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, misleading statements, bad business decisions and many other reasons.
Typically, such claims can come from employees, shareholders, investors, regulators, customers, competitors, creditors 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 the core purpose of D&O insurance is to protect individual directors and officers. Some policies can also provide cover to the company in specified circumstances, so it is important to check exactly what a particular policy includes.
It’s also worth noting that directors or officers can face claims relating to alleged actions taken while they held office, even after they have left the company. Most D&O policies operate on a claims-made basis, so when a claim is made and whether appropriate cover remains in force can be important.
There is no general legal obligation to have D&O cover, but you may have a contractual obligation to do so, and/or it can provide peace of mind.
Types of claims directors and officers face
It’s fair to say people today are quicker than ever to seek compensation.
There are a number of reasons for this, such as increased awareness of consumer and shareholder rights, greater scrutiny of business practices, 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:
- Shareholders claim against directors for alleged breaches of their duties to the company.
- Investors allege that a director made false or misleading statements when they invested in the business.
- An employee makes a claim against an individual director over an alleged wrongful act connected with their employment.
- Creditors seek to recoup losses from a director who they allege provided false or misleading financial information when applying for credit.
- A UK regulator takes action against a director for an alleged breach of their legal or regulatory duties.
Do you need D&O insurance?
As the director of a UK company, you and your fellow officers have a range of duties and responsibilities.
If you’re alleged to have acted outside your duties or responsibilities, you could face claims for compensation as well as regulatory or criminal proceedings.
D&O insurance may cover the cost of defending certain proceedings, depending on the policy. However, insurance cannot cover criminal fines or penalties.
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 can be complex and 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 tailored to your specific needs.
You can expect cover to include certain claims made against you in the examples given above and, more generally, alleged wrongful acts committed in your capacity as a director or officer.
You can also be insured for legal and other professional costs of defending yourself against covered claims.
However, D&O insurance doesn’t cover everything. Policies typically contain exclusions and limits, and matters such as fraud, dishonesty, criminal fines and penalties may not be covered. Other business risks may instead fall under policies such as professional indemnity insurance, public liability insurance or employers’ liability insurance.
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.
For a small owner-managed limited company, the level of exposure may be very different. Factors such as outside shareholders, employees, borrowing, investors, regulatory responsibilities and other directorships can all affect the potential risk.
Whatever the size of the company, check the limit of indemnity, excess, exclusions and claims-made terms rather than assuming every type or value of claim will be covered.
Read more about D&O liability insurance from the Association of British Insurers.