Directors’ and Officers’ Liability and Employment Practices Liability Seminar

Chris McMurray, Senior Financial Lines Underwriter (Scotland)

August 2015

Background to D&O Insurance Scope of cover Directors’ duties and responsibilities Directors’ disqualification and other potential liabilities Where do claims come from? Recent D&O Cases and Claims The effect on the individual not just the entity Employment Practices Liability

Agenda

What is D&O insurance? Origins of the cover Who should purchase the cover? Claims trends Premium trends

Evolution of D&O Insurance

D&O– Side A– Side B– Side C

Corporate Legal Liability Employment Practices Liability

Scope of Cover

Directors’ duties and responsibilities

“Wrongful Act”

The Companies Act 2006 sets out eight duties:-

1. Duty to promote the success of the company

2. Duty to exercise reasonable care, skill and diligence

3. Duty to exercise independent judgement

4. Duty to act within powers

5. Duty to avoid conflicts of interest

6. Duty to declare interests in proposed transactions

7. Duty to declare interests in existing transactions

8. Duty not to accept benefits from third parties

B. Directors’ disqualification and other potential liabilities

1. Breach of duties under the Companies Act 2006 Sections 171 to 177

2. Wrongful trading under Section 214 of the Insolvency Act 1986“if in the course of the winding-up of a company … the court … may declare (a company director) liable to make such contribution … to the company’s assets as the court thinks proper”

3. Company Directors Disqualification Act 1986- Those concerned direct or indirect in promotion, formation or

management of company- Up to 15 years disqualification

4. Liability under Contracte.g. Personal guarantees, shareholders approval, pre-incorporation

agreements

5. Bribery Act

6. Corporate Manslaughter/Homicide legislation

7. Health and Safety at Work, etc Act 1974, Section 37

On the increase Sources

– Internal– External

Claims

Creditors

Stockholders

Customers

Suppliers

Competitors

Tax Authorities

Social Security

Employees

Bankruptcy/insolvency

trustee

Subsidiary

Company Itself

Other insured individu-als (D&O)

Internal Claims

External Claims

Claims

C. Recent D&O cases & claims

i. Slander - insurer paid out £26,500 under D&O policy due to comments made in public by a manager against a

clothing retail customer

ii. Overstated company’s financial - insured paid out £10,000 under D&O policyPosition after a director overstated solvency and profit

levels to potential investors

iii. Hefty damages award against - in ODC Securities v McGrath (2013) the Highdishonest director Court awarded damages of £5 million against a

dishonest director in breach of fiduciary duties

iv. Three monkeys’ defence of - Aberdeen Sheriff awarded damages ofno avail £100,000 to a liquidator against a former

director who claimed to be unaware of wrongdoing taking place in case of McGregor Glazing Ltd v McGregor (2013)

v. Managing Director to repay - The Court of Session in Parks of Hamilton

£50,000 (Holdings) Ltd v Campbell (2013) held that a director had been in breach of his fiduciary

duties in a sale negotiation

vi. Directorship defined for - High Court in UKLL Limited (2013) very usefully

disqualification purposes sets out ten characteristics of “de facto”

director 12 years disqualification imposed after

losses of £70 million.

Unlimited!!! The company will protect me, won’t it? Personal wealth at risk!!! Is it worth the risk?

Personal Exposure

Scope of cover Where do claims come from? Development sin EPL claims since 2008 Difference between EPL and other similar covers What underwriters are looking for

Employment Practices Liability

U.S – 1980’s, UK – 1990’s Stand alone policy Now in D&O forms in some part Increased claims activity

Background to EPL

Employment practices liabilities

1. “Wrongful Employment Practice”

2. Wide potential scope- Defence costs and claimant’s costs- Investigation costs- Awards of Damages

3. Important exceptions not covered- Criminal fines/penalties- Notice payments- Severance payments

4. Main relevant EPL legislationa) Employment Rights Act 1996b) Equality Act 2010c) Working Time Regulations 1998

5. Can be costly…- Statutory caps on compensation of £72,400 or 52 weeks pay (whichever is lower)- No cap on discrimination awards- Interest on unpaid discrimination awards increased from 0.5% to 8% from 28/07/2013)

6. Recent case examples:a) £235,825 award in disability discrimination case (Wilebore cancer victim)b) £136,592 in an age discrimination case (Dixon : head groundsperson aged

58)c) £1 million award for institutionalised racism Browne including £5,000

aggravated damages as no employer apologyd) Manner of dismissal can give rise to damages e.g. in Mark v Cann Hall PS

– marching teacher off premises

Claims activity increased since 2008 Recession Increased coverage Reduced deductibles Employees understanding their rights

Claims and the Evolving Environment

Legal expenses D&O Limits available Cover

Differences

Employee numbers Claims activity Territories Salaries / turnover in staff etc Occupation Deducible levels Limits available

Underwriting

Questions?