With directors facing an increasingly litigious society and an ever-evolving legal environment, directors and officers liability (or D&O insurance) is now more important than ever. Surprisingly, the majority of UK directors and company officers may not have adequate liability insurance in place. Many do not even purchase cover.
Directors and officers of companies of all sizes have certain personal liabilities that come with the fiduciary duties of their position. When directors are accused of breaching these duties, actions are brought against them personally and this can have devastating consequences for the individuals concerned, even if they have done nothing wrong.
A common misconception is that being a director of a limited liability company in some way limits the director’s personal liabilities. This is not the case – directors’ personal liabilities are unlimited.
Directors liability insurance provides a pool of money for the directors of a company that can be drawn on to fund defence and settlement costs and to pay for the cost of legal representation at investigations. Almost every large UK company purchases D&O insurance for their directors. The exposures are so onerous that most business people operating at this level would not accept a board or non-executive position without first reviewing the company’s D&O policy to ensure that they are adequately covered.
The exposures for smaller companies are just the same – the law doesn’t discriminate between small and large companies – and in some respects are actually higher. Government bodies such as the DTI, HSE and SFO are increasing their focus on SMEs and the number of investigations of companies in this sector is rising rapidly.
In the course of carrying out everyday duties for a company, directors are exposing themselves personally to lawsuits, investigations and criminal prosecutions. Without insurance, directors can end up having to re-mortgage (or worse), to pay legal fees.
For example, an HSE investigation into a fatality at work could occur which could result in a full-blown public enquiry which a director would be required to attend. The D&O insurance policy would fund his legal representation at the enquiry.