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Directors and Officers Insurance

What is D&O insurance and who does it cover?

Directors and officers (D&O) insurance policies offer liability cover for:

  • a Director,

  • Officer,

  • Member of any executive or management committee,

  • Non-Executive Director,

  • Retired Director de facto director or trustee of the Company including anyone acting or alleged to have been acting as a Shadow Director of the Company

  • An employee of the Company to the extent that they: were acting in a managerial or supervisory capacity when the Wrongful Act was or was alleged to have been committed.

D&O Insurance protects from legal and other costs they may become personally liable to pay as a result of litigation.

Given the growing potential for litigation and the exposure to risks faced by directors and officers, D&O insurance cover is now taken out by an ever-increasing proportion of companies, not just by large multinational organisations, but small, medium, and large entities, private, public, and charitable.

What actions might Senior Management be personally liable for?

An allegation could be made for committing a wrongful act, this includes but is not limited to;

  • A breach of trust

  • A breach of duty

  • Neglect

  • Error

  • Misleading statement

  • Wrongful trading i.e., trading in the knowledge the business is or will become insolvent

  • Bribery and corruption

  • Employment Practices – Wrongful Dismissal, Wrongful deprivation of career opportunities,  Anti-discrimination regulations, including sexual, racial and age discrimination

Why do I need D&O Insurance?

Directors and key management staff who are not insured face a greater risk of not being able to defend themselves against serious claims. This means that they could be barred from holding the position of director, face significant financial costs from civil proceedings or face criminal prosecution with the potential for fines and even imprisonment.

Even if allegations are unfounded, defence costs can be crippling, especially to smaller companies. Other legal costs, such as attendance at investigations into the affairs of the company, should not be underestimated.

D&O insurance policies will usually cover the following people:

  • Past, present, and future directors

  • Past, present, and future officers or important management staff

  • Personal legal representatives in the case of death, insolvency, or bankruptcy of the company

What does D&O Insurance cover?

A D&O policy will pay for defence costs and financial losses. In addition, extensions to many D&O policies also cover costs for managers generated by administrative and criminal proceedings or in the course of investigations by regulators or criminal prosecutors.

Claims are settled up to the D&O insurance limit of indemnity set out in the policy, which varies depending on the cover required and the type of risks you may be exposed to.

What is not covered?

Directors’ and officers’ liability does not cover claims made against your organisation as a whole, only those made against individuals for alleged wrongful acts carried out in their capacity as directors or officers

Not all D&O policies are identical, and you should always speak to a broker or insurer to make sure you have the cover you need.

But there are a number of things that most D&O insurance does not cover, including:

  • Fraudulent or criminal conduct: this could include embezzlement or insider trading. Usually, insurers will pay for defence costs on the presumption of innocence but will decline all cover if found guilty by formal ruling or by admission.

  • Pre-known claims and circumstances: a new D&O policy will not cover claims that were either known about or ongoing when the insurance was taken out.

  • Property damage or bodily harm: other than for corporate manslaughter or following a breach of the Health & Safety at Work Act 1974.

  • Claims covered by other insurance

  • Illegal remuneration or personal profit

  • Pollution

  • Pension and Employee Benefit Trustees

Who can make an allegation against Senior Management?

Those who are most likely to launch an action against a manager include:

  • Shareholders, investors, creditors, and banks

  • Employees

  • Regulators

  • Customers, suppliers, or competitors