What is a D&O Insurers’ Appetite for Settling Unpaid Corporate Taxes?

Locked-up-Wallet

The short answer is a strictly limited one!  Tax evasion/avoidance schemes of the sort recently highlighted by the Dolce and Gabbana case raise the question as to insurers’ appetite to foot the bill for unpaid corporate taxes. 

In a case such as that where the individuals have been found guilty of, in effect, defrauding the State, it is not hard to see why, with the exception of defence costs and legal representation expenses, insurers would not expect to pick up any part of the underlying tax or penalties. That would anyway be the effect of the English law public policy principle of ex turpi causa regardless of policy terms or conditions.

The trouble is that D&O insurers’ dislike of tax related liabilities for directors of companies often extends beyond facts such as the D&G case. Indeed the starting point for many D&O carriers is that they will not pay taxes of any kind.  Rather than reflecting this reluctance in a specific exclusion, it is instead usually buried in the definition of “loss”.

So What’s the Problem With this Approach by the Insurers to Tax?

Well, let’s take the situation where directors, by virtue of their office, assume statutory liabilities to pay corporate tax following a corporate insolvency.  Many countries in the developed world contain legislation which imposes strict liability of this kind in the absence of any proven fraud or dishonesty.  So for example in the UK, directors can assume such an obligation to pay a company’s unpaid National Insurance contributions if the company becomes insolvent.

How is this Handled?

To cater for this type of situation, some D&O carriers have introduced extensions to the policy. Typically, these will provide that where a company is unable through insolvency to bear its own tax liability and where the director has assumed that liability by virtue of his office, the insurers will treat it as a “loss” under the policy despite the “exclusion” in this respect.  Although that may seem to be a perfectly adequate solution, it may not always deliver a satisfactory outcome for the directors.  Whilst directors might be able to show that the specific unpaid tax constitutes a “loss” under the policy, could they also show that they had committed any necessary “wrongful act” in order to qualify for cover?  If a liability to pay unpaid corporate tax is automatic as it sometimes is, what “wrongful” act have they in fact committed?

Other coverage questions might include the nature of the liability (i.e. is it really one in respect of taxes or is it in substance something else) , the nature of the Court seeking to impose it (criminal, regulatory, civil or administrative) , and finally as to  the specific type of anti-avoidance or other tax legislation involved.

As I seemingly always conclude, whenever I talk about D&O coverage, the words on the page really do matter as does finding a good lawyer (and/or broker)!!

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, Executive Risk | Tags: ,

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