Time to review director indemnity and insurance coverage

IMAGINE the following scenario.

A director is prosecuted for allegedly being in criminal breach of his duties. The case goes through the courts and the director is found innocent. He is landed with a huge legal bill for which he tries to seek an indemnity from the company or the insurers under the directors' and officers' (D&O) liability insurance policy that the company had purchased. Lo and behold, he finds that the company is not legally obliged to indemnify him under either the terms of his appointment or its constitution. Nor does the policy cover legal expenses for criminal prosecution or regulatory actions. The director, though blameless, is out of pocket for tens, if not hundreds, of thousands of dollars in legal fees.

Most directors will have some inkling of the directors' liability insurance coverage the company has taken out, but probe further and chances are they will be unaware of the extent and details of that coverage. Given the scenario above, it is crucial that they step up their understanding of the legal exposure they face when serving on corporate boards and, more importantly, what protection they have.