Directors and Officers Insurance
What is directors and officers insurance? Do we need management liability cover?
Operating a business is increasingly complex and you can be held personally liable for the actions you take on behalf of the company. Directors and officers insurance coverage under a management liability insurance policy provides peace of mind you can defend yourself against civil, regulatory, or criminal allegations
It's important to understand that company directors and decision makers can be held personally liable when undertaking their duties, such as those under the Companies Act 2006. The business insurance will provide cover for legal liabilities, regulatory investigations, and claims made against the individuals that make decisions on behalf of the company.
Directors and officers insurance, otherwise known as D&O insurance, is recommended for every business and is typically provided under a management liability insurance policy for private companies. Policies can provide financial protection to the senior management and non executive directors from a range of disputes, litigation, and regulatory investigations.
As an insurance broker we can access a wide range of D&O insurers to meet your needs. Annual premiums for director and officers insurance can start at £345 for a £1 million limit for a small private company, but can cost tens of thousands for mid-large companies (including financial institutions)
Directors and officers insurance explained
D&O insurance is the main cover provided under management liability insurance policy. It provides a safety net against legal action and regulatory investigations, protecting the personal assets of the management team and non executive directors. It's important to understand that company directors have a personal liability and a claim for compensation or investigation is seperate to the company. The D&O section covers the individuals for wrongful acts, by providing cover for defence costs, damages, settlements, awards, and insurable fines.
Corporate legal liability provides the company financial protection from civil litigation and regulatory investigations. Corporate legal liability is similar to D&O insurance but will defend a claim for compensation made against the company as opposed to individuals. Breach of contract, copyright infringement and corporate manslaughter can be covered.
Employment practices liability provides the company financial protection from claims arising from a range of employment disputes (i.e. unfair dismissal, harassment and discrimination). Dealing with employees can be highly emotive and if internal procedures aren't followed, you can leave yourself open to successful employment tribunal claims. The EPL section can protect the company by defending allegations, paying damages and settlements for an alleged wrongdoing.
Do you also need to consider professional indemnity insurance?
Why directors and officers insurance is important?
It's important to appreciate that directors have a personal liability when undertaking their duties on behalf of the company. Civil, regulatory and criminal allegations made against individuals and/or the company can be very costly and time consuming to defend, even if they're without merit.
Breach of fiduciary duty
Directors have a fiduciary duty to stakeholders of the company and if these interests aren't protected, directors can find themselves liable.
Neglect
All directors can be held accountable for actions of another director due to a lack of oversight, even though they had no knowledge.
Breach of trust
A personal liability for directors can occur for breaching a third parties’ trust, when you have failed to act responsibly.
Looking for Directors & Officers Insurance? Speak to one of our experts about your needs
Directors and officers (D&O) insurance can start from £345 annually for a £1 million limitWhat does directors and officers insurance cover?
Corporate manslaughter
The Corporate Manslaughter and Corporate Homicide Act 2007 means companies can be found guilty of corporate manslaughter as a result of senior manager failures and gross breach of a duty of care. The corporate legal liability cover can offer the company financial protection from an investigation by the HSE, police and the Crown Prosecution Service, by providing a legal defence and covering insurable fines.
Company disputes
Private company directors are exposed to disputes with shareholders and other directors. The cover can protect individuals from allegation made on behalf of shareholder or other directors. It's also worth acknowledging that individuals can be held accountable for the actions of others, even though they had no knowledge of the wrongdoing.
HSE investigations
Under The Health and Safety Regulations, companies that the HSE consider are in material breach of any health and safety laws are liable for HSE’s related costs, including inspection, investigation and taking enforcement action. Management liability cover can offer financial protection against regulatory investigations and subsequent insurable fines.
Insolvency
D&O insurance can cover reasonable professional and legal expenses of preparing and defending directors (and shadow directors) against regulatory actions after an insolvency, including any subsequent disqualification proceedings.
Unfounded allegations
A determined litigant can incur thousands in costs and months of time, even when their case has no legal merit. This can occur when claimants feel very strongly about an issue and go ahead with action without following any legal advice. Cover can provide for reasonable costs of defending allegations made against directors and officers.
Contract disputes
Disagreements with suppliers or customers can mean a claim under the entity cover. These types of 'entity' claims are more commonplace than actions against directors for breaches of duty that D&O cover was originally designed for. Some policies will provide sub limited cover for the costs of defending contract disputes with suppliers and customers.
Why do we need director and officer insurance?
Anyone that’s makes decisions on behalf of a company can be held accountable under any number of statute laws and regulations. Where individuals have acted in good faith and complied with their responsibilities, they can rely upon the corporate veil. This is a separation when a company is incorporated between the company, and its directors and shareholders for its debts and liabilities. However, if a court finds against an individual or a board for an alleged wrongful act, or neglect of their duties, they have the powers to make judgements against their personal assets.
D&O insurance claims can arise from a wide range of different interested parties, such as shareholders, customers, employees, competitors, suppliers, administrators and regulators.
Claims made against individual directors or the company can originate from a number of different sources, these can include: regulators, shareholders, customers, competitors, employees, administrators, and suppliers. The most common type of directors' and officers' insurance risk occurs from: 1) breach of law or regulation; 2) shareholder claims; 3) corporate manslaughter; 4) creditor claims; 5) breaches of fiduciary duties; 6) competitor claims; and 7) employment claims.
Charities should read about trustee liability insurance
What does directors & officers insurance cost?
Cover can start from £345 annually for a £1 million limit for a small private company. For larger businesses, the premium costs can increase significantly depending upon which sector you work and importantly your financial stability. Insurers will calculate your insurance premiums on several factors, including: the company’s industry, financial solvency, company's revenue, total assets, whether the company has any publicly traded securities, and the company’s claims history.
Industry sector
Different industry sectors are more prone to claims. Very high D&O risk sectors include: biotechnology, telecommunications, oil exploration and professional sports clubs.
Financial stability
Do you have sufficient capital to meet your ongoing financial obligations. Insolvency represents a high risk, with numerous parties potentially seeking to recover losses.
Trading history
A successful trading history is preferred. However, this is not always the case, and a load factor will be applied to start-up businesses when applying for cover.
Compare directors & officers insurance quotes. Talk to one of our experts about your company needs
What directors & officers insurance excludes?
Who is covered under a D&O policy?
Typically, all directors, officers and senior managers of the company and its subsidiaries will be covered, whether current, future and past. The definition of Insured Person can vary between insurance products but will typically extend to any employees whilst acting in a managerial capacity. D&O liability insurance is also typically afforded to any lawful spouse, estate, heirs, if named as co-defendant in circumstances allegations are made against a person who is deceased, insolvent, or bankrupt.
What happens if the board fails to act?
D&O liability insurance can protect against negligent failure to prevent, or neglect - which means there is no requirement for knowledge, merely the failure for the individual to act. An error on the part of one director or officer can have financial consequences for the others, even though they had no knowledge of the wrongdoing.
How to apply for director and officer insurance cover?
Please complete our digital onboarding process to obtain quotations from our panel insurers. If the business didn't make a profit and have a positive net worth in the last reporting period, you will be required you to complete a D&O proposal form and submit either a monthly cash flow forecast for the next 12 months, or if you are an established business, a copy of your most recent consolidated management accounts (balance sheet and P&L).
We work with a wide range of insurers who specialise in financial lines to secure the necessary cover for our clients. All the providers we work are governed by the Prudential Regulation Authority with have strong financial ratings (A) from AM Best.
Related Pages
Frequently asked questions
Where can claims arise from?
D&O claims can arise from a wide range of circumstances, aimed at the individuls of a company, stemming from their management decisions and actions. Below are some common types of wrongful acts typically covered:
1. Breach of Fiduciary Duty: This includes failures by directors and officers to exercise a reasonable level of care, skill, and diligence in carrying out their duties.
2. Misrepresentation: A claim for making false or misleading statements about the company’s financial status, operations, or compliance with regulations.
3. Breach of Statutory Duties: Company directors are required to adhere to various statutory duties under the Companies Act 2006.
4. Failure to Comply with Regulations: This covers the failure to adhere to regulatory requirements (i.e. health and safety).
5. Misuse of Company Funds: Improper or unauthorised use of company resources, which could lead to allegations of fraud.
6. Decisions Exceeding Authority: Actions taken against directors or officers that go beyond the scope of their powers, possibly involving company agreements.
7. Neglect: A claim for inadequate corporate governance, board oversight or not maintaining proper checks and balances within the company.
8. Employment Practices Liability: A claim arising from employment-related issues such as wrongful dismissal, discrimination, or harassment.
Do startups need D&O cover?
Founders of startups will often take risks in order for to be successful, unfortunately this can lead to disputes with regulators, shareholders, customers, competitors, employees, and suppliers. If you raise money, it can be a common request by investors to buy the cover. Shareholders may later seek to claim against the policy for several reasons, including misrepresentation, breaches of fiduciary duty, breaches of law, or maleficence.
If you have not submitted a monthly cash flow forecast for the first 12 months and a pitch deck or business plan, insurers will typically apply an insolvency exclusion. Which removes a significant amount of cover for stakeholder claims if the business has failed.
What does D&O insurance not cover?
Understanding D&O exclusions is important for companies and their leadership to manage risk effectively and know where additional business insurance or risk mitigation strategies might be necessary.
Illegal Acts or Fraud: D&O insurance does not cover acts of intentional wrongdoing or fraud committed by directors or officers. Generally, defence costs will be provided until it is determined by a final adjudication that an individual has engaged in fraudulent or criminal behaviour.
Professional Services: D&O insurance will not cover liabilities that are specifically related to professional services or advice. This type of risk is generally covered under professional indemnity insurance.
Prior Claims and Known Issues: Any claims that arise from wrongful acts that were known or ongoing before the D&O policy began are generally excluded. This is often addressed through a "pending and prior date" exclusion.
Bodily Injury or Property Damage: Claims related to bodily injury or physical damage to property are typically not covered under D&O insurance, as these are generally handled by public liability or other specific types of insurance policies.
Employment Practices Liability: D&O policies will typically provide cover to the individual directors, officers, for employment claims, however, allegations made against the company will be excluded. Therefore, it is typically recommended that cover is also sought for employment practices liability insurance (EPLI). That provides comprehensive cover for claims related to wrongful termination, harassment, discrimination, and other employment-related issues.
Cyber Incidents: D&O insurers are more commonly applying cyber related exclusions. To ensure that companies purchase adequate cyber insurance and do not rely on their D&O insurance for failing to adequately protect the business from a cyber-attack or data breach.
D&O insurance is a complex product, and the exclusions can significantly affect the coverage. It’s recommended you discuss the availability of coverage with your insurance broker.
How does a D&O insurance policy work?
A company may indemnify its directors in respect of legal proceedings under a written agreement, however most companies will not. If there is an agreement in place, there will be circumstances which the company will be unable or permitted to meet its obligations under this agreement. For example, the insolvency of the company or restricted under law.
D&O policies have been designed to respond to the different circumstances, offering to either pay on behalf of the individual (called Side A); or reimburse the company after it has indemnified the individual (called Side B). It is worth noting that most policies will not maintain a deductible for Side A, however, will maintain a deductible for Side B.
Policies are typically structured in three main parts:
Side A Coverage: This directly protects individual directors and officers against claims where the company cannot indemnify them. This is particularly relevant in cases where the company is bankrupt or insolvent.
Side B Coverage: This reimburses the company when it indemnifies the directors and officers, covering the expenses the company incurs in defending its senior management.
Side C Coverage (Otherwise known as Entity Coverage or Corporate Legal Liability): This extends coverage to the company itself for claims made against it alongside its directors and officers.
Why is D&O insurance necessary?
Given the complexity and the risks associated with corporate governance, combined with the litigious environment in which modern businesses operate, D&O insurance is not just a luxury but a necessity. It helps ensure that directors and officers can focus on steering their companies towards success without fear of personal liability.
Financial Protection: Directors and officers of a company can be held personally liable for their actions and decisions made in their official capacities. This means their personal assets are at risk in the event of an alleged wrongful act.
Investor Confidence: Having D&O insurance reflects positively on the company’s governance standards. It shows it is committed to responsible management and protecting its leadership and stakeholders.
Attracting Talent: Companies need skilled and experienced individuals to serve as directors and officers. Qualified candidates, however, will be cautious about assuming roles without adequate cover.
Peace of Mind: Coverage provides peace of mind, allowing directors’ and officers to perform their duties without fear of personal financial loss. This can encourage more decisive and innovative management practices.
Indemnification: While some companies indemnify their directors and officers against certain liabilities, this indemnification may not always be sufficient or available if the company either becomes insolvent or interests are not aligned.
Do nonprofit directors need cover?
If you operate a non-profit organisation or charity, please refer to trustee indemnity insurance. The cover is similar, however some insured person definitions maybe different to ensure that trustees and the appropriate persons which manage the non-profit are protected.
We might consider listing on an exchange in the future, does that matter?
If you are considering issuing a public prospectus to raise capital you will need to separately consider IPO insurance. Talk to one of our D&O experts to find out more.
How much D&O insurance cover do we need?
The amount of cover you decide to 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 cover limit. It is also worth considering that defence costs on average amount to 65% of the total cost of claims. Please note you should consider your individual circumstances and note the limits above may not be sufficient to cover your defense costs and damages.
Can you provide cover to a residential association?
We can arrange cover to protect the boards of residential associations. Please give us a call to discuss your needs on 0345 625 0711.
Is fiduciary liability the same as D&O?
Although policies will typically provide cover for breaches of fiduciary duty, there will typically be an exclusion that remove any cover for taking up positions on an employee pension scheme. Pension trustee liability insurance will need to be considered seperately.
Are non-executive directors covered?
Non-executive directors can be held liable for their actions in the same way individuals that manage the day to day running of the business. Some people take up positions as non-executives without fully understanding what their responsibilities are. Director's insurance is therefore critical because they could be exposing themselves to costly litigation in the course of their duties.
Related articles and guides
Learn about what the Financial Ombudsman Service does and how it protects consumers against a range of problems arising from various financial services. The Financial Ombudsman Service acts as independent and impartial organisation in the UK dedicated to resolving disputes between consumers and financial service providers.
Claims involving directors & officers are often highly political, commercially sensitive, and complicated. Below we take a closer look at examples of D&O insurance claimants.
The Financial Conduct Authority (FCA) regulates the financial services industry in the UK. Its role includes protecting consumers, keeping the industry stable, and promoting healthy competition between financial service providers.
In the United Kingdom, company directors have certain legal responsibilities and potential liabilities associated with their role. It's important for directors to understand these obligations and ensure compliance with the law.