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How Corporate Directors Can Protect Themselves Against Liability Risks

Insurers offer directors and officers Liability cover to protect executives and board members

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Under company laws, directors have a duty to make decisions aimed at enhancing operational efficiencies and profitability. Indeed, the first task of every director is to comply with corporate governance policies, relevant applicable laws and adherence to rules stipulated by regulatory bodies during execution of their mandate.

Ironically, the same law allows directors to be held liable for decisions deemed to be harmful to their company, employees or shareholders. Section 194(2) of the Companies Act, 2015 expressly nullifies ‘a provision that purports to exempt a director of a company, to any extent, from any liability that would otherwise attach to the director in connection with any negligence, default, breach of duty or breach of trust in relation to the company.”

This leaves directors in an awkward position since they are recognised as the bona fide decision makers while at the same time left to fight their own battles when claims of unprofessional conduct are made against them.

America’s Silicon Valley Bank (SVB), the largest commercial bank in Silicon Valley, was recently put under regulatory administration after failing to raise new money to cover its funding shortfalls that were occasioned by realised impairments on its bond portfolio holdings. This incident prompted a class action lawsuit being filed against SVB parent company, SVB Financial Group, and two of its top executives by the bank’s shareholders.

Closer home, our country’s financial services sector has also experienced similar situations with several financial institutions in the banking and insurance industries having been placed under statutory management, forcing their former employees and shareholders to turn to the court system in the hope of settlements.

Since no one knows when certain decisions made will result in litigation, there is a need for individual organisations to embrace risk solutions that will offer protection against judgements from civil lawsuits that can be initiated by shareholders, employees, customers, competitors, and government agencies.

Considering the massive payoffs resulting from such civil suits, an organisation needs to be prepared for the possibility of several associated risks, especially lawsuits, which simply cannot be ignored. Indeed, such risks come with tremendous financial liability which can potentially drain an organisation’s income as well as have their directors held personally liable on account of their actions or otherwise.

So, how can organisations and their leadership stay protected considering such events?  Section 194(3) and Section 195 of The Companies Act 2015 acknowledges these exposures and recommends that a company should maintain an insurance cover for any liability specified in that subsection against a director of the company or a director of an associated company.

Insurance companies offer Directors and Officers Liability cover designed to protect executives and board members of a company from lawsuits that may arise from their actions or decisions made while carrying out their duties.

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The policy may protect the insured from claims arising out of various instances such as wrongful termination, sexual harassment, libel and slander, whistleblowing, tax issues, negligence, and regulatory response. However, intentional illegal acts are usually not covered under D&O policies.

One of the key benefits of D&O insurance is that it provides financial protection for the personal assets of directors and officers in the event of a lawsuit. This includes legal fees, settlements or judgments, and other related costs. Without D&O insurance, directors and officers may be forced to pay these costs out of their own pockets, which could be devastating for their personal finances.

Moreover, D&O insurance can provide protection for the company itself. If a director or officer is sued, the company may also be named in the lawsuit. D&O insurance will help cover the costs of defending the company against such claims. This can be especially important for smaller companies that may not have the financial resources to defend themselves against lawsuits.

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What are the considerations when procuring D&O Insurance? The first step would be ascertaining adequate liability of limit for this insurance cover considering today’s corporate environment. Engage Risk Management services to conduct liability exposure analysis to guide on adequacy of limit liability to be procured which will vary from organisation to organisation. This will give an audit of the risk exposure and direct the Company to the right D&O cover for the risk.

In conclusion, the importance of insurance is not just limited to the corporate coverage but also extends to the protection of its officers and directors. While no one can predict and avert these major risks, they can most certainly be financially prepared to battle the large expenses that come with them. Director’s and officers’ insurance is an essential tool in today’s business world and should be seriously considered by all companies and their directors and officers.

The writer is the General Manager, Minet Risk Solutions – Corporate Division at Minet Kenya.

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Francis Maina is the General Manager, Minet Risk Solutions - Corporate Division at Minet Kenya.
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