Director faces serious personal criticism for failing to take out adequate insurance
For many entrepreneurs, taking out liability insurance seems like a formality that can quickly be left to the insurance broker. However, a recent case before the Oost-Brabant District Court shows that this is a risky approach. The judge explicitly places the responsibility with the director of the company: it is the director who must ensure that there is appropriate insurance that matches the nature and risks of the business activities. If he fails to do so, he may be held personally liable and run the risk of being held personally liable for substantial claims for damages.
What is this case about?
This case centred on a roofing company that was carrying out renovation work on the flat roof of a residential property. During the roofers’ lunch break, a fire broke out on the roof. The owner of the house was well insured: the building insurer compensated the customer for the fire damage. As usual, the building insurer then attempted to recover the damage paid out from the party that may have been liable for causing the fire, in this case the roofing company. However, that attempt to recover the costs came to nothing because, although the roofing company had taken out liability insurance, that policy expressly excluded damage resulting from “fire-hazardous work” from its cover. Precisely the type of work that the company carried out professionally was therefore not covered by the insurance.
As the insurer was therefore unable to seek recourse from the roofing company, it turned its attention to the former director in his private capacity. The essence of the claim was that the director was personally liable for the fire damage on the basis of directors’ liability, because he had failed in his duty as a director by not arranging adequate liability insurance that was commensurate with the risks of the company.
What did the court consider?
In its assessment, the court first considered the position of the company. If it is established that the fire was caused by the actions of the roofers, then the roofing company is in principle liable for the damage. At the same time, it is established in the proceedings that the company itself offers no recourse: there is no insurance cover and apparently insufficient funds to compensate for the damage. This shifts the focus to the question of whether the director can be held personally liable.
In this regard, the court applies the main rule of external director liability. If a company is liable but offers no recourse, a director may be personally liable if he or she is seriously at fault. This is particularly the case if the director knew or should reasonably have understood that the way in which he or she allowed the company to act would result in the company failing to fulfil its obligations towards third parties and offering no recourse. For entrepreneurs and directors, this means that they must actively consider risk management, insurance cover and the protection of third parties against irrecoverable damage.
In its judgment, the court emphasises that financial loss caused by fire must, in principle, be borne by the person or company that caused the damage. It is not the customer’s building insurer, but the person who caused the damage who should bear the financial consequences, whether or not through appropriate liability insurance. It is precisely against this background that the court imposes strict requirements on a professional company that carries out risky, fire-hazardous work for customers and can therefore cause potentially high damage. Such a company can be expected to take out adequate liability insurance that specifically covers these risks, so that there is a safety net if the company itself cannot bear the damage from its own resources. According to the court, it is the core responsibility of the director to ensure that this insurance is actually taken out and that it provides the correct coverage.
The director defended himself by arguing that it was not he, but his insurance broker who had committed a professional error. In his view, it was the insurance advisor’s job to ensure that the policy was appropriate for the fire-hazardous activities of the roofing company. The court did not agree with this. It assumed that the director had received (a copy of) the policy conditions, or should at least have requested them. From that policy, he could and should have deduced that damage caused by fire-hazardous activities was expressly excluded from coverage. The court held it against him that he had not looked at this or recognised the risk of that exclusion. According to the judge, this omission is a serious personal reproach, precisely because it concerns a core risk of the company.
It is important to note that, at this interim stage, the court has not yet given a final ruling on the director’s actual liability for the fire damage. First, further proceedings must determine whether the fire was indeed the result of unsafe or careless actions on the part of the roofers. Only once this has been established can it be assessed whether the director is actually obliged to compensate the damage personally. The proceedings will continue on that point.
However, this is a warning from which entrepreneurs can learn a valuable lesson:
For entrepreneurs, directors of private limited companies and other legal entities, and for professionals in the business services sector, this ruling offers a clear warning. Taking out liability insurance is not a matter that can be left entirely to the insurance broker. A director remains ultimately responsible for whether insurance is in place and what exactly is insured. This means that the director must request and read the policy conditions and critically assess them in relation to the specific business activities, especially when the company works with increased risks such as fire-hazardous activities, dangerous machinery or complex advisory processes.
The practical lesson is that a director can be expected to actively prevent third parties from being confronted with irrecoverable damage. He does this, among other things, by ensuring adequate, tailor-made liability insurance, by regularly checking whether the cover still matches the actual business operations and by explicitly discussing the risks of the company with the insurance adviser. If a director fails to do so, he or she may – as in this case – be seriously blamed personally and private liability for business damage will become a serious issue.
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