Many clients believe that Directors and Officers insurance (D&O) is only applicable to those running public limited companies or large private businesses. However, every director and officer is at risk of claims from customers, competitors, suppliers, employees, regulators, and the company itself as well as governmental and law enforcement agencies.
If a director does not comply with their duties, they may be liable to civil or criminal proceedings and could be removed from their acting role. In the UK, directors may also be subject to financial penalty by the regulatory authorities. There is an increasing amount of red tape across the country and new areas of claims are constantly arising, for which the legal fees are significant.
A common assumption by many directors is that in the event of an incident involving them, the company will pay their defence costs. However, in many circumstances the company may be unwilling, unable or not permitted to protect their directors and officers in this way.
A director is personally liable to the extent of all their assets. The ‘Limited Liability’ status of a company does not apply to claims against the individual person for breach of their duties as a director. D&O insurance protects the directors’ personal assets when their own cash, home, pension pot, other assets and even their liberty is at stake. It can also cover legal expenses and settlements.
A D&O insurance policy will compensate directors against loss arising from a claim for wrongful acts. These include most acts or omissions concerning their role for example, breach of trust and duty, neglect, or misstatement. Although companies may indemnify their directors, there will be occasions when that indemnity is not available (e.g., insolvency), and so taking out D&O protects the director.
Many companies do not budget for the cost of buying Directors and Officers insurance as they think it’s expensive and unnecessary, but it does not cost as much as perceived and the benefits out way the risks. It is becoming almost impossible to attract new directors without offering them the protection of D&O insurance. Shareholders and stakeholders are also increasingly away of their rights and willing to testify.