How directors can cover themselves against liability risks

Under company laws, directors have a duty to enhance operational efficiencies and profitability. FILE PHOTO | SHUTTERSTOCK

Under company laws, directors have a duty to enhance operational efficiencies and profitability.

Indeed, the first task of every director is to comply with corporate governance policies, relevant applicable laws and rules stipulated by regulatory bodies during the execution of their mandate.

Ironically, the same law allows directors to be held liable for decisions deemed to be harmful to their company, employees or shareholders.

This leaves directors in an awkward position since they are recognised as the bona fide decision makers while at the same time left to fight their own battles when claims of unprofessional conduct are made against them.

America’s Silicon Valley Bank (SVB) was recently put under regulatory administration after failing to raise new money to cover its funding shortfalls that were occasioned by realised impairments on its bond portfolio holdings.

This incident prompted a class action lawsuit being filed against SVB parent company, SVB Financial Group, and two of its top executives by the bank’s shareholders.

Closer home, our country’s financial services sector has also experienced similar situations with several financial institutions in the banking and insurance industries having been placed under statutory management, forcing their former employees and shareholders to turn to the court system in the hope of settlements.

Since no one knows when certain decisions made will result in litigation, there is a need for individual organisations to embrace risk solutions that will offer protection against judgements from civil lawsuits that can be initiated by shareholders, employees, customers, competitors, and government agencies.

Considering the massive payoffs resulting from such civil suits, an organisation needs to be prepared for the possibility of several associated risks, especially lawsuits, which simply cannot be ignored.

How can organisations and their leadership stay protected considering such events? Section 194(3) and Section 195 of The Companies Act 2015 acknowledge these exposures and recommend that a company should maintain an insurance cover for any liability specified in that subsection against a director of the company.

Insurers offer cover designed to protect executives and board members from lawsuits that may arise from their actions or decisions made while carrying out their duties.

One of the key benefits of such covers is providing financial protection for the personal assets of directors and officers in the event of a lawsuit. This includes legal fees, settlements or judgments, and other related costs.

When procuring such insurance, the first step would be ascertaining adequate liability of limit for this insurance cover considering today’s corporate environment.

The importance of insurance is not just limited to corporate coverage but also extends to the protection of its officers and directors.

While no one can predict and avert these major risks, they can most certainly be financially prepared to battle the large expenses that come with them.

Director’s and officers’ insurance is an essential tool in today’s business world and should be seriously considered by all companies and their directors and officers.

The writer is the general manager at Minet Risk Solutions, Corporate Division at Minet Kenya.