D & O Policies: What’s the point of the Spousal Liability extension?
by Camargue LAB
A Directors and Officers liability policy often contains a spousal liability extension. This extension provides cover for the innocent spouse of a director who is being sued for mismanagement. On the face of it this cover appears to be pointless because:
- If they are married in community of property there is only one estate: the joint estate.
- If they are married out of community of property then the common law position is that the spouse’s property is separate and cannot be attached.
The answer lies in Section 21 of the Insolvency Act 24 of 1936 which has changed the common law position of the spouse married out of community of property. It says that all the property of both the insolvent spouse and the solvent spouse will automatically vest in the trustee of the insolvent estate. The onus is then on the solvent spouse to show that the property claimed is, in fact, her separate property. In other words, the Spousal Liability extension is necessary to cover the solvent spouse’s costs in getting her property out of the insolvent estate.
It is significant to note that word ‘spouse’ in terms of the Act refers not only to persons married to each other, but also to unmarried persons living together as spouses.
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