Widespread misunderstanding of D&O cover among UK directors

A vast majority of UK directors have a fundamental misunderstanding of their D&O insurance coverage and could be left footing the bill for legal claims potentially running into millions.

This was the finding of a recent survey of UK board members. It found that as many as 83% are unaware that their D&O insurance is unlikely to cover them should they leave the company, while less than a third understand how to make a valid claim.

The specialist broker behind the research, McGill and Partners, said that unless directors get more involved in the purchase of D&O, they could be left with large legal bills.

The survey, run in conjunction with non-executive directors professional body NedOnBoard, canvassed 160 UK board members during March 2021.

It found that just 17% of those surveyed understand whether they would be covered for any claims after they left the company, based on allegations of misconduct while in office.

Similarly, 83% were unaware that D&O coverage could not be guaranteed after they left the company if their former employer did not continue to purchase the appropriate insurance.

The research also uncovered widespread misunderstanding of the impacts of insolvencies and mergers, with less than a third aware that their policies may be affected under these conditions.

“What is worryingly clear from our research is that many directors don’t understand how their cover will be affected by changes to the company,” said Francis Kean, a partner in McGill’s financial lines team.

“Events completely outside of directors’ control can restrict or curtail the cover available to them. This means that many could be leaving themselves open to serious financial losses, and even bankruptcy, by not understanding the nature and limitations of their cover,” he added.

Kean suggested that one reason for the gap in understanding is that the recipients of the coverage are rarely involved in its purchase. “Unless there is a stronger connection between the product and its intended end users, there is the very real risk of serious expectation gaps, or worse, emerging at the worst possible time,” he said.

Directors face increased risk from a number of directions, according to recent reports. Data from law firm BLM has revealed that fines for regulatory infractions and cyber liabilities have risen rapidly in recent years. UK SMEs have been hit with more than £100m of sanctions in that time.

The risks are also intensified by the rise in corporate insolvencies as a consequence of Covid-19.

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