Why Do You Need D&O Liability Insurance?

The personal liability of a Director and/or Officer of a Company is unlimited, whereas a Company’s liability is limited by shares or by guarantee. When a claim or allegation of wrongdoing arises, a Director’s personal assets are at risk, and it is a common misconception that a Director can expect his or her company to provide indemnity.

Directors are increasingly being held personally responsible for the management decisions made during every working day.  Claims brought against individuals can threaten both the personal wealth of individual directors & officers and the financial viability of the company in question.

Only in limited circumstances are Companies obliged to indemnify their directors for wrongful acts. Many companies’ articles of association specifically stipulate that the directors and officers will be indemnified in certain situations. This does not necessarily provide directors and officers with complete protection, as their company maynot be able to indemnify them, perhaps because:

• it has insufficient funds. Many claims made against directors are from investors and creditors and arise when the company is insolvent
• it may not be permitted by its articles of association to do so in certain situations
• it may be prevented from doing so in certain situations by the provisions of the Companies Acts

Even where a company can and does indemnify a director for a personal liability, who will make good the loss to the company? A D&O policy will.

The purpose of Directors & Officers Liability insurance is to provideprotection to directors and officers of a company for defence costs and legal liability incurred for claims and prosecutions against them in their role in the company.  This includes the representation costs in investigations of them by regulators and other authorities.

Traditionally only larger companies have purchased D&O insurance. However the Directors of SME companies require the same protection, particularly as their responsibilities become more onerous from both increasing regulation and third party awareness of their duties.

Who can bring claims?

Allegations of wrongful acts can come from a wide range of sources. Investigations into the activities of the company could come from the Health and Safety Executive, the Inland Revenue, a regulatory body or a trade association. Employees or former colleagues could bring allegations. Customers, competitors, liquidators or auditors are other examples of parties who could have a grievance. Directors can be held accountable for the actions of others, so whilst a Director may not have committed a particular act, the actions of a subordinate can have ramifications for the Director.

The Directors’ & Officers’ Liability Policy is designed to provide financial support. It provides for defence costs for investigations, costs involved in appearing in court and legal costs to fight various forms of allegations, involving any of the Directors.