Prepare yourself for a shock: D&O insurance for corporate manslaughter

It can only be a matter of time before a property developer or construction firm faces a criminal prosecution under the new Corporate Manslaughter Act. With one in four construction sites found to be failing safety checks by the Health and Safety Executive, directors need to be sure they are taking all possible steps to minimise the risks and acquire adequate financial protection to mount a defence case.

Directors and officers liability (D&O) insurance is a relatively inexpensive policy that could be absolutely priceless should a prosecution occur. The fundamental point about D&O insurance is that it focuses on personal financial protection and is designed to cover directors’ individual risks, not those of the company as a whole.

D&O coverage is typically structured in two parts: side A and side B. Side A protects an individual who has been accused of a wrongful act but cannot be indemnified by the company. If, for example, a company becomes insolvent or the indemnity is forbidden by law, as it is in some countries, the side A insurance cover pays for the legal defence of the relevant director or directors.

Side B cover compensates the company if it is permitted to pay its directors’ legal costs. Either way, the bottom line is that directors know that they are not funding a possibly protracted and expensive case from their personal resources - a comforting thought given the scale of possible legal costs. While there are a number of variables, it would not be unreasonable to expect these costs to run into hundreds of thousands of pounds.

The wording and conditions of D&O policies can vary, so it is important that the cover your policy provides is as broad as possible, and that it has been updated to include prosecutions brought under the Corporate Manslaughter Act. D&O insurance can also help to pay for public relations experts who may need to be brought in to prevent a company’s reputation being destroyed by a high-profile prosecution.

Insurers, and potentially litigators, will look for evidence of risk discussion in board meeting notes and will expect to see a track record of health and safety focus

There is no set formula for calculating the levels of D&O insurance that individual firms should purchase - every firm will be different. The factors that need to be considered include the type of industry in which it operates, the level of regulatory oversight of that industry (construction being very highly regulated), whether a company is publicly quoted or privately owned and, most importantly, the risk appetite of the board. If they are confident of their systems, governance and balance sheet, they may be willing to buy less cover.

The cost of insurance is also variable and depends on the company’s financial security, risk management record and claims history. However, there is a lot of competition among D&O insurers at the moment, and this has resulted in premiums for well-run companies remaining steady, and in some instances reducing slightly, over the past two years.

To get the broadest coverage at the most competitive price, you need to make your business an attractive prospect to D&O insurers. To do this you will need to demonstrate that the health and safety culture in your firm is more than a manual on the shelf.

Ideally, directors need to ensure that health and safety-type risks to employees, customers, partners and the public have been identified and minimised where possible. Once the risks are identified, documented plans must be drawn up and management measures put in place to reduce or prevent these risks.

Insurers, and potentially litigators, will look for evidence of risk discussion in board meeting notes, will check the content and frequency of training courses and will expect to see evidence of a consistent track record of health and safety focus right across all operations of the company.

No insurance policy can take away the need for directors to ensure that the company is managed in a sensible and legal manner - nor will insurance pay fines or stop irresponsible directors and companies being brought to justice. However, it will provide financial assistance at a time of crisis that may protect directors and the company from ruin.

David Hayhow is director of real estate and construction and Ray Pallett is divisional director financial risks at Lockton International