Directors and officers liability insurance is a particular form of cover that protects directors and officers of a company from financial liability in connection with claims that arise from actual or perceived failure in their duties as managers of the company. It is worth noting that D&O is distinct from errors and omissions insurance, which relates to failures or harm, real or perceived, arising from the use of products or services provided by the company. This means that both forms of insurance will likely be required.

Why might you need directors and officers liability insurance?

D&O insurance is required because claims against managers are made against both the people – the directors and officers – and against the company itself. The lines between the company and the individuals concerned are not as clear as you might expect. What this means is that managers can be held liable for mistakes carried out by the company. This includes financial liability as well as, in the worst cases, criminal liability. Since they are assumed to be in a position of responsibility in the company, and those actions were carried out under their authority, the consequences can be severe. Directors and officers liability insurance is designed to protect them from this eventuality, since most individuals would be highly reluctant to enter employment knowing that this risk existed.

Even if individual employees are happy working without this cover – which is unlikely if they know the risks – directors and officers liability insurance will often be required when a company first brings together a board of directors. This is to protect their personal assets, which could otherwise be taken in the event of a lawsuit. Similarly, you will usually need D&O before venture capitalists invest in your business, since they do not want their money going to claimants.

What eventualities does directors and officers liability insurance cover?

If the managers at your company think that there are no circumstances under which they might need D&O, they probably do not know enough about it. There is now a huge range of eventualities for which you need to be insured. The definition of failure in a management capacity is so broad that it is beyond the control of even the most diligent individuals to avoid. One increasingly common case is action from shareholders who are disappointed with the performance of their stock. Another growing area covers employment practices liability. Such cases account for roughly half of all D&O claims.

Employment practices liability covers you for claims brought by employees and other third parties. These can include failure to promote, wrongful dismissal and sexual harassment, to name a few. Remember that you do not need to be guilty – it just has to be a perceived failure of management that results in a lawsuit. Even if you are innocent, and ultimately win the case, this could still result in hefty legal fees. This is one reason why directors and officers liability insurance is so critical.

Conclusion

Directors and officers liability insurance is almost certainly something you should consider for the managers and board members of your company. The consequences of not being insured in the event of a claim could be extremely serious, both for the individual and for the company. There is a wide range of instances under which you might need D&O, from those mentioned above to issues as diverse as Data Protection breaches, corporate manslaughter, discrimination and pollution. There are literally hundreds of different areas of potential non-compliance under the Companies Act, 2006. D&O can also protect you from the actions of former directors, for which the company might otherwise be held liable.

This article was supplied by the leading firm of Irish insurance brokers and members of the Irish Brokers Association, Robertson Low, established in 1995 and the only Irish incorporated ‘Lloyd’s broker’.