What is directors and officers liability insurance? Your questions answered

As a director and/or officer you may personally be liable to defend any claims brought against you. Directors and officers liability (D&O) insurance is designed to protect you from personal liability in the face of legal action.

In our increasingly litigious society, there’s a growing focus on personal accountability which remains a substantial threat to directors and officers. The legal costs for defending allegations against directors and officers can be sizeable, along with potential settlements. Risk management and the implementation of adequate systems and controls are key to preventing and mitigating these risks.

We've answered the most common questions about what directors and officers liability (D&O) insurance is, what it covers and what it doesn't.

What is directors and officers insurance?

Directors and officers liability (D&O) insurance is designed to protect your past, current and future directors and officers from personal liabilities in the face of legal action. This insurance can step in to cover legal costs and financial losses brought by claims and protect individuals' personal assets.

Who is D&O insurance suitable for?

D&O insurance is a critical safeguard for company executives and board members. Coverage is usually for current, future, and past directors and officers of a company and its subsidiaries. D&O insurance covers the individual for the acts they’ve performed or omitted while in that position with the company.

What does D&O insurance cover?

The scope of activities covered by D&O insurance is usually described in the definition of "wrongful act", which often means an:

• Error.
• Falsification.
• Misleading statement.
• Action or omission.
• Negligence or breach of duty, actually, or allegedly committed or attempted by a director or officer.

As with all insurance policies, terms and conditions apply.

What does D&O insurance not cover?

Common D&O exclusions include:

• Fraud: Claims related to intentional fraudulent acts committed by directors or officers.
• Intentional criminal acts: Claims resulting from deliberate criminal actions by directors or officers.
• Illegal remuneration or personal profit: Claims arising from directors or officers receiving illegal payments or personal gains.
• Claims made under a previous policy: Claims that were known or occurred before the current D&O insurance policy's effective date.
• Uninsurable fines and penalties: Claims for fines or penalties imposed by regulatory authorities that are uninsurable by law.

Directors and officers insurance may not cover your company for warranty and indemnity liability in mergers and acquisitions. As D&O insurance protects individuals and not the company, it also doesn’t cover unfair dismissal claims brought against the company. However, you can arrange an extension or separate policy called ‘Employment Practices Liability’ to provide cover for this type of claim.

Who could try to sue directors and officers and why?

Anyone you come into contact with during your employment could attempt to sue you, if they feel they’ve suffered as a result of any shortfall in your proper duties as a director and/or officer. This includes:

• Employees.
• Shareholders.
• Creditors.
• Regulators.
• Customers.
• Competitors.

Claims can happen for a variety of reasons, such as:

• Regulatory investigation.
• Mismanagement or negligence.
• Libel or slander.
• Breach of duty of trust.
• Unfair dismissal or discrimination.
• Anti-competitive behaviour.

Even if a claim is false, you still have to defend it. This is why we recommend clients consider this vital insurance where appropriate.

How much does D&O insurance cost?

As with most insurance policies, the insurance cost will depend on a number of factors, including:

• How much coverage you need.
• The level of risk that insurers see your company posing them.

It’s therefore important that you to speak to an expert and ensure that you choose the right insurance coverage to meet your needs.

What is management liability insurance?

Directors and officers insurance is often part of a suite of business insurance covers called management liability insurance that protects senior management. It can include:

• Directors and officers liability (D&O).
• Company legal liability (CLL).
• Employment practice liability (EPL).

Management liability can cover:

• Corporate manslaughter.
• Data breaches.
• Environmental claims.
• Health and safety claims.
• Criminal and regulatory investigations.

Find out more about directors and officers liability insurance and how you can build resilience by focusing on some core business practices. Get in touch with a directors and officers liability insurance expert.