Corporate Governance & Risk Management
A lot has been written about section 250 of the Act, which has widened the scope of UK corporate liability, capturing more senior individuals and a broader range of activities.
Criminal and regulatory investigations routinely examine decision-making, who exercised oversight and how concerns were managed. Directors and senior managers may be required to explain how decisions were made and how they discharged their responsibilities.
Such investigations can generate significant legal costs, management time and reputational damage. Whistleblowing, shareholder claims and other actions can arise as well, placing further strain on the company and its senior management.
The overlooked issue: Alongside the wider implications for corporate liability, directors and senior managers need to consider whether their Directors and Officers (D&O) insurance provides adequate protection against the costs of an investigation.
Why D&O Insurance Matters
However, I want to focus on a sometimes overlooked aspect: D&O insurance.
Having been responsible for the Global Insurance programme for many years, I am all too familiar with the intricacies of the D&O insurance market.
D&O insurance is designed to protect directors and officers against claims arising from the performance of their duties. It does not protect against corporate fines and penalties, nor criminal liability for the individual.
Its key role is to provide defence costs, including where separate representation is required or where indemnification is not available.
The key distinction: D&O insurance is not a shield against criminal liability. Its importance lies in the financial protection it may provide for legal defence costs, subject to the terms, conditions and exclusions of the policy.
Understanding the Potential Cost of an Investigation
These costs can spiral if an investigation continues for several years. Directors therefore need to understand the cover available.
Multiple individuals requiring separate representation can significantly increase expenditure, potentially eroding insurance limits.
Why policy limits matter: A lengthy investigation involving several directors or senior managers may require multiple legal teams. Defence costs can accumulate rapidly and reduce the insurance protection available for other claims.
Five Key Questions Directors Should Ask
When reviewing D&O insurance, directors and senior managers should consider the following questions:
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Is an investigation covered?
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Are interview preparation and representation costs covered?
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What exclusions, such as fraud, dishonesty or wilful conduct, may apply?
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Will defence costs be advanced pending a final determination if fraud or dishonesty is alleged?
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Are policy limits sufficient where multiple insured persons require separate legal representation?
The Wider Implications for Corporate Risk
The senior manager attribution model broadens the circumstances in which companies may face criminal investigation and prosecution. As investigations become more frequent, the risk will increase in parallel.
This is likely to drive greater demand for defence-cost protection and closer examination of D&O policy wordings and limits.
What this means for boards: Greater exposure to investigation and prosecution makes it increasingly important to understand exactly when insurance cover is triggered, how defence costs are funded and whether existing limits remain appropriate.
Reviewing Insurance, Governance and Crisis Response
The key takeaway is to undertake a review of the D&O policy wording to establish whether cover is adequate and negotiate changes needed to protect the board and senior management.
Review governance structures and crisis-response plans to ensure boards are not blindsided by these reforms.
Final takeaway: Directors and senior managers should not assume their existing D&O insurance provides sufficient protection. Reviewing policy wording, investigation cover, defence-cost provisions and available limits, alongside governance and crisis-response arrangements, is an important step in preparing for increased corporate liability exposure.
By David Ludlow, Partner Fractional General Counsel Services
David is a qualified solicitor with over 30 years global experience working for multi-nationals.