It’s an unfortunate truth that the litigious society we now live in means claims against directors and officers are becoming increasingly common. Your business, its directors and officers could be sued by current or former employees, disgruntled customers, competitors, regulators and even investors.
Defending legal claims against your business or senior management can easily run into six figure sums, crippling your company financially and, worse, your directors and officers could lose everything because, in the event of a claim, their personal assets may also be at risk.
This article looks at what directors and officers insurance is, what it covers and who should have it to protect the interests of their business and their management teams.
Read on for the full low-down or click a link to jump ahead:
Directors and officers (D&O) insurance is a liability protection policy designed to protect corporate directors and officers against potential legal problems arising while carrying out their official duties.
D&O insurance cover provides directors and officers with protection against having to pay for losses relating to any action taken on behalf of the company from their own pocket.
If they are personally sued for alleged or actual wrongdoings due to decisions they took in the workplace, a D&O insurance policy will go towards paying defence costs and damages (such as awards and settlement payments) which could arise.
D&O insurance can protect directors and officers of a business from all kinds of personal liability problems. These can range from the frivolous to potentially malicious claims brought by unhappy customers, all the way up to official investigations.
Claims and proceedings which involve personal liability might typically include:
- Claims brought by shareholders and investors holding directors responsible for losses
- Actions brought by liquidators when there is suspicion of wrongful trading
- Actions brought by HMRC if they suspect misappropriation of tax payments
- Health and safety investigations from the Health and Safety Executive (HSE) if they suspect there has been negligence
- Serious Fraud Office (SFO) or Police investigations
Although the definition of a director is fairly clear, the definition of an officer can be more vague. It’s important to realise that, in these litigious times, claims or proceedings could be issued against pretty much any employee working in a managerial or supervisory post.
It’s therefore important to understand that it’s not only directors of a company who need to be aware of their legal responsibilities.
As well as protecting directors and officers performing their roles from personal liability, D&O insurance can also protect the company, for example, a policy can cover the repayment of legal defence costs.
Typical features covered by directors’ and officers’ insurances are:
- Cover is provided on a ‘claims made’ basis, so the policy covers all claims the insurer is notified of for the duration of the insurance period, regardless when the event giving rise to the loss occurred. Claims made before the policy start date will not be covered
- Cover protects past, present and future directors of a company
- Cover also indemnifies the personal legal representatives in case of death, insolvency or bankruptcy of the insured company
- Policies automatically provide cover for new subsidiaries of a company, up to a predetermined size and number of employees acting as managers or supervisors
- Cover can is typically subject to an annual indemnity limit of £1 million, although this limit can be higher. For smaller businesses cover limits may start at £250k
As well as the above cover, there are also a range of additional features you can opt for when taking out D&O insurance. For example, cover can include representation for the insured company at investigations or examinations.
Not all policies for directors and officers insurance are the same and what is and isn’t covered by a policy can vary widely.
You’re unlikely to find a policy covering all and any eventuality, but some of the more common exclusions you may find could include:
- Pre-known claims and circumstances: a dispute may be covered by a previous D&O policy but it won’t be covered by the new one, most insurance experts would never recommend changing insurer during an ongoing claim
- Catastrophic hazards: this is a hazard deemed to be catastrophic for the insurance provider’s own financial stability, where an insurer couldn’t realistically meet the cost of pay-outs if it occurred. For example, losses caused by war, terrorism or natural environmental damage. These exclusions are by no means limited to D&O policies and are often found in other insurance products as well.
- Conduct exclusion: insurance providers are legally prohibited from providing cover for fraudulent or criminal conduct. Criminal acts by any individual which result in losses will not be covered. Examples of this include embezzlement and insider trading. In these cases, it’s rarely clear if the defendant is guilty ahead of a trial so an insurer will usually pay defence costs in advance, on the presumption of innocence, but in the event of a formal ruling, or admission of guilt, coverage will be declined completely.
- Major shareholder; this is designed to exclude protection for any claim from a shareholder owning more than a set percentage of a company. This is done to try and dissuade collusion and infighting between shareholders and the management team, as well as encouraging significant shareholders to take a proactive approach to remain informed of the companies they invest in.
D&O insurance policies can vary widely and, due to their complexity, are often only sold through experienced insurance brokers, like those we work with.
Get in touch for a free, no-obligation chat and we’ll connect you with an expert who can answer any questions you may have and ensure you get the right level of cover for the best possible price.
The level of cover you need will depend on what your company does and the kinds of risk your management team are regularly exposed to. An experienced insurance broker will be able to help you identify your level of risk and figure out how much insurance you need, before then finding the insurance policy to match your specific industry needs.
The premiums you’re charged will be based on the level of indemnity you require, taking into account such things as turnover, assets and the financial position of your company as well as how many directors and officers will be covered, the geographical areas and jurisdiction your business covers.
The things you need to look out for when comparing directors and officers insurance policies and quotes are what you are actually paying cover for. Pay careful attention to what is and isn’t included in the policy as insurance products can vary widely, especially when it comes to specific automatic exclusions.
If you’ve been in your role for a long time, some insurance providers may take this into account and reduce premiums accordingly. An experienced insurance broker, like the ones we work with, will know of the providers who are most likely to reduce their premium rates in line with your level of experience.
Get in touch for a free, no obligation chat and we’ll match you with an insurance expert who will compare directors and officers insurance policies on your behalf, saving you time, hassle and, potentially, money.
No, not really. Director insurance policies in the UK all vary according to the insurance provider. To make sure businesses buy insurance protection which best suits their needs, most insurance products of this type and complexity are sold through experienced insurance brokers, like those we work with.
To find out more about director insurance and to get help working out which policy is right for you, get in touch for a free, no-obligation chat with one of the insurance experts we work with.
Yes, according to the government’s Employment Income Manual EIM30513, if you’re paying premiums on a directors and officers insurance policy, the payments should be tax deductible.
In addition, Section 349 ITEPA 2003 states that a contract of insurance will qualify as being tax deductible if cover provides:
- Protection for one or more employees against specific qualifying liabilities or costs arising from claims that’s they’re subject to
- Cover to an employer where a loss arises from meeting any qualifying liability of one of their employees
The tax rules surrounding directors and officers insurance should be straightforward but certain exclusions can complicate things. To be certain you’re paying the right tax and gaining the tax deductible advantages you’re entitled to, seek advice from a qualified tax advisor who will be able to lay out all your rights and obligations.
Directors and officers insurance is a complicated business and throws up a lot of questions for people who are considering cover.
These are just a few of the questions we regularly get asked by our customers.
Does director’s insurance cover death?
If you are a director and want to buy life insurance, you will need a life insurance policy. In terms of business insurance policies your two options would be relevant life insurance or key person cover.
A relevant life policy will pay out to your family or beneficiaries in the event that you pass away. This is a very different insurance policy to directors and officer insurance which we are discussing here, but you can learn more about relevant life insurance in our dedicated relevant life article.
If, on the other hand, you want life insurance to protect the needs of your company in the event of your untimely death, you may wish to consider key man insurance, which you can learn more about in our Definitive Guide to Key Person Insurance.
If you’d like to discuss your business insurance needs with an expert, get in touch and we’ll connect you to one of the business insurance brokers we work with. They will be able to advise you of the insurance products you may wish to consider to protect your company.
Can I get director and trustee insurance?
If you’re a trustee looking for indemnity protection, you need to take out a trustee indemnity insurance policy. This is very similar to directors insurance but is designed to protect trustees of a charity or community organisation.
As with directors insurance, trustees indemnity insurance will cover a trustee against significant costs of legal investigations. Examples of cover you can get with this kind of insurance includes cover for costs incurred due to investigations into financial irregularities, libel allegations and other similar issues.
Do I need a separate policy for a nominee director?
Nominee directors are often overlooked when it comes to indemnity insurance such as directors insurance. Nominee directors are often appointed to subsidiary companies and are often appointed with little consideration for potential problems for either the business group or the individual acting as a director.
UK law is clear that there is no difference between directors and nominee directors and that both job titles cover the same director duties and should therefore be treated equally.
In many cases nominee director insurance can be a vital insurance protection for both parties and should not be overlooked.
Can I get a policy designed for partnerships?
Directors indemnity insurance can be particularly useful in providing protection to partnerships which can be vulnerable to employment-related claims.
Although partnerships aren’t governed by Companies Act legislation they must still adhere to employment legislation and the Equality and Human Rights Commission.
The experts we work with are whole-of-market insurance brokers with access to all the insurance providers in the UK. They know which products provide the best cover for partnership liabilities and can help you find the right insurance package for the most competitive price.
Get in touch for a free, no obligation chat and we’ll connect you to an expert who can help get you the cover you need.
Is it a good insurance policy for start-ups?
As a start-up you may find you’re limited on funds for every kind of insurance you should consider. If you have investors, however, or intend to find investors to help fund your growth, D&O insurance may be one of the insurance policies investors might want you to have in place in order to help protect their risk.
There are directors and officers insurance policies specifically designed for startups with premium prices starting from as little as £6.90 in some cases. If you have a startup which is going places, get in touch for a free, no obligation chat with one of the insurance experts we work with.
A little time could save you a whole heap of hassle down the road and the right insurance package might give potential investors confidence in their decision to back your business and help you raise the cash you need.
Can I get cover for a non-executive director too?
Yes, if you wish to include non-executive directors in your directors and officers insurance this is possible. You can get D&O policies which cover all current, future and past directors and officers of a company, this can extend to non-executive directors too.
What about executive directors?
Absolutely. D&O insurance is available to protect executives at all levels. If your role in a company means you could be at risk from being sued in the course of actions you take in your job, directors and officers insurance can help protect you from personal financial loss in the event of a claim being made against you.
If you think you need cover, speak to one of the insurance experts we work with. All the experts are whole-of-market brokers with access to every provider offering D&O insurance in the UK.
Get in touch for a free, no obligation chat about your insurance needs today.
Do I need this kind of policy if I’m a sole trader?
No, as a sole trader you are more likely to require legal expenses insurance (LEI), this should provide the level of cover you require as the owner of your business.
If you want to get a quote for legal expenses insurance or talk with an insurance expert about any other insurance you should consider as a sole trader, get in touch and we’ll introduce you to one of the expert whole-of-market insurance brokers we work with. There’s no obligation to take their advice and the initial conversation will cost only a little of your time.
Directors and officers insurance or errors and omissions?
While D&O insurance protects individuals making management decisions, errors and omissions insurance insures the product or service offered by a company.
Errors and omissions insurance (E&O) is a term more often used in America, in the UK the same insurance is more often referred to as professional indemnity insurance or PI for short.
Whatever name it goes by, this type of insurance covers legal fees or compensation costs if your business is sued by a client for being negligent. For example, if you’re an estate agent and fail to complete closing documents, this might lead to you being sued for negligence and having an E&O policy in place could protect you from financial losses.
What’s the difference between directors and officers insurance and a fidelity bond?
A fidelity bond is an American insurance term which is referred to as fidelity coverage in the UK. Fidelity insurance protects a business against theft, forgery or fraud carried out by an employee. In the Uk, insurers provide Crime Cover which covers the same kind of protection as a US fidelity bond.
If a business owner or employer suffers loss due to this kind of dishonesty at the hands of one of their employees, this type of insurance policy will share the loss, as long as it falls within the terms of the cover you have taken out.
Directors insurance is liability protection designed to protect individual decision makers in a firm. If accused of wrongdoings in the course of doing their job, directors and officers insurance can protect the financial losses of a company and the individual in the event of a legal problem.
How do directors and officers insurance compare with employment practices?
Employment practices liability insurance covers legal costs and compensations if an employee makes a claim against you.
Employment practices liability insurance (EPLI) can protect you in the event of claims such as:
- Unfair dismissal
- Constructive dismissal
EPLI can often be added to a directors and officers insurance policy as part of a comprehensive insurance package for bosses. Employers Liability and Employment Practices Liability are two very different products, if you think you need one, make sure you understand what kind of protection you are buying first.
To find out more, speak to one of the expert insurance brokers we work with…
Directors and officers insurance products can be complicated and many insurance providers will insist that you get expert advice before buying a policy. With a variety of cover available and a choice of inclusions and exclusions, getting the right advice could save you a heap of time and trouble if you find yourself in legal hot water.
We work with whole-of-market insurance brokers who are experts when it comes to directors and officers insurance, as well as the other tranche of insurance every successful business should have to protect their interests.
Call us on 0808 189 0463 or make an online enquiry for a free, no-obligation chat today.