The stakes are high

16 April 2018 Jonathan Faurie
Gareth Beaver, CEO, SHA

Gareth Beaver, CEO, SHA

The liabilities faced by South African businesses and their boards are once again in sharp focus, in light of well-publicised corporate failures such as the scandal currently surrounding Steinhoff.

Yet, recent research undertaken by SHA shows that South African companies are significantly under-insured when it comes to directors and officers (D&O) liability insurance. 

A wide chasm

FAnews spoke to SHA CEO, Gareth Beaver, who said that as many as 52% of the businesses surveyed by SHA did not yet have any form of directors and officers (D&O) insurance in place. “From a personal liability perspective, this places the director’s physical and financial assets at risk.” 

Beaver pointed out that this is worrying when one considers the implications of cases of corporate failure, such as the Steinhoff situation. 

“The underlying trigger when it comes to a potential D&O claim is that there needs to be an event that results in a financial loss suffered by any one or more of the company’s stakeholders, be it shareholders, bondholders, creditors, etc. In the case of Steinhoff, shareholders have to date lost significant value and as such are likely to pursue a claim against the directors and officers,” said Beaver. 

Important dynamics

By all accounts, D&O cover is very important to have if one considers what is at stake should a claim be brought against the directors. By far, the majority of companies that did not have D&O insurance cover were from the small to medium size category, with up to 70% of such companies admitting to this. 

Beaver explains, “Many of these companies are single owner and operated businesses, have limited to no unsecured debtholders and operate relatively simple businesses. The likelihood of an event giving rise to a valid D&O claim against the director(s) of such companies is highly unlikely”. 

He said contributing to this shortfall in personal liability cover for directors is that a fairly high percentage of small to medium sized independent brokers surveyed admitted to the fact they themselves felt uncomfortable advising their clients as to the need for, and features of a typical D&O insurance policy as well as lacking the competence to handle these claims. 

Misunderstood obligations 

Of particular concern is the admittance by many directors of their lack of knowledge and understanding when it comes to the obligations and responsibilities imposed upon them as directors by the Companies Act. 

“As a director, you are acting as a representative of the company. You are responsible for ensuring appropriate internal controls are in place to safeguard against the company’s assets and sustainability of its future earnings capacity. You are responsible to ensure that the company complies with all applicable regulation governing the company’s operations and you are responsible to ensure that the company reports honestly as to its financial health and trading performance. A major obligation expected of all directors is to act in the best interests of all the stakeholders and to apply the expected level of due care and skill as required in your specific role. But humans make mistakes and are not infallible; this is why D&O cover is so important,” said Beaver. 

Expensive litigation

“The most significant rationale in considering the need for D&O cover is that of providing directors with the financial means to defend their actions should allegations of professional negligence be brought against them in their capacity as directors. While many such claims do not succeed in a successful damages claim against the directors, the costs of defence can be enormous and could lead to personal financial ruin for most directors” explains Beaver    

Beaver points out that South Africa had fast caught up with many other developed countries in terms of litigiousness. Given this trend and the corresponding need for significant amounts more of D&O cover to be purchased, it is up to product providers (D&O insurers and specialist UMAs) to properly equip their partner brokers when it comes to selling this type of cover. He added that it may also be a consideration for the government to consider implementing a law requiring companies to purchase a minimum level of D&O cover. 

Editor’s Thoughts:
Unlike all other company purchased insurance policies, D&O cover is not of direct benefit to the company itself, but instead is there to provide personal protection to the directors of companies should their professional conduct and actions be called into question. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts

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