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The Primary Claimants
Directors and officers insurance is commonly purchased by startups and SMEs to protect the founders, board members, officers, and senior managers against claims arising from alleged wrongful acts committed in the management of the business.
For some startups, the first D&O conversation occurs during a Seed or Series A funding round. Even though the cover is commonly recommended for every limited company or partnership.
As startups scale, the risks shift from operational survival to making sure the business is investable. Investors will commonly require D&O Insurance as a condition precedent before funds are released. Once external capital enters the business, the board’s decisions are subject to far greater scrutiny and the exposure for acting as a director increases.
Shareholder Actions
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Under the Companies Act 2006, derivative actions allow shareholders to bring proceedings on behalf of the company where they allege that directors have breached their duties. This may include allegations of negligence, default, breach of trust, or breach of statutory duty.
These claims are particularly significant because they can bypass the usual management control of the company. Minority shareholders may pursue directors personally where they believe decisions have harmed the company.
Shareholder actions may arise from:
- alleged misuse of company assets
- conflicts of interest
- failure to act in the company’s best interests
- unfair transactions
- mismanagement
- failure to exercise reasonable care
- breach of fiduciary duty
Administrators
When a company enters administration, liquidation, or receivership, an insolvency practitioner is appointed to investigate the conduct of directors in the period leading up to failure. The focus often shifts from whether the business was unsuccessful to whether directors acted properly once insolvency became likely.
Once insolvency becomes unavoidable, directors must carefully consider creditor interests. Decisions that may have appeared commercially reasonable during normal trading can later be scrutinised with the benefit of hindsight.
Case law has made the directors personally liable for any additional debts the company incurred during the period they traded while insolvent. Creditors can also hold directors personally to account if they have been found guilty of wrongful trading.
Regulatory Bodies
Directors and senior managers can be drawn into investigations by statutory bodies and enforcement agencies. Regulatory investigations can be time-consuming, expensive and disruptive. Directors may be required to attend interviews, provide documents, respond to formal notices, or defend allegations of management failure.
Common regulators and authorities include:
- Health and Safety Executive
- HM Revenue & Customs
- Financial Conduct Authority
- Information Commissioner’s Office
- Companies House
- Insolvency Service
- Competition and Markets Authority
- Prudential Regulatory Authority
- The Office of Fair Trading
- Local authorities and sector regulators
These bodies may allege a breach of regulations, such as health and safety, competition law, export regulations, wrongful trading, or failure to disclose information. Even where no wrongdoing is ultimately established, specialist legal representation is often required from an early stage. A good D&O policy can help fund investigation costs and defence expenses for individual directors and officers where covered by the policy wording.
Disgruntled Employees
Employment disputes can also trigger D&O claims, where senior executives or directors are named personally in an allegation. It is recommended that Employment Practices Liability is purchased to provide cover to the legal entity, given that most employment disputes won’t name a specific individual in the allegation.
Employment related claims may involve allegations of:
- discrimination
- harassment
- unfair dismissal
- retaliation
- failure to follow proper procedures
- breach of employment rights
- wrongful termination of a senior executive
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