By Simon Fisher
In the Middle East, two high-profile legal cases recently caught the attention of executives and investors. The former management teams of companies in the UAE and Oman found themselves entangled in lawsuits that resulted in financial damages totalling nearly $200 million.Once pillars of their respective markets, these companies sued their former executives, seeking amends for alleged misconduct, ranging from corporate governance violations to mismanagement and financial misreporting.While the cases themselves are noteworthy, it is the broader implications of these events that deserve scrutiny. Such cases beg the question: Who bears the true cost of mismanagement? Is it the executives, whose personal assets and reputations are at risk?Or does the business ultimately shoulder the financial burden, particularly when the executives do not have the means to meet their liability?Executives can often be named personally as part of legal action. But despite personal liability, the company may ultimately bear the financial risk. In these volatile environments, the necessity of protecting key personnel—and, by extension, the company itself—becomes increasingly clear.Liability exposure: The growing risk for directors and officersIt is an uncomfortable truth that directors and officers face growing liability exposure when undertaking their corporate responsibilities, specifically when their decisions have the potential to lead to losses, shareholder dissatisfaction, or violations of statutory obligations.The legal systems hold directors personally liable for negligent actions (or failing to act) that result in financial harm to shareholders, employees, and other stakeholders. This level of personal exposure is particularly acute when regulatory authorities are involved, as we have seen in recent cases.Further, the law prohibits their employer from voiding their personal liability, so there can be no protection by way of indemnification paid by the company.Consider the ongoing criminal case in Oman, where a claim has been brought by the company against former management, for mismanagement and financial misrepresentation, resulting in a staggering OR50 million (roughly $130 million) claim.The financial repercussions are significant, but the broader implications for executive behaviour are just as critical. What happens when these individuals are held accountable, but the financial strain weighs heavily on the company?While directors face a legal burden which can take several years to play out, the company’s balance-sheet has already incurred the loss. The potential for a conflict between personal accountability and corporate responsibility is a real concern.For companies in the Middle East, where legal frameworks are becoming increasingly stringent, the risk of financial instability—due to mismanagement claims or regulatory fines—can bring down even the most robust organizations.Protecting the companyIn such a high-risk environment, where executives have a duty to act in the best interest of the company, whilst concurrently accepting significant personal liability, Directors & Officers (D&O) insurance plays an indispensable role.At its core, D&O insurance is designed to protect individuals from personal financial stress associated with defending legal action brought against them in relation to their professional conduct. This extends to cover any resulting legal liability for judgements, fines, penalties and settlements.Indirectly, D&O insurance also safeguards the company itself. In the event it is the company that has suffered as a result of the actions of its management, the existence of the policy will provide comfort to the company and its shareholders that the management have access to insurance to meet the liability they owe to the company.When the final judgement is $130 million, this may determine whether the company receives anything close to what it has been awarded.Critical role of policy provisionsAs board members, executives and employees become more aware of the risks they face, understanding the finer details of D&O insurance policies is paramount. Key provisions such as ‘insured vs. insured’ exclusions, misconduct clauses, major shareholder exclusions and authorization requirements can significantly affect the extent of coverage.The ‘insured vs. insured’ exclusion can limit coverage when a claim is brought by one insured party (such as the company itself) against another insured party (the executives). This provision is critical, as it can significantly alter the way a claim is handled and can lead to situations where neither the company nor the executives are fully protected.Similarly, policies may contain clauses that exclude coverage for intentional misconduct, making it important for boards to clearly define and understand what constitutes ‘mismanagement’ or ‘misconduct’ under their policy. Moreover, authorization clauses determine when, how and if an ‘insured person’ is allowed by their employer to make use of the policy. Perhaps, the most pressing issue for businesses is the recognition that the lines between personal accountability and corporate responsibility are becoming increasingly blurred..The writer is CEO of ACE Gallagher Insurance Brokers.