Call to reform directors' insurance as iSoft four left with bill

By Andrew Bounds, Jane Croft and Alistair Gray

Taking on the role of a company director could become "impossibly risky" without reforms to the liability insurance market, the Institute of Directors has warned, after the recent collapse of the high-profile iSoft trial.

The four defendants were cleared at Southwark Crown Court of alleged conspiracy to make misleading financial statements at the software company after procedural mistakes by the prosecution.

The men had always denied wrongdoing but were left to fund their own legal costs or seek help from the taxpayer after Chubb, which had provided directors and officers (D&O) insurance, decided they had breached the terms of their cover.

They were acquitted on July 22 after a seven-year investigation and two trials brought by the Financial Conduct Authority, which said it would not pursue a third prosecution as the "case was now stale".

John Whelan, former finance director of iSoft, said it was "devastating, the lowest point of my life", when he was informed of the insurance firm's decision in July 2011 ahead of the first trial last year.

He lost his house as well as his job and has not worked since. "My personal life has fallen apart and you can imagine how my financial situation has changed compared to being the finance director of a plc," said Mr Whelan, 46.

He went three months without legal representation until his solicitor and barrister said they would work for a reduced fee set by legal aid.

Anthony Barnfather, his solicitor at Pannone, said some insurers were acting as "judge and jury".

"To arrive at a conclusion without hearing evidence is perverse given policy wording and the clear reasons for D&O cover," he said. "This action often completely undermines the whole point of taking out D&O insurance."

Chubb said it could not comment on the iSoft case as it was "an ongoing matter" but said it was "widely renowned for its fair and equitable management of claims".

Directors and officers insurance is supposed to cover the costs to executives of becoming embroiled in legal action or regulatory probes - ranging from investor lawsuits to manslaughter charges - in the course of their jobs.

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As the financial regulator has stepped up its enforcement action in recent years, more executives have found themselves on charges such as insider trading.

Patrick Cryne, Stephen Graham and Timothy Whiston were the other directors cleared in the iSoft case, which dates back to 2006.

Mr Whiston said he funded his own defence for the first trial but was forced to rely on legal aid for the second hearing. "If I was a director now I'd be having a really good, hard look at any D&O cover particularly with the changes going through to legal aid."

Roger Barker, director of corporate governance at the IoD, said the issue was pressing because directors were being asked to take more responsibility for corporate failures. "There is a need to ensure that existing D&O policies being promoted by the insurance industry are genuinely fit for purpose and are not misrepresenting the cover that they can deliver to directors.

"It is right that directors should be held accountable for their decisions and performance. But it makes no sense to make directorship an impossibly risky profession," he said.

Stephen Pollard, a white-collar crime lawyer at WilmerHale, said he was aware of cases where defendants had D&O cover pulled before trial. "Directors need to take the trouble not only to look at the premium and the amount of cover . . . but to find out something about the historic performance of the provider standing by their policy and providing a proper level of support," he said.

<>Critics complain insurance law allows underwriters to avoid paying claims for tenuous reasons - not just for D&O policies, but for all sorts of corporate coverage.

The Law Commission is preparing to recommend that ministers tighten the regime to give policyholders more protection but insurance brokers say directors should play a more attentive role in insurance purchasing decisions.

"Until the directors themselves take a more active interest there are going to be these sorts of problems," said Francis Kean, a directors' insurance expert at the insurance broker Willis.

"Especially in a soft market [when premiums are low], there's a natural commercial instinct for insurers to investigate whether they have to pay large claims. But I don't think you can say there's a trend for them to avoid paying claims. There are a lot of examples when they have paid big [D&O] claims."

The Association of British Insurers said D&O insurance is always sold by a broker who should explain the policy clearly.

It added: "As with any insurance policy it is important to understand exactly what you are covered for and what could result in you jeopardising that cover."

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