Why you need Directors and Officers Insurance…
Directors & Officers insurance (D&O) is an important cover for any company and its management team, protecting them against claims arising from their decisions and actions. Here, we look at this essential cover, finding out what it is and why it’s crucial, especially in the current landscape.
More directors investigated in insolvency surge
Higher interest rates and a stagnant economy have resulted in hard times for many businesses, leading to a huge rise in insolvencies. This, in turn, has led to more cases of fraud and other types of misconduct, with numbers expected to increase.
Last year, the Insolvency Service launched 36% more investigations into the alleged misconduct of insolvent companies than the year before, according to law firm RPC1, with the number of investigations increasing from 142 a month (April 21 – March 22) to 193 a month (April 22 – Dec 22).
As a result of the increase in investigations, it’s anticipated there’ll be an increase in claims under the Directors and Officers Insurance (D&O) to cover the cost of the investigations or penalties. This highlights the importance of having D&O cover in place if you are a director, partner or officer of a company.
What is D&O?
In today’s increasingly complex and litigious culture, businesses are at higher risk of liabilities and litigations. Since lawsuits are expensive and costs associated with them are rising, more companies are now purchasing D&O policies. If companies don’t have this cover in place, it is probable that they won’t be able to attract top managerial talent, given the risks now involved.
Common risks
Typical D&O risk scenarios include breaches of duty of care, breach of trust, negligent errors, defamation, health & safety failure, causing pollution, mismanagement of pension schemes, inaccurate or inadequate disclosure, failure to comply with regulations or law, corporate manslaughter, creditor claims, competitor claims, employment practices and HR issues. (Fraudulent or criminal actions are not covered.)
It's worth noting that cover is usually for current, future and past directors and officers, with insurance covering the individual for acts carried out while in that position. So, even if the individual is no longer a board member, if a claim is made during the policy period for alleged wrongdoing, they will still be covered.
How does D&O work?
D&O reimburses defence costs incurred by company directors and officers in defending them against claims by shareholders or other third parties for alleged wrongdoing. As well as defence costs, it also covers monetary damages, settlements and awards resulting from the claims.
In other words, whether the case is upheld or not, D&O insurance can step in to cover the costs, whether they involve legal fees or compensation, protecting the individual manager’s personal assets. If the company itself is sued, the policy can also provide some coverage.
Talk to TMD
TMD is currently seeing an increase in companies taking out D&O policies and we encourage any company director or manager to consider purchasing this cover, given the current increasingly litigious climate.
As D&O is a fundamental aspect of business risk management strategies, many limited companies pay for this as a matter of course, particularly as the policy can reimburse the company for losses incurred as a result of a director’s actions.
If you are a limited company, we recommend taking out Directors and Officers insurance (not applicable if you are a sole trader), and will be happy to advise on the level of cover you need to have in place based on your individual circumstances.
Our business is your protection, so to ensure you are protected where possible, against litigious claims and expensive legal costs, click here or please give us a call at 01992 703 000 or email insurance@mcdonaghs.co.uk