The Importance of Directors and Officers Insurance

25/05/2021

Directors and Officers Insurance now often referred to as Management Liability Insurance, covers the insured against compensation claims made against their business’s directors or key managers for alleged wrongdoing. Some examples of this are: neglect, misleading statements, breaches of trust, errors, and others. Even with the limited liability status of a business, personal liability of directors and officers is unlimited.

Now the important question is, Do I need it?

The answer to this really depends on your attitude to risk. However, every incorporated business with Directors and Officers is at risk in some way or another of needing to defend themselves against Criminal proceedings, civil proceedings, or disqualification from their role. This could be brought against them by shareholders, investors, employees, regulators or third parties. These situations often arise due to accidental wrongdoing not just intentional wrongful acts and therefore anybody in these positions are at risk.

Here are some 2 examples of situations where D&O cover would be crucial:

  • A fire occurs and the companies’ premises are destroyed. It is discovered that the director who is responsible for arranging the company’s insurances inadvertently failed to keep the insurances up to date and the insured value was not high enough when the loss occurred. This led to a significant underpayment from the company’s insurers, and insufficient funds to rebuild the company’s premises. The other directors sued the responsible director for this shortfall.
  • The company makes a derogatory remark about its customers. As a result of this the company receives negative publicity which hampers the year end profits. In response to this the shareholders of the company sue the company’s directors for alleged mismanagement and incompetence.

As you can see in these examples, nobody set out with the intention of causing a loss and could have occurred to a company of any size. Without D&O cover the officers involved could be personally accountable to pay hefty sums of money in order to settle claims should they be found liable. Individuals are becoming more vulnerable to claims as employees know their rights and have become more likely to sue, as well as legal liability shifting away from companies towards personal liability. On top of this regulators are now more proactive in investigating companies.

The prices of D&O cover can vary drastically dependant on company size, structure and the risk it imposes. However, we feel it is a cover that is invaluable to a large number of business’s and is well worth considering.