Will insurers foot the corporate killing bill? Nick Stanbury comments.
The difficulty of proving manslaughter against a director or officer and his or her company has led to widespread calls for a change in the law. It is likely that the proposed new statutory offence of corporate killing will be easier to prove. It may only be necessary to show that the quality of a company's management fell far below that which would be reasonably expected and that it solely or partially caused someone's death - effectively a case of death by mismanagement. The result could be more convictions of companies and management.
Corporate killing will not only result in actions for criminal conviction and punishment. A deceased's dependants may bring a civil action for damages under the Fatal Accidents Act 1976 . If the accident also injured other people or damaged property, further claims are inevitable.
Anything other than a minor accident may well have a much wider indirect effect on a company's business. It may cause operational and management disruption and loss of public confidence. Any of these could adversely affect profitability and share price, perhaps permanently.
In such circumstances, the company's shareholders may wish to consider management's liability for failing to protect and preserve the value of their investment. The company itself may wish to sue those of its directors who have been the architects of the company's fall from grace.
The total financial loss flowing from an accident could include:
Who pays?
Most companies recognise these potential exposures and arrange suitable liability cover to indemnify them for most or all of such loss. Some larger and wealthier companies self-insure at least part of their anticipated liability, creating a financial reserve for this, or arrange their primary cover through a captive insurer. However, the residual potential liability, which could be catastrophic, will probably be insured in the commercial insurance market.
As far as corporate killing is concerned, you should ensure that any insurance you buy will properly cover possible losses, bearing in mind the identity of those who may be legally liable. It is not possible to insure a fine imposed for a criminal offence, as this is intended to be borne by the perpetrator as a punishment, without any relief. The same applies to compensation for any other punishment upon conviction, such as imprisonment for manslaughter, the more common sentence. However, even if a conviction results, defence costs are insurable.
What type of insurance?
Conventional public liability insurance covers damages for death, bodily injury and property damage, unless relating to an employee's death or injury, when statutorily required employers liability insurance applies. These covers include the costs of defending prosecutions for manslaughter or other accident-related offences and, usually, representation at any relevant inquiries.
Directors and officers liability insurance (D&O) normally addresses directors' personal civil liability for financial loss arising indirectly from the accident (including their representation at any inquiry). It excludes the direct injury and damage losses covered by public and employers liability insurances.
Most D&O policies are much less restrictive than they were a few years ago. However, you need to study the terms carefully to ensure there are no pitfalls. For example, if the policy excludes losses consequent on physical injury or damage, or any action brought by the company itself or by aggrieved shareholders, the insurer is likely to deny indemnity for any post-accident "loss of value" action.
If proposed legal reforms go ahead, recognising the wider concept of corporate killing, actions against companies and their directors will probably increase. Liability claims will become more frequent and severe. While the reforms are unlikely to result in any new form of liability or the need for fundamentally different cover, companies should ensure that they - and their directors and officers - have adequate and suitable protection.
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Nick Stanbury is an insurance consultant and writer.
