Directors & Officers Liability Insurance

Thu 22 Feb 2018 00:00:00 UTC

D&O: Officers includes all top management

Directors and officers (D&O) liability insurance cover protects the personal assets of a company’s directors and officers, in the event they are personally sued by employees, vendors, competitors, investors, customers or other parties, for wrongful acts in managing a company.

The policy usually protects the company as well, covers legal fees, settlements, and other costs. D&O insurance is the financial backup for a standard indemnification provision, which holds officers harmless for losses due to their role in the company. Many officers and directors will want a company to provide both indemnification and D&O insurance. Listed firms tend to take D&O insurance, as there is an increased risk because of the trading of company securities.

So What does D&O cover?

Directors and officers are sued for a variety of reasons related to their roles in managing the affairs of the company, for example:

1. Breach of fiduciary duty resulting in financial losses or bankruptcy

Creditors of a company that was having some financial trouble and in need of capital, sued its directors and officers for failure to identify, evaluate, negotiate, and secure the sale of company assets in a timely manner, which resulted in the company defaulting on its outstanding loans.

2. Misrepresentation of company assets

A Company negotiated a large contract with a customer. The contract required the company to have certain financial and human resource assets in place to satisfy production and delivery requirements. The directors misrepresented the company’s revenues and capabilities and after being awarded the contract, the company was unable to meet the terms. The customer sued.

3. Misuse of company funds

Investors sued a company alleging that some of the company’s officers had personal connections to a third party contractor hired to re-tool the company’s assembly line and that they hired that contractor to further their personal interests, not the interests of the company. Other officers and directors were alleged to have either knowingly colluded with one another, or at least breached their duty of care in undertaking the project without properly investigating the qualifications of the contractor.

4. Non compliance

Covers the cost of regulatory investigations involving non-compliance due to actions of directors and officers. Wilful and Intentional non-compliance however, is not covered.

5. Failure to comply with workplace laws

A female employee was terminated and then sued the directors and officers and the company for wrongful termination based on gender discrimination.

6. Theft of intellectual property and poaching of competitor’s customers

For example, an employee left his firm to start up his own company. His former employer sued him and his new firm alleging that he took with him certain proprietary software/algorithm/technology or information, creating unfair competition. Unauthorized use of a trademark (or a substantially similar mark) on competing or related goods and services with a view to causing confusion in the average consumer also falls in this category.

What does Directors & Officers liability NOT cover?

A D&O policy does not cover fraudulent, criminal or intentional non-compliant acts. In any of the above cases, if the court were to decide that the acts were intentional, then the cover will not apply. Innocent directors remain fully covered if they are co-defendants, even if the acts of their colleagues were intentional or fraudulent. D&O will also not cover cases where directors obtained illegal remuneration, or acted for personal profit. All activities which are covered by another insurance policy, such as Professional Indemnity, or general liability are either excluded in a D&O policy or the D&O cover is only provided after erosion of that other policy.

Does Your Business Need D&O Coverage?

Any business with a corporate board or advisory committee should consider investing in D&O liability insurance, including non-profit organizations. It is a common misconception that a company has to post revenues in the millions for directors and officers to be personally sued over their management of company affairs.

In fact, smaller businesses with fewer assets may need the protection more, as they are often unlikely to have processes in place to effect corporate governance ,and hence leave themselves more open to law suits.

Another misconception is that executives mistakenly believe they are protected under their general liability insurance policies, but those policies are not designed to cover management mis-steps and do not provide the same protections as D&O insurance.

If you are looking to secure venture capital or funding from investors, you will most likely need to have D&O coverage in place, as a form of protection for the investors.

Similarly, if you want to attract and retain qualified directors, D&O coverage will attract competent executives who might otherwise be reluctant to make hard decisions.

As with most business insurance, it is always advisable to go to a specialist like a broker in order to analyse what cover you need and where the gaps are. Perilwise are licenced brokers, and also have an online Directors liability premium estimator. You can check it out here.

Does D&O encourage bad behaviour?

A D&O insurance policy is not a blank cheque for bad behaviour, despite what it may sound like. This frequently made assertion is not just specific to D&O cover but is valid for all liability covers in general.

The sentiment that managers should "get what they deserve" eclipses the real facts; that managers don’t behave any less responsibly when insured by a D&O policy. The opposite is actually true; the process of a public lawsuit and financial losses, the possibility of corporate and personal reputational losses and all the other pains that accompany a claim made against a manager are a major deterrent.

Also, a Directors liability policy excludes fraud and intentional misdeeds entirely.

Furthermore, limits and personal deductibles allow insurers to adjust their policies to individual persons or companies, leading to better corporate governance.

It can be easily argued that a Directors and Officers liability cover therefore provides an essential tool for both steering good business practice and handling the growing risks directors and officers face.