|Directors and Officers|
As corporate actions against the controllers of businesses become more frequent, Directors and Officers Insurance is increasingly being seen as a necessary piece of business insurance. Indeed many directors or senior controllers will not accept appointments unless the employer provides robust insurance protection on their behalf.
Who is a director?
An 'officer' of a company is a little more difficult to identify. All companies have at least one 'appointed' officer (the company secretary). They are likely to have other employees with significant executive responsibilities who, if they are managers, will also be 'officers'
What are a director's or officer's legal obligations?
Under the Companies Act alone, there are more than 200 offences that may result in action against an individual director or officer.
Who might issue a claim?
Directors and officers involved in merger, acquisition or divestiture activities also have a considerable risk of litigation from potential buyers, shareholders and regulatory bodies.
How may claims arise?
Directors and Officers insurance provides indemnity for the legal costs involved in responding to an action and for any awards that may be imposed. Cover is for wrongful acts, defined as breach of duty, breach of trust, neglect, error, mis-statement, misleading statement, omission, or breach of warranty or authority.
The policy defines the insured as any past, present or future director, officer, or equivalent executive manager of the company, as well as any employee while acting in a managerial or supervisory capacity.
D&O insurance is generally underwritten on a 'board basis' in that it protects directors and officers of a given company or group of companies. It can usually be extended to embrace associated companies and appointments held by directors or employees in outside companies, e.g. those in which the insured company has an investment or other commercial interest. Cover is also commonly available on a 'blanket basis', embracing all past, present and future directors and officers.
If there is an excess on the policy this may or may not apply to legal costs. It is worth noting however that a claimant's legal costs normally form part of the claim against the insured director.
The Corporate Manslaughter Act 2007
The act came into force in April 2008, and has the effect that an organisation can be held to account for corporate manslaughter if a management or organisational failing causes someone's death. Police investigating any death in the workplace will have to consider the new offence with the Health and Safety Executive. If a prosecution were brought the jury would have to evaluate the corporate 'attitude' to safety in its deliberations. Cover can be extended to cover legal defence costs up to the point that guilt is proven but cannot cover criminal penalties.
Employee dishonesty or third-party computer funds transfer fraud can cause large losses and can even financially devastate small and medium-sized companies. It is therefore important to protect the company against such losses. In addition, expenses cover is provided for any corporate identity fraud.
For those accused - their liberty is at stake and, financially, the costs of defence can be high; sometimes reaching six-figure sums. Directors could go to prison for their actions, inaction or ignorance. D&O insurance cannot cover the criminal penalties as that is against public policy, but it can cover the costs of defending a claim up until the point that guilt is established.
Entity cover extends the cover to the company or organization itself which sometime bears the brunt of any awards.
Currently almost all charitable organizations have entity coverage which is why we don't recommend it for such organisations on our "quote and buy facility."
Entity coverage is purchased by charitable organisations and "non profit" associations as well as many "for profit" organizations.
Please note - The inclusion of Entity cover has been questioned of late following certain high profile bankruptcies where the policies have been ceased by the liquidator as part of the corporate assets. This defeats the original purpose of D&O which was to protect the directors and officers in exchange for them sitting on the board. Please seek advice before purchasing.
Employment Practice Liability Cover (EPL)
Any employee suing in respect of an alleged employment practice violation is likely to direct the action at the employer who, in most circumstances, will be the company. The employee may, particularly in cases of discrimination, also name individual colleagues, supervisors or directors. As such, it is important to protect both employees and the company. (EPL) can be added, purchased separately or incorporated with D&O. Most D&O policies offer a sub limit but it is not a standard component of D&O. See our section on Employment Practice Liability Insurance.
With the introduction of many online quote and buy services it is important that you read policy wordings including particularly the exclusions. Many websites tell you "why you need to buy their D&O cover" and the risks you may be exposed to such as Corporate Manslaughter but the actual wording may not necessarily provide the coverage.
Insurers need to be advised of any mergers, acquisitions, share offers etc, if full cover is to continue. .
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