• Catherine France

10 Step Guide to Directors & Officers Insurance (you might be surprised to find out you need it)

Directors and officers are personally liable for making a mistake, it is often assumed, incorrectly that the personal directors of a company are not personally liable for mistakes made but even in a limited company the personal liability of the individual directors is unlimited.


Directors and officers are under increasing scrutiny, and allegations of mistakes can be made. These are called “wrongful acts” and include breach of trust, breach of duty, neglect, error, misleading statements, wrongful trading [1] by a director or officer whilst acting on behalf of the company.


What is directors and officers liability insurance?


Directors and officer’s insurance is protection against the financial costs of action taken against directors and officers of your business and will pay for the losses of the directors where a company is required by law to cover these costs, the insurance policy may cover the company for such losses.


How can I buy directors and officers liability insurance?


The directors and officer’s liability insurance products are available as a stand-alone policy or can be bought as part of a package of covers usually called management liability insurance.


You can buy this type of insurance online directly from a broker or insurer or via an insurance broker face to face, or over the phone. It is important to know that if you buy insurance directly from a broker or insurer online then you will not be getting any advice, this means that it is up to you to know what you are buying and that it is suitable for you including understanding what is and is not covered.


I make this distinction because I think it is important to know and you can read more about this in my blog post Who to buy business insurance from and how to know if you need advice.


Do you need Directors & Officers insurance?


The Association of British Insurance (ABI) describe it like this. “If your company has directors or key managers, directors’ and officers’ liability insurance can cover the cost of compensation claims made against them by shareholders, investors, employees, regulators or third parties.


Directors and officers have specific duties, responsibilities and powers relating to their positions. These are usually set out in their job description or terms of reference. If a director or officer of your company is found to have acted outside of their terms of reference, civil, criminal or regulatory proceedings can be brought against them.


Directors’ and officers’ liability insurance covers the cost of defending these proceedings, as well as any compensation costs that arise from an unsuccessful defence.”


What could happen if I don’t have directors and officer’s insurance?


If directors and officers do not have insurance, they face a greater risk of not being able to defend themselves against:

  • disqualification from holding the position of director

  • civil proceedings which can lead to hefty legal costs and awards for damages

  • criminal prosecution which can lead to fines and possible imprisonment

How can a claim happen?


Claims and proceedings where personal liability can be involved also typically include:

  • Claims by investors and shareholders who blame directors personally for their losses

  • Actions brought by liquidators, where they suspect wrongful trading or incorrect payments to creditors

  • Actions brought by HMRC where insolvent trading or misappropriation of tax payments is suspected

  • HSE investigations where negligence is suspected [2]

What is usually covered?


Directors’ and officers’ liability covers claims made by regulators, shareholders or investors, e.g., for failure to act in the company’s best interest, creditors. It also covers claims brought about by breach of European legislation, and insolvency.


Employment practices liability insurance can be bought as an extension of directors’ and officers’ liability insurance. It covers employee discrimination claims e.g., for unfair dismissal, harassment, or failure to promote a person.


Directors’ and officers’ liability sometimes covers defence costs arising from criminal and regulatory investigations into your company where no actual wrongful act has been alleged against a director.


What isn’t covered?


Directors’ and officers’ liability does not cover claims made against your organisation as a whole, only those made against individuals for alleged wrongful acts carried out in their capacity as directors or officers.


How much Directors and Officers Insurance do I need?


This is a tricky question, and not one I can easily answer I’m afraid. The amount of cover you need will depend on what you do and the risks you face as a business as well as how much you want to spend to mitigate the risk – transfer that risk to an insurer at a price.


How much will directors and officers insurance cost?


The premiums you pay will be based on how much coverage you want to buy, taking into account your turnover, the number of directors and officers that will be covered, the geographical areas and jurisdiction your business operates in. It’s worth thinking about these areas before you get a quote, so you have them to hand.


I’m a sole trader, do I need Directors or Officers insurance?


No, you don’t but you might want to think about legal expenses insurance or professional indemnity insurance depending on what you do. My blog The Insurance You Really Need for Your Small Business

What Next


If you feel worried that you don’t have the right business insurance and too embarrassed to ask?


I provide a friendly no-nonsense approach to explaining insurance that is designed to remove your fear and gives you the information, knowledge and confidence to talk to an insurer or broker about your insurance, leaving you feeling happier and smarter.


You can book a 30 minute 121 for £39.


I will send you the notes of our conversation so you don't have to worry about getting it all down, which can be tricky as we cover a lot! You can also have a copy of the zoom recording if you wish.


So if you need some help understanding the insurance you need to protect your small business then you'll need a link, here it is Book a 121

Further Reading


If you found this useful you might also like to read the following blog posts;


How do I know what insurance my start-up needs?


Who to buy business insurance from and how to know if you need advice?


What the hell is Cyber Insurance?


You can also find me on Instagram, Facebook and LinkedIn.

Content Disclaimer: The information contained above is provided for information purposes only. The contents of this article are not intended to amount to advice, and you should not rely on any of the contents of this article. Professional advice should be obtained before taking or refraining from taking any action as a result of the contents of this article. Catherine France disclaims all liability and responsibility arising from any reliance placed on any of the contents of this article.


Sources:

[1] ABI - https://www.abi.org.uk/products-and-issues/choosing-the-right-insurance/business-insurance/liability-insurance/directors-and-officers-liability-insurance/


[2] Markel - https://www.markeluk.com/business-insurance/directors-officers-insurance/what-is-directors-and-officers-insurance