Understanding Directors’ and Officers’ (D&O) Liability Insurance
12th March 2019 7 min readDownload PDF
Directors’ and officers’ liability insurance, otherwise known as D&O, is the most effective way to protect your company’s directors and officers against financial costs that could arise against you or any of your employees in a managerial or supervisory role.
What is directors’ and officers’ (D&O) insurance?
Directors’ and officers’ liability insurance, otherwise known as D&O, is the most effective way to protect your company’s directors and officers against financial costs, including: defence costs, legal advice and legal representation for potential regulatory investigations or any resultant settlements of claims that could arise against you or any of your employees in a managerial or supervisory role. D&O protects your personal assets and liability as a director. When looking for a new role, many directors now require companies to have D&O insurance to a satisfactory level of cover before agreeing to join.
People do make mistakes, even those in management positions, and with these demanding job roles comes increasing exposure to risk. There is a risk that you could be held personally liable for these corporate management mistakes; the law imposes significant and broad duties on directors and officers, which can easily be breached, such as “wrongful trading”.
It is important to remember that even if claims made against your individuals are unfounded, the cost of defending the case would take up valuable time, money and effort from the business. Given limited management resources SMEs may suffer more damage than major corporates in the event of a claim.
How can purchasing D&O insurance help to protect your business?
It’s not just high-profile, multi-million-pound companies that need D&O insurance. The same risks that affect larger businesses can affect any size of company. Any decision made by your company, irrespective of its innocent intention, can result in personal claims, proceedings and investigations. However, it is important to remember that D&O insurance does not cover inadequate advice, services or designs to a client – risks which are covered by professional indemnity insurance, so this needs to be purchased separately.
Many SME directors are unaware of their liabilities and neglect purchasing D&O insurance, therefore failing to protect themselves. In the UK, for example, a Datamonitor survey found that only 27 per cent of SME’s purchased D&O insurance*. A prudent business should ensure that D&O insurance is a mandatory purchase, because in many cases you can be the one held personally responsible, even if the mistake was not solely yours. By overseeing a company, you are not only responsible for your own actions, but for those of your employees as well.
Claims can arise from many areas of your commercial operations. The following are various case study examples on how D&O claims can affect all kinds of businesses, including SMEs:Sexual discrimination and harassment. The claimant was dismissed from her employment for gross misconduct, due to her
Racial discrimination. The claimant claimed that she had been the victim of continuous racial harassment by her supervisor and that the company had ignored her complaints, forcing her to resign from her role. She was awarded £36,000 from the accused company.
- Sexual discrimination and harassment. The claimant was dismissed from her employment for gross misconduct, due to her
failingto pass a test. The claimant consequently sued her former employers together with various former colleagues for sexual discrimination and sexual harassment. The complaint was eventually settled for £50,000 but the insured also acquired defence costs. Their D&O insurers contributed towards both the settlement cost and the defence costs.
- Racial discrimination. The claimant claimed that she had been the victim of continuous racial harassment by her supervisor and that the company had ignored her complaints, forcing her to resign from her role. She was awarded £36,000 from the accused company.
- Cheque mistakes. A director of company A signed a cheque made out to company B but it did not include the word “Limited”. The cheque was not honoured so was sent back to company A. By the time that the cheque had been corrected and re-presented by company B, company A had gone into liquidation.
The managing director of company A was held personally responsible for this mistake and the value of the cheque, which was over £30,000.
What factors should you consider when purchasing D&O insurance for your business?
5% of SME businesses would prioritise the level of cover offered to them by a provider, over the price of the insurance (72%)**, proving that it is worthwhile making the investment in D&O insurance.
When deciding to purchase D&O insurance, there are a number of factors that you should take into consideration, such as:
- Level of cover provided
- Transparency of T&Cs
- The provider’s overall claims service
- Additional pre-loss services
- Previous experience and reputation of the provider
Paul Samways, Managing Director of Miles Smith Insurance Solutions, explains why directors’ & officers’ cover should be a vital part of all businesses’ insurance portfolio:
“When you fully understand the true exposure for directors and officers within a company, it is shocking that the first item on their insurance purchase agenda is not cover for themselves. There is clearly a great argument that says before talking about the insurance arrangements for the company, they should
If you would like to discuss D&O cover for your business, please call your Miles Smith Insurance Solutions Account Executive directly, or contact the team on 020 7977 4800.
Article by Miles Smith Insurance Group with contributions from EC3 Legal LLP