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Liability Insurance
Monday, September 1, 2008
The new Companies Act

There’s reportedly dramatic fresh interest in Directors and Officers’ liability insurance cover as result of the pending new company law.

The Companies Bill, part of the government’s corporate law-reform project, is aimed at improving regulatory oversight and redress for shareholders. It is expected to replace the 1973 Companies Act next year. A recurring theme in its proposals is that they may lead to directors being personally sued for alleged loss and damages caused to creditors, employees or shareholders of a company.
The changes have raised speculation and no small amount of trepidation says Nick Shutte of the Financial Markets division at brokers Glenrand M.I.B. “The amount of increased activity we have already seen as a result of the Bill has picked up dramatically,” he adds.
“The provisions of the Bill, currently still doing the rounds of the financial services sector for comment, are far reaching.
“While reiterating and embellishing much of the current Act, the Bill goes further on numerous aspects, notably those affecting Directors and Officers such as board remuneration packages, levels of responsibility and participation at board level.
“Importantly, the Bill holds directors personally liable for losses suffered by the company, shareholders and others arising from breaches, in effect reinforcing and enlarging the risks in this respect faced by the top corporate hierarchy in South Africa.
“On the other hand the Bill, as currently contemplated, would increase the number of scenarios in which a company can rightly indemnify Directors in terms of relieving them from certain duties or liabilities, as well as the advancement of expenses to defend litigation proceedings against those directors.
“Interestingly, by comparison with our proposals, if one looks at the litigious ‘go for the deep pockets’ culture in the States, most insurance companies over there no longer offer Company Reimbursement cover of this nature, due to the extent of claims in the last few years.
“This has led to the almost exclusive focus on Directors & Officers’ liability cover as such, a situation that’s unlikely to occur in SA due to the less litigious nature of the local business environment.
“However this situation could change and tip the scales in favour of Company Reimbursement cover locally with increased focus on corporate governance via the latest King report, tightening of JSE listing requirements, stricter reporting on financials in line with the new directives from the International Accounting Standards Board (IASB) now integrated locally, greater transparency in reporting requirements, increased general awareness of the public and shareholders of their rights and countless other factors.
“The new Bill also formalises duties and responsibilities of directors and officers which were previously implied, but will be written into the legislation.
“There is speculation that this and the other provisions of the Bill may cause directors who currently serve on boards and new directors who are contemplating board positions to reconsider the extent of their participation based on their increased exposure to personal liability.
“It may also cause litigation to increase in this sub-sector of the legal field and could cause directors to put more pressure on companies to take out D&O insurance on their behalf. Indeed this happens to a large extent already, where directors refuse to sit on company boards without the existence of D&O insurance protection
“Accordingly and within the overall context of the Bill’s raft of proposals, we find boards are concerned about the risk their directors and officers face in this changing scenario.
“The solution is risk managing the exposures, the starting point of which is an assessment of potential liabilities and a company’s broad compliance with existing and pending legislation.
“Arising from such an exercise it becomes possible to establish an effective programme that should entail, among other steps, the training of directors in their duties and responsibilities and setting up a system of checks and balances to ensure compliance.
“Ultimately, the programme should inculcate an organisational culture that supports ethical and responsible behavior in addition to reducing the likely frequency and magnitude of possible claims against its Directors and Officers.
“The question that arises of course is whether the new legislation will lead to directors relinquishing their responsibilities and titles en masse in favour of new line management appointments. The related debate is whether this will curtail the effectiveness of the already hard-pressed management hierarchy in South Africa.
“This is not taking place on a large scale as yet according to our assessment, but the message from the insurance sector is that such drastic action is unnecessary, providing the correctly scoped protection is in place.”

Copyright © Insurance Times and Investments® Vol:21.8 1st September, 2008
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