The market for Directors & Officers Insurance has grown rapidly over the last 30 years, since the late 1980s when it spread from the US to other geographical markets. According to Allianz, the insurance product now generates $10 billion in gross written premiums worldwide [Introduction to D&O Insurance, 2010].
An important and much-discussed insurance product, it’s important for business owners to have a basic understanding of the policy so that you can make an informed decision as to whether it may be of benefit to your business.
What is Directors & Officers Insurance?
D&O Insurance is liability cover for company managers. It offers protection from any claim that may arise from the decisions and actions taken within the scope of their regular duties.
It has become a common component of large multinational companies’ risk management strategies, but is necessary for all kinds of other organisations as well. While major publicly listed companies do have the highest risk of attracting such claims, any business, not for profit organisation or entity, whether private or publicly traded has potential D&O exposure.
Why do Companies Purchase Directors & Officers Insurance?
Managers are still only human, and as such they can make mistakes. In many cases, they can be held personally, legally liable for these mistakes. They often have to make difficult and complicated decisions that have huge ramifications not only for the business, but also for employees, stakeholders and the wider environment. Furthermore, it’s becoming increasingly common that investors, trading partners and other operational departments are based all over the world, and as such have their own legislation, compliance regulations and governance to adhere to; further increasing the complexity of the decisions that managers have to take.
Any manager’s decision can result in losses for the company or a third party, and the directors and officers who made those decisions can be held personally liable for those losses, which can often result in a costly litigation process.
What is Covered in a Directors & Officers Insurance Policy?
The main purpose of a D&O policy is to provide financial protection for managers against the consequences of actual or alleged “wrongful acts” when acting in the scope of their managerial duties. A D&O policy will typically pay for defence costs and financial losses. Typical situations that may be covered by a D&O policy include:
- Employment practices & HR issues
- Shareholder actions
- Reporting errors
- Inaccurate or inadequate disclosure (for example, in company accounts)
- Decisions exceeding the authority granted to a company officer
- Failure to comply with regulations or laws
What is Not Covered in a Directors & Officers Policy?
A D&O policy will not cover fraudulent, criminal or intentional acts. However innocent directors remain fully covered if they are co-defendants, even if the acts of their colleagues were intentional or fraudulent. D&O Insurance will not cover cases where directors obtained illegal remuneration, or acted in a way that was for personal profit.
All activities that are covered by another insurance policy (most commonly Professional Indemnity), are either excluded in a D&O policy or the D&O cover is only provided after erosion of the other policy.
Who May Be Covered By a Directors & Officers Policy?
All current, future and past directors and officers of a company and its subsidiaries may be covered under a D&O policy. Non-executive directors may also be included in the policy.
Directors & Officers insurance is particularly relevant for large, multinational corporations, while Management Liability Insurance can be a good alternative for SMEs. Speak to a PSC Insurance broker for more information on Directors & Officers insurance and whether it may be appropriate for your business.
Conditions apply for each policy and the information expected from you for a policy to trigger. Coverage may differ based on specific clauses in individual policies. Please ask your broker to explain the additional benefits and exclusions pertaining to your policy.
The information provided is general advice only and does not take account of your personal circumstances or needs. Please refer to our financial services guide which contains details of our services and how we are remunerated.
