Thursday, February 18, 2010

Questions on board liability insurance

Board members in Norway, including the chairman, has the opportunity to purchase board liability insurance (also referred to as Directors & Officers Liability Insurance). This link provides simple background information (in English) on the purpose of such an insurance from a Norwegian insurance provider.

According to the Norwegian Companies Act §17-1,  board members (members of the corporate assembly, CEO, shareholders) will be held liable for the losses they intentionally or negligently cause during the execution of their duties. Every individual board member who is made responsible - eventually in solidarity with one or several others, and not the board as a collective organ. Board members can get insurance against the liability they expose themselves to in their function as members of the board. 

This is a topic I find interesting in relation to maintaining adequate security for any business. What risk does such an insurance represent to the business itself and its employees?

 Now it's not the usual audit stuff I'm interested in here, such as "has the board of directors ensured that a proper internal audit function has been established and is working?" My questions are quite specific on the board liability insurance.

I don't know too much on how this is done in other countries, so comments and links to additional information is highly appreciated ( per - at - thorsheim DOT net)

There are several providers of board liability insurance in Norway. CODAN offers collective liability insurance for the board (not single individuals), while the Norwegian Bar Association offers individual insurances in cooperation with an external provider to its members, who sits at the board of other organizations than their own. Please note that these are only referred to as random examples, and does not constitute any recommendation or cooperation with them. 

From the company point of view, I see that the board liability insurance can be offered to get interesting people to take board positions, especially in newly established companies, or even in companies that have financial challenges. I have no problem understanding every individuals wish for, or even demand for such insurance, as the liability is on them personally.

My questions are:
1. If a board candidate before getting elected to the board asks for, or even demands board liability insurance, could that be interpreted as:
a) The candidate has little or no faith that the company will be able "live", or
b) that they may be willing to take (unconsciously) unnecessary risks with the business because of their insurance coverage

2. If the board enters into collective liability insurance, what kind of signal does that send to the employees of the company?
a) We fear for the survival of this company, or
b) we can possibly (and unconsciously) take additional high risk for the company (since we have insurance)

3. Can the company (or externals) require information from board members on whether they have, or will sign up for board liability insurance, either personally or collectively?  Additionally for this company, or for any other board positions they are currently at?

I do not want to be a critic here, and this can certainly sound like union talk, which it is not meant to be. However i find it even more interesting to know how the employees' representatives in Norwegian board of directors position themselves to such liability insurance, either paid by themselves or by their employer?

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