Guide to directors’ and officers’ (D&O) insurance

d o insurance

Directors’ and officers’ insurance, also known as D&O insurance, is a type of business insurance that can often seem quite complex. How does it differ from other types of business insurance, what exactly does it cover, and is it really necessary?

To answer these and other frequently asked questions, we’ve prepared a short guide for company directors, administrators, and other office bearers who may benefit from this type of policy.

The fundamentals

D&O insurance covers some or all of the cost of compensation claims made against company directors or office bearers for errors, omissions and wrongful acts they are alleged to have committed.

Compensation claims may be prompted by alleged breaches of duty or trust, for misleading statements or bad business decisions, and many other reasons.

Typically, such claims come from employees, shareholders, investors, regulators, customers, competitors, or other third parties. The amount of compensation awarded to claimants, if successful, can vary from a few thousand pounds to many millions, depending on each individual case.

An important distinction to bear in mind is that D&O insurance is not designed to cover claims made against the company or organisation as a whole but only for claims filed against individual directors or key office bearers. It’s also worth noting that directors or officers can be sued for their alleged actions under ‘past liability’, even after they have left the company.

Types of claims directors and officers face

It’s fair to say people today are quicker to seek compensation than ever before. There are a number of reasons for this, such as increased awareness of consumer and shareholder rights, greater scrutiny of business practice, the relative ease of making a claim, and solicitors incentivising potential claimants with no-win no-fee offers.

The types of claims can also vary tremendously, but a few examples include:

• A supplier claims for losses against an individual director who they allege failed to honour their promise of placing increased orders in future.
• Shareholders make a claim against directors for breaches of fiduciary duties, such as making fraudulent inducements to investors.
• An employee files an individual suit against a director for misleading them over a contractual matter, or for wrongful termination.
• Creditors seek to recoup losses by filing against an office bearer who they allege provided false or misleading financial information when applying for credit.
• A regulator files a claim for alleged breaches of European legislation by a company director.

Do you need D&O insurance?

As the director of a company in the UK, you and your fellow officers have a range of duties, responsibilities and specific powers. If you’re alleged to have acted outside your terms of reference, you could face claims for compensation as well as regulatory or criminal proceedings. So, while you may not be legally required to have D&O insurance, it’s for this reason that many company directors, managers and key office holders choose to have this type of cover in place.

Your exposure to risk may vary but without D&O cover you could compromise your ability to defend yourself against a claim of negligence, breach of trust, or some other alleged wrongful act.

Remember, simply knowing you are in the right is not enough and if a claim is made against you as a director, you will have to seek legal advice and may have to defend yourself in court. Compensation claims are often complex and invariably time-consuming, not to mention expensive to defend.

What does D&O insurance cover?

As with other types of business insurance, individual policies can be designed to suit your particular needs but you can expect cover to include the cost of claims made against you in the examples given above and, more generally, for alleged failure to act in the best interests of shareholders or in the company’s interest. You can also be insured for legal and other professional costs of defending yourself against such claims.

How much cover do I need?

The level of cover you need will depend on a range of factors. If you are on the board of a large organisation, for instance, you may not be at any greater risk of being sued, but the claims themselves will tend to be bigger. That said, regardless of the size of company you work for and whether you are answerable to shareholders or not, D&O insurance gives you the peace of mind of knowing that whatever happens, you’ll be covered.