Directors and Officers Insurance

A company guide about directors and officers liability insurance

Below we explain how directors have a personal liability when making decisions on behalf of companies, and why directors and officers insurance, otherwise known as directors liability insurance or D&O insurance, is an important consideration.

 Directors and officers liability explained by the Willis Towers Watson Network

Directors and officers (D&O) liability explained by the leading insurance companies

As a Willis Towers Watson Network Broker, we work with the best insurance companies who can provide affordable directors and officers insurance quotes to help protect your personal liability. Below we explain why the board, executives and senior decision makers, should ensure they have D&O liability insurance in place to offer financial protection.

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What is directors and officers insurance?

Directors and officers insurance offers financial protection for individuals against civil, criminal and regulatory proceedings, whilst acting in a managerial capacity, otherwise known as D&O liability insurance.

Regulation and legislation exists to make senior individuals responsible for their actions when making decisions on behalf of companies. If these laws did not exist, then directors could act recklessly in the pursuit of profits without any consequence.

Director's liability insurance will pay legal costs incurred in defending claims and damages against a director or officer. For small to medium companies the cover is called management liability insurance.

What directors and officers liability insurance covers?

The law generally seeks to protect directors from personal liability where they have acted in good faith and complied with their responsibilities. However, any director, partner or employee, acting in a managerial capacity that fails to meet their legal obligations can be held personally liable. Below we explain how a D&O liability policy can benefit an individual from a range of different allegations.

 Civil liability

Civil liability

A variety of different parties could seek to claim financial compensation through the courts and name a director of the company.

 Regulatory coverage

Regulatory coverage

There are numerous regulators that operate across many different industries that could hold directors and officers to account.

 Criminal coverage

Criminal coverage

D&O insurance will typically cover directors and officer's defence costs up to the point they have been found guilty of a criminal charge.

Consider whether your business needs a D&O policy to help protect your directors and officers liabilities

One mistake or misjudgement could end up being expensive. Consider D&O liability cover with a specialist insurance broker

How does a directors and officers liability policy work?

Directors and officers have numerous responsibilities when making decisions on behalf of a company. D&O liability claims can arise from customers, competitors, suppliers, contractors, regulators, administrators, creditors, shareholders, and employees. Below we take a closer look at how a D&O liability insurance policy works.

Employment dispute

A director was accused of sexual discrimination, harassment and failing to promote an employee. The case went to employment tribunal but the liability claim was ultimately settled out of court, with insurers agreeing to settle the demand for compensation made against the individual for £70,000.

Intellectual property

A senior manager left the company to set up his own business, and his previous employer later accused them of taking proprietary software, creating unfair competition and trademark infringement. Although the individual was later found to be innocent, the costs to defend the claim were excess of £300,000.

Misleading information

Following an investment round and loan from the bank to expand the business, the board was found negligently for providing inaccurate financial statements which the investment decision and creditors based their decision making. After the business failed, they sought to claim compensation of six million pounds against the directors.

Health and Safety

A construction company’s board of directors were held responsible for not having sufficient controls in place, and breaches of health and safety legislation, which was found after an accidental death of an employee. Both the company and directors were fined over £1 million and liable to pay damages to the families.

Unfair competition

A real estate agency successfully made a liability claim against its former CEO for diverting new business opportunities to a new company. A court held that the individual misused his former position, breaching his fiduciary duty and had to personally pay compensation excess of £600,000.

Regulatory sanction

The Financial Conduct Authority (FCA) brought criminal proceedings against the CFO for misrepresentation of the financial standing of the company. The case went on for many months and the cost to defend the allegation was excess of £500,000, and the individual was later struct off the register.

How much does D&O insurance cost?

For a small business that has a positive net worth (assets are greater than liabilities) and made a profit in your latest reporting period, directors and officers insurance premiums can start from £345 annually for a £1 million limit.

If you are a director or officer of a company perceived to carry a higher risk to claims, such as financial services, care homes, biotechnology, pharma, oil & gas, telecom or sports club, the cost will be significantly higher.

Insurers will calculate your D&O insurance cost by considering the size of your business by turnover, then will want to understand the financial health of the business. Startups and loss making businesses will need to submit a cash flow forcast for the next 12 months.

 How to calculate directors and officers insurance cost?

What does directors and officers liability insurance not cover?

Directors and officers liability insurance should be considered in conjuction with other business insurance to ensure their are no gaps in cover. As a Willis Towers Watson Network Broker, we can provide a wide range of commercial insurance policies to help meet your business needs.

Ensure your board has directors liability insurance for allegations such as breach of fiduciary duty

We specialise in D&O coverage for both small business and medium sized companies

Is directors and officers liability insurance necessary?

Arranging a D&O policy is not a legal requirement, and not all private limited companies, limited liability partnerships, or non-profit organisations buy. However, in a litigious society for a cost-effective premium you can mitigate the potential risk of expensive legal fees, court damages, fines and penalties, that you could be held personally liable.

1.) Breach of duty

Individuals can be individually liable for failing to do something that you are legally responsible. As a director you have numerous duties under the Companies Act 2006.

2.) Neglect

A D&O liability claim for neglect can occur when one director can be held accountable for the actions of another. Even though they had no knowledge of the wrongdoing, the other directors can be held accountable due to of the lack of oversight.

3.) Breach of trust

Claims can arise if directors have been found responsible for breaching a third parties’ trust. Given the individual has failed to act responsibly on behalf of the company.

4.) Wrongful act

Wrongful act is a broad term that describes an action on behalf of the business. D&O liability claims can arise against individuals for acts which are either illegal, immoral, or unjust (i.e. theft of intellectual property).

5.) Error or omission

An error or omission is a broad term that describes when a director or officer makes a mistake for failing to fulfil a legal obligation.

6.) Misstatement

Individuals can be held accountable to regulators or third parties for misstatement which occurs when you express a fact that is incorrect.

Frequently asked questions

Can one director be held liable for the actions of another?

Directors and officers can be held jointly liable for the actions of others. Therefore, an error on the part of one individual can have financial consequences for the others, even though they had no knowledge of the wrongdoing.

What amount of D&O insurance cover do we need?

The limit of D&O liability insurance you purchase will depend on your perception of the exposure and how much you are prepared to spend to mitigate the risk. We recommend you consider more than one option to appreciate the cost to increase your limit of liability. It is also worth considering that defence costs on average amount to 65% of the total cost of D&O insurance claims.

How is fraudulent, dishonest, or criminal conduct dealt with?

Typically, a directors and officers policy will require a final adjudication from a formal authority (i.e., a court of law) or admission of guilt from the offending individual. As a general rule, the insurer will continue to defend the individual on the basis they are innocent until proven guilty.

What are director's duties and responsibilities?

Directors’ duties and responsibilities is a broad topic and beyond the scope of this guide, however their general duties can be found under the Companies Act 2006.

How do insurers calculate your D&O insurance premium?

If your company has a positive net worth (assets are greater than liabilities) and made a profit in your latest reporting period, D&O insurance can start from £345 annually or £28.75 monthly for a £1 million limit.

Can you provide a D&O insurance proposal form?

We recommend you complete our digital onboarding process first, then if required we will send you a proposal form to complete and identify any additional information that insurers will be looking for.

Who is covered under D&O liability insurance?

Typically, all current, future and past directors & officers of the company and its subsidiaries are covered under a D&O policy, which can also include non-executive directors.

Why D&O liability insurance is important?

The potential financial risks faced by directors and officers is significant and giving them financial protection should an allegation or claim be made against them is very important.

What are the D&O liability market conditions?

The insurance market has been through some turmoil over the last two years from businesses failing as a result of Covid-19. Insurance companies have therefore pulled back from the market for what are perceived to be more challenging risks.

How do we compare D&O liability quotes?

Insurance contracts can be complicated and difficult to understand, therefore we recommend you discussing your needs with specialist directors insurance broker before making any decisions.

How does directors and officers Side ABC work?

Side A coverage provides coverage to help the directors and officers when the company is either unable or refuses to provide indemnification. The policy section is commonly relied upon if the company goes into insolvency or administration. Side B coverage seeks to reimburse the company after they have paid legal defence costs on behalf of a director or officer from a wrongful act. Side C coverage, also referred to a 'corporate legal liability' or 'entity cover', the coverage helps protects the wrongful acts made against the company, as opposed to the individual directors & officers.

Is non-profit D&O insurance different?

Non-profit organisation, or charity D&O insurance is commonly referred to as trustee indemnity insurance. The coverage operates the same as directors insurance, however you need to ensure that trustees are also named as an insured person.

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