D&O Insurance Explained

What is directors' and officers' insurance?

The directors and officers in your company are in a position of responsibility. Managers, directors and supervisors can face allegations and claims for which they may be personally liable. Even in a company with limited liability status, personal liability is unlimited. Directors and officers are under increasing scrutiny, and it is commonplace for allegations of wrongful acts to be made.

Directors and officers (D&O) insurance policies offer liability cover for company managers to protect them from claims which may arise from the decisions and actions taken within the scope of their regular duties.

Key personnel are likely to have more and higher-risk responsibilities and compensation claims could be made against them by staff, customers, investors, or regulators.

Any allegations of wrongdoing need to be investigated and defended, and this can cost a significant amount even if the case doesn’t reach court. This means directors' and officers' personal finances are at risk, so it is essential companies provide protection through directors and officers (D&O) liability insurance.

D&O insurance can also cover legal costs from defending a case.

What is covered under D&O insurance?

The core purpose of a D&O policy is to provide financial protection for managers against the consequences of actual or alleged “wrongful acts” when acting in the scope of their managerial duties. The D&O policy will pay for defence costs and financial losses. In addition, extensions to many D&O policies also cover costs for managers generated by administrative and criminal proceedings or in the course of investigations by regulators or criminal prosecutors.

These coverage extensions are gaining more and more importance among company directors. In this way, managers receive comprehensive, integrated cover that ensures them a reliable, consistent and structured legal defence.

There are different risks in different markets. The United States is by far the world’s largest D&O market with a premium volume of around $6 billion, and there the most frequent source of claims are claims related to employment or HR issues such as discrimination, sexual harassment or wrongful termination. From 2000 to 2008, over 40% of D&O claims in the US were employment related claims. In most cases the managers did not act themselves; they simply did not enforce employee conduct rules against discrimination and harassment.

While these are the most frequent claims in the US market, they are not the most expensive ones. The severity of securities claims is much higher. Insurers are watching closely whether shareholder activism and class-action lawsuits are on the rise, but the frequency of these claims seems to have stabilised at its current high level. In other markets worldwide, shareholder claims are on the rise along with the general trend of increasing shareholder rights.

Who is covered under directors and officers insurance?

All current, future and past directors and officers of a company and its subsidiaries are covered under a D&O policy, which can also include non-executive directors. In very specific cases like securities claims, the policy can even be extended to cover claims against the company itself. Cover is usually taken out and paid for by the company. Depending on the respective local law and policy, this may or may not be viewed by legislators as a “benefit-in-kind” for those persons it covers.

The reassurance of directors and officers liability insurance

Directors and officers insurance covers costs associated with the defence of an allegation of a wrongful act. This means it takes away the financial risks faced by directors and officers, giving them protection should an allegation or claim be made against them. Considering that even simple investigations can cost thousands, if not hundreds of thousands, of pounds, purchasing directors and officers makes financial sense.

Why are individuals so vulnerable?

  • Employees know their employment rights and are increasingly likely to sue
  • Legal liability is shifting away from companies and towards personal liability
  • Regulators are now more proactive in investigating companies

What is a wrongful act?

This could be a breach of trust, breach of duty, neglect, error, misleading statement or wrongful trading, committed or attempted by a director or officer whilst acting in this capacity on behalf of the company.

Directors and officers insurance and Covid-19

Given the unique and complex problems Covid-19 has caused businesses, inevitably some well-intended decisions they have made during the pandemic could lead to litigation. A key priority will be protecting staff and providing a secure, health and safety compliant working environment.

One untested but key question is if employees can requires employees to be vaccinated. Ter will be legal discussion around Article 8 of the European Convention of Human Rights (protecting the right to private and family life) against the exclusion clause of this law, where it can be overruled “in the interests of national security, public safety or the economic wellbeing of the country”.

Either way, if such a decision to vaccinate employees before they are allowed to return to the office – or indeed a decision not to – could result in litigation against senior personnel. This means directors and officers insurance has recently become even more important to protect your organisation.

D&O Insurance from Towergate

Our directors and officers insurance covers your D&Os against claims brought against them, and is designed to help you cope with the strict legislative and regulatory world in which we work. Our policy grows and develops with your company, providing the best defence should the worst happen. See our D&O insurance webpage for more details, or call 0330 123 5741 to speak to a specialist adviser.

About the author

Mike Stephens is a respected senior industry professional and Fellow of the Chartered Insurance Institute (CII) with well over 40 years’ varied experience in the commercial insurance sector as a director, underwriter, and operational improvement manager.