The importance of D&O insurance for NEDs

On 29 January, Clyde & Co hosted a NEDonBoard panel discussion on the legal duties and liabilities that apply to non-executive directors (NEDs), the role of directors and officers (D&O) insurance in mitigating directors’ personal liability and the due diligence that NEDs should carry out before accepting a position on the board.

In this blog post, we share the thoughts of the panelists on the importance of D&O insurance for NEDs. We also provide some useful tips for NEDs when they join a board.

When it comes to personal liability, a company will usually stand behind its NEDs provided they have not acted dishonestly. However, NEDs should check, as part of their due diligence, whether their actions while performing their director duties will be covered by an adequate D&O insurance taken out by the company.

Despite the name, D&O insurance covers more than directors and officers, it usually extends to employees with managerial responsibilities. It also covers the insured company, which can recover under it any amount paid on behalf of its managers to protect them from a third-party claim. Class actions are covered by D&O insurance.

D&O insurance grants cover only in relation to claims made while the policy is in effect or within an agreed term. Policies may also have an agreed retroactive period. NEDs should check whether the applicable policy gives them some backstop reassurance and whether the company will continue to buy D&O insurance after they ceased to be NEDs.

D&O insurance covers damages and settlements, defense and investigation costs. It does not cover penalties and fines and will not cover “bad” (that is, criminal, fraudulent or intentionally non-compliant) conduct. Directors should argue against claw-back clauses. It will not also cover “any business as usual” regulatory investigation. Query is where do you draw a line (that is, when is a formal investigation open?).

In addition to D&O insurance, NEDs should consider getting protection from the company in the form of an indemnity. The indemnity would need to be negotiated. NEDs should be aware that, even if an indemnity is agreed, the company may refuse to provide protection under it by alleging that the director acted dishonestly or in case of insolvency.

Claims have significantly increased over the last 18 months. Often, active investors use the reports from regulatory investigations as a base to bring claims against the company and its directors. He also notes how the regulators post-financial crises are really focusing on senior management alleged misconduct.

Alleged financial misstatements remain a very common base for claims while “event base” class actions (that is, directors should have understood that a specific event was about to happen) appear to be on the rise.

A full recording of the event is available to NEDonBoard members in the member area of the website. The event included notably a section on due diligence to be performed by NEDs prior to accepting an appointment – this section is only available to NEDonBoard members. If you are not a member yet, join today and unlock the resources of the NEDonBoard website.

On behalf of NEDonBoard, Laura Marianello

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