I N CRISIS Sarah Turpin and Frank Thompson of K&L Gates look at - PDF document

Conference preview 26 FINANCIAL SERVICES: D&O EXPOSURE D I R E C T O R S I N CRISIS Sarah Turpin and Frank Thompson of K&L Gates look at how D&O insurance and corporate indemnification can be combined to offer comprehensive protection for directors to mitigate the financial consequences of claims and investigations in which directors are implicated

Commercial Dispute Resolution 27 NOVEMBER-DECEMBER 2012 I n today’s highly regulated and and will be structured around the of defence costs. For this reason many litigious climate, directors and offjcers indemnifjcation provided by the UK companies purchase only Side A and are subject to heightened scrutiny and company. Side A insurance covers the Side B cover so as not to dilute the cover fjnd themselves increasingly exposed liabilities of directors and offjcers in available to the directors. to civil, criminal and regulatory respect of claims made against them Most D&O policies provide cover for proceedings. New legislation, stricter where no indemnifjcation is provided by civil, criminal and regulatory proceedings governance and more shareholder the company. Side B (ofuen referred to including the cost of defending those activity all result in greater external as corporate indemnifjcation coverage) proceedings. Some D&O policies are pressures. Tie increase in regulatory covers the same liabilities but where extended to also provide cover for activity resulting from the recent the company has or is legally permitted criminal and regulatory investigations but economic downturn, combined with to provide indemnifjcation. Side B the extent of coverage for investigations the growing interaction between cover efgectively provides balance sheet varies enormously and some policies have criminal and regulatory bodies on a protection to the company, but in respect not kept apace with the ways in which global scale, all add to the risks faced by of losses incurred by or on behalf of criminal and regulatory bodies conduct directors and offjcers in a wide variety of the directors. the investigation process. Tiere are also business sectors. Most D&O policies impose a policy restrictions in any D&O policy regarding Most companies recognise the retention or excess in relation to the the availability of cover for criminal benefjts of directors & offjcers’ liability Side B cover which is payable by the and regulatory fjnes and penalties since, (D&O) insurance cover in providing company. Tie policy will typically include under English law, fjnes and penalties protection to directors in respect of the presumptive indemnifjcation language resulting from deliberate wrongdoing risks and liabilities they face. However, whereby it is presumed that the company cannot be insured against as a matter the extent of cover available and the will indemnify to the maximum extent of public policy. Tie Financial Services interaction between D&O insurance permitted by law. Authority has also banned insurance and corporate indemnifjcation is not Tie aim of this is to ensure that the coverage over any fjnes it imposes, always fully understood. Tiere are real company is liable for the retention even although it remains permissible to benefjts both to directors and to the if the company decides, for whatever purchase insurance to protect directors company in understanding how these reason, that it is not willing to indemnify against the costs of formal proceedings protections operate and can be used to the director in question. It is important and other investigations conducted by the maximum efgect. to check that the policy wording will not FSA. It is not uncommon for all fjnes and impose the retention on the directors penalties to be expressly excluded from D&O insurance – how does it where their only recourse is against D&O D&O coverage. Tiat said, some D&O operate and what does it cover? insurers as the company has failed to policies covering D&O risk in multiple Tie D&O policy will typically be taken indemnify them. territories will provide cover for fjnes and out by the company as policyholder Some companies also purchase Side C penalties to the extent insurable in the (also referred to as entity cover) which relevant jurisdiction. covers the liabilities of the company D&O policies will normally provide itself usually for claims arising out of cover for criminal proceedings including depreciation in value of the company’s the costs of defending such proceedings. securities. Tie disadvantage of Side C Tiis is becoming one aspect of the policy cover from the directors’ point of view is where it is important to get the wording that the directors are efgectively sharing right as criminal proceedings can now the policy limit with the company. arise from a variety of sources – such Securities claims against the company as competition law, health & safety can be very expensive even just in terms legislation and environmental protection measures – which ought to be covered. However, fraud and dishonesty cannot be insured as a matter of public policy and most policies will include express exclusions for claims arising from fraudulent or dishonest conduct. Tie language of the exclusion can be critical and it is important that the exclusion only applies to the individual against whom there is a fjnding of fraud and dishonesty.  www.cdr-news.com

Conference preview 28 FINANCIAL SERVICES: D&O EXPOSURE  Also, given the scope for fraud or dishonesty to be alleged but not ultimately proven, it is important to ensure the exclusion does not apply in the absence of any admission or fjnal adjudication so as to ensure defence cost cover is available. D&O policies should provide cover for most civil proceedings including claims by third parties and claims by the company. However, D&O policies will typically impose “insured v insured” exclusions which seek to exclude certain types of claim brought by other directors or by the company, the aim being to exclude collusive claims designed to access the proceeds of the D&O policy. Again, the wording of these exclusions requires careful attention to avoid directors fjnding themselves without cover particularly for claims brought by shareholders or the company at arms length and claims made by a liquidator, receiver or administrator. It is particularly important to ensure that cover is available in the event of insolvency (and that coverage does not lapse due to an insolvency event) as it is in these circumstances that directors are ofuen most at risk. Company indemnification – how does it operate and what does it cover? Tie extent to which the company is able to indemnify its directors is usually dependent on the country of incorporation. For UK companies, changes were introduced by the Companies Act 2006 which signifjcantly broadened the extent to which companies are permitted (but not obliged) to indemnify directors. Some companies include indemnifjcation provisions in the Articles of Association which enable the company to It is particularly indemnify directors to the extent permitted by the Companies important to ensure Act. However, provisions in the Articles of Association may that cover is available in not be enforceable by the director against the company in the the event of insolvency absence of a separate indemnifjcation agreement. It is therefore (and that coverage does in the best interests of the director to have the benefjt of an express indemnifjcation agreement with the company. Tiis not lapse due to an can take a number of forms such as a deed or deed poll insolvency event) as it is benefjting all directors or separate contractual arrangements in these circumstances with individual directors. that directors are often Tie Companies Act 2006 does impose certain restrictions most at risk in relation to liabilities and defence costs which the company