Why all businesses require Directors and Officers insurance
Directors and Officers liability insurance (D&O insurance) provides financial support and defence against potential investigations into the behaviour of your executives and the possibility of them being sued. Without such insurance, the company will be left to pick up the tab from their own resources. Or, failing that and more worryingly, it can often be left to the director, themselves.
Many businesses mistakenly assume that they do not need Directors Officers insurance (D&O), as they do not have shareholders. Others assume that they are covered under general liability. This is not the case. Every director or officer is vulnerable to a claim. They can come from virtually anywhere: customers, competitors, suppliers, employees, the company itself, regulators, as well as governmental and law enforcement agencies.
So what type of cover is available?
✔ Limits of indemnity of up to £10 million.
✔ Extends to reimburse the company in situations where they are allowed to pay Directors and Officers defence costs.
✔ Cover for claims instigated by shareholders against any director or officer.
✔ Full cover in respect of insured versus insured actions, other than in the USA where limitations apply.
✔ Cover for legal representation at any proceedings subject to our written consent.
D&O policies are comprehensive enough to protect individuals against claims and allegations including:
Employee claims – Such as unfair dismissal, failure to prevent harassment, discrimination. In any one year, there are on average 500% more employment tribunal claims affecting businesses in the UK than there are fires on business premises.
Regulators – Investigations by the HSE or other regulators can be costly, even when no wrongdoing is proved.
Shareholders – Shareholders are ever-more vigilant of directors activities and there are increasing requirements for decision transparency.
European legislation – Directors and officers must ensure that the company does not breach European legislation, but staying up to date is easier said than done.
Creditors/insolvency – Company insolvencies occur frequently and the actions of directors and officers are scrutinised carefully for any potential wrongdoing.
Where a wrongful act is discovered, the director or officer may be required to contribute – from their own assets – to meet the company’s debts. This has led to situations where company directors have had to sell their own homes to fulfil their obligations to creditors.
Nowadays most larger businesses tend to take out Directors and Officer liability insurance, as it protects their shareholders’ value and allows them to recruit the top candidates for these positions. But it is generally the case that smaller businesses are less likely to seek out this insurance, which is somewhat counter-intuitive considering their likely inability to meet the potential huge fees that may result from defending such a case.
Two types of Directors and Officers liability insurance
There are two types of liability insurance, including both corporate and individual coverage. Corporate coverage is where individuals are not named and all directors are covered, whereas individual coverage is personal to a specific director and perhaps also their spouse and estate. Individual coverage can be taken in addition to corporate coverage and acts an additional layer of defence, should the company be unable or unwilling to defend the director.
A typical policy will cover the costs of any investigations, awards, damages or settlements. With so many areas where claims could be made against a director or officer and the fact that a director’s personal assets could be at stake, this form of liability insurance is a no-brainer.
It doesn’t cost much to protect yourself
Often, companies or directors will expect that this type of coverage is expensive and not worth the cost, but this is not really the case. Premiums can start from as little as £400 per year, depending on your exact requirements and the type/size of your company. Considering the high potential to come up against claims that could run into the thousands, if not millions, the cost is a mere drop in the ocean.
Just because your business has high moral standards, doesn’t mean a director’s behaviour will go unquestioned
Some Charities or Trusts will assume that they don’t need coverage, but the truth of the matter is that all organisations can be investigated or sued for the way in which they are managed. In particular, these kinds of organisations will not want to rely on their own much needed resources to fund a legal defence, so it is well worth at least finding out if your organisation has sufficient coverage in place.
Investigations can begin even after you have left a company
It is also important to know that, even if you leave a company as a director or officer, you can still be sued or investigated for your behaviour for the time you were there, and in many cases, a prior employer will not necessarily readily fund this cost once you have left. Even if you are a non-executive, you can be found liable for unreasonable behaviour if it is proven that you were acting as a director. And you can’t always assume that your company will be quick to defend you.
We advise that you do not get caught with a lack of insurance in place. Even when not guilty, proving your innocence can be highly expensive and damaging to your character without access to the best possible representation for you.
Not all D&O policies are the same, to understand more or if you require a detailed review of your present arrangements then please contact us.