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Directors’ & Officers’ Liability Insurance

We are often asked by directors (both exec and non-exec) of clients about whether their company should have D & O liability insurance in place, and what it does and does not cover.

A trite observation, but we live in a litigious society now, and the blame culture is a widespread phenomenon. The business world is much more heavily regulated than in the past, shareholders are much more aware of their rights, and directors themselves have a far greater number of statutory, regulatory and corporate governance responsibilities imposed on them than ever before, starting with the statutory general duties under the Companies Act 2006, which replaced years of vaguer common law duties and equitable principles.

Directors may face allegations and legal action not only over performance of their day-to-day duties but also over their conduct of specific transactions such as mergers, acquisitions and disposals. There is also the rise of the shareholder class action to which directors are joined as defendants, still relatively rare in the UK, but likely to increase as shareholders look across the Atlantic for inspiration!

All this should make any current or aspiring director look closely and seriously at whether their company has D & O cover in place. The Companies Act 2006 allows some limited   indemnification by companies to their directors for financial loss arising from allegations made against them. While such indemnification is undoubtedly helpful, as ever, it will only be as good as the solvency of the company providing it. Furthermore, if the company simply refuses to pay out to a director with whom it is in dispute, that director will be left both funding their own legal defence costs (at least for a period) and making a claim against the company under the indemnity, a far from satisfactory state of affairs.

Companies are permitted under the Companies Act 2006 to purchase D & O cover in relation to “any liability attaching to [a director] in connection with any negligence, default, breach of duty or breach of trust in relation to the company” (ie alleged wrongful acts).

There are clear advantages for both the company and the directors in this. For the company, there is protection against what may be a significant costs hit by way of legal fees and other liabilities. For a director, the issue of company solvency risk disappears, and a refusal to pay by the company also ceases to be an issue.

The main purpose of D & O liability insurance is to cover the potentially significant legal costs which a director may incur in having legal representation in a wide range of circumstances, from a regulatory investigation to defending claims by the company itself through a shareholder derivative action to defending claims arising from corporate insolvency.

Jon Chapman

Senior Consultant

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+44 118 960 4683

Companies are permitted under the Companies Act 2006 to purchase D & O cover in relation to “any liability attaching to [a director] in connection with any negligence, default, breach of duty or breach of trust in relation to the company” (ie alleged wrongful acts).

Typical D & O liability insurance will cover not only legal costs but also the amounts of any damages awarded against the insured, or settlement amounts. What are not covered are criminal fines and penalties, so, for example, the consequences of fraud and dishonesty, and indeed defence costs paid out where there is an ultimate finding of criminal guilt may be repayable to the insurer.

The insurance purchased will probably have an aggregate limit of cover available for all insured directors and officers and is usually provided on a worldwide basis. It goes without saying that it is worth a company which is obtaining D & O liability insurance having a very careful look at what jurisdictions liability may arise in – if there is a potential US exposure, for example, then the aggregate cover limit may well need to be greater.

And finally, who are “officers”, as opposed to “directors”, you will be wondering? These would usually be company secretaries, employed lawyers and other senior managers of the company.

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Disclaimer
This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full General Notices on our website.

Jon Chapman

Senior Consultant

View profile

+44 118 960 4683

About this article

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