Safeway: A painful check out for D&O insurers?

Ripples of excitement have spread across the directors’ and officers’ (D&O) insurance market after last month’s judgement in which ex-directors could be liable to Safeway for fines Safeway incurred from the Office of Fair Trading (OFT).

In January 2005 the OFT decided to investigate the allegedly collusive behaviour between various supermarkets, (which included Safeway and Morrison) and various dairy processors during 2002 and 2003. This included Morrison and its recently acquired subsidiary in 2004, Safeway. In this, Safeway, among others, was found to have indirectly disclosed information about cheese, milk and butter prices with other retailers.

It is at this stage that D&O underwriters develop a frisson of fear. Both the company and directors are insured parties in a D&O policy; directors for any damages and defence costs they may sustain, and the company for any reimbursement of directors it may be liable for. Due to the elimination of the insured versus insured exclusion thanks to market competition, D&O underwriters in cases where companies take directors to court, are looking at a very real loss.

As a further potential worry for insurers it seems that the claim was framed with the D&O policy in mind. As the judge in the case stated: “….it is apparent that the real target of the present claim is not the assets of the individual defendants……but the directors’ and officers’ liability insurance available to the defendants.”

It is only of superficial comfort that fines and penalties are covered by the policy only where legally allowable as i) it looks as if the Safeway style fine may be allowable and ii) this is not a fine but an indemnity for a fine imposed on another party (in this case Safeway is asking for an indemnity for a fine imposed on it).

There are a few tentative points to be made. The first is this is a strike out application and is subject to a full blown case. Secondly the main fine imposer in the UK, the FSA, is not in any mood to let organisations or people get away with fines by collecting them through the backdoor via insurance. As such we may not see a flood of fines making their way to insurers. Thirdly this is very much a case that relies on its facts. Safeway are not taking their present board to court, but their ex, pre-takeover, board – a much easier target that does not threaten the ongoing activity of the company. It is noticeable that none of the other companies listed in the OFT investigation have taken the same course as Safeway.

For the short term insurers will just have to sit and wait for further developments. However if this style of claim develops into a substantial loss making trend the phraseology of the fine extension may want to be sharpened to exclude indirect fines. The case does illustrate the consequence of competition in having eliminated the “insured versus insured” exclusion and also illustrates the virtue of D&O cover in the event that a director finds himself bitten by the same company that fed him.

Patrick White is head of D&O at Markel International.