Directors and Officers insurance protects company directors and other senior executives in the event of negligence, default, breach of duty or breach of trust claimed by a third party. In the event of any claims made to this effect - which could be mischievous and completely unfounded - the business and/or its directors may face significant legal expenses, which may also be compounded by any financial settlement that needs to be made as a result of the claim.
It's important to remember that a company and its directors are separate legal personalities and each can be sued in their own respective capacity. Limited liability status only protects shareholders up to the value of their own capital.
The appetite to pursue claims against directors continues to grow and the risk exposure has increased as new laws have been introduced. Here are ten scenarios in which D&O insurance can protect directors.
Small and medium-sized companies are often dynamic and entrepreneurial by their nature - but this often means they have little in the way of risk management policies and procedures. They are particularly susceptible to employment-related disputes which - if they reach tribunal stage - can be protracted and expensive. This process usually involves the senior management team, who then become distracted from the day-to-day business of growing their company. D&O covers the defence costs and any compensation payments that result
Partnerships can be particularly vulnerable to employment-related claims - in particular discrimination, harassment and failure to promote.
Family firms can erupt into disputes both internally and externally. D&O cover can pay for legal expenses incurred in disputes between directors of the same firm.
Firms can be troubled by mischievous, vexatious or unfounded accusations that can become very frustrating and time-consuming to confront. D&O cover can give executives of those firms valuable peace of mind during troubling times.
Hundreds of directors are disqualified every year for periods ranging from 2 to 15 years. This has the potential to have a devastating impact on their personal circumstances. When disqualification periods end, there could still be problems with creditworthiness and reputation. Businesses that take out D&O insurance are often more able to afford the best legal defence in the event of allegations.
When a director is accused of personal negligence, their private assets are put at risk. These include homes, investments and pension funds. D&O covers the costs involved in mounting a strong defence and meeting any financial settlement that results.
It is against public policy to have the ability to insure against dishonest or fraudulent acts, but D&O can pay legal defence costs up until the moment that any guilt is established.
The Department for Business, Enterprise and Regulatory Reform receives complaints concerning thousands of companies every year and mounts further investigation in the majority of cases. This can cost the subject of such investigations a huge amount of time and money - but D&O insurance helps to cover the costs involved.
Resignation and retirement do not necessarily mean the end of any negligence claim. In fact, actions may even be pursued against a director's estate after his or her death. D&O can provide vital run-off cover as long as it was in place at the time of the alleged incident.
In 2007, changes to the UK Companies Act resulted in the introduction of certain duties for directors that had never been laid out in statute before. This made directors more accountable and placed the onus on them to be aware of their responsibilities under such laws. Identifying breaches of these duties is now straightforward and can result in claims being made against directors. D&O insurance may cover the defence costs and any resulting damages arising from directors' duties being breached.
Call Make It Cheaper Financial Services today on 0800 970 0077 and a business insurance expert will talk you through a no-obligation D&O quote.