Specialist Risk Insurance Solutions' Alan Tattler outlines why it is more important than ever for Co‑operative Directors and Officers (Managers) to be aware of their duties, responsibilities and personal exposures.
Changing working practices have been large-scale due to Covid‑19 – including furlough and government support packages – as well as territorial and regulatory changes as a result of Brexit and new and evolving legislation and regulation including revised taxation.
Management Liability is the more common and appropriate term for Directors & Officers Liability. This is because this class of indemnity has evolved and broadened in recent years and now includes additional and allied ancillary protections as well as support and resources. These additional and complementary covers generally include:
- Directors and Officers Liability: indemnity in respect of costs and awards against allegations of wrong-doing by the individual Directors (Including advisory/shadow and non-exec) and Officers (anyone in a managerial or supervisory role).
- Corporate Legal Liability: indemnity in respect of costs and awards against allegations of wrong doing brought against the business either as a result of alleged actions of individuals or the entity and including action/investigation by regulatory, crown enforcement bodies and/or professional bodies (including the Health and Safety Executive, Her Majesty’s Revenue and Customs, The Environment agency, Local Authorities, The Financial Conduct Authority, The Care Quality Commission, Serious Fraud Office, The Information Commissioners Office).
- Employment Practices Liability: indemnity in respect of costs and awards against allegations of employment dispute/wrong-doing.
- Fidelity or Crime: indemnity including costs and awards for any alleged theft/coercion by an employee.
It is widely reported and demonstrably true, that insurance premiums are rising across the board as the market contracts. This is more stark in the Management Liability market where premiums are steadily increasing, more and more insurers are applying increasingly restrictive terms to policies or exiting the market altogether. This hardening of rate and reduced underwriter competition is due largely to increased claim volume and quantum of those claims.
As a result of the Coronavirus pandemic, Co‑operatives, directors, and management teams will have found themselves needing to make urgent business critical decisions, consideration to the consequences of any changes or failure to act. These decisions are set against a backdrop of a global pandemic and rapidly changing government advice, national restrictions and government support packages.
There are no signs to suggest we will experience any changes in the short-term, instead experiencing continued disruption to businesses and individuals day-to-day life. The decisions of management teams during these times will be evaluated and analysed for months to come as we all navigate our way out of lockdown and to a recovery.
The rise in Management Liability claim volume is in part attributable to Covid‑19 but also representative of the fact that we live in an increasing litigious society, where claim farming activity is prevalent, access to legal services and funding is readily available, and action can be brought by a variety of stakeholders.
We also expect to see an increase of claims in all classes during periods of recession or economic uncertainty.
It may come as a surprise, but a company’s Limited Liability Status offers does not protect the company’s Directors/Officers from allegations whether founded or not, instead the personal wealth of the individuals is at stake.
Companies are permitted to fund the defence of individuals (where there is means to do so) but only where the defence is successful. If a Director or Officer makes an unsuccessful defence they will be obligated to refund all defence costs incurred by the business. In practice, the individual is often on their own!
Where are we seeing claims?
Claims generally emanate from:
Allegations relating to a Breach of Health and Safety Policy
It is not uncommon for an individual to be named as a second defendant in an action brought following an injury or illness suffered by an employee or third party. Personal injury lawyers may also name the individual responsible for maintaining a safe system of work or the implementation of health and safety across the organisation. This can also include prosecution by the HSE and prosecution for Corporate Manslaughter.
Allegations of Financial Mismanagement
Allegations often give rise to shareholder disputes and allegations that the shareholders have suffered a quantifiable financial loss due to the negligence of the management team. Claims can (and are) also be brought by unsatisfied creditors.
The management team is responsible for monitoring a business’s financial health and its ability to meet debt obligations. If a business becomes insolvent, creditors may pursue individuals if they feel that there is a case. Common allegations by creditors include breach of fiduciary duty, breach of duty of due care, negligence, and misconduct. Once appointed, insolvency practitioners can look back at the behaviour of past and present directors for a duration of three years, seeking to allocate blame for the bankruptcy. Recent newsworthy business failure such as BHS serve to highlight this.
Allegations of Failing to Safeguard Data
An emerging area of allegation/claim is the failure to safeguard data. As we are seeing a significant increase in cyber claims, so too are we seeing actions being brought against individuals who have a responsibility to ensure compliance and safeguarding of data. Claims farming and class actions are growing following major data breaches and the practice of naming the CISO/CIO or DPO/DPCO (or any individual for safeguarding data) following a breach that impacts the rights and freedoms of individuals presents a genuine risk to Directors/Officers.
Allegations relating to Employment Law
By far the most common area of claim where either the individual and/or the business is named in actions that can include allegations of bullying, harassment, or discrimination (of any description), allegations of wrongful or constructive dismissal, failure to follow/establish a prescribed protocol. Claims in this area can also include allegations of failure to promote/hire due to any bias/discrimination meaning that the exposure can include not only employees but perspective candidates. This is anticipated to be an area where there is increased claims activity due to COVID-19 with likely increased redundancies, issues with furlough, and potential for allegations including stress and mental anguish related to employee wellbeing and a safe return to work.
It is important to recognise that Management Liability claims can be the result of completely spurious or unfounded allegations, but these actions can cost considerable amounts of money to defend – and underwriters are, understandably, concerned.
The financial consequences of the Covid‑19 pandemic have not been truly realised and whilst management liability claims are dramatically increasing this is causing genuine concern to underwriters as these claim numbers may increase significantly when government and fiscal support packages are withdrawn. As a result, this is impacting both premiums and availability of Management Liability cover.
What should Co‑operatives be doing?
How your renewal will be affected will depend on your businesses risk profile, claims record and evidenced risk management regime. Whilst every risk is underwritten on its individual merits with a reduction in capacity available in the market it is critical that underwriters are able to easily identify and prioritise quality risks. Therefore now, more than ever, it is important to start work on your renewal process early. Your Specialist Risks Insurance Solutions team will work with you to produce a detailed underwriting presentation, highlight positive risk factors and provide underwriters will all the information necessary including:
- A fully completed proposal form
- Supplementary questionnaires (where necessary)
- Latest audited and management accounts
- A verified claims experience
- Organisational structure (including details of any proposed acquisitions/disposals)
Policy holders should be prepared for a more invasive renewal process but recognise that the time taken to work with your insurance broking team to establish a clear picture of the business and risk, will pay dividends in accessing capacity and securing the most comprehensive and competitive terms.
About Specialist Risk Insurance Solutions
Specialist Risk Insurance Solutions are experts in the unique risks co-operatives face. For a confidential review of your existing programme please contact Alan Tattler ACII on 07867369939, [email protected] or Laurence Owens ACII on 07711 850643.
Alternatively, find out more about the Specialist Risk offering from Specialist Risk Insurance Solutions.