What is D&O insurance?
What is D&O insurance?
Directors and Officers play a significant role within businesses to help keep them running smoothly, but we all know, mistakes happen. If a senior individual within the business falls short of their obligations, they can be held personally liable via civil, criminal, or regulatory proceedings. Did you know that Directors have unlimited personal liability in lawsuits brought against them and can lose their homes, pensions, savings and any other personal assets as a result of prosecution or damages awarded? It's commonly thought that any personal assets of Directors and Officers are safe when operating as a limited liability entity, but that’s not the case!
The exposure to decision making individuals within businesses has led to the development of ‘Directors’ and Officers’ insurance, which you might sometimes hear referred to as ‘Management Liability’ insurance. Purchased by the business, director and officers insurance is designed to cover directors and officers for any disputes that could arise as a result of their managerial decisions and protect them in a personal capacity. The D and O policy:
- Covers Directors against personal lawsuits in civil courts – defence costs and any damages awarded
- Covers Directors against any personal criminal defence costs (but not any fines or penalties imposed)
- Can be extended to cover Directors, officers and the “entity” for employment disputes.
Recently increased likelihood of claims
Claims under Directors’ and Officers’ (D&O) insurance policies have increased ten-fold in the past decade, making D&O insurance more relevant than ever. The COVID-19 Pandemic is causing great uncertainty across the world and decision making is having to happen quicker than ever before. Sadly, COVID-19 will likely mean that the number of claims against individuals will increase and some examples could include:
- Furloughing is an untested area in terms of case law, and is likely to prove fertile ground for legal action against Directors, either by employees who feel they have been treated unfairly, or government regulators if the rules were not properly observed.
- An employee asked to return to the workplace could resign, then claim constructive dismissal if they were concerned about safety because social distancing measures have not been properly implemented.
- The Health and Safety Executive could take action if a cluster of Covid-19 cases were traced back to a specific work place, and they consider that required social distancing measures have not been properly implemented.
We have already seen an increase in the number of companies becoming insolvent and unfortunately, this is likely to continue. Where a company no longer has enough money or assets to pay creditors, the likelihood is that claims will be made against individual Directors to help settle outstanding debts, which is why it is so important to be initially covered with Directors liability insurance.
Who can claim against me on my D&O Policy?
- Customers
- Suppliers
- Competitors
- Employees
- Regulators
- Creditor
- Governmental and law enforcement agencies (HSE for example)
- Shareholders
- Other Directors of your business!
Justify your decision making
In the case that someone claims against your Director and Officer insurance, ensure that you are prepared to justify your decision making with the following tips;
- DOCUMENT YOUR DECISIONS
Why did you place certain staff on furlough? Why did you cut the salaries of certain individuals? How are your actions in the interests of investors? Why are you continuing to trade? The commercial decisions of the directors and any relevant advice given by professionals with insolvency expertise should be carefully documented so you can provide evidence and justify all decisions.
- FINANCES
Why are you spending money on increased advertising? Will any creditors or lenders allow repayment holidays on any leasing or financing agreements?
- EMPLOYEES
Public Health England has published precautions to help prevent the spread of Coronavirus. Determine who is essential in your organisation. The only staff returning to work at this point may include essential employees whose role is critical to the success of operational continuity, safe facility management or to fulfil regulatory requirements. Promote the sharing of skills, information and training.
- ADVICE
The current climate is unchartered territory and what may have been an easy decision before Coronavirus probably has you second-guessing yourself. Reach out to the services you pay for. If you have a legal expenses policy, these often come with a free advice helpline.
- DON’T PANIC
These are unprecedented times but at some point, life will return to normal and people will need the service/product you provide. We still want your business to be trading so make sure you are properly protected with an adequate D&O insurance policy!
Should I still purchase D&O insurance cover?
The simple answer is YES. There are still so many decisions to be made for your business as we navigate through these uncertain times and whilst there is a wealth of professional advice out there that you may follow, this won’t necessarily prevent allegations being brought against you or your business. D&O insurance cover is there to defend you against these allegations. Protect yourself and your business with Directors and Officers liability insurance, and our trained team at A&T will provide expert support and guidance along the way so you can be confident with your insurance cover.
Why purchase D&O cover right now?
It’s commonly thought that the risk to Directors of ‘Blue Chip’ companies is much higher than Directors of all other companies, but it’s often the other way around. Where decision making outside of ‘Blue Chip’ companies is often a less formal or collaborative process, not fully discussed with the Board of Directors and formally minuted, this leaves the individual who made the decision wide open to personal legal action. Having D&O insurance will help protect you against potential legal claims.
D&O Insurers are fully aware that the current crisis is likely to result in more claims, and this is causing the market to begin ‘hardening’. A ‘hardening market’ means that insurers are probably going to revise the D and O insurance cover they provide, and increase the premiums to purchase a D&O policy. We are anticipating that this trend will continue and so purchasing a policy now makes sense to help control costs in obtaining this essential cover, even if your other insurance policies are not yet due for renewal.
Insurance buyers are personally at risk for a decision not to buy D&O insurance
If a director fails to take out D&O insurance without consulting the board or lapses an existing policy without consulting the board, they could face a personal lawsuit from the entity or other directors.
This can happen if at a later date it can be shown that had the D&O cover been in place, an individual director or the entity would have gained some form of protection from the policy.
To protect against this, the officer responsible for buying D&O insurance should ensure that the decision not to buy is formally agreed and documented.
The Claims
D&O & Corporate Entity
Your shareholders could allege a lack of preparedness, a lack of planning, a lack of supplier alternatives or discriminatory behaviour towards some employees in respect of furloughing and salary cuts. Your shareholders have a vested interest in the operation and largely the profit margins of your business. However, when their shares take a dip because trading results have suffered at the hands of coronavirus, the first person they'll target is the decision-maker.
D&O insurance cover can help reimburse any legal costs that are incurred as a result of defending you and your actions against any allegations made.
D&O Extension - Employment Practice Liability
This is a popular cover for businesses but if you have planned redundancies that have come as a result of COVID-19, very few insurers will be providing cover for this undertaking. Outside of planned redundancies, if you have to terminate an employee, your senior leadership team must follow the company's formal dismissal process. If you do not, the employee can take legal action against your senior leaders for unfair dismissal.
D&O cover can help you here as the cover extends to paying for resulting legal and employment tribunal costs.
D&O Extension - Crime
Times are tough. Especially for your employees. No one knows what goes on in the home lives of their staff and this pandemic could be taking its toll on your employee's personal lives both financially and psychologically. ‘Crime’ cover is an extension of a typical Directors and Officers insurance policy and covers the unfortunate circumstances of fraud or dishonesty of an employee. This could mean theft of funds from a company bank account for example.
A great extension of Crime cover under D&O Insurance is that most policies also incorporate Social Engineering cover. Typically found under a Cyber policy, Social Engineering occurs, for example, when a staff member unintentionally sends money to a supplier whilst being unaware that the supplier’s email was hacked and bank details provided were for a third-party fraudster.
This extension in D&O cover will cover the loss up to a certain limit depending on the level of cover you purchase. This may be the time to consider your options for Cyber Liability Insurance.
Time to Act
If you have any questions about Director’s & Officer's Liability Insurance, please don't hesitate to get in contact with us. We also highly recommend speaking to your usual contact here at Alan & Thomas if you want to look at extending your existing cover to include Employment Practices Liability, Pensions Trustees Liability and Crime.