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UK Director's Liability Insurance Requires Reform

Directors liability insuranceThe Institute of Directors (IoD) has stated that becoming a company director is becoming ‘impossibly risky’ unless reforms are introduced. The IoD has warned that company directors are being placed under too much pressure under the event of legal action. It has been suggested that reforms should be brought in to make sure that the insurance companies are covering all applicable legal fees. These suggestions have arisen after the Financial Times wrote about the case involving the software company iSoft. The directors of the company were involved in a seven-year legal battle and they had to fund the whole thing themselves due to the insurers saying that they had broken their liability insurance terms of cover.

The court battle began when the directors of iSoft had been accused of planning to create huge discrepancies in the company accounts between 2003 and 2006. All of the directors were found innocent last month, but all were subject to severe financial losses due to their liability insurance being void; therefore, covering all the legal costs themselves. John Whelan, iSoft’s former finance director, said: “My personal life has fallen apart and you can imagine how my financial situation has changed compared to being a finance director of a PLC.” Directors and Officers (D&O) insurance is designed to cover the costs of legal proceedings, such as the costs incurred on the iSoft case. However, some insurance companies are refusing to pay out for these costs without providing proper proof of the terms being broken by the policy holder.

Roger Barker, the IoD’s director of corporate governance, said: “As a result of the recent spate of legal actions against companies and regulatory investigations, protection was vital to ensure directors were properly covered. There is a need to ensure that existing D&O policies being promoted by the insurance industry are genuinely fit for purpose and are not misrepresenting the cover that they can deliver to directors. It is right that directors should be held accountable for their decisions and performance. But it makes no sense to make directorship an impossibly risky profession.” British taxpayers have also been affected by the iSoft case, inheriting £5.9 million of legal fees by the Financial Conduct Authority (FCA).

James Savery, 13 August 2013

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