Risk Insights: Protecting trustees and charity leaders
The definitive guide to the management liability and risks facing leaders in the third sector – and how to insure against them
Charity trustees, directors and leaders carry a burden of ensuring good governance and effective management/oversight of their organisation. Legal action can be brought against these leaders in their individual capacity, as well as the entity, for a number of failings.
Fortunately, Trustees Indemnity Insurance (also called Directors & Officers insurance) is available to charities, However, cover options vary significantly. You need to be aware of the common exclusions and pitfalls.
What is covered in this guide?
- Who is classed as a ‘trustee/director’ or ‘officer’?
- The risks to individuals and the organisation
- Who can bring a claim against you?
- Types of claims
- Types of D&O cover
- Key exclusions/clauses to be aware of
- Factors which determine the price of D&O cover
- A plan for arranging cover in time
Who is classed as a ‘trustee/director’ or ‘officer’?
The term ‘trustees, directors and officers’ is broad and encompasses anyone acting in a managerial capacity. Throughout this paper, we use the terms ‘director’, ‘officer’ and ‘senior leaders/leadership’. We use these phrases in their broadest sense to include:
- Trustees, Directors or management committee members
- Company officers
- Shadow or de facto directors
- Employees (or volunteers) acting in a managerial or supervisory capacity
The risks to individuals and the organisation
The applicable UK law highlights the responsibilities of trustees and senior management and emphasises the fact they can be held personally liable as a result of their own errors or omissions or those of their fellow directors and officers. Legal defence costs for claims against trustees, directors and officers can run well into six figures, leaving an organisation at financial risk.
In the event that an organisation faces a D&O claim, but has no D&O insurance cover in place, the costs of defending and potentially settling the claim may need to be met by senior management individuals. For this reason, D&O cover has become a key component of most organisations’ insurance programmes.
Claims can be brought for a range of reasons including any of the below committed by trustees or member/s of your senior leadership team:
- Actual instances or allegations of wrongful acts
- Errors or omissions
- Negligence
- Breach of duty
Some organisations which are limited liability entities have been wrongly informed that their directors can’t be held personally liable. This limited liability only applies to debts in the event the organisation goes into administration.
There are a range of scenarios which are commonly misidentified as being covered under a D&O policy, but for which no cover exists. These include:
- Allegations or incidents of fraud/theft (covered by crime/fidelity insurance).
- Failure to pay monies owed to a third party under a contract. (Some policies will cover the personal liability of directors to creditors in the event the organisation is declared insolvent and wrongful trading occurred).
- Failure to deliver services to a third party under a contract.
- Poor commercial decisions, for example, overspending on a project.
Who can bring a claim against you?
Claims against directors and officers are becoming increasingly common. Donors, service users, members, tenants, current or former employees/trustees, regulators, partner organisations, creditors and suppliers can all bring legal actions against individual directors or against the organisation and its directors.
Types of claims
In recent years there has been a major shift as senior leaders have been held more accountable by their fellow employees, service users and government bodies for organisational failings. As a result, stakeholders have begun taking increased legal action against individual leaders within organisations rather than, or in addition to, the organisation as a whole when incidents occur.
The following D&O market trends are emerging throughout the UK:
Event-driven / bad news litigation
A common cause of D&O claims, these claims are brought on the back of organisational problems i.e. issues with service delivery or corporate corruption. In these cases, stakeholders will take legal action against an organisation’s senior leaders following a disaster, holding them responsible for any damages that resulted. Senior leaders can be deemed accountable in these cases if they failed to implement reasonable controls to help prevent the disaster or lacked a proper response plan to limit the damages after the disaster took place.
Financial failings
Another cause of D&O claims is financial failure/mismanagement. It’s crucial for organisations to engage in proper cash flow practices with trusted senior leaders to avoid the risk of insolvency or bankruptcy. Senior leaders who engage in poor financial decision-making could face substantial D&O claims.
Cyber security/data failure (class actions)
Workplace technology is consistently evolving, providing innovative solutions and advancements for organisations across industry lines. However, new technology comes with increased cyber-security and data protection risks. What’s more, the General Data Protection Regulation (GDPR) requires organisations and their senior leaders to take specific steps to prevent and appropriately respond to a cyber-attack—or face hefty non-compliance consequences. In response, senior leaders are being held accountable more than ever before for maintaining proper data protection practices.
Senior leaders who don’t ensure GDPR compliance or effectively protect stakeholder data could face D&O claims in the form of class actions – a type of litigation in which a group of stakeholders takes collective legal action against a senior leader for the damages that result from an organisational security failing.
Environmental issues
Organisations are now expected to consider the environmental risks that could arise as a result of their operations. Failure to adjust key operations and bolster environmental risk management measures as climate change progresses could result in D&O claims from a variety of sources – including government bodies and regulators.
Types of D&O cover & common exclusions/clauses
Cover to protect senior management ‘Directors & Officers Insurance’ is available on a number of different bases. It’s important you understand the type of cover you are buying and key exclusions. The coverage provided under D&O insurance policies differs hugely, with low-priced ‘off the shelf’ policies excluding cover for key areas of risk. By understanding these key factors you can ensure the policy your organisation purchases meet your needs.
The two key aspects of cover:
- Cover for the organisation: covers the entity for claims brought against it for the wrongful or negligent act of a senior leader.
- Cover for individuals: covers individual senior leaders for claims brought against them in a personal capacity for the wrongful or negligent act of a senior leader.
Limits of indemnity
Having the right level of cover is important. You will have the option to choose different limits for your individual policy and you must decide how much is sufficient to cover your organisation’s risks. This process includes assessing your company’s specific circumstances and any possible claims that may arise including legal defence costs, expenses, settlements/ damages awarded for alleged wrongful acts.
For the majority of policies, the limit of liability is an aggregate limit for all claims during the period of insurance. This means that once the limit has been reached or paid out by the insurer, additional claims will not be covered by the D&O policy.
There also may be sub-limits for certain costs, such as reputational crisis and emergency defence costs, written into the policy. Be sure that you are comfortable with the limit of indemnity set forth in your policy because claims that exceed this limit will be excluded.
Policy period
Typically, D&O policies only cover claims first made and notified to the insurer while the policy is in effect. It is important to carefully review the start and end date of the policy to ensure that you are fully covered. If moving insurer it’s important your policy has a suitable retroactive date to cover claims which occurred before the start date of your policy, but come to light during the policy period. There can also be language in the policy that dictates discovery period (or run-off) terms, the period immediately following expiry of the policy in which the organisation can still make claims if the wrongful act was committed during the period of insurance.
The majority of D&O policies also offer the option to purchase an extended reporting period in the event you or the insurer declines to renew the policy. Like the discovery period, this extended reporting period only applies to wrongful acts committed prior to the expiry of the original insurance period.
Terms for the discovery period and extended reporting period will differ from policy to policy; therefore it is important to be aware of the exact terms and conditions in your specific policy. Also, be sure that the policy is irrevocable by the insurer unless there is non-payment of the premium.
Claims made after retirement or resignation
When a trustee or director retires or resigns, they are still vulnerable to claims of wrongful acts if the wrongful acts occurred prior to their departure. Most policies will grant directors retiring or resigning an additional lifetime discovery period (run-off) at no additional cost. However, there can be stipulations and conditions placed on this discovery period. Read your policy carefully to make sure that past, present and future directors are covered under your policy. If you are thinking about retirement soon, be aware of the length of the discovery period for retired insured persons in your policy and the associated conditions.
Types of exclusions in D&O policies
Some exclusions that insurers and insureds dispute about concern incidents that happened or allegedly happened before the D&O policy went into effect. In some cases, the insurer simply won’t cover the claim; in other cases, the insurer may render the policy void.
The ‘known circumstances’ exclusion
With this exclusion, the insurer will not pay for claims that arise from a negligent act, error, omission or personal injury that occurred prior to the start date of the D&O policy. The insurer attests that the insured knew or could have foreseen that any of the above happened and could have been the basis for a claim. This exclusion is found frequently in not-for-profit policies.
What is especially important to note is that the premium is usually not returned to the insured if it is determined that they withheld their knowledge of circumstances that occurred prior to the start of the policy.
Prior acts exclusion
Similar to the known circumstance exclusion, this exclusion is also concerned with pre-policy circumstances. The insurer is not responsible for wrongful acts committed or attempted before the cover was enacted. A wrongful act is that which damages the rights of another. These acts are not only limited to criminal offences, but can also include acts that result in civil legal actions.
Bodily injury exclusion
Many standard policies come with a bodily injury exclusion. This means that the D&O policy will not cover costs and claims made for bodily injury. However, one can negotiate for the exclusion not to apply with respect to corporate manslaughter proceedings or employment practice liability. Make sure you know whether there is a bodily injury exclusion in your policy when it applies and whether it is absolute (broad or narrow).
Reasonableness of defence fees
This is more prevalent in not-for-profit D&O policies, as most of those policies give the insurer the right and duty to defend the insured’s claims. If this is written into your D&O policy, it means that the insurer will only pay for “reasonable and necessary” defence fees. Some insurers also provide detailed information on litigation guidelines.
Contractual liability exclusion
This exclusion is especially pertinent to not-for-profits who have broad entity cover under a D&O policy. Since contractual obligations are not liabilities imposed by law but rather an obligation that is voluntarily undertaken, many D&O policies have an exclusion that prevents insurers from having to cover contract-related claims, especially breaches of contract that arise when the company enters into a contract with another party.
When examining this exclusion in your D&O policy, make special note of the wording of this clause. This exclusion can substantially affect the extent of your cover under the policy – the narrower the scope of the exclusion, the more protection you have.
Conduct exclusions
D&O insurance protects directors and officers, but most policies do not protect them from intentional acts or gross misconduct. Most D&O policies have exclusions that deny cover for certain types of misconduct. There are two categories of misconduct exclusions:
- For loss relating to fraudulent or criminal conduct
- For loss relating to illegal profits or remuneration to which the insured was not legally entitled
Insured vs. insured exclusion
In some D&O cases, one insured director may bring a claim against another insured director. Some insurers exclude cover because they don’t want to get involved in the infighting between an organisation’s directors and officers.
Other insurance exclusions
D&O insurance is just one form of insurance in a comprehensive risk management plan for most organisations. Because of this, most D&O policies have exclusions for claims that involve bodily injury, property damage claims, which could be covered by other types of insurance, such as a Public/Products Liability policy.
Other exclusions found in D&O policies revolve around the duty to defend and defence expenses in the event of a claim. If the insurer has the right to the duty to defend, then they are able to select the insured’s defence and have greater control over the rates and billing practices of the defence counsel.
Factors which determine the price of D&O cover
There are a number of key factors which will determine the price and availability of D&O insurance for your organisation. Some are internal and under your control, while others are external which you have no control over.
Organisation characteristics and exposures
To determine the cost of premiums and the limits of cover, insurers review several facets of an organisation’s structure and price D&O insurance accordingly. Some of these attributes include the following:
- Whether your organisation is mature or young and developing. Organisations with less experience and a shorter history of proven effective management will be considered ‘riskier’ to underwrite than well-developed organisations with experienced directors and officers.
- The extent of your operations and exposure. Organisations with operations which encompass an element of care or work within the homelessness sector may be considered as higher risk – especially with the backdrop of the Covid-19 pandemic.
- Whether the organisation is financially stable. Insurers will consider the amount of debt your organisation has. If your finances are unstable, the organisation has an increased chance of becoming insolvent during a legal action and thus is seen as higher risk.
- Number of employees. From small not-for-profits to large charities, employment-related claims are the primary cause of legal actions against an organisation’s directors and officers.
- The organisation’s history of past litigation. Insurers will analyse an organisation’s history of previous legal actions and any adverse business developments and executive management changes.
Trends in D&O legal actions
Even after a thorough assessment of a company’s risks, D&O insurance continues to be a high-severity product, as insurers are often hit unexpectedly with catastrophic claims. It’s no surprise that as litigation increases, the price of D&O insurance increases as well. In addition, as the litigation process grows lengthier and if multiple legal actions erupt from a single transaction, an organisation can quickly exhaust its primary layer of D&O cover.
Some types of legal actions occur less often, but result in catastrophic losses. Other types result in smaller pay outs, but occur more frequently. Nonetheless, defence expenses can be substantial, even if the director is not found liable.
Market rates for D&O cover are currently increasing. Insurers are pulling out of underwriting certain aspects of the sector and organisations will have fewer choices of D&O providers.
Know what your policy covers
While many organisations focus on the cost of their D&O policy, understanding the scope of the policy is critical. The type of cover and exclusions which can apply as laid out in this paper, have a significant impact on the price of your D&O policy.
A plan for arranging cover in time
Current market conditions and emerging trends have contributed to an increase in D&O claims. This surge in demand has resulted in a major market fluctuation, leaving D&O insurers to pay the hefty price tag of additional claims with a limited financial supply. Consequently, D&O insurers have implemented a variety of measures to reduce their risk of paying out costly claim settlements.
To ensure you obtain cover which meets your needs, you should take the following measures into account:
Select a specialist broker – make sure you select and talk with a specialist broker to discuss what level of cover and unique policy features your organisation needs. Many insurers have implemented serious restrictions upon policy renewals, such as reducing indemnity limits and eliminating various policy extensions. Ensuring frequent communication with your broker will help you stay informed and supported during these market conditions.
Start the renewal process early – in a difficult market, you can’t wait until the last minute to secure quality cover. With this in mind, be sure to engage in your D&O policy renewal process as early as possible. Doing so will give you plenty of time to gather any documentation required for renewal. In addition, insurers will likely ask more questions than usual before finalising your policy, making it even more vital to get a head start on the process. Organisations should start the D&O buying process three months ahead of their renewal date.
Expect higher premiums – in order to compensate for lost profits from a growing number of claims, many insurers have increased their premium rates, forcing organisations to pay additional expenses for adequate cover.
Invest in risk management – now more than ever, it’s vital to invest in robust D&O risk management processes and provide documentation of these practices to your insurer upon renewal time. Your risk management documentation should highlight:
- Proper financial practices and cash flow controls
- Seamless contracts with stakeholders
- A business continuity plan, cyber-incident response plan and risk assessment. (Contact us if you need templates for these plans).
- Robust internal policies to mitigate on-site risks and ensure regulatory compliance
If you have questions about anything in this paper, or would value advice and help in arranging D&O insurance please contact one of our specialist advisors at charity@accessinsurance.co.uk / 020 8651 7420.