Personal risks facing board members of South African companies



FW moderates a discussion focusing on the risks faced by South African board members between Quinton Kotze at Chartis South Africa, Teri Solomon at Marsh, and Sandra Sithole at Norton Rose.

FW: To what extent have you seen an increase in the personal liability risk facing directors and officers (D&Os) in South Africa?

Kotze: The biggest impact is undoubtedly the changing regulatory environment in South Africa, which now makes it far easier for a multitude of stakeholders to bring actions against company directors or officers. The financial crisis of 2008 and a prolonged poor economic environment mean the wellbeing of a company continues to increase the potential liability of company directors and officers. We have seen a marked increase in claims not only as a result of liquidations but also against businesses trading in insolvent circumstances. South African directors are being called upon to make more difficult business decisions as a result of increased expansion into complex foreign markets and contending with increased foreign competition in an open South African economy. With more difficult decisions comes increased potential liability to stakeholders.

Solomon: There has undoubtedly been an increase in the personal liability risks facing directors and officers in South Africa in the past five years. The increase has been fuelled largely by the global focus on corporate governance, pressure on boards to perform in tough economic conditions, major local legislative changes as well as the increase in stakeholder rights and more stringent media scrutiny. Not only do directors and officers now increased exposures, but they also face an increase in the number of remedies available to potential plaintiffs. These include for example, class actions, derivative actions, applications to declare directors delinquent, and actions for civil damages.

Sithole: Recent legislative changes in the form of the Companies Act, 2008 have increased the focus on the personal liability of directors and officers in South Africa. The Act, which is a partial codification of directors’ fiduciary duties, extends the term ‘director’ to include alternate directors, prescribed officers and persons who are members of a committee of a board of the company. Section 77 of the Act provides a detailed list of the circumstances in which a director may be held liable for losses sustained by the company. The list includes the furnishing of false or misleading financial statements; partaking in fraudulent activity; and reckless trading. Shareholders and third parties also have recourse against directors in terms of section 218 (2) of the Act which makes a director liable to any person if that director contravenes any of the provisions in the Act. The Act is likely to see a marked increase in the personal liability risk of directors and officers.

FW: Has there been a rise in related litigation? What types of claims are being brought against D&Os?

Solomon: There has indeed been an increase in related litigation, with a handful of reported matters, but South Africa is not a litigious society. As such, we have not experienced major claims against directors or offices when compared to other countries. The new South African Companies Act also only became effective on 1 April 2011, making it still somewhat early for the true effect of the legislation to take effect. In the main we have seen claims by liquidators alleging reckless trading of companies by directors, as well claims alleging breach of fiduciary duty. Prior to the implementation of the new companies Act, the law was not conducive to class actions. This has changed with the new Act making specific provision for Class Actions as a remedy against directors.

Sithole: The Companies Act, 2008 came into effect on 1 May 2011. While there have not been any reported judgments following the legislative changes, D&Os do face a number of potential claims under the Act. Traditionally, the types of claims that have been brought against directors include breach of fiduciary duty for non-disclosure of personal interests and reckless trading. A case in point is Fourie NO v Newton [2011] 2 SA 265 (SCA). Although this case deals with the old Companies Act, it sets out the considerations with regard to directors trading recklessly. Litigation can also be anticipated under section 22 of the Act, which prohibits reckless trading. The effect of the partial codification of the fiduciary duties of directors is that consumers and shareholders will find it easier to identify a basis for a claim against directors which should lead to a significant rise in litigation.

Kotze: What’s worth noting is that the policy does not only respond to claims but is also designed to provide investigation and or defence costs – both pre loss expenses. The public, shareholders, and regulatory bodies are certainly becoming more aware of the responsibilities that a director owes to all stakeholders concerned. In 2011 we saw claims notifications increase approximately 40 percent versus the prior year. Litigation is currently centred on criminal prosecutions brought against directors for unlawful pollution, allegations of wasteful expenditure and negligence associated with expected corporate governance values. We have also seen a trend in claims emanating as a result from breaches found in either a corruption and or bribery related act. Another interesting fact is the increase in actions brought by the company against its own directors. Times are changing and we fully expect to once again see an uptick in our 2012 claims statistics.

FW: Have there been any recent legal and regulatory changes in South Africa which affect the personal risks to D&Os?

Sithole: The 2008 Act will bring about changes which do and will continue to affect the personal risks of directors and officers.Section 75 of the Act places a duty on directors to disclose all personal financial interests. The section then sets out limited circumstances under which directors are not required to make disclosure such as in sole shareholder companies. Section 77(3) exposes directors to risk if they bind a company without authority; and carry on business recklessly or fraudulently, or under insolvent circumstances. Section 76 of the Act sets out standards of director’s conduct which include the general fiduciary responsibility to act in good faith and for the proper purpose and in the best interests of the company. The introduction of class action suits under section 156 and 157.1, and under the new Consumer Protection Act, will also increase the scope of personal liability of directors. 

Kotze: The introduction of the new Companies Act in 2011 has brought South Africa in line with international standards and best practice. The changes to the Act have dramatically increased the exposure of company directors and officers. It encapsulates stricter provisions on a director’s conduct and liability and sets a higher standard of corporate governance but it is also very clear on the duties and responsibilities of a director. From a liability perspective, the new Act makes directors directly accountable to all concerned stakeholders for negligence or for a breach of their fiduciary duties. In addition to the new Companies Act we have seen new regulation in form of the Consumer Protection Act, written on a strict liability basis as well as pending regulation like the Protection of Personal Information Act, once again increasing a director’s exposures to potential litigation. 

Solomon: In the past three years, South Africa has experienced a plethora of new legislation, most of which have affected directors’ personal risks. The most onerous of these include the New Companies Act, which became law on 1 April 2011, the Consumer protection Act, and the amended Competitons Act. In addition, although not law, the South African Code of Corporate Governance, King 111, was substantially updated. The new legislation, coupled with the onerous principles contained in the King 111 code, have ushered in a new era for South African D&Os, whose personal liability exposures have never been greater.

FW: What kinds of prosecutions, settlements and penalties have you seen imposed upon D&Os in South Africa? Are there any particular cases worth highlighting?

Solomon: There are very few reported prosecutions and settlements. One case worth mentioning is the matter of Fourie NO v John Newton where liquidators of a failed company sued the financial director for reckless trading. This matter reached the Supreme Court of Appeal and is the first fully reported matter where a D&O policy responded to the claim. Notwithstanding that the case turned on the provisions contained in the previous Companies Act, it clearly highlighted to South African directors the consequences of being sued personally. There has also been a marked increase in the number of regulatory enquiries into company’s affairs and the way in which directors are managing them. Inquiries by the tax authorities and the financial services regulator are examples of these inquiries.

Kotze: Chartis’ and South Africa’s most notable D&O settlement was resolved for an indemnity amount of R18m – excluding defence costs – on behalf of the covered directors. As previously mentioned, one also needs to be mindful that it is not only the indemnity portion of the loss that is covered. Defence costs are also covered and are often as costly as indemnity payouts. For example, in 2011 we finalised a matter where third party claimants were seeking R270m in damages. We successfully defended the claim on behalf of the covered directors. However the matter spent seven years in the courts and defence costs incurred exceeded R16m for the firm. At this point in time market knowledge suggests that there are currently a number of matters on the go that could far exceed the figures previously incurred. 

Sithole: The new Companies Act has only been in force since May 2011 and no prosecutions, settlement or penalties have been imposed under the Act. 

FW: Given the potential costs associated with defending claims against D&Os, are you seeing an increased take-up in D&O liability insurance in South Africa?

Sithole: With the advent of the Act, there has been a renewed interest in D&O liability insurance in South Africa. The codification of directors’ duties will probably lead to a significant increase in the purchase of D&O liability insurance which is now expressly permitted. Prescribed officers and board committee members who are not directors will need to ensure that they are brought within the definition of a director in D & O policies and that their liability is indemnified. In terms of the Act, the circumstances under which a company can indemnify a director are limited in a few respects. A company is prohibited from indemnifying a director where the director is guilty of fraud, willful misconduct or willful breach of trust; acts without authority despite knowing that no such authority exists; acquiesces in the conducting of the business recklessly, with gross negligence, with intent to defraud or for any fraudulent purpose; and where the director allows a company to trade under insolvent circumstances despite knowing that the business was being conducted in this manner.

Kotze: We have seen a steady increase in the number of new clients, averaging around 30 percent year on year. An important factor is the change in the market segmentation now making enquires for the first time. Historically, only public companies where concerned with D&O cover. However, now we are seeing interest from the private and SME space. This is due to a more litigious society within which business is now operating and the fact that claims are emanating from all stakeholders, not just public shareholders. Credit should also be given to the brokers who are doing an excellent job of highlighting potential exposures to directors and making them aware that there is a policy available to address their concerns.

Solomon: We are most definitely seeing an increase in both the take-up of D&O insurance as well as an increase in the limits purchased. Boards are fast realising that D&O insurance provides critical personal and balance sheet asset protection and that is has become a necessity. Many boards are acutely aware of the rising legal costs associated with legal compliance. Couple that with their acknowledgement that they may face personal lawsuits, and D&O insurance has become a vital and generally welcomed risk transfer solution. 

FW: What advice would you give to D&Os on selecting a policy that is appropriate for both the individual and the company? How important is it to properly assess the terms, coverage and pricing of available policies?

Kotze: A comprehensive assessment of the policy terms and conditions is absolutely critical. D&O insurance in South Africa has become too much of a commodity purchase and one driven purely on price. During these difficult times it’s fair to consider the premium required, but an onus of responsibility needs to fall on the brokers to better educate their clients and make recommendations based on the varies policies in our market against the exposures faced by the company to be insured. Outside of the policy terms and conditions, one also needs to consider the insurers financial stability, claims paying, and settlement history. The capability of an insurer to cover claims in foreign jurisdictions while understanding the legal and regulatory landscape of that jurisdiction is also becoming a significant requirement. Clients shouldn’t overlook the extent that an insurance company passes on risk to a third-party reinsurance company – in the event of a claim they could be hamstrung by the re-insurance company, making claims assistance and settlement very difficult.

Solomon: D&O is one of the most technically complex forms of insurance. Policy language, as well as general terms and conditions can also vary vastly from one insurer to the next. D&O is also such an evolving product that changes to policy forms are frequent. As such, it is vital that boards consider using only specialist D&O brokers to assist them in placing a D&O programme that is not only optimal in its structure, but also in the breadth of cover it provides. Specialist D&O advisors will also be able to assist with the selection of the most appropriate insurer for the particular risk.

FW: Could you explain how appropriate limits for insureds are determined, and what benchmarking criteria, if any, are used? In this respect, are there limits that South African companies carry compared to the rest of the world?

Solomon: As is the case in the rest of the world, there are no specific parameters for determining D&O limits. The level of cover ultimately selected will depend on a number of issues specific to the company purchasing the cover. These issues include the risk profile of the industry within which the company operates, the size and structure of the company and its board, as well as financial health of the company. The company’s adherence to good corporate governance and robust risk management practices are also important criteria. Unfortunately there is at present no accurate benchmarking data available in the South African market, however admittedly this is something the local D&O industry desperately needs. 

Kotze: Limits are ultimately determined by the insured and usually upon a recommendation of, and in consultation with, their broker. The data would typically include details around the operations/industry sector, asset size and market cap including their geographical locations, shareholder and securities exposures. Our own analysis suggests that South African companies, generally speaking, carry a limit far exceeding that of their peers across the world. One could argue that this is based on the local cost of capacity but given South African D&O claims history and the fact that no successful claim has exceeded more than 10 percent of the limits available in the market, this speaks as a misconception that the limit of indemnity one carries as an insured is more important than the policy terms and conditions. 

FW: How can D&O polices be structured to cater for D&Os of companies that operate in a multitude of territories, with varying regulatory exposures?

Kotze: The first key is understanding the exposure in these foreign jurisdictions. Every country across the globe has different legal requirements and it is necessary that an insurance programme is tailored to cover each individual territory. In practice this is done by placing a ‘master’ policy in South Africa with additional policies in each of the countries required. Local policies are tailored for the particular country and tied into the master policy insuring consistent policy terms and conditions. This is done because a locally domiciled company or insurer is unlikely to understand the legal framework or the equivalent of our Companies Act in Brazil or India.

Solomon: South Africa is no exception to the increase in regulatory compliance. It is vital for multinational companies to consider programme structures which meet the requirements stipulated by country regulators, tax authorities, and insurance carriers. For example, companies need to ensure that in territories where there is a D&O exposure, and where locally admitted insurance is required, that they consider purchasing a local policy in that territory. Boards should consult their brokers for specialist advice on achieving regulatory compliant D&O programmes with insurers who can truly provide the global coverage they may require.

FW: Looking ahead, do you expect to see more South African companies taking a proactive approach to risk management tailored specifically to protecting board members?

Solomon: The new Companies Act and other onerous legislation now demands that companies implement effective governance and risk management strategies to address their management liability exposures. More D&Os are attending proactive training on their duties and responsibilities than ever before. Boards are also increasingly placing the issue of management liability and D&O insurance as items on the board agenda. There is no doubt that the myriad of new legislation has made suing directors easier than ever before and that D&Os are going to be held accountable for their actions. Those boards that are not proactively managing their personal liability risks, do so at their own peril.

Kotze: From an insurer’s perspective, I would certainly hope so. Recent changes like King III have provided companies with the tools to better equip themselves to assess risk and exposure. Additionally the new Companies Act now clearly outlines the duties and responsibilities directors face. A proactive approach to good corporate governance will also help the board to attract and retain talent on an executive and non-executive level. One cannot discount the importance of getting on with running the business and delivering value to shareholders – it’s a minefield out there and directors need to have an eye on a multitude of eventualities. Thankfully, directors are able to protect their personal worth in the form of D&O insurance.


Quinton Kotze is the financial lines manager for Chartis South Africa, and has been responsible for the division for the past two years. Prior to joining Chartis, he held various roles within Zurich and Marsh in the UK and New Zealand, and has 11 years experience in the Financial Lines market. Mr Kotze can be contacted on +27 (0)11 551 8641 or + 27 (0)72 612 3846, and by email:

Teri Solomon is a divisional executive at Marsh. She has spent the past 14 years specialising in management liability insurance and related topics. Her role includes advising some of the largest global corporate entities on their management liability exposures and structuring and placing their global directors and officers liability insurance programmes. Ms Solomon advises boards on their D&O exposures and risk management strategies. She is a Council member of the Institute of Directors in South Africa, and a member of the South African IOD Corporate Governance Forum. Ms Solomon can be contacted on +27 (0)11 506 5192 or by email:

Sandra Sithole is an associate at Norton Rose South Africa. She specialises in the areas of insurance including D&O liability insurance, litigation and dispute resolution, medical law and medical malpractice, personal injury litigation, professional liability law and product liability. Ms Sithole advises South African short-term insurers in respect of regulatory work, subrogated defences and recoveries, and policy interpretation and response. She also advises major private hospital networks. She regularly publishes articles on insurance law related topics and on medical malpractice law. She also presents at seminars, including those specific to insurance medical law topics and the Consumer Protection Act. She can be contacted on +27 (0)11 685 8935 or by email:

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Quinton Kotze

Chartis South Africa


Teri Solomon



Sandra Sithole

Norton Rose

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