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New Companies Act throws spotlight on directors’ and officers’ liability

The new Companies Act, due in April 2011, will hold Directors and officers more accountable for their actions than ever before. This onerous position means that liability cover will become essential, for all company directors, and not just those of public listed companies.

“Directors are likely to face an increase in actions against them when the new Act becomes effective on 01 April and we enter a new, more litigious era,” says Gregg Smith, head of the Commercial Crime Division, Camargue Underwriting Managers.  The company is the specialist liability underwriter for Mutual & Federal, a member of the Old Mutual Group.

“Directors and officers are now more accountable for negligent actions as well as breaches of their fiduciary duties,” he says. 

Mutual & Federal strongly advises brokers to ensure their clients are made aware of the implications of the new Act before it comes into effect.

“Apart from protecting policyholders, this will ensure brokers are not exposed to professional indemnity actions should they neglect to inform clients,” says Caroline da Silva, executive general manager of Sales and Marketing at Mutual & Federal.

Until now, only listed companies have tended to cover Directors for their personal liability, in the event of shareholders taking action against them.  Now, however, any Director is fair game, even if she or he may own the business 100%. Section 218 (2) of the Act states: ‘Any person who contravenes any provision of the Act is liable to any other person for any loss or damage suffered by that person as a result of that contravention’.

This means that not only shareholders of businesses have the right to take Directors to task but any person who may have been prejudiced by a Director’s contravention of the Act.

“Even if duties are performed with absolute care and without negligence, disgruntled plaintiffs could nevertheless institute frivolous legal actions that result in substantial legal fees,” says Smith.

A major change in the new Companies Act is that the definition of ‘knowledge’ has been widened to include negligence, for which directors can now be held liable. Directors must ensure they have obtained all relevant information needed to make informed business decisions to prevent being held liable for such decisions.  If they do not possess the necessary knowledge, they must use experts such as consultants or lawyers to assist them.

The microscope is therefore not only on what information directors had at their disposal during the decision-making process, but also what information they ought to have had. 

Other major changes to the Companies Act that brokers need to make clients aware of include:

·         Director’s duties have been codified into the new Act and they cannot defend themselves by saying they were unaware of their fiduciary duties;

·         Directors can be held liable for company and third party losses if in breach of the new Act; and

·         The new Act opens the door for class actions, which were not previously allowed.  It is now possible for consumer organisations to bring actions on behalf of consumers, or trade unions on behalf of their members.

Camargue’s Directors’ and Officers’ Liability policy protects the interests of company Directors, officials, managers and supervisors by managing risk under both the old and new Companies Act, providing defence and investigation costs, as well as awards for valid claims. It covers Directors and officers for wrongful acts, including errors and omissions, misstatements, misrepresentation and negligence.  Wilful acts are obviously excluded.

Directors can also minimise their risk by using the Camargue risk services such as induction courses for new Directors, corporate governance surveys, membership of the Institute of Directors and private arbitration services.

The company has recently launched a liability policy aimed specifically at the Directors and officers of small- to medium-sized companies (SMEs). “Because these entities represent a different exposure to insurers, compared to traditional buyers of this cover”, Says Smith, “we are able to relax our underwriting protocols significantly.  For businesses with Assets of less than R50m, we will not require the usual proposal form and Financial Statements etc. and Brokers will be able provide quotes themselves.  Our minimum premium will also fall away and the cover will be much more affordable than what we require for traditional D&O risks”.

Shortly Camargue will launching a web-based pricing platform that brokers will be able to access for quotes and submitting basic underwriting information.

Camargue is also setting up a Broker Liability Academy to provide full training and tool kits to brokers.

Mutual & Federal is one of the leading short-term insurers in southern Africa.

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