The collapse of Greensill Capital in March 2021 sent shockwaves through the global financial system, exposing Greensill’s management team to a barrage of litigation and regulatory scrutiny. Four years on, the fallout continues as administrators sue former directors for breach of fiduciary duty and make fraud allegations. This underlines the role of D&O insurance and the importance of extended reporting periods and run-off cover.
The Role of D&O Insurance in Corporate Governance
D&O insurance is designed to protect company leaders against personal liability for decisions made in their managerial capacity. In the event of insolvency, as with Greensill, directors and officers can face lawsuits from administrators, creditors, or regulators. D&O insurance policies typically cover legal defence costs, settlements, and damages arising from claims of wrongful acts such as breach of fiduciary duty, mismanagement, or misleading disclosures.
The ongoing litigation against Greensill’s former directors illustrates this risk. The administrators’ lawsuit alleges breaches of fiduciary duty, a common trigger for D&O policy response. Without adequate D&O insurance, directors could be personally liable for substantial legal costs and potential damages.
Why D&O Run-Off Cover Is Essential
A unique feature of D&O insurance is the need for run-off cover, especially when directors leave a company or when the company ceases trading. Run-off (or ‘extended reporting period’) cover extends the reporting period for claims made after directors have stepped down, but which relate to actions taken during their tenure.
In the Greensill case, run-off cover is particularly relevant. Four years after the company’s collapse, former directors are facing fresh claims and investigations that emerged months or even years later. Run-off cover ensures that these individuals remain protected for past decisions, even after their official roles have ended. This is crucial, as claims for breach of fiduciary duty or misrepresentation often surface long after the alleged conduct. Extended reporting periods are often aligned to the statute of limitations.
Fraud Allegations: The Gray Zone in D&O Coverage
One of the thorniest aspects of D&O insurance is its response to fraud allegations. Most policies contain exclusions for deliberate fraud or criminal acts – but crucially, these exclusions typically only apply once fraud is proven in court. Until then, D&O insurers usually advance defence costs, recognising that allegations alone do not equate to guilt.
The Greensill case highlights this complexity. Administrators and creditors have alleged fraudulent misrepresentation and non-disclosure by Greensill’s leadership, particularly in relation to insurance arrangements and the securitisation of trade receivables.
This dispute underscores a key nuance: while D&O policies may ultimately exclude coverage for proven fraud, they typically provide defence costs and other protections during the lengthy period required to resolve such allegations. In high-profile collapses like Greensill, litigation and investigations can drag on for years, making this interim coverage vital for directors’ financial security.
Lessons for Boards and Executives
The Greensill Capital saga presents several lessons for company leaders and risk managers:
- Always maintain robust D&O insurance with sufficient limits and broad coverage for defence costs, settlements, and regulatory investigations.
- Secure statute of limitations run-off cover before you start a policy, so that the terms are agreed prior to an event occurring. This way the terms and cost applicable are clear when seeking cover from insurers.
- Understand policy exclusions and the insurer’s obligations regarding defence costs, especially for fraud allegations.
- Regularly review and update coverage to reflect evolving risks and regulatory expectations.
As the Greensill litigation unfolds, it serves as a reminder that D&O insurance-and particularly run-off cover-is not just a compliance checkbox, but a strategic necessity for anyone in a leadership role. In an era of heightened scrutiny and accountability, it is the last line of defence when the unexpected happens.
For more information on this risk and to discuss coverage for your senior team, contact Elmore’s D&O specialists.