Directors Liability Insurance

The vital nature of D&O insurance

Directors liability insurance, also known as directors and officers liability Insurance or D&O, is designed to protect those who are required to take on various responsibilities and obligations in connection with their position of leadership within a company.

In the vast majority of cases the responsibilities, duties and powers that a director or officer will have are set out in the job description or terms of reference. This means that legally the director or officer can be held responsible for issues involving data protection, fraud, negligence, health and safety and the maintenance of properly kept accounts.

What is covered by directors liability insurance?

Directors liability insurance is a form of liability insurance that is payable to the these officers and directors, or to the company itself, to provide cover for damages or the cost of legal defence if a challenge is made against the director on any of the grounds for which they are responsible. Directors liability insurance has come to be broadly associated with the idea of management liability insurance, which allows for the cover of both the corporations and the management structure’s liabilities.

If the director or officer is discovered not to have complied with their brief or the terms of reference by accident or through negligence, it could result in a legal claim being made against that director or against the company as a whole. In this situation directors liability insurance will cover the cost of the claim as well as any compensation payments or legal fees incurred by the director, officer or company. The cover supplied by directors liability insurance will not cover any of the aforementioned legal costs if the actions of the directors that subject to further legal challenge and are found to have been deliberate.

So, for example, if the director fails to inform their employees of health and safety regulations because they were always running late between meetings and someone has an accident as a result of this lack of training, directors liability insurance will cover the legal costs for negligence proceedings. If the director is found to have deliberately engaged in large scale fraud with the company’s money, this is a deliberate action and will not be covered by directors liability insurance.

The main sources of directors liability insurance claims come from shareholders, shareholder-derivative actions, customers, regulators and competitors (who may challenge the company on anti-trust of fair trading grounds).

The exact level of coverage that a directors liability insurance policy offers is majorly influenced by whether or not the company in question is publicly or privately traded — it is important to perform adequate research and get a policy which is right for you.

Directors liability insurance is generally purchased by the company even if it will only be of any use to the directors or the officers. Companies do this for various reasons, the most common being so that they can entice and then retain directors in the first place. It is also relatively common for directors and the company to split the cost if the country’s legal system does not allow the company to purchase the insurance by itself, directors liability insurance allows the directors and officers of companies to take strategic risks based on current information and as such can greatly help a company if it knows it has some tough business choices to make. For more information about directors liability insurance and other financial services browse through our other pages.

Get advice on directors liability insurance from a qualified independent financial advisor

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