Directors and officers insurance, often referred to as D&O insurance, may provide critical protection for individuals in senior positions. In a legal setting, the law holds directors accountable for company decisions. This cover offers valuable financial and legal support. It helps in case of allegations, claims, or investigations.
In this guide, we look at what D&O insurance covers. We also discuss who can benefit from it. Finally, we explain why it is a smart choice for managing corporate risk.
What Is Directors and Officers Insurance?
Directors and officers insurance protects individuals who hold management or executive positions within a company. This typically includes:
- Company directors
- Senior managers
- Non-executive board members
- Officers of charities, not-for-profits, and clubs
Policies may respond when these individuals are accused of wrongful acts in the performance of their duties. Such acts could range from negligence or breach of duty to misrepresentation or failure to comply with regulations.
The business usually sets up D&O insurance. However, it covers the individuals, not the company as a whole.
What Does Directors and Officers Insurance Cover?
Although terms vary between insurers, most D&O insurance policies in the UK could include protection for:
1. Legal Defence Costs
Defending a claim brought against a director can be costly. D&O insurance may cover legal representation expenses, even if the case does not proceed to court.
2. Settlements and Damages
If a director commits a wrongful act, some policies may help pay for settlements or awards. This depends on the situation and any exclusions.
3. Regulatory Investigations
Cover may extend to official investigations or proceedings initiated by regulators such as the Financial Conduct Authority (FCA), the Information Commissioner’s Office (ICO), or the Charity Commission.
4. Employment-Related Claims
Allegations of wrongful dismissal, harassment, or discrimination made against senior staff could fall within the scope of D&O insurance.
5. Representation at Official Hearings
Directors summoned to attend public inquiries, tribunals, or disciplinary proceedings may receive support with representation and advice.
D&O policies usually do not cover claims related to fraud, dishonesty, or crime. This is especially true if the court proves these claims.
Who May Need Directors and Officers Insurance?
This type of cover may benefit a wide range of businesses and organisations, including:
- Limited companies, regardless of size
- Start-ups, especially those seeking external investment
- Non-profits and charities with trustees or boards
- Educational institutions and clubs
Even in small private firms, directors may be held personally responsible for business decisions. D&O insurance could offer peace of mind where shareholders, employees, creditors, or regulators initiate action.
Scenarios Where D&O Insurance May Help
- An employee alleges harassment by a board member
- A supplier brings a claim for breach of contract linked to director decisions
- A regulatory authority investigates the company’s data handling practices
- Shareholders file an action following poor financial performance
In each of these situations, D&O insurance may help with legal costs and associated liabilities.
Is D&O Insurance Legally Required in the UK?
In the UK, businesses do not have to have directors and officers insurance. However, many companies see it as an important part of their risk protection plan. Some investors, particularly venture capital firms, may require D&O cover as a condition of funding.