Cartel behaviour is nothing new and takes the form of colluding with competitors to fix prices, divide markets amongst themselves or collude in relation to the award of tenders. Cartel behaviour has historically been addressed by the competition Act of 1998, which took various companies to task in the form of hefty fines, while very little action and consequences were taken against directors who practice cartel conduct.

However, new legislation that came into effect on 1 May 2016, now holds individuals involved in Cartel behaviour personally liable for penalties in their personal capacity of up to R500 000 or ten years imprisonment, labelling it a criminal offence. These new changes do not only hold the directors and officers involved in the action liable, but also those who have had actual knowledge of collusive conduct without taking any preventative action. For this reason a correctly structured Directors and Officers (D&O) liability insurance policy could potentially be a lifeline.

What is D&O liability insurance?

The main purpose of a D&O policy is to offer financial protection for executives, which

provides investigation and defence costs together with awards for a valid claim. “The cover

that a D&O liability insurance policy provides is an absolute necessity when it comes to the protection of the personal assets of directors, officers and other employees that are charged with supervisory and managerial responsibilities, who can be held liable for wrongful acts which may occur in their day to day management activities,” says Geoffrey de Pinchart, the Business Unit Manager for Directors and Officers Liability at Aon South Africa.

“If cartel behaviour is suspected, the Competition Commission or Competition Tribunal will start their investigation by requesting information from the Director or Manager to appear at meetings or to provide them with information. In some instances a company can also be raided to confiscate documentation, records or other information that the Competition Commission or Competition Tribunal may need in their investigation. It is also crucial to note that any statement made by the directors or managers that give formal written admission could result in them waiving their insurance rights,” explains Geoffrey.

It is recommended that directors and officers advise their broker and insurer of the situation as soon as possible to activate their D&O cover. “The insurer’s written consent is required before any fees, costs and expenses will be permitted in their preparation and response to the inquiry. The D&O policy will pay pre-investigation costs if the extension is available on the policy, in addition to paying defence and investigation costs until the matter is resolved in court,” he elaborates.

“The policy will, however, stop responding if there were any deliberately dishonest or fraudulent acts or personal gain on the part of the director or officer, which could also result in the insurer potentially reclaiming any costs incurred from the director or officer,” Geoffrey highlights.

Certain D&O policies make provision for civil fines and penalty fines arising from anti-competitive behaviour, but only where there has been no determination of intentional, grossly negligent, wilful misconduct or wilful breach of the law by the directors.  These particular fines need to be permissible by the court before they can be paid by the insurer.

Why is D&O liability insurance important?

Directors and officers can be held personally responsible for losses and face costly litigation in prolonged legal proceedings, defending claims. Whilst they would normally expect to be indemnified by the company, directors and officers should not rely on the company to incur the costs of the cover, as in some instances companies may be prohibited from doing so either by law, financial inability or corporate policy.

All businesses, whether a small enterprise or a listed multinational company, have to meet increasingly complex regulatory and compliance requirements, on top of delivering greater transparency, disclosure, accountability and governance, to name a few. It inevitably brings about a barrage of responsibilities that directors and officers (D&Os) need to comply with, not to mention keeping abreast of various enactments, corporate codes and best practices.

“Negligent and wrongful acts that a director could be held liable for can be defended through a correctly structured D&O liability insurance policy. There is no one size fits all approach to business risk insurance, that is why consulting with a professional Aon risk advisor is an invaluable exercise in protecting your business, reputation, clients, colleagues and bottom line,” concludes Geoffrey.