Directors and Officers Insurance
Directors and Officers Insurance: are your senior executives protected from liabilities?
Becoming the director or officer of a company has legal consequences. You can be held responsible for failings of the company on health and safety, data protection, accounting and fraud, even if you were not actively involved. Potentially officers and directors will still be held liable for negligence if a court feels they should have been aware of what was going on.
Officers and directors found guilty of wrongful conduct can be held to account in civil, criminal, or regulatory proceedings – or all three. Possible penalties include fines, imprisonment and disqualification from office, as well as the detrimental impact on professional standing and career prospects.
Claims may also be brought by the full range of stakeholders in a company. This includes owners, investors, employees, bondholders and lenders, customers, consumer bodies, vendors and suppliers, and competitors. The competing interests of these groups mean that it is highly likely that a claim will be brought against your company and its executives at some point.
In view of this risk, it makes sense for senior staff to be protected by Directors’ and Officers’ Insurance (D&O). D&O provides protection to pay legal costs to help defend claims and pay compensation where necessary.
There is a common misconception that D&O insurance is not needed where Professional Indemnity (PI) insurance is in place. The two policies cover different situations: PI applies where a professional offers advice or a service is claimed to fall short of the required standard. D&O applies to claims about how a company has been managed. It relates to how senior executives ensure good governance and oversight.
For example, in today’s digitised world no company is immune from the threat of cyber-attacks. Businesses of any size have vulnerabilities that can be exploited, as demonstrated by the recent Talk Talk hacking.
The fallout from this kind of attack is severe for directors and officers, who will face claims from many sides: customers claiming for data breaches, stakeholders seeking compensation for the reduction in their share value, business associates for cancelled contracts. There may also be criminal and regulatory investigations. Added to this, very often after such an attack the board is replaced wholesale, and new directors seek to bring proceedings against the outgoing officers. It is a scenario in which executives would naturally want maximum protection for their private assets.
Officers and directors can also be held liable for employee claims, for example sexual harassment or disability discrimination. As these claims usually hinge on the oral testimony of those involved, it can be very difficult to predict the outcome of a tribunal. Settlements can be substantial where senior employees are held to have been lax in ensuring compliance with the law. D&O policies with an Employment Practices Liability extension will provide cover for legal costs and compensation of this type of claim.
There are also some positive arguments for D&O insurance. If a business fails to take out a D&O policy, its ability to attract the best candidates for senior positions is seriously compromised. The brightest stars are wise enough to insist on an insurance policy that protects them from personal liability; where protection is inadequate, many will simply refuse to consider taking up a role.
D&O insurance is not just for large companies. SMEs and medium-sized firms are no less liable to claims from employees and outsiders. Indeed, it could be said that D&O is even more important for smaller firms as they are less likely to have the in-house HR and legal resource to ensure best practice, monitor compliance and resolve claims in their early stages.
As an independent broker Stride can provide a tailored service, which balances the unique needs of each set of directors and officers. Not all policies are the same, so it is important to be clear what risks you face and what cover is in place to protect you.
A standard D&O policy provides protection for claims brought by regulators, such as the Health and Safety Executive or the Office of Fair Trading. It also provides cover for defending claims brought by shareholders and investors who claim one or more officers and directors failed to act in the company’s best interests.
Most policies also provide protection if it is alleged that senior staff are in breach of European legislation, or if a company becomes insolvent and claimants seek to recover their losses from a director or officer’s personal assets, such as their home and savings.
Coverage is more variable for employment claims. Some policies may provide cover, in other instances you will need to take out an Employment Practices Liability extension. This is more relevant to some companies than others, depending on the size and composition of your workforce.
It is not always the case that D&O policies cover defending criminal or regulatory proceedings. Policy wording often limits cover to particular sets of circumstances, for example where there is no allegation that a director has committed an actual wrongful act.
It is important to note that D&O insurance only applies to individuals acting as directors and officers; it cannot give a company any legal protection. It is possible to take out Entity cover, which is an approximate equivalent to D&O which protects companies only.