Finpro Practice Leader Marsh JLT Specialty
With the business rescue industry set to benefit on the back of the devastation that COVID-19 will leave in its wake, business rescue practitioners (BRPs) should take note of the importance of Directors and Officers Liability Insurance (D&O).
This should play an important role in their decision-making capabilities as they take control over distressed companies.
Unnecessary expense
Many BRPs see D&O insurance as an unnecessary expense. In most cases, they simply do not renew, or worse, cancel the cover. They often do so without the consent of the very people the policy is designed to protect: the directors of distressed companies.
Business recue practitioners who fail to renew a D&O policy during the rescue plan period, should worry about being sued for negligence. Lack of funds should never be an excuse not to renew the policy.
D&O policies are annually renewable but operate on a claim’s made basis. This means, there must be a valid policy in place at the time a claim is made against a director or officer of a distressed company. If there is no policy, there is no cover.
No mandate on complaints
It is important to remember that from an aggrieved party’s point of view, there is no set period within which they can open a case against a Director or Officer. This is often caused by the actions, or inactions, of a Director or Officer that caused their companies to be placed into business rescue in the first instance.
These complaints or claims are often brought months, if not years, after the failed business rescue plan. In addition, these claims are often brought once the company has been placed into liquidation. Directors whose D&O policies have been cancelled on the advice of the rescue practitioner will have no cover should such claims arise.
It is critical to ensure that the D&O insurance is renewed, alternatively placed into run-off for at least three years post the liquidation of the company.
Strongest weapon
What rescue practitioners also sometimes fail to realise is that the D&O policy can often be their strongest weapon. Discharging their duties towards shareholders and creditors, they may well need to bring action against the directors who caused the business rescue.
Access to a D&O policy, and the risks that it covers, may go a long way to assisting creditors in possibly recovering their investments.
Finally, Directors are entitled to have a say in the renewal, or non-renewal of the D&O cover. Cancellation of the D&O must be done with the Directors consent, even if such a Director has resigned. If the rescue practitioner points out that there is no money to pay the annual D&O premium, Directors should be afforded the opportunity of paying same themselves. They are, after all, the policyholder and not the company.
This is just another example of how insurance plays a vital role in economic growth and stability. A recent survey pointed out that the average South African cannot readily afford a financial setback that exceeds R10 000. Imagine the stress when faced with a D&O claim that can amount to much more.
Teri Solomon is the Finpro Practice Leader at Marsh JLT Specialty
