Understanding the scope of your directors’ and officers’ liability insurance policy

A recent DFSA decision highlights some of the key issues insurers and insureds need to consider when assessing coverage.

In the UAE’s financial free zones, the Dubai International Financial Centre (“DIFC”) and Abu Dhabi Global Market (“ADGM”), regulatory enforcement by the Dubai Financial Services Authority (“DFSA”) and Financial Services Regulatory Authority (“FSRA”) has increased, leading to more penalties for non-compliance with relevant legislation and regulatory provisions. This highlights a conscious move by the authorities in the UAE and the wider region as commercial and legal practices are brought more in line with the UAE’s global commercial counterparts and illustrates the need for businesses to react accordingly. Companies and their directors and officers may face sanctions: most commonly fines, but other possible sanctions include prohibitions and directives to account for funds.

Recent decisions such as the DFSA’s against a senior manager at a financial services company operating in the DIFC, highlights the importance of directors & officers (“D&O”) liability insurance and some of the issues that arise. In this case, a senior manager engaged in conduct that was adjudged to be deceptive and misleading when he facilitated the processing of transactions which had characteristics of money laundering, in direct contravention with the DFSA administered rules. Through his actions, he unjustifiably benefited from enhanced bonuses and remuneration. The DFSA found him guilty of misconduct, leading to the imposition of fines and sanctions.

Subject to the wording of a policy, this situation would be notifiable under a D&O policy, potentially leading to a claim as the senior manager is likely to be classified as an “Insured Person” under their company’s D&O policy. Both the company and the senior manager could seek indemnity for the costs incurred during the course of the investigation, underscoring the importance of D&O liability insurance. Equally, in the ADGM, the FRSA has increased regulatory fines against shareholders and directors for operating and conducting regulated financial activities in and from the AGDM in absence of a license from the regulator. This conduct is contrary to the Financial Services and Markets Regulations 2015.

However, whilst having a policy in place is of paramount importance, the decisions by the DFSA and FRSA also demonstrate the need for both insurers and insureds to understand the precise cover under a policy’s terms and conditions.

Early engagement with the Authorities is essential and could lead to mitigation. This therefore demonstrates both the importance of having the D&O policy and the early notification of claims and investigations, which will allow insurers potentially to instruct lawyers to assist with, for example, early interviews with the Regulators. The earlier such assistance is sought, the better. There is therefore an onus upon those seeking to rely on D&O policies to know the terms of those policies and also on brokers to advise their insured clients when assistance under the policy might be available.

While D&O policies typically cover defence costs, awards, and settlements, they may not always cover (depending on jurisdiction) regulatory penalties leaving those prosecuted having to pick up these costs. Also, if deliberate or reckless misconduct is expressly excluded (usually subject to a final adjudication provision), any advanced defence costs might need to be repaid back to the insurer if misconduct is later determined to have been deliberate or reckless.

These issues highlight the need for comprehensive D&O liability insurance and a clear understanding of the extent of coverage in terms of misconduct-related exclusions, the costs of regulatory investigations and any fines and penalties levied.