2.7.6 Outside directors insulated:• indemnification, insurance

There is little chance that non-executive directors of UK public companies will end up being sued. Directors' duties are fairly clear and case law shows that judges do not second guess directors with hindsight.1 This is close to the US business judgment rule — a safe harbour for directors. Directors are liable if they have infringed the duties mentioned above, which can be summarized as loyalty and care.2

The company may indemnify directors in case they are nevertheless sued, but only under certain conditions. The Companies Act 2006 excludes indemnification of a director against claims by the company — section 232. The company may equally not indemnify a director against a fine, administrative penalty or payment of damages resulting from a breach of duty — section 234(3)(a). Also, in contrast to the position in the US, a director who loses in court may not be reimbursed by the company for legal costs — section 234(3)(b). However, the company may give an indemnity in the case of a civil action by a third party e.g. a shareholder class action, covering the liability of the director and the costs of defence, section 234.3

But, interestingly, the company is permitted by law — section 233 — to insure its outside directors under D&O coverage. Typically, D&O policies in Britain give cover for "losses" arising from culpable acts or omissions committed in the insured's capacity as a director. "Culpable act" will usually be defined broadly to include breaches of duty, trust, neglect and wrongful trading. "Losses" will include sums paid under a settlement after a trial and legal costs incurred defending claims. D&O policies specifically exclude coverage for dishonest or fraudulent conduct, for obtaining a private benefit or profit, and for intentional misconduct.4

Another point is coverage. Partly because of the Equitable Life litigation, coverage of £100-200 million and with the largest companies up to £600 million, i.e. comparable to US levels, has become common This shift to higher policy limits could be a catalyst for more litigation against directors. Still, with regard to out-of-pocket liability for outside directors in case of damage claims, the unfavourable procedural terrain for plaintiffs in the UK should mean that even well-insured UK directors will face much less risk of litigation than their US counterparts.5