A broadening risk landscape

Posted: 02 April 2019
The role of a company director or owner can be a stressful one. In addition to the responsibility of making the right strategic decisions for the organisation, directors also face the implications of a broadening risk landscape and an ever-present threat of a claim being brought against them as a result of their actions.
Whilst these might stem from a disgruntled employee or a vexed consumer, the advent of the digital age and the move towards an increasingly connected world means that directors are now faced with a new raft of risks and exposures. Being aware of these vulnerabilities is not enough; rather directors and senior decision-makers need to implement measures to minimise their exposures and protect themselves in the event of a claim being brought.
In September 2018, a director of a waste transfer company in Derbyshire was fined £38,000 for breaching conditions of an environmental permit over a 19-month period. The magistrate found that the company’s failure to comply with the environmental permit had had a significantly detrimental impact on the community.

In October 2017, the #MeToo movement against sexual harassment and assault went viral on social media. This movement, in conjunction with the Harvey Weinstein scandal, inevitably shone a spotlight on sexual misconduct in the workplace with a reported one in three woman alleging sexual harassment against a colleague[5]. Following #MeToo, the number of office romances fell to a ten-year low and there were reports of office parties being cancelled for fear of any possible repercussions.

A company director could be subject to criminal proceedings, not only if they themselves commit such misconduct, but also if they are found to have turned a blind eye to such activities. Senior executives have a responsibility to follow up on any warnings or complaints and where a company suffers reputational damage as a result of a claim which leads to insolvency, liquidators could bring action against board members.

Against the backdrop of this risk landscape, many directors are recognising the benefits of taking out Directors & Officers (D&O insurance).

First introduced by the London Insurance market in the 1930s, D&O initially went by the name of 'personal finance protection insurance', and clarified rules around the indemnification of directors and officers from claims. Since 2000 there has been a 63% increase in the number of UK businesses, reaching 5.7 million private sector businesses in 2018 of these, 99% are small or medium enterprises (SMEs)[6]. By this reckoning, there are at least the same numbers of company directors, since each private company must have at least one director. It’s almost impossible to say how many UK companies and directors buy D&O insurance, since only the small number of publicly traded companies must declare whether or not this insurance is held. However, reports suggest that penetration of D&O insurance is much lower amongst SMEs with only approximately 27% taking up cover[7]. It could be argued that SMEs are even more vulnerable than their larger counterparts, since many are unlikely to have dedicated HR or legal departments to offer advice should an incident occur.

A director could even be held liable once they’ve ceased to hold office, meaning that any D&O policy should ideally include run-off cover. Crucially, this must have been in place at the time of the alleged incident to ensure the policy is on cover.

D&O insurance can offer a safety net to any company, whether publicly traded or not-for-profit, in respect of liabilities not otherwise covered by other insurance policies. It does not give directors licence to behave irresponsibly or in bad faith, but can be used both to steer good practice and provide essential support and guidance in an increasingly complex and sophisticated risk environment.