Why Directors and Officers need Insurance
People appointed as Directors or Officers of a company hold positions of trust and must act accordingly. They will be liable for any act which is negligent, outside their authority, or in breach of duty or trust. Their responsibilities are onerous.
The circumstances in which a company may indemnity officials against claims are extremely limited, owing principally to Section 200 of the Companies Act 1963. Directors and Officers without insurance are effectively risking their personal wealth, since the financial implications of legal action can be disastrous. There is no limit on liability, and legal costs, which are payable in addition, can sometimes run into hundreds of thousands of euros.
HOW LIABILITY ARISES
The following duties are owed by all Directors’ & Officers;
a) The duty to act bona fide in the best interest of the company
b) The duty to exercise power properly as per the Company’s Memorandum and Articles of Association
c) Trusteeship of the company assets.
Duty of Skill and Care
Directors must apply skill and care that is reasonable for a person of their knowledge and experience.
Duty of Shareholders and Persons dealing with the Company
As the officers are the trustees of the shareholders assets then any mismanagement of those assets is likely to create a cause of action.
In addition to the Common Law duties, there are numerous duties imposed by statute. The most noticeable act is the Companies Act 1963 which contains more than 200 possible offences. Other more recent legislation includes the Data Protection Act 1988, the Safety Health & Welfare at Work Act 1989 and Reckless Trading under the Companies Act 1990.
WHO CAN BRING AN ACT AGAINST DIRECTORS AND OFFICERS?
In the event of winding up, they may maintain an action for misfeasance and they may bring an action in their own names if their rights are injured.
2) The Official Receiver and Liquidator
In all types of winding up action, the Official Receiver or Liquidator can apply for permission to examine the conduct of Directors’ & Officers, both past and present.
3) Company Creditors
In the event of a winding up, and particularly where allegations are made about unfair trade practices.
4) The Company
A company may have rights of action against Director’s & Officers in respect of breaches of duty.
5) EU Commissioners
As EU Directives come into operation, the Commissioners power will increase.
6) The Department of Enterprise Trade and Employment
They have the power to appoint an Inspector to investigate a company’s state of affairs.#
Competitors could take legal action against Officers for infringement of copyright, defamation or unfair competition practice.
THE DIRECTORS’ AND OFFICERS’ LIABILITY INSURANCE POLICY
Directors’ & Officers Liability Section
This section cover s the liability at law of Directors and Officers for ‘Wrongful Acts’ which are defined in the policy as – breach of contract, breach of trust, breach of duty, act, neglect, error, omission, misstatement, misleading statement, breach of warranty of authority or wrongful trading committed in their capacities as Directors and Officers or as trustees of the company’s pension fund.
In addition to damages, this section also covers claimants’ and other costs.
Directors and Officers are defined in the policy as any person who was, is or may become;
• a Director appointed to the Board of Directors of the company or its subsidiaries
• an officer
The policy also covers any employee who may act in a managerial or supervisory capacity.
Company Reimbursement Section
This section indemnifies the Company against payments which it is permitted or required by law to make in respect of claims made against Directors or Officers which would otherwise have been the subject of indemnity under the Directors and Officers Liability Section.
Remember: Directors and Officers without insurance are effectively risking their personal wealth, since the financial implications of legal action can be disastrous.