Ukrainian insurance companies, in common with other insurers in the new fledgling States of what used to be the USSR like Azerbaijan and Kazakhstan, are turning their minds to the potential market for D&O insurance. A most basic and yet perfectly valid question posed to me by the Ukrainians at a recent event hosted by Willis, was why would anyone want to buy a D&O policy in a jurisdiction where there is no track record of civil, regulatory or criminal claims being brought against directors? This got me thinking. I realised that I needed to come up with something a little more compelling than “you might get sued or locked up”.
Prepare for battle
I started by asking them to imagine that they or their prospective insured clients were preparing for battle or even a full scale war or invasion. I asked them whether they would want their own army or would they instead be happy to rely on someone else’s; the “someone else” in this case being of course the company on whose board the directors would be sitting. Would the company’s army, in the form of a war chest providing a constant supply of well-seasoned, tough and streetwise lawyers, be one on which they could always rely. Between us, we came up with five scenarios in which that might not be the case. They were:
- Corporate insolvency
- Corporate extinction
- Refusal by the company to pay
- Legal prohibition
- “They may be firing at you!”
Category one requires no further explanation. On this scenario, the war chest is well and truly empty. A good recent example of scenario two is perhaps the recent headline-grabbing offensive by Hewlett Packard against the former directors of Autonomy in relation to the price paid by the former for the acquisition of the latter. Post-acquisition, Autonomy’s “army” would have been acquired by HP and therefore to all intents and purposes extinguished so far as its former directors are concerned.
The third scenario, a refusal by the company to open its war chest in favour of its directors, is a perennial risk run by all directors. That risk can be mitigated by Articles of Association coupled with contracts of employment conferring legal rights on individual directors to receive blanket indemnification rights from the company on whose board they sit. Such rights are, however, subject to legal constraints as to which. See scenario four below. Perhaps more importantly and less obviously, the mere fact that directors have such legal rights does not always mean that a company will honour them. For example, a company may take a different view from that of its directors on the threshold question as to whether a director has acted in “good faith”. Even the generous indemnification regime applicable to directors in the State of Delaware USA apply a good faith test to the threshold question of entitlement.
Scenario four is familiar territory to anyone with an international perspective on D&O liability insurance. France is a good example of a developed economy in which public policy plainly prohibits the indemnification by companies of their directors, or indeed the provision of defence costs to them in relation to Wrongful Acts alleged against them in their capacity as company directors. In many other countries around the world, Russia being a good example with the Ukraine, Azerbaijan and Kazakhstan perhaps also falling in this category, the law is simply uncertain. Indeed, on one view, the obligation to indemnify seems to run the other way i.e. there may be an obligation by the director to indemnify the company in respect of losses the company has suffered as a result of the director’s mismanagement.
The fifth and final scenario in which they may be firing at you is really an extreme version of scenario three. There are a few striking examples here in the UK and beyond. These include Equitable Life and the more recent case of Safeways v Twigger in the UK as well as all derivative claims (more common in the USA than the UK) in which the company is, in effect suing the directors albeit at the behest of a small group of shareholders.
The Ukranians seemed to respond positively to our discussions and it struck me that the army approach to buying a D&O policy would serve equally well as a metaphor for the need for this type of cover in other parts of the world including the developed economies of the West.