As a business owner you want to make sure that your assets are adequately protected in the event of any mistakes, accidents, or incidents which could cause a claim. You might have received quotes for directors and officers insurance and professional indemnity insurance; often these two covers are included in package policies or offered as add-on covers, but what do they do and how do they differ from one another?
In this article we will explore the differences between each policy and highlight how each provides cover, including easy comparisons and claims examples.
|Directors and officers||Professional Indemnity|
|Legal fees for covered claims||Yes||Yes|
|Protects the company||No||Yes|
|Protects the company directors’ personal assets||Yes||No|
Tables of Contents
- What is directors and officers insurance?"]
- Am I legally required to have directors and officers insurance?"]
- What is professional indemnity insurance?"]
- Am I legally required to have professional indemnity insurance?"]
- What is the difference between directors and officers insurance and professional indemnity insurance?"]
- Can I get professional indemnity and directors and officers insurance from the same insurer?"]
What is directors and officers insurance?
Directors and officers insurance is a policy which protects the owners, directors and officers of a business from allegations that their mismanagement of the company has caused damage, injury or losses to other businesses, members of the public, employees, or the business itself.
Types of directors and officers claims
There are several types of events which a directors and officers policy will cover, although fundamentally the policy is intended to protect the personal assets of directors and officers when claims are made directly against those individuals.
Note that it’s worth checking with any insurer whether their directors and officers cover includes some or all of the below, as directors and officers cover is often included in a small package of policies known as a ‘management liability’ covers, whilst in other cases a directors and officers policy will have some ‘extras’ bundled in as standard.
- Corporate Manslaughter
- Regulatory fines
- Health and safety breaches
- Mergers and acquisitions
Insurer’s policies are by no means identical, so ensuring you know what is included in any quotation you receive will help you to make fair comparisons. It’s ok to send one insurer’s quote to another and ask them to highlight the differences between the two.
- After being given their notice, an employee claims against their employer on the grounds that their termination directly resulted from discrimination and harassment in the workplace. Insurers defend the claim including paying legal fees, eventually reaching a settlement with the claimant.
- Following the death of an employee in their warehouse, it is alleged that a carpentry business had not carried out appropriate health and safety procedures in managing the warehouse. Insurers defend the case and pay a fine of £220,000 plus legal costs.
- After acquiring a management consultancy firm the acquiring company discovers that records have been modified and several business liabilities misrepresented, leading to a significant loss for the acquiring company. They claim against the management firm’s previous directors and insurers pay £92,000 in settlement of the claim.
Am I legally required to have directors and officers insurance?
No, you are not legally required to have directors and officers insurance, although as a director your personal assets can be at risk in the event of a claim for mismanagement of your business. It is a common misconception that limited company status protects the assets of directors and officers in the event of claims, however as a separate legal entity in some cases your own business can even claim against you where your actions have caused a loss to the business.
What is professional indemnity insurance?
Professional indemnity covers you for claims that your professional services have been negligent, causing your clients financial loss, property damage or in some cases bodily injury. This type of policy is designed to protect your business against allegations that it has not upheld a professional duty of care towards its clients, and can be purchased by individual professionals or businesses with multiple employees.
- The director of a mechanical engineering consultancy provides a client with designs for a new piece of production line equipment which, when built is less effective than the existing method. The client claims against the consultancy’s professional indemnity policy for their money back in addition to the costs of hiring another firm to repeat the work last minute.
- A consultant is hired to train new staff for a software developer’s telephone service division. They train 120 new hires but the vast majority fail to meet company standards or adhere to correct policy. The software developer sues the consultant for negligence in failing to educate their staff. The consultant’s professional indemnity insurer defends the claim.
Am I legally required to have professional indemnity insurance?
No, you are not legally required to have professional indemnity insurance, although if you provide any form of expert or professional service or advice you can be held responsible for causing losses to your clients and you should seriously consider obtaining a policy.
Professional indemnity usually includes coverage for the legal fees incurred defending a claim and access to experts from the first intimation of legal action against you, so even if you’re ultimately found to be innocent of any negligence a professional indemnity policy may save you time, stress and money.
What is the difference between directors and officers insurance and professional indemnity insurance?
In a nutshell, directors and officers insurance protects the directors and their personal assets from claims of business mismanagement, whilst professional indemnity protects a business and its assets from claims of negligent service provision.
Can I get professional indemnity and directors and officers insurance from the same insurer?
Yes, it’s likely that if an insurer provides professional indemnity, they will also provide directors and officers insurance, and both covers are often included in ‘business insurance’ packages offered by insurers and brokers, which include office contents and liability insurance.