Directors and officers (D&O) insurance policies offer liability cover for company managers to protect them from claims which may arise from the decisions and actions taken within the scope of their regular duties.

Any allegations of wrongdoing need to be investigated and defended, and this can cost a significant amount even if the case doesn’t reach court. This means directors’ and officers’ personal finances are at risk, so it’s essential companies provide protection through directors and officers (D&O) liability insurance

If your directors or management team have legal or regulatory responsibilities to employees, the public, regulators, investors or other directors, then D&O liability insurance should be considered. It is particularly important for companies who have raised or who are seeking investment from external shareholders. All firms that fall under the Senior Managers Certification Regime (SMCR) have an increased risk in making sure they act appropriately. D&O is even more relevant for these firms as it ensures your employees are covered if they unintentionally run afoul of their regulatory responsibilities.

D&O personal liability claims can cover a whole range of issues, from breaching health and safety laws, allegations of cyber-bullying, to misrepresentations in a pitch deck, or errors in financial reporting.

• Employees know their employment rights and are increasingly likely to sue
• Legal liability is shifting away from companies and towards personal liability
• Regulators are now more proactive in investigating companies

If you have shareholders that own 15% or more of the company, then check for a “major shareholder exclusion” – this effectively excludes any claim brought by a shareholder against the business that owns 15% or more of the company’s shares. And should you have shareholders, business activities or contracts, make sure your jurisdiction allows for worldwide claims. Another thing is to make sure your limit is high enough, as many D&O plans have an aggregate limit, meaning another director/officer could use it up, should a claim be made – leaving you exposed.

The core purpose of a D&O policy is to provide financial protection for managers against the consequences of actual or alleged “wrongful acts” when acting in the scope of their managerial duties. The 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.

These coverage extensions are gaining more and more importance among company directors. In this way, managers receive comprehensive, integrated cover that ensures them a reliable, consistent and structured legal defence.

There are different risks in different markets. The United States is by far the world’s largest D&O market with a premium volume of around $6 billion, and there the most frequent source of claims are claims related to employment or HR issues such as discrimination, sexual harassment or wrongful termination. From 2000 to 2008, over 40% of D&O claims in the US were employment related claims. In most cases the managers did not act themselves; they simply did not enforce employee conduct rules against discrimination and harassment.

While these are the most frequent claims in the US market, they are not the most expensive ones. The severity of securities claims is much higher. Insurers are watching closely whether shareholder activism and class-action lawsuits are on the rise, but the frequency of these claims seems to have stabilised at its current high level. In other markets worldwide, shareholder claims are on the rise along with the general trend of increasing shareholder right

This could be a breach of trust, breach of duty, neglect, error, misleading statement or wrongful trading, committed or attempted by a director or officer whilst acting in this capacity on behalf of the company.

All current, future and past directors and officers of a company and its subsidiaries are covered under a D&O policy, which can also include non-executive directors. In very specific cases, like securities claims, the policy can even be extended to cover claims against the company itself. Cover is usually taken out and paid for by the company. Depending on the respective local law and policy, this may or may not be viewed by legislators as a “benefit-in-kind” for those persons it covers

An important thing to bear in mind is that cover isn’t exhaustive, meaning there are certain actions and behaviours which won’t be protected under the terms of your arranged cover.

You can find these exclusions as part of your policy wording, and the majority of reputable insurers will also make you aware of these from the outset too. While the specifics of these exclusions will vary from policy to policy, and insurer to insurer, there are some common exemptions across the board to be aware of.

For the most part, D&O insurance won’t cover any instances of criminal wrongdoing or illegal activity on the part of your director or officer. Nor will the policy offer protection for claims or accusations that arose prior to the insurance start date.

These exclusions typically include (but aren’t limited to):

• Criminal acts such as fraud or money laundering
• Damage to property or bodily harm (except corporate manslaughter)
• Deliberate acts of non-compliance
• Any illegal activity
• Pre-existing claims
• Grievances already in effect at the time the policy was taken out

So even those with a directors & officers insurance policy can still find themselves at risk should they breach the terms of their agreement, or indulge in behaviour outside the remit of the law.