REGULAR A RISK TOO FAR
Entrepreneurs and executives running companies tend to be risk takers. But directors should have tailored protection as they put their personal assets and livelihood on the line, says Ashley Hoadley, Director at Darwin Clayton Insurance Brokers.
Running your own company, or making it to the top in any business, is an achievement. Hard work deserves its reward. But it also brings major responsibilities if you’re a director.
As an insurance specialist dealing with a lot of SMEs, we know that many directors do not consider the need for specific insurance to protect them against the risks they personally face.
Directors’ and officers’ liability insurance, as it’s usually known, is provided for almost all directors in large companies. Many executives wouldn’t consider taking on the role without it. But among SMEs, research by the big insurers suggests that between a quarter and half of directors are covered, falling to just one in ten at the smaller end of the spectrum.
The trouble is, whatever the size of the enterprise, the risks are the same, except that smaller companies don’t have in-house experts to advise them – on corporate governance in the first place, and on their response to an action against them.
So what are the risks? They arise mainly from the legal duties of a director, based on case law and various pieces of legislation. Directors owe these duties first and foremost to the company itself and its shareholders (though that does protect owner-directors), but also employees, customers and creditors too, particularly where there’s a risk of insolvency.
The Companies Act 2006 alone sets out a long list of general duties covering everything from duty of care and diligence to honesty and loyalty to the company. A director must also act within their powers, exercise independent judgment, and avoid conflicts of interest.
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Directors are liable to penalties for some infringements and criminally liable for other breaches, sometimes by default. Sanctions range from a fine to imprisonment and disqualification from acting as a director – blighting a person’s name, career and livelihood.
Apart from the Companies Act, areas such as health and safety, environmental protection, employment rights, fair trading and HM Revenue are also potential sources of action against directors who fail, even if unknowingly, in their duties.
It’s not possible to give a comprehensive account of the risks here, and the aim is not to decry these duties. They exist to protect society from unscrupulous or incompetent businesspeople, and to hold companies to account. The point is that they are many, complex and continually changing as new regulations are introduced. The recently enacted Small Business, Enterprise and Employment Act 2015, which significantly raises the stakes for company directors in relation to insolvency, is one such example.
An even more telling fact is that limited liability protects a company’s shareholders, not its directors and senior officers. As individuals they are personally liable for the legal expense of defending a claim, awards for damages and fines levied by regulators. So a director’s home and savings are at risk.
Liability insurance for directors and officers will not shield managers who engage in criminal activity. The cover normally excludes fraud and dishonesty, criminal fines and regulatory penalties.
D&O policies also meet the costs of investigations brought by regulators, who do not discriminate between blue- chips and SMEs when it comes to
Whatever the size of the enterprise, the risks are the same, except that
smaller companies don’t have in-house experts to advise them.
rooting out alleged misconduct. Such investigations can be long-running and highly disruptive.
A director of an SME cannot be expected to be familiar with the procedures to be followed. The distraction from their everyday role can be disastrous for the business.
This type of insurance is well established in the UK. Cover can be secured with a reputable insurer from as little as a couple of hundred pounds; however, careful consideration should be given to a suitable level of protection.
People end up running businesses because of their entrepreneurial flair, specialist skills, market knowledge and hard work. They tend not to have studied the myriad legal obligations of the modern director en route. But ignorance of the law is no excuse.
Similarly, ignoring the risks to the director in this litigious environment does not make business or common sense.
www.darwinclayton.co.uk Tomorrow’s Cleaning September 2015 | 29
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