One of the perennial questions for D&O insurance buyers and their advisors is: What is the right amount of insurance to buy? In the following guest post, Francis Kean, Partner in the Financial Lines Team at McGill and Partners, takes a look at a recent court judgment in which the court raised serious questions about a company’s limits selection and proposes five lessons that may be drawn from the case. I would like to thank Francis for allowing me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is Francis’s article.

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Introduction

“There is no evidence before me about when or why the BHSGL (British Home Stores Group Ltd.) board or its brokers agreed cover limited to £20 million or £20 million (including defence costs) and this was plainly inadequate to meet the potential claims against them given the sums with which they were routinely dealing.” These are the chilling words of Mr Justice Leech in his 2024 judgment, finding former directors of British Home Stores (BHS) each liable to pay £6.5 million for wrongful trading under Section 214 of the Insolvency Act. By that point, most of the £20 million D&O limit had already been spent in legal costs. The total compensation ultimately awarded against three of the BHS directors exceeded £130million, underlining the overall inadequacy of the D&O limit.

The BHS judgment was delivered only months after the Insolvency Service’s abandonment in November 2023 of Directors Disqualification proceedings brought against five former non-executive directors of Carillion at a cost running into many millions of pounds. It also came only shortly before the failure in October 2024, of ISG, a major construction company employing over 2000 employees, which went into liquidation amid allegations of significant inaccuracies in its published financial statements. In fact, according to the UK’s Insolvency Service, 2023 and 2024 saw the highest ever number of corporate insolvencies (23,872 in 2024 alone) in England and Wales.

The BHS case contains some salutary lessons both as to the adequacy of D&O limits and as to how those limits are spent and shared.

Background

BHS was a well-known chain of department stores selling clothes and household goods, but it had become heavily loss-making. In March 2015, BHS was purchased for £1 by a company that was controlled by Mr Dominic Chappell. Mr Chappell had no experience in the retail sector or of running such a large company. The sale of BHS had been agreed on the basis that the buyer would inject £5 million of new equity funding into the business but no new funding was introduced. In June 2015, BHS’s directors decided to borrow money to cover its ongoing trading losses. Ultimately, in April 2016, BHS went into insolvent administration, and then into liquidation in December 2016.

Four years later in December 2020 the liquidators brought proceedings alleging wrongful trading and misfeasance against four former directors. The liquidators alleged that from the date of the directors’ appointment, they all knew or should have known that there was no reasonable prospect of BHS avoiding insolvent liquidation. They also alleged misfeasance based on breaches by the directors of various fiduciary duties owed by them under the Companies Act. The claim took a further three years to come to trial. By that stage, only three directors were left to contest the claim; the case against one director having already been settled. (Mr Chappell who had not participated in the first trial on health grounds was nevertheless bound by written admissions on the basis of the Judge’s finding that he had no reasonable prospect of defending the claim.)

The liquidators ultimately succeeded in their claim winning an award of £6.5 million against each of the directors for wrongful trading and a further £110 million against two of the directors based on the misfeasance claims.

Lesson 1: The limit may have to provide for a decade’s worth of legal costs on a variety of different fronts

In the BHS case, over nine years had elapsed between the date of liquidation and the delivery by Mr Justice Leech of his epic 533-page judgment on liability (one of the longest in Chancery Court history). In that time (and long before proceedings would have been launched), extensive legal costs must have already been incurred in dealing with a raft of complex questions and issues which the liquidators would have put to the directors over an extended period, both by way of written questions and oral interviews.

By comparison, in the Carillion case, although there were no wrongful trading or misfeasance claims against the directors, there were a number of high-profile investigations including two House of Commons Select Committee inquiries as well as investigations by the Financial Reporting Council, the Financial Conduct Authority, the Official Receiver, the National Audit Office and the pension regulator. There were also FCA proceedings against two directors as well as Directors Disqualification proceedings against eight individuals. These were not abandoned as against five non-executive directors until the eve of trial, more than six years after the collapse of Carillion. Each of these proceedings and investigations will have required the expenditure of significant legal costs on behalf of senior executives including those who had already left the company at the time of its collapse.

Lesson 2: Don’t assume because you have not been dishonest you will necessarily be treated more leniently and therefore require less cover.

In the BHS case, there was no doubt in the Judge’s mind who was principally to blame for the corporate failure. He commented that Chappell had tried “…to plunder the BHS Group whenever possible.” Also, by the time of the judgment, Chappell had already served a jail sentence for tax evasion.

 It’s perhaps too easy to apply hindsight and question the wisdom of the other directors who agreed to serve on the board of BHS post-acquisition. Mr Chandler for example, who took on the role of Group General Counsel, was a criminal barrister by training although he had no prior experience of corporate law. The judge, despite finding that Chandler had not been dishonest, decided he was “clearly out of his depth” and able to be manipulated by others. As such, he was held liable to pay the same level of compensation (£6.5 million in respect of wrongful trading) as his co-director, Mr Henningson, whom the judge held had in fact acted dishonestly. (The wrongful trading aspect of the case necessitated a calculation of the extent of the increase in the net deficiency in the company’s assets over the entire period during which it continued to trade when it should not have done. After deductions that left a total of £110,230,000.)

The judge could have exercised a statutory discretion under the Companies Act to relieve (or reduce the scope of) Mr Chandler’s liability but refused to do so. He concluded that factors such as the inadequacy of the D&O limit and the fact that Chandler was not personally very wealthy, would, if used to exonerate him from liability, “send a green light to risk-taking.” So, the fact that Mr Chandler, although not dishonest, was facing bankruptcy as a result of being in office and failing to act properly at a time when the company was trading while insolvent did not result in a more lenient award against him.

Lesson 3. Know with whom you share your D&O limit.

This is often not simply a case of knowing (and trusting) your fellow board members. The starting point is in fact that “D&O” insurance is something of a misnomer. A typical policy does not simply cover the “Directors and Officers” of a company. Depending on how the policy is configured, it typically provides the same level of protection also to any employees “acting in a managerial or supervisory capacity”. In a large company that could mean hundreds and, in some cases, thousands of employees. So, a limit of £100 million which may seem adequate, when earmarked only for board members, in fact runs the risk of being significantly diluted by claims by other individuals.

To make matters worse, the same limit of indemnity is prone to further erosion by claims involving the company as an insured in its own right. Historically, the D&O insurance policy was offered separately from the liability cover provided to the corporate entity. Perhaps consideration should be given to restoring that separation? 

Lesson 4: Understand what happens to the D&O policy when the company becomes insolvent.

There are several important factors here to consider including:

• D&O policies operate on an annually renewable “claims made” basis. In other words, they are designed to respond only to claims made or investigations commenced (or to circumstances notified which may give rise to a claim) during the policy period. Since insolvency itself is almost certainly not a notifiable circumstance, what this means is that (in the absence of special provision) directors only have until the expiry of the policy period in which to notify insurers of any future claims or investigations which may be commenced against them. Once the policy has expired it is extremely unlikely that insurers would be willing to offer (or that the directors could afford to purchase) fresh insurance. In such a situation, no matter how large the insurance limit originally purchased to meet wrongful trading claims and other investigations arising out of the insolvency process, it will not be accessible to the directors at the point of greatest need.

• D&O policies (along with other liability insurances, again in the absence of special provision) operate on a first come first served basis. It may therefore be the case that a substantial slug of the overall limit has already been eroded by other claims under the policy before the directors (and in particular the non-executive directors who tend to be the last ones required to give an account of themselves to regulators and/or the courts), require access to insurance proceeds.

• The company which has purchased the policy on the directors’ behalf has fallen into the hands of the insolvency practitioner whose job it is (along with protecting the interests of creditors) to investigate what went wrong. In so doing, he or she will wish to conduct interviews with the directors and perhaps some of the former directors. Directors have a duty to cooperate in this process. It is highly desirable that they have legal representation at this point since the answers they give may well dictate what (if any) future action may be taken against them. In theory, the D&O insurers should pay these costs, but a number of practical problems can arise:

• The directors may not know who the D&O insurers are or where the relevant insurance policy is to be found. (The insurance is typically purchased on their behalf by the (now insolvent) company.)
  • The policy may have expired (see Lesson 3 above)
  • Many D&O policies restrict the amount of insolvency hearing costs provided by imposing inadequate sub-limits to be shared among all “insured persons” for this kind of exposure.
  • The directors may not have the means or ability to answer any coverage related questions which the D&O insurers may ask before confirming cover which the company would ordinarily address on their behalf. This may result in unnecessary doubt and uncertainty as to coverage.

Lesson 5: Be prepared to explain and justify the amount of D&O insurance the company has bought on your behalf

This takes us back to the question posed by Mr. Justice Leech at the start of this article. In the case of BHS for example, if Mr Chandler had been able to produce evidence that the £20 million D&O limit was all the company could sensibly afford at the time or that it was the maximum reasonably obtainable in the market for BHS, it is possible the judge would have had more sympathy with his application to have his liability reduced or removed in proportion to the remaining insurance proceeds.

It is good practice carefully to consider the question as to appropriate D&O limits with insurance brokers and other industry professionals (and to document such consideration) at the relevant time. Observing this practice may also help deflect criticism (especially when insurance rates are high) that a company has overspent in buying unnecessarily large limits of D&O insurance. Benchmarking with limits purchased by other comparable companies can provide useful guidance but should not be relied upon because no two companies have the same risk profile, history or appetite.

Conclusion

As the BHS case demonstrates, the purchase of inadequate D&O limits on behalf of directors can lead to unpleasant consequences. As it also demonstrates, the question: “how much should we buy?” is nuanced. It gives rise to further questions and issues some of which we have tried to encapsulate in the five lessons above.

A final question remains which is intimately related to “how much should we buy” and that is: “how should the money be spent?” The answer will vary from company to company. No two D&O policies offer the same level of cover.  Coverage priorities differ and, especially for larger companies buying bigger limits, there are many ways in which a D&O programme can be configured.

For example, it is possible within the same programme to combine cover for all insured persons and the company with separate ring- fenced protection for individual board members. It is also possible to cater within the policy wording for many of the insolvency related challenges listed in lesson 4. In short, the question: “how much should we buy” is, in truth, a qualitative as well as a quantitative one on which appropriate expert advice should always be sought.