The importance of Directors & Officers Liability Insurance
Belinda Thorpe investigates the risks of not having adequate liability insurance in place.
Those who serve on a Residents’ Management Company (RMC), Right to Manage (RTM) or Residents Association (RA) committee often do so in a very selfless way. They work with the best interests of the individual residents at heart but are often unaware of the inherent risks that they assume from the moment they join the board.
Nowhere to hide
Just imagine for a moment how you would feel if, whilst fulfilling your duties as an RMC/RTM/RA director, you were faced with the very real prospect of having all your personal assets at risk.
The potential for error that can lead to legal action is very real. When there is financial loss, situations can change abruptly, and RMC/RTM/RA directors can very quickly be confronted with having to defend legal action brought against them and/or other committee members. Ultimately, you can be drawn into an action brought by any lessee where they feel you or the RMC/RTM/RA has let them down.
Being caught up in a legal action may appear to be unfair when you have been managing your block to help your neighbours. However, in these situations often you are left with little choice other than to defend your position which could be a fairly complex and lengthy affair: substantial legal costs can (and do) mount up very quickly. Who would pay these defence costs?
Simple solutions – the benefits of education and the correct level of protection
How many RMC/RTM/RA officers are aware of the full extent of their potential exposure? Part of the issue and the solution is education.
The potential for legal action against individual RMC/RTM/RA officers exists because errors, misstatements, omissions, neglect and breach of duties do happen in real life. Consider this from a different perspective: could you imagine anyone agreeing to be a Company Director without adequate protection in the form of Directors and Officers Liability insurance? Would you even consider sitting on the board of BP after witnessing the company incur a multi-billion-dollar oil spill, without first ensuring that you have the correct insurance in place to protect you as an officer or director?
Each potential claim is judged on the material facts behind the particular incident, but the point to remember is that RMC/RTM/RA officers (whether legally liable or not) are exposed to the potential risk of litigation and legal costs.
Consider if the following scenarios happened to you:
During its annual insurance review, the Committee takes the decision to change their existing insurance arrangements and obtains cover with a different provider. The new policy includes a reduced £5 million Property Owners Liability cover. The reason behind the change was to save money and the new policy was chosen because the premium on offer was cheaper than their existing insurance cover.
At a party in one of the flats, an over-crowded balcony collapses, seriously injuring several people. A claim against the Insurance Company is incepted with a potential cost of £7.25 million, however the RMC/RTM/RA only has £5 million Property Owners Liability cover in place. The individual flat owners are distressed as this amount is well below the potential cost of the claim. The flat owners believe that the RMC/RTM/RA was wrong to reduce the cover and they bring legal action against the responsible director to make up the shortfall.
An officer pays a contractor to fix their roof with RMC/RTM/RA funds before the works have started. Subsequently, the contractor absconds with the money, never to be seen again. There is an exposure to potential legal action being brought by the individual flat owners following the loss of RMC/RTM/RA funds due to a mistake made by a member.
Consider the potential exposure that may exist if an RMC/RTM/RA officer fails to assess the number and extent of defects within a building, compounded by the fact that the officer fails to lodge a claim within the time constraints of the NHBC framework. Funds required to rectify defects are no longer available but could have been covered by the NHBC guarantee. Once again, there is an exposure to potential legal action being brought by the individual flat owners due to an error on the part of an RMC/RTM/RA officer.
Claims that have been seen recently:
- A claim by a member/resident alleging that the directors had defamed his character at a meeting of shareholders. Damages for injury to feelings and defence costs amounted to over £15,000.
- A claim for breach of lease provisions relating to the alleged failure to maintain the property, and in respect of steps taken which had a detrimental effect on value. A claim alleging the overcharging of service charge. Reimbursement was sought.
- A claim for disregarding the Companies Act 2006, in that the directors allegedly passed resolutions (removing the Claimant as a director) at an EGM contrary to the provisions of the Act and the company’s Articles. Damages in the sum of £25,000 were claimed.
- Following damage caused to a residential block of flats, it was discovered that the insurance purchased by the directors was inadequate to cover the loss. The shareholders of the property (the residents) brought a claim for losses they incurred as a result.
Don’t forget, it’s not always the directors and officers that have claims made against them, it can often be the Company. Making sure that your policy includes Corporate Legal Liability Insurance will also protect your RMC/RTM/RA against the financial consequences of a wide range of claims made against it.
Premiums start from only £94 (for up to 10 flats with a limit of indemnity of £100,000).