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Directors Liability

The Companies Act makes Directors and Officers Liability Insurance mandatory

The Companies Act introduced in 2008 holds Directors and Officers accountable for any wrongful act or negligent action, as well as any breach of fiduciary duty. The act has rendered Directors and Officers Liability Insurance crucial for all companies regardless of size or incorporation. When a Board of Directors is assembled, Directors and Officers Liability Insurance is mandatory and no person should consider taking up a position as a Director before ensuring that there is cover in place.

Of critical importance, is the fact that D&O cover includes defence and settlement costs. Many claims are either successfully defended, or result in settlements where the decision maker was not at fault – so it is not enough that companies try to manage this risk by checks and balances alone. A senior person in a business could be sued maliciously, or for any number of reasons, and whether there is any basis for the claim or not, the individual must defend him or herself to protect their personal assets.

Who is exposed?

What is at risk?

What does D&O Insurance cover?

Where do claims come from?

Examples of claims

Case study 1 – Claim against Body Corporate Committee member

The board of Directors of a body corporate hired a contractor to perform significant work on the buildings common areas. The board paid the contractor the full cost of the job prior to any work being completed. Soon after, the contractor filed bankruptcy without completing any of the work. Upon investigation, it is determined that a member of the board has a personal relationship with the principal of the contracting company. The apartment owners subsequently sued the board for mismanagement of funds to the amount of the contract, R200 000

Case study 2 – Claim against Officer of company by disgruntled staff member for sexual harassment

The claimant was dismissed from her employment for gross misconduct on the grounds of her failure to pass a test. The claimant subsequently sued her former employers together with a number of colleagues one of whom was deemed to be an Officer of the company, alleging sexual discrimination and sexual harassment. The complaint was ultimately settled for R650 000, without defence costs

Case study 3 – Claim against Director in an acquisition

The acquiring company in a UK acquisition launched proceedings against the principal Directors of the target company, alleging negligent and/or fraudulent misrepresentation of the financial standing of the company. The amount claimed was the entirety of the purchase price. Loss: Estimates of the defence costs exceed several million pounds

 Case study 4 – Claim against senior Director from shareholder for breach of duty

The Vice President of a manufacturer determined that diversification into a different product line presented tremendous sales potential for his company. Instead of presenting that opportunity to his employer, the VP shared it with his brother who formed a new company to produce such product. On behalf of the company, a shareholder sued the VP alleging that he wrongfully took advantage of an opportunity belonging to the corporation. The suit eventually settled for R2.5 million

Case study 5 – Claim against Director for wrongful termination

A former employee discovered illegal transactions involving retirement funds. Shortly after reporting the violations, she was retrenched by her employer. She filed a suit alleging wrongful termination. The total loss exceeded R1 000 000

For more information read our article on Director and Officers Liability Insurance, or contact us to arrange a consultation and quote.

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