What About Management Liability for Service Sector Professionals?

U.S. Financial Policy

When considering Directors & Officers Liability, it is easy and perhaps natural to restrict one’s thinking to directors of traditional limited and public limited companies. Given that an estimated three quarters of the British economy is based on the services sector rather than in manufacturing, it is perhaps worth sparing a thought for the management liability of professionals. 

A Recent Example

A claim brought shortly before Christmas 2012 by Aviva against the former chairman, executive director and chief financial officer of law firm Dewey & LeBoeuf accusing them of concealing that firm’s serious financial problems in order to raise money from potential bond holders provides a spectacular example of this separate but related strand of potential liabilities.

Aviva claims that its purchase of US$35m of senior secured notes in a private placement issued by Dewey in the Spring of 2010 was based on false and misleading statements which the three partners knew or should have known were deceptive.

By May 2012 Dewey & LeBoeuf had become the largest law firm in US history to file for Chapter 11 Bankruptcy.  Interestingly, the firm is not named as a party in the lawsuit.  In essence, what is claimed against the 3 partners is that they represented to Aviva that Dewey was a financially sound business with a conservative debt profile whereas in reality it conducted an undisclosed practice of extending large guaranteed compensation agreements to certain partners. 

Aviva alleges that these compensation agreements were concealed and, in effect, committed Dewey to use revenues from subsequent years to pay certain partners guaranteed compensation that had not been paid in past years.

US and UK Similarities

They claim that this practice was part of a “… larger course of conduct engaged in by Dewey and the defendants to intentionally or recklessly misrepresent Dewey’s financial condition for defendants’ own enrichment.” 

The Aviva complaint has been filed in the United States District Court in the Southern District of Iowa on the basis that many of the acts giving rise to the violations complained of allegedly occurred there.  It relies upon breaches of the Iowa Securities Act as well as breaches of the US Exchange Act. 

That said, the allegations are strikingly similar to those one would expect to see in English Court in an action based on the tort of deceit.  The defendants have indicated that they reject and will vigorously defend the allegations made.

The case provides a vivid illustration of the ways in which individuals responsible for the management of professional services practices can incur personal liability other than through the provision of professional services.  It is tempting to conclude that a traditional D&O liability insurance policy should or could cater for the management liability of professional service firms.

That said, there are a number of unique and specific features of the way such firms are incorporated and managed which suggest that a more tailored approach to this topic is required. But that would be the subject for another day.

About Francis Kean

Francis is an Executive Director in Willis Towers Watson's FINEX Global, where he specializes in insurance for Dir…
Categories: Directors & Officers

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