Directors and Officers Insurance
A comprehensive guide about directors and officers insurance
Directors' and officers' insurance is recommended for every business no matter whether you are a small private company or large public company. A policy will provide financial protection from legal liabilities, regulatory investigations, and claims made against the individuals.
What is directors' and officers' insurance?
Directors' and officers' insurance, also known as D&O insurance, is a liability policy that provides financial protection to the company's executives and board members against allegations of wrongful acts. It's important to understand that company directors have a personal liability when undertaking their statutory and fiduciary duties, such as those under the Companies Act 2006. Directors' and officers' insurance is commonly purchased by companies of all sizes to protect the senior individuals against compensation claims and regulatory investigations.
What does directors' and officers' insurance cover?
A D&O policy will protect against civil liabilities, regulatory proceedings, and criminal allegations. A policy provides a safety net against legal actions, protecting the personal assets of the leadership team against claims for financial loss. Claims made against directors can arise from a wide range of different interested parties, such as shareholders, customers, employees, competitors, suppliers, administrators and regulators. Directors' and officers' insurance will cover your legal costs, in addition to covering any damages awarded by a court, or insurable fines levied by regulatory bodies.
Annual D&O premiums can start at £345 for a £1 million limit for a small private company but can cost tens of thousands for a large public company. We work with a wide range of insurance companies to provide competitive solutions.
What is directors and officers insurance?
The cover provides financial protection for individuals against civil, criminal and regulatory proceedings, whilst acting in a managerial capacity on behalf of the company. Individuals that accept roles as directors, officers and senior managers can be held personally liable while acting on behalf of your business. D&O insurance is therefore critical in protecting those individuals should any allegations occur. It's important to note regulation and legislation exists to make senior individuals responsible for their actions on behalf of companies. If these laws did not exist, then company directors could act recklessly in the pursuit of profits without any consequence.
D&O insurance is common practice these days to provide the security that in the event individuals are held accountable, they have access to a legal defence and protection against damages and insurable fines. The regulatory and legal landscape continues to evolve with an ever increasing burden placed on directors. Failure to comply with the Companies Act 2006, health and safety laws, insolvency laws, GDPR, competition laws, consumer laws, reporting requirements, can all be levelled at individuals. D&O insurance provides a cost-effective mechanism to protect those individuals that take on leadership roles within the business.
What does directors and officers liability insurance cover?
D&O insurance will offer protection by paying legal costs incurred in defending claims and paying damages awarded by a court. The support from D&O insurance not only provides for a legal defence, but also helps to reduce the disruption to management that allows them to focus on the needs of the business. In the UK, cover is typically offered under a management liability insurance policy to small and medium sized companies and will typically include corporate legal liability, and employment practices insurance.
1. Civil coverage
A variety of different parties could seek to claim financial compensation through the courts and name a director of the company
2. Regulatory coverage
There are numerous regulators that operate across many different industries that could hold the company directors to account
3. Criminal coverage
D&O insurance will typically cover directors defence costs up to the point they have been found guilty of a criminal charge
Talk to a D&O liability insurance expert about comparing quotes from the market
One mistake or misjudgement could end up being very expensive without coverDirectors and officers insurance examples
Employment dispute
A director was accused of sexual discrimination, harassment and failing to promote an employee. The case went to employment tribunal but the claim was ultimately settled out of court, with insurers agreeing to settle the demand for compensation made against the individual for £70,000.
Intellectual property
A senior manager left the company to set up his own business, and his previous employer later accused them of taking proprietary software, creating unfair competition and trademark infringement. Although the individual was later found to be innocent, the costs to defend the claim were excess of £300,000.
Misleading information
Following an investment round and loan from the bank to expand the business, the board was found negligently for providing inaccurate financial statements which the investment decision and creditors based their decision making. After the business failed, they sought to claim compensation of six million pounds against the directors.
Health and Safety
A construction company’s board of directors were held responsible for not having sufficient controls in place, and breaches of health and safety legislation, which was found after an accidental death of an employee. Both the company and directors were fined over £1 million and liable to pay damages to the families.
Unfair competition
A real estate agency successfully made a claim against its former CEO for diverting new business opportunities to a new company. A court held that the individual misused his former position, breaching his fiduciary duty and had to personally pay compensation excess of £600,000.
Regulatory sanction
The Financial Conduct Authority (FCA) brought criminal proceedings against the CFO for misrepresentation of the financial standing of the company. The case went on for many months and the cost to defend the allegation was excess of £500,000, and the individual was later struct off the register.
How much does D&O insurance cost and how much cover should you buy?
For a small business that has a positive net worth (assets are greater than liabilities) and made a profit in your latest reporting period, D&O insurance cost can start from £345 annually for a £1 million limit. Insurers will calculate your D&O insurance premium by considering the size of your business by turnover, then will want to understand the financial health of the business. Startups and loss making businesses will need to submit a cash flow forcast for the next 12 months. For medium sized and larger businesses, the cost can increase significantly depending upon which sector you work and your financial stability.
We recommend you consider more than one option to appreciate the cost to increase your limit of liability. It is also worth considering that defence costs on average amount to 65% of the total cost of claims. Talk to a D&O insurance expert, Simon Taylor to appreciate the importance of the cover. Having worked in the industry for over 20 years, he can share his experience to ensure you have the most suitable protection to meet your needs.
What D&O insurance doesn't cover?
Fraudulent, dishonest or criminal conduct, in addition to gaining an illegal profit, is not insurable. Typically, an insurer will require a final adjudication from a court of law, or an admission of guilt. As a general rule, the insurer will defend the individual on the basis they are innocent until proven guilty. It's worth noting that innocent directors under D&O insurance will typically remain fully covered if they are co-defendants, even if the acts of their colleagues were fraudulent or dishonest. Unless specifically included, corporate legal liability, and employment practices liability may not be included. If you are considering issuing a public prospectus to raise capital you will need to seperately consider IPO insurance. Talk to one of our D&O insurance experts to find out more.
Looking for D&O insurance? Talk to one of our experts about your requirements
D&O insurance can start from £345 annually or £28.75 monthly for a £1 million limitDoes a small business need D&O insurance?
1.) Breach of duty
Individuals can be individually liable for failing to do something that you are legally responsible. As a director you have numerous duties under the Companies Act 2006.
2.) Neglect
A claim for neglect can occur when one director can be held accountable for the actions of another. Even though they had no knowledge of the wrongdoing, the other directors can be held accountable due to of the lack of oversight.
3.) Breach of trust
Claims can arise if directors have been found responsible for breaching a third parties’ trust. Given the individual has failed to act responsibly on behalf of the company.
4.) Wrongful act
Wrongful act is a broad term that describes an action on behalf of the business. D&O insurance claims can arise against individuals for acts which are either illegal, immoral, or unjust (i.e. theft of intellectual property).
5.) Error or omission
An error or omission is a broad term that describes when a director or officer makes a mistake for failing to fulfil a legal obligation.
6.) Misstatement
Individuals can be held accountable to regulators or third parties for misstatement which occurs when you express a fact that is incorrect.