If you are a director of a business then you are probably aware that you should buy Directors and Officers (D&O) Insurance. D&O insurance is probably one of the least well understood insurance policies that a business should buy, and often this lack of understanding results in the business putting off the decision to buy cover until they have time to sit down and properly understand what it covers.
D&O insurance covers the directors of a business against their personal liability for claims which arise from the decisions and actions that they take in the course of running the business. In addition a D&O policy will also cover any costs that the
company has paid out to a claimant in order to protect the directors.
Directors of publicly listed companies are most likely to be the subject of a D&O claims, however directors of any sized company, not-for-profit organisation or charity, has potential exposure to D&O claims.
No matter how qualified or careful a director is the decisions that they make can result in losses for the company or a third party, and the directors who made those decisions can be held personally liable for those losses and can be involved in costly
litigation. Such personal liability is unlimited and does not cease on death.
The business environment has become more risky rather than less in recent years. For example Margaret Cole, Director of Enforcement at the Financial Standards Authority, recently sated the Authorities intention to hold more directors and officers of companies to account. “We’ve made a strategic decision to investigate more individuals,” she is recorded as saying.
Directors and Officers insurance provides the directors of a business with the freedom to make decisions. If a claim arises as a result of these decisions, D&O insurance can provide the complainant with a degree of financial security. In cases where a company goes into liquidation or closes a D&O policy is often one of the companies few remaining assets, and this can provide the company, its shareholders or its creditors a
way recapture some part of that loss.
A D&O policy provides financial protection for the directors and managers of a business against the financial consequences of actual or alleged “wrongful acts” when acting in the course of their duties. The policy will pay for defense costs and financial losses which result from the wrongful acts.
A D&O policy can also be extended to cover costs of administrative and criminal proceedings or in the course of investigations by regulators or criminal prosecutors. A
D&O policy does not cover fraudulent, criminal or intentional non-compliant acts, although innocent directors would be covered if they are brought into an action as co-defendants.
A Directors and Officers policy will normally cover all current, future and past directors and officers of a company and its subsidiaries. This can also include non-executive directors. Directors and Officers insurance is normally bought by the company, not the individual directors. As D&O insurance is written on a “claims-made basis”. This means that claims are only covered if they are are made while the policy is in effect. These two factors can result in a problem for retired directors or director that have sold their businesses as a future director could decide to cancel or lapse the policy.
This is particularly pertinent in the case of companies that go into liquidation as a D&O claim is most likely if a company declares bankruptcy. This is because claimants will try to hold the Directors liable for the company’s failure in an attempt to recapture debts owed to them. Liquidators are also obliged to look for and pursue promising claims as a source of liquidity.
Typically claims under a D&O policy arise from Employment practices & HR issues, Shareholder actions, Reporting errors, Inaccurate or inadequate disclosure (e.g. in company accounts), Misrepresentation in a prospectus, Decisions exceeding the authority granted to a company officer or Failure to comply with regulations or laws.
The cover granted under a D&O policy will be restricted by the individual policy terms and conditions, and limited to a maximum amount chosen by the business owner.
Limits for D&O cover start at £100,000, however as the limit includes the legal defence costs, such a low limit is not recommended. The policy limit will be on an “annual aggregate” basis, this means that there is only one single limit for all the claims against all the directors during the policy year.
Most D&O policies include a “change in control” provision. This basically allows for the policy to stay in place (subject to the premium having been paid) If the company is merged or bought. This would cover claims based on wrongful acts that occurred before the change of ownership goes into legal effect.
For directors and officers a takeover can present real difficulties. If the acquiring company faces liquidity problems due to costs of the acquisition the new owners can investigate the company’s recent history and decide to sue the old management, looking for wrongful acts in the past to make D&O claims.
In such cases the directors who have left the company will have difficulty defending themselves as they will not be able to access data and internal information of the company. Normally the merged or bought company will be integrated into the D&O program of the new parent company with cover for new wrongful acts. For claims due to wrongful acts in the past, a “run-off policy” can be agreed for an additional ppremium, granting cover for claims for up to six years after the date of the transaction.
Some directors and officers liabilities can extend beyond this period so lifetime D&O run off liability might be preferable.
One of the most important features of some of the specialist run off policies is that they allow a previous director or officer to make a claim directly against the policy
rather trying to claim against the previous company policy over which they no
longer have control.
If you need help or advice about Directors and Officer cover PI Expert can help you. Please contact us today 01825 745 410