When you set up a company, run a business with others or begin to employ key management staff, there is increased risk.
As a director of a company, you have increased responsibility and there are many cases where Directors and Officers of a company may be held liable for their actions.
Often SME’s lack the same formal control processes that larger corporates have and this can lead to mistakes being made. Many SME directors don’t always sit back and assess the risks involved around themselves or their colleagues being held personally liable.
If someone decides to sue you as an individual, then your own personal finances are at stake. This is where Directors and Officers liability insurance comes in.
What is Directors and Officers Liability Insurance?
Directors and Officers Liability Insurance - also known as ‘Management Liability Insurance or D&O Insurance’ covers the cost of claims made against the company’s directors and key management (referred to as officers) for alleged ‘wrongful acts.’
Wrongful acts or scenarios could be:
• Neglect
• Breach of duty
• Breach of trust
• Misleading statements
• Reporting errors
• Failure to comply with regulations or laws
• Legal actions brought by shareholders against directors and officers
• Creditor claims
• Corporate manslaughter
What does Directors and Officers Liability Insurance cover?
If your company has directors or key management, the insurance can cover the cost of compensation claims made against them by other stakeholders such as employees, shareholders, investors, regulators or other third parties.
Unlike other liability policies, D&O insurance provides cover and indemnity for individuals within a business as opposed to the whole company.
Defending a claim against an individual can last for months and be incredibly expensive. D&O insurance will cover financial losses made by an individual during the process of defence as well as compensation costs arising from an unsuccessful defence.
D&O insurance policies can cover:
• current directors and officers
• past and future directors and officers
• non-exec directors
• key people in subsidiary companies
What isn’t covered by Directors and Officers liability insurance?
Serious criminal activity such as fraud, or acts committed deliberately or maliciously will not be covered by a D&O policy. Intentional acts are not covered as this could encourage deliberate behaviour in individuals.
Personal injury or property damage isn’t covered either as these will be covered by Employers’ Liability Insurance and Public Liability Insurance.
Who is classed as an ‘officer’?
The title of director is often clearly defined legally; however, the term ‘officer’ is less defined. Generally, it means key management team members. For example, a CEO, CFO, Company Secretary or COO.
Is D&O insurance only for large corporates?
Absolutely not! SME’s, partnerships and family run businesses carry with them risk exposure to all the key individuals involved in the day to day running of the company. These types of companies often face increased risk as they will have a lack of formal control processes that larger corporates often have in place.
Charities or Not for Profit organisations should also take out D&O insurance as they operate under a strict regulatory and statutory environment, so can be more at risk of claims being made against the individuals running them.
Whilst there is no statutory requirement to have D&O Insurance, not taking out such a policy could leave you, fellow directors and management exposed to costly personal legal claims.
Summary
Directors and Officers have duties, responsibilities and powers relating to their positions managing a company. This can make them more likely to have individual claims made or proceedings brought against them. The individuals are personally liable for the costs of defending such claims and compensation awarded for an unsuccessful defence.
Directors’ and Officers’ Liability Insurance covers individuals within the company for the cost of defending these claims themselves and any subsequent compensation costs.
If you are an owner/director or key management team member of a limited company, partnership or not-for-profit organisation, we strongly recommend that you take out D&O insurance.
For more help and advice on Directors and Officers Liability Insurance
Contact the team at Harborough Portas
Call us on 0116 260 0506
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