The Future For Directors’ And Officers’ Liabilty

This article was first published in Issue 128 (June) of Sweet & Maxwell's Insurance and Reinsurance Law Briefing.

Introduction

The directors' and officers' ('D&O') liability insurance market has been disappointing for insurers since approximately 2004: rates have been stunted whilst coverage has expanded. Some insurers are even offering policies under which they promise to pay where third-party policy limits are exhausted or compromised.

For the future, there are at least two forecasts: insurable exposures will augment, and average settlement values will elevate.

Insurable exposures

Some of the most modern insurable exposures may be categorised as follows:

Environmental

Reporting obligations

Companies legislation

Environmental

The potential for corporate environmental liability could be pandemic. For instance, it is suspected that radiation from wi-fi technology and mobile telephones injures bees. If this is substantiated, there may well be claims against companies from beehive-owners. Further, because natural pollination relies on bees, many others in agriculture might also seek to sue.

Directors and officers are liable on their own account to third-party claims under the general law, including the laws of negligence, agency and breach of warranty. Of course, the law of negligence only rarely compensates a third-party for economic loss, but directors' statutory exposure to their own company circumvents many of the negligence principles. Quoted companies must specifically include information about environmental impact in their business review; and any director should address such impact as a factor of his or her duty to promote the success of the company. In theory, shareholders could mount a derivative action on the putative behalf of the company in which they assert that directors have under- or over-prioritised the environment contrary to the promotion of the company's success; although the courts are likely to be wary of such actions as discussed under the heading Companies legislation below.

As regards affirmative environmental action, there may be generic (alleged) business interruptions if legislation compels companies to curtail their emissions.

Individual directors and officers are especially at risk in circumstances of an "environmental incident": i.e. the unlicensed release of pollution or waste into the environment. Any director, manager or equivalent office-holder is liable to criminal prosecution where an environmental incident constitutes an environmental or health and safety offence committed by the company with the consent or connivance of the individual or is attributable to neglect on the part of the individual. Environmental regulatory entities are also empowered to require individuals and their employers to rectify environmental casualties such as by cleansing contaminated land, recycling waste and restoring watercourses. Directors and officers will be grateful that hitherto they have seldom personally been convicted in environmental proceedings...