Key takeaways
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Directors & officers insurance isn't just for large corporations, it is recommend for every limited company and partnership no matter their size
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The directors of small businesses face exposures from investors, regulators, creditors, and employees (increased by the risk of business failure)
As an SME do we need D&O insurance?
Claims against directors and officers are not limited by company size. Startups and small businesses are accountable to a wide range of stakeholders and will operate in regulated markets.
For example, investors may allege that they were misled during funding rounds; employees might bring actions against directors for employment-related issues; regulators may investigate compliance breaches; and creditors may pursue directors personally in cases of insolvency.
Startup founders are in fact more vulnerable to claims made against directors than an established business. Rapid growth, external investment, and limited experience, can create situations where a decision made with good intentions has unforeseen legal consequences.
Why does D&O insurance matter?
As a company director you have the power to make your business act in a particular way. Therefore, you can be held accountable by the courts for ensuring your business complies with all the applicable laws and regulations. If you’ve never managed a business before, the different roles company directors required to perform can seem overwhelming. However, as a person that makes decisions on behalf of the business, you should be fully aware of your personal liability and the protection available under
directors and officers insurance.
It’s a common misconception when setting up a business, the company directors are protected by the ‘corporate veil’ by creating a separate legal entity. Whereby, the obligations and duties of a company are solely the companies. While it holds true the business may have limited liability, the courts have the power to make awards against the company director’s personal assets.
Factors that increase the risk of D&O claims for startups?
• Raising funds from external investors
• Seeking exceptional high levels of growth
• Taking an new and innovative approach (unknown risks)
• Operating in industries with a high degree of regulation
• High cash burn rate and small runway
Is D&O insurance legally required in the UK?
No, but it’s highly recommended for limited companies and partnerships to protect directors from personal liability. To better understand read 'Directors Liability and Risk Management'.
Benefits of D&O insurance for startups and small business
D&O insurance allows business leaders to make strategic decisions, in the knowledge that they are financially protected against the unexpected. The cover provides peace of mind that financial support and legal representation are available, allowing directors to focus on running the business rather than worrying about personal liability.
It's not uncommon for investors to request that the company purchase D&O insurance prior to making an investment into the business. As it provides investors peace of mind there is the potential to claim against the policy in the event of mismanagement. Additionally for startups and SMEs operating with limited reserves, this can make a significant difference in maintaining business continuity.
Below we have identified some of the UK legislation and regulation, whereby company directors have a legal liability:
The Companies Act 2006
The Companies Act 2006 is the primary source of UK company law and sets out directors duties and responsibilities. Breach one of the seven codified duties could mean that company directors are held personally liable for their actions. Shareholders for example, could bring a claim for failing to act in the interests of the business.
Employment Law
Company directors can be found personally liable for a variety of employment related issues, including harassment, discrimination and unfair dismissal. Employees of startups are just as aware of their rights and will claim against an employer if they feel they have been unfairly treated.
Health and Safety Law
The Health and Safety at Work Act 1974 sets out the general principles of compliance, which is enforced by the Health and Safety Executive. Company directors have a duty to take reasonable measures to ensure the health, safety and welfare of all employees and others.
Criminal Finances Act 2017
Company directors can find themselves personally liable for their employee’s criminal activities, including activities such as tax evasion. Also, the Bribery Act 2010 makes it an offence to fail to prevent an associated person paying a bribe.
Insolvency Act 1986
Insolvency is one of the largest drivers to third party claims made against company directors. Under the Insolvency Act, company directors have a responsibility to protect the interests of creditors once there is a risk of insolvency. Company directors are duty bound to act in the creditor’s best interests.
Defamation Act 2013
The Defamation Act has made it harder to bring a successful claim in a UK court. However, if the business is found to have said or written anything that causes serious harm to an individual or corporate body, then company directors can be found personally liable.
General Data Protection Regulation
Data controllers are the primary party responsible for compliance under General Data Protection Regulation. However, processors can also be held personally liable towards data subjects in the event of non-compliance. Company directors have a duty to take reasonable measures to adequately protect data.
About the author
Simon Taylor is a respected senior industry professional and a Chartered Insurance Broker with over 20 years’ of experience in the commercial insurance sector as an underwriter, broker and director.
