SMEs and D&O insurance: "Prest" for cover - DAC Beachcroft

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SMEs and D&O insurance: "Prest" for cover

Published On: 2 September 2014

The lack of D&O insurance amongst small and medium-sized businesses ("SMEs") continues to be a large potential growth area for insurers.

Whilst the popularity of D&O insurance has increased over recent years, particularly in connection with larger businesses, where the individuals making the decisions have realised the costs of a potential claim being made against them, SMEs do not appear to have a full appreciation of the dangers of not obtaining D&O cover.

Indeed, a recent survey found that only 23% of SMEs had D&O insurance in place – a decrease from 26% in the previous year. This downturn is troubling and does not necessarily match the SMEs' expanding exposures.

D&O insurance remains an important product for any size of business, with smaller businesses perhaps being more at risk than ever. It is often easier to commence legal proceedings against smaller businesses and those individuals standing behind them, rather than larger corporations where a number of individuals can be involved in the decision making process, making legal action more complicated.

The relatively recent decision of Prest v Petrodel Resources Limited and others [2013] is a good example of this. In this case the Supreme Court was asked to decide whether a number of properties owned by companies, of which Mr Prest was the controlling director and shareholder, should be transferred to Mrs Prest as part of a divorce settlement. Here it was accepted that Mr Prest had used the companies’ assets as his own without restriction. However, this was not deemed sufficient to show "impropriety" - the court was clear that the corporate veil could not be pierced. Nevertheless, it was held that, because Mr Prest (not the companies) had originally provided the funds to acquire the properties, the companies actually held the properties on bare trust for him. Accordingly, as the properties were beneficially owned by Mr Prest, an order could be made for the transfer of the properties to Mrs Prest.

Whilst the Supreme Court was at pains to reiterate that the corporate veil should only be pierced in extremely limited circumstances, it effectively allowed the corporate veil to be circumvented, producing an arguably similar result.

SMEs should pay attention to decisions such as Prest, which indicate that the corporate veil may be less protective towards them.

Even in circumstances where the corporate veil remains intact, with SMEs it will typically be easier for third parties to successfully sue company directors, on the basis that they have assumed responsibility together with the company. This may make them more vulnerable to third party claims, especially in today's litigious society. Such levels of proximity could only take place in SMEs, hence the potential for D&O claims is magnified.

These increased exposures facing SMEs may pave the way for insurers to penetrate this promising, but difficult, market.