D&O Insurance is often described as a must have cover for directors of RMC’s and RTM companies. In this guest blog and accompanying resource, Paul Robertson, MD of 1st Sure Flats, explains this essential cover:
The need to insure and the provision to do so
We live in an ever more litigious environment and have all been exposed to an increase in the ‘blame culture’ with sayings such as “where there is blame there is a claim” now commonplace. Coupled with new risks caused by cybercrime and theft of money by deception, RMCs and RTMs (along with their directors), are exposed to an increasing number of threats.
Many of these can be protected by insurance cover. However these potential exposures are not always considered and policies may be misunderstood.
Anyone signing up to become a director of an RMC or RTM should be aware that technically they are subject to the same legislation as the director of a large PLC. Of course it can be argued that their liability is less than the director of a PLC but conversely a director of a PLC wouldn’t accept such a post unless there was a contractual obligation for appropriate insurances to be in place. Many lessees are made directors of companies without any clear understanding of the personal exposures that may be involved. Nor are they routinely offered appropriate insurance protection.
A limited company’s liability is, as suggested by the name, limited to its shareholding – which in the event of an RMC or RTM is only a small sum of money, even after accounting for the service charge funds held in trust.
The directors can however be held accountable for their acts, errors and omissions and this liability extends to their personal wealth. It is therefore not unreasonable that they would wish to carry appropriate insurance against claims and this cover must have the ability to respond to actions brought against them.
Directors and officers insurance (D&O) indemnifies the directors against their acts, errors or omissions while they are acting in their capacity as directors of the company. Cover is also available for unincorporated associations to protect the officers (or trustees as they may be called).
The basis of cover is to protect against “wrongful acts” which normally means a negligent act, error or omission resulting in a breach of any duty. Such breaches could be fiduciary or statutory, i.e. failing to file accounts to Companies House in good time or breach of trust, warranty or authority, i.e. acting outside their capacity. In addition it is normal for cover to include inadvertent libel and slander.
It is important to note that these covers only apply to the directors or officers while acting in this capacity for the RMC or RTM. The cover does not cascade down to insure them in respect of their personal affairs or in their capacity as a lessee. There are also some common exclusions to be aware of. The D & O policy will not indemnify in respect of deliberate and reckless actions taken with disregard to their outcome and will exclude any actions intended to generate a profit to which that person is not legally liable.
So while the D & O policy is intended to protect the directors and officers it does not give them carte blanche to act illegally or to be deliberately irresponsible. As such it will not normally cover punitive fines (fines exceeding simple compensation and awarded to punish the defendant) and fines for criminal activities. Dependant on the circumstances, it may however provide some protection defending these actions in so far as the law allows. Cover will also normally extend to include the cost of obtaining bail for the directors and officers, court attendance fees and the costs of arranging assistance in managing crisis and public relations.