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D&O Insurance UK
Directors & Officers insurance covers the losses incurred by directors and officers of a company, if an investigation or claim is brought against them for an alleged wrongful act. Here's what you need to know about cover before you buy a policy.
- What is Directors & Officers insurance?
- What does Directors & Officers insurance cover?
- Why is Directors & Officers insurance important?
What is Directors & Officers Insurance?
Directors & officers (D&O) insurance protects individual directors and officers if they're accused of making errors. It's purchased by a company on behalf of its officers and directors, and is meant to reimburse these individuals for losses they incur due to actual or alleged wrongdoing in their role. D&O insurance can also cover anyone working in a managerial or supervisory role within a company.
D&O insurance can protect against claims from a wide range of parties, such as shareholders, investors, employees, competitors, regulators or other third parties (but claims from clients regarding an individual's service or advice would typically fall under professional indemnity).
D&O cover is an important type of business insurance because any claim or investigation against a company's directors and officers needs to be handled, often at great expense—even if the claim is unjustified or frivolous.
Directors & Officers Examples
As D&O insurance can cover a wide range of situations, here are a few examples of different types of claims for which D&O insurance can offer protection:
- Investors in a startup that goes under blame the directors personally for their losses.
- Liquidators bring a claim against directors when they suspect incorrect payments to creditors.
- HMRC suspects misappropriation of tax payments and investigates.
- HSE investigation leads to claims of negligence by senior management.
- The Serious Fraud Office (SFO) investigates suspected fraud.
- A competitor claims that a director has stolen trade secrets.
- The board of directors is sued for hiring and failing to supervise an individual who was negligent.
- A manager is named personally in an unfair employee dismissal or sexual harassment case, which goes to tribunal and ends with a settlement to the employee.
- A regulatory body investigates the actions of a certain director.
Note: any fines or penalties imposed by a regulator or other body would not be covered.
What does Directors & Officers Insurance Cover?
Directors & Officers Insurance provides access to a legal team and covers the expenses to defend a claim or investigation against an office or director of a company. It can also cover damages or compensation that is required to be paid by the individual, if they are found liable. Cover is capped by the stated limits on a policy, of course.
- Access to expert legal advice
- Cost of legal representation
What's Not Covered
D&O insurance does not cover all wrongful acts, nor all losses related to a covered wrongful act. For example, D&O policies don't generally cover fines or penalties imposed by a regulator—even if the legal defence costs and settlement payments are covered for a certain situation.
Also, intentional wrongdoing by an officer or director is not covered. For example, an individual knowingly and willingly accepting a bribe would not be covered. While exclusions will vary from insurer to insurer, here is a list of common D&O exclusions:
- Intentional non-compliant acts
- Directors acting for personal profit
- Directors receiving illegal remuneration
- Property damage
- Acts pre-dating the policy
- Claims covered by another policy
Directors & Officers insurance policies are written on a claims-made basis, which means means a policy will only cover claims made while the policy is still active, not after. This is important because a third party might not discover wrongdoing and submit a claim until years after the alleged act or decision.
If a policy expires or is cancelled, it won't offer any more cover—even if the incident in question occurred while a policy was active. For example, say a company let their D&O insurance expire in 2019, shortly after the completion of an acquisition of another company. In 2020, it became clear that the acquisition would be detrimental to the company's bottom line, and the shareholders sued the directors. The claim would not be covered, even though the decision to acquire the company occurred in 2019 while the D&O policy was in force.
Who Needs Directors & Officers Insurance?
Officers and directors need D&O cover because without it, their personal assets at risk—they're personally liable if accused of a wrongful act or breaching their duties. Legal costs to defend a claim can easily tally tens of thousands of pounds, and settlements can run into the millions. Without D&O cover these individuals would be personally responsible for paying for their legal defence and any required settlements.
Even if your company has other forms of liability insurance such as public liability or professional indemnity, the actual or alleged misconduct by an individual that is covered by a D&O policy is not covered under other types of liability insurance.
Clearly, company directors should have D&O insurance to protect them against any claims. But who counts as an officer? Individuals at many levels of an organisation could be liable—it depends upon their level of responsibility and power, so really anyone with managerial or supervisory responsibilities can benefit from D&O cover—it's a critical part of limited company insurance.
Who can be covered
Any company that has directors, officers and managers can benefit from D&O cover, including for-profit businesses, not-for-profit organisations, privately-held firms and educational institutions—over a wide range of industries including, but not limited to:
- Banking and Finance
- Architecture and Engineering
A company may promise to protect their directors and officers if they become the target of a claim or investigation related to their role. That is, the company would cover personal financial losses incurred by a director or officer if they need legal defence for their actions and decisions. This protection is called indemnification and would be written into the Articles of Association, a Memorandum or trust deed—and is required by law in some situations.
Most indemnification agreements are unlimited, which means the company will cover an officer or director’s full financial losses. In reality, however, this indemnification would not be unlimited, but would be restricted by a company's resources.
When a company has indemnified its directors and officers, then D&O cover would reimburse the company not the individual (since it will have been the company that incurred the costs). Many officers and directors expect a company to provide indemnification and buy D&O insurance.
D&O insurance covers claims against individual officers and directors in relation to lawsuits brought over decisions or actions they've made as part of their role. D&O claims can be brought by shareholders, investors, employees, competitors, regulators or other third parties. This coverage differs from Professional Indemnity insurance which covers wrongful acts in relation to services or advice provided to customers.
SMEs face the same risks and regulations as larger companies, but usually don't have access to in-house human resources or legal teams—or big budgets to help defend claims against their directors and officers. So, yes, SMEs need D&O insurance, too.
D&O insurance costs start from under £500 a year, but ultimately the premium will depend on the company size, industry, claims history, company profits and debts, the professional background of the officers and directors, and M&A history.