Director Liability Insurance known otherwise as Director and Officers Liability Insurance (D&O) which is somewhat synonymous with corporate indemnification, is insurance protection for Directors against claims which arise from the actions (and failure to act) taken (or not taken) by them in the performance of their statutory duties. D & O Insurance is usually taken out by companies on behalf of Directors. In other cases, Directors take out the Policy on their own. In such cases, premium is either borne solely by the respective Director or split between the company and the Director.
A notable exception is Berkshire Hathaway Inc., an American multinational holding conglomerate that manages a number of subsidiaries and owned by billionaire Warren Buffett. Unlike its peers, the company does not purchase D & O for its Directors. According to Mr. Buffett, Directors should think and act like owners of the investments. As such, if they mishandle investors’ funds, they essentially mishandle theirs as well (www.insurancejournal.com). Warren Buffet’s position is shared by many who consider D & O Insurance as undermining corporate governance as it tacitly encourages illegal or unethical behavior (risk encyclopedia).
Section 279 of the Companies and Allied Matters Act (CAMA) make the situation in Nigeria somewhat peculiar. The Section mandates a Director to act at all times in what he believes to be the “best interest of the company” and “in such manner as a faithful, diligent, careful and ordinarily skillful Director would act”. CAMA also prohibits any provision in any Article, resolution or contract from relieving any director from the liability incurred as a result of any breach of his statutory duties. It is suggested however that the provision contemplates situations where Directors act in breach as opposed to where they act in good faith.
Section 290 of CAMA provides for the “personal liability” of Directors where money received as loan or for the execution of a contact is diverted. Directors will also be personally liable where individually or collectively, they have acted beyond the authority conferred upon them by the company’s Articles of Association; acted in breach of the Companies and Allied Matters Act or other legislation; acquiesce in the company carrying on business recklessly; sign or authorize the publication of false or misleading financial statements.
Courts in America have extended protection similar to that provided by the D & O Insurance using the “Business Judgment Rule”. The rule makes officers, directors, managers, and other agents of a company immune from liability to the company for loss incurred in corporate transactions that are within their authority and power to make when sufficient evidence demonstrates that the transactions were made in good faith and with reasonable skill and prudence (Farlex Legal Dictionary). Directors are often confronted with decisions concerning business expansion – including mergers and acquisition, disposal of assets, taking up long term liabilities, declaring dividend etc. The rule helps directors and officers meet these challenges without fear of liability.
The rule originated in Otis & Co. v. Pennsylvania R. Co., where a shareholder’s derivative action alleged that Directors failed to obtain the best price available in the sale of securities by dealing with only one investment house and by generally neglecting to “shop around” for the best possible price, resulting in a loss of nearly half a million dollars. The federal district court ruled that although the directors chose the wrong course of action, they acted in good faith and therefore were not liable to the shareholders. The court reasoned that “mistakes or errors in the exercise of honest business judgment do not subject the officers and directors to liability for negligence in the discharge of their appointed duties” (61 F. Supp. 905 (D.C. Pa. 1945).
The position of Directors as fiduciaries and the nature of their statutory duties place them at substantial risk in the performance of those duties. It is thus not out of place that they should be entitled to some form of protection from liability. It is suggested that D & O policies which can be tailored to meet the strict requirements of CAMA would be useful in attracting qualified and reputable individuals to corporate Boards. The premium payable on the D & O Policy can be incorporated into Director Remuneration. The Policy should clearly exclude illegal, ultra vires, wrongful and unethical acts.