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Why every director should dissect the details of liability insurance

29 Mar 2019

Overlooking the fine-print and particulars stipulated in Directors' Liability Insurance can be detrimental to company directors. The duties and liability of company directors were codified by the Companies Act of 2008, with The Act identifying three major principles, being: the standards to be expected from a director; the director's duty to separate his or her financial interests from those of the company; and the liability that faces directors and prescribed offices following a breach in the rules. Apart from being declared delinquent and prohibited from holding office, directors can also be held liable for any misconduct.

PJ Veldhuizen

Subject to The Memorandum of Incorporation of a company, the company may indemnify and/or alternatively pay for professional liability insurance for its directors. This liability insurance can be made available should the director be required to defend his or her conduct via costly legal routes. It may not be that a director is ultimately found guilty of unprofessional conduct and even if it is proven that the director is not liable as a result of his or her conduct, simply being put to the defence of such allegations is going to mean that your defence could play out in the High Court and this can be financially catastrophic for you.

The costs of commercial litigation of this nature can run into hundreds of thousands of Rands, which would normally be covered under a professional directors’ liability insurance policy.

Directors should go one step further and have their attorney or legal adviser scrutinise the policy.

The trick is - what is in the policy? Details of a policy should always be dissected and adjusted to suit each person’s situation. In the same manner that an insurance company will go to great lengths in providing a policy that protects them from high risk, the director should make certain that the policy is prepared with his or her best interest in mind.

An experienced attorney will have an eye for detail and could protect you from what you don’t know.