UNDERSTANDING DIRECTORS & OFFICERS LIABILITY INSURANCE

What Is It? Do I Need It?

Only large, publicly traded companies buy or need Directors & Officers (D&O) Liability Insurance. Smaller, privately owned businesses just don’t have the same level of exposure to create the need. The only potential claims, if any, would come from a disgruntled shareholder, if those even exist outside of the family. Right or Wrong?

Wrong. These are common misconceptions that we hear when business owners decline D&O coverage. Did you know small businesses can be more vulnerable to legal expenses related to a D&O claim? Did you know lawsuits filed by shareholders represent only a portion of claims brought against directors and officers? Due to the nature of how small businesses are structured, executives are more involved in the day-to-day administration and operation of the business. Therefore, these individuals are often more at risk of being personally named in a lawsuit. These suits can come from a variety of parties, including, but not limited to: customers, employees, vendors, suppliers, competitors, government regulators, or investors. These lawsuits do not trigger coverage under your General Liability policy. You will be held personally accountable. If you want to protect your estate and personal assets from claims arising out of your involvement in the company, you need D&O insurance.

What Does D&O Liability Insurance Cover?

D&O liability insurance protects the personal assets of corporate directors and officers and their spouses in the unfortunate event that they are personally sued for actual or alleged wrongful acts while managing a company.

This insurance will cover legal fees, settlements, and other related costs, while also protecting the company. Most companies provide a standard indemnification provision in their contracts, which holds officers harmless for losses due to their role in the company. D&O insurance is the financial backing of this provision.

Why Should My Company Buy D&O? 

• To provide for the costs of a legal defense
• Access to the insurance carrier’s expert defense counsel
• Attract and retain qualified officers and outside independent directors
• Attract and retain a qualified Board of Directors

What Is My Exposure? 

Claim allegations can be brought in many different forms, including:

• Breach of Contract
• Deceptive Trade Practices
• Merger & Acquisition Decisions
• Inadequate Disclosure
• Misrepresentation in a Sale
• Breach of Fiduciary Duty
• Anti-Trust Violations Stock Dilution Fraud/Dishonesty
• Misuse of Company Funds
• Issues with a Failed Merger
• Unfair Trade/Trade Secrets (i.e. Hiring Competitor’s Employee)
• Business Interference
• Regulatory Actions Brought by Governmental Agencies such as KRA

How Do I Prevent D&O Claims From Occurring?

There is no way to prevent any claim from arising, but there are several ways to mitigate your risk. Here are some strategies and action items:

• Prepare a written corporate governance program
• Execute procedures to avoid potential breaches of fiduciary duty
• Set up a succession plan
• Utilize contracts with third parties/clients/customers
• Prepare a written business continuity plan
• Employ a specific risk management committee

How Do I Purchase D&O Liability Insurance?

Typically, you will need to provide an application proposal form duly executed, financials, and the company’s ownership structure. All policies are different and can be tailored to meet a company’s specific needs. Policy limits and coverage provisions should be reviewed on an annual basis. For more information or to proceed with a quote, contact our office at +254700296850 or write an email to insure@assurein.co.ke