A D&O insurer’s denial of coverage for a claim against corporate officials can leave the individuals in a very difficult position, as illustrated by a recent high-profile case in the U.K. According to an August 4, 2013 Financial Times article entitled “Call to Reform Directors’ Insurance as iSoft Four Left With Bill” (here), four former directors of iSoft who were recently acquitted of criminal financial misrepresentation charges were financially devastated when they were forced to fund their criminal defense after the company’s D&O insurer denied coverage for the matter.  


The high profile nature of the case and the tone of the Financial Times article are sure to draw attention to the directors’ plight, at least in the U.K. However, though I discuss this situation below, I wish to emphasize that the article does not discuss the basis on which the insurer denied coverage and the only comment from the insurer in the article is its statement that it could not discuss the situation because it is an “ongoing matter.” Accordingly, there is no basis from which to assess the grounds on which the insurer denied coverage. The article seems to take it as a given that the coverage denial was unjustified; I wish to stress here that based solely on the article (which is my only source) I have no way of assessing the coverage denial.


According to the article, the four former iSoft officials were alleged to have engaged in a conspiracy to make misleading financial statements at iSoft. The individuals were acquitted at the Southwark Crown Court on July 22, 2013, following “procedural mistakes by the prosecution,” and after a seven year investigation and two trials.


The article reports that the company’s D&O insurer denied coverage for the claim in July 2011, before the first trial. The individuals were “left to fund their own legal costs or seek help from the taxpayer” after the coverage denial. The article quotes one of the four, iSoft’s former financial director, as saying when he learned of the coverage denial, it was “devastating, the low point of my life.” He says that he has lost his house as well his job and has not worked since. The former financial director went without legal representation for three months until his solicitor and barrister agreed to work for a reduced fee set by legal aid.


The article quotes the former financial director’s barrister as saying of the insurer’s coverage denial that “to arrive at a conclusion without hearing evidence is perverse given policy wording and the clear reasons for D&O insurance.” He added that “This action often completely undermines the whole point of taking out D&O insurance.”


The article also quotes a representative of the Institute of Directors as saying “There is a need to ensure that existing D&O policies being promoted by the insurance industry are genuinely fit for purpose and are not misrepresenting the cover that they can deliver to directors." The article also reports that the Law Commission is preparing to recommend that ministers tighten the regime to give policyholders more protection.


Another lawyer, who apparently was not involved in the iSoft criminal case, is quoted as saying “Directors need to take the trouble not only to look at the premium and the amount of cover … but to find out something about the historic performance of the provider standing by their policy and providing a proper level of support.”


The article concludes with a quote from a leading U.K. broker who notes that there are many examples where D&O insurers have paid large D&O claims.


Without knowing more about the basis on which the insurer has denied coverage, this entire situation is hard to assess. However, the article itself does underscore the enormous consequences that can ensue for involved individuals when a D&O insurer denies coverage. Even though these individuals have been acquitted, their lives are left in disarray because of the financial consequences of having to fund their own defense.


The article highlights a different issue as well – that is, even if its decision is entirely justified, a D&O insurer’s coverage denial can have enormous reputational consequences for the insurer, particularly in a high profile case like this. Whether justified or not, the carrier is exposed to public swipes like the comment above from the attorney about the need to need for policyholders to look unto whether the carrier will stand by their policy and provide the proper level of support.


The article also underscores the fact that a coverage denial in a high profile case can not only attract public criticism but it can also trigger calls for reform and regulatory scrutiny, which seems to be what has happened here. Indeed, at a time when some potential buyers remain unconvinced of the need for or value of the insurance product, high profile publicity about a coverage denial can threaten to undermine consumer confidence in the product. 


However, as I emphasized at the outset, there is no basis from the article to assess whether or not the carrier’s actions in connection with this claim were warranted. From that perspective, the adverse publicity may be unfair. Whether the publicity is fair or not, it is definitely the kind of thing that an insurer hazards when taking a tough coverage position in a high profile case. The possibility of this kind of adverse publicity is one factor carrier must take into account when deciding what actions to take when considering whether or not to deny coverage.


Special thanks to a loyal reader for providing me with a link to the Financial Times article.


A Kingdom Explained: While thinking about the article above, I remembered the classic video, embedded below, explaining, among many things, the difference between Britain, Great Britain and the United Kingdom. I highly recommend this entertaining video. You will be surprised and amused by the role that God plays in all of this. Watch for the shot of the Gibraltar monkeys. (Sorry about the advertisement at the beginning, it is short.)