What is Director and Officers Insurance?

January 10, 2024

However large or small your business, some activities are more likely than others to be central to its success. Your business is almost certainly driven by the direction given by key decisions and actions taken by the company’s directors and leading officers.

Like many things in business, however, the critical role played by directors and officers might go completely unnoticed – until they are no longer around to play their part or when their decisions or actions go wrong. Let’s imagine a scenario or two …

Financial perils

• in his role as a director of the company, a director has made comments about business rivals that are judged to have been slanderous. As a result, the director is successfully sued;

• the officers responsible for your company’s human resources have been sued by a disgruntled former employee who alleges sexual harassment and discrimination when passed over for promotion;

• a key decision has been overlooked by one of the directors and an aggrieved party who suffered financial losses because of the omission has taken legal action alleging negligence by the director concerned;

• in our final imagined example, the directors of a failing company in the throes of winding up proceedings have inadvertently allowed trade to continue while the company was insolvent – considerable legal costs mount up in defending the directors against potential disqualification for the error.

Directors and Officers insurance

In each of these examples, the company involved typically faces potentially crippling legal costs in defending against the claims brought against the directors or officers alleged to have been at fault.

Directors and Officers insurance – also known as D&O insurance – is a specialist form of cover. It provides the company indemnity (up to set limits) against legal claims that might be brought against it because of the decisions and actions of directors or officers in the normal course of their duties.

What does Directors and Officers insurance cover?

How does it do that? It offers indemnity by meeting the costs involved in defending the legal action together with any awards or settlements that are made as a result of the legal proceedings.

Claims alleging some manner of negligence or other wrongdoing on the part of directors or officers of your company can be made by customers or clients, shareholders, third parties, or industry regulators. Specialist insurance cover will cover not only the individual directors and officers but also your company itself.

Like any other insurance policy, directors and officers insurance runs for a prescribed period of time. For the duration of the validity of your policy, cover remains in place – even if the individuals named in any legal action have since resigned from their directorships or are no longer employed by the company.

Just as with any other insurance, you should be aware of certain exclusions and exemptions. These invariably relate to intentional wrongdoing on the part of a director or officer of the company. Claims arising from intentional fraud or deliberate criminal activity by those individuals will not be covered by the insurance.