Directors’ & Officers’ Liability Insurance
What is Directors’ and Officers’ Liability Insurance?
Directors’ and officers’ liability insurance – also known as D&O insurance – covers the cost of compensation claims made against your business’s directors and key managers (officers) for alleged wrongful acts.
In today’s business climate of corporate transparency and accountability, an organisation’s officers and directors face a myriad of employment-related exposures. Claims can come from many sources, employees, regulators, shareholders, creditors, customers, etc. Ever-changing regulations, increased employee awareness of employment rights as well as the rise of shareholder activism means directors are more frequently at risk, translating to rising claims and escalating settlement costs.
In the wake of recent unprecedented corporate scandals, clearly the trend of corporate accountability applies to large corporations. But smaller privately held companies, including not-for-profits, are not exempt from litigation arising out of the management decisions of their boards. They, too, are at risk.
Regardless of your company’s size, the legal cost to defend a director is substantial, as are the potential penalties that can be personally incurred. Due to liability risks, protecting boardroom talent can be a challenge. To help ensure both your officers’ as well as company’s well-being, a directors’ and officers’ liability insurance (D&O) policy is part of a comprehensive risk financing strategy.
Do I need it?
If your company has directors or key managers, directors’ and officers’ liability insurance can cover the cost of compensation claims made against them by shareholders, investors, employees, regulators or third parties.
Directors and officers have specific duties, responsibilities and powers relating to their positions. These are usually set out in their job description or terms of reference. If a director or officer of your company is found to have acted outside of their terms of reference, civil, criminal or regulatory proceedings can be brought against them.
Unlike other liability policies that provide cover for claims arising from professional negligence, property damage and bodily injury, a D&O policy specifically provides cover for a ‘wrongful act’, such as an actual or alleged error, omission, misleading statement, neglect or breach of duty.
Wrongful acts can include:
- breach of trust
- breach of duty
- misleading statements
- wrongful trading
Directors’ and officers’ liability insurance covers the cost of defending these proceedings, as well as any compensation costs that arise from an unsuccessful defence.
If directors and officers do not have insurance, they face a greater risk of not being able to defend themselves against:
- disqualification from holding the position of director
- civil proceedings which can lead to hefty legal costs and awards for damages
- criminal prosecution which can lead to fines and possible imprisonment
What does the Directors’ & Officers’ policy cover?
A D&O policy provides defence costs and indemnity cover to the entity listed on the policy declarations, which may include:
- cover for individual directors and officers;
- reimbursement to the organisation for a contractual obligation to indemnify directors and officers that serve on the board; and
- protection for the organisation or entity itself.
It covers claims made by:
- regulators, shareholders or investors, e.g. for failure to act in the company’s best interest
It also covers claims brought in relation to:
- breach of European legislation
There are also additional forms of cover to adequately protect directors and officers, including:
- entity cover;
- payment priority for insured persons;
- severability of the insured as well as severability of the application;
- cover over time, meaning cover responds to past, present and future directors and officers;
- pay on behalf clause; and
- duty to defend clause
Employment practices liability insurance can be bought as an extension of directors’ and officers’ liability insurance. It covers employee discrimination claims, e.g. for unfair dismissal, harassment, or failure to promote a person.
Directors’ and officers’ liability may also cover defence costs arising from criminal and regulatory investigations into your company where no actual wrongful act has been alleged against a director.
Something else to also consider concerns indemnification provisions which are typically included in the charter/bylaws of a company. While an important risk component, small to medium-sized enterprises or not-for-profit organisations often do not have the financial resources to fund the indemnity provisions, making the bylaws hollow. A D&O policy can provide an extra blanket of security in the event of a covered loss
What is not covered
A ‘fraud’ exclusion is typically included in a D&O policy, which eliminates cover for losses due to dishonest or fraudulent acts or omission or wilful violations of any statute, rule or law. D&O cover can be tailored to your needs but be aware that D&O insurers are not consistent with their policy forms. This fact, plus the complexity of D&O claims, requires the insurer to have market commitment and deep expertise as well as the financial resources to handle potential claims.
Example Directors’ & Officers’ Claims
A manufacturer told one of its suppliers to increase inventory because they were expecting a large increase in production. As predicted, demand for the manufacturer’s product grew but the manufacturer increased its inventory with another supplier instead. The original supplier successfully sued the manufacturer, alleging they suffered damages as a result of having relied on the manufacturer’s promise.
A construction company suffered a near miss when a huge pane of glass fell from the fifth floor of a redevelopment project onto the pavement. Miraculously, no one was injured but the Health & Safety Executive made a site visit the following day. This revealed a number of legislative breaches. A variety of actions were subsequently brought against the directors.
The insured designs, manufactures and installs computer control systems for the oil, gas and petrochemical sectors. The company was formed by a management buy out. Two separate claims were brought, one against the company itself, and one against the individual directors in response to the alleged breaches of two clauses in the agreement governing the buy out.
A property developer claim demonstrates director vs. director action concerning breach of fiduciary duty plus two former directors acting outside their authority. They committed the company to an agreement to purchase land for development without approval of shareholders (fellow directors). The evidence established that the claim was unlikely to succeed. Our investigations demonstrated the board were provided with adequate information in terms of this particular transaction. Simply put this was a fallout between personalities with axes to grind, however, the insured still incurred legal costs to investigate allegations. Insurers defended the legal action until common sense prevailed.
We’re Here to Help
Whether you are a not-for-profit, privately held or a public company, it is likely that your business can benefit from a D&O policy. Since there is no such thing as a ‘standard’ policy, a professional broker is invaluable when purchasing D&O cover. We understand your organisation and can knowledgeably help design policy language to meet your needs. Call us today at (0161) 233-4499 to learn more about the appropriate protection for your company against potential directors’ and officers’ liability.