Directors & Officers Liability: it has nothing to do with me

Read the article published on 8 February 2011 (in French)


OVERVIEW


Directors & Officers make important decisions: its their job, but the decisions can lead to a lawsuit.  There are many sources:

• based on what was decided (or what was not decided or followed-up)
• based on what was said (or should have been said)
• based on a sales or investment policy ... (or because of the non-execution of an existing policy)

TRADITIONAL PROTECTIONS

Directors & Officers tend to reassure themselves that they have prepared everything needed in case of a lawsuit.  However, the traditional protections do not respond to this problem:

• the work contract… the company cannot (in France) legally pay defense costs for the director & officer
• the articles of incorporation or the legal form ... the limitation of the (financial) liabilities as a partner or shareholder
• the Liability, Errors & Omissions or Professional Indemnity insurance policies ... do not cover this type of claim or event.

RESUME

YES: The law says that the Directors & Officers are personally liable for the decisions made in their capacity as Directors & Officers.
NO: The law did not provide either for an exonoration nor for a limitation of this liability.



SOME LEGAL REFERENCES

• The New Commercial Code (Nouveau Code de Commerce, article L 225-251): Directors & Officers are personally and solidairement liable (formerly the law of 24 juillet 1966) for the consequences of infractions of the law, violations of the articles of incorporation, as well as all wrongful acts
• The bankpucty law (loi de sauvegarde des entreprises du 26 juillet 2005):  Directors & Officers must pay for the net debts generated (=ex article L- 624.3 – nouveau L-651.2 et article L-652.1 concerning the obligation to social-related obligations/debts)
• The Civil Code (articles 1382 – 1383 - 1992)
• The 2001 new economic rules (La loi NRE du 15 mai 2001)...power of shareholders
• The 2003 financial security law (La loi du 1er août 2003 dite « de sécurité financière »)

It is worthy to note that a "wrongful act" (« faute de gestion »):

• is not defined by law
• is appreciated by the judge
• evolves with case law
• can actually be a simly error, omission, imprudence, inexact declaration or negligence

to which the case law theory of the unseparable wrongful act (« faute détachable », arrêt Seusse du 20.05.2003) has just added a twist.


CLAIMANTS


Any natural person or entity that pretends to have suffered a prejudice because of a decision made by a Director & Officer, can exercise their rights as a claimant by suing the Director(s) & Officer(s) in that capacity (i.e. shareholders, employees, governement, debtors, competitors, clients, suppliers, …)




WHO CAN BE SUED

• the directors are always sought as a target:

–        directors (including those representing other company and/or stakeholders)

–        the CEO and other top officers

as much as

• the managers/shadow directors :

–    they are defined by case law as natural persons who are not directors, but perform positive management acts, having wide and autonomous powers

–    it is the freedom and independence of the power and not the job's title, that determines the quality of this type of person

Kidnapping: what could never happen

Read the article published on 10 January 2011 (in French)

Kidnapping has always been surrounded by a certain aura, reflected by Holywood movies: a dramatic situation where it is difficult to remain emotionless, and psychologically, an ordeal that leaves traces ... for life.

However, it continues to grow and is no longer limited only to child-napping, transforming itself into an international business.  Faced with increasing risks, Kidnap & Ransom insurance (called "K&R") is proliferating.  Never say never. 

This type of event is rarely publicized, so statistics on the number of kidnapings are hard to estimate.  According to Control Risks, the "most dangerous" countries in 2009 were Venezuela, Nigeria and Mexico, leaving Colombia far behind. Europe has also had its cases, notably with the Greek shipper Pericles Panagopoulos, who was kidnapped and released in January 2009, for which the ransom is purported to have reached many millions of Euros.

(Kidnappings in 2009 by regional geographic zone according to Control Risks)

WHAT TYPES OF KIDNAPPING?

Kidnappings with political motivation are those that grab the headlines, such as that of Daniel Perl in June 2002 (Karachi, Pakistan) while he was waiting for a meeting with Islamic extremists linked to Al-Quaïda.  There are other notable examples, such as the hostage taking at the Japanese embassy in 1996 (Lima, Peru) ending in a police raid, or the theater where gas was used to neutralize the aggressors and give up the victims in 2002 (Moscow, Russia) or the assault by police on the school in 2004 (North Odessa, Russia).  All were committed to exert pressure and obtain political reparation, but they were not associated with a ransom demand ("political detention"), a risk on the rise in recent years.  However, the most common form of kidnapping is the one practices in Columbia and Mexico, where the main goal remains obtaining large sums of money.  Even in Columbia, where kidnappers are traditionally so-called Marxist rebels, their well-oiled organization does not hide their ultimate objective: running away with the maximum amount of dollars from a kidnapping.

For companies with foreign subsidiaries, the risk to people is aimed towards either expatriates (alongside local employees), or travelling managers: the favorite targets of kidnap criminals.


LOSS PREVENTION

However, more and more security precautions – a basic rule in risk management – could change the current trend.  For example, Par example, using a bodyguard in difficult areas or changing daily routes. You do not have to be a celebrity

According to Clayton Consultants, more than 85% of kidnappings occur on a weekday on the journey between work and home.  Most of the targets know this and yet fait to take the necessary measures to reduce the risk.  They drive big cars, wear fashionable clothes and take the same route to work every day.  Rather than being unpredictable, they play right into the hands of the kidnappers.The best loss prevention strategy is to make sure you have a good “pre-incident” security advisory services company.  The can follow the how risk conditions evolve in a specific world region and can help put together crisis management strategies.  Furthermore, they can provide training to employees who could become targets of kidnapping attempts.  It can be simple common sense attitudes, like remaining alert or noticing cars not usually parked in the street, at your home or office.  The cost of these services can sometimes be used to negotiate a reduction in the insurance premium.  It should also be noted that certain insurers propose web access to the geopolitical situation in almost every corner of the globe. rich or other grand characteristic to become a target: any Western employee is a source of value for a Third-world kidnapper.

IS INSURANCE ILLEGAL?

Often perceived as being at the boarder of what is insurable (alongside drunken driving and punitive damages, …), article 6 of the French civil code says "You cannot go against … public order laws or to the detriment of others" However, contrary to popular opinion: no French law ever forbade K&R insurance.

The major bias resides in the generalized belief that K&R insurance encourages the kidnappers. Because of the non-disclosure of its existence – explained previously – and the fact that statistically less than 1% of all kidnappings are insured, this argument must be set aside. Furthermore, insurance plays its role fully by mitigating risk in making expert consultants available to respond to such a situation and who encourage preventive measures.

The French authorities demand that insurers respect the local laws (and those of their home country), in order to give them the right to practice K&R insurance in France, which has only been done for a handfull of insurers to date.

Tacit renewal: the two sides of the principal

Read the article published on 17 December 2010 (in French)

WHAT IS IT ALL ABOUT?

When you take out an insurance policy, your risk continues over time, therefore, the policy must have a certain continuity too, usually on an annual basis.  This clause is called tacit renewal, because the contract renews "automatically", without either of the two parties being obliged to act.  This renewal happens at a pre-determined date, calculated by deducting the "notice period" (most often expressed in number of months) from the anniversary date of the contract.

THE INSURANCE CODE (FRANCE)

Despite this perpetual system, the French regulatory texts have allowed for a certain number of cases where you can interrupt your policy's mechanism during the insurance period:

• if one of the following events occurs, a three month notice period applies (article L 113-16 du code des assurances) :

•             change of registered address;

•             change of marital status or situation;

•             change of profession;

•             retirement or ceasing your activity.

• if the insurer cancels another policy of the insured after a claim (article R 113-10 du code des assurances);
• by the liquidator or authorized debtor, un case of bankruptcy, within the three months following the court;
• by the inheritor, the acquirer or the insurer if the insured transfers the ownership of the assets covered by the insurance policy (article L 121-10 du code des assurances);
• immediately :

•             if the insurer looses its license (article L 326-12 du code des assurances) ;

•             if the assets covered by the insurance are requisitionned (article L 160-6 du code des assurances) ;

•             if the assets covered under the insurance policy are lost, be it by insured event or not (article L 121-9 du code des assurances).

The insurer also has rights, for instance, in case of increase of risk and/or in case of false declaration/omission.

The "loi Châtel" has since modified insurer obligation, because not only it obliges them to notify the insureds (natural persons) of the possibility to not renew not more than 3 months before and at the latest 15 days before the last day available to cancel.  If the insurer does not respect this, you have a additional 20 days after having received the annual bill, however, if it is not received before the anniversary date, you can cancel your contract at any time, without penalty.

INSURED ADVANTAGES

• Not having to think about renewing the contract
• Not having to renegotiate the contract (submit insurance proposal forms)
• Being able to budget from year to year
• If the insurer wants to cancel or significantly modify the terms and conditions, the insurer is obliged to communicate its position in advance of the renewal date, which leaves time for the insured to find anther solution.

INSURER ADVANTAGES

• Not having to think about renewing the contract
• Not having to administratively or technically "manage" the renewal
• Being able to budget from year to year, allowing the constitution of a client "portfolio"
• If the insured wants to cancel or significantly modify the terms and conditions, in the insured is obliged to communicate its position in advance of the renewal date, which leaves time for the insurer to react. 

It is worthy to note that the advantages for both sides are of similar origins.

CONCLUSION

Tacit renewal has a reason for existing that applies to all parties, you must just know for what it is used and how it functions, to better be prepared for the multitude of situations of daily life that could happen, necessitating a desire to renegotiate the insurance policy.

 if your risk decreases and the insurer refused to reduce the premium accordingly (article L 113-4 du code des assurances);