director and officer liability insurance

Understanding Directors and Officers Liability Insurance

Directors and Officers’ liability (D&O) provides cover for the costs of defending legal action arising from the decisions and actions taken by a company’s directors or senior management.

Stakeholders in a company can bring a claim against directors where they have suffered loss due to their negligent (wrongful) decisions company. Most notably when there is a separation between the ownership and management, shareholders are relying on the decisions of directors to protect and provide a financial return on their investment.

What is covered for this type of insurance?

At GSI Direct, we provide cover:

  • to individual directors where the company is not able to indemnify / reimburse the directors for the action brought against them. Sometimes this is because it is restricted by law from doing so.
  • to the company when it indemnifies / reimburses the directors for the claim made against them.

What isn’t covered?

The main area not covered is fraudulent, criminal or intentional non-compliant acts. Therefore stakeholders do not have access to the cover available under a D&O policy where it is found that directors have made deliberate decisions that they knew were not in the best interests of the company, or were for personal gain for example.

Where there is no segregation between the shareholders and directors there will also not be cover as the shareholder cannot claim they did not know about the decisions the director was taking. Note: There will be other exclusions in an insurance policy to consider.

Why is it needed?

are you covered for professional indemnity insurance

Directors and management of companies make decisions which will directly impact on the direction and profitability of the business. Sometimes these decisions lead to investigations by the regulators or civil claims.

The companies Act 1993 places a number of obligations on directors:

  • Act in good faith
  • Duty to be able to perform an obligation
  • Declare conflicts of interest
  • Avoid reckless trading
  • Comply with the director’s duty of care,
  • Ensure a company remains solvent; and
  • Comply with the Companies Act.

What does acting in good faith mean?

  • It means that the decisions made were reasonable in light of the director’s knowledge and experience. Whilst directors aren’t expect to know everything and decisions can always be more critically analysed with the benefit of hindsight, it needs to be supported that the intentions being decisions were appropriate, and in the interests of the company.

Examples of Liability Insurance for Directors and Officers

Generally a claim against directors occurs when something has gone wrong. The company has gone bankrupt or put into liquidation. Or a stakeholder in the company has lost money.

  • Financial Performance
    • Many D&O claims will occur because shareholders have suffered loss. This may be through the bankruptcy of a company, or a significant decrease in value.
    • Often the liquidator will bring claims against directors for breaching their obligations in order to recovery money for creditors.
  • Regulatory
    • An action may be brought by a regulatory body against directors where they have breached certain statutes or obligations as directors.
    • This might include reporting errors or other non-disclosure of information.

Disclaimer: There are other factors and policy exclusions that may influence whether a claim is covered by a policy or not. Policy coverage will solely be determined by the policy documents and policy wording, and no reliance can be placed on the content of this blog post whatsoever. The content and examples of this blog post are only given to provide a general understanding or to help explain a specific concept.

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