Not all risks are equal. Some business risks are more apparent. Protecting against things like property loss is more obvious and easy to swallow. But the hidden costs that could be incurred by directors within a business, such as legal fees and compensation claims, often occur by surprise.
With a large proportion of businesses still failing to purchase Directors’ and Officers’ Liability the exposure to risk is vast. According to ACE[1], 120,000 SME companies could possibly benefit from this cover but only 40,000 actually have it in place. But why is it important to have this type of cover in place?
Directors’ and Officers’ Liability Insurance (D&O), is a type of insurance which reimburses directors for the cost of legal fees and compensation claims, should a 3rd party allege that they have acted wrongfully in their capacity as a Director/Officer of the company. It could be; Health and Safety investigations, regulators, shareholders, and investors. A claim can arise for anything from a director’s failure to act in the best interests of their company; to a breach of European legislation which they may not have known existed.
Is D&O cover really that important?
Some people think that Directors’ and Officers’ liability insurance is only for public trading or larger companies; others assume it’s covered in a standard commercial combined policy. It can’t be stressed enough that it is essential for any Director or Officer to be covered by some form of D&O insurance. In fact many employees operating at Director level would require the cover as a pre-requisite to an employment contract.
What’s my liability?
Directors unfortunately have unlimited liability. The legal proceedings around D&O can prove to be extremely costly. It was revealed in a 2010 survey[2] of 451 US companies that 1 in 8 had received a D&O claim in the last five years, costing an average of $225,682 on legal fees. The amount of cases in Europe also continues to grow year on year, with AIG reporting between 2007 and 2011 they saw a 63% increase in D&O claims.[3]
Without a D&O policy you could find yourself:
- having to pay costs from your own pocket in order to defend yourself from being disqualified from being a Director from existing and future companies
- or defending yourself against civil or criminal action being brought against you
It must be stressed, that the insurance does not cover criminal or deliberate acts of non-compliance.
What are ‘discovery periods’?
Even if you decide to leave your company, sell it on, or retire, you will still remain liable for any past actions you undertook while you were a director.
Discovery periods allow you to continue to make insurance claims for a set period of time after the policy expires. And if your insurer declines to renew your policy, you may be able to purchase an extended notification period too. However, both of these legal clauses only apply to actions which took place prior to the expiry date of the original insurance. Your broker will be able to advise you of the best course of action in these circumstances.
Mitigating risks. Things to be aware of…
As with any insurance policy there are exclusions, of which you should be advised and be sure to check for. Here are just a few that you should consider:
- D&O cannot cover you for claims made against your organisation.
- Criminal acts, or any acts of deliberate non-compliance are not covered.
- Limits of indemnity. This is one of the most important aspects to review in a D&O policy. Policies have traditionally been written on an overall limit ‘per policy’ term (referred to as an aggregate limit). However, an ‘any one claim’ limit is becoming more common. Ensure you know what basis your policy is on.
D&O is just one form of insurance cover, playing a part in a company’s wider plan.
Our advice
Ask an experienced insurance professional for advice. Cover will vary depending on the type of business you are running and sound advice is a must. Make sure that you check your current D&O policy is fit for purpose. If you don’t have a policy, speak with your insurance adviser about adding it to your insurance portfolio.
Protect yourself and your business from costly legal fees. Don’t leave your company or employees with the financial and legal burden of having inadequate insurance cover.
[1] http://www.acegroup.com/eu-en/insight/the-large-small-of-do.aspx
[2] http://www.inc.com/guides/2010/12/how-to-determine-whether-to-insure-directors-and-officers.html
[3] https://www.aig.co.uk/content/dam/aig/emea/united-kingdom/documents/aig-whitepaper-do-captains-of-industry0413-v6-brochure.pdf
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