Demand for D&O liability cover takes off as environment for litigation heats up

Claims against directors and officers of companies are expected to increase exponentially, spurring companies to gear up their directors & officers (D&O) liability insurance in the face of a growing litigious environment. The three main areas of concer

With the common law responsibilities for D&O’s now been codified to some extent into the amended Companies Act, this will now allow for greater recourse against D&O’s in respect of wrongful acts, bringing about an increase in the levels of litigation.

Added to this, increasing regulation, economic volatility and the ongoing demand for transparency has seen the vast majority of companies becoming first time buyers, or seeking increased and enhanced covers according to Gillian Wolman, Account Manager at Aon South Africa’s Financial Services Group.

“Businesses operating in today’s environment are facing ever increasing requirements for better transparency, disclosure, accountability and governance, therefore bringing about increased responsibilities to directors and officers (D&O’s) for maintaining compliance with many enactments, corporate codes and best practices, as well as having to illustrate to various stakeholders that they are running their organisations effectively and profitably,” says Gillian.

“A claim is usually made by a third party who has some relationship with or interest in the company and alleges that a director or officer has acted wrongfully. In some cases this results in financial loss to a third party. The third party could litigate against the company as well as the individual directors and officers, which involves substantial legal costs and sometimes civil damages.”

A wrongful act is typically defined as an actual or alleged breach of duty, breach of trust, neglect, error, misstatement, misleading statement, omission, breach of warranty or authority or any other act.

“An analysis of South African actions in this respect shows a variety of motivating factors for the purchase of the cover and these include the demise of large corporate companies due to mismanagement by key executives, the failure of accounting and auditing firms to unveil financial irregularities, increased awareness and practice of good corporate governances. Other factors could include extensive press coverage of directors’ faults, including alleged irregularities.

“Ultimately a programme of this nature must instil an organisational culture that supports ethical and responsible behaviour in addition to reducing the frequency and severity of possible claims against directors and officers,” says Wolman.

This cover has become an absolute necessity for the protection of the personal interests of directors, officers and other employees charged with supervisory and managerial responsibilities and who can be held liable for wrongful acts which may occur in their day to day management activities.

“The personal risks for corporate office bearers and the reputational risks for corporate themselves are therefore significant. In extreme cases directors and officers may even be forced to surrender personal assets due to circumstances beyond their control.

“The good news however is that minds can be put as rest in the knowledge that negligent acts which one could be held liable for can be mitigated through a correctly structured D&O liability insurance policy. Depending on the risk, the cover is still reasonably inexpensive and the South African insurance market remains relatively “soft” at this point.

The time to review your current D&O cover arrangements is now as premiums remain affordable. There is a perception that the “New Companies Act” may see the emergence of renewed ligation and this could have an adverse effect of the cost of the “risk transfer”,” concludes Wolman.