The regulatory tides have recently shifted toward holding top management more accountable for company performance at a time when the insurance products which cover the liability of directors and officers (D&O) are steadily growing in complexity.
In this new environment, maritime companies’ chief risk officers should be keeping a keen eye out for the metaphorical icebergs on the horizon, unless they want to lay themselves open to accusations of having been rearranging the deckchairs on the Titanic as danger neared.
Changing Sea States
In September, the US Deputy Attorney General, Sally Yates, issued a memorandum to US assistant attorney generals for anti-trust, tax, environment and national security, and all other US States Attorneys, which made clear that corporations could “only commit crimes through their flesh-and-blood people.” She went on to say:
“It’s only fair that the people who are responsible for committing those crimes be held accountable. The public needs to have confidence that there is one system of justice and it applies equally regardless of whether that crime occurs on a street corner or in a boardroom.”
That sentiment just as easily could have been offered by a number of lawmakers across the developed world. The memorandum was not limited to criminal acts; it also raised the specter of bringing civil proceedings against executives.
Having recently extracted some eye-watering fines from companies, US prosecutors appear to now have the human element – the recognized cause of most major marine accidents – firmly in their sights.
A typical D&O policy can easily comprise 30 or 40 pages of closely typed text, with an equal number of defined terms. It is no exaggeration to say that legal advice is often necessary to work out precisely what is and what is not covered.
Is there a reliable way to cut through this complexity and focus on what really matters? A good place to start is to establish the personal liabilities that senior maritime executives might reasonably expect a D&O policy to protect them against.
For example, a standard expectation is that, if they become embroiled allegations, investigations, proceedings or enquiries relating to their capacity as senior maritime executives, the D&O policy would ensure payment of all defense and representation expenses, together with any settlements or damage awards made against them, absent any dishonest or other egregious conduct.
The good news is that such expectations can be met, but only if a number of metaphorical and medium-sized coverage ‘icebergs’ are first removed from the course being steered. These include:
- Shared cover
- Claims made policies
- Typical exclusions, limitations
One might be forgiven for assuming that cover under a D&O policy is primarily for the benefit of an organization’s most senior executives. Very often, however, the definition of “director and officer” covers all employees, including those in a managerial and supervisory capacity. The breadth of that definition in a large organization could easily cover several hundred individuals and could well include, for example, ships masters and officers, and perhaps even some crewmembers.
In itself, that is not a coverage problem, per se. But it is highly relevant to the question of how much liability cover should be purchased. Limits are usually shared on an aggregate and ‘first-come-first-served’ basis.
Following a major shipping incident or disaster, regulators, prosecutors and litigants tend to adopt a “bottom up” approach, focusing first on those individuals most obviously implicated in the causes.
Senior executives may not come under detailed scrutiny until months or even years later. This may result in inadequate cover remaining for senior executives, if and when the repercussions rise to their level.
Claims Made Policies:
A key feature of the way in which the liability insurance for directors and officers works is that it only responds to claims that are first made against them during the period for which the policy is purchased.
What this means is that, if several years after they have left the company, the board members of any shipping company are held accountable for a “wrongful act” committed while they were in post, there will only be cover if the company has continued to purchase D&O liability insurance for the period in which the allegations are made. That of course assumes that the company is still in existence, and has not been “reorganized” or otherwise ceased to exist.
As with all good rules, there are exceptions; for example, individual directors can mitigate this exposure by obtaining cover to protect them for a set period after they cease to be board members (often referred to as “run off” cover). The key point is that, unless they take steps to ensure this protection is in place, they run the risk of being uninsured.
Typical Exclusions, Limitations
Some of the exclusions most typically seen in D&O policies cover precisely the situations in which exposure to liability for shipping companies is most likely to arise. For example, it is not uncommon to encounter exclusionary language relating to pollution, property damage, bodily injury and death; nor is this language safely identified by a thorough read of what appears to be the relevant section of the policy.
This is because insurers often adopt lengthy definitions which include within them restrictive or exclusionary language. A good example of this is the definition of “loss,” which frequently contains language such as: “Loss does not include…,” adding a list of further exclusions often covering, for example, all types of fines and penalties, as well as clean-up costs.
Despite the apparent traps, there are rational and sensible restrictions available on the scope of cover.
Another trap for the unwary maritime executive can be what appear to be ‘enhancements’ to cover that are, on closer examination, in fact restrictions. Examples might include so-called additional limits on cover for pollution exposure and/or for “corporate manslaughter.” These protections can be laden with additional restrictions and limitations.
For example, under careful inspection, the additional marine pollution limit may turn out to be a sub-limit on the total amount of cover available and, in any event, may only provide restrictive cover. Similarly, cover for corporate manslaughter might appear useful, relevant and generous. But, in fact, it may not extend to investigations, as opposed to prosecutions.
D&O insurers will tell you, with some justification, that their policies are not designed to cover exposures such as clean-up costs and/or damages for bodily injury and death. They might also say that the D&O premium does not take account of the ‘business as usual’ costs for a shipping company, such as cooperating with regulators and, if necessary, incurring the legal costs to do so.
Focus on the Essentials
Be that as it may, the seasoned maritime professional can still safely navigate the risk of these increasingly treacherous waters. Reverting to the ‘reasonable-expectation’ test above, they would be well counseled to focus on a few essentials, by asking:
- Do the key definitions of “claim”, “wrongful act”, “loss” and “investigation” – which often serve as the main gateways to cover—provide sufficient breadth?
- Do the exclusions (and related definitions) allow scope for defense and investigation costs (at least) for all types of claims and investigations?
- Is the limit adequate (and of adequate duration) for the number of people insured, given that, when the iceberg (literally or metaphorically) hits, the consequences are likely to be felt by the shipping company and its directors for many years to come?
This article originally appeared in the November 2015 edition of Marine News.