Does our block of flats really need Directors & Officers Liability insurance?

Darren Bagnall, Operations Director at Flat Living Insurance, discusses why Directors and Officer Liability Insurance should be considered.

This valuable cover protects the directors and officers of an RMC, Residents’ Association or RTM Company against ‘Wrongful Acts’: errors or omissions in the running of the management of the block of flats for which they are responsible.

Directors and officers should be aware that they can be held personally liable for their acts, errors or omissions and that the law does not distinguish between the director or officer of an RMC, Residents’ Association or RTM Company and that of a major corporation. Surprisingly, some directors choose not to protect their personal wealth with a Directors and Officers policy.

Recently, leaseholders of a block of flats successfully brought an action against the residents’ committee for failing to appoint a building company in a timely fashion to repair external brickwork on the building. Damage had been caused following a heavy rainstorm and reported to the Committee however, repair work had still not been commenced several months later when a subsequent rainstorm caused further damage. The costs and legal charges resulting from damages awarded by the court and paid from RMC directors’ personal assets could have been avoided had the RMC taken out Directors and Officers Liability insurance.

The potential for claims is wide-ranging and can be from internal or external parties. Examples include:

Defamation in respect of statements made by the directors:

A claim by a member/resident alleging that the directors had defamed his character at a meeting of shareholders. Damages for injury to feelings and defence costs amounted to over £15,000.

Breach of lease provisions (by landlord or residents/tenants):

A claim for breach of lease provisions relating to the alleged failure to maintain the property, and in respect of steps taken which had a detrimental effect on value.
A claim alleging the over-charging of service charge. Reimbursement was sought.

Breach of Companies Act 2006:

A claim for disregarding the Companies Act 2006, in that the directors allegedly passed resolutions (removing the Claimant as a director) at an EGM contrary to the provisions of the Act and the company’s Articles. Damages in the sum of £25,000 were claimed.
A claim for the unlawful amendment of a company’s Articles, such that the directors contravened the Companies Act 2006. It was alleged that there had been a failure to pass a special resolution with the requisite number of votes.

Failure to protect the interests of members:

Following damage caused to a residential block of flats, it was discovered that the insurance purchased by the directors was inadequate to cover the loss. The shareholders of the property (the residents) brought a claim for losses they incurred as a result.

Claims for Unfair Prejudice pursuant to s994 of the Companies Act (allegations that company affairs are being, or have been, conducted in an unfair manner, and which is prejudicial to the residents’ interests, i.e. attempted exclusion from management and/or abuse of power / breach of Articles of Association):

A claim for unfair prejudice relating to a former director’s exclusion from management, contrary to the Articles of Association, resulting in his resignation. Defence costs were in excess of £5,000.

As you can see, incidents can be very varied and often very complicated.

Do you want to find yourself uninsured to save your block £90?