The Basics of D&O Cover & 5 Key Considerations you need to know.
Directors know that directors’ and officers’ liability insurance is important, particularly in regulated industries, but it is important cover for all firms. Directors would be prudent to ask what D&O is in place before accepting a board appointment, but simply having the cover is not enough. With your broker you should examine the wording and ensure you are correctly covered for the risks you and your board faces. If you do not have D&O cover here is a good place to start your research.
The Fundamentals of D&O - What's Covered
Insurance cover is provided for claims arising out of actual or alleged breach of trust, breach of duty, neglect, error, omission, misstatement, libel, slander, breach of warranty of authority and wrongful trading. Furthermore, Directors & Officers Liability Insurance also protects the value of a director’s personal holding in the company by covering the substantial expense of funding its own defence.
Why you need Directors & Officers
The legal environment for directors and officers in Ireland is becoming increasingly hostile. In recent years, both the government and shareholders have become more willing to bring actions for breach of duty against directors and officers of companies.
As a director or officer of a company, you should consider the following:
- As a Director or Officer, you act as an agent for the company, and are legally responsible for your actions. You cannot hide behind the veil of incorporation. Directors and Officers personal assets are exposed to claims against them arising out of their business activities.
- Claims can be brought by any party with an interest in the affairs of the company. Directors owe a duty to the company who are ultimately the present and future shareholders. In addition, this is extended to creditors in the event of insolvency.
- Voluntary or Not for Profit directors should remember that The Charities Act of 2009 defined Charity Trustees as company directors and consequently they will be treated the same as company directors of an Ltd.
Legal Responsibilities of Directors
Legally, the directors of a company and the company itself are separate entities and so may both be defendants, separately or jointly, in any legal action or prosecution.
Directors and officers of companies and other organisations have various duties, responsibilities and powers in connection with their position. Director’s duties are set out in a combination of case law and relevant sections from various statutes and regulations.
Consequently, directors and officers can be held responsible for a range of issues including:
- Fraud
- Negligence
- Health and safety
- Data protection
- Maintaining satisfactory accounts
Directors may sometimes be unaware of the full scope of their duties & Unfortunately ignorance is no defence when it comes to an action being taken against you.
What circumstances would a D&O Insurance policy respond to?
- Actual or alleged Wrongful Acts.
- Negligence, error, omission or any other act wrongfully attempted.
- Matters claimed by virtue of your position as a director and officer.
Whats Covered by Directors & Officers Liability Insurance?
- Legal defence costs.
- Fund appeals
- Representation costs at official enquiries.
- Damages, settlements and awards.
What's not covered by Directors & Officers Liability Insurance?
- Fraud & Dishonesty
- Direct claims for bodily injury and property damage
- Pollution
- Prior & pending litigation known when the policy was incepted.
So, what should directors consider?
1. Even honest directors can be sued
Bad things can happen to good people. In 2005 in the UK, for example, after landmark proceedings involving Equitable Life Assurance Society1, nine former non-executive directors, along with the former auditors, were sued for £3 billion. It was alleged that the former directors had failed to appreciate the correct meaning of a provision in the articles of association. The non-executive directors had very good reputations and, although eventually vindicated in a settlement, by then the parties had spent £75 million on lawyers’ fees and expenses. The D&O policy give you peace of mind and protects your firms balance sheet, in a very litigious world.
2. Regulatory Sanctions are more common
We have seen in Ireland many cases of public inquiries leading to an arrest or ‘dawn raids’ on homes or offices. Regulators & Safety authorities within Ireland may wish to interview a director regarding their action (or inaction!). Public inquiries and criminal trials are high-profile. A director under threat often needs first class advice at short notice. Covid 19 adds another layer of potential litigation for directors for their action or inaction in the crisis.
3. The law’s wheels grind slowly
Most directors of reputable companies are unlikely to be successfully sued or convicted. However, legal processes are painstaking and often move very slowly. Directors may endure years of litigation-related uncertainty and expense before the claims are abandoned. Whilst a case is ongoing, a director may lose the support of the company’s board, or simply retire. Directors need to know that they will be able to benefit directly from the policy for as long as a case continues.
4. Key Considerations in cover
Severability clause: this protects innocent directors where another director has misled insurers or committed some other serious breach of the policy.
- Where allegations of dishonesty are made, a good policy may continue to pay a director’s defence costs unless in due course a court finds that the director had been dishonest, or he or she admits dishonesty.
- If the company has any USA business, the directors must have specific cover for that business.
Choice of representatives: insured parties have the scope to choose specialist legal advisers. Individual directors may require separate legal advice too, where more than one director is sued.
No delay: legal costs and expenses should be payable as incurred and without unnecessary delay.
Disputes clause: Certain policies provide for a speedy and fair means of dealing with disagreement between the insured and insurers.
5. D&O Insurance Market is Hard at the moment.
A recent UK report highlighted premiums were up significantly, some as much as 200%. This was caused by insurers becoming increasingly concerned not just with historic sources of D&O claims, but also with new exposures that may result from COVID-19. The market correction has meant less D&O capacity with certain insurers exiting altogether, with new insurers unwilling to fill the resulting gaps. This has exacerbated the pricing of D&O.
Where to Get D&O Cover
It is important firstly to have an experienced brokers to ensure that you are getting the best possible cover and premium in an extremely challenging environment.
Brady Insurance currently have access to a number of markets for D&O / Management Liability and are in a position to quote most firms, depending on activities, turnover and areas of operation.
To start the ball rolling with a quote for your directors, send us some info here, and we will start working on getting your board covered today.