Insurance for UK Directors Lags Developments in US

Financial News, August 25, 2002 | Go to article overview

Insurance for UK Directors Lags Developments in US


Byline: Kit Bingham

The company director's role has become more prominent and time-consuming, thanks to increased regulation and the persistent attentions of shareholders. The job has become much riskier.The risks of a career-ending lawsuit for directors have never been greater. Nor has the need for comprehensive liability insurance.

Earlier this year, 15 former directors of Equitable Life, the UK pensions mutual, found themselves on the end of a pound sterling3bn ([euro]4.7bn) lawsuit. In the US, the wave of financial scandals has caused large investors to seek redress through the courts.

Barry Dinan, director of Hanson Green, which recruits chairmen and non-executives, says: "It's a hugely developing area. It's essential to get people properly looked after."

In the US, directors' and officers' liability insurance - D&O - has long been a standard feature of boardroom life; WorldCom shareholders will be looking to get their hands on the company's $100m in D&O coverage.

But in the UK the situation is more clouded, with varying estimates of how comprehensively directors are covered. Tony Couchman, a non-executive director specialist at recruitment firm Egon Zehnder, says that insurance is assumed. "It's taken as read that there's professional liability insurance in place," he says.

Couchman estimates that virtually all listed firms have D&O insurance. "I'd be very surprised if they don't," he says.

But research by Hanson Green conducted at the end of 2001 found that only one in six directors was covered. Moreover, those who were insured had little idea of what they were covered for. There are gaping loopholes in many existing policies, says Dinan. For example, coverage may expire a few years after the director has left the board.

Dinan says: "The available insurance in the UK is not very comprehensive. We're saying to directors, 'don't rely on the company'."

Chris Pearce, professional standards executive at the Institute of Directors (IoD), says there is "a general under-coverage at large companies, particularly multinationals and the ones that are dealing with the US". At Equitable Life, for example, total liability insurance totalled pound sterling5m - a fraction of the total claim.

Pearce says: "Directors don't understand exactly what the insurance covers. There are many myths, such as directors are covered for all negligence claims. It just isn't so. These are sophisticated individuals who don't fully understand their coverage - it's quite surprising. …

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