In most corporations, directors and key managers have covered under directors and officers insurance. Protection will be provided against claims made for business losses as a result of management actions or alleged wrongdoing by company individuals.
D&O insurance shields the assets of company directors and leaders, and the provided protection extends to their spouses and any privately-held property. To find a competitive D&O quote, companies like NimbleFins can assist with comparing directors and officers insurance deals to find the best offer.
Having D&O insurance will not protect against acts that are intentionally deceptive or illegal like criminal acts, fraud, bribery, or deliberate malicious actions. Still, it will shield against claims made for things such as:
- Illegal or wrongful trading
- Breach of duty
- Breach of trust
Claims can be brought by shareholders, employees, vendors, investors, and other third parties. Legal proceedings can be civil, criminal, or regulatory. D&O insurance coverage will cover the costs of defending the claim in court and pay for any awarded financial settlement.
For high-level decision-makers, the cost of defending claims can run into thousands of pounds, and without D&O insurance in place, individuals are not only financially responsible. Still, they may be at higher risk of dismissal or imprisonment.
Who needs directors and officers insurance?
Any company with a board of directors or a committee including non-profit or educational organisations should consider investing in the director’s and officer’s insurance. Whether publicly or privately held, organisations can be at risk of claims brought against their company leaders.
While many large businesses obtain D&O insurance as part of standard business practice, smaller businesses can also benefit from having adequate coverage in place as well as shielding key operatives from claims; having D&O insurance can provide some other benefits.
For companies seeking funding, having directors and officers coverage can provide assurance for potential investors. Venture capitalists and external funding sources may demand that D&O insurance is in place before offering financial support.
Suppose businesses are seeking to hire for key positions. In that case, experienced managers will expect that D&O insurance is provided as part of the employment package to protect their personal assets from any potential claims. This means that when hiring for key positions, the top-quality candidates may be deterred if D&O insurance is not provided.
Why buy directors and officers insurance?
Apart from enabling corporations to attract top talent and outside investors, D&O insurance can help to defend claims brought by regulatory offices, liquidators, and government offices, like the HMRC, for things like mishandling tax payments. The insurance coverage extends beyond the current directors and managers of the company and will protect both past and future operatives.
Even if the corporation has public liability or other indemnities in place, these insurances will still not protect the same type of claims as D&O insurance. Larger corporations typically opt for having a D&O policy, but smaller or medium-sized enterprises should also consider purchasing a policy to protect their senior members as well.
D&O coverage is not required by law, but when compared to the costs associated with successful claims, most corporations understand the value of having coverage. Policies can start from less than £500 per year but will increase based on the size of the corporation and the type of industry. Premium payments have the added benefit of being tax-deductible for the business and therefore even more affordable for smaller businesses that are concerned with keeping expenses down.
Coverage limits will be capped depending on the policy terms but can be set high enough to offset any potential risk. In addition, D&O insurance will provide access to experienced legal teams and professionals to help defend claims, give access to expert legal advice, and will pay the cost of awarded damages.
For corporations involved in mergers and acquisitions (M&A), directors and officers insurance can protect against issues relating to the transaction that could result in claims like:
- Bankruptcy resulting from a failed takeover
- Claims from past vendors or creditors
- Alledged incorrect financial statements
- Shareholder lawsuits
- Failure to perform due diligence
Can a sole trader have directors and officers insurance?
For corporations of most types, D&O insurance is necessary to protect the personal assets of company directors, managers, and supervisors. However, as a sole trader, the company ownership and responsibility falls to one person, meaning that D&O insurance will not typically be required (e.g. there would be no one else to bring a D&O-type claim).
For sole traders that need to protect against claims of certain types, there are several other insurances available that will better suit individually owned businesses. Coverages like Legal Expenses Insurance, Public Liability Insurance and Professional Indemnity Insurance are available to guard against certain types of claims that may be brought.
D&O insurance is designed for companies with a corporate structure that contains a company board and directors; therefore, it is not the most appropriate insurance for those that operate their business as a sole trader.