In today’s climate of corporate transparency and accountability, an organisation’s officers and directors face a variety of business-related exposures. Claims can come from many sources: employees; regulators; shareholders; creditors; customers, the list goes on. Ever-changing regulations, increased employee awareness of employment rights as well as the rise of shareholder activism all mean that directors are more frequently at risk, which can quickly translate to rising claims and escalating settlement costs, as well as the possibility of reputational damage.
In the wake of recent unprecedented corporate scandals, the trend of corporate accountability currently applies mostly to large corporations. But smaller privately held companies, including not-for-profits, are not exempt from litigation arising out of the management decisions of their boards. They too are at risk.
Regardless of your company’s size, the legal cost to defend a director is substantial, as are the potential penalties that can be personally incurred. Due to liability risks, protecting boardroom talent can be a challenge. To help ensure both your officers’ as well as company’s wellbeing, a Directors’ and Officers’ liability insurance (D&O) policy is part of a comprehensive risk financing strategy.
How a D&O policy can fill a gap in cover
Unlike liability policies that provide cover for claims arising from property damage and bodily injury, a D&O policy specifically provides cover for a ‘wrongful act’, such as an actual or alleged error, omission, misleading statement, neglect or breach of duty.
For example, a manufacturer told one of its suppliers to increase inventory because they were expecting a large increase in production. As predicted, demand for the manufacturer’s product grew but the manufacturer increased its inventory with another supplier instead. The original supplier successfully sued the manufacturer, alleging they suffered damages as a result of having relied on the manufacturer’s promise.
A D&O policy provides defence costs and indemnity cover to the entity listed on the policy declarations, which may include:
- Cover for individual directors and officers
- Reimbursement to the organisation for a contractual obligation to indemnify directors and officers that serve on the board
- Protection for the organisation or entity itself
Indemnification provisions are typically included in the charter/bylaws of a company. While an important risk component, small to medium-sized enterprises or not-for-profit organisations often don’t have the financial resources required to fund the indemnity provisions, making the bylaws hollow. A D&O policy can provide an extra blanket of security in the event of a covered loss.
A ‘fraud’ exclusion is typically included in a D&O policy, which eliminates cover for losses due to dishonest or fraudulent acts or omission or wilful violations of any statute, rule or law. D&O cover can be tailored to your needs but it’s important to be aware that D&O insurers are not consistent with their policy forms. This fact, plus the complexity of D&O claims, requires the insurer to have market commitment and deep expertise as well as the financial resources to handle potential claims – and makes it more important than ever to work with an experienced broker to find appropriate cover for your business.
There are also additional forms of cover to adequately protect directors and officers, including:
- Entity cover
- Payment priority for insured persons
- Severability of the insured as well as severability of the application
- Cover over time, meaning cover responds to past, present and future directors and officers
- Pay on behalf clause
- Duty to defend clause
Advice for not-for-profits
Many not-for-profit organisations with directors and officers often report difficulty in affording the cost of D&O insurance. To minimise the costs, a professional independent broker can help by recommending only those policy provisions considered most critical. For example, a volunteer-run not-for-profit without any paid staff could skip employment practices cover until it hires staff. To pay the cost of premiums, some not-for-profit organisations consider charging board members a portion of the policy cost as a contribution.
Find out more
Whether you are a not-for-profit, privately held or a public company, it is likely that your business can benefit from a D&O policy. Since there is no such thing as a ‘standard’ policy, a professional broker is invaluable when purchasing D&O cover. Scrutton Bland has over one hundred years of experience in advising our clients on their insurance needs and we can use that experience and knowledge to help design the appropriate policy language to meet your needs. Contact us today to learn more about the appropriate protection for your company against potential directors’ and officers’ liability.