Why do I need Directors’ & Officers’ Insurance?
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 and 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.
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.
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.
Wrongful acts include:
- breach of trust
- breach of duty
- misleading statements
- wrongful trading
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 it covers
Directors’ and Officers’ liability covers claims made by:
- regulators, e.g. investigations by the Health and Safety Executive (HSE)or the Office of Fair Trading 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
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 sometimes covers defence costs arising from criminal and regulatory investigations into your company where no actual wrongful act has been alleged against a Director.
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.