Using a corporate D&O Policy to cover “outside directorships”

As the directors’ and officers’ liability insurance (D&O) market continues to harden – and we consider will continue to do so beyond 2020 – directors’ outlooks are becoming increasingly grim regarding their own personal liability. Skilled directors of large and public companies are often invited to hold many directorships. The requests may be for the purpose of benefiting a smaller business with a senior directors reputation or acumen, to form or ‘cement’ a strategic partnership or simply be a personal preference to assist a community or charitable organisation.

Risk of outside directorships

These ancillary appointments to external companies (outside directorships) may be perceived as low risk. Otherwise, the director may have the benefit of an indemnity provided by the outside entity complemented by the entity’s D&O insurance programme. But is this enough?

External matters may however present emerging and sometimes even unknown risk. By way of example, presently, COVID-19 is having a significant impact on the solvency of charitable organisations, sporting and recreation clubs. Many insurers apply “insolvency” exclusions to policies written for smaller entities. These exclusions will preclude the policy responding where the company cannot pay its debts as and when they fall due. Practically speaking then, the D&O policy becomes somewhat futile if the company becomes impecunious, a claim is made against a director and the policy has an insolvency exclusion.

What is outside directorship cover?

Outside directorship cover is an optional extension to most D&O policies. It operates as an umbrella to cover claims which may not be covered by the outside entity D&O policy or responds when that policy limit is eroded by claims.

The company requesting the extension to cover (“consenting company”) simply agrees to extend the policy for the benefit of the director (“common director”). The consenting company’s own D&O policy therefore covers its own directors (including the common director) and the common director for the outside directorship.

The consenting company thus exposes its D&O policy limit to claims which may be made against the common director in connection with liability in connection with the outside entity. Caution must be had by the consenting company to the risk profile of the outside entity.

Some policies provide automatic outside directorship cover for non-for-profits and small privately held companies. But that will usually only respond in very limited circumstances.

Considerations and steps to activate outside directorship cover
The consenting company must first approve of the extension of its D&O policy. It should start with a due diligence process which could include, having regard to the outside entity:
  1. any strategic or other benefit

  2. the profile of the company (listed/unlisted/shareholders, etc)

  3. governance and compliance

  4. composition of the board

  5. nature of industry or services provided internal and external risk

  6. financial strength

  7. terms of deed of access and indemnity available to the common director

  8. D&O and other insurance arrangements of the outside entity.
If there is agreement the consenting company should consider its own policy limit remembering that D&O policies will cover all claims for all insured persons made and notified during the policy period. A higher limit of indemnity ought to be purchased to cater for possible claims in connection with the outside entity.

There should then be a minute in the board papers nominating the common director and the external company.

Thereafter, the consenting company will be asked to complete an “outside directorship” schedule which ordinarily is found as an appendix to the D&O renewal application. In that application, details of the common director, the outside company, claims history and sometimes financial statements will be requested. There may be additional premium for the extension to be enlivened.
What if the cover is not required?

Companies who do not want cover for outside directorships eroding their own cover should tell their broker. Further, there is no need to complete any “outside directorship” addendum in circumstances where no cover is required for a company’s directors for their liability on external boards.