Dubai court orders former CEO and executive to pay Dhs151.97 million in compensation: A key lesson on directors’ & officers’ liability insurance

In a landmark legal decision, the Dubai Court of Cassation (“the Court”) has ruled that the former chief executive officer (“CEO”) and executive (“the Executives”) of a construction company (“the Company”), must pay Dhs151.97 million in compensation for both material and moral damages to the Company.

This ruling is final and binding, serving as a stark reminder of the personal liabilities corporate executives could face. As we have reported previously, this is part of a wider global trend whereby claimants and Regulators are increasingly looking to pierce the corporate veil and claim against the individuals responsible for the running and governance of the organisations they represent. It also underscores the crucial role that directors’ and officers’ (“D&O”) liability insurance can play in potentially safeguarding executives from the financial consequences of being found liable when claims are made.

The Court’s decision followed investigations that revealed the Executives had diverted Company funds for personal use and falsified financial documents.

Corporate executives are bound by numerous fiduciary and statutory duties, and breaching these responsibilities can result in substantial civil liabilities – often with no limits. D&O liability insurance is designed to indemnify directors and officers against the financial consequences of such claims (and the costs incurred in defending the claims), shielding them (at least to an extent) from personal liability in connection with their corporate decisions.

In cases such as the one involving the Company and its former Executives, a well-structured D&O liability insurance policy can play a crucial role in mitigating the financial fallout from such claims.

An executive may turn to a D&O liability insurance policy, provided one is in place, and subject to the terms and conditions of the policy. However, such polices often include exclusions that prevent insurers from covering losses caused by a director’s or officer’s dishonesty, fraud, or malicious actions and any actions which involve the director becoming enriched as a result. The burden of proving dishonesty, fraud or malice typically rests with the insurer and is typically subject to final adjudication, meaning that there must be a finding of dishonesty in a court or other arbitral process before the dishonesty exclusion can be applied. Subject to the wording of the policy, insurers are usually required to cover the costs of defending the claim but if a finding of dishonesty is made against an insured person, insurers have the right to seek reimbursement of any defence costs which have been advanced.

As highlighted in our previous article, having a policy is crucial, but it is equally important for the insured fully to understand the policy’s terms and conditions. This case highlights the need for comprehensive D&O liability insurance and a clear understanding of exclusions related to misconduct, fraud, and dishonesty. These exclusions prevent coverage if the insured gains a personal profit or acts fraudulently or dishonestly.

Whilst it is difficult, if not impossible, to detect fraudulent activities on the part of board members, from insurers’ perspective, it is important that underwriters understand the potential claims and regulatory investigations to which individuals with calls on D&O policies might be exposed. In a world where increased regulation is everywhere the importance of knowing an insured’s business and internal policies is brought into even greater focus. The relationship with the broker is also key to understanding the risk and asking the right questions at the proposal or renewal stage might allow insurers to tailor policies in order to mitigate the risk of significant claims in the future. The Court’s ruling against the Company’s former Executives serves as a powerful reminder of the risks that come with executive roles. Personal liability for corporate decisions can have financially devastating consequences. For corporate boards and leadership teams, this case emphasises the importance of D&O liability insurance as a protective measure. It also serves as a clear reminder that no one is immune from the legal consequences of corporate mismanagement.