Lexicon
What is director’s insurance?
Despite not being a legal requirement, if you sit on a board of directors, having director’s insurance is strongly advised.
So, what is company directors’ and officers’ (D&O) insurance, and why do board members need it?
D&O liability insurance protects company directors and officers who may be personally sued by someone aggrieved by the company’s actions, whether that person is an employee, vendor, competitor, investor, customer, or another party.
Some people think D&O insurance is only for those running substantial companies or public limited firms.
This is not the case.
Once you are a company director and board member you are open to claims from customers, competitors, suppliers, employees, the company itself, or regulators.
Directors can be sued for several reasons
Directors and officers are typically sued for actions relating to their role in a company, including:
- Financial loss or bankruptcy resulting from a breach of fiduciary duties
- Fraudulent representation of company assets
- Errors in judgement
- Corporate manslaughter
- Using company funds for personal gain
- Fraud and mismanagement
- Non-compliance with workplace laws
- Intellectual property theft and theft of competitor’s customers
- Absence of good corporate governance
- Insolvencies
- Competitor claims
However, an illegal act by a director is not usually covered by D&O insurance.
D&O cover is essential for any business with a board or an advisory committee. D&O insurance is also crucial in non-profit organisations.
What is director’s insurance?
So what is director’s insurance?
Today’s litigious culture can result in dramatic compensation settlements for claims relating to discrimination or sexual harassment.
If a director is accused of breaching their duties, their personal assets are potentially at risk if they lack adequate D&O protection.
A regulator’s investigations and fines are among the primary drivers of claims in today’s global business climate.
Investors would be entitled to compensation if their shares lost value due to a director’s or the company’s alleged misconduct.
In a bankruptcy or insolvency situation, creditors may sue directors if they believe they have not acted in their best interests.
The costs of defending allegations against a company or a member of its board can be extremely high – tens if not hundreds of thousands of euro.
Some company directors think they will never be in the position where they could be sued by one of their employees or stakeholders, but this is a dangerous attitude to have.
Investors like to see board members insured
One more reason why a company needs D&O insurance coverage is to appease investors.
For you to secure venture capital or funding from investors, you will need D&O protection as a safeguard for their concerns.
A D&O policy will also help hire and retain highly skilled directors who might otherwise be reluctant to put their personal assets at risk.
When taking out insurance, what should directors insure against?
A D&O policy is complex and requires attention to the actual coverage.
Companies must ask themselves the following questions regarding D&O insurance:
- How much is enough?
- Who is covered?
- What is covered?
- What is not covered?
It would be best if you spoke to a qualified insurance broker to craft a protective D&O policy for your organisation and its directors.
A real-life scenario
Markel International in the UK highlights a real-life scenario that demonstrates the importance of D&O cover. A client of the firm owned a work vehicle that was involved in a fatal road traffic accident.
The driver of the vehicle was found to be talking on his mobile phone.
The directors were investigated about the offence of manslaughter by gross negligence (directors and officers section) and the company for corporate manslaughter (entity defence section).
Police gathered evidence to prosecute the transport manager.
The total claims costs and expenses exceeded £200,000. The premium paid for the period of insurance was only £600.