Business

The need for directors and officers liability

IN the recent past, I have received questions on the potential liability on members of the public who contract an illness on business premises.

Before addressing this question I will revisit some articles on liability policies in the next few weeks then conclude by addressing this particular question.
Directors and Officers Liability (D&O) is a form of liability insurance that covers directors and officers of an organisation or the organisation itself in terms of indemnification (reimbursement) after paying directors.
The policy will pay for defense costs and financial losses against the consequences of actual or alleged “wrongful acts” by directors or officers as they perform their duties.
The cover may be extended to cover costs for the directors/officers generated by administrative and criminal proceedings or in the course of investigations by regulators or prosecutors.
A recent case of Boeing shareholders suing the company for concealing safety deficiencies in its MAX 737 planes, following the recent Ethiopian plane crash gains significance.
Chief executive officer, Dennis Muilenberg, admitted that it was apparent that in both flights (involving MAX 737), “a maneuvering system activated in response to the erroneous angle of attack information,” and then apologised for the lives lost.
Among potential insurance claims is D&O liability claims, concerning the lawsuit by shareholders.
Other potential claims relating to compensation of the 157 victims of the March 10, 2019, Ethiopian plane crash.
According to the Montreal Convention, the victims are entitled to about US$1.39 million each but other media reports indicate claims could be around $2 million to $3 million per victim if lawsuits are brought before US courts compared to about $200,000 each in Ethiopian courts. Meanwhile, the cost of the plane is reported to be around $50 million.
As custodians of an organisation, directors, and officers may be sued, in their capacity as directors, for alleged or actual wrongful acts.
There could be various accusations against directors for their errors and omissions that potentially lead to financial losses by third parties.
The potential lawsuits put at risk personal assets of directors and officers resulting from prosecution including those of an organisation.
Like in any legal battle, there are associated costs involved such as defense costs, settlements, and awards when defending directors and officers of an organisation. Given the magnitude of responsibility, it is in their best interest for the directors and officers of an organisation to insist on having adequate insurance cover against such liabilities.
However, like any other insurance policy, some acts are not coverable under an insurance policy.
These include fraudulent, criminal, or intentional non-compliant acts as directors as expected to act above board.
Further, the policy does not cover directors and officers in cases where directors/officers obtained illegal remuneration or acted for personal profit.
In multinational mergers and acquisitions, we have seen cases where shareholders do not realise the value expected before a merger or an acquisition.
In some cases, directors have acted selfishly where they get more perks for managing bigger organisations while shareholders do not enjoy corresponding share value.
This resultant mismatch can potentially lead to legal battles.
When such cases occur aggrieved shareholders may decide to sue directors on the premise that they acted based on the advice given by directors involved.
D&O may also be triggered where minority shareholders allege that directors have abused their position to favor certain dominant shareholders.
The insurer in this case may join to defend the insured should they (insurers) be satisfied with the strength of the defense.
Another situation is where a competitor alleges that the director (or former employee) has misappropriated trade secrets and confidential information.
This might be common where trade secrets such as the Coca-Cola formula form the core competence of an organisation.
Another example that may trigger D&O, is where a group of people complain from outside investors stating that directors failed to disclose material information, which could have elucidated that the company would eventually be liquidated, or a situation where creditors allege that directors utilised their services for the company although the said directors were aware that the company was insolvent and would not have the ability to pay.
In arranging this cover a limit of liability will have to be selected by the proposer. What is deemed an adequate limit is subjective; it depends on a particular organization but an experienced underwriter or broker may assist in this regard.
Profiles of directors will be required by the insurer to assess their qualifications and experience with their roles in an organisation.
Other information will be elicited through a proposal form after which a quotation will be issued by the insurer.
Directors or officers of an organisation are exposed to various risks arising from the decisions they make in their official capacities.
Therefore, these officials need to ensure that there is adequate insurance in place that should cover them against such risks.
For comments or questions email w.twaambo@gmail.com or webster@picz.co.zm or visit my Facebook page Webster Twaambo, Jr.




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