Most, if not all, directors of major corporations will not take on a position if the company does not insure them against personal liability. With the New Consumer Act, this has become even more important than before, but what of SMEs?
“The CPA doesn’t distinguish between companies,” explains Philip Hobson of Chartis Insurance. “The same act covers multi-nationals and mom and pop stores. The problem is that SMEs are more exposed – they don’t have the same resources as major corporations.” Major corporations might be able to foot the legal bills of liability lawsuits, but they still take out insurance on their key players. Conversely, SMEs, who often cannot afford expensive legal battles, do not have insurance.
“If directors are found to be liable for negligent behaviour, they are held in breech personally,” explains Hobson. “The court would need to prove negligence, but simply thinking he or she was acting in good faith would not be enough. You don’t need to be malicious to be found negligent. If a director has not acted in the best interests of the company and its stakeholders, they are guilty.” If found guilty, the insurance would cover costs – unless fraud was committed.
However, even if the director is found innocent, there are still huge costs associated with this form of litigation. Two recent and well-known cases of directors who were insured by Chartis cost R40 million and R15 million a piece, and even though in both cases the directors were found innocent of all wrong doings, they still needed to pay their legal fees. If they hadn’t been insured, this would have been their personal cost to bear.
SMEs and liability
While director liability might seem to fall within the purview of large corporations only, in reality any stakeholder can bring a case against a business owner or director. “Our biggest claims have been from liquidators. Creditors lose money and appoint a liquidator to go after a director personally to recover costs,” explains Hobson.
For many business owners, they are the company, and suing one effectively means suing the other. As an SME owner, can you afford to be sued?
Insurance shouldn’t be used to buck the system or contravene the Act. It’s a safety net. “Insurance is not luxury purchase. It’s a necessity,” says Hobson. “But it doesn’t need to cost an arm and a leg either. As the business owner, you decide your own exposure. The things you should think about include who your customer base is, how officially you comply with Act, the territories you operate in, how much various insurance packages cost and what you can afford.
“Speak to a broker and discuss the level of insurance you need and what size policy suits you and your business. Brokers will give advice and evaluate what level of exposure you and your company are exposed to, and will tailor a product accordingly.”