Who needs to Insure against Directors and Officers liability?
A business doesn’t have to have external shareholders for its directors and/or officers to be personally sued. Some small business owners even think that their general liability policies will cover claims involving directors and officers but with premiums starting as low as £125, how can a business not afford to plug this gap? The following guide will review what D&O insurance is and buying tips.
D&O insurance protects directors and officers in the event they are personally sued — sometimes as well as the company being sued — by shareholders, employees, competitors, and customers, among other parties but importantly also covers personal prosecutions for breaches of company law or health and safety legislation for instance.
The policy covers legal fees, damages and other costs. If properly arranged, the cover sometimes can extend to protect the company if it is named in a suit. Directors don’t want to put their personal assets at stake. Sometimes outside investors, will insist on D&O policies before providing funding — they often see the policy as a way to protect their investment. Directors and officers can face actions for a variety of reasons connected with their company positions, such as misuse of company funds, misrepresentation, fraud, failure to comply with the law generally.
Bankruptcy is one of the leading causes of loss for a business — and one of the leading causes of D&O actions. A bankruptcy can lead to litigation against directors and officers from creditors, lenders, customers, as well as investors. Even if a company doesn’t go bankrupt and just needs to restructure, redundancies may still prompt claims personally targeting directors and officers, in addition to the business.
Tips on Purchasing D&O Policies
As with any type of insurance , small and mid-sized businesses must work with a broker who understands D&O policies either as a standalone or included within a package of other cover. Some of the options to think about include the following:
Should you limit cover to directors and officers only or include the entity also?
Make sure the policy will cover innocent directors if one member is found guilty of wrongdoing. Policies will cover defence costs following allegations of criminal misconduct up to the point of judgement.
What limit of indemnity is suitable? Policies start at £50,000 any one claim up to multi million limits. Unfortunately, some Directors find out too late that they need D&O insurance as there are many Brokers who don’t understand the scope of cover and just how essential it is. Once there is a claim, they understand why they should never have said no to D&O.