Directors & Officers Liability Insurance – do you need it?
Prizm Solutions
Many business owners choose a limited company structure in order to minimise their personal liability should their businesses ever run into trouble. However, did you know that, even with Limited Company status, that you, as a director can still be personally sued in certain circumstances?
As a shareholder, your liability is limited to the value of your shares. However, as a director, the law says you have unlimited liability to your company, shareholders, employees, creditors, the public and to certain government agencies (such as the Health & Safety Executive). This is why it’s still possible to be personally sued as a director, despite having limited company status.
As well as the Companies Act 2006, other legislation also impacts specifically on company directors, putting them at personal risk, such as the Insolvency Acts 1986 & 2000, Company Directors Disqualification Act 1986, Value Added Tax Act 1994, Data Protection Acts 1984 & 1998, Environmental Protection Act 1990, Competition Act 1998, Enterprise Act 2002 and the Bribery Act 2010!
It's a scary world, isn’t it! The good news is, there is a solution – and it’s not expensive!
Directors & Officers Liability insurance is a very useful policy to take out to help you keep your personal assets secure.
If you’re still not sure why you might need such insurance cover, here are some examples of genuine claims under this type of insurance.
1. A director signed a company cheque but omitted the word 'Limited'. The cheque was not honoured and by the time the corrected cheque was re-presented, the company had gone into liquidation. As a consequence, the managing director was held personally liable for the value of the cheque, over £30,000.
2. A small shareholder in a private company took action against the directors alleging that, over a period of several years, the directors had abused their positions by paying themselves excessive salaries but paying low dividends to the shareholders. The shareholder applied to the High Court for a review of the directors’ actions and demanded that they repay over £1,000,000 to the company.
3. A driver fell asleep whilst driving for the family-run haulage company for which he was employed. Two motorists were killed. The court held that the operations manager should have ensured that his driver adhered to the relevant driving regulations. He had also failed to keep in close touch on these matters with his co-director. Both directors incurred substantial defence costs before being convicted of corporate manslaughter.
4. A construction company suffered a near miss when a huge pane of glass fell from the fifth floor of a redevelopment project onto the pavement. Miraculously, no one was injured but the Health & Safety Executive made a site visit the following day. This revealed a number of legislative breaches. A variety of actions were subsequently brought against the directors resulting in costs of £45,000.
5. A fire results in the destruction of a company’s premises. It is subsequently discovered that the Director responsible for arranging the Company’s insurances had inadvertently failed to keep the insured values up to date resulting in a significant underpayment by their Insurers. This in turn meant that the premises could not be rebuilt with the insurance proceeds alone. The other Directors decide to sue the Director responsible for the shortfall.
We live in a society where blame culture is common, so a problem is often deemed as someone’s fault. And whilst in many cases the formation of a limited company may help protect the directors, the examples above show how that isn’t always the case.
If you’d like to find out more about how to keep your personal assets safe in times of trouble, just give the friendly team at Prizm Solutions a call on 01827 313931.
