Directors' and Officers' Liability Insurance

Adolfo Paolini, Deepak Nambisan

• Publisher: Informa Law from Routledge
• Year: 2020
• ISBN:
  9781000341430
• Edition: 1
• Topic: Droit
• Subtopic: Droit financier

"With the ever increasing number of claims against directors and officers, this book provides a very welcome addition to the bookshelves which hitherto have lacked books on this important area" - Alison Green, Chairman of the Trustees of the BILA Charitable Trust. This book scrutinises the origins and the rationale underlying D&O insurance, and provides answers to the question of protecting directors against the potential liabilities they may face. It provides clear understanding about D&O policies wording, exclusions and issues of misrepresentation. The information contained in this new book includes Nature and Legality of D&O Liability Insurance, D&O Exclusions, Directors' and Officers' Liability to Third Parties, Directors' Liability at Civil Law, D&O: Defence Costs Cover and Allocation, Aggregation Principles and D&O Cover and the Reinsurance of D&O Policies.

CHAPTER 1

INTRODUCTION TO LIABILITY INSURANCE

I. THE NATURE OF LIABILITY INSURANCE

1.01 Insurance arose for the purpose of restoring the victim of an uncertain and unpredictable event, as far as is possible, to his or her original position. Insurance is essential to risk allocation between commercial operations, and also operates to remove the fear of personal and financial ruin. Since its earliest days, insurance has gradually expanded to cover the increasing risks inherent in a modern society. The earliest insurances were first party, in particular marine and, in due course, life, with the insurance of buildings and goods coming later. The idea of insuring against third party liabilities came relatively late, but liability cover is now a crucial element in all forms of insurance activity.

II. WHAT IS A CONTRACT OF INDEMNITY INSURANCE?

1.02 One of the main features of third party liability insurance¹ is the fact that it belongs to the general area of indemnity insurance. Indemnity insurance may be defined as a contract under which the insurer agrees to indemnify a person (“the insured”), upon the occurrence of an uncertain and/or unpredictable event causing a “loss” to the insured, for the consideration of payment or the promise to pay a stipulated amount of money (“the premium”) to the insurer. The fact that it is a contract of indemnity means that the insured may recover only where he has suffered a loss caused by the occurrence of a peril insured against under the policy.

1.03 In answering this question it assists to differentiate between indemnity insurance and non-indemnity insurance. Although the aim of any type of insurance is to hold the insured harmless and indemnified where possible,² that aim is manifested in different shapes and forms. Indemnity insurance pays compensation up to the amount of actual assessable loss³ in order to restore the insured to a similar condition to that which he/she would have been in if the unwelcome event had never happened. Although parties will almost always fix the maximum recoverable sum,⁴ unless the policy is “valued”, that is, the parties have agreed in advance the sum to be paid in the event of a loss,⁵ the exact amount of the actual payment falls to be ascertained at the time of the loss. Accordingly, the amount which may be payable is unknown by the parties when they enter into an indemnity insurance contract.

1.04 Non-indemnity insurance⁶ works differently since the contractual terms establish ab initio the exact sum payable to the insured in case they face the contingency. Since a contract of indemnity is an agreement by which one of the parties undertakes the obligation to compensate, within the terms agreed, he/she who suffers a loss up to the limit of the amount of their actual deprivation, subject to the financial limits of the policy, where the insured profits from their insurance by receiving more that their actual loss, the principle of indemnity is violated.⁷ The point was established by the Court of Appeal in British Cash & Parcel Conveyors v. Lamson Store Service.⁸

1.05 Third party liability insurance is the provision of coverage against either actual or potential damage caused by the insured’s personal or professional activity to a third person who is generally not a party to the insurance contract and whose individual existence is not contemplated by the policy at the date of its formulation. The insured’s insurable interest is based upon his/her potential legal liability to a third party, so that liability can be the subject-matter of indemnity in much the same way as physical loss.

1.06 The significance of third party liability insurance, as a submission-species of indemnity insurance, is reflected in its wide statutory recognition. Indeed, liability insurance is compulsory in a number of fields of activity⁹: for example, third parties are given a right of action against the insurers in the event that the insured becomes insolvent¹⁰ and the Marine Insurance Act 1906 recognises that third party liabilities give rise to an insurable interest.¹¹

1.07 Professional indemnity cover is now a significant sub-species of third party liability insurance. Professional liability may arise from the failure to comply with statutory provisions, contractual obligations or common law rules. In professional indemnity cases there will normally be a breach of duty if the insured fails to comply with professional rules or standards of conduct.¹² Liability generally does not arise on the basis of a failure by the insured to succeed in performing a task voluntarily undertaken for a third party,¹³ although if the insured voluntarily assumes the responsibility of achieving a particular result then he may face liability for failure to do so.¹⁴

III. THE SCOPE OF LIABILITY POLICIES

(a) Liability at law: is there a loss?

1.08 There is an additional important aspect of indemnity insurance that relates to what is considered to be a “loss” for the purpose of indemnity.¹⁵ The insured’s losses may be the result of either (i) a personal detriment or (ii) the fact of becoming potentially liable to pay damages to a third party by reason of a failure to comply with certain obligations or legal standards.¹⁶ Actual personal detriment, first-party property loss or damage and personal injury each fall within the first category. Anyone may insure their own belongings, house, car, etc and the contingency is the risk of losing these assets and the cost of replacing them. Furthermore, concerns may relate to matters such as the financial consequences of personal injury, the cost of medical treatment or even loss of income. Insurance may alleviate the insured during the period of recovery and compensate them in case of temporary or permanent disability.

1.09 As to the second category, the common law gradually came to recognise that a potential liability to pay damages could amount to a material detriment capable of giving rise to an insurable interest. However, it was suggested at first that nothing but payment would be satisfactory as proof of loss.¹⁷ Nowadays the established rule¹⁸ applicable to indemnity presupposes that “pay to be paid” is no longer a condition precedent for the right to an indemnity since “the plaintiff need not to pay and perhaps ruin himself before seeking relief”.¹⁹ This is the point at which the decision of the Court of Appeal in Post Office v. Norwich Union Fire Insurance Society Ltd²⁰ assumes crucial importance. In that case it was held that the insured’s right to an indemnity under a liability policy arose as soon as his liability to a third party was ascertained by means of a judgment, an arbitration award or a binding settlement contract,²¹ and not upon the earlier occurrence of the event which gave rise to such a liability,²² or on the later date on which payment was made to the third party by the assured.²³ The standard form of wording under indemnity policies refers to the provision of cover when the insured’s “liability at law” is established, and this wording reflects the position reached in the Post Office case. That said, additional contractual terms may still be incorporated into a policy of this nature so as to prevent the insured from admitting liability without the written consent of the insurer or without allowing the insurer to take over the conduct of the defence proceedings on behalf of the insured.²⁴

(b) Claim as a subject of indemnity

1.10 Third party liability policies can be issued in either of two forms:

(1) “occurrence” or “events” based; or

(2) “claims made”.

1.11 Under an occurrence policy the insurer is required to provide an indemnity to the insured against his liability to a third party as long as the wrongful act which has caused loss to the third party occurs during the currency of the policy. It is immaterial that the insured’s liability to the third party is determined at some time in the future since what matters is the date of the occurrence of the contingency, provided that the contingency occurs during the policy period.²⁵

1.12 Claims made policies work differently. Here, the insurer is required to indemnify the insured against any claim made against the insured during the currency of the policy, even if the event giving rise to the claim occurred many years earlier. A claims made policy may also provide indemnity for a claim arising after the insurance contract has been entered into, provided that the claim is made against the assured within the policy period. It is usually a requirement of a claims made policy that the insured notifies the third party’s claim to the insurers within the currency of the policy so that if notification occurs after the policy has expired the insurers are not liable (regardless of whether the claim is made against the insured during the period of coverage).²⁶ Once the claim is reported to insurers, the insured discharges his/her obligation to notify the insurer and it is not necessary for the policy to remain in force at the time the claim is settled or finalised.²⁷

1.13 Because a claims made policy applies to events which have occurred prior to its inception, the insurer will generally require any events likely to give rise to a claim to be disclosed when the contract is entered into. It is often a condition precedent that the insurer will not be liable for events which have been notified under earlier policies.²⁸ The main purpose of a policy of this nature ha...