Directors And Officers Liability Insurance

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The Motto for Directors and Officers should be “One For All” and “All for One” in terms of personal liability, with all directors and officers being liable for the actions of their colleagues regardless of whether they were aware of them or not. Directors’ and Officers’ Liability Insurance is a very complex area of insurance and each individual case requires careful consideration and evaluation. Given the wide range of industries and business risks it would not be possible to provide a sample policy to cover all eventualities. However the following provides a general guide to the factors influencing a particular policy.

Why Do I Need D&O Cover?
The business community is awash with cases where individuals who had no knowledge or part in the fraudulent or negligent activities of their fellow directors or officers being struck off or even sued personally for damages.

Individual Indemnity v Corporate Indemnity
Individual Indemnity.
Individual indemnity relates to Directors’ and Officers’ personal Liability. It covers loss to the director’s personal assets to the extent that they are not indemnified for that loss. In other words loss incurred when the company is not legally permitted to indemnify its directors and officers

Corporate Indemnity
Corporate Indemnity indemnifies the company for loss to the extent that its Directors and Officers are indemnified for that loss. This means that the company is covered only for reimbursement which it is required or permitted by law to make to its directors and officers against whom a legal action has been brought. An action taken against the company itself is not covered, unless specifically addressed within the terms and condition of the policy. Policies generally stipulate that directors and officers are indemnified for any ‘wrongful act’ committed in their capacity as directors and officers of the company. The policies generally define ‘wrongful act’ as ‘any actual or alleged breach of duty, breach of trust, neglect, error, misstatement, misleading statement, omission or other act committed or wrongfully attempted by any director or officer’.

Who is Insured?
Policies vary as to who is insured. They can cover directors, past and present, and can be extended to cover employees engaged by the company in a managerial or supervisory role. Cover is generally extended to include spouses of insured persons for loss arising from a claim against an insured person and will often extend to the estate of insured persons. Some policies will cover outside directorships held by directors and officers sitting on unconnected boards i.e. boards outside the insured group, where the director sits at the request of the group. Where an ‘outside entity director’ is involved care must be taken to ensure that there is appropriate cover in place.

Acquired Companies
Directors of Acquired Companies Acquired companies are addressed in different ways
– some policies will automatically cover acquisitions other policies will require prior approval before providing cover.

What Period Does The Policy Cover?
Period of policy cover for Directors and Officers will normally start from the date of appointment, but there may be a requirement to notify the insurer of the appointment during the term of the policy. Frequently the only obligation is to update the list of directors and officers at annual renewal. However care should be taken to ensure that if there is a notification requirement on appointment such notification is made in writing within the prevailing time limit.

Basis of Any Claims
All policies are written on a ‘claims made’ basis and the limit of indemnity purchased is in the aggregate. Cover may cease when a director’s appointment comes to an end, but an individual’s liability may continue for some time in respect of actions or inactions occurring during the period of appointment, it is essential that the extent of cover for passed or retired directors is clearly understood.

Scope of Cover
The extent of cover in Directors’ and Officers’ Liability insurance policies can vary and care should be taken to understand precisely what is and what is not covered. This involves careful evaluation and consideration of all the policy terms, conditions, definitions and exclusions.

Principal Inclusions

  • Damages awarded against an insured person.
  • Defence costs in relation to an action
  • Investigation costs arising from any official investigations including the Director of Corporate Enforcement. This can include the cost of investigations in relation to restriction and disqualification
  • Libel and slander

Exclusions

  • Pending and prior litigation
  • A director or officer, or the company, against another director or officer
  • War and terrorism
  • Dishonest, fraudulent, criminal or malicious acts by the insured
  • Personal profit, remuneration or advantage
  • Fines and penalties
  • Bodily injury and damage to property – but claims against directors where the liability is primarily the liability of the company but the director has secondary liability may be covered
  • Pollution however generally defence costs and derivative claims may be covered
  • Professional indemnity
  • Liability in respect of pension funds or employee benefit schemes
  • Legal jurisdiction – some policies may restrict cover to certain geographical areas
  • Taxes are rarely covered
  • Liabilities covered elsewhere such as Employer’s or Public Liability policies
  • Some policies exclude actions made by major shareholders

Who Can Bring A Claim?

An example of some sources of actions against directors and officers are:

  • Regulatory Claims from regulatory proceedings under various statutes
  • Shareholders
    i. Mismanagement
    ii. Misleading statements
    iii. Poor business decisions
  • Employees, past and present alleging
    i. Sexual harassment
    ii. Unfair dismissal
    iii. Discrimination
  • Customers
    i. Disputes relating to contracts
  • Creditors
    i. Insolvency