What Is Directors and Officers Liability Insurance?

Directors and officers or also known as D&O insurance is essential for both private and public companies that function in an increasingly litigious society. No matter of the size or type of company, all of them can benefit from this coverage. Protecting the personal assets of a company's directors and officers, as well as the ones of their spouses, is what a directors and officers liability insurance is used for, but also for protecting the company itself.

Generally speaking, directors & officers liability insurance is usually purchased by the corporation for the benefit of their directors and officers in order to protect them in case they are accused of making management errors. This type of insurance is considered an important tool that can help any company in attracting and keeping talented officers and directors. Otherwise, companies are risking of dealing with executives who do not want to work in a company that puts their personal assets at risk.

Directors and officers have lots of duties, responsibilities and obligations like for example, to exercise the powers of a person and to discharge the duties in good faith in the best interests of the corporation and for the proper purpose of course. Besides this, they also have the duty to exercise care and diligence but also to prevent insolvent trading. They have disclosure obligations that differ by the nature of the entity like the continuous disclosure regime. What's more, they have a law duty to avoid conflicts of interest and statutory duties to disclose personal interests and not to use their position improperly. Last but not least, both directors and officers have the obligation to comply with personal liability provisions under different State and federal statutes.

According to the law, directors & officers liability insurance usually provides 12 months cover on claims made and notified basis. This means that the policy requires the insurer to be notified of the claim throughout the whole policy period. This type of insurance may also cover executive directors, non-executive directors, the company secretary, executive officers and employees who are involved in the management of the organisation. Another important thing to take into account is to always have a copy of the whole D&O insurance policy, otherwise, you are risking of being scammed. Usually, directors & officers liability insurance comprises policy period, premium, excess and limit of indemnity and any sub-limits and reinstatement of the limits. Another important thing to know is that there are three main types of directors & officers liability insurance policies to choose from.

• Side A Cover – This cover is usually designed for directors when there is no other indemnification like under the deed of indemnity available. Simply said, it is a direct cover to directors in respect of liabilities and legal costs of defending claims which are made against them by the company or third parties for making wrongful acts committed to their time as directors or officers.
• Side B Cover – This type of cover reimburses the company for the money it has spent in indemnifying the ones that are covered by a deed of indemnity. This type of directors & officers liability insurance cover, covers the company for its liability to indemnify its directors and officers for liabilities and legal costs in claims which are made by third parties for making wrongful acts.
• Side C Cover – The side C cover is usually purchased by publicly-listed companies in order to ensure the company's liabilities that arise out of security market conduct breaches.

Generally speaking, the directors and officers insurance is offered on a” claims made” basis or on a “claims made and notified” basis. The first type means that the policies provide coverage for claims that are made against insured persons during the overall policy period. The second one means that the policy requires the insurer to be notified of the claim during the policy period. A thing to have in mind is that according to the law, there are some risks that cannot be transferred to an insurance company or carried by the company. These include:

• Personal financial losses – For instance, if you are found liable, you may experience some related financial issues like loss of income in the future period.
• Loss of reputation – If you are liable in legal proceedings, the reputation damage you sustain can be considerably greater than the actual monetary fine or penalty imposed by the court.
• Fraud, criminal conduct and willful misconduct – This usually falls outside the ambit of the directors' and officers' liability insurance and indemnities which can leave directors potentially exposed to meet related legal defense costs.
• Certain civil pecuniary penalties and fines and penalties for criminal offenses.

Depending on the person itself, some directors manage the residual financial and reputation risk with the assistance of professional legal, financial and accounting advice.