Company directors are envied for their status and salary, but soon they could be subject to a wave of legal claims with no guarantee their insurance will cover them
Company directors should be worried. If two government bills become law they could find that their job title carries a whole lot more risk than before. The draft company law reform bill and the corporate manslaughter bill will increase a director's and its company exposure to litigation in several ways, and there's no guarantee you'll be covered even if you've got insurance.
First, let's look at the company law reform bill, which is aimed at reducing the legislative burden and making directors' duties and liabilities crystal clear. Current legislation makes it hard to prove negligence or a breach of duty of care. The proposed bill widens directors' liability by stating that directors must act in the interests of shareholders, and take account of the interests of employees, suppliers, consumers and the environment. This will increase the likelihood of successful claims from all quarters. Claims from shareholders in particular could rise under changes to derivative actions, whereby a shareholder can bring a claim on behalf of and for the benefit of the company. The bill will bring in a new statutory derivative procedure that will make it easier for shareholders to exercise their rights.
Of course if the number of successful claims does increase after the bill becomes law that will be reflected in a hike in the price of D&O cover.
However, the real threat for construction firms lies in the second bill going through parliament, the draft corporate manslaughter bill. Current legislation is unclear in its definitions and requires a "directing mind", or someone who embodies the company and its actions, to be found guilty of manslaughter before a company can be convicted of manslaughter. This has proved difficult to do, especially in large companies where it's hard to single out one individual, and to date all prosecutions of large companies have failed. Since 1992 there have been 34 prosecutions for corporate manslaughter and only six (all of which were small companies) resulted in prosecutions. As a result there has been huge pressure for a change in the law.
The bill is aimed at making large companies accountable. Under the bill the corporation is liable, not the directors - making it easier for litigation to stick. As a result the Home Office is predicting that if the bill is passed prosecutions will go up five fold.
This will obviously have a huge impact on a company's exposure. The scope of the evidence in any cases that do come to court will be much wider, trials will be lengthy and defence costs very high - the overall commercial effect of any such prosecutions could be potentially crippling without adequate directors' and officers' (D&O) liability insurance. Directors should also be aware that if this bill becomes law they can still be charged under existing law, including gross negligence manslaughter and under health and safety legislation.
The problem is that current D&O policies do not cover the company itself for corporate manslaughter other than in so far as it has indemnified its directors, for example a if a director is called to give evidence in a corporate manslaughter case the company may be able to call on its D&O policy to reimburse any legal costs. This gaping hole in protection leaves companies dangerously exposed. Should the bill be passed, an extension will need to be added to existing D&O policies in order to plug the gap.
In terms of their personal exposure, directors of companies must ensure that their D&O covers them for corporate manslaughter actions, as even under existing policies many will exclude bodily. For construction firms in particular it is vital directors are covered if their policy is to be of any relevance now or in the future.
Directors should also be aware that decisions taken today may well be the subject of prosecutions if they result in a death after the legislation comes into force.
One option is to bury your head in the sand and hope both these bills do not become law.
The other option is to look at your D&O policy now and start planning how to make provisions to protect your company and its directors in the future.
Matt Farman is a director at insurance broker Howden. Email: firstname.lastname@example.org