- What is D&O insurance?
- Directors and officers insurance v professional indemnity
- How much does D&O cost?
- How much D&O insurance do I need?
- What is D&O insurance for non-profits?
When you’re a director or officer at an organisation of any size, the burden of responsibility can be heavy – both in terms of ensuring its success through careful strategy, and strengthening its reputation with customers and employees as a brand ambassador.
As anyone in a managerial position will know, it’s a precarious position to be in. But what’s less well known is just how personal the effects of making a mistake can be. One unforeseen change in the market; one momentary lapse of judgement; or even one employee with a vendetta could be all it takes for a lawsuit to land on your desk.
Luckily, this is where directors and officers liability insurance (also known as D&O insurance) steps in to lend a helping hand…
All decisions, actions and comments made by company directors and officers (or key managers) are under constant scrutiny as they carry out their daily duties.
Shareholders, for example, want to ensure their investments are protected and lucrative, so they need reassurance that those tasked with running the business are making the right choices. If they suddenly suffer a loss, they are well within their rights to make a claim against an individual director or officer if they consider him or her to be personally liable for that loss.
Legal action could also be taken by investors, creditors, employees, third parties or regulators if a director or officer is alleged to have committed any wrongful act while carrying out his or her duties. This could be an error, a misleading statement, wrongful trading, negligence or a breach of duty or trust.
D&O insurance can provide financial protection to the directors, officers and senior managers of a business should a claim be made against them (rather than the company as a whole) in circumstances such as these. It covers legal costs and expenses involved in investigations and defence, as well as costs awarded to successful claimants.
Add-on options are usually available too, such as public relations crisis management; cover for non-executive directors; emergency costs and expenses; entity defence; and employment law protection.
Without D&O insurance, directors and officers may not be in a position to defend themselves against disqualification, civil proceedings or prosecution, or to cover the cost of any compensation owed.
Confusion often surrounds these two forms of insurance, which are in many ways very similar. The main difference lies in who the policy actually covers.
As we’ve already seen, D&O insurance covers the personal liability of the directors and officers of a company, in the event of a claim being made against them for a wrongful act – whether alleged or actual.
Professional indemnity (PI) insurance, on the other hand, covers the company itself. It offers financial protection against claims made by customers or clients that relate to the professional advice given or services rendered by that company. PI insurance is therefore invaluable (and in some cases, mandatory) for a wide range of advice-giving businesses, from fitness instructors and IT consultants to accountants and architects.
Premiums vary depending on a variety of factors specific to the business in question, such as its size, its claims record, and the industry sector in which it operates – as well as the level of D&O insurance taken out, and any optional extras that are added onto the policy. Ultimately, it all comes down to the frequency and severity of claims a business’s directors and officers are likely to face – in other words, the risk they are deemed to pose to the insurer.
Unfortunately, your personal liability as a director or officer of a business is unlimited in the eyes of UK law. Therefore it’s particularly important to consider your level of cover carefully.
Your personal liability as a director or officer of a business is unlimited in the eyes of UK law
In general, the recommendation is to take out the highest level of cover you can afford, but it’s always best to seek advice from an expert to make sure you don’t end up under- or over-insured. An experienced, specialist insurance broker, for example, can take a holistic approach to finding the right policy for you.
D&O insurance is not only applicable to directors and officers of businesses that are run with the aim of making a profit – it’s just as relevant to those working in managerial roles at non-profit organisations such as charities, churches, social enterprises and professional associations.
After all, non-profit directors and officers are essentially carrying out the same duties as their for-profit counterparts. They will be making financial and operational decisions; building future strategies; engaging with third parties; and managing staff members, etc. They are also just as liable to make mistakes or to be accused of having made them.
In fact, some may find themselves at even greater risk. Quite often, for example, directors and officers at non-profit organisations will have had no prior experience of these roles at all, and may not fully understand the legal responsibilities they’ve signed up to. Meanwhile, it’s not unknown for experienced for-profit directors and officers to inadvertently relax their approach to leadership and decision-making if they move into a very different non-profit environment – especially if their new role is part-time.
D&O insurance mitigates these risks by offering financial protection to the directors and officers of non-profit organisations, should a claim be brought against them as individuals for an alleged or actual wrongful act.