D&O insurance protects the personal and family assets of directors and executives against claims arising when they are performing their managerial duties in a company. D&O liability is personal and non-transferable, so their assets are at risk in the event of claims.
Claims arising from decisions, acts, negligent omissions or non-compliance with legal or statutory obligations may be lodged by customers, suppliers, competitors, the same company, liquidators, public bodies, creditors, shareholders or employees.
A well-designed insurance policy covers the economic damage for which directors may be liable. The main items covered are: direct damages, legal defence expenses, civil bonds, insurable administrative sanctions, tax liability, insolvency liability and workplace practices.
In a macroeconomic recession government measures or new laws may be implemented that will affect the normal operation of the business. This undoubtedly changes how insurance policies are used and function, for both the insuree and the insurer.
The COVID-19 crisis in Spain has affected every business. Royal Decree Law 8/2020, of 17 March, brought in urgent and extraordinary measures to address the economic and social impact of COVID-19, affecting life throughout society in the short and medium term.
Did you know that certain obligations and responsibilities are suspended during the state of alarm, and that some circumstances cannot be recognised as the responsibility of the directors?
Article 40.12 of Royal Decree Law 8/2020 establishes that directors will not be liable for company debts incurred during the state of alarm, if the legal cause for winding up the company arose during this period.
Article 43 establishes that, for the duration of the state of alarm, insolvent debtors will not have to apply for bankruptcy, and the courts will not accept claims against them submitted by creditors until two months after the end of the state of alarm.
Although liability may be suspended, cancelled or deferred, once the state of alarm is no longer in place, these responsibilities will no longer be attributable to the COVID-19 crisis and a properly functioning D&O insurance policy will be vital to protect directors.
There are also circumstances in which liability is not suspended, quite the opposite, despite being closely connected to COVID-19.
Did you know that directors and executives could be held responsible for work-related accidents linked to COVID-19?
On 26 February, the Directorate-General for Social Security Management (DGOSS) adopted Criterion 2/2020, establishing that for the purposes of Social Security benefits, illness caused by the coronavirus must be classified as a common disease “unless it is proven that the illness has been contracted exclusively in the course of carrying out work, under the terms set out in Article 156 of the General Social Security Law, in which case it will be classified as an occupational accident”.
The company’s directors and officers are liable in the event of a work-related accident. The Law establishes a strict burden of proof for employers and those involved in the accident: they must demonstrate that all necessary measures to prevent or avoid risk were adopted, and must provide full evidence of any factors that would exclude or mitigate their liability. Nor is liability waived if the accident was caused by the employee’s own negligence or because the employee was carrying out normal work practices or was due to over-familiarity with said practices.
Did you know that you might not be covered?
Did you know that most markets do not cover claims arising because of insolvency, whether linked to COVID-19 or not?
RibéSalat offers the following instant services:
- Review of the terms of your current insurance policies
- Check renewal terms carefully
- Ensure all D&O resources are covered
- Make sure the payout limit is in line with the company’s net equity
- Know how and when to activate a claim
Once the state of alarm is over, directors will once again be liable if the company is undercapitalised, has financial problems or becomes insolvent, and it is therefore important that they are properly protected.
In these situations, the policy provides cover up to the limit of compensation available for damages, plus 25% of the ceiling on legal defence costs in the event of corporate criminal liability and regulatory compliance liability.