood is that the investigations into P&O Ferries will rumble on for some considerable time and may indeed spawn further claims or proceedings in the future. The answers which the directors give when subjected to initial interview are likely to remain relevant in the context of any such proceedings. The need for adequate and independent legal representation from the outset paid for either by the company or by its D&O insurers is plain and obvious. Because the path to recovery of such costs may not always be a smooth one, there is much to be said for conducting a road test of your policy with your brokers or other professional advisers before it is too late.
This article is intended to highlight general issues and benefits relating to its subject matter and does not take into account the individual circumstances or requirements of individual recipients. The opinions expressed in this article are my own and do not reflect the views of McGill and Partners.