Managing personal liabilities when running an incorporated dental practice
One of the fundamental reasons to run a dental business via a limited company is to protect the owners and directors from incurring personal liability for the debts and liabilities of the business. The general rule is that an owner or director of an incorporated business cannot be held personally liable for its debts and liabilities provided their actions fall within the parameters of the company’s constitution and the actions are otherwise lawful.
But - and it is quite a big but - there are a number of situations where an owner or director of an incorporated dental practice may retain or attract personal liability. So, here are some of the key situations and how they may be managed.
1. Personal liability from contracts
A contract can be personally binding on a director where it is not clear from the contract that the director is entering into it on behalf of the company. To manage this risk, directors should always make sure that stationery, business cards and emails they use to contract with others make it crystal clear that they are acting on behalf of the company. It is also vital to quickly correct any attempt by another party to make the director individually liable for the company’s contractual liabilities. The company should always try to control the drafting and approval of the contracts it enters into and, wherever possible, adopt its standard terms.
2. Personal liability from guarantees
Sometimes, particularly with smaller private dental companies or newly established dental companies, a director or owner may be asked to provide a personal guarantee for bank overdrafts, loans, or property leases. Where a director agrees to this (usually when there is no other option but to do so), this effectively creates a personal liability for the director should the business be unable to meet its obligations to the lender or landlord. Although there are a number of personal guarantee insurance products on the market, insurers are usually only willing to underwrite part of the sum guaranteed, leaving the guarantor to foot the rest of the bill. It is important to take independent legal advice on any personal guarantee being given and also on the wording of any personal guarantee insurance product being considered.
3. Personal liability from patient treatment
Practice principals retain vicarious liability and non-delegable duties of care for the patient treatment provided by their associates. Recent changes to the dental landscape have led some dental professional membership schemes to extend their benefits to cover this risk. However, it is important to note that the benefits provided under these schemes are almost always discretionary. With the increasing level of risk in the dental profession, scheme operators may exercise their discretion to not pay benefits, leaving the liability the personal responsibility of the principal.
4. Personal liability from employee claims
Under the Equality Act 2010, claims for discrimination and harassment can be brought directly against directors, making them personally liable for unlawful discrimination committed by them in the course of their employment, even if their company is found not to be liable. Where a director (as an employee) and the company (as the employer) are held liable for the same discrimination or harassment act, it is important to appreciate that this is a joint and several liability which means that the director could be personally responsible for not only their own fines but also those of the company.
Similarly, personal liability can arise from health and safety legislation. If a director is fully aware of a health and safety issue but deliberately or recklessly chooses to ignore the issue and an employee suffers personal injury or worse, the normal protection afforded by limited company status may be lost and the liability may attach to the director personally. As further discussed below, a policy of directors and officers (D&O) insurance could cover the professional and legal costs incurred by directors in defending any claims made against them.
The importance of indemnities and directors & officers insurance protection
Many companies now offer indemnities to their directors in their articles of association which can reduce the risk of personal liability other than in relation to criminal acts. To ensure even better protection however, a company’s indemnity to directors can be supplemented by a robust directors and officers (D&O) insurance policy. Whether or not a director is ultimately held liable for claims made against them, the associated defence costs can be extremely expensive, and the defence process can be lengthy. D&O insurance can be used to indemnify past and present directors for defence costs incurred in defending an action which falls within the scope of cover. Unfortunately, any associated fines and penalties are usually excluded from cover. Getting expert legal advice on policy wording to ensure the cover is adequate and appropriate and that all those likely to benefit from the cover have access to it is key.
Kerry Brooks, Solicitor, O'Connors