4Th AIDA EUROPE CONFERENCE
Civil Liability Working Party
The Effectiveness of D&O Insurance and Bankers’
Liability by Dr Adolfo Paolini
University of Buckingham and DACBeachcroft LLP
13th September 2012
Risk Management in Banking
“ If you open the vaults of a bank, you may
think you would know what you would find
there. You would be wrong. What is really
there, hidden behind the stacks of currency, is
the bank’s inventory risk.” Allen L & Saunders
A in The Oxford Handbook of Banking, OUP
2012 at 90
Risk Management in Banking
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Liquidity Management
Asset Management
Liability Management
Capital Adequacy Management
Directors of Financial Institutions
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BCBS “ … the board should take into account the legitimate interest
of shareholders , depositors and other relevant stakeholders..”
OECD: Duty of Loyalty “...to act in the interest of the company and
shareholders”
Companies Act 2066 ss 170-177
Shareholders cannot recover for reflective loss. Prudential
Assurance v Newman Industries/Impossibility to sue as member of
a Class /Class Action.
Civil Liability to third parties is unlikely: Williams v Natural Life
Health Food Ltd.
Criminal Liability /Tort of Deceit/Fraud was found on a director
personally: Standard Chartered Bank v Pakistan National Shipping
Corporation
Scenario: Sub-Prime
Lending/CDO’s & CDS’s
• Sub – Prime Lending
• Over the Counter Derivatives (OTC)
• Collateralised Debts Obligations (CDO’s)
• Credit Default Swaps ( CDS’s)
D&O: Directors v. Company
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CA 2006 s 174: Monitoring and Supervising
Sub-Prime Lending Negligence?
Levels of Speculation Were Almost Reckless
Lehman Brothers: Repo 105 /108 (off balance
sheets products) sales or liabilities?
• D&O does not cover wilful misconduct
• Side ‘C’ cover and the effect of Stone & Rolls v
Moore Stephens and Safeway Stores v Twigger
D&O: Directors v. Investors
Civil Liability/Misrepresentation
1. Hedley Byrne/ Caparo Industries v Dickman
• Assumption of Responsibility: Williams
2. Reliance on Financial Advice
3. Contractual and /or Statutory Financial Advice
D&O: Directors v. Unsophisticated
Investors
• Who are they?
• FSA principles of Business ( PRIN 9): “reasonable care
to ensure the suitability of its advice and
discretionary decisions for any customer who is
entitled to rely upon its judgment”
• Bank/Customer Contractual Relationship
• FSMA 2000 s 150: private and non-private customers
• Director’s Personal Liability?
D&O: Directors v. Sophisticated
Investors
• JP Morgan Bank (formerly Chase Manhattan
Bank) v Springwell Navigation Corp
• IFE Fund SA v Goldman Sachs International
• Peekay Intermark Ltd v Australia & New
Zealand Banking Group Ltd
• Titan Steel Wheels v RBS
• D&O substantive cover: Liability cannot be
ascertained
LIBOR Twist
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Interest Rate Manipulation
Derivatives Market relies on LIBOR rates
Intentional / Wrongful Act
D&O: Public Policy to deny cover
Defence Cost Cover still available for
investigations.
Conclusions
• Company v Directors: D&O cover for breaches
of the duty of care, skill and diligence
• Director v Unsophisticated investors: D&O
unlikely to cover / only exceptionally
• Directors v Sophisticated Investors: D&O
unlikely to cover/ not reliance defeats the
claim
• LIBOR: D&O/ failure to monitor/ intentional
manipulation may defeat the claim
Thank You
Dr Adolfo Paolini
adolfo.paolini@buckingham.ac.uk
apaolini@dacbeachcroft.com