"D&O insurance is a waste of money for company directors because we’ve never had any issues in the past"
This is a typical response from company directors that have never purchased. However, D&O insurance could be the most important business insurance
your company purchases because it protects your personal liabilities.
UK legislation and regulation exists to make individuals responsible for their actions on behalf of limited companies. If these laws didn’t exist, then company directors could act recklessly in pursuit of profits without any consequence.
Personal liability for company directors is commonly misunderstood because when you create a limiited company, you create a separate legal entity for your debts and obligations on behalf of the company.
However, anyone acting in a position of authority on behalf of the company that fails to meet their legal obligations, can be held personally liable.
Company director's legal landscape
Generally, the law will protect company directors where they have acted in good faith and complied with their duties.
However, you may still be required to put forward a costly legal defence to prove your innocence. Directors and officers insurance is a neccessity for many individuals that particapte of boards because they appreciate the risks that company directors face.
Allianz looks at examples to show the breadth of legislation and regulatory action that can apply to company directors individually. Whereas, a guide produced by the ICAEW provides a detailed insight into directors duties
D&O insurance and company directors
Claims made against company directors can arise from a range of legal obligations they hold to employees, customers, shareholders, creditors, regulators or third parties. The resulting legal action can be disruptive and very costly to mount an effective defence.
Financial support and legal defence
The financial support provided under a D&O insurance policy to company directors not only ensures a quality legal defence but also helps to reduce the disruption, allowing them to focus on the needs of the business.
Without established legal and HR teams, defending a claim or dealing with a regulator’s investigation, can be complicated and time consuming. D&O insurance offers company directors valuable access to legal support and specialist services to assist mitigate the damage of any allegation.
Company directors will commonly purchase D&O inurance under a management liability insurance
policy for small to medium sized companies. Cover may provide additional protection under corporate legal liability, employment practices liability and crime insurance
Why company directors don't buy D&O insurance?
At get indemnity™ we have seen many objections over the years for the need to purchase D&O insurance, below we've sought to clarrify some company director misunderstandings:
1) The company is a separate legal entity, therefore any awards made by the courts are limited to the company share capital.
A number of statutes exist to make company directors responsible for their actions on behalf of corporate bodies. While the company has limited liability, courts have the power to make awards against your personal assets with unlimited liability.
2) As company directors we hold the majority of shares, therefore the duties we owe to the legal entity are a technicality.
The shareholders may decide not to hold the company directors to account for their actions, however employees, customers, regulators and third parties potentially can. Alternatively, if the company was entering administration, or the company was sold to a third party, they could seek to enforce the legal rights of the corporate entity.
3) As a company director I can’t be held accountable for the actions of others, if I don’t have any knowledge of the wrongdoing.
A number of statutes exist to make company directors responsible, negligent failure to prevent, or neglect can mean there is no requirement for knowledge, merely the failure for the individual to act.
4) The company will protect me against any legal disputes or regulatory investigations whilst acting as a director.
As a company directors, you may have an indemnification agreement in place (most company directors don’t), however have you considered what would happen if: 1) the company was unable to fund your defence; 2) your interests and the company’s interests were not aligned; or 3) you left the company and were held accountable for historic actions?
5) Only public companies purchase D&O Insurance because they’re exposed to litigation and regulatory investigations.
The largest single cause of D&O insurance claims is insolvency, therefore SMEs that are financially unstable have a higher than average exposure to claims. Whereas, a regulators decision to undertake an investigation or issue a fine will be governed by your compliance, no matter your size.
6) Health and safety matters are the responsibility of the company rather than of individual company directors or managers.
If a company commits a health and safety offence with the knowledge of a person with significant control, or the offence is attributable to their neglect, they can be prosecuted individually under the Health and Safety at Work Act
Visit our directors and officers insurance page to obtain your quotes, or give us a call.
Company Directors Risks posted by Get Indemnity
This guide is for information purposes and based on sources we believe are reliable, the general risk management and insurance information is not intended to be taken as advice with respect to any individual circumstance and cannot be relied upon as such.