The secrets of director protection

For company directors, securing the right personal protection is vital in tough economic times such as these. Foresight talks to John Batch, senior vice president at Marsh, Mercer’s sister company and the world’s leading insurance broker and risk adviser.

No matter how strong a company’s risk management procedures are, there remains the potential for claims from disgruntled employees, regulators, shareholders or other parties leading to significant legal costs. Indemnities provided to cover directors’ personal assets can be worthless in the case of insolvency, hence the need for better personal insurance.

“The most important thing for directors is to be confident they are receiving the right legal advice,” says John Batch, senior vice president at Marsh. “Secondly they need to ensure they have adequate insurance.”

Directors’ and Officers’ liability (D&O) insurance is a must for board members. However, not all D&O policies offer the same protection and it is critical that companies check the extent of their coverage.

“Like so many things, the value of D&O insurance is in the quality of cover afforded rather than the amount bought. These policies can vary greatly,” explains John.

To emphasise this point, analysis taken by Marsh specialists discovered that many directors who had taken out D&O insurance were still exposed in certain areas. Marsh experts use a specially developed D&O liability diagnostic tool to analyse existing cover and offer guidance on options for small and medium-sized companies.

John also advises that businesses consider engaging with their insurers: “If a company is just about to go into refinancing all its debt, it’s far better for them to sit down with insurers to discuss this. The insurer can’t deliver the right policy if they are kept in the dark.

“We can place the cover for them or, if they get into a difficult position, such as insolvency, we can arrange a run-off insurance policy which will cover them for up to six years for claims that might be made. We’ve already helped several clients with run-off policies or difficult renewals,” he explains.

The good news for commercial operators who plan to take out or renew D&O insurance is that, despite the downturn, the market for such policies remains competitive and it can be obtained at a price that is not prohibitive.

Of course, prevention is better than cure and Marsh is keen to ensure its clients embed strong risk management cultures. Control of risk needs to be communicated as a way of maximising opportunities, argues John. It should be positioned as an expected part of any business decision.

Directors who take an active approach to risk are better placed to defend themselves against any legal claims of mismanagement and improving the flow of communication to board level is a crucial component of this.

New health and safety legislation also increases the personal risk to directors found to be in breach. The Health and Safety Offences Act 2008, which came into force this year, raises the maximum financial penalties that can be imposed and broadens the range of offences for which a director may be fined or imprisoned.

“The D&O policy can provide some cover in this regard but many insurers differ on the extent to which they would provide cover for corporate manslaughter, for example,” explains John. “Again this is something that any discerning company director should be checking, particularly if they run a business that interacts a lot with the public.

“We help companies through this. We focus on getting the right type of insurance in place, thus assuaging concerns and leaving companies free to concentrate on enhancing their business.”

Marsh in the UK provides clients with the full spectrum of risk and insurance products and solutions. For more information on director protection and mitigating risks, contact John Batch on +44 20 7357 5501 or e-mail.