The Essential Guide to Directors and Officers Indemnity Insurance

In the tough corporate climate of today, protecting your company’s greatest asset and that which is tasked to innovate and push the company forward, the company management, have never been more important. With the constant rise of litigation, the company’s officers and board of directors face the ever-growing risk to personal assets.

Directors and offices are legally required to act with care, in good faith, within the law, but also in the best interests of the company. This places a burden of personal liability on directors and officers within their company role.

What is Directors and Officers Liability Insurance?

Directors and Officers Liability Insurance
Source: bbgbroker.com

Directors and Officers (D&O), and commonly called directors indemnity insurance is liability cover for company directors and management which aims to protect them from claims in normal day-to-day running of the business. This needs to be distinguished from professional indemnity insurance which covers the company against claims made on professional advice that results in financial loss to a third party.

D&O insurance in essence covers management and staff in cases deemed as managerial mistakes, or mismanagement. Managers can and do make mistakes, but need protection when claims made against them involve substantial damages or financial penalties. Policies are designed to reimburse settlements, or defence costs that result in covered claims. The claim is payable either to the directors and officers of the company, and individual employees, or the company itself.

Who is D&O Insurance For?

The directors indemnity insurance may cover executive directors, non-executive directors, company secretaries, executive officers and employees with a managerial role and duties in the company. Though not a necessity in itself, a D&O policy will cover claims and legal costs in the event the company doesn’t have the sufficient means to meet the claims, or in cases when the company is deregistered. Such policies will protect managerial staff in small and large public or private companies, legal and consulting firms, medical practitioners, architectural and building firms, brokerages, engineering companies and more.

What does Directors Indemnity Insurance Cover?

Directors Indemnity Insurance Cover
Source: excelam.com

A D&O policy indemnifies a company director against certain losses or costs resulting from actions that are allegedly or actually deemed as “wrongful acts”. What is considered a wrongful act largely depends on the insures and the industry involved. This may be breach of duty, breach of trust, negligence, misuse of company funds, misrepresentation of company assets, failure to comply with workplace laws, omission and error, breach of warranty of authority and any act done by the insured party because of their role as company director.

Coverage will reimburse insured parties for any damages, settlements, or judgements in favour of a third party. It will also cover defence costs, extradition costs, public relations expenses, bail bond expenses, prosecution and investigation costs, deprivation of assets expenses, court attendance costs and pecuniary penalties.

What doesn’t D&O Cover?

Of course, there are exemptions to cover. Directors’ and officers’ insurance won’t cover insured parties that wilfully engage in fraudulent activities, intentional conduct in non-compliant acts, seek illegal remuneration or personal profit, cause bodily harm or property damage, or face legal action when the policy begins. Insured parties also are not covered for prior claims made under a previous policy.

Exclusions also exist in the form of “insured against insured” which is aimed to prevent the director from receiving cover against claims brought forward by the company itself against the director. The wording in the policy should be closely reviewed to ensure that directors and company officers are adequately covered with their industry.

Policy structures differ for different industries, with ABC policy forms preferred for publicly-listed companies, and simplified AB forms for private and non-profit companies. Side A defines that the policy protects directors and officers in cases where the company is not legally or financially able to fund indemnification.

This additional cover offers an added layer of defence to personal funds. Side B cover relates to the company, and aims to protect corporate assets by reimbursing the company to the extent that it grants indemnification and covers directors’ and officers’ legal fees. Side C cover involves coverage for the financial mismanagement on behalf of the company as an entity, and a D&O policy will provide coverage in such cases.

How Directors and Officers Insurance Works?

Pertaining to what constitutes as a “wrongful act” as described above, a company director or executive officer may allegedly fail to perform his or her managerial duty. This may be seen as a breach of duty, which results in complainants, either within the company structure or outside it, to sue the director. The director is informed of the claim and contacts the legal or risk management department. This is tasked to notify an insurance broker or insurer that deals with such claims.

Three possible outcomes exist. If the claim is covered, the insurer pays for the legal defence costs. If the claim is covered and the case is lost, then the insurer pays the defence costs in addition to any incurred losses as covered in the policy. The worst-case scenario is when the director is not insured, and must cover defence and other losses to the extent of the claim out of the pocket. This can be a debilitating outcome of events for any career.