Directors & Officers Insurance Explained

D&O insurance policies should always be in the name the parent entity as the policyholder. Subsidiary companies (if applicable) and their boards of directors will then automatically be covered by the standard definition of Subsidiary within the policy wording. Cover for non-UK parent companies can be arranged in Lloyds of London, however there maybe restrictions depending upon where your parent company is domiciled. For further information, please contact us to discuss.

A company may have an indemnification agreement in place, however the vast amount do not. In which the company agrees to indemnify its directors in respect of legal proceedings. However, even if there is an agreement in place, there will be circumstances which the company will be unable (i.e. insolvency), permitted (i.e. restricted by law), or unwilling to meet its obligations (i.e. company vs executive disputes).

Polices have have therefore been designed to respond to the different circumstances, offering to either pay on behalf of:

• the individual (Side A); or 
• reimburse the company after it has indemnified the individual (Side B). 

D&O insurance can be complicated to understand, therefore it's important to work with a knowledgeable broker to guide you where necessary. It is worth noting that most policies will not maintain a deductible for Side A, however, they will maintain a deductible for Side B.

"Every company should consider cover that protects the management of the business, whether you're a startup, small business, or large corporation. D&O liability cover can provide financial protection and timely access to a legal defence when the individuals need the protection the most. It provides a cost-effective risk management solution to guard against compensation claims and investigations made from a wide range parties, whether that be regulators, customers, competitors, suppliers, or employees."

Simon Taylor (Chartered Insurance Broker)

Run-off cover, alternatively known as an extended reporting period, provides an period of time to notify claims. It is worth considering that your duties as a director will continue to exist even after you ceased to act in the position, therefore in certain circumstances, such as a 'change in control', it is worth considering this option.

We have seen many objections over the years for the need to arrange D&O insurance, below we provide some examples:

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 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 directors we hold the majority of shares therefore the duties owed to the company are a legal technicality.

The shareholders may decide not to hold the 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 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 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.

You may have an indemnification agreement in place (most companies 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 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.

If you operate a non-profit organisation or charity, please refer to trustee indemnity. 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.

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.

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. If you have a higher number of directors on. your board, you would typically arrange higher limits of 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.