With costs rising, it’s never going to be easy to ask service charge payers to add something new to the block’s shopping list. Nevertheless, we do urge you to review your insurance cover and make sure it’s providing protection that meets the needs of the block. More management companies are finding that means insuring against legal liability and costs for both the management company itself and its individual, volunteer directors.
Having appropriate legal liability insurance cover offers directors access to specialist advisers as well as providing cover for costs and compensation payments awarded against the company or individual directors. With insurance in place, the directors of the company can focus on the responsibilities they have taken on for keeping the fabric of the building and its finances in good order. It should also be easier to recruit and keep the directors you rely on for the block to flourish.
Why would small residents’ management companies and their directors need liability cover?
The short answer is that residents’ management companies (RMCs) are subject to company law. This rightly provides protection and assurance for everyone living in the block and required to pay service charges. The good news is that RMCs are often classed as micro entities, which can make for easier admin, accounting and Companies House filings. Nevertheless, the directors can still be held liable for errors, omissions, and wrongdoing just as directors of big commercial companies are.
They could be sued for the consequences of any mistakes they make and their personal assets, even the roof over their own head, could be at risk. Their exposure is the same whether the management company ‘outsources’ the day-to-day work to a managing agent or does it all itself.
This begs the question of why anyone would take on the burden and risk of acting as a director for a residents’ management company? It involves hours of unpaid work to keep the block running smoothly, comply with fire and general building safety law, deal with the unpleasantness of chasing up service charge arrears, and know the impossibility of pleasing all of the people all of the time! And it’s all on a voluntary basis. Even with the best intentions, there’s plenty of scope for something to slip through the net.
If no one stepped up, and the company had no active directors and failed to file correctly with Companies House it could be struck off which would have potentially huge knock-on consequences for all leaseholders, not least that effective management would cease, and the job of any managing agents could become untenable. Individual flats would be much harder to sell, and many hours work and possibly much expenditure would be needed to put things right.
We think every block should treasure its active directors and do everything to retain them. Protecting them from personal liability seems like a basic step and sound ‘investment’ in the well-being of the block for service charge payers.
Who are the management company directors?
Even people who may do little towards building management are likely to be directors and at risk of personal liability. In many residents’ management companies, each leaseholder’s name is entered on the register of members. In most cases, RMC company members are also directors and so are potentially liable under company law. If not, they will delegate management responsibility to directors.The company secretary is particularly exposed as the Companies Act 2006 imposes a broad variety of duties on the company secretary, accompanied by around 150 separate criminal offences. Company secretaries assume responsibility for compliance with corporate governance and other financial and legal regulations.
If someone resigns as a director or member, typically because they have moved on and aren’t even living in the building anymore, they will also want to be assured that their liability for past mistakes they may have made comes to an end as well. Check that any liability policy you choose includes a ‘long tail’ so that past directors are covered for a number of years after they resign.
What is the difference between insuring the RMC and insuring the directors?
You’d think that the first port of call for anyone who needs to start legal proceedings if something goes wrong in a block of flats would be the management company itself. Logically this makes sense; and corporate giants have the funds behind them to cover massive fines and costs.
However, in the case of a residents’ management company, it may well be that the company reserves are minimal, and much less than those of the directors, whose assets typically include their own flat at the very least. If people really need to recover a loss, they may have no choice other than to seek redress from the individuals.
What can go wrong?
Directors of Residents’ Management Companies and Associations can be held liable for acts deemed to be negligent, outside of their authority or in breach of duty or trust.
It could be that a building contract has gone wrong or over-budget, or that the management company failed to identify and rectify serious structural defects in good time, leading to further damage to the building resulting in big costs being passed on to service charge payers.
As well as the general compliance with company law, directors need to keep abreast of regulators such as the Health and Safety Executive and new building safety laws, such as those on fire risk assessments.
Directors of Residents’ Management Companies and Associations can be held liable for acts deemed to be negligent, outside of their authority or in breach of duty or trust.
It could be that a building contract has gone wrong or over-budget, or that the management company failed to identify and rectify serious structural defects in good time, leading to further damage to the building resulting in big costs being passed on to service charge payers.
As well as the general compliance with company law, directors need to keep abreast of regulators such as the Health and Safety Executive and new building safety laws, such as those on fire risk assessments.
It won’t happen in our friendly block …
Think it could never happen? The neighbours are all friends and wouldn’t dream of suing each other?
Imagine, though, if someone has suffered a significant loss, such as their flat plummeting in value because the need for essential repairs was missed. They might have no choice but to try and recover the money from the company or individual directors.
The management company or directors could also be sued by third parties such as contractors or visitors who are injured at the premises.
The likelihood of being held liable may seem low, but so can be the premiums to insure against the potentially huge legal costs that could arise if something does happen. It is important that you have specialists on your side to help you when you need them.
What should a D&O policy cover?
Basically, you are looking for the costs of defence and/or liability for compensation awarded for wrongful acts committed by a director or officer to be covered.
The policy should be specifically written for managers of leasehold flats and should include claims made against the management company as well as directors personally.
It should also include costs incurred in defending the company and directors at a First-tier Tribunal, the usual first port of call for legal disputes in leasehold flats.
A D&O Liability policy for leasehold flats can be very affordable, but don’t just treat it as a tick-box add on to your core buildings insurance. Ask the broker to go through the cover it provides and what the policy limits are and reassure yourself that they meet your specific needs. So often we see six and seven figure sums quotes as policy limits – but do they ever really think through what they mean and if they are sufficient?
Find out more about how Gallagher can protect your management company and its directors.
Directors’ duties
The Companies Act 2006 imposes certain general duties on a director of a UK limited company. Here’s a quick, but certainly not exhaustive, introduction as a reminder that directorship is a serious undertaking and directors deserve protection.
A director must:
- act in accordance with the company’s articles of association and resolutions and agreements of a constitutional nature (for example, decisions made at company meetings),
- act in the way you consider, in good faith, would be most likely to benefit the members as a whole,
- exercise independent judgment and make your own decisions, taking professional advice if you wish but using your own judgment as to whether to follow it,
- exercise the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as you in relation to the company and that you actually possess, and
- avoid a situation in which you have, or could have, an interest that conflicts, or may conflict, with the interests of the company.
Disclaimer
The sole purpose of this article is to provide guidance on the issues covered. This article is not intended to give legal advice, and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. We make no claims as to the completeness or accuracy of the information contained herein or in the links which were live at the date of publication. You should not act upon (or should refrain from acting upon) information in this publication without first seeking specific legal and/or specialist advice. Arthur J. Gallagher Insurance Brokers Limited accepts no liability for any inaccuracy, omission or mistake in this publication, nor will we be responsible for any loss which may be suffered as a result of any person relying on the information contained herein.
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