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WHY D&O INSURANCE?
Company directors have an obligation to make decisions in the best interest of the business and are under immense pressure to meet the expectations of all stakeholders. However, despite having good intentions, mistakes can happen (not just their own mistakes, but also for the failings of people they relied on) and as the company director you are at risk of being held personally liable for allegations of a breach of duty or wrongful acts.
Directors and officers’ liability insurance (often called D&O insurance) is designed to protect directors, officers and employees involved in the management of a company, from personal loss resulting from legal claims made against them while they perform duties on behalf of the company.
The policy provides indemnity against amounts which the insured shall become legally liable to pay as compensation including agreed defense costs and expenses resulting from any Wrongful Act by the insured in their capacities as directors or officers of the Insured Company.
A Wrongful Act is defined as Breach of Duty, Breach of Trust, Errors and Omissions, Alleged Negligence, Misstatement, Misleading Statement or Misrepresentations. The Coverage includes payment for Court Awards and Legal Representation Costs incurred by the insured.
In effect, the policy functions as “management errors and omissions liability insurance,” covering claims resulting from managerial decisions that have adverse financial consequences to the company.
WHAT YOU NEED TO KNOW
What Does A D&O Liability Insurance Policy Cover?
A DnO policy provides cover for a range of Wrongful Acts. Common D&O lawsuits arise because of the following - Breach of Fiduciary Duty, Mismanagement, Employment Practices Liability, Securities Violation, Misstatement or misleading statement and Regulatory Authorities actions.
What Are The Coverages Under A D&O Liability Insurance Policy?
The policy provides cover under 3 Sections SIDE A COVER (covers Non-Indemnifiable Claims. Non-Indemnifiable Claims means claims which are not payable by the Company. There could be certain situations where the companies are restricted by law and cannot provide Indemnification in certain types of allegations), SIDE B COVER (covers Indemnifiable Claims. Under Side B Cover, the claims are also against the Directors or Officers as under Side A Cover, but here the claims are indemnified by the Company which then seeks reimbursement from the insurer and SIDE C COVER (which deals with claims against the Company such as Employment Practice Liability Insurance (EPLI) Section and the Shareholders Claims or the Security Claims Section.
What Are The Duties of Directors and Officers?
Directors and Officers of a company have 2 primary responsibilities to adhere to while executing their duties – 1. Duty of Care: Directors and Officers need to perform their duties in good faith and should exercise care that a reasonably prudent person in a similar situation and circumstances would exercise. They are also expected to exhibit professionalism and take decisions in the best interest of the company they work for. 2. Duty of Loyalty: Directors and Officers of a Company should refrain from using their positions to further their own private interests or engage in activities that harm the interests of the company they work for. Directors and Officers can get sued for Breach of these duties
Who Is An Insured Under a D&O Liability Insurance Policy?
An Insured under a D&O Policy is any natural person who was, is or during the Policy Period becomes A director or officer, but not an external auditor or insolvency office holder of a Company; an employee of a Company; a de facto director or prospective director named as such in any listing particulars or prospectus issued by a Company and an Outside Entity Director but only when and to the extent that such Insured Person is acting in such Insured Person capacity.
Who Can Bring A Claim Against The Company or Directors and Officers Of The Company?
Shareholders, Employees (including claims for wrongful dismissal, harassment or failure to employ), Statutory bodies (including alleged breaches of a director’s responsibilities), Creditors, Competitors (including allegations of conduct involving anti-competitive behaviour), The corporation itself (including actions by a liquidator)
What Is The Target Market For D&O Liability Insurance?
A D&O Insurance Policy is important for all types of companies ranging from Startups, Small Companies and even large companies. The coverage requirement in a D&O Liability Insurance Policy for different companies will differ depending on the size of the business. Directors & Officers Liability insurance can be written to cover the Directors and Officers of for-profit businesses, privately held firms, not-for-profit organizations, and educational institutions.
Can D&O Liability Insurance Help You Get And Keep Board Members?
Insurance for board members attracts talented individuals to your organization. Look at it this way: If your directors and officers are sued over the decisions they make, they might face Millions of Shillings in legal costs and the hassle of defending themselves. The possibility might prevent them from wanting to help your business grow.
What is the Cost of A D&O Liability Insurance Policy?
The cost of a D&O Liability Insurance policy depends on the following factors including Firm Turnover, D&O Liability policy coverages, Policy Limit and Exclusions, Size of Company and number of directors and officers who need coverage, Prior Claims Experience, Industry to which the firm belongs and Level of Risk Exposure. The above list is not exhaustive and the Insurance Company at its discretion may ask for more documents as required.