Even decisions made with the best of intentions can be scrutinised, and legal actions that allege director misconduct cannot be ignored.
To clear up the confusion that often surrounds what liabilities directors have, we dispel some common myths:
- I have limited liability…
No, you don’t. Just because the company is limited it doesn’t mean that your liability is. There is no limit on the liability you can incur for things such as negligence. Legal defence costs can run into thousands of pounds, so proving your innocence can be expensive. You need to carefully think about who will meet those costs.
- Insurance cover is expensive…
Not necessarily. A corporate policy, which would protect all directors and many senior employees on an umbrella basis, starts at £535 a year for £1m of defence and awards cover. Individual cover starts from as little as £33 per month.
- The company will defend me…
Are you sure about that? Having an undertaking in the company’s Articles of Association or a clause in your Director’s Service Agreement (or both) is prudent, but what if the company doesn’t have the financial resources or the cash flow to fund your defence? You could easily be left to fund the bill yourself.
- We’re only a small private company
So, what. A director of a privately held company is just as likely to face a claim as a director of a publicly held company. Size bears no relation to the problems you can encounter. A small company is more likely to struggle to meet the costs of your defence. Who will meet these costs if the company is unable to?
- We don’t need cover because we’re a charity or trust…
Wrong. Organisation type has no relevance. Directors, officers and trustees of all forms carry onerous duties and can be sued or investigated due to the way in which an organisation is managed. Do you really want the charity or trust using its resources to mount a legal defence?
- Our legal expenses insurance policy will cover us…
Only if insurers think they can win. Most legal expenses policies contain a ‘prospects clause’ so insurers will only respond if they feel they have an odds-on chance of winning. You need to think about what you will do if the insurer’s think they won’t win.
- I don’t work for the company any more…
This doesn’t matter. You were still responsible for the way the business was run when you were there. Actions can take several years to materialise, so resigning is no defence. Will the company be willing to use its own resources to defend you now you don’t work for them?
- As a non-executive I can’t be found liable…Possibly. There have now been several cases that have ruled a non-executive was behaving as a de-facto director (someone who acts as a director but who hasn’t formally been appointed one). If you are named in an action, then it will need defending and who will bear the cost of that?
Even decisions made with the best intentions can be scrutinised – and defending a case of director misconduct can be extremely costly and time-consuming. Quantum provides advice and market-leading directors’ liability insurance policies, underwritten by Chubb Insurance. IoD members are eligible for discounts of up to 35% on premiums.
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