Directors and Officers Insurance: A business essential

This simplified scenario demonstrates why Directors & Officers (D&O) insurance exists. Senior employees are exposed to civil and criminal liability in relation to a host of responsibilities including employee safety, tax and finance law. Company law can also give rise to personal liability, for example, if directors know a company is about to become insolvent but continue trading anyway, any resulting losses can potentially be recovered from their personal assets.

D&O insurance gives directors and officers the confidence to know there is support available to pay compensation or defend claims or prosecutions when things go wrong. It’s not a ‘get out of jail free’ card to excuse negligent behaviour, but it does provide valuable protection in difficult situations.

Let’s consider seven key things you need to know about D&O insurance.

• Claims can be brought by a variety of company stakeholders

  It’s not just shareholders who may bring a claim against senior staff. Employees, bondholders, lenders, customers, consumer bodies, suppliers and competitors could all have legal standing to bring a claim. The likelihood is that at some point, every company will face the threat of a claim.




• D&O insurance is not compulsory

  The law does not require you to hold D&O insurance, but in practice, companies can find it very difficult to recruit top talent without having a policy in place. Qualified candidates see insurance as essential protection and usually ask to see the policy before entering an employment contract.




• Operating without D&O insurance can cause undue risk aversion

  Failing to put D&O insurance in place will not only harm recruitment; it also impedes the ability of senior executives to make decisions on behalf of the company. Put simply, they are likely to be more risk-averse when their own assets are under threat.




• Professional indemnity insurance and D&O cover different types of risk

  There is often confusion about whether policies for professional indemnity and D&O are the same thing. They are separate: professional indemnity relates to situations where it is claimed that a service or advice has not been delivered to a competent standard. D&O insurance relates to the management of a company and concerns risk connected to governance and oversight.




• The first policies were developed in the Great Depression

  History time: D&O insurance was created in the 1930s after new laws were introduced in the US to hold directors to account for failings that led to the 1929 Wall Street crash.




• The law says some areas of liability must be excluded

  Providing cover for every corporate misdemeanour would arguably create a moral hazard in which executives would feel immune from the consequences of their actions. This is why English law says insurance cannot cover some types of penalty and fines. However, D&O insurance can pay for costs such as legal fees in defending a criminal charge.

Do you have the insurance coverage you need?