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Being a director or an officer of a company is no small task. It comes with significant responsibilities, not only to your employees, but to shareholders, investors, regulators, and even sometimes the public.
With those heightened responsibilities comes a potential greater risk of a claim being made against you. That is why, as a business owner, it may be worth considering directors and officers insurance for both you and your key personnel.
If you are unsure what directors and officers insurance is, what it covers, and whether you need it, read on below to find out more.
What is directors and officers insurance?
Directors and officers insurance, also known as D&O insurance, is a product designed to cover compensation costs and legal fees if a claim is made against your business’ directors, key managers, partners, and officers. This includes past, present and future leaders, both of a parent company and any subsidiaries. For example, if a director has recently retired, they can have the peace of mind that they would still be covered for alleged mistakes they have made at work – this ‘run off’ cover can last for up to six years in the UK.
The policy can also extend to company secretaries, in-house lawyers, lawful spouses, estates and liquidators.
The main point to understand about directors and officers insurance is that it is to protect specific individuals and their personal assets from a direct claim made against them, rather than the business as a whole.
What does directors and officers insurance cover?
Your directors and officers insurance policy would kick in if one of your business’s company leaders were accused of a ‘wrongful act’. When it comes to directors and officers insurance, a wrongful act can include:
- breach of duty of care
- breach of trust
- negligent errors
- reporting errors
- misleading statements
- wrongful trading
- defamation
- health and safety failures
- insolvencies
- failure to comply with regulations or laws
- breach of European legislation
- mismanagement of pension schemes
- corporate manslaughter
» MORE: Liabilities of directors: Can personal finances be affected by business insolvency?
What is not covered by D&O insurance?
It is just as important to know what is not covered by directors and officers as what is. For example, your policy likely won’t automatically cover claims made against your business in general, but only specific individuals fitting the personnel requirements.
There are also certain ‘wrongful acts’ that wouldn’t fall under D&O insurance. These can include, but are not limited to:
- fraud
- prior claims, investigations and other pre-known circumstances
- intentionally non-compliant acts or dishonest conduct
- willful violations of law and criminal behaviour
- illegal remuneration or personal profit
- property damage and bodily harm outside the scope of corporate manslaughter
- fines and penalties
It may be worth considering other types of business insurance alongside D&O insurance to ensure you are fully covered. For example, this could include public liability insurance, employers’ liability insurance, which is a legal requirement if you employ staff, and professional indemnity insurance.
» MORE: Employers’ liability insurance explained
Does D&O insurance cover all employees?
Directors and officers insurance will only cover directors, partners, and employees in positions of leadership or management, as defined by your specific policy. This means that it won’t cover the actions of your employees below a certain level of seniority.
Many of the ‘wrongful acts’ that fall under the remit of directors and officers insurance cannot necessarily be committed by just any employee, but only by individuals with the level of responsibility granted to company leadership.
You may need to source other insurance to cover the actions of all your employees. For example, public liability insurance deals with claims for injury, death or property loss or damage to a third party on behalf of you and your employees.
» MORE: What is public liability insurance?
Is management liability the same as directors and officers insurance?
Some insurers use management liability as another term for directors and officers insurance.
However, other insurers treat it as a slightly different product, one that includes everything covered by directors and officers insurance, as well as a potential combination of corporate legal liability, employment practices liability and crime insurance.
It is important to check what exactly is covered by your insurer, whether that is management liability or directors and officers insurance, before you take out a policy.
Is professional indemnity insurance the same as directors and officers insurance?
No. Professional indemnity insurance differs from directors and officers insurance.
Professional indemnity insurance relates to your business’s services, and accusations of negligence.
Directors and officers insurance, on the other hand, typically protects individuals from claims of mismanagement.
» MORE: What is professional indemnity insurance?
Do I need directors and officers insurance?
Directors and officers insurance isn’t a legal requirement. But that doesn’t mean it isn’t an important consideration for your business.
An accusation doesn’t have to be true for it to cost money. Even fighting a false claim could cost thousands of pounds in legal fees. These are fees that could be covered by a solid directors and officers insurance policy.
And while you might not feel personally responsible, your seniority could still mean that the buck stops with you. For example, while employers’ liability insurance would cover compensation if an employee is injured at work, you could get in further trouble if your company is found to have breached the Health and Safety at Work Act 1974.
You may also inadvertently get yourself into trouble. Let’s say you are quoted in an interview expressing some concern over one of your company’s suppliers. If that supplier decides to sue you personally for defamation, directors and officers insurance could protect you from the costs.
It is worth noting that if you are a sole trader, you won’t need directors and officers insurance. This is because you and your business are seen as the same entity.
» MORE: Do I need business insurance?
Why buy directors and officers insurance?
As a business owner, there are a few reasons why you may look into buying directors and officers insurance. For example, If you did not have a policy in place, and you or another of your directors or senior leaders are accused of a wrongful act, you would have to pay for the legal fees and compensation costs associated with the claim out of your own pocket.
With a good directors and officers insurance policy in place, you would have peace of mind that you and other key managers are protected from the brunt of the financial burden created if a claim is made against you.
How much is directors and officers insurance?
As with all kinds of business insurance, the cost of directors and officers insurance will depend on a number of factors, causing it to vary greatly from organisation to organisation.
The following will likely play a part in determining your premium:
- what is the nature of your business
- your role in the organisation
- the size of your company
- the level of cover you choose to take out
» MORE: Business insurance costs
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