Protecting your assets - Directors' and Officer's liability
Unlike normal business insurance, where the assets of the business are insured, Directors and Officers Liability protects the personal assets and Liabilities of a Director.
Liability for the Director of a business is personal, unlimited and cannot be contracted out of. It is the Director’s own personal assets that are at risk if they are subject to a lawsuit relating to their conduct as a Director of that Company.
If the business has multiple Directors, an action can be brought against any number of them. In such instances, it only takes one Director to make a questionable decision, the result of which could see all Directors named in a regulatory investigation or costly litigation.
Many restaurants are unlikely to have the in-house expertise that larger organisations rely on to mitigate their risk. The smaller size allows regulators and potential claimants to trace individual acts back to a single Director far more easily than would be the case for larger, more complex organisations. The result is that prosecutions or actions against individuals in smaller companies tend to be easier to bring and more likely to succeed.
A Directors & Officers Liability policy that includes Corporate Legal Liability and Employment Practices Liability will cover Directors’ personal wealth for legal defence costs. It will also cover any potential awards that are made against them from claims made by individual shareholders or for defence against regulatory claims. It can cover the business itself for defence costs and awards associated with events such as alleged breaches of regulations: in tax, health & safety, trading standards or corporate manslaughter.
Health & Safety / Corporate
One London restaurant that was found to be in breach of six different fire regulations, they were fined £3,000 for each breach and ordered to pay £8,000 costs towards the investigation.
Food Standards Agency investigations
While fines tend to be around the £5,000 mark and with a similar amount associated with costs the reputational damage done can of course be much more significant.
Home Office Immigration
Restaurants are often identified by Home Office Immigration enforcement teams as potential places of work for immigrants in the UK that have outstayed their visa or were thought to be here illegally. A recent operation in Surrey targeted two restaurants where seven illegal immigrants were found to be working. Each restaurant was fined £10,000 per person identified unless they could provide retrospective proof that correct right-to-work checks had been carried out.
The restaurant trade is often associated with not having the most stringent recruitment and employment practices. Even if an organisation is 100% justified in dismissing an employee, unless they follow the correct procedures in doing so, they can be subject to a successful action. In 2011-12, 186,500 claims were accepted by employment tribunals with a further 548,100 awaiting resolution. Employment practice claims can also be made by individuals that don’t even make it through the recruitment process, if they feel the reason behind their rejection was due to some form of discrimination.
Running a business is difficult enough as it is, but to suffer a financial loss of your personal assets would be soul destroying. With Directors and Officers Liability insurance having become far more accessible there are many insurers now offering the cover.
An average Indemnity limit for a small business would be between £1m-£5m. Costs are not overly excessive but when considering this cover you should consider the ‘worst case’ scenario. How many Directors, or even Officers could be reasonably implicated should an incident occur? As any Indemnity limit would be spread across the number of defendants and as we all know, legal defence costs are not cheap!