As someone working for an American company, one of the interesting features in the Directors and Officers insurance field has been seeing different claims litigation and work practices flowing from the US to the UK and then on to Continental Europe.
When we first started to see D&O claims regularly notified in the UK, neither the policy nor the concept of D&O liability was well understood within the insurance market. The wording was very specific in what was covered and what was excluded, while the nature of the claims notification received was frequently very vague.
Over time, we have seen a gradual but constant development in policy coverage and the claims made.
The changes we have seen in the claims received, reflects the overall change in attitudes towards directors and their liabilities.
Changing business environment
A change in the business environment has left directors and officers more exposed. Within corporate organisations, traditional management hierarchies have been replaced with a flatter management structure. This should lead to greater accountability and responsibility for managers - perhaps in new areas in which they have less experience.
Also, globalisation has become popular, and the increased level of merger and acquisition carries with it increased risks. A 1998 survey by Tillinghast-Towers Perrin showed that companies with a history of merger and acquisition were almost twice as likely to experience a D&O claim than those without.
In addition, companies increasingly seek to become global players by attracting public investors. The United States has become the dominant centre for raising capital, largely through the mechanism of American Depository Receipts or ADRs. ADRs are a method of accessing US capital markets and trading securities on a US exchange. However, to do so requires the company to comply with US securities legislation.
It also makes the company subject to suit before the US courts, even if it is not physically located or present in the United States.
At AIG, we have found that there are now fewer bad cases being brought, but those cases that survive a motion to dismiss are more likely to have merit, or at least be less likely to settle for a nominal sum. Also, while the stricter pleading requirements have made it easier for cases to be dismissed, the courts frequently grant leave for the plaintiff to amend their complaint and so provide a second chance.
Another trend is the development of shareholder action groups primarily in continental Europe, particularly France, Germany and the Benelux countries,
In France, there are three main minority shareholder associations, the most active of which is known as ADAM. It has developed quite a high profile, and has been involved with companies such as Euro Disney and Credit Foncier de France.
In Belgium, there is Deminor, which has been active in defending the rights of minority shareholders as well as large institutional investors. It is perhaps best known for its legal action on behalf of Dutch shareholders of Phillips, following a settlement in the United States between Phillips and US shareholders.
Finally, in Germany there is the Association for the Protection of Small Shareholders and Professor Wenger, who has regularly harangued top German companies on various corporate matters.
In the UK, we have not yet seen organised shareholder action groups but this may change. The increase in the level of claims awareness, together with changes in legal fee arrangements, and other changes which simplify the procedure for shareholders wishing to bring a claim, may mean that shareholder actions are a phenomena we shall see in the not too distance future.
Redefining the role of the director
In recent years there has been a worldwide trend towards defining the duties of directors and officers more clearly, and ensuring accountability
In the UK, from the Cadbury Commission in 1992 through to the Combined Code of 1998, various recommendations have been made to improve corporate governance. We now also have Turnbull to provide the guidelines for how to comply with the requirements of the Combined Code.
In Europe, there has been a series of directives which have had an impact in areas such as shareholder rights, corporate governance principles and the liability of company managers, In other areas, such as environmental matters, pollution, health and safety and employment issues there has also been an emphasis on defining the responsibilities of directors and officers and identifying sanctions for both the entity and individuals for a failure to comply with these.
Statutes where such personal liability can arise include: the Environmental Protection Act 1990, Water Resources Act 1991 and the Clean Air Act 1993.
Increased claims awareness
Recent trends show there is a growing international claims culture, particularly in Europe, which is following the example of the US. The gradual introduction of "no win, no fee" arrangements in the UK is expected to further enhance this claims mentality.,
Exposure to US investors, and their high level of claims awareness can also affect the UK and Europe namely from US pension funds. The volume of this investment is increasing. In 1998 an estimated 30-50% of the shares traded on the Paris stock exchange were held by the US and UK pension funds. In the UK, 17% of company shares were owned by US pension funds .
With their money, the US pension funds bring their culture which is a keen protection of their investment. Indeed, they are required to do so by a 1994 directive of the US Department of Labour which requires pension funds to vote in shareholder meetings abroad.
The D&O policy was originally exclusive. Everything was excluded unless it was specifically included.
This has changed significantly over time with greater coverage for the entity in certain situations, and broader coverage for other employees named in litigation, in areas such as Employment Practices Liability,
Combined with this has been a steady reduction in the number and scope of policy exclusions.
The overall effect of these alterations to basic policy coverage has been to greatly increase the number and type of situations where the policy is able to respond,
There are five main sources of D&O claims. These are: employees, shareholders, government regulatory bodies, mergers and acquisitions and creditors.
As business develops, so will the associated risks and thus the need for the D&O policy to evolve accordingly.
The spotlight will remain on the directors and the way in which they conduct the affairs of their companies.
The DTI has launched an independent review of company law that is due out in Spring 2001. It is anticipated that this may recommend a wider duty upon directors to balance shareholder interest with those of other parties connected with the company, such as employees, customers and the local community.
In my opinion, this is unlikely to reduce the number of claims brought against directors and officers. The frequency of claims in certain areas, though, will probably wane, but, no doubt, new types of claims will emerge of which we currently have no knowledge.
One thing I can say with some certainty is that the claims department will be busy for some time to come.