Directors' and Officers' Liability Insurance

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4.01 D&O policies are complex documents which usually form part of the blanket or umbrella cover put in place by a company in order to protect against potential financial exposures. Often though the effect of such cover is to put in place a series of different policy wordings which may either overlap or contradict each other in respect of construction and enforceability. Even though the market has developed certain common sets of exclusions in respect of D&O cover, it is often possible to find examples where a director’s or officer’s wrongdoing—excluded under special provisions —may be covered under some other provision contained in the company’s umbrella or blanket cover. Some examples illustrate the point:
  • (1) Ordinary D&O policies exclude actual or alleged damage to or destruction of property by directors, officers or the company had the latter been protected by entity cover. However, this does not mean that the company is precluded from recovering under the fidelity provisions of the policy where there has, for example, been theft of corporate property by the directors.
  • (2) Further, excluding pollution liability under the D&O heading might prevent the company from insuring against such liability under the blanket cover, albeit subject to special burdens or payments. This is potentially even more important if the office of director is not to be regarded as a profession in its own right1 as this would have the effect of denying directors the usual protection afforded by the professional liability section of the policy. The same argument applies if directors are no more than well-paid employees of the company to whom employment practices liability (“EPL”) cover2 and fidelity provisions—if any—apply accordingly.
4.02 There are three important questions to be answered in the field of D&O exclusions, via an analysis of market practice:
  • (1) What is the rationale behind the exclusion?
  • (2) What sort of exclusions could be contractually covered?
  • (3) What sort of exclusions stem from the proper features of D&O insurance?

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4.03 In answering these questions, it assists to classify exclusions as belonging to one of the following groups:
  • (1) illegal contingencies or public policy considerations to which general accepted principles of insurance apply;
  • (2) contractual exclusions characterised by those which attempt against proper nature of D&O insurance; and
  • (3) negotiable exclusions or that sort which are neither expressly prohibited nor against D&O common principles of law.


(a) General

4.04 The maxim ex turpi causa non oritur actio prevents any director or officer from being indemnified if their claim is based on grounds which contravene general principles of insurance. As a result of public policy limitations and the overlapping notion that insurance covers only losses or liabilities which occur outside the control of the assured, the insurer’s liability under a professional indemnity policy—from which D&O was developed—is confined to acts of negligence, that is, a failure to exercise the level of skill and care required in the performance of a professional activity.3 In other words, fraudulent and/or deliberate misconduct, wilful default or deliberate breach of statutory provisions prevents recovery under an insurance policy.4 4.05 Therefore, the authors are of the view that the inclusion in the policy wording of any sort of exclusion regarding illegal contingencies is irrelevant for the purpose of determining what may or may not be covered, since in any case a court may intervene and prohibit the insured from enforcing the insurance contract. This view may contradict—at least to some extent—the decision of Staughton, J in Euro-Diam Ltd v. Bathurst 5 where the judge was of the opinion that there was no implied term in a non-marine insurance contract that the undertaking was lawful or ought to be carried out lawfully (in contrast to marine insurance contracts to which section 41 of the Marine Insurance Act 1906 applies).6 4.06 Nevertheless, market practice opts for incorporating exclusions in this regard.7 The authors take the view that the idea behind this aspect of market practice is not only to reaffirm generally accepted principles of insurance but also to warn the insured from acting in a fashion which may preclude cover.

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(b) Scenarios in which there will be no cover

4.07 First, a director may not recover in respect of his liability for loss of property which he has misappropriated. This principle stems from the decision in Geismar v. Sun Alliance and London Assurance Ltd,8 in which the court refused to allow the insured to recover in respect of the confiscation of goods which he had smuggled into the UK. Talbot, J refused to allow recovery in such circumstances on the basis that to hold otherwise would permit the insured to profit from his own wrongdoing. 4.08 Secondly, if the director has brought about his own loss by reason of fraud or misconduct he has no claim. A director who has deliberately or recklessly exposed himself to liability is to be taken to have intended the consequences of his conduct and he, therefore, cannot look to the insurers for reimbursement.9 However, mere negligence is not enough. As noted earlier, a distinction must be drawn between losses caused by carelessness and losses caused by recklessness or fraud. Therefore, misleading or deliberate inaccuracy in making company financial statements or in preparing a prospectus with the intention of deceiving investors10 is a wrongful act to which this exclusion applies. 4.09 Thirdly, illegal profits and a director’s subsequent accountability in respect thereof are also subject to this exclusion. A director’s expectation of cover therefore vanishes in circumstances where he has sought to obtain a profit to which he is not entitled.11 This may have its foundations in two separate but related principles:
  • (1) The concept of illegal profits, viewed in isolation, is an adventure controllable by the insured alone; it is implausible that a director -acting in that capacity—might have so profited in complete unawareness of the cause of (and reason for) his gains. It is important to note, however, that this does not mean that the obtaining of such benefits must be fraudulent. On the contrary—as explained below12—it may be quite “innocent”, although still rendering the director subject to a potential liability, having taken advantage of his position (in the sense that but for his holding office he would not have been in a position to become involved in the objectionable course of dealing in the first place).
  • (2) Additionally and perhaps of critical importance is the fact that corporate opportunities and information are properly viewed as forming part of the company’s assets.13 It follows that any relevant misappropriation is an adventure incapable on its own of being insured via third party insurance, although first party insurance may assist the company in these circumstances.14

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4.10 Fourthly, a director may be caught by public policy considerations. In particular, if the director has acted in a manner which is frowned upon by the courts and there is clear proximity between the unlawful act and the loss suffered by the director in respect of which cover is sought, public policy may disallow recovery. The general principle here is that if the director has to rely upon his own illegal act in order to substantiate his claim, he will be unable to recover.15 However, if the insured is able to establish his rights without relying on such illegality he might be entitled to recover under the policy following the decision in Tinsley v. Milligan.16 In this case two parties bought a house in the sole name of one. They had previously agreed that they were both joint beneficial owners of the premises. The whole purpose of this transaction was to carry out a social security fraud. Later on following a disagreement with regard to their joint venture, the party in whose name the house was registered, initiated legal proceedings to obtain a declaration as to her right to sole ownership of the property. The other counterclaimed that she had an equitable right as well. This was allowed by the court, and the former appealed. It was held that despite the fact that the property had been purchased for fraudulent purposes, the equitable right of the claimant would stand if the claimant does not have to rely on any illegality to recover or assert his right. 4.11 This seems to be the approach and consequent practice at Lloyd’s by covering any loss where:

“the final judgement or other final adjudication of the court hearing proceeding against any Director or Officer determines that he/she is legally liable in respect of a Wrongful Act on some cause of action which is not dependent on the existence of a dishonest, fraudulent or malicious purpose or intend and makes no finding that he/she was guilty of dishonesty, fraud or malicious conduct in relation to the Wrongful Act in question.”17

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