Directors and Officers Insurance

Directors and Officers Insurance protects Directors or Officers of Companies, Charities or other institutions that are run by a board or committee (including clubs and residents associations) against claims made against them for any actual or alleged breach of duty, trust, neglect, error or omission in the performance of their duties.

Claims made against you as an individual Director or Officer could lead to you personally having to pay for investigation costs, defence costs or actual damages. Even if you are not to blame, significant costs can be involved to defend yourself in legal or other regulatory proceedings. These costs and damages can be very expensive but you can protect yourself by arranging a Directors and Officers policy. The policy pays for these costs and damages so that neither yourself or the company, charity, resident association has to on your behalf.

Vital protection

Directors and Officers Insurance (sometimes referred to as Directors Liability Insurance) is a relatively new concept to many smaller businesses and organisations but it is equally as relevant to them as it is to the larger corporate multi-nationals and PLC’s. Exactly the same rules and regulations apply to small businesses as to larger companies and it is no surprise to see that the percentage of larger companies purchasing appropriate cover is much higher than for smaller businesses. In many cases, the exposure for a Director in terms of his/her own liability, is very much greater with a smaller company/entity due to lack of resources and in some cases, expertise in what can be detailed regulatory areas.

Most Directors incorrectly believe that they’re protected by the limited liability status of their company. A breach of duty by a Director can result in a claim against them personally which is not in any way connected to the limited status of the company itself. This means that a Directors personal assets can be at risk. The Company could choose to indemnify the Director and pay for appropriate representation but this is costly compared to the cost of Directors and Officers Insurance. Directors and Officers Liability Insurance ‘plugs’ the gap in Directors’ exposure where the company cannot indemnify them.

• Directors do NOT have limited personal liability – your personal assets are at risk
• Your company cannot indemnify you if it has gone into liquidation/administration
• Legislation/Regulations apply to ALL companies, whether large or small
• Non directors can be liable too

For Clubs, Charities, Residents Associations and other entities where Trustees or a Committee are operating the organisation, similar principles apply. Each representative is individually responsible to ensure that they are acting in accordance with the law. Often with smaller organisations, there are simply no funds available to contribute towards individual representation and legal costs making it even more important for a policy to be arranged.

How Can a Directors and Officers Claim Arise?

Anyone who is a Director or Officer of a Company, Charity or other Institution run by a board or committee (including Clubs and Resident’s Associations) is at risk. Where a Director or Officer is alleged to have committed a wrongful act (any actual or alleged breach of duty, trust, neglect, error or omission) in the performance of his/her duties and is the subject of litigation, they may have to personally meet any losses arising out of the litigation, such as investigation costs, defence costs or actual damages.

A breach by a Director or ‘Officer’ of the Company/Organisation under any of the following legislative examples could lead to a claim being made against those involved:

• Companies Act
• Health & Safety at Work
• Insolvency Act
• Data Protection Act
• EC Regulations/Legislation
• Employment practice legislation
• Shareholders
• Customers/clients
• Creditors
• Competitors
• Investigation expenses

Claims can be in the form of:

• Civil proceedings
• Arbitration hearings
• Criminal proceedings
• Administrative and regulatory factfinding proceedings

A Summary of the Cover Usually Provided

Cover can vary between Insurers but in general, you would expect to find the following in a Directors and Officers policy:

• Legal defence costs and damages awarded against a Director or Officer of the Company arising from a Wrongful Act by a Director or Officer of the Company
• Legal costs and damages on behalf of the company if the company is legally permitted to indemnify the Directors or Officers
• Cover for the Directors and Officers of the Company and all subsidiaries at the policy inception date
• Pollution defence costs on behalf of Directors and Officers

Significant Exclusions

• Bodily injury and property damage
• Fraud, dishonesty and illegal profits
• Breach of professional services – this would be covered under a professional indemnity insurance policy.
• Known claims or circumstances at the policy inception date

Common Situations Where Directors Claims Can Occur

Each of these scenarios illustrate the difficulties that any business could face. Whether the situation is a criminal, civil or regulatory investigation, the need for adequate insurance protection is vital. The examples show the need for an insurance cover that is going to pay for appropriate expert legal defence and resultant awards and damages. Very often, regulatory investigations never progress into a civil or criminal action, yet the legal costs associated with such circumstances can be extremely costly.

Merger
Following the sale of a company, several accounting irregularities are discovered. The Managing Director and Finance Director are sued following an allegation that they had deliberately misrepresented the Company’s true financial position.

Health and Safety
An employee is killed during the course of their normal work. The subsequent Health and Safety investigation uncovered poor working practices and the Directors are personally prosecuted for failings in their risk management. This policy covers both the initial investigation and the costs of the court case.

Insolvency
Following the failure of a Company, two Directors are pursued by Creditors. It is alleged that, at the time of purchasing materials, they had reasonable knowledge that the company would have difficulty in meeting its debt.

Investigation Costs
A Company is required to attend an investigation into ‘anti competitive practices’. Although no wrongful act is alleged, several people are required to attend the investigation, each being supported by legal counsel. Although the Company is exonerated and no court case follows the legal costs in attending the Hearing are significant.

Outside Directorship
A Finance Director assists a local charity at the request of their Company. The charity ceases trading and the Director is subsequently required to attend a Hearing into the matter. The Charity does not have cover for their costs, but the Company would be liable to pay for these costs.

Abuse of Position
A Director is sued by fellow shareholders for sanctioning a dividend payment without ratifying this with fellow Directors.