What is directors and officers insurance & do I need it?

If you are a director or a key manager of a business, you have an important and complex role that probably includes a lot of different activities day to day.

If you are accused of wilfully carrying out a wrongful act during your duties, you could face significant costs in trying to resolve the matter.

This is where directors’ and officers’ (d&o) insurance comes in, to cover you against any liabilities you might incur during the dispute. Here is all the essential information on this important business insurance policy.

What is d&o insurance?

Also sometimes known as management liability insurance, a d&o policy is designed to help directors and managers cover the costs of defending claims made against them, either through litigation or some other form of resolution.

It can also cover the financial losses that an individual may face during this process. D&o insurance is a kind of business liability policy, but one that provides individual indemnity rather than a broader level of protection to a whole organisation.  

How dos d&o insurance work?

There are a wide range of claims that could be made against you as a director or a key manager.

You could be accused of knowingly disregarding health and safety regulations or being negligent in the course of your daily duties.

While many businesses are covered against these claims by public liability and other forms of business insurance, the individuals working there are often unprotected from the significant financial costs of having these kinds of allegations made against them.

As a director or manager, you will have to pay the cost of any legal defence, awards or settlement payments that occur because of the claims made against you. In these stressful situations, knowing that you have d&o insurance to take care of these costs is really beneficial.

Cover is usually provided on a ‘claims made’ basis – meaning that you are covered for any claims made during the insurance period, regardless of when the actual event in question took place.

What does d&o insurance cover?

The first thing to understand before you take out a policy and start paying premiums, is who exactly is covered.

Most d&o insurance policies cover all current, future and past directors and officers of a company and its subsidiaries, including non-executive directors.

While the title ‘director’ has a clear legal definition, what exactly constitutes an ‘officer’ is a little vaguer. Essentially it means key management staff, although this will vary from business to business. It could be your CEO, Chief Operating Officer, Chief Financial Officer or company secretary among others.

A range of potential scenarios are covered by d&o insurance policies:

• Claims made by shareholders and investors that hold you responsible for losses
• Accusations of wrongful trading brought by liquidators
• HMRC investigations into your tax payments
• Health and safety investigations by the Health and Safety Executive (HSE)
• Investigations by the police or Serious Fraud Office (SFO)
• Claims brought against you due to alleged errors in administration, particularly around pension and employee benefit schemes
• Defamation claims resulting from statements that you have made about competitors or other individuals

If you feel you need other forms of liability cover, it’s best to talk to an independent financial adviser (IFA) as they might be able to suggest specialist providers or other types of policy.

Who needs d&o insurance?

Directors and key management staff who are not insured face a greater risk of not being able to defend themselves against serious claims.

This means that they could be barred from holding the position of director, face significant financial costs from civil proceedings and the following awards and damages or face criminal prosecution with the potential for fines and even imprisonment.

D&o insurance policies will usually cover the following people:

• Past, present, and future directors
• Past, present, and future officers or important management staff
• Personal legal representatives in the case of death, insolvency, or bankruptcy of the company

Your policy will typically cover directors and management of any new subsidiaries of the company too.

What is not covered by d&o insurance?

It is important to understand that d&o insurance will not provide cover for any fraudulent or criminal conduct, including insider trading or embezzlement.

Because it is often impossible to tell whether a person is guilty before a trial, insurers will usually offer a payment in advance, but decline further cover in the event of a guilty verdict.

Trustees are not covered by d&o insurance, but they will be able to find a specialised indemnity insurance policy for them.

How much on average does d&o insurance cost?

There is a lot of variance between different d&o insurance policies and providers, so make sure that you shop around before settling on one.

There are a few factors to take into consideration that are likely to affect the premium that you pay.

Premiums can either be paid monthly or annually, and you may be able to save some money by making a single payment each year.

Your premiums will be based on the level of risk that insurers see your company posing for them.

If you work with dangerous chemicals and machinery, or in an industry that involves potentially dangerous operations, you may find your premiums are higher.

Your costs will also depend on the level of cover that you need.

There are three main bands of protection that a d&o policy will offer:

• Protection of your personal assets if the company is not legally required, or financially able, to pay for compensation
• Reimbursement for a company that pays the legal expenses of directors and officers after the fact
• Cover for the company in the event of a securities claim

Average cover for a small private company can start at £345 a year, but as we've mentioned, it's important to bear the above factors in mind when considering costs.

Where can I get d&o insurance?

Finding the right level of tailored insurance cover for your business and its employees requires a deep understanding of the insurance market, your commercial environment, and your strategic goals.

While you know the last two inside out, you may not have as complete an understanding about the first. This is where an IFA who specialises in business advice can provide real value, as they can use their knowledge and experience of the market to find the right policy and provider for you and your business.

While it is important to make sure that you have the right level of protection, being a director or important manager means being time-poor and extremely busy. Your IFA will take care of finding the perfect d&o policy for your company.

How much d&o cover do I need?

The level of cover you require will depend on your role and the kind of risks to which you are likely to be exposed.

Providers will also base your premiums on the level of indemnity that you require, and will consider factors such as assets, turnover and the current financial position of your company.

An experienced IFA will be able to work with you to identify your current level of risk and suggest the right level of d&o insurance policy cover.

Is d&o insurance the same as professional liability?

While it might seem that d&o insurance bears a lot of similarities to professional liability, there is one crucial difference.

While your d&o policy will cover you as an individual, professional liability is focused on the business as a whole.

For example, if a builder were to make a mistake during construction, any legal action taken against the building firm would be a professional liability issue.

However, if the director of the building firm is threatened with legal action for approving the hire of the incompetent builder, this falls under the cover provided by d&o insurance.

Another key difference between the two is that d&o insurance provides financial assistance to cover legal costs and other expenses, whereas professional liability covers mistakes the business has made that have had a negative impact on clients or customers.

If you found this article useful, you might also find out article on director's loans informative, too.