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Directors and officers may face more shareholder suits if recommendations of the government's law reform body are adopted.
In its first set of proposals for reforming corporate law, the Law Commission last month published its final report on Changes to Shareholder Remedies, recommending changes in law and court procedure to make it easier for small shareholders to sue company directors.
The move, however, is unlikely to have any impact on a still-softening D&O liability insurance market, observers note.
Among the recommendations in the Law Commission's report is that the law should be modernized to expand grounds for derivative actions by shareholders. In a derivative action, a shareholder seeks to enforce a right that the company chooses not to exercise. This may include a claim against a director, for example. The commission proposes removing a restriction in the law so that shareholders may bring these derivative actions if the directors have been negligent but have not committed fraud.
"The shareholder's remedy to enforce his company's claims against directors is the means by which, in the last resort, corporate governance is enforced," Dame Mary Arden, chairwoman of the Law Commission, a government-funded legal review body, wrote in a recent article.
However, while making it easier for shareholders to bring legal action against company directors, the Law Commission also proposes that a company's article of association contains a basic dispute-resolution mechanism, so as to encourage shareholders in the future to have pre-agreed routes to resolve disputes without litigation.
Although insurance executives agree the proposals would result in more litigation against directors, they do not anticipate any immediate changes in rates or capacity in a highly competitive D&O market.
If the law is changed, "we will see an increase in the number of claims" against directors, but for the foreseeable future, the market is likely to remain soft, said Martin Beagley, a director of Willis Corroon Professional Risks in London.
Other legal developments, such as the increasing use of conditional, or contingency, fees to fight legal actions; the proposed introduction of a new corporate manslaughter charge; and various European Commission proposed legislation affecting directors' responsibilities, are increasing directors' liabilities without impacting the market, noted Mr. Beagley.
"There is no sign of the market hardening," he said, predicting further rate reductions of 5% to 10% for next-year renewals.
"It is good news for policyholders, but we wonder when it's ever going to end," he said, noting there is "increasing capacity particularly at Lloyd's" of London.
Dean Horton, a senior underwriter for executive protection at Chubb Insurance Co. in London, also described the market as soft-"softer than the softest pillow, with no sign of hardening at all."
Not only are rates under pressure, but coverage wordings also are being constantly broadened, said Mr. Horton, adding that Chubb will bring out a new, broadened policy in the next few months. Mr. Horton would not comment on changes in the policy wording but hinted it would offer additional coverage.
Julian Enoizi, Chubb's counsel for Europe, said the proposed legislation is designed to "encourage a greater level of professionalism" among company directors.
It is currently "very difficult" for a shareholder to bring a derivative action against a director, and the proposed changes, together with allowing action for negligence, will mean "directors are going to be more open to actions," he said.
The proposals will "mean more litigation, but there will still be tight controls so the floodgates will not open," he said.