Directors and Officers Liability 101

What Is Directors and Officers Liability Insurance?

Directors and Officers (D&O) insurance, also known as Management Liability, is coverage for Management-level employees that provides protection against claims against them which may occur due to the outcomes of their decisions or practices. D&O Liability can protect company directors and officers individually, as well as the company as a whole.

Why Should I Purchase D&O Coverage?

Company managers are not just accountable for their own actions, but also the outcome of any decisions they make. It’s easy to make the wrong call if you’re working in a high-pressure environment, and if the mistake is particularly damaging the manager is personally liable for it. As more and more businesses operate globally it is essential for managers to have a solid knowledge of their markets as well as the various compliance regulations, government bodies, auditors’ opinions and best practices for corporate governance and risk management. Any broken regulation or missed area of compliance could prove costly for a business that trusts an employee to make high-level decisions. By purchasing D&O insurance coverage, companies and organizations can protect themselves against any unintentional mistakes.

What Does Directors and Officers Insurance Cover?

D&O insurance is primarily focused on the financial protection of managers in business, companies or organizations from claims made regarding any perceived wrongful acts, errors and omissions or whistleblowing. Certain risks, depending on the country of origin, can include:

 

• employment practices
• HR issues such as discrimination, sexual harassment, wrongful termination or constructive dismissal shareholder actions
• reporting errors
• inaccurate or inadequate disclosure
• unauthorised decisions
• legal action already taken when the policy begins
• breaching compliance, regulations or laws

D&O does not necessarily just cover the direct actions of a managing executive, but also the wider activities of the workforce. If any of these risks occur because of negligence from a manager -- or they fail to ensure their team upholds any areas of compliance -- then they may also be held responsible and accountable for their actions. Claims can be made from a variety of sources ranging from former employees, regulators, shareholder groups, third parties and even the actual company themselves. The expenses that need to be paid because of claims of wrongdoing or negligence from a manager include:

 

• administrative and criminal proceeding costs
• legal expenses / defense costs
• financial losses / loss of earnings

Under a typical D&O insurance policy all past, present and future managers are covered. This means that as long as the coverage is kept up to date, historical claims can be included.

What Is D&O Side A Coverage?

Side A coverage (also referred to as ‘personal protection’) is the cover that applies to Directors and Officers individually, rather than the company. This allows a corporation to protect their executives against non-indemnifiable claims where the company cannot legally provide protection or is financially unable to do so. Side A coverage can either be bought as part of a large or general D&O package or as a stand-alone policy. It usually sits in excess of the other coverages and is usually referred to as ‘broad-form’ coverage.

What Is D&O Side B Coverage?

Side B coverage is the coverage for a company that requires reimbursement for its indemnification obligation to its directors and officers. As such, Side B coverage is mostly related to the claims brought against directors and officers.

What Is D&O Side C Coverage?

Side C coverage, also known as ‘entity coverage’ or ‘entity securities coverage’, is required when claims are made against both a company and its directors and officers. If a company is sued alongside the management associated with the claim then Side C covers the cost of anything associated with the lawsuit. Taken together, Side B and C coverage can also be known as Balance Sheet Protection.

Is There Insurance For Non-Profit Directors And Officers?

While some D&O products are all inclusive of directors and officers from all sectors, others concentrate specifically on nonprofit organizations. As the professional stakes can be higher for a nonprofit – in terms of brand reputation and personal assets – it is important to make sure that any potential legal fees or damages are covered from in the event of litigation from vendors, donors, competitors, employees and government regulators.

Are There Any Exclusions For Directors And Officers Insurance?

As with most insurance policies, there are certain areas that are not typically covered under most D&O plans. Of course, each insurance policy is different, so it is important to check exactly what is offered from a specific product, but most D&O policies tend to exclude the following:

 

• deliberate or intentional acts
• fraud
• crime
• illegal remuneration or personal profit
• property damage and bodily injury (except corporate manslaughter)
• legal action already taken when the policy begins
• claims made under a previous policy
• claims covered by other insurance

How Much Does Directors And Officers Insurance Cost?

The maximum limits of coverage will depend on the size of the company -- small companies may only require a coverage limit of £2m whilst larger international corporations can purchase limits of £300m and above. The will depend on a company’s revenue and will also determine the cost of any premiums. Any add-ons, extensions or excess layers will also affect the limits or total amount covered.