Insurers in bid to cushion directors from costly lawsuits

Today’s business executives are increasingly finding their decisions being put under the microscope, raising the risk of their facing lawsuits.

They face the possibility of being blamed for data breaches, loss of supply chains or businesses facing reputational damage.

New legislation now holds directors personally responsible for their firms, and gives shareholders, customers and other stakeholders the power to demand better governance and decision-making in businesses.

To respond to the increased risks of legal suits, insurance companies are looking to cushion executives from expensive proceedings with the directors and officers liability insurance, also known as D&O insurance.

It covers the cost of compensation claims made against directors and key managers for alleged wrongful acts. These include breaches of trust, neglect, misleading financial statements or wrongful trading.

Intentional illegal acts, criminal fraud or illegal profiteering are typically not covered; D&O policies extend to specific wrongful acts while acting for an organisation.

Financial manipulation

Last year, Ernst and Young (EY) consultancy firm released a report that revealed more than a fifth of Kenyan executives have admitted to the existence of financial reports manipulation in their firms.

The report found 23 per cent of these managers believe the irregular adjustment of financial statements is mainly driven by the pressure to meet ambitious targets in a competitive environment.

Claims for compensation resulting from wrongful acts can come from anywhere. For instance, the Kenya Pipeline Company will compensate hundreds of residents of Thange village in Kibwezi, Makueni County, affected by an oil spill from a pipeline belonging to the company.

Shareholders can also sue over inadequate or inaccurate disclosures, poor financial performance or bankruptcy.

Aon Kenya Insurance Brokers Ltd is offering D&O cover in partnership with a number of insurers, including AIG Kenya and ICEA Lion.

“So far, we have 65 clients who have taken up this cover. We are optimistic there will be more,” said Anne Mkala, the chief broking officer at Aon Kenya, which is organising an awareness workshop.

“The main purpose of a D&O policy is to provide financial protection for today’s executives, and to provide compensation for any legal expenses following a claim.”

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