Directors and officers are personally liable for making a mistake or misrepresentation. It is often assumed, incorrectly, that the personal directors of a company are not liable for mistakes made but even in a limited company the personal liability of the individual directors is unlimited.
Directors and officers are under increasing scrutiny and allegations of errors are often made. These are called ‘wrongful acts’ and include breach of trust, breach of duty, neglect, error, misleading statements, and wrongful trading [1] by a director or officer whilst acting on behalf of the company.
1. What is Directors and Officers insurance?
Directors and Officers insurance is protection against the financial costs of action taken against directors and officers of your business and will pay for the losses of the directors where a company is required by law to cover these costs. The insurance policy may cover the company for such losses.
2. How can I buy Directors and Officers insurance?
The Directors and Officers liability insurance products are available as a stand-alone policy or can be bought as part of a package of covers usually called management liability insurance.
You can buy this type of insurance online, directly from a broker or insurer or via an insurance broker face to face or over the phone. It is important to know that if you buy insurance directly from a broker or insurer online then you will not be getting any advice. This means that it is up to you to know what you are buying and that it is suitable for you including understanding what is and is not covered. If you use an insurance broker it is our job to assess your needs and provide the right insurance products to meet those needs, this does not always mean paying more for your insurance. This can include factors such as assessing the coverage provided, selecting the correct limit of indemnity and ensuring the excess level is correct for you as a higher excess can reduce the premium.
3. Do you need Directors and Officers insurance?
The Association of British Insurers (ABI) describes it as follows; “If your company has directors or key managers, directors’ and officers’ liability insurance can cover the cost of compensation claims made against them by shareholders, investors, employees, regulators or third parties.
Directors and officers have specific duties, responsibilities, and powers relating to their positions. These are usually set out in their job description or terms of reference. If a director or officer of your company is found to have acted outside of their terms of reference, civil, criminal, or regulatory proceedings can be brought against them.
Directors’ and officers’ liability insurance covers the cost of defending these proceedings, as well as any compensation costs that arise from an unsuccessful defence.”
While it is not a legal requirement to buy Directors and Officers insurance most businesses consider it to be additional protection for Directors, Employees, and Shareholders as well as helping attract Directors and demonstrate to investors that you have adequate insurance in place to protect the business.
4. What could happen if I don’t have Directors and Officers insurance?
If directors and officers do not have insurance, they face a greater risk of not being able to defend themselves against:
- disqualification from holding the position of director
- civil proceedings which can lead to hefty legal costs and awards for damages
- criminal prosecution which can lead to fines and possible imprisonment
5. How can a Directors and Officers insurance claim happen?
Claims and proceedings where personal liability can be involved also typically include:
- Claims by investors and shareholders who blame directors personally for their losses
- Actions brought by liquidators, where they suspect wrongful trading or incorrect payments to creditors
- Actions brought by HMRC where insolvent trading or misappropriation of tax payments is suspected
- HSE investigations where negligence is suspected [2]
6. What is usually covered by Directors and Officers insurance?
Directors and Officers liability covers claims made by regulators, creditors, shareholders or investors, e.g., for failure to act in the company’s best interest. It also covers claims brought about by breach of European legislation and insolvency.
Employment practices liability insurance can be bought as an extension of Directors and Officers liability insurance. It covers employee discrimination claims e.g., for unfair dismissal, harassment or failure to promote a person.
Directors and Officers liability sometimes covers defence costs arising from criminal and regulatory investigations into your company where no actual wrongful act has been alleged against a director.
7. What isn’t covered by Directors and Officers insurance?
Directors and Officers liability does not cover claims made against your organisation, only those made against individuals for alleged wrongful acts carried out in their capacity as directors or officers.
8. How much Directors and Officers insurance do I need?
The amount of cover you need will depend on what you do and the risks you face as a business as well as how much you want to spend to mitigate the risk and transfer that risk to an insurer at a price. It is worth talking to an insurance broker who can help you assess the amount of cover you need.
9. How much will Directors and Officers insurance cost?
The premiums you pay will be based on a number of factors, such as;
- how much coverage you want to buy
- your turnover
- the nature of your business
- the number of and experience of the directors and officers that will be covered
- the geographical areas and jurisdiction your business operates in
- previous claims.
It’s worth thinking about these areas before you get a quote, so you have them to hand.
10. I’m a sole trader, do I need Directors and Officers insurance?
No, you don’t, but you might want to think about legal expenses insurance or professional indemnity insurance depending on what you do.
What Next
We partner with a range of insurers who can provide Directors and Officers insurance for you and your specific requirements. For further information, please contact us. Alternatively, you can reach me directly at jaimie.quill@blwinsurance.com
Sources:
[2] Markel – https://www.markeluk.com/business-insurance/directors-officers-insurance/what-is-directors-and-officers-insurance