Director’s & Officer’s Liability Insurance (D&O) – Corporate / Entity Protection

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D&O cover provides liability protection to company directors and officers to protect them from claims that arise from decisions they make whilst running a Company. The policy protects a Director or Officer by:

– Paying legal defence costs

– Paying settlement costs or awards

– Investigation costs

– Other costs such as mitigation costs, civil fines & penalties etc.

 

What Does a D&O Policy Look Like?

There are usually three sides to a D&O policy:

Side A – Directors personal asset protection where no company indemnification is available

Side B – Provides balance sheet protection to the company, where the company has advanced legal costs on behalf of a Director

Side C – Provides cover for claims brought against the entity itself in certain circumstances

 

What is Entity Cover?

 

Coverage under a D&O policy for the direct liability of the company. Historically, no entity coverage was provided by a D&O policy. The purpose of the policy was specifically to protect the directors and officers from the risk of personal liability. Usually, the company for which the directors and officers worked also wanted to protect them and agreed to indemnify them subject to reimbursement by the D&O insurer. Because the company was typically named in a suit with its directors and officers, however, a dispute arose over what portion of defence costs, settlement amounts or judgments were properly credited to the directors and officers and covered under the D&O policy, and what portion were properly credited to the company and thus, not covered. This led to arguments and has now resulted in D&O policy forms that expressly address entity coverage.

 

The principle of a company indemnifying its directors to protect them against claims has been ingrained in Company Law for many years. However the savvy director should not solely rely on this indemnification provision, as strict conditions apply under the Companies Act and the company may not want or be able to provide this indemnity because:

• The company may be financially distressed and may not have the resources to fund the legal defence costs
• The company may be a claimant taking the action against the director for breach of duty
• The company may be the subject of a takeover, which causes uncertainty and can delay or prohibit the provision of defence costs

 

Common Misconceptions

 

D&O is only for those running public limited companies or in very large private businesses”

This not the case. Every director or officer is open to claims. Claims can originate from anywhere – customers, competitors, suppliers, employees, the company itself, regulators and governmental and law enforcement agencies. A good way to frame the conversation is to compare D&O cover to catastrophe cover, something that we are all used to taking out as individuals to protect our personal assets

 

“We don’t need D&O cover because the directors are covered by the company’s limited status”

Many directors assume they are covered by the company’s limited liability status, but this is not the case. Shareholders’ liability is limited, but that of the directors and officers is not. Brokers need to point out that the directors or officers own cash, home, pension pot, other personal assets and even their liberty is at stake should a claim occur

 

Director & Officer Claims Examples

 

1. An allegation of slander was made by a customer against an officer of a company (a clothing retailer). Allegedly comments were made by the manager in public, which supposedly damaged the reputation of the customer. A threat to take the manager to court was made unless a settlement was forthcoming, which was negotiated at €26,500 and covered under the D&O policy
2. Prior to making an investment in a company, an investor was given details of the company’s solvency and profit. Following the investment, it became clear that the solvency level and profit levels had been misrepresented. The directors had over-stated the company’s financial position to encourage investment. The D&O policy paid out €10,000
3. Food manufacturer – over 300 shareholders claimed they ‘suffered a huge loss’ and were suing the company’s directors and auditors for breach of duty in relation to overstatement of the company’s financial position
4. Minority action – a company and its directors were sued by hedge funds whose shareholders were also minority shareholders. It was alleged that as part of a merger, shareholders were originally offered eleven shares in the new merged company for seven shares in the old company. Once the offer was accepted by a large majority of the old company shareholders, the terms of minority shareholders were changed to eight shares for seven of their old shares
5. EPL – an employee was dismissed for gross misconduct after a violent altercation at work. The company Disciplinary Committee judged he had brought the company into disrepute and their decision was in line with the rules and procedures set out in the company handbook. The employee brought an unsuccessful claim for unfair dismissal against the company. Legal costs of €17,900 were paid

 

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Remember: D&O cover provides liability protection to company directors and officers to protect them from claims that arise from decisions they make whilst running a company. Some D&O policies also extend to provide cover for the entity itself i.e. entity cover, whereby cover is provided for claims brought against the entity itself in certain circumstances.