What is D&O Insurance and do I need it?
Directors & Officers insurance (D&O) is possibly one of the lesser-known policies available to businesses in the UK. There are still a number of misconceptions about the cover these policies provide, so to try and explain it better we’ve written a simple article about what it is and why you (probably) need it.
What is Directors & Officers (D&O) Liability Insurance and who does it protect?
D&O insurance provides financial protection in the event senior decision makers within the business being held liable for civil, criminal or regulatory proceedings, while acting on behalf of their business. You’ll often see these policies called ‘Management Liability’ policies and offer protection to any past or present director, officer or senior decision maker. Typically policies extend to include subsidiaries of the parent company.
There are 3 main sections to directors & officers insurance; Directors & Officers, Corporate Legal Liability and Employment Practices Liability.
Directors & Officers Insurance protects directors and senior decision makers. Corporate Legal Liability covers the commercial entity.
Employment Practices Liability covers any claims relating to employment of staff, such as unfair dismissal or health and safety claims.
Do I need D&O insurance?
While there is no legal requirement to purchase D&O insurance, it’s rapidly becoming more popular with businesses. With markets in general becoming more litigious, allegations of wrongdoing are arising from many sources, most commonly; shareholders, regulators, competitors, customers and employees.
We often find that D&O insurance is a very common conversation when a business raise funds, takes on new directors or has a growing number of employees. If you are a sole trader it’s unlikely you’ll need this cover.
Give me some examples!
These examples were collected from the Travelers Insurance Library of Claims:
An employee of a small private business convinced the board of directors that he was qualified to step into the role of president of the company. Under his leadership, the company’s financial position got worse. On behalf of the company, a shareholder sued the board of directors alleging that they used poor judgment and did not act in the best interest of the company when appointing the new president. The case eventually settled for $1.5 million and legal fees totalled $300,000.
The vice president of a manufacturer determined that pivoting into a different product line presented sales potential. Instead of presenting the opportunity to his company, the VP informed his brother, who then formed a new company to manufacture that product. On behalf of the company, a shareholder sued the VP alleging that he wrongfully took advantage of an opportunity belonging to the corporation. The suit eventually settled for $2.5 million.
How much D&O should I purchase?
The below offers a general guide based on market data and a typical business purchase. It is important however to consider your own circumstances and note that the limits below might not be substantial enough to cover your financial loss and defence costs.
Please bear in mind that, if you’ve raised capital to fund your operations and you are still at an early stage, you should take into consideration your asset size and not your turnover.
Is D&O Insurance expensive?
It’s difficult to say as it varies from business to business but, in comparison to legal defence costs, absolutely not!
D&O insurance prices have continued to rise sharply during the COVID pandemic. This has been driven largely by insolvencies and the need to cut staff numbers, resulting in claims from external parties and the former employees. With that in mind, the time to buy D&O insurance is now – not later, as it’s unlikely premiums will be reducing any time soon.
If you’re looking for a D&O quote, you can request one here!