Why buy directors’ and officers liability insurance?

As part of our series on the business insurance you should consider taking out, we look here at directors’ and officers’ liability insurance – often just called ‘D&O’ insurance. If you are a director or company secretary then directors’ and officers’ liability insurance is personally relevant to you. First we’ll look at why.

Directors and other officers now face an increasingly litigious environment, while the law itself is developing quickly in many areas. There is increased scrutiny from shareholders, employees and other stakeholders to verify that directors and officers act in the best interests of the company and comply with their statutory duties. Legal liability is shifting away from companies and towards personal liability for failings, with your personal assets potentially at risk.

Claims can come from a variety of parties:

• Employees – employees are now more aware of their employment rights and are increasingly likely to sue for such matters as unfair dismissal, failure to promote, negligent evaluation, harassment or discrimination.
• Government and regulators – they are now more active in investigating companies, with increased scrutiny from bodies such as the Health & Safety Executive, Environment Agency and other industry-specific regulators to ensure that all laws and regulations, including European legislation, are complied with.
• Shareholders – who now review the activities of directors ever more closely and there are more requirements for transparency of directors’ decisions.
• Creditors and liquidators – insolvency claims are being brought more frequently and directors and officers can be singled out for such claims.
• Competitors and suppliers – for example, anti-trust and unfair trade practices.

You may become personally liable for losses of your company if you do not act reasonably given the circumstances and situation that you face. This could be a breach of trust, mixing personal and business assets, failing to disclose conflicts of interest, a breach of duty, neglect, error, making misleading statements or wrongful trading, committed or attempted whilst acting as a director or officer on behalf of your company.

Despite these risks and the significant increase in claims we’ve witnessed, it still appears that the majority of UK directors and company officers may not have adequate liability insurance in place. Many still choose not to purchase cover at all, often unaware of the risk involved or of the policies that are available.

The cover can be for your company instead of you individually where your company has provided an indemnity to you and any other directors and officers, something that is permitted by the Companies Act 2006. A policy may cover past and current directors, non-executive directors alongside executive directors, as well as other employees acting in a managerial capacity. Cover may also extend to spouses and the estates of directors of the company.

What directors’ and officers’ insurance does not do is allow directors or officers to engage in acts they know to be wrong. Intentional illegal acts or any illegal gains or profits obtained by directors or officers are not covered under such policies.

Having directors’ and officers’ liability insurance allows knowledgeable directors and officers to take strategic risks based upon the information reasonably available to them at the time the decision is made without the threat of personal liability.  This should in turn make it easier to attract qualified, intelligent, and reasonable directors and officers to manage the operations of the company.