Let’s say a Director violates their duty of care and the business judgment rule doesn’t protect them. A derivative action where the company itself sues the director and recovers has been the subject of a judgment against the officer and the director for sums to be paid to the company or in a direct action to be paid directly to the shareholders as well as to administrators. Directors’ liability insurance would ask to cover or protect the Director from the obligation to personally pay this judgment, which is the insurance policy that would pay for the Director’s judgment and this is something that companies buy into frequently to inspire officers and directors to fulfill these roles.
There was recently a case where heavy damage was caused to a building by a heavy rainstorm. The tenants reported it to the committee to repair the exterior masonry of the building. Despite the report, the repair work still had not started and several months later a rainstorm caused further damage. Due to that, the tenants successfully sued the Residents’ Committee for failing to appoint a construction company for timely repairs. The court subsequently awarded costs and lawsuits as damages and this was to be paid out of the personal property of the directors of CMR. This could have been avoided if CMR had purchased directors ‘and officers’ liability insurance.
The claims made can come from internal or external parties and be of all kinds and wide. These claims can be:
- A defamation of directors’ statements which is a claim made by a member or resident who pleads that the directors failed in their task by defaming his character during a shareholders meeting. Damages can amount to more than £15,000 interest for non-pecuniary damage and defense costs.
- A violation of the terms of the lease (by landlord, residents or tenants) which is a claim for non-compliance with the provisions of the lease. This concerns the failure to maintain the property and relating to actions taken which impaired the value. It is also a complaint which alleges the overcharging of service fees and generates a request for reimbursement.
- A violation of the Companies Act 2006 which is a claim for non-compliance with the Companies Act 2006 insofar as the directors adopted resolutions at an EGM contrary to the provisions of the law and the articles of association of the company. Damages in the amount of £25,000 have been claimed. It is also a claim for unlawful amendment of the articles of association of a company, so that the directors violated the Companies Act 2006. It was alleged that a special resolution was not passed with the required number of votes.
- A failure to protect interests of members which is an allegation that the business of the company is or has been conducted unfairly and which is prejudicial to the interests of residents. It is a claim for losses suffered by the shareholders of the building (the residents) because it was discovered that the insurance taken out by the directors was insufficient to cover losses resulting from damage to a flat building.
- Claims for unjust prejudice under section 994 of the Companies Act which is an unfair prejudice claim against the exclusion of a former director’s exclusion from management which resulted in his resignation.
There are a lot of incidents that can occur, and it varies, but most of the time these incidents are very complicated. Which is why the directors ‘and officers’ liability insurance needs to be considered in order to protect the personal property of the directors and officers in the event of a personal lawsuit.