Directors and officers

In this chapter of our Annual Insurance Review 2019, we look at the main developments in 2018 and expected issues in 2019 for directors and officers.

Key developments in 2018

Regulatory investigations impacting directors and officers cover have been a feature of 2018, with Serious Fraud Office (SFO) investigations and subsequent prosecutions particularly prominent.

Particularly high-profile has been the prosecution and trial of two ex-Tesco directors over alleged fraud and false accounting (it is alleged they knowingly manipulated figures that resulted in Tesco’s profits being overstated by £250m); as well the trial of ex-Alstom UK directors over alleged bribery and corruption.

The investigation and subsequent defence costs can be extraordinarily high – in our experience, in large white-collar crime matters such as the examples above, the defence costs can average £4m per director.

This assumes there is only one trial, but with complex cases such as these re-trials are not uncommon.

When one factors in that often multiple directors are prosecuted, and that at the preliminary stages many other directors or employees will be questioned by the investigating authority (be it the SFO, Financial Conduct Authority (FCA) or police) and will incur their own investigation costs, the total loss in terms of legal fees will not uncommonly exceed £20m. In some cases, considerably greater.

What to look out for in 2019

The FCA has for some time stated “preventing, detecting and punishing market abuse is a high priority for us”.

We anticipate that 2019 will be the year when this mission statement really takes hold, with the number of market abuse investigations instigated by the FCA, whether civil or criminal, increasing.

Any market abuse investigation by the FCA is likely to lead to significant legal costs being incurred – both by the individuals being investigated and by any individuals from whom the FCA requests information, whether in the form of documents or through an interview. Like the SFO, the FCA has broad powers to compel information relevant to its investigation.

There is though a further exposure for directors and officers insurers. Where the FCA is investigating market abuse concerning incorrect statements that have had the effect of overinflating a listed company’s share price, this alerts investors to the potential for a civil claim against the company under section 90A of the Financial Services and Markets Act 2000 to recover any loss they have suffered by relying on the statements, for example when buying the company’s shares at the overinflated price. 

In line with our expectation of more FCA market abuse investigations, we expect more section 90A claims during 2019.

Section 90A claims will invariably involve a large number of claimants and be extremely costly to defend. The defendant is the issuer of the shares (the company) but most directors and officers policies cover the company itself against certain types of claims, including claims concerning the company’s shares.

Authored by Ben Gold.

Download our full Annual Insurance Review 2019 for more insights.