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Directors' & Officers' Liability Insurance: How to obtain cover?

Posted on 23 November 2022

What is D&O insurance?

Directors' & Officers' Liability Insurance (D&O insurance) provides an indemnity to pay an insured director's legal fees in respect of: (i) civil legal proceedings (ii) regulatory investigations; (iii) director's disqualification proceedings; (iv) the costs of assisting a liquidator/administrator; (v) extradition proceedings; and (vi) (sometimes) the fees of a PR expert.

D&O insurance provides cover for directors and officers accused of wrongdoing arising out of the actions they take in discharging their duties.

D&O policies do not provide cover in respect of acts of dishonesty or fraud, but these contractual exclusions usually only apply after there has been a finding (e.g. judgment or final adjudication) of deliberate dishonesty on the part of the insured person or, where the insured person has admitted dishonesty. It is therefore possible for an insured (i.e. – a director) who has been accused of dishonesty – whether in the context of civil, criminal or regulatory proceedings – to claim cover from insurers.

Practical steps to follow as soon as possible

Making a timely claim for coverage will enable the director to instruct independent lawyers (and potentially other professional advisors).

Step 1 – Get a copy of the D&O insurance policy and schedule (speak to your General Counsel, Company Secretary, Risk Management team or the company's insurance broker).

Step 2 – Do you meet the policy's definition of an "Insured Person"?

Step 3 –Notify insurers of a claim made against you or of circumstances likely to give rise to a claim against you.

Why is it important to notify insurers?

It is usually mandatory for an insured (i.e. the director) to provide written notice to insurers as soon as practicable following receipt of (i) a letter of demand (ii) a letter before action (iii) a claim form, and (iv) an injunction.

Failure to notify in line with policy terms will present insurers with an opportunity to deny cover for a technicality, when cover would otherwise be available.

What steps can a director take to secure funding from insurers to pay their initial legal fees?

It can take weeks (and sometimes months) for an insurer to determine whether a director is entitled to an indemnity to pay for their legal fees under the terms of a D&O policy. If a director has been sued or is the subject of a regulatory proceeding then a long delay will be stressful.

A director can usually rely on an "emergency costs provision" clause which will entitle them to claim funds to pay legal fees in the period between notification to insurers and insurers determination in relation to cover.

Why can the process to determine whether to provide an indemnity to a director to pay their legal costs take so long?

Insurance policies are complicated agreements. D&O insurance policies are usually "claims made" policies, being policies which cover claims made against the insured regardless of when the wrongdoing is alleged to have occurred. However, these policies also often contain provisions such as "discovery period clauses", which permit a director to make a claim after the expiration of the D&O policy if the alleged wrongdoing occurred during the period of the D&O insurance policy.

It is also important to bear in mind that if insurers confirm cover they are potentially on the hook for millions of pounds of defence costs. They are therefore keen to ensure they are making the right decision in confirming cover, which can take time.

However, all is not lost.

What steps should a director expect to take to obtain an indemnity to pay their legal fees?

Identify a solicitor that you want to assist you

Insurers will sometimes try to direct the insured (the director) to one of their panel firms (insurers do this to ensure that appropriate solicitors are appointed). However, it is important to note that most D&O policies will not restrict who an insured may instruct. It is therefore important that you identify who you want to defend you (and be prepared to explain why to insurers).

Obtain insurers' consent before solicitors' fees are incurred

In seeking to obtain an indemnity to pay your legal fees, your solicitor will incur legal fees. That is fine (and will likely be covered by the "emergency costs provision" mentioned above). However, make sure you obtain insurers' consent before fees are incurred.

Engage with insurers constructively

To secure an indemnity, the director (and the solicitors who they wish to defend them) must engage expeditiously with the insurer's in-house claims handler (often a lawyer) and/or the insurers' external lawyers.

This can be an uncomfortable process. Nonetheless, it is vital that you answer the insurer's questions quickly and accurately to secure cover. A lack of candour will delay a confirmation of cover or, in a worst-case scenario, result in cover being declined.

For more information on how we can assist you if you are accused of wrongdoing or fraud, please contact Barry Coffey.

For more information on our insurance disputes practice, please contact Sonia Campbell.

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