In this article, we will be discussing Directors’ and Officers’ Insurance.
Being a company director in the 21st century is not for the faint hearted.NGOs, local communities, regulatory bodies, and climate change activists are seeking modern ways to hold companies accountable for alleged environmental and economic damage. This means the risk in terms of directors’ liability for breaching fiduciary duties is more significant than ever before, making Directors’ and Officers’ (D&O) Insurance an essential insurance policy.
What is covered by Directors’ and Officers’ Insurance?
The Companies Act 2006 provides for several director’s duties that could give rise to a civil claim if breached. Directors must:
- act in accordance with the company’s articles of association
- only exercise powers for the purposes for which they are conferred
- promote the success of the company, taking into consideration the long term impacts of decisions made, including for employees and community and the environment
- exercise independent judgement.
- exercise reasonable care, skill, and diligence
- avoid conflicts of interest
- not accept benefits from third parties
- declare an interest in proposed transactions or arrangements of the company
Apart from potential misconduct in the day-to-day operations of a company, directors and officers often confront claims linked to securities offerings, acquisitions, and disposals.
As per the Finance Act 2009, violations of accounting duties constitute another potential area of claims covered by D&O insurance policies. Senior accounting officers are mandated by the Finance Act 2009 to establish and adhere to proper tax accounting arrangements for large companies (with a turnover exceeding £200 million or gross assets surpassing £2 billion).
Insurance Coverage
D&O insurance also extends coverage to various other breaches that might lead to claims.
This includes ‘derivative claims,’ initiated internally by shareholders on behalf of the company against a director or officer. Section 260 of the Companies Act 2006 specifies that a derivative claim can only be brought for actions arising from actual or proposed acts or omissions involving negligence, default, breach of duty, or breach of trust by a company director. This coverage is crucial due to the broad scope of derivative claims, which can be raised concerning alleged breaches, even predating the director or officer’s tenure with the company.
Furthermore, D&O insurance offers protection against class action claims.
The range of liabilities covered by D&O insurance encompasses negligence, health and safety failures, default, defamation, director’s breach of duty, or breach of trust by the director or officer concerning the employing company. Past directors and officers are also covered.
Officers protected by D&O insurance include company secretaries, in-house lawyers, and senior executives. Moreover, D&O coverage can extend to employees temporarily placed in management roles, spouses of directors and officers, estates of deceased directors and officers, and liquidators.
Is there anything D&O insurance does not cover?
If a director or officer commits a serious criminal offence their D&O policy will not provide cover. In addition, D&O Insurance will not cover damage to property or personal injury. These are covered by separate policies, namely, Employee Liability Insurance and Public Liability Insurance.
Is Directors’ and Officers’ Insurance essential?
The 2008 financial crisis and high-profile company collapses such as Carillion and Patisserie Valerie, where the alleged directors’ misconduct led to the demise of the businesses, alongside the growing climate catastrophe, have led to shareholders, investors, NGOs and consumers increasingly using litigation to hold company directors to account. For example, in 2022, ClientEarth brought actions against Shell’s Board for mismanaging climate risk and against KLM Airlines for alleged greenwashing via one of its marketing campaigns.
At present, it is the boards of large companies facing the greatest risk; however, as more of these types of claims succeed, the greater the threat to SME directors and officers becomes.
What is the difference between Professional Indemnity Insurance and D&O Insurance?
PII insurance covers errors and omissions concerning a person’s work. For example, if an accountant makes a negligent error that results in their client facing a significant tax bill they would otherwise have not had to pay, PII would provide cover. D&O insurance protects directors and officers if they make a negligent management decision, for example not employing a supervisor to check a junior accountants work.
Many claims are multifaceted and will engage PII and D&O insurance; therefore, it is vital to be covered by both types of policies.
Do NGO directors need Directors’ and Officers’ Insurance?
Yes, as they face the same challenges and risks as a director or officer of a private company and often operate in a strict statutory and regulatory environment (for example, charities must comply with the Charities Act 2011 and the Charity Commission.
Concluding comments
Directors’ and Officers’ Insurance can provide directors with peace of mind that should they be sued for negligence or breach of fiduciary duty whilst undertaking their responsibilities as a company director or officer, they will have the funds required to fight the claim and/or pay out any compensation awards.
