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We live in a highly regulated business environment. New laws and regulations place increasing managerial responsibilities on directors and officers of private and public companies. What if something goes wrong and a director or officer unwittingly falls foul of the law, or mistakenly fails to uphold their duties and responsibilities? They could find themselves being held personally liable for their negligence, which could result in jail time or large financial claims. Companies of all sizes, whether listed on the JSE or privately-owned or even a non-profit organisation or membership association, need comprehensive cover for liabilities that might arise from negligent wrongdoings by their directors and officers conducting their day-to-day managerial responsibilities. Directors and Officers (D&O) liability insurance plays an important role in any business, regardless of size or nature of ownership. In the past 10 years, D&O claims against privately-owned businesses and NGOs are increasing, yet 70% of SMEs do not have adequate D&O cover. This means the executive management in such firms are exposed should they be criminally charged or sued in their private capacities. David O’Sullivan spoke to Geoffrey de Pinchart, Business Unit Manager for Directors and Officers Liability at Aon South Africa, about the issue.
Geoffrey, let’s start with a basic principle, what is D&O liability insurance, what does it cover?
D&O insurance is an insurance product that protects directors, officers and any employee in a managerial or supervisory capacity. It protects those that make key management decisions when running a company. That, in a nutshell, is D&O cover.
When we say it covers them, it covers them in the event that they run into legal problems, in the event that they are sued, is that right?
That is correct. It provides financial protection should they be sued for mismanaging the company.
Are they not protected by the company in the event that they’re sued?
In certain cases, they may be able to get indemnification from the company and in certain cases; they may not be able to. Sometimes the company might not have the financial resources to protect them, should they be sued in their personal capacity. It’s always nice to have an insurance policy that will provide for those costs should a director get sued, especially in the event of the company not being able to defend them and in certain cases where the Companies Act would restrict it.
Let’s talk about the areas of concern to companies. We are in quite a regulated environment, we have the amended Companies Act and many common-law responsibilities for the MO’s have been codified to some extent, so regulation is one big concern, isn’t it?
It’s a very big concern if you’re managing a company or sitting as a director, your key duty is to make sure that you’re looking after the company, the environmental issues and your social responsibilities. As you mentioned, you have the new Companies Act that’s been introduced. You always have new things that you, as a director, need to ensure are in order, such as looking after personal information, which is going to be a big thing once POPI is introduced, for example.
When we look at issues of employee awareness as well, I think more and more employees are aware of their rights. Many more protections are afforded to employees, which may result in some kind of legal action or litigious environment for directors and officers, that would also be an area of concern, won’t it?
That’s a very big area of concern. One thing, as a director and a manager, you make sure your employees are working in a safe working environment. If it’s not a safe working environment and somebody is injured or killed, the director can be held criminally liable for that. What’s nice about a D&O policy, is that it provides defence costs to prove that you did everything that you could have done to make your employees work in a safe environment. If a D&O is held criminally liable, the company can’t protect the individual and that’s where you need a D&O policy to pay those defence costs.
Is there anything that D&O liability cover excludes?
The D&O policy is there to protect directors for mismanaging, such as errors, negligence, unintentional acts. The policy does exclude incidences when deliberate actions were taken that the director or officer knew was wrong. For example: If you were involved in fraud, the D&O policy wouldn’t protect in that regard as it is a criminal offence. Some policies may advance your defence costs if you’re held liable for an allegation of fraud or something deliberate. If it were found that you were actually doing those things knowingly or fraudulently then the insurer who indemnified you for those D&O claims would reclaim their money back because you can’t insure somebody for fraudulent activity and wilful actions.
Is it becoming more and more difficult for directors and officers of companies to operate in this highly regulated environment? There are increasing demands for transparency, for disclosure, accountability, and governance. Are we seeing more and more of a demand for this kind of cover because it’s such a litigious environment or a potentially litigious environment for directors and officers?
That is correct. With all these laws being introduced, it’s a lot harder to be a director. You have to comply with many rules and regulations and make sure you’re always acting ethically and in the best interest of the company, against a seemingly, never-ending list of rules.
This might seem to apply to the large listed companies that have many fiduciary duties attached to their directors and officers, but let’s talk about smaller companies, SME’s, non-profit organisations, membership associations, do they necessarily need this kind of cover?
Yes, they do need this cover. Many of them don’t buy it because they think it’s more suited to large corporate and JSE listed companies. As a director, you need to perform your duties with reasonable care and skill and even if you’re a small SME, if it can be shown that you didn’t perform your duties with reasonable care and skill, you can be held liable. As a director and a manager, you need to be making sure you’re looking after your environmental and social responsibilities. You can’t say because I’m an SME I’m not responsible for, let’s say a pollution incident. As a director, you will be held liable for those matters where you didn’t do your duty with reasonable care and skill.
Is it your experience in, South Africa, that a large percentage of SME’s do not have D&O cover simply because they don’t understand the kind of regulatory scrutiny to which they’re now subjected?
We estimate about 70% of small SMEs don’t have D&O cover and as a result we designed a new product to make it easier for these small SMEs to have access to this product going forward – it’s a new product that we’re launching soon.
Do we have the litigious society that understands that legal action can be taken against directors and officers who are in breach of their duties?
Society is becoming more and more litigious and everyone’s becoming more aware of their rights. There are new rules and regulations that are always being implemented and when people know that they can claim and get some money back for a loss that they have incurred or suffered, they will use that route to get money back.
From your experience, how prevalent are D&O claims against privately owned businesses and non-profit organisations; are they as prevalent as in the large listed entities?
Decidedly with D&O claims, the premiums you pay are very cheap compared to other lines of insurance because the chances of having a claim are very small, but when you do have a claim, chances are it’s going to be very large and it’s going to hit the director’s personal bank account. That’s why we buy the D&O policy, to protect the director and cover the investigation costs, which could take the form of lawyers and accountants investigating the matter, the legal cost to defend you in court, and if it’s a valid claim, there could be awards.
With JSE listed companies, the chances of claims are very infrequent compared to other claims that you may have, but when you do have a claim, it’s typically a very large one. The same applies to SME’s – your chances of a claim may be small, but when you do have one, it’s going to hit you quite drastically. I’ve seen scenarios with PTY Ltd companies right through to non-profit organisations who have taken D&O cover and then realised how vital the cover is come claims time.
What does a D&O policy actually cover? Is it protecting a company, the non-profit organisation, or is it protecting the directors, the officers personally?
As you said at the end, it protects your directors, your officers, and your employees acting in a managerial position only, it does not protect the company.
So we’re looking after the personal assets of the people who have the supervisorial and managerial responsibilities and who could be held liable for wrongful acts.
That is correct; you’re protecting those people because they make the key decisions for the running of the business.
Typically, who makes a D&O claim?
It can be a shareholder, but that’s just the tip of the iceberg. Many of these claims originate from stakeholders such as customers, suppliers, creditors, trade unions, employees. These individuals can also take action against the director should they feel that they’ve mismanaged the company.
Do SME’s have the same exposures as the big corporate entities?
SME’s typically have less exposure to D&O claims than big corporate entities when you look at shareholder exposure, but they also have to comply with similar rules and regulations as large corporations need to comply with. In America and in Europe, many directors have been held liable for not making sure that their IT infrastructure is secure. For example on the US, a company was hacked, the share price dropped and because of the drop in the share price, the shareholders took a class action against those directors.
You could have people taking action against a small SME – for example should you have personal information from your customers that for some reason gets leaked into the public domain. If those people find out that their information ended up in the public domain, they could take action against the directors of a small SME for not making sure that their information is secure.
Typically with SME’s, when we’re talking about the costs that can be incurred, what are we talking about here, Geoffrey?
For a limit of R20m, you’re looking at a premium of between R18,000 to R25,000 annually, so it depends on the financial condition of the company, because the better the financial condition of the company is, the cheaper the rate. We are also launching an SME product which has a fixed rate where the client can actually see the premium before completing the forms, so the premium is very cheap.
To answer to your question: How long is a piece of string?
When you’re insuring your car, you know what the value of your car is and you insure it. If the car is stolen, you know you’re going to be paid X, Y, and Z after the excess is taken off. With a liability, you only know the amount of the claim once it’s been settled in court and that could take a few years to get resolved. Therefore, when you have a liability claim you always want to have the highest limit that you can have. In many instances, non-profit organisations go for a limit of R1m, even though they were advised to go for a higher option. Only once they have a potential claim do they realise how important it is to purchase a higher limit.
We’re talking about a situation where a director or an officer can be held liable for a wrongful act, how do you define a wrongful act?
That’s the core of the policy. A wrongful act is an error, miss-statement, misrepresentation in breach of your fiduciary duties. It’s when you do something negligently.
Therefore, it’s not done intentionally; it has to be negligently done. If it’s intentionally done, does the cover still stand?
There’s an exclusion in all your D&O policies, where deliberate, intentional and fraudulent acts are excluded, but depending on the situation, some insurers may advance you the defence costs. But if you were found guilty of being involved in a deliberate or fraudulent act, you will have to refund that money to your insurer.
Do we have case law that can help guide people through the dangers of not having D&O liability, do we have incidents where people have been sued that can be used as cautionary tales.
Many people like to deal with these matters out of court to keep it out of the public domain. There was, however, a case in Limpopo where a director of Blue Platinum Ventures, was held personally liable because the company did not adhere to the environmental regulations. It was the first example of a director held liable on the African Continent for not adhering to environmental regulations. You’re going to find a lot more of these cases in future because if you look in the news, the environment is something that everyone’s concerned about and directors are the custodians of the way business is done and they have a social responsibility to make sure that the environment is looked after.
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