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.
Directors’ and officers’ insurance
Ensuring you have the right type of insurance to help protect against new and emerging risks can be complex – we help to make it simple.
Directors and officers in every business make hundreds of decisions – each of which has the potential to be scrutinised by employees, clients, shareholders and peers if they believe a decision adversely affects their best interest. The stakes are high – directors and officers risk losing their personal assets if they are ever involved in a legal action for a decision they have made while performing their regular duties.
Amidst the evolving business environment, the significance of Directors and Officers insurance has never been greater. What if your business lacks the suitable coverage or adequate limits, or, in a more serious scenario, don’t even possess a policy? How might this affect your business operations?
- The ramifications financially and commercially of not having a Directors & Officers policy in force could result in the business being liquidated and personal guarantees being called upon if a claim arose under the D&O parameters.
- Should a D&O policy not have an Employment Practice Liability (EPL) section selected/or included and an employee pursues a claim against the Director or someone in a managerial position for career deprivation, sexual harassment or similar, the Company would have to fund their own legal costs.
- What would happen if there was an employee fatality or injury on site and the Health and Safety Executive investigated and prosecuted the Directors for breach in their responsibilities? Do they have enough indemnity limit of insurance cover in place? Has their indemnity limit ever been reviewed or increased?
- What would happen if the company had offered death in service cover to a new employee with certain limits but failed to increase their standard cover offered and a fatality occurred? The spouse of the partner could issue proceedings that the HR director had failed to process the change and acted negligently which could result in a significant claim cost.
- What would happen if an ex-Director of the business became disgruntled with his exit package and states the other Directors had conspired against him/her in his employment – would the limits of indemnity in force be enough?
- What would happen if an employee fell asleep at the wheel whilst driving on business for the company and an accident occurred which resulted in the death of members of the public. The Transportation manager could be sued for negligence in not making sure company employees were adhering to the companies ‘working shifts policy’ and the senior Directors could be found negligent also if no procedures were in place to manage this area of exposure.
What is D&O insurance?
Directors’ and officers’ liability insurance – also known as D&O Insurance – is designed to protect senior employees in a company against being personally financially liable for any wrongful acts, which can include:
- Breach of duty
- Breach of trust
- Errors and omissions
- Misleading statements
- Wrongful trading
Unlike liability policies that provide cover for claims arising from property damage or bodily injury, D&O insurance specifically provides cover for a “wrongful act”, such as an actual or alleged error, omission, misleading statement, neglect or breach of duty.
A D&O policy provides cover for 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
- Protection for the organisation or entity itself
Regardless of your company’s size, the legal cost to defend a director can be substantial, as are the potential penalties that can be personally incurred. A D&O policy is a key part of a risk management strategy.
Why you need D&O liability insurance?
In order to drive your business to the next level, you need to understand the risks you face and how you can minimise or avoid them altogether. Directors and officers are bound by complex legislation in the UK and allegations of wrongful acts from interested parties like shareholders, investors and regulators are on the rise. Non-exec directors are even feeling the pressure. It is not just the blue-chips who need to consider this type of insurance – managers and directors of SMEs are exposed too.
Ever changing regulation, increased employee awareness of employment rights as well as the rise of shareholder activism means that directors and officers are more frequently at risk, translating to rising claims and escalating settlement costs.
If directors, company officers and senior managers do not act within the law, they could find themselves facing fines and paying compensation for damages that could result in risk to their personal assets.
Ensuring you obtain the right advice about directors’ and officers’ liability insurance for your senior employees means you can help mitigate the risks faced by you and them. The policy can provide legal advice and cover for defence costs as well as any compensation costs that arise from an unsuccessful defence.
Who needs directors’ and officers’ insurance?
Directors and officers, regardless of sector or industry, face wide ranging employment-related exposures. Claims can come from many sources including employees, regulators, shareholders, creditors, clients, etc.
Directors’ and officers’ liability insurance is often a requirement before investors and board members risk their personal assets to serve your company.
If your company operates overseas, you could be exposed to a raft of further legislation including EU directives and US securities laws. If directors make frequent business trips to the USA, adequate D&O coverage must be in place to provide legal representation and extradition protection should they be detained by US authorities.
Public liability and products liability policies do not cover the cost of D&O legal actions. Settling these – even if the director or officer is found innocent – can be costly and bankrupt a company or individual. Many companies choose to purchase D&O Insurance to protect their directors from legal expenses and personal liability exposure not covered by indemnification.