COMPANY DIRECTORS AND OFFICERS N=
EED SPECIAL PROTECTION FROM LAWSUITS

Directors and Officers of=
private and public sector companies will recognize the personal risks they=
face in performing their duties. Organizations are also aware that in orde=
r to attract and retain directors of the highest probity and skill they mus=
t put systems in place to manage those risks. Some have adopted the Private=
Sector Organization of Jamaica’s voluntary governance code in addition to =
buying Directors and Officers (D & O) Liability Insurance.

This newsletter will exam=
ine (a) the legal framework within which directors, officers and other offi=
cials of companies and other organizations in Jamaica operate; (b) the risi=
ng trend towards litigiousness in the society coupled with increases in the=
value of court awards and legal costs; (c) the inability of traditional ri=
sk management to control many of the potential risks that are inherent in d=
ecisions and actions executed at board level; (d) some of the risks that di=
rectors and company officers face and (e) the protection that is afforded u=
nder a typical Directors’ and Officers’ Liability Insurance contract. The a=
im is to add clarity to D&O Liability Insurance. Sources say that this =
topic is increasingly forming part of agendas in and outside of board rooms=
.

Company directors, execut=
ives and other senior officials encounter risks that arise from their decis=
ions and actions. The PSOJ’s corporate governance initiative recognizes t=
he threats. In 2005 it said that: "There has been an increasing public=
and political focus on the issue of corporate governance." The spotli=
ght had its origin in the "numerous corporate scandals and frauds that=
have been perpetrated by the executive management and directors of major c=
ompanies …"[1] Misdeeds, negligence and misman=
agement by executives have led to the demise of companies and the destructi=
on of wealth. Even though the majority of Jamaican companies are family-own=
ed/managed, as opposed to being publicly-owned enterprises, there is still =
a need "for a high standard of corporate behaviour and performance …=
" opines the PSOJ; corporate governance protects shareholders and &quo=
t;the rights of other stakeholders such as creditors, employees and (the) s=
ociety on a whole."

What The Companies Act Says

Sub-section 174.- (1) of =
The Companies Act, 2004 states that "Every director and officer of a c=
ompany in exercising his powers and discharging his duties shall – (a) act =
honestly and in good faith with a view to the best interest of the company;=
and (b) exercise the care, diligence and skill that a reasonably prudent p=
erson would exercise in comparable circumstances, including, but not limite=
d to the general knowledge, skill and experience of the director or officer=
."

Section 2.-(1) of The Com=
panies Act states that "directors" include ‘any person occupying =
the position of director, by whatever name called’ and also defines a &quot=
;shadow director" as ‘a person in accordance with whose directions or =
instructions the directors of a company are accustomed to act."

A company may, under sect=
ion 201.-(1) of the Act, indemnify a director/officer for all costs and exp=
enses reasonably incurred by him in respect of any criminal, civil or admin=
istrative action or proceeding to which he is made a party by virtue of his=
position. However, the director/officer may only be indemnified where he a=
cted honestly and in good faith with a view to the company’s best interest =
and in the case of a criminal/administrative action where a fine is imposed=
, he had reasonable grounds for believing that his conduct was lawful.

Permission is granted to =
companies under section 204 to purchase and maintain insurance for the bene=
fit of a director/officer against any liability incurred by him in his capa=
city as a director/officer of the company other than liability for fraud. T=
he coverage referred to is Directors and Officers Liability Insurance.

Risk Management is Almost Powerl=
ess

Some experts say that &qu=
ot;traditional risk management (is) powerless to control many of the potent=
ial risks in (the) board-level behaviour (of company directors and officers=
). Such risks are barely recognized within traditional risk management fram=
eworks."[2] This opinion was based on a study th=
at examined well-known corporate failures such as Enron.

Sources of Risks

Summarized below are a fe=
w examples of some of the risks to which company directors and officers are=
exposed:

1. Failure to exercise care, diligence and skill in relation to the co=
   mpany’s business.
2. Failure to discharge their fiduciary responsibili=
   ties in a prudent manner.
3. Failure to comply with their statutory du=
   ties and functions as directors and officers under for example, The Insuran=
   ce Act, 2001, The Banking Act, 1992, The Financial Institutions Act, 1992, =
   The Pensions (Superannuation Funds & Retirement Schemes) Act, 2005 and =
   The Securities Act, 1993.
4. When rights vested in regulatory bodies, =
   for example, the Natural Resources Conservation Authority (under section 36=
   of that Act) "…to institute proceedings against any person for an o=
   ffence against this Act and to recover any penalties … made thereunder&qu=
   ot; are exercised.
5. When litigants sue not only the company on whose=
   boards directors and officers sit but also the directors and officers in t=
   heir personal capacities.
6. When directors and officers need to secur=
   e funding to mount a proper legal defence even though the claim against the=
   m may lack legal merit.

Companies whose shares ar=
e publicly-traded face a reputational risk which can result in a reduction =
in the price of their shares. These examples show that claims can come from=
many sources: shareholders, creditors, government regulatory bodies, emplo=
yees, liquidators, customers and suppliers.

What Directors & Officers Li=
ability Insurance Covers

Policy forms differ from =
insurer to insurer. Many policies will cover directors and officers – past,=
present and future – due to wrongful acts.

Wrongful Act means any actua=
l, alleged or proposed act or omission, error, misstatement, neglect, breac=
h of duty or breach of trust that is committed when acting or serving in th=
e insured capacity. Wrongful Act includes but is not limited to an Employme=
nt Related Claim.

In addition to any legal =
settlement awarded, D&O policies normally pay for reasonable costs and =
expenses incurred with the insurer’s prior written consent … by or on beh=
alf of an insured after a claim is made … in connection with its investig=
ation, defense, settlement or appeal.Defense costs include the reasonable f=
ees, costs and expenses of an accredited expert retained through defense co=
unsel approved by the insurer on behalf of an insured to prepare an evaluat=
ion, report, assessment, diagnosis or rebuttal of evidence in connection wi=
th the defense of a covered claim. Some policies will also pay for emergenc=
y costs, regulatory crisis response, mitigation and avoidance services, pro=
secution costs, bail bond and civil bond expenses.

Exclusions typically foun=
d in D&O contracts relate to: a) dishonesty, fraud and criminal breach =
of regulations; b) injury and property damage; c) liability arising from po=
llutants d) acts and/or omissions arising out of actions performed as trust=
ees of pension plans; and e) professional indemnity.

Conclusion

When directors and office=
rs of companies discharge or fail to discharge their functions, they face r=
isks. These dangers, which can come from many directions, should be recogni=
zed and analysed, much in the same way that threats to the company’s assets=
, income and brand are routinely scrutinized. Strategies should be implemen=
ted to manage these exposures. D&O Liability Insurance should become a =
part of the organization’s risk transfer strategy, to help reduce some of t=
he personal risks that directors and officers face.

=

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