What is D&O insurance?


As a senior manager, your mistakes can have costly consequences. There’s the potential to hurt employees, customers, shareholders, investors and other third parties.
Who foots the bill for these mistakes? The company’s own commercial insurance should cover most claims, but in certain circumstances the individual director can be held personally liable. This means claimants can potentially recover their losses from your own assets, including your home and future earnings.
A claim does not have to be made in relation to your current role. It is possible that a decision you made in a job years ago comes back to bite you; even though you may be in a very different place professionally and geographically, you could still be on the hook for your actions taken in another role.
Moving roles can make it additionally hard to respond and defend a claim because all the documentation is no longer at your fingertips. If you left the company in less than amicable circumstances or if your former employer has a vested interest in you being held liable, you could be in a difficult situation.
D&O insurance protects you from this grim prospect. This form of cover insures against you personally as a result of your professional actions or shortcomings.


How things can go wrong

Put simply, anyone can make a mistake. As a director or officer you should be absolutely clear about where your role begins and ends, with supporting documentation. If you act within your powers, making sound decisions that draw on the information available at the time, in theory you should be ok.
Apart from, as we all know, sometimes life gets in the way. You might be under strain for personal reasons, or face a period of increased stress at work. You might misinterpret the law or the data in a particular area, with dramatic consequences. You might simply have an error of judgment. Or you might not do anything wrong at all, but an allegation is made nevertheless.
Even if you are sure that you will be found to have acted impeccably, responding to a claim can be stressful and time-consuming. You will need to consult a lawyer, prepare documents and review ongoing correspondence and filings in the claim. You may need to travel to meetings and court dates to deal with the claim. Even a groundless claim can cause considerable annoyance and inconvenience.
The cultural shake-up that followed the financial crash has a greater emphasis on personal accountability for directors and officers. There has been an increase in claims made against directors following the crash, as well as large-scale changes in corporate governance at major companies.


What does D&O insurance cover?

This type of cover provides protection against claims brought by interested parties such as regulators, investors or shareholders, creditors and employees who allege that a senior manager (director or officer) acted wrongly and that they have suffered a loss as a result. It also covers claims arising from insolvency.
Depending on the nature of your policy, employment claims may also be covered. This would include claims for things like wrongful dismissal. Importantly, the cover also pays for legal fees for civil litigation or the cost of defending a criminal claim. Even if you believe you are not at fault, proving this is the case can be ruinously expensive without commercial insurance cover.
Litigation also frequently sees the defendant being ordered to pay all or some of the claimant’s legal costs.This means you could stand to pay your own legal fees, the claimant’s legal fees (or those of multiple claimants) plus the cost of reimbursing the claimants for the harm caused – all out of your own pocket.
A businessman on his phone outside of a city building

The harm a claim can do to your career

A claim against a director is not just stressful and costly in the short-term; it can be nothing short of career-ending. There is the damage to your reputation and professional standing, but you may also face disqualification from your position as director, severely limiting your future career prospects.
In some circumstances, criminal prosecutions can also be brought. A conviction can carry a sentence of fines and/or imprisonment, as well as being something you would have to declare in seeking later employment.
We all know that people like to talk; industry gossip about supposed wrong-doing travels fast and can cause considerable harm to your reputation. This is particularly the case where you work in a small, close-knit industry where everyone knows everyone.


What is not covered by D&O commercial insurance?

No insurer will pay out where the director is found to be acting dishonestly. This includes fraud, criminal intentionally non-compliant acts and situations in which directors are found to have taken remuneration illegally or acted for personal profit. Property damage and bodily harm are also generally excluded, with the exception of corporate manslaughter (where someone dies and your firm is said to be at fault).
Commercial insurance providers generally only agree to cover claims that are addressed against the individual. A claim against the company itself should be covered by the business’ insurance policies. You should not expect insurers to provide cover for claims made under a previous policy or before the policy start date.
Insurance providers also do not pay out for fines and penalties resulting from a criminal prosecution; these will have to be met from your own pocket.


How is D&O insurance different to professional indemnity insurance? 

There is some overlap between these types of insurance, but the key difference is that D&O insurance covers decision makers in a company, whereas professional indemnity insurance provides cover for those who have an advisory role.
Individuals and companies who offer advice are vulnerable to claims that advice was negligent, that work was not carried out to the required standard or that records have been lost or stored incorrectly. These claims can be made against companies of any size, even individual freelancers working as sole practitioners or through a limited company.
Professional indemnity insurance is more likely to cover the cost of your business making an error that has a negative impact on customers and clients, whereas D&O insurance usually covers legal costs of defending senior managers from allegations of wrongdoing.


Lifting the veil of the limited liability company 

Most claims in business will be directed against a company or ‘limited liability company’. The limited liability part in the name refers to the idea that the company is itself the responsible party for its actions, meaning only the assets of the company are at stake when something goes wrong.
However, there are a number of situations in which the individuals acting on behalf of the company are held to be liable. This is often referred to as lifting the veil of corporate liability. A common legal argument is that a director has done something which is so bad as to be against the best interests of the company.
Directors are under a duty to ‘act in good faith so as to promote the success of the Company’ under s172 Companies Act 2006. If they can be shown to have acted outside what the company was lawfully permitted to do and knew that they were not acting properly, directors may be held personally liable.
A director is expected to know what a company is lawfully permitted to do and to put in place systems to ensure that the activities of the company do not stray beyond these limits.
A businessman on his phone in the back of a car

What are the most common types of claims covered by D&O insurance? 

Let’s look at some of the most common areas where claims are brought against managers and where commercial insurance might be able to help.


1.   Employment claims

Workers can sometimes claim against their bosses, rather than the company that employs them. In the starkest cases, this can be done where working conditions amount to exploitation. A 2019 case, Antuzis v DJ Houghton Catching Services Ltd involved some Lithuanian workers who were badly mistreated in their roles as chicken catchers, with denial of payments, poor working conditions and physical intimidation.
A claim against the company would have brought them nothing as there were almost no assets in the company. Instead, a claim against the senior managers succeeded on the basis that the directors could not have believed they were acting lawfully and within the terms of their authority.
Thankfully, exploitative practices among UK directors are rare, but the principle applies in less lurid situations, too.


2.   Shareholder actions

Circumstances where shareholders might claim against a director include where one director has taken money from the company without the knowledge of other directors; where directors are not reporting to shareholders any longer; or a director has used knowledge or contacts from the company to establish a competing business.
Shareholders may apply to recover losses from a director, as well as seeking other measures such as winding up the company or selling a shareholding.


3.   Reporting errors

Directors provide information in the company accounts to give a picture of a company’s performance. This data influences a huge range of decisions, from investors to shareholders or corporate partners. Where information is inaccurate, inadequate or simply wrong, claimants may seek to recover their losses from the individual directors of the company.


4.   Pollution

The release of pollutants is a major area where directors may face personal claims. For example, where chemicals from a business leak onto adjoining ground or waterways, this can cause damage to other businesses and individuals nearby and claimants may bring a claim against directors to recover their losses.


5.   Competition law infringement

Directors are expected to comply with competition law, and may be personally liable for infringements. In 2005, a major case in this area involved the directors of Safeway supermarket, who were alleged to have worked with other supermarkets to raise the prices of milk and dairy products for consumers.
Safeway claimed against its own former employees and directors to recover the cost of a penalty they were ordered to pay by a regulator. The claim said that the directors had failed to inform the pricing initiatives to superior directors at the chain.

The directors were ultimately not held to be liable for the penalty, but the claim went all the way to the Court of Appeal.


6.   Corporate Manslaughter

If a company’s activities are managed or organised in a way which causes someone’s death and amounts to a gross breach of the duty of care owed by the organisation to the person who dies, a prosecution could be brought against a company director.
This is not an exhaustive list of the types of claims covered by D&O insurance. The exact nature of your risk profile will depend on the nature of your business and scale of your operations.


What can you do to protect yourself?

A businessman in a suit smilingOf course, the first thing you can do to protect yourself from this type of claim is to ensure that you have a clearly-defined set of duties and responsibilities and that you understand your legal obligations. Documenting your activities to provide a paper trail for decisions taken is also advisable.
How do you know if you need a policy? Company directors and officers all face risk, even in very small businesses. It is advisable to assess your vulnerability and take out a suitable policy. Of course, the extent of cover (and the cost of premiums) will vary depending on the nature of your business and your individual level of risk.
Talk to our team about commercial insurance today.