Ian West, professional and financial risks underwriter at RE Brown Syndicate 702 at Lloyd's, looks at the increasing liability risks faced by companies and explains why "stand-alone" corporate cover is a better option than simply extending D&O policies.
There is growing concern among underwriters and the business community as a whole at the increasing liability risks faced by companies. These risks threaten firms in their own right as corporate entities as distinct from those faced by their directors and officers.
The tendency to extend Directors and Officers Liability (D&O) policies to cover certain corporate liabilities (so-called "Entity Extensions") has several disadvantages over "stand-alone" corporate cover.
A new company liability policy, from RE Brown, provides protection for the company itself without the confusion created by entity extensions to D&O policies. The D&O programme remains unimpaired and concerns over ownership of cover, conflicts of interest and effectiveness are successfully avoided.
The policy addresses four areas where corporations face risk: employment disputes, securities transactions, investigation costs and shareholder derivative actions.
Employment disputes
Of particular concern are employment disputes, one of the fastest growing areas of liability in the UK and abroad. Recent legislation and court cases have established a trend for increasingly frequent employment litigation and escalating awards of damages.
For example, the first employment disputes to arise from new whistleblowing legislation are hitting the headlines. The company liability definition of "retaliatory treatment" is wide enough to cover these disputes. Every entity is exposed to employment liability.
Problems arising from securities transactions usually only form part of a company's risk management strategy when a public offering is mooted.
The purchase of a securities entity extension can lead to disputes over "ownership" of the cover. However, the company and its directors can often become embroiled in unpleasant wrangles over shared excesses and limits of indemnity. Arranging separate cover for the company alone overcomes such problems.
Moreover, it is common for extensions under D&O policies to restrict cover to claims brought by the purchasers of shares, thus providing no indemnity for claims by regulatory authorities. This area is covered, in the new company liability entity policy from RE Brown Syndicate 702 at Lloyd's.
Company investigations
In addition, inquiries and official investigations into companies are launched every day by various authorities dealing with employment discrimination, health and safety issues, pollution, ownership of, and trading in, securities, and restrictive trading practices.
Such inquiries can be drawn out and costly for the companies involved. Amazingly, despite increased regulation meaning that companies are now more likely than they ever were to find themselves subject to these kinds of investigations, many companies nonetheless remain uninsured.
The few policies already on the market tend to restrict cover to very specific situations such as equal opportunities or racial equality, but protection needs to be more extensive.
When a shareholder brings civil proceedings to enforce a right of the company against a director or officer this is known as a shareholder derivative action. Often the shareholder can obtain a court order making the company responsible for paying his or her costs of bringing the action. Indemnity for such costs is sometimes included in a D&O policy.
This is inappropriate, as it means that a policy intended to benefit directors and officers ends up funding proceedings against them. Companies need to ensure that cover for the potential costs of derivative actions are in place.
There is another advantage in separating the entity cover from that of individuals. Separating out the insurance provided to directors and officers from that provided to the company may simplify the UK tax treatment of the former.
It could enable directors to take advantage of the tax reliefs available to them in relation to D&O premiums, something that may not be possible with "mixed" products, such as in the cases where entity extensions are added to D&O policies.
