Directors, partners and officers assume the highest level of responsibility in a company. They have a duty of care to their employers and members of the public as well as duties to investors, regulators, partner companies, competitors and other stakeholders. This leaves the most senior members of staff at the highest risk of claims of wrongdoing.
One poorly judged decision or one foot out of line can result in a hefty lawsuit and a substantial financial loss, from paying for legal representation to a compensation payout if the claim is successful.
Directors’ and officers’ liability insurance, known as D&O insurance, can help protect those at the very top of an organisation from costly legal claims.
Familiarise yourself with the ins and outs of D&O insurance in the following sections:
- What is directors’ and officers’ liability insurance?
- What is covered by D&O insurance?
- Common claims made against directors and officers
- Do I need D&O insurance?
- How much cover do I need?
- How much does directors’ and officers’ liability cost?
- How to find a D&O insurance provider
- Final thoughts & FAQs.
What is directors’ and officers’ liability insurance?
If somebody makes a claim against a business’ directors, key managers or officers for alleged wrongful acts, the individual in question may be found personally liable.
Personal liability means that it’s not the company’s responsibility to respond to the claims or finance the legal proceedings. Instead, this financial burden comes down to the director personally. A D&O policy is therefore designed to protect directors from these costs, preventing them from losing their personal assets such as their savings, car or even their home.
Any director or officer related allegation of misdemeanour or wrongdoing needs proper investigation, which can run up high costs without even reaching the court. If somebody pursues the claim further, the director in question will need legal defence. If a compensation settlement is agreed in court, the guilty officer could find themselves with a total bill into the millions.
Directors’ and officers’ liability insurance can cover all of these fees, including the cost of legal defence, court fees and financial losses associated with legal claims against actions that the insured persons have taken in their capacity as a director. It can be payable to the insured director, officer or partner personally so that they don’t have to pay for actions taken on behalf of the company out their own pocket.
What’s the difference between D&O liability insurance and management liability insurance?
Directors’ and officers’ liability is often confused with management liability, and even insurance providers have been known to use the two terms interchangeably. Technically, management liability insurance is a blanket policy which covers D&O liability as one of its primary components.
As we’ve seen, D&O cover is designed to protect the directors and officers of a company against claims of wrongdoing where they are found personally liable, and must therefore foot the costs of the legal proceedings themselves, even when the decision in question was taken within their capacity within the company. D&O cover, therefore, serves to protect directors’ and officers’ personal assets and can also reimburse companies that volunteer to cover these costs on behalf of their managers.
Where management liability differs is in the scope of cover provided by a policy. Management liability includes D&O cover alongside two other primary areas of protection: corporate legal liability and employment practice liability. The former covers companies against claims against the entity as a whole for unlawful acts, typically paying out for legal fees, investigation costs and settlement payments. Employment practice liability specifically covers legal action brought against a company or its management for breaching employees’ rights, filed by current or former employees, including claims of sexual harassment or unfair dismissal.
What is covered by D&O insurance?
Directors’ and officers’ liability insurance is designed to cover claims of wrongful acts committed by a director or officer within the scope of their managerial role in the company, whether these acts are alleged or not.
It can cover both legal and criminal actions brought against the director, as these usually come hand in hand. A D&O policy can typically cover the following costs associated with claims of wrongdoing:
- defence costs for the insured director or officer
- settlement costs of legal or criminal action
- financial losses incurred by the insured.
Wrongful acts can include any number of decisions or actions, committed or attempted by a director or officer while working on behalf of the company. These can include:
- breach of trust
- breach of duty
- mistakes or errors
- misleading statements
- breach of legislation
- wrongful trading.
It’s worth noting that directors or officers may commit any of the above unintentionally, but may still be found liable. Many parties could file a claim against a director, including:
- investors and shareholders who may claim if they have suffered losses and blame the directors personally
- HMRC, where they suspect misappropriation of tax payments
- investigations by the police where they suspect fraud
- HSE investigations where negligence is suspected
- claims made by creditors.
Who has cover under directors’ and officers’ insurance?
A D&O policy can cover any current, future or past director or officer of a company or its subsidiaries. Consequences of a simple decision may only become apparent further down the line, even years later. As such, past directors can also find D&O cover, with most policies including several years of run-off cover after the insured person retires. It is usually the company which takes out and finances the insurance, and the beneficiaries are the insured directors, officers or the company itself.
Are there any key exclusions?
A directors’ and officers’ liability insurance policy can only cover the company’s directors and officers for alleged wrongful acts in their capacity as directors or officers within the company – it does not always include claims made against the organisation as a whole. While the policy can typically cover defence costs in the case of criminal trials or regulatory investigations, directors cannot use their D&O liability insurance for intentional illegal acts.
Other typical exclusions are:
- claims made under a previous policy
- claims covered by other insurance policies
- fines and penalties
- acts which resulted in illegal remuneration or personal profit for the insured person
- intentional non-compliance
- legal action brought against the insured before the policy begins
- property damage and bodily harm.
Common claims made against directors and officers
Almost any decision made in the management team can have adverse consequences for third parties.
While some people or organisations choose to take legal action frivolously, some claims come from serious oversights made by members of senior management that have had significant ramifications on the claimant. Either way, D&O cover can help protect directors and officers in many instances, including the following types of scenario.
Health and safety
If an employee sustains a severe injury while moving some heavy equipment, they may sue their supervisor for not ensuring that they had adequate health and safety training.
In this case, both the employee and the Health and Safety Executive (HSE) may take legal action. A D&O policy can pay for the compensation costs, legal costs and fines.
If a company expands into international markets and shortly after goes into liquidation, the lenders may incur significant losses.
If the lender considers the director to have provided inaccurate information on the business’ financial and trading position, the director may be found personally liable for the lending party’s losses. This constitutes misleading information, leading them to mistakenly believe that the company was stable enough financially to follow through with the expansion.
Individual employees and financial regulators could sue if a director makes an error in the administration of an employee benefit scheme or of their pension. D&O cover could pay for the legal fees and compensation settlement for the employee.
You could also be found personally liable for defamation if you’re quoted making an inaccurate statement.
For example, a director could make an incorrect statement about a competitor. Should the competitor pursue them for defamation, a D&O policy can cover the fees, protecting the director in question.
Do I need D&O liability insurance?
It’s difficult to determine who needs D&O liability insurance. Unfortunately, as a director, your decisions affect people at all levels of a company, as well as investors and shareholders, which exposes you to serious risk of allegations of personal wrongdoing from all sides.
Even actions that seemed logical and sensible at the time may later turn against you if somebody suffers adverse consequences as a result. As an allegation could come from anywhere, almost all directors and officers should consider taking out a policy.
What’s more, legal liability has started to shift away from companies and towards personal liability. When before an employee or investor may have made a claim against the company at large, both claimants and the directors’ own companies are increasingly holding the individual responsible for the action as accountable. This is the case even in limited liability companies, where many directors overestimate their protection from liability. For these reasons, any director, officer or partner should consider having D&O liability insurance in place, no matter the size or sector of the business.
It’s crucial to note that the legal definition of an officer is relatively vague. As such, third parties can bring claims against almost anybody in a managerial position within a company, even if the person accused doesn’t consider themselves an officer.
Individuals at many levels of a company can inadvertently trigger claims. D&O cover is, therefore, worth considering for any individual with a supervisory role.
There’s no hard and fast rule for whether a company director has a high risk of exposure to D&O insurance claims. That said, insurers commonly consider specific industries to be at a higher or lower risk of D&O claims, such as:
- Lower risk: agriculture, entertainment, industrial, manufacturing, warehouses
- Low to medium risk: commercial, hospitality, leisure, logistics, retail
- Medium risk: education, financial services, media companies, professionals, transportation
- Medium to high risk: construction, engineering, exploration, property
- Higher risk: biotechnology, oil exploration, telecommunications, pharmaceuticals.
A final consideration when weighing up D&O cover and your level of risk is where your company operates geographically. The USA is one of the most litigious countries in the world, where suing companies and directors is more commonplace than the UK. If the scope of your business activities reaches the USA, you are more highly exposed to D&O claims and should consider D&O insurance more carefully.
How much cover do I need?
D&O liability insurance is one of the most wide-ranging insurance products on the market, with indemnity limits starting at £100,000 and reaching anywhere up to £10 million or beyond. How much you need is difficult to determine, as it is hard to predict the type of claims that people or organisations may bring against you. There are, however, several aspects to consider when choosing the level of cover you require.
Business size/decision impact
A principal concern is the size of your enterprise. For multinational giants with hundreds of investors and shareholders, a small decision could trigger enormous consequences, especially when so much investment, capital and revenue is involved. On the whole, directors of larger companies require a higher level of cover.
Different roles have different risks
Your role in the company is also a factor to consider. No two director roles are the same, and directors of similar-sized companies may have vastly different levels of control within the enterprise, which will also affect the level of cover required. When choosing a policy, insurance providers, advisers or brokers can help you select a level of protection suitable to your industry and your specific role.
The third element to consider is which features of cover you need within your policy. Companies operating internationally, with global subsidiaries or offices around the world will need an international insurance programme, to cover them against allegations made outside the UK.
Some overseas markets may require the company to take out insurance from a local insurer based in the country in question.
D&O duration is a key consideration
A final aspect to consider is the duration of cover you choose. D&O insurance covers the insured on a claims-made basis, which means that the policy can cover only claims made while the policy is in effect.
It’s therefore sensible to secure the longest term available and opt for a cover which protects your directors into their retirement. Some insurers may be able to offer an extended reporting period, typically up to another 72 months.
Common policies limits based on turnover
The following breakdown shows what level of cover companies typically purchase:
- Companies turning over less than £1 million annually: £1 million limit of D&O insurance
- Companies with less than £5 million annual turnover: £2 million limit
- Companies with an annual turnover below £50 million: £5 million limit
- Companies turning over more than £50 million per year: £10 million limit.
If you’re an early-stage business that has raised capital to fund operations, advisers recommend that you consider your asset size rather than your turnover.
These are only examples of typical cover limits purchased by businesses – for guidance, seek professional advice from a trained insurance adviser, broker or financial adviser.
How much does directors’ and officers’ liability cost?
The cost of your premiums will depend mainly on the limit of indemnity you have, as well as other factors, including the business’ annual turnover and geographical reach. If you have been in your role as a director or officer for a long time without an issue, some insurance providers may reduce your premiums.
How much you pay will also depend heavily on the D&O insurance structure you choose. There are commonly three insuring agreement structures when it comes to a D&O policy, known as Side A, Side B and Side C.
Generally, companies can choose between AB policies, typical for private or non-profit companies, or ABC policies, which tend to be the standard policy for publicly listed companies. Side A, B or C determines the protection offered by the plan, commonly defined as per below:
Side A sometimes known as ‘non-indemnified’
Protects the assets of individual directors or officers, where the company is not able to fund indemnification due to legal or financial constraints. The individual officer or director is the insured person.
Side B, or ‘indemnified’
Protects corporate assets. Offers protection to the public or private company by reimbursing them for any indemnification or advancement of legal fees it has made on behalf of its directors or officers. Here the company is the insured.
Side C, or ‘entity securities coverage’
Extends cover for public listed companies and provides coverage to the corporation as a whole for security claims only. The company is the insured party in this case.
In the last decade, D&O insurance has evolved to often extend cover to the company itself in the case of claims brought against its directors and officers, where the company has indemnified them against such claims. A typical D&O policy uses the AB structure, insuring both the directors and the company.
How to find a D&O insurance provider
Directors’ and officers’ liability insurance is a complex product. Determining an individual’s level of risk to D&O claims depends on a multitude of interplaying factors, and no two directors risk is the same. For this reason, it’s a good idea to seek professional advice before purchasing a policy, no matter where you buy.
Approaching insurers directly
A simple way to find a D&O insurance product is to seek out quotes directly from insurance providers. Many commercial insurance providers offer directors’ and officers’ liability insurance and may be able to provide a quote online.
It’s critical not to judge a policy at face value by the price of the premiums, as a cheaper policy may not offer the level of indemnity suitable for you. It’s a good idea to speak with an adviser for a more accurate quote. Indeed, many insurers insist that you seek expert advice from a third-party source before taking out a policy.
Going through a broker
Brokers are particularly helpful for complex insurance products, where a policy covers multiple people, peculiar events or needs to accommodate for bespoke requests. D&O insurance is one of these. Brokers can advise clients on their level of risk and an appropriate level of cover to choose. They also have access to a large portion of the market and can use their expert knowledge and experience to compare products, finding you the most appropriate solution.
Brokers also have access to exclusive products and prices which aren’t available to the general public. Going through a broker can mean you can find a more extensive product for a lower price. With more complex products, there’s also a risk of a claim dispute between the policyholder and the insurer. Brokers can act as an intermediary, helping negotiate and handle a claims dispute.
A helpful way to evaluate the pros and cons of multiple policies and providers is to use a comparison website. Such sites can summarise the features of various products on the market, highlighting policy benefits and offering quotes from numerous providers in one place. Many of these platforms give the option to filter or order search results according to multiple variables, such as price or level of coverage. You can use a typical comparison website to find a deal, or seek out specialist business websites to compare products.
Final thoughts & FAQs
One in three companies has faced a claim against one of its directors or officers over the past ten years in the UK. This increasingly litigious environment means that those at the top are under increasing scrutiny by investors, employees and in the public eye. More and more, people are seeking personal accountability for actions or decisions which negatively affect them. As directors and officers hold significant responsibility and power in their managerial roles, this leaves them exposed to all kinds of legal claims.
Directors’ and officers’ liability insurance can offer financial protection for these directors and officers, as well as the companies for which they work. Having a policy in place can help keep a director’s professional and private life independent from one another, by protecting their finances and personal assets from problems at work.
Still have questions on D&O insurance? Find answers to common queries below.
What is the difference between professional indemnity and directors’ and officers’ insurance?
The primary difference between D&O insurance and professional indemnity insurance is that D&O is designed to provide financial protection for senior members of the team, typically covering any management decisions made in the company. Claims covered by D&O insurance could be brought by shareholders, investors, employees, clients or more. Professional indemnity insurance can cover any claims explicitly made by clients or customers due to errors or omissions made by the business or any of its employees.
Sometimes, both types of claim come hand in hand. If an accountant gives poor advice which leads to a client’s financial loss and the client pursues a claim, this would likely come under professional indemnity insurance. However, a claim may subsequently be brought against the director for failing to supervise the accountant who gave the incorrect advice. This subsequent claim would require D&O insurance, as it relates to oversight within the scope of the director’s managerial responsibilities.
Is directors’ and officers’ insurance tax-deductible?
Generally, any premium payments made on a directors’ and officers’ insurance policy are tax-deductible, according to the Employment Income Manual EIM30509. However, there are always exclusions and conditions to tax rules concerning directors and officers, so you must seek advice from a qualified tax adviser.
Can a directors’ and officers’ liability policy protect me for outside directorship liability?
Many directors choose to serve on a board of directors in external entities. If this is the case for you, you would be an outside director when serving in this capacity.
Many directors’ and officers’ insurance providers offer outside directorship liability (ODL) cover as an optional extension to cover the director in their role in an external company, although some providers may include this as standard. This extension can protect directors for any claims brought against them for action taken in their role in the outside entity.
However, many insurers will only pay in excess of any indemnity already provided by the outside company, so it’s essential to verify the level of cover any entity has before you become an outside director.
You must also check with your D&O insurance provider for any other conditions to an ODL cover extension, as many companies will only offer cover if the director’s company has requested that they become an outside director.
Do non-profit organisations need directors’ and officers’ insurance?
Non-profits have the same exposure to litigation, from donors, competitors, employees and government regulators among other stakeholders. It can be even more critical for non-profits to have D&O cover in place to foot the bill for expensive legal fees and lawsuits.
Many individuals who sit on the board of directors for charities and non-profits aren’t aware of their personal liability within the organisation, so may overlook their need for cover. Many D&O insurance products are suitable for non-profits, while some may offer tailored policies for these organisations.
Does D&O insurance cover the company?
A D&O policy can also protect the company, too. In many cases, a company may choose to cover the costs of legal defence and proceedings to protect its directors or officers. In these cases, D&O insurance can reimburse the company for the costs of a D&O claim.