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Directors’ and officers’ liability insurance

This article was last updated by the author in October 2016.

A brief introduction to directors' and officers' liability insurance.

Contents

Overview

This is a more recent type of liability cover, which reflects the growing trend towards action being taken against individual directors (or officers) of a company.

At common law, a director's primary duty is to the company and not 'the shareholders' of the company. However, the Companies Act 2006 codified certain responsibilities of directors. They are required to act honestly and in good faith, and carry out their duties with reasonable care and skill. The act imposes upon directors and officers responsibilities not only to their company, but also its shareholders, its employees, its creditors and to the public. There is now a statutory list of duties for directors:

  • to act within powers of the company's constitution and properly exercising those powers
  • to promote the success of the company for the benefit of its members as a whole. This includes, for example, taking account of the likely long-term consequences of any decision and the need for the company to maintain a good reputation for business conduct. The interests of the company's employees must also be taken into account, as must the impact of the company's operations on the community and the environment
  • to exercise independent judgment
  • to exercise reasonable care, skill and diligence
  • to avoid conflicts of interest - directors must authorise any individual director's conflict of interests and may do so, provided there is no conflict with the constitution of the company
  • not to accept benefits from third parties, unless these are unlikely to give rise to a conflict of interest
  • to declare an interest in any proposed transaction with the company

Directors and officers can be prosecuted for failures and civil action can also be taken against them. Their liability is unlimited in amount.

Legislation allows companies to assist their directors financially while litigation or other proceedings are going on and to indemnify their directors against certain liabilities to third parties, even if the directors are at fault. However, they may not reimburse the legal costs of the unsuccessful defence of criminal proceedings or criminal fines and penalties.

Directors' liabilities can arise at common law from:

  • negligent advice or misstatement, particularly in the context of a merger or take-over
  • acts outside the company's constitution, such as excessive borrowing or unauthorised payments
  • failure to disclose conflicting interests or the full extent of the director's interests
  • errors of judgment, such as failing to recognise insolvency
  • negligent supervision, for example of delegated responsibility
  • imprudent investments.

In addition, there is an ever-growing volume of legislation which directors must ensure their company complies with concerning insolvency, VAT, data protection, the environment and competition.  

Typical cover provided

Directors' and officers' policies are structured into two parts:

  • Directors' and officers' liability: cover for the directors and officers in their personal capacity when they are unable to claim an indemnity from the company, and
  • Corporate reimbursement: cover to protect the company in circumstances where it is permitted to indemnify the directors or officers, such as the repayment of legal defence costs

Other features of directors' and officers' insurances are:

  • cover is on a 'claims made' basis, which means that the policy covers all claims notified to the insurer or the insured during the period of insurance, no matter when the event giving rise to the loss occurred
  • past, present and future directors are covered
  • the policy also indemnifies the personal legal representatives in the event of death, insolvency or bankruptcy of the insured
  • cover is automatically provided for new subsidiaries up to a certain size and employees whilst acting in a managerial or supervisory capacity
  • cover is subject to an annual aggregate limit of indemnity. This is typically a minimum of £1 million, although higher limits are available

Optional extensions

The optional extensions which are available include:

  • representation at investigations and examinations
  • extended discovery period
  • securities claims
  • employment practices claims
  • outside directorships
  • employees whilst acting in a managerial or supervisory capacity

Key exclusions

The main exclusions and limitations include:

  • circumstances known (or which ought to be known) prior to cover commencing
  • prior and pending litigation
  • a jurisdiction clause, stating that English law will apply and may exclude actions in the USA or Canada
  • bodily injury and property damage
  • pollution and contamination
  • claims based upon improper personal gain by a director
  • fraud or dishonesty of a director
  • 'insured v. insured'
  • outside directorships
  • pension fund trustees
  • pollution
  • breach of professional duty
  • computer date recognition

Rating factors

Premiums tend to be based on the limit of indemnity required, taking into account a number of other factors, such as turnover and gross assets, the financial position of the company, number of directors and officers and the geographical areas and jurisdiction to be covered.

Product providers

Professional indemnity insurance is a specialised branch of liability insurance which is most commonly purchased as a stand-alone policy. Cover is not offered by all insurers and is often purchased through an insurance broker. 

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