Throughout the pandemic, business owners have had to be incredibly agile in making quick decisions to maintain business continuity. However, there is a risk that these decisions could, without careful consideration, expose them to costly compensation claims. We spoke to Directors’ and Officers’ insurance specialist, Sam Brown, to find out why now is the time for business owners to make sure they’re covered.
In a nutshell, what is Directors’ and Officers’ insurance?
“Directors’ and Officers’ (D&O) insurance is protection against claims or ‘wrongful acts’ made against directors and management team in steering and managing their business. This includes allegations following regulatory investigations and it can be extended to cover employment issues as well.”
What is a ‘wrongful act’?
“A ‘wrongful act’ is what is needed to trigger a claim. To put it simply, it means an action or decision that is deemed to be wrongful by another party. It can take the form of an allegation made against the company or directors – whether founded or unfounded. Something like an accusation that the director or the company has made the wrong decision, or it could be a breach of regulations such as the Health and Safety Act or environmental regulations. It can come from various stakeholders – employees, shareholders or the regulators themselves, so it’s a very wide definition.”
The policy is called “Directors’ and Officers'” insurance, does that mean it only covers people in a director or officer job role?
“The definition of the policy is very wide generally, and you don’t have to be a formally appointed director or an officer for it to apply. It will cover anyone in a management position, anyone with seniority or a position of authority over someone else. One of the extensions of cover is employment practices liability that will pick up any employment disputes. If a team leader was to incorrectly manage an employee, it would respond to that as well.”
The policy will cover anyone in a management position, anyone with seniority or a position of authority over someone else
What kind of business should have a directors and officers insurance policy?
“Every business and its directors & officers has an exposure to this risk, so every business should consider having this cover.
“If you manage the company or are a director, you can be held personally liable in certain circumstances. So whilst you might have a private limited company, where the liability is limited to the value of the shares issued, a director’s personal liability is potentially unlimited. Director’s personal assets are therefore at risk if they are personally pursued. By way of an example, amendments to the Privacy and Electronic Regulations which came in to force in December 2018 allows directors to be fined up to £500,000 for breach of the rules on unsolicited direct marketing.”
Is the cover mandatory – do people have to have it?
“No, there’s no obligation or legal requirement told the cover. However, some non-executive directors will insist upon a D&O policy being in place before they’ll join the board, for the very reason they could be held personally liable if something goes wrong.
“Although it’s not mandatory, the unlimited personal liability alone is why all businesses should consider taking out a policy.”
Although cover is not mandatory, the unlimited personal liability alone is why all businesses should consider taking out a policy.
How much cover do businesses need?
“It varies depending on the area or sector of the business. It also comes down to risk appetite and how much potential exposure to risk a business may have. A small SME business with more part time or temporary staff may be more comfortable with a lower limit than that of larger multinational organisation.”
How has directors and officers insurance been affected by the current situation with COVID-19?
“COVID-19 has, and will continue to, have a big impact on insurance cover. Insurers were already seeing increasing claims frequency and severity and the pandemic will only increase this further. Cover is likely to be restricted moving forward which could make it more difficult to get cover.
“The pandemic has brought a new set of challenges for senior management, as well as the usual day-to-day challenges. Regulations are changing all the time, which all increases exposure to directors. So now more than ever, there’s a need to think about what if something went wrong? What if we weren’t up to date with regulations? That’s where a D&O policy could help.
“Redundancy is obviously a big issue at the moment and, if you have the employment practices section of cover under the D&O policy, it would respond if an employee brought a claim of unfair dismissal. Insurers expect to see a lot of those types of claims over the coming months, so they will respond accordingly and potentially cover will become more difficult to obtain.”
What would be your overriding message to anyone who is maybe on the fence about taking out a Directors and Officers Insurance policy?
“Get it now while you can and while it’s affordable. Exposures to these risks are increasing and the policy caters for a lot of different challenges. No-one is perfect and not everyone will be up-to-date on all of the regulatory changes that are coming in fast. It would be easy to fall foul of something and leave yourself open, so make sure you’re not in that position.”
You can find out more about Directors’ and Officers’ insurance here or call our team on 01603 21800.