Directors & officers insurance in sports: A guide to risk protection in an evolving industry – Written by Graham Denny

Written by Graham Denny

18th December, 2024 – In today’s complex sports industry, directors and officers face unprecedented scrutiny of their decision-making and conduct. This article provides a practical guide to Directors’ and Officers’ (D&O) insurance, examining how it protects both companies and their leadership from the risks inherent in sports sector governance, and provides guidance for acquiring and claiming under such policies.

Article overview:

KeypointstoknowaboutD&Oinsurance

This article follows on from the author’s general introductory article that explains the importance of insurance to the business of sport ^[1]and the discussions that took place at the Global Summit in October.

Introduction: the growing complexity and oversight of the sports sector

D&O insurance is important, and it is often insisted upon as one of the requirements for a potential senior candidate joining a company, as such it can help in the recruitment process. For those directors and officers who understand the value of D&O insurance, it is an essential insurance purchase. Whilst shareholders own the business, it is the board of directors who drive the business forward, making decisions for the business. They are supported of course by employees and officers of the business.

In our previous article ^[2], which focussed on the importance of insurance, we discussed the development of the sports sector generally. With new opportunities come new risks that need to be managed. The development of the sports sector has led, for example, to clubs developing media companies (with their own television channels and social media content); combining multi sports under one brand (but likely separate group companies); the development of esports; the development from a club focussed on sport to essentially events and hospitality companies, through which clubs seek to diversify and increase their revenue streams.

Different sports have different regulators who impose rules and obligations upon clubs and their directors and officers. For example, directors (and other officers) of football clubs must pass the “fitand proper person” test (now called the Owners’and Directors Test ^[3]) required by the Premier League and the English Football League, the National

League and the Scottish Premier League. There is also the implementation of the Football Governance Bill ^[4], with the introduction of a new regulator, part of whose remit will be to focus on directors’ performance, implement a club licensing regime to help a more consistent approach to how clubs are run and to monitor clubs finances.

The focus on directors’ performance and the financial affairs of clubs is not limited just to football. In rugby union, the England Rugby Football Union have their governance rules, which includes Regulation 4 ^[5], focussing on the authority of “Relevant Persons” and the rugby clubs and the “Directors’ Test”, as well as the club and personal declarations required. In all sporting businesses directors and officers have obligations on them and responsibilities which, in the case of regulated activities, will be overseen by the relevant regulator. However, in addition, and more broadly through the operation of law, duties and obligations are placed upon directors and the management of businesses. The effect of the growth and development of the sports sector has seen the growth of multi-dimensional, complex business structures, and such businesses are potentially subject to increasing regulation and risk.

Insurance is an important component of a risk management strategy of a business. However, before you can focus on a risk management strategy to manage the risks of a business, you first need to understand what those risks are. This is not necessarily straightforward, and requires an in-depth knowledge of the business, the regulations within which it must operate, how it operates, its procedures and also its business strategy moving forward. Directors and officers must also be fully aware of their legal and regulatory obligations.

D&O insurance is a liability policy, it provides insurance cover for a company and its management, protecting them from claims arising from directors and officers decisions and actions.

The specific legal risks facing directors and officers Claims against directors

The risks directors and officers face are on the one hand claims for wrongful acts, which (usually) result from breaches of their duties owed to third parties or the company. Alternatively, a director or officer might face regulatory investigations and possibly disciplinary proceedings.

It would be unusual for a director or officer to be on the receiving end of legal claims against them personally brought by third parties. This is because usually when acting in their role as a director or officer, they are acting on behalf of the company / business and therefore will not be personally liable for their conduct unless they step outside of their actual or ostensible authority. An example of a claim that might be brought by third parties would be in respect of a personal representation made by a director and which was relied upon by the receiving party which turned out to be incorrect. Other situations might include misrepresentations by a director in a prospectus issued during fundraising or initial public offering. An example of where a director might step outside of their actual or ostensible authority would be if they were involved in fraudulent acts.

However, claims can also be brought against a director or officer by the company for whom they work (or by shareholders) due to their actions and decision-making being considered to be a breach of their duties owed to the company. In this respect a D&O policy not only supports the director or officer by paying for his legal defence costs but would also pay a liability found to be owed to the company. So, whilst D&O insurance is there to primarily support directors and officers, it also provides the company with an assurance that a loss caused by that director or officer can be paid to the company (so long as the acts causing the loss are not dishonest or fraudulent).

Directors’ duties Fiduciary duties

English Law recognises the elevated authority and responsibility of directors when compared to employees and imposes upon directors fiduciary duties that they owe to the company^[6]. Company directors are considered to be entrusted with the assets of the company which are under their control^[7]and that explains the reason why they are considered to owe fiduciary duties to the company.

The key component of a fiduciary duty is loyalty and fidelity. A director must act in the best interests of the company^[8]and not put their personal interests or those of another ahead of the interests of the company.

These duties are encapsulated in the Companies Act 2006, which requires directors to

To act within their powers^[9];
To promote the success of the company^[10];
To exercise independent judgement^[11];
To exercise reasonable care, skill and diligence^[12];
Avoid conflicts of interest^[13];
Not to accept benefits from a third-party^[14]; and
To declare an interest in a proposed transaction or arrangement^[15].

Directors can also face claims from shareholders, for example derivative claims or where they have acted in such a way that might have prejudiced a minority shareholder^[16].

In addition, the way in which directors can operate on behalf of the company and their decision making is prescribed by the internal constitutional documents of the company, such as the Articles of Association, breaches of which could support a claim for breaches of the directors’ duties set out above.

Regulatory investigations

As explained above and as is frequently covered in the media, the regulation of businesses and imposition of obligations and duties upon directors and management is ever increasing. In sport these can be multi-layered, in that there are not only the regulations that would affect any business in the UK, but the additional regulation specific to the sport in question.

The kinds of areas where directors could face scrutiny include:

breaches of the Financial Fair Play rules (or what are now referred to as the Profit and Sustainability Rules in football);
employment related laws (allegations of wrongful termination of employment contracts harassment, bullying allegations);
safeguarding – for example not having in place proper policies and oversight to ensure the safety of staff, volunteers and players;
breaches of taxation laws;
bribery and corruption;
breaches of health and safety legislation; and
corporate manslaughter.

In addition, the Financial Reporting Council ^[17](FRC), is an independent regulator in the UK and Ireland that is responsible for regulating auditors, accountants and actuaries. It sets the UK’s Corporate Governance and Stewardship Codes and regulates auditors, accountants and actuaries – including those who are in-house (for example within clubs and companies in the sports sector). The FRC can and does instigate disciplinary proceedings.

Duties upon officers

Officers of a business are the key management executives who carry out the daily work of the business. They are appointed by and report to the board of directors and oversee specific business functions (usually based upon their background and expertise). The difference between a director and an officer is that a director is appointed by the shareholders to oversee the management of the company whereas officers are appointed by the directors to manage the day-to-day activities of the company.

The roles and departments for which an officer might be appointed are broad. These include: the Chief Executive Officer; Chief Financial Officer; Chief Operating Officer;

Chief Marketing Officer; Chief Technology Officer; General Counsel / Head of Legal; Company Secretary; Human Resources Director; Chief Administrative Officer; Chief Compliance Officer; Welfare Officer; Treasurer; Sporting Director.

Whilst the duties set out in the Companies Act 2006 might not apply to officers, due to their elevated levels of responsibility associated with the roles that they fulfil, officers will usually owe fiduciary duties to the company for whom they are an officer. Furthermore, their appointment to a particular role is usually because they have a particular expertise – for example a Chief Financial Officer is likely to have finance or accounting; a General Counsel is likely to be a lawyer, both of whom are likely to have professional regulatory obligations.

The above is a quick run through of examples of the responsibilities, obligations and duties upon both directors and officers. A breach of such obligations can lead to legal claims and investigations into the actions of a director or officer. It is not uncommon for a director to insist as part of their remuneration package that the company takes out a certain level and breadth of D&O insurance to ensure they have access to paid legal advice if facing or becoming involved in a legal claim against them, or regulatory or disciplinary investigations.

How does D&O insurance work?

D&O insurance provides insurance cover for a company and its management, protecting them from claims and providing the funds to support them in regulatory investigations and disciplinary proceedings. But what does this actually mean?

The focus of the insurance is to meet the cost of providing the director or officer with legal advice and representation in relation to defending claims against that director / officer or where the director or officer becomes embroiled in regulatory investigations (and potential disciplinary action) which are focussed on that director or officer’s actions. In circumstances where damages awards are made against that director or officer the insurance policy (if the policy’s limits allow) also indemnifies the amount of damages ordered to be paid by the director or officer.

The structure of a D&O insurance policy depends upon which of the coverages is required.

Traditionally, a D&O policy was (and is) structured as a Side A and Side B coverage.

Side A is the coverage which responds to claims where the director or officer is not indemnified by the company.
Side B coverage provides insurance to indemnify the company in circumstances where the company is permitted to indemnify the director or officer and seeks reimbursement for standing behind its directors and officers by paying their legal fees. Side B coverage would usually incur an excess (i.e. for the indemnification of the company), whereas under Side A cover, (the direct indemnification of the director i.e. where the company cannot do so) there is no excess to be paid.

Under section 234 of the Companies Act 2006, companies are permitted to indemnify directors against third party claims and by section 233 are permitted to purchase insurance for directors against liability.

However, whilst companies are only allowed to indemnify directors in relation to third party claims, section 232 of the Companies Act 2006 prohibits companies from indemnifying directors for liability related to negligence, default, breach of duty or breach of trust (i.e. essentially where the company is bringing the claim against directors). It is for that reason companies cannot indemnify directors for claims against them which are brought by the company and / or directors – which is the reason Side A coverage under a D&O policy exists.

There is also a Side C cover which can be purchased by Public Companies against the loss that is incurred as a result of a claim in relation to securities of the company. However, this article focusses on Side A and Side B cover on the basis that such cover is more relevant to the sports sector.

Key points to know about D&O insurance

There are a number of issues worth bearing in mind when it comes to D&O insurance coverage:

The definition and scope of “Wrongful Acts” coverage

D&O policies respond to claims focussed on directors’ or officers’ actions. A term often used in a D&O policy to define the acts covered by the policy is “Wrongful Act(s)”, which is a definition set out in the policy wording. An example of a definition of Wrongful Act in a D&O policy is “Any actual or alleged libel, slander, error, misstatement, misleading statement, misrepresentation, omission, neglect, breach of duty, breach of warranty of authority or other act attempted or committed or proposed by You when acting or serving in any capacity included in the definition of You below”. The definition of a Wrongful Act, and therefore what is covered by a D&O policy, is broad. Importantly, the acts in question that are covered are acts which are considered to be part of that director or officer’s operational duties in relation to their management of the business. This is an important, so if for example the head of legal / General Counsel was to provide negligent advice, or where a board was negligent in their oversight of ensuring that the company had policies and procedures in place that complied with legal requirements and obligations on the company, for example health and safety or perhaps a board’s failure to correctly manage the club to ensure they were not breaching certain regulatory obligations, for example the salary caps in rugby union. Available coverage extensions and supplementary protections

When purchasing a D&O policy it is important to consider what cover is required. For example, D&O policies can be extended to provide reimbursement for mitigation (legal) costs incurred in trying to deal with a potential issue before it turns into a claim. Other extensions of cover include: legal costs in relation to extradition proceedings; legal costs incurred in relation to corporate manslaughter proceedings; and environmental claims cover. D&O policies can also provide public relations cover which provides insurance cover for the costs of a public relations consultancy required in the context of a covered claim.

Scope of personnel coverage and protected individuals

D&O policies not only provide insurance cover for current directors and officers, but usually extend to provide insurance cover for former directors and officers, thereby providing those individuals with the comfort of such insurance should they be the subject of claims brought after their tenure at the company has finished. Cover can be extended to provide insurance cover for non-executive directors.

Dishonesty and fraud exclusion parameters

D&O policies do not provide cover for acts of dishonesty or fraud. Although the usual position is that legal defence costs are indemnified by insurers until there has been an admission (by the director or officer) of such fraud or dishonesty or where there is a formal determination by a court or tribunal of such dishonest or fraudulent conduct.

Treatment of fines and penalties

It is common for policies to provide for the indemnification of fines and penalties so long that such indemnification is permitted by law, in practice it is unlikely that fines and penalties will be reimbursed by insurers because, whilst there are academic arguments that certain fines and penalties are indemnifiable, for reasons of public policy (and case law) the situations in which they would be indemnifiable are very rare (and potentially do not exist).

Understanding aggregate policy limits

The limit of insurance provided by D&O insurance policies is usually on the basis of an “aggregate limit”. What this means in practice is that within a policy year, any indemnification under the policy reduces the limit of cover available for the rest of the policy period. It is therefore important to consider the limit of cover you require. For example, circumstances might arise where multiple directors or officers require separate representation in the context of a regulatory investigation(s) which can erode the aggregate limit quickly.

Official investigations coverage triggers

When it comes to the insurance cover offered by regulatory investigations, it is important to understand what the trigger points for such cover actually are. A D&O policy is likely to exclude what might be considered to be routine investigations, audits and hearings. Also, such cover is often sub-limited (i.e the insurance offered is a lesser limit as compared to the policy aggregate limit).

Insured versus insured exclusion considerations

This exclusion is intended to exclude from the insurance cover the indemnification of claims brought against directors and officers by the company. It is unusual to find such an exclusion in a D&O policy purchased by a company which is based in the UK. Usually, such exclusions are associated with US companies as a result of the litigious nature of that jurisdiction. As a result, policies covering directors and officers of UK companies do not usually have such exclusions. If you have a D&O policy

covering directors and officers of group companies where one company is incorporated in the US and another is incorporated in the UK, then you should be very careful to check that this exclusion is limited such that it does not apply to the UK company. Policyholder cooperation requirements

Unsurprisingly, the policies require the directors or officers who are the subject of claims or investigations to co-operate with the insurers and the lawyers appointed to represent the directors or officers. A failure to co-operate often entitles the insurers to decline the insurance claim.

Claims notification protocol and timing requirements

There are usually requirements to notify circumstances as well as claims. There also can be restrictions on the amount of time afforded to make such a notification and you should ensure you are aware of such because a late notification can permit insurers to decline the insurance claim. Also of import is the scope of the notification. Care does need to be taken when drafting the notification to insurers to ensure it is all encompassing as to the circumstances and potential claims that might arise from those circumstances. A failure to correctly notify can lead to issues, particularly in circumstances where a claim or investigation does not manifest until after the policy period expires, as it is common to find in policies exclusions for prior known circumstances (which may or may not have been notified to the expiring insurance policy).

Internal communication and contact procedures

This is an important practical consideration. We have come across situations where the directors or officers might not know that a D&O policy exists or who they should contact where they have a concern that might need to be notified to a policy. This potentially increases the risks of failing to notify circumstances or claims in time and therefore elevating the chances of a denial of the insurance claim under the policy. Similarly, it is important to educate directors and officers of the types of scenarios and circumstances in which they need to consider making notifications to insurers. What might constitute a circumstance is broad, it is not limited to claims but includes scenarios where the director or officer is aware of something that they did or omitted to do which might lead to a claim. As such circumstances can exist even where there is no making of a verbal or written allegation.

Comment

Like all insurance policies, D&O insurance is an extremely useful part of the risk management toolkit of a business. However, you need to understand their scope, conditions and exclusions as well as what the obligations are to ensure you do not lose the useful cover that they provide.

The guidance above provides but a few important considerations when it comes to thinking about D&O insurance. Insurance policy wordings do differ however, and so it is always important to understand what cover is being purchased and to have your internal systems geared toward detecting circumstances at an early stage so that decisions can then be made in relation to whether a notification needs to be made.

In such a radically evolving industry sector, protecting directors and officers who are at the helm of companies and businesses is important. Moreover, D&O insurance is not there just for their support and financial protection, it is also there for the company’s protection.

This piece was written for and first published by LawInSport

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