Marsh says D&O mutual plan could be illegal

Airmic's proposal to set up a mutual providing directors' and officers' (D&O) cover could be illegal, according to Marsh.

An Airmic spokesman confirmed this week that its new D&O taskforce was considering the establishment of a mutual, as a way of enabling companies to secure affordable D&O cover.

Airmic is looking at alternatives to traditional D&O cover after rates for its members soared by up to 400% this year.

But Marsh argued that there were significant legal barriers to the establishment of a D&O mutual.

"Current law imposes a lot of obstacles to alternative forms of D&O cover," said Marsh D&O practice head Nick Foord-Kelcey.

"Section 310 of the Companies Act prohibits a company from indemnifying their directors except when they have been acquitted."

Insurers say Section 310 could also restrict Airmic members in their attempts to use bank letters of credit as an alternative to D&O insurance.

"If a court rules that a company is unable to indemnify its directors in a particular instance, providing D&O cover with bank letters of credit, for example, will be illegal," said one D&O underwriter.

Airmic's best hope of finding a solution to its members' D&O problems may be to put pressure on the government to amend Section 310 of the Companies Act, Foord-Kelcey said.

Earlier this year, the Higgs report suggested that the government "provide that a company should be able to indemnify a director in advance against the reasonable cost of defending proceedings from the company itself".

Foord-Kelcey said: "Airmic's approach should be to lobby for amendments to Section 310. It's a good time to lobby because Higgs recommended amendments to allow the advancement of defence costs."

Despite dramatic increases in the cost of D&O cover during the past 12 months, brokers say premiums are beginning to stabilise.

"Rates are definitely levelling off," said Foord-Kelcey.

"Talking to insurers on behalf of clients looking to renew in early 2004, the prices for the primary level of cover appear to be staying the same."