This article is part of the FERMA/AIRMIC joint Brexit Newsletter which is designed to give risk professionals unique insight into Brexit related risks and mitigation strategies.
Insurers may refuse claims if Brexit-related risks are not disclosed, leaving businesses exposed to a “reputational double whammy”, warns Bruce Hepburn, CEO of Mactavish.
Failure to prepare for Brexit leaves UK company directors legally exposed
Brexit fatigue may have set in months ago for most people but as we edge towards a resolution, the fact remains that Brexit has profound implications for the UK as a whole and the UK insurance market in particular.
Take the directors of virtually every listed UK company. They face major liability risks for failing to prepare adequately for Brexit, especially if there is a ‘no deal’ outcome.
Our research indicates that UK directors have overlooked new liabilities. This could leave them exposed personally to legal action because of traditional limitations applied to “Directors’ and Officers’” (D&O) insurance cover.
Moreover, Mactavish believes that if preparations compare badly with those of their peers, this will give rise to a glut of new D&O actions against board members.
Years of uncertainty
Looking at the longer term, the regulatory disruption caused by Brexit will leave large swathes of uncertainty for many years as to the details of new regimes applying on a sector by sector basis. This will increase the risk of unanticipated regulatory action or censure – a key area of D&O insurance cover.
Unless a company’s D&O policy has been specifically reviewed and negotiated, it is unlikely to be reliable because there will likely be far too many exclusions to cover and ‘outs’ for insurers, and as the market hardens more such arguments will be taken by insurers.
D&O policy coverage is notoriously complex and bound up in a labyrinth of policy definitions, triggers and cost categories, and policyholders should expect claims to be scrutinised carefully and negotiated aggressively if they spike. Common policy limitations which could affect a Brexit preparation claim include:
- Exclusions for “Professional Activities” restricting cover for all claims relating to operational management of the business;
- Limited cover for response costs, especially early stage mitigation/PR;
- Restrictions to the individuals covered by the D&O policy.
Have you disclosed your Brexit risks?
Along with liability risks for directors, UK listed and private companies need to ensure their Brexit plans are comprehensive and clearly documented as they may need them to defend themselves against lawsuits brought by disgruntled investors, as well as to ensure their insurance remains valid.
The Insurance Act 2015 introduced legislation applying to all commercial insurance policies explicitly requiring boards to properly investigate their risks and disclose them to insurers. Failure to investigate risks properly may lead to lawsuits from customers, suppliers, shareholders or even members of the public.
Mactavish believes that if boards are seeking to rely on their D&O insurance to defend against allegations of poor preparation for Brexit, they face a separate but equivalent risk that insurers refuse to pay such claims on the grounds that they did not properly investigate and disclose their Brexit-related risks. This would be a reputational double whammy for boards.
Brexit represents a major market event that requires a near-forensic appraisal of current commercial insurance contracts and appropriate cover of risks. Mactavish believes that not enough potentially liable individuals are aware of this new risk environment.
Read related articles from the FERMA-Airmic Brexit newsletter: