Directors’ and officers’ liability insurance – also known as D&O insurance – is now considered a crucial form of protection for all businesses. It is often a requirement before investors and board members risk their personal assets to serve your company.
Why is directors' and officers' liability insurance important?
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.
Directors, company officers and senior managers can be held personally liable for the actions and decisions they make on behalf of the company. If they do not act within the law, they could find themselves facing fines and needing to pay compensation for damages that could result in risk to their personal assets.
Taking out 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 defence costs as well as any compensation costs that arise from an unsuccessful defence.
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.
Wrongful acts can include:
Breach of trust
Breach of duty
Errors and omissions
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Where can D & O help?
An employee is involved with a fatal accident at work. The health and safety executive and the heirs to the employee’s estate bring legal action against the company, and the directors personally, for compensatory damages.
A minority shareholder brought action against the former directors of a property management company after they sold it. He alleged they had failed to obtain fair value for the sale of the company and demanded the directors make good the shortfall.
Two directors were disqualified after actions by the secretary of state when financial irregularities were uncovered when the company went into receivership. The accounts were overstated prior to a public share offering, which led to an inflated share purchase price.
A competitor claims a board member has released misleading statements tarnishing their reputation. They issue legal proceedings against the company, and the director individually, for libel damages.
An employee accuses a director of inappropriate advances after a business dinner celebrating clinching a large contract. The employee brings the action against the director personally.
The share price plunges following a profits warning. It is subsequently discovered there were numerous share disposals immediately prior to the announcement. All the directors face an investigation, and the external shareholders sue for their losses.