The environment in which company Directors and Officers operate every day has become even more difficult and risky in the current climate of economic uncertainty. Even in a relatively normal scenario, managers face difficult decisions every day, where they may not be able to please all stakeholders. Redundancies, investment-divestment, debt management, expansion, and factory openings and closures are just some of the issues they have to deal with.
The key concern associated with the responsibility inherent in the role, is that the consequences of these decisions directly affect directors’ personal assets. In the event of a claim, directors’ own assets are on the line, including accounts and property, extending to embargoes on marital assets or inheritances.
Directors and Officers civil liability insurance (D&O), is thus an effective tool for protecting them in the event of a third-party claim for wrongful acts or omissions committed in the exercise of their duties.
Additional liability in the state of alarm
Why is it particularly important now? Mainly because many companies are suffering at first hand the consequences of the current uncertainty. Senior executives are under greater stress than ever because of the important role they have to play in their companies, where their responsibility has increased exponentially.
In other words, making decisions during a state of alarm is not easy. Although liability may be suspended, cancelled or deferred during this time, it should not be forgotten that, as soon as this exceptional regime ends, or responsibility cannot be attributed to the COVID-19 situation, D&O insurance will be a vital form of protection.
Moreover, if directors are not protected by the company, they may avoid taking decisions that could be difficult but are necessary for the development or survival of the company. The business then becomes trapped, unable to move forward, with possibly disastrous consequences.
As companies have grown in size and international scope, the risks to which Directors and Officers are exposed have increased and the environment in which executives and civil servants operate has become more treacherous. As the risk increases, so will the frequency and seriousness of D&O claims.
Risk Management teams and legal advisers will attempt to analyse internally the likelihood of third-party claims and will emphasise the value of protection to mitigate potential significant impacts.
Moreover, new risks are likely to emerge in the years to come, making it highly advisable to take out D&O insurance, especially in the field of corporate management. We can expect to see an increase in claims by shareholders following a fall in the share price, claims associated with bullying, malpractice in the application of data protection laws or the General Data Protection Regulation (GDPR) or environmental damage, and claims related to the cyber/technological field.
The failure by company boards to recognise, manage or mitigate a variety of emerging risks could give rise to personal liability and to claims related to the securities markets, in addition to potentially harming the business.
There are already cases before the courts where investors have sued the board for lack of supervision in certain circumstances. We cannot, therefore, rule out the possibility of shareholders suing boards for failing to take appropriate decisions when the COVID-19 crisis is over.