Directors & Officers Insurance

Directors’ roles and responsibilities are becoming more and more onerous with the risk of litigation, and therefore the exposure of personal wealth, increasing proportionally.

The management of risk is a fundamental responsibility for all directors and extends beyond that of corporate risk to include the management of personal risks associated with the acceptance of responsibilities by the directors and officers of a company.

Director’s and Officer’s Liability Insurance is a very complex area of insurance and each individual case requires careful consideration and evaluation. Given the wide range of industries and business risks it would not be possible to provide a sample policy to cover all eventualities. However the following provides a general guide to the cover and structure of a typical Director’s and Officer’s Liability Insurance policy:

Policy provisions

Policies generally provide cover by way of two operative clauses as follows:

Operative Clauses
1. Individual indemnity relates to Directors’ and Officer’s personal Liability. It covers loss to the director’s personal assets to the extent that they are not indemnified for that loss. In other words loss incurred when the company is not legally permitted to indemnify its directors and officers.
2. Corporate Indemnity indemnifies the company for loss to the extent that its Directors and Officers are indemnified for that loss. This means that the company is covered only for reimbursement which it is required or permitted by law to make to its directors and officers against whom a legal action has been brought. An action taken against the company itself is not covered, unless specifically addressed within the terms and condition of the policy.

Policies generally stipulate that directors and officers are indemnified for any ‘wrongful act’ committed in their capacity as directors and officers of the company. The policies generally define ‘wrongful act’ as “any actual or alleged breach of duty, breach of trust, neglect, error, misstatement, misleading statement, omission or other act committed or wrongfully attempted by any director or officer”.

Insured persons
Policies vary as to who is insured. They can cover directors, past and present, and can be extended to cover employees engaged by the company in a managerial or supervisory role. Cover is generally extended to include spouses of insured persons for loss arising from a claim against an insured person and will often extend to the estate of insured persons.

Some policies will cover outside directorships held by directors and officers sitting on unconnected boards i.e. boards outside the insured group, where the director sits at the request of the group. Where an ‘outside entity director’ is involved care must be taken to ensure that there is appropriate cover in place.
Directors of Acquired Companies
Acquired companies are addressed in different ways – some policies will automatically cover acquisitions other policies will require prior approval before providing cover.
Period of policy cover
Cover for Directors and Officers will normally start from the date of appointment, but there may be a requirement to notify the insurer of the appointment during the term of the policy. Frequently the only obligation is to update the list of directors and officers at annual renewal. However care should be taken to ensure that if there is a notification requirement on appointment such notification is made in writing within the prevailing time limit.
Basis of cover
All policies are written on a ‘claims made’ basis and the limit of indemnity purchased is in the aggregate. Cover may cease when a director’s appointment comes to an end, but an individual’s liability may continue for some time in respect of actions or inactions occurring during the period of appointment, it is essential that the extent of cover for passed or retired directors is clearly understood.
Scope of cover
The extent of cover in Directors’ and Officer’s Liability insurance policies can vary and care should be taken to understand precisely what is and what is not covered. This involves careful evaluation and consideration of all the policy terms, conditions, definitions and exclusions.
Principal inclusions
1. Damages awarded against an insured person
2. Defence costs in relation to an action
3. Investigation costs arising from any official investigations including the Director of Corporate Enforcement. This can include the cost of investigations in relation to restriction and disqualification
4. Libel and slander
Principal exclusions
1. Pending and prior litigation
2. A director or officer, or the company, against another director or officer
3. War and terrorism
4. Dishonest, fraudulent, criminal or malicious acts
5. Personal profit, remuneration or advantage
6. Fines and penalties
7. Bodily injury and damage to property - but claims against directors where the liability is primarily the liability of the company but the director has secondary liability may be covered
8. Pollution however generally defence costs and derivative claims may be covered
9. Professional indemnity
10. Liability in respect of pension funds or employee benefit schemes
11. Legal jurisdiction – some policies may restrict cover to certain geographical areas
12. Taxes are rarely covered
13. Liabilities covered elsewhere such as Employer’s or Public Liability policies
14. Some policies exclude actions made by major shareholders
Who can bring an action against directors and officers?
An example of some sources of actions against directors and officers are:
1. Regulatory
  Claims from regulatory proceedings under various statutes
2. Shareholders
  1. Mismanagement
  2. Misleading statements
  3. Poor business decisions
3. Employees, past and present alleging
  1. Sexual harassment
  2. Unfair dismissal
  3. Discrimination
4. Customers
  1. Disputes relating to contracts
5. Creditors
  1. Insolvency