D&O insurance court case a game changer for SMEs

At a glance

  • SMEs are facing increased exposures that they may not have previously considered
  • A court decision has highlighted how vulnerable SME directors could be to litigation
  • Only 23% of SMEs currently have D&O insurance

A Supreme Court decision has emphasised the type of exposures that SMEs may face, and the need for bespoke insurance products.

It is estimated that only 23% of SMEs currently have D&O insurance. This is particularly startling given the increased exposure that individuals within SMEs are facing in a more litigious society.

“The demand for D&O insurance has increased for larger corporate entities where the directors and officers making key decisions have become aware of potential claims being issued against them as individuals,” says Mark Dowsing, Senior Claims Adjuster at Zurich.

“It is however clear that SMEs have yet to appreciate the full ramifications of not purchasing bespoke D&O cover.”

A case before the Supreme Court of England and Wales – Prest v Petrodel Resources Limited and others [2013] – highlighted the necessity for SMEs to consider D&O insurance.

The Court had to decide if a number of properties owned by companies of which Mr Prest was the controlling director and shareholder, should be transferred to Mrs Prest as part of a divorce settlement.

It was accepted that Mr Prest had used the companies’ assets as his own without restriction, but because Mr Prest (not the companies) had originally provided funds to acquire the properties, the companies actually held the properties on a ‘bare trust’ for him. As Mr Prest beneficially owned the properties, an order could therefore be made for the transfer of the properties to Mrs Prest.

Game changer

In light of this decision, it is important that SMEs and their CEOs note that they may be less protected than they previously were.

It is clear that SMEs have yet to appreciate the full ramifications of not purchasing bespoke D&O cover.

Even where it is apparent that the corporate veil seemingly remains intact, in relation to SMEs, it will typically be easier for third parties to successfully sue company directors if they have assumed liability together with the company itself.

Brokers could therefore see customers become susceptible to an increase in third party claims. Such levels of proximity could only occur within SMEs, and the potential for D&O type claims is substantially increased.

The increased exposure facing SMEs makes bespoke D&O insurance all the more important for directors and officers of SMEs.

More information about Our D&O products can be found here.

Article supplied by Zurich.co.uk

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