Directors and Officers Insurance

Directors and Officers Liability Insurance or (D&O insurance) covers the cost of claims made against the companies senior Managers and Directors for actual and alleged wrongful acts.

Any Director or officers has a risk of being sued, even a frivolous lawsuit has to be defended, and it is personal liability and personal assets of the directors and officers that are at risk.

Why Directors and Officers Insurance ?

The simplest reason that this cover is needed is that people make mistakes that can easily lead to a financial loss and result in a lawsuit. Board members and company officers can be held personally liable for their management decisions if it financially affects the organization’s stakeholders, employees, and clients.

What is covered in a D&O policy?

The Directors and Officers insurance policy was designed to provide cover for “wrongful acts” when the board member or manager is acting within the scope of their managerial duties. Common risks that the policy provides cover for are:

• Actions brought by Shareholders
• Misrepresentation of the company in a prospectus
• Employment practices
• Breach of trust
• Misleading disclosure in company accounts
• Breach of duty
• Misstatement
• Neglect
• Defamation

Of the claims filed globally, over a third were related to employment practices such as discrimination, sexual harassment, and wrongful termination. Although most claims that were filed did not accuse the manager or board member of the wrongful act, they were held responsible for not enforcing the rules of conduct that were implemented to prevent the wrongful act.

What is not covered in a D&O policy?

Although the Directors and Officers Insurance policy provides cover for wrongful acts, it does not provide cover for fraudulent, criminal, pollution, or intentional acts. The most common excluded acts are:

• Fraud
• Bodily injury or property damage (covered under Public liability)
• Claims alleged under a prior policy
• Receiving illegal compensation or acting for personal profit

How Cover is Provided

The majority of Directors and Officers Insurance policies are set up to pay claims on a “claims made” basis rather than an “occurrence” basis like other commercial policies. This means that the insurance cover must be available WHEN the claim is REPORTED, not WHEN the offence OCCURRED. This basis of reporting is used because in most cases, the claim is reported well after the offence or action actually took place.

This reporting basis makes it somewhat difficult to change insurance carriers because the new carrier must accept the risk of wrongful actions that may have happened in the past but have not been reported. To overcome the problem of dealing with historical actions, the new insurer will typically offer the new policy with cover on a retroactive basis, so that actions (unknown to the organization) will be covered if the claims are finally reported.

Finally, one of the most important covers that is available with a Directors and Officers Insurance policy is the cover for defence costs. The policy will pay to defend the insured from allegations and also pay for settlement costs or a judgment awarded by the court

If your business, whether profit or nonprofit has a board of directors and company officers, then the members and officers should be financially protected by the company acquiring a Directors and Officers Liability policy.

Speak to your Trusted Union insurance adviser to mitigate your Directors and Officers risk and to get the information you need to make a smart and informed decision.